INVESTMENT IN UNCONSOLIDATED VENTURES

As of September 30, 2013, the Company had an aggregate investment of approximately $194.6 million in 18 unconsolidated Real Estate Ventures. The Company formed or acquired interests in these ventures with unaffiliated third parties to develop or manage office properties or to acquire land in anticipation of possible development of office or residential properties. As of September 30, 2013, 12 of the Real Estate Ventures owned 50 office buildings that contain an aggregate of approximately 6.2 million net rentable square feet; four Real Estate Ventures owned 25.3 acres of undeveloped parcels of land; one Real Estate Venture owned 1.0-acres of land under active development and one Real Estate Venture developed a hotel property that contains 137 rooms in Conshohocken, PA.

The Company accounts for its unconsolidated interests in its Real Estate Ventures using the equity method. The Company’s unconsolidated interests range from 20% to 65%, subject to specified priority allocations of distributable cash in certain of the Real Estate Ventures.

The amounts reflected in the following tables (except for the Company’s share of equity and income) are based on the historical financial information of the individual Real Estate Ventures. The Company does not record operating losses of the Real Estate Ventures in excess of its investment balance unless the Company is liable for the obligations of the Real Estate Venture or is otherwise committed to provide financial support to the Real Estate Venture.

The following is a summary of the financial position of the Real Estate Ventures as of September 30, 2013 and December 31, 2012 (in thousands):



	September 30, 2013		December 31, 2012
Net property	$	879,838	$	923,536
Other assets	164,508		174,677
Other liabilities	36,115		53,645
Debt	707,847		724,780
Equity	300,384		319,788
Company’s share of equity (Company’s basis) (a)	194,572		193,555

(a) Amounts reflect the effects of basis differences resulting from assets contributed to Real Estate Ventures, as well as certain costs at the Real Estate Venture level. Basis differences occur from the impairment of investments and upon the transfer of assets that were previously owned by the Company into a Real Estate Venture. In addition, certain acquisition, transaction and other costs may not be reflected in the net assets at the Real Estate Venture level.

The following is a summary of results of operations of the Real Estate Ventures for the three and nine-month periods ended September 30, 2013 and 2012 (in thousands):



	Three-month periods ended September 30,					Nine-month periods ended September 30,
	2013			2012		2013			2012
Revenue	$	30,684		$	42,772	$	108,500		$	120,644
Operating expenses	13,199			18,753		48,671			51,819
Interest expense, net	9,223			10,233		28,167			31,100
Depreciation and amortization	9,893			12,947		33,778			36,067
Net income (loss)	(1,631		)	839		(2,116		)	1,658
Company’s share of income (Company’s basis)	714			500		3,757			1,382

4040 Wilson Venture

On July 31, 2013, the Company formed 4040 Wilson LLC Venture ("4040 Wilson"), a joint venture between the Company and Ashton Park Associates LLC (“Ashton Park”), an unaffiliated third party. 4040 Wilson expects to construct a 20-story office building located in the Ballston submarket of Arlington, Virginia. Each of the Company and Ashton Park owns a 50% interest in 4040 Wilson. 4040 Wilson would develop the project on a 1.3-acre land parcel contributed by Ashton Park at an agreed upon value of $36.0 million. The total estimated project costs are $194.3 million, which the Company expects would be financed through approximately $72.0 million of partner capital contributions (consisting of $36.0 million in cash from the Company and land with a value of $36.0 million from Ashton Park) and approximately $122.3 million of debt financing through a construction lender that has not yet been determined. Construction is scheduled to commence during the fourth quarter of 2013, with a targeted project completion in 2015. As part of the 4040 Wilson venture, the Company has agreed to guarantee 100% of any lender mandated recourse. As of September 30, 2013, the Company had not provided any guarantees in respect of 4040 Wilson.

Based upon the facts and circumstances at formation of 4040 Wilson, the Company determined that 4040 Wilson is a VIE in accordance with the accounting standard for the consolidation of VIEs. As a result, the Company used the variable interest model under the accounting standard for consolidation in order to determine whether to consolidate 4040 Wilson. Based upon each member's shared power over the activities of 4040 Wilson under the operating and related agreements of 4040 Wilson, and the Company's lack of control over the development and construction phases of the project, 4040 Wilson is not consolidated by the Company, and is accounted for under the equity method of accounting.

