Investment in Office and Parking Properties

12 Months Ended

Dec. 31, 2011

Investment in Office and Parking Properties [Abstract]

Investment in Office and Parking Properties

Note B - Investment in Office and Parking Properties

Included in investment in office and parking properties at December 31, 2011 are 36 office and parking properties located in ten states with an aggregate of 8.6 millionsquare feet of leasable space.  This excludes office properties in unconsolidated joint ventures and office properties classified as held for sale.

The contract purchase price, excluding closing costs and other adjustments, of office properties or additional office property interests acquired during the year ended December 31, 2011 is as follows:

	Cost
Market Location	(in thousands)
Atlanta, GA	$	212,250
New Orleans, LA		250
Jacksonville, FL		18,500
Tampa, FL		68,375
Orlando, FL		67,750
Phoenix, AZ		39,400
Philadelphia, PA		180,375
	$	586,900

The Company's acquisitions are accounted for using the acquisition method.  The results of each acquired property are included in the Company's results of operations from their respective purchase dates.

Summary of Acquisitions

On January 21, 2011, the Company and Fund II acquired the office and retail portion of 3344 Peachtree located in the Buckhead submarket of Atlanta for $167.3 million.  3344 Peachtree contains approximately 483,000 square feet of office and retail space and includes an adjacent eleven-story parking structure.  Funds II's investment in the property totaled $160.0 million, with Parkway funding the remaining $7.3 million.  Due to Parkway's additional investment, the Company's effective ownership in the property is 33.03%.  An additional $2.6 million is expected to be spent for closing costs, building improvements, leasing costs and customer improvements during the first two years of ownership.  Simultaneous with closing, Fund II assumed the $89.6 million existing non-recourse first mortgage loan, which matures on October 1, 2017, and carries a fixed interest rate of 4.8%.  In accordance with GAAP, the mortgage loan was recorded at $87.2 million to reflect the value of the instrument based on a market interest rate of 5.25% on the date of purchase.  Parkway's equity contribution in the investment is $25.5 million and was funded through availability under the Company's senior unsecured revolving credit facility.

On February 4, 2011, the Company purchased its partner's 50% interest in the Wink-Parkway Partnership ("Wink JV") for $250,000.  The Wink JV was established for the purpose of owning the Wink Building, a 32,000 square foot office property in New Orleans, Louisiana.  Upon completing the purchase of its partner's interest, Parkway now owns 100% of the Wink Building.

On March 31, 2011, Fund II purchased 245 Riverside located in the central business district of Jacksonville, Florida for $18.5 million.  245 Riverside contains approximately 135,000 square feet of office space.  An additional $1.6 million is expected to be spent for closing costs, building improvements, leasing costs and customer improvements during the first two years of ownership.  In connection with the purchase, Fund II placed a $9.3 million non-recourse first mortgage loan secured by the property with an initial 36 month interest only period and a maturity date of March 31, 2019.  The mortgage loan has a stated rate of LIBOR plus 200 basis points.  In connection with the mortgage loan, Fund II entered into an interest rate swap agreement that fixes the interest rate at 5.3% through September 30, 2018. Parkway's equity contribution of $2.8 million was funded through availability under the Company's senior unsecured revolving credit facility. Parkway's effective ownership interest in this asset is 30%.

On April 8, 2011, Fund II purchased Corporate Center Four at International Plaza ("Corporate Center Four") located in the Westshore submarket of Tampa, Florida for $45.0 million.  Corporate Center Four contains approximately 250,000 square feet of office space.  An additional $5.6 million is expected to be spent for closing costs, building improvements, leasing costs and customer improvements during the first two years of ownership.  In connection with the purchase, Fund II placed a $22.5 million non-recourse mortgage loan with an initial 36 month interest only period and a maturity date of April 8, 2019.  The mortgage loan has a stated rate of LIBOR plus 200 basis points.  In connection with the mortgage loan, Fund II entered into an interest rate swap agreement that fixes the interest rate at 5.4% through October 8, 2018.  Parkway's equity contribution of $6.8 million was funded through availability under the Company's senior unsecured revolving credit facility.  Parkway's effective ownership interest in this asset is 30%.