Two and Six Tower Bridge Exchange Transaction

On June 19, 2013, the Company acquired, from an unaffiliated third party, the third party's ownership interest in Six Tower Bridge real estate venture through a nonmonetary exchange for the Company's ownership interest in the Two Tower Bridge real estate venture. Six Tower Bridge owns an unencumbered office property in Conshohocken, PA. The Company previously accounted for its noncontrolling interest in Six Tower Bridge using the equity method. As a result of the exchange transaction, the Company obtained control of the Six Tower Bridge property and the Company's existing equity interest was remeasured at fair value based on the fair value of the underlying property and the distribution provisions of the real estate venture agreement. Accordingly, during 2013, the Company recorded a gain of approximately $7.8 million, which is reflected in "Gain from remeasurement of investment in a real estate venture" on the accompanying statements of operations. Following the acquisition, the Class A office property in Conshohocken, PA is wholly owned by the Company with an unencumbered fair value of $24.5 million. The Company accounted for this acquisition as a business combination and allocated the fair value as follows: $14.8 million to building, $6.9 million to land, $3.3 million to intangible assets and $0.5 million to below market lease liabilities assumed.

As mentioned above, the Company exchanged its investment in Two Tower Bridge real estate venture in a nonmonetary transaction with an unaffiliated third party for the third party's interest in the Six Tower Bridge real estate venture. The investment in Two Tower Bridge had a fair value of $3.6 million on the date of the exchange transaction based on the fair value of the venture's equity and the distribution provisions of the real estate venture agreement. Based on this fair value and the carrying value for the Company's investment of $(0.1) million, during 2013 the Company recognized a gain on exchange of interests in real estate ventures of $3.7 million.

evo at Cira Centre South Venture (formerly the Grove Venture)

On January 25, 2013, the Company formed the evo at Cira Centre South Venture, a joint venture among the Company and two unaffiliated third parties: Campus Crest Properties, LLC ("Campus Crest") and HSRE-Campus Crest IXA, LLC ("HSRE"). The evo at Cira Centre South Venture has commenced construction of a 33-story, 850-bed student housing tower located in the University City submarket of Philadelphia, Pennsylvania, to be called "evo at Cira Centre South." Each of the Company and Campus Crest owns a 30% interest in the evo at Cira Centre South Venture and HSRE owns a 40% interest. The evo at Cira Centre South Venture is developing the project on a one-acre land parcel held under a long-term ground lease with a third party lessor. The Company contributed to the evo at Cira Centre South Venture its tenancy rights under a long-term ground lease, together with associated development rights, at an agreed-upon value of $8.5 million. The total estimated project costs are $158.5 million, which will be financed through partner capital contributions totaling $60.7 million, with the remaining $97.8 million being financed through construction facilities provided by PNC Bank, Capital One and First Niagara Bank. Construction has already commenced, with a targeted project completion in 2014. In connection with the development of the evo at Cira Centre South Venture, each of the Company and Campus Crest provided, in addition to customary non-recourse carve-out guarantees, a completion and cost overrun guaranty, as well as a payment guaranty, on the construction financing (with the Company's share of the payment guaranty being approximately $23.0 million).

The Company's historical cost basis in the development rights that it contributed to the evo at Cira Centre South Venture at formation was $6.0 million, thus creating an initial $2.5 million basis difference between the Company's initial outside investment basis compared to its $8.5 million initial equity basis in the evo at Cira Centre South Venture. As this basis difference is not related to a physical land parcel, but rather to development rights to construct evo at Cira Centre South, the Company will accrete the basis difference as a reduction of depreciation expense over the life of the evo at Cira Centre South Venture's assets.

Based upon the facts and circumstances at evo at Cira Centre South Venture Venture formation, the Company determined that the evo at Cira Centre South Venture is a VIE in accordance with the accounting standard for the consolidation of VIEs. As a result, the Company used the variable interest model under the accounting standard for consolidation in order to determine whether to consolidate the evo at Cira Centre South Venture. Based upon each member's shared power over the activities of the evo at Cira Centre South Venture under the operating and related agreements of the evo at Cira Centre South Venture, and the Company's lack of exclusive control over the development and construction phases of the project, the evo at Cira Centre South Venture is not consolidated by the Company, and is accounted for under the equity method of accounting. Accordingly, the land parcel and associated development rights contributed by the Company to the evo at Cira Centre South Venture were deconsolidated by the Company upon formation of the evo at Cira Centre South Venture.

BDN Beacon Venture

On March 26, 2013, the Company sold its entire 20% ownership interest in an unconsolidated real estate venture known as BDN Beacon Venture LLC (the "Beacon Venture"). The carrying amount of the Company's investment in the Beacon Venture amounted to $17.0 million at the sale date, with the Company's proceeds effectively matching the carrying amount.

The Company, from time to time, also provides guarantees and indemnities on behalf of Real Estate Ventures, including environmental indemnities and non-recourse carve-outs under mortgage loans, in connection with both construction and permanent financing. As of September 30, 2013, the Company had guaranteed repayment of approximately $0.6 million of loans on behalf of the PJP VII Real Estate Venture.