On May 18, 2011, Fund II completed the closing of its purchase of four additional office properties for $316.5 million.  The four properties include Two Liberty Place in Philadelphia, Two Ravinia Drive in Atlanta, Bank of America Center in Orlando, and Cypress Center I, II and III ("Cypress Center") in Tampa.  The properties contain approximately 2.1 million square feet of office space, and an additional $20.9 million is expected to be spent for closing costs, building improvements, leasing costs and customer improvements during the first two years of ownership.  An existing institutional investor in Two Liberty Place retained an 11% ownership in the property.  Parkway's pro rata share of Two Liberty Place is 19% and Parkway's partner in Fund II owns the remaining 70% interest.  Fund II acquired 100% of the remaining three assets, with Parkway's ownership at 30%.  In connection with the purchases, Fund II placed separate non-recourse mortgage loans on each property totaling $158.3 million with a weighted average interest rate of 5.0%, initial 36 month interest only periods, and maturity dates ranging from May 2016 to June 2019 (see Note F - Notes Payable, for details regarding the interest rate swaps associated with these mortgage loans).  Parkway's equity contribution of $37.6 million was funded through availability under the Company's senior unsecured revolving credit facility.

On June 30, 2011, Fund II purchased Hayden Ferry Lakeside I ("Hayden Ferry I") located in the Tempe submarket of Phoenix, Arizona, for $39.4 million.  Hayden Ferry I contains approximately 203,000 square feet of office space.  An additional $4.3 million is expected to be spent for closing costs, building improvements, leasing costs and customer improvements during the first two years of ownership.  Fund II obtained a $22.0 million non-recourse mortgage loan with a fixed interest rate of 4.5%, an initial 36 month interest only period, and a maturity date of July 25, 2018.  Parkway's equity contribution of $5.2 million was funded through availability under the Company's senior unsecured revolving credit facility.  Parkway's effective ownership interest in this asset is 30%.

The allocation of purchase price related to intangible assets and liabilities and weighted average amortization period (in years) for each class of asset or liability for 3344 Peachtree, 245 Riverside, Corporate Center Four, Two Liberty Place, Two Ravinia Drive, Bank of America Center, Cypress Center and Hayden Ferry I is as follows (in thousands, except weighted average life):

		Amount	Weighted Average Life
Land	$	66,267	N/A
Buildings		380,147	40
Tenant improvements		45,267	6
Lease commissions		26,913	6
Lease in place value		41,195	6
Above market leases		27,428	7
Below market leases		(4,955)	13
Other		2,388	7
Mortgage assumed		(87,225)	7

On May 18, 2011, the Company closed on the agreement with Eola Capital, LLC and related entities ("Eola") in which Eola contributed its Property Management Company (the "Management Company") to Parkway.  Eola's principals contributed the Management Company to Parkway for initial consideration of $32.4 million in cash and Eola's principals have the opportunity to earn up to 1.8 million units of limited partnership interest in Parkway's operating partnership ("OP Units") through an earn-out and earn-up arrangement based on the achievement by the Management Company of targeted annual gross fee revenue and/or share price levels during an initial period for the balance of 2011.  On December 30, 2011, Parkway and the former Eola principals amended certain post-closing provisions of the contribution agreement to provide, among other things, that if the Management Company achieved annual revenues in excess of the original 2011 target, all OP Units subject to the 2011 earn-out, the 2012 earn-out and the earn-up will be deemed earned and paid when the 2011 earn-out payment is made. The earn-out and earn-up consideration is accounted for as a liability and therefore, any changes in fair value is measured through profit and loss each reporting date until the contingency is resolved. The target gross fee revenue target for 2011 was achieved and the 1.8 million OP Units were earned and issued on February 28, 2012. All OP Units are redeemable for cash, or at Parkway's option, for shares of Parkway stock on a one-for-one basis. The Management Company was contributed to a wholly-owned taxable REIT subsidiary and therefore, the Company began incurring income tax expenses upon closing of the agreement. The Management Company currently manages assets totaling approximately 11.4 million square feet. Parkway funded the cash consideration for the Management Company contribution with operating cash flow, proceeds from the disposition of office properties, proceeds from an equity issuance and amounts available under the Company's credit facilities. For details regarding the Management Company's purchase price allocation see "Note E - Management Contracts."

The unaudited pro forma effect on the Company's results of operations for the purchase of 3344 Peachtree, 245 Riverside, Corporate Center Four, Two Liberty Place, Two Ravinia Drive, Bank of America Center, Cypress Center, Hayden Ferry I and the Management Company as if the purchase had occurred on January 1, 2010 is as follows (in thousands, except per share data):

		Year Ended
		December 31
		2011		2010
Revenues	$	197,065	$	183,485
Net loss attributable to common stockholders	$	(129,783)	$	(13,111)
Basic net loss attributable to common stockholders	$	(6.04)	$	(0.61)
Diluted net loss attributable to common stockholders	$	(6.04)	$	(0.61)

Included in the Company's consolidated financial statements for the year ended December 31, 2011 were revenues and net income attributable to common stockholders from 2011 acquisitions of $68.4 million and $11.2 million, respectively.

On January 11, 2012, Fund II purchased The Pointe, a 252,000 square foot Class A office building in the Westshore submarket of Tampa, Florida.  The gross purchase price for The Pointe was $46.9 million and Parkway's ownership share is 30%.  Parkway's equity contribution of $7.0 million was funded through availability under the Company's senior unsecured revolving credit facility.

On February 10, 2012, Fund II purchased Hayden Ferry Lakeside II ("Hayden Ferry II"), a 300,000 square foot Class A+ office building located in the Tempe submarket of Phoenix, and directly adjacent to Hayden Ferry I purchased by Fund II in the second quarter of 2011.  The gross purchase price is $86.0 million and Parkway's ownership share is 30%.  Simultaneous with the purchase, Fund II closed a $50.0 million non-recourse first mortgage with a maturity date of July 2018.  The mortgage has an initial fixed interest rate of 5.0%, which is scheduled to decline in stated increments over the first four years of the term, with the decline in the fourth year of the term subject to achieving a defined debt yield hurdle, at which time the rate will remain fixed through maturity.  The mortgage loan secured by Hayden Ferry I has been amended such that it is now cross-collateralized and cross-defaulted and is coterminous with the mortgage loan secured by Hayden Ferry II.  Parkway's equity contribution of $10.8 million was initially funded through availability under the Company's existing senior unsecured revolving credit facility.  This investment completed the total investment of Fund II.

Summary of Dispositions

On May 11, 2011, the Company sold 233 North Michigan, a 1.1 million square foot office property in Chicago, Illinois, for a gross sales price of $162.2 million.  At closing, the Company repaid the $84.6 million first mortgage secured by the property that was scheduled to mature in July 2011.  Parkway received net cash proceeds after repayment of the mortgage loan of $74.0 million, which were used to reduce amounts outstanding under the Company's senior unsecured revolving credit facility.  The Company recognized a gain on extinguishment of debt of $302,000, which is classified as income from discontinued operations and a gain on the sale of real estate from discontinued operations of $4.3 million during the second quarter of 2011.  All income from 233 North Michigan has been classified as discontinued operations for all current and prior periods presented.

On July 6, 2011, RubiconPark II, LLC, sold Maitland 200, a 204,000 square foot office property located in the Maitland submarket of Orlando, for a gross sale price of $23 million.  The $16.9 million mortgage loan secured by the property was repaid upon closing.  Parkway owned a 20% interest in the property and received a priority distribution after the repayment of secured debt of $2.8 million, which was used to reduce amounts outstanding under the Company's senior unsecured revolving credit facility. The Company recognized a gain on the sale of $743,000 during the third quarter of 2011. Additionally, the Company retained management of the property and therefore, the gain was recorded in continuing operations.

On July 19, 2011, the Company sold Greenbrier Towers I & II, two office properties totaling 172,000 square feet in Hampton Roads, Virginia, for a gross sale price of $16.7 million.  The sale represented the Company's exit from this market.  The properties were unencumbered by debt at the time of the sale.  Parkway received $16.1 million in net proceeds at closing, which were used to reduce amounts outstanding under the Company's senior unsecured revolving credit facility.  The Company recognized a gain on the sale of real estate from discontinued operations of $1.2 million during the third quarter of 2011.  All income from Greenbrier Towers I & II has been classified as discontinued operations for all current and prior periods presented.

On August 16, 2011, the Company sold Glen Forest, an 81,000 square foot office property in Richmond, Virginia, for a gross sale price of $9.3 million.  The property was unencumbered by debt at the time of the sale.  Parkway received $8.9 million in net proceeds at closing, which were used to reduce amounts outstanding under the Company's senior unsecured revolving credit facility.  The Company recognized a gain on the sale of real estate from discontinued operations of $1.1 million during the third quarter of 2011.  All income from Glen Forest has been classified as discontinued operations for all current and prior periods presented.

On September 8, 2011, the Company sold Tower at 1301 Gervais, a 298,000 square foot office property in Columbia, South Carolina, for a gross sale price of $19.5 million.  The property was unencumbered by debt at the time of the sale.  Parkway received $17.9 million in net proceeds at closing, which were used to reduce amounts outstanding under the Company's senior unsecured revolving credit facility.  The Company recognized a total non-cash impairment loss of $2.7 million during the year ended December 31, 2011.  This impairment loss and all income from current and prior periods have been classified as discontinued operations.

On December 9, 2011, Parkway conveyed the deed in lieu of foreclosure on Wells Fargo, a 134,000 square foot office building in Houston, Texas.  In association with the deed in lieu of foreclosure, the Company recognized an $8.6 million non-cash gain associated with the forgiveness of the mortgage loan secured by this property.  During the year ended December 31, 2011, the Company recognized a total impairment loss of $11.6 million. This impairment loss and all income from the Wells Fargo building has been classified as discontinued operations for all current and prior periods presented.

On December 31, 2011, the Company completed the sale of its interest in nine assets in the Fund I portfolio to Ohio PERS.  The completed sale of Fund I assets included nine properties totaling approximately 2.0 million square feet in five markets, representing a majority of the Fund I assets.  Additionally, on March 1, 2012, the Company completed the sale of its interest in Renaissance Center, a 190,000 square foot office property located in Memphis, Tennessee.  The sale of the remaining three assets in the Fund I portfolio is expected to close during the first half of 2012, subject to obtaining necessary lender consents in connection with the existing mortgage loans and customary closing conditions.  Parkway received approximately $11.3 million in net proceeds at the initial closing of the Fund I assets, which were used to reduce amounts outstanding under the Company's senior unsecured revolving credit facility.

The gross sale price for all Fund I assets, including the properties that have yet to close, is $344.3 million.  The Fund I assets had a total of $292.3 million in non-recourse mortgage loans, of which $82.5 million was Parkway's share, with a weighted average interest rate of 5.6%.  On March 1, 2012, in connection with the sale of Renaissance Center, the buyer assumed the $15.6 million non-recourse mortgage loan, of which $3.9 million was Parkway's share.  The remaining three assets in the Fund I portfolio have a total of $61.3 million in non-recourse mortgage loans, of which $15.3 million is Parkway's share, which will be assumed by the buyer upon closing during the first half of 2012.

In connection with the completed and pending sale of the Fund I assets, the Company recorded an impairment loss in 2011 in discontinued operations totaling $105.4 million, of which $29.3 million was Parkway's share and a gain on sale of real estate from discontinued operations of $11.3 million, of which $3.2 million was Parkway's share.  Additionally, Parkway recorded a loss on extinguishment of debt in discontinued operations of $966,000, of which $276,000 was Parkway's share.  All income from the Fund I assets has been classified as discontinued operations for all current and prior periods presented.

On January 6, 2012, the Company sold Falls Pointe, a 107,000 square foot office building in Atlanta, Georgia, for gross proceeds of $6.0 million and Parkway's ownership share was 30%.  Since Falls Pointe was classified as held for sale at December 31, 2011, all income related to this property has been classified as discontinued operations for all current and prior periods presented.

On January 9, 2012, the Company sold 111 East Wacker, a 1.0 million square foot office building in Chicago, Illinois, for gross proceeds of $150.6 million.  A non-cash impairment loss totaling $19.1 million was recognized during the year ended December 31, 2011.  This impairment loss and all income from 111 East Wacker have been classified as discontinued operations for all current and prior periods presented.

The Company is under contract to sell a non-core portfolio of 15 assets (the "Non-Core Portfolio") in Jackson, Memphis and Richmond for a gross sale price of $147.5 million.  The sale is expected to close by the end of the first quarter of 2012, subject to the buyer's successful assumption of certain existing mortgage loans and customary closing conditions.  Accordingly, income from this portfolio of assets has been classified as discontinued operations for all current and prior periods presented.   During the fourth quarter 2011, the Company recognized an impairment loss on this portfolio totaling $57.2 million, of which $609,000 was related to a parcel of land in Jackson and $5.9 million was related to two remaining assets in Jackson and Memphis that are classified in continuing operations.  As of March 1, 2012, the Company had completed the sale of seven properties totaling 580,000 square feet.

A non-cash impairment loss of $500,000 was recorded in 2011 in connection with the valuation of approximately 12 acres of land available for sale in New Orleans, Louisiana, based on a change in the estimated fair value of the land.

Contractual Obligations and Minimum Rental Receipts

Obligations for tenant improvement allowances and lease inducement costs for leases in place and commitments for building improvements at December 31, 2011 are as follows (in thousands):

2012	$	10,806
2013		156
2014		31
2015		42
2016		1,651
Total	$	12,686

Included in total obligations for tenant improvement allowances and lease inducement costs is $7.7 million related to properties classified as held for sale at December 31, 2011.

Minimum future operating lease payments for various equipment leased at the office properties is as follows for operating leases in place at December 31, 2011 (in thousands):

2012	$	383
2013		150
2014		72
2015		14
2016		8
Total	$	627

The following is a schedule by year of future approximate minimum rental receipts under noncancelable leases for office buildings owned at December 31, 2011 (in thousands):

2012	$	196,636
2013		193,087
2014		177,237
2015		153,990
2016		120,311
Thereafter		309,418
	$	1,150,679

Included in total future minimum rental receipts under nonconcelable leases is $277.4 million related to properties classified as held for sale at December 31, 2011.

The following is a schedule by year of future approximate minimum ground lease payments at December 31, 2011 (in thousands):

2012	$	224
2013		224
2014		224
2015		224
2016		224
Thereafter		14,339
Total	$	15,459

At December 31, 2011, Fund II owned Corporate Center Four in Tampa, Florida that is subject to a ground lease.  The lease has a remaining term of approximately 69 years with an expiration date of December 2080.  Payments consist of a stated monthly amount that adjusts annually and a development rental rate that is fixed through August 2015.  The development rent rate is $0.40 per gross floor foot area through August 2015 and is subject to increase every five years thereafter at the lesser of 10% or the CPI percentage increase for all urban consumers.