| ARDEN REALTY INC ITEM 1A RISK FACTORS In addition to the other information contained or incorporated by reference in this Form 10-K, readers should carefully consider the following risk factors |
| Risks Related to the Proposed Merger On December 21, 2005, we, entered into a merger agreement with GECC and Trizec pursuant to which GECC will acquire us through the process set forth under the heading “Proposed Merger” in Item 1 above |
| In connection with the proposed merger, we have filed a definitive proxy statement with the SEC The proxy statement contains important information about us, the proposed merger and other related matters |
| We urge all of our stockholders to read the proxy statement |
| In relation to the proposed merger, we are subject to certain risks including, but not limited to, those set forth below |
| Failure to complete the merger could negatively impact our stock price and our future business and financial results |
| Completion of the proposed merger is subject to the satisfaction or waiver of various conditions, including the receipt of approval from our stockholders, receipt of various approvals and authorizations, and the absence of any order, injunction or decree preventing the completion of the proposed merger |
| There is no assurance that all of the various conditions will be satisfied or waived |
| 7 _________________________________________________________________ [59]Table of Contents If the proposed merger is not completed for any reason, we will be subject to several risks, including the following: • being required, under certain circumstances, including if we sign a definitive agreement with respect to a superior proposal from another potential buyer, to pay a termination fee of dlra100dtta0 million; • being required, under certain circumstances, including if we breach the merger agreement, to reimburse GECC for up to dlra10dtta0 million of its costs and expenses in connection with the merger agreement; • having incurred certain costs relating to the proposed merger that are payable whether or not the merger is completed, including legal, accounting, financial advisor and printing fees; and • having had the focus of management directed toward the proposed merger and integration planning instead of on our core business and other opportunities that could have been beneficial to us |
| In addition, we would not realize any of the expected benefits of having completed the proposed merger |
| If the proposed merger is not completed, we cannot assure our stockholders that these risks will not materialize or materially adversely affect our business, financial results, financial condition and stock price |
| Provisions of the merger agreement may deter alternative business combinations and could negatively impact our stock price if the merger agreement is terminated in certain circumstances |
| Restrictions in the merger agreement on solicitation generally prohibit us from soliciting any acquisition proposal or offer for a merger or business combination with any other party, including a proposal that might be advantageous to our stockholders when compared to the terms and conditions of the proposed merger |
| If the merger is not completed, we may not be able to conclude another merger, sale or combination on as favorable terms, in a timely manner, or at all |
| If the merger agreement is terminated, we, in certain specified circumstances, may be required to pay a termination fee of up to dlra100dtta0 million to GECC In addition, under certain circumstances, we may be required to pay GECC an expense fee of dlra10dtta0 million |
| These provisions may deter third parties from proposing or pursuing alternative business combinations that might result in greater value to our stockholders than the merger |
| Our stock price and businesses may be adversely affected if the merger is not completed |
| If the merger is not completed, the trading price of our common stock may decline, to the extent that the current market prices reflect a market assumption that the merger will be completed |
| In addition, our businesses and operations may be harmed to the extent that tenants, vendors and others believe that we cannot effectively operate in the marketplace on a stand-alone basis, or there is tenant or employee uncertainty surrounding the future direction of the strategy of our company on a stand-alone basis |
| Uncertainty regarding the merger may cause tenants, vendors and others to delay or defer decisions concerning their business with our company, which may harm our results of operations going forward if the merger is not completed |
| Because the merger is subject to several closing conditions, including the approval of the merger by our stockholders, uncertainty exists regarding the completion of the merger |
| This uncertainty may cause tenants, vendors and others to delay or defer decisions concerning their business with our company, which could negatively affect our business and results of operations |
| If the planned merger were not completed, we could suffer a number of consequences that may adversely affect our business, results of operations and stock price, including the following: • activities relating to the merger and related uncertainties may lead to a loss of revenue that we may not be able to regain if the merger does not occur; • the market price of our common stock could decline following an announcement that the merger has been abandoned, to the extent that the current market price reflects a market assumption that the merger will be completed; • we would remain liable for our costs related to the merger, such as legal fees and a portion of the investment banking fees; • we may not be able to continue our present level of operations and therefore would have to scale back our present level of business and consider additional reductions; and • we may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures |
| 8 _________________________________________________________________ [60]Table of Contents Real Estate Investment Risks An inability to retain tenants or rent space upon lease expirations may adversely affect our revenues and our ability to service our debt |
| Through 2010, 2cmam667 leases, including month-to-month leases, comprising approximately 75prca of our leased net rentable square footage and approximately 72prca of our annualized base rents at December 31, 2005 are scheduled to expire as follows: Percentage of Percentage of Number of Aggregate Portfolio Aggregate Portfolio Year Leases Expiring Leased Square Feet Annualized Base Rent Month-to-Month 135 2dtta1 % 1dtta8 % 2006 593 14dtta0 % 13dtta4 % 2007 576 14dtta3 % 13dtta4 % 2008 593 17dtta4 % 17dtta2 % 2009 395 13dtta1 % 12dtta6 % 2010 375 14dtta3 % 13dtta9 % If we are unable to promptly renew or relet leases for all or a substantial portion of this space, or if the rent upon renewal or reletting are significantly lower than expected, our cash flow and business could be adversely affected which would limit our ability to service our debt |
| Lack of non-farm job growth in Southern California or a deterioration of the local and national economy will adversely affect our operating results |
| All of our properties are located in Southern California |
| We believe non-farm job growth to be a leading indicator of office demand for the region |
| During 2006, a total of approximately 2dtta8 million square feet of occupied space, representing approximately 16dtta0prca of our total net rentable space, including month-to-month leases, will expire |
| Negative non-farm job growth in our submarkets or a deterioration of the local and/or national economy may result in a decline in occupancy and rental rates and may cause tenant concessions to increase and would most likely negatively affect our operating performance and property values |
| Competition affects occupancy levels, rents and cost of land which could adversely affect our revenues |
| Many office properties compete with our properties in attracting tenants to lease space |
| Some of the competing properties may be newer, better located or owned by parties better capitalized than we are |
| Although ownership of these competing properties is currently diversified among many different types of owners, from publicly traded companies and institutional investors to small enterprises and individual owners, and no one or group of owners currently dominate or significantly influence the market, consolidation of owners could create efficiencies and marketing advantages for the consolidated group that could adversely affect us |
| These competitive advantages, the number of competitors and the number of competitive commercial properties in a particular area could have a material adverse effect on the rents we can charge, our ability to lease space in our existing properties or at newly acquired or developed properties and the prices we have to pay for developable land |
| The financial condition and solvency of our tenants may reduce our cash flow |
| Tenants may experience a downturn in their business which may cause them to miss rental payments when due or to seek the protection of bankruptcy laws, which could result in rejection and termination of their leases or a delay in recovering possession of their premises |
| Although we have not experienced material losses from tenant bankruptcies, we cannot assure you that tenants will not file for bankruptcy protection in the future or, if any tenants file, that they will affirm their leases and continue to make rental payments in a timely manner |
| Because real estate investments are illiquid, we may not be able to sell properties when appropriate |
| Equity real estate investments are relatively illiquid |
| That illiquidity may tend to limit our ability to sell properties promptly in response to changes in economic or other conditions |
| In addition, the Internal Revenue Code of 1986, as amended, may under specified circumstances impose a 100prca prohibited transaction tax on the profits derived from our sale of properties held for fewer than four years, which could affect our ability to sell our properties |
| Rising energy costs and power outages in California may have an adverse effect on our operations and revenue |
| Problems associated with deregulation of the electric industry in California have resulted in significantly higher costs in some areas |
| All of our properties are currently located in areas served by utilities that either produce their own electricity, or that have procured long-term, fixed rate contracts with commercial electrical providers |
| While we have no information suggesting that any 9 _________________________________________________________________ [61]Table of Contents future service interruptions are expected, we believe that higher utility costs may continue as price increases are allowed by the California Public Utility Commission or other regulatory agencies |
| Approximately 22prca of our buildings and 16prca of the total rentable square footage of our portfolio are subject to leases that require our tenants to pay all utility costs |
| The remainder of our leases provide that tenants will reimburse us for utility costs in excess of a base year amount |
| Although we have not experienced any material losses resulting from electric deregulation, it is possible that some or all of our tenants will not fulfill their lease obligations and reimburse us for their share of any significant electric rate increases and that we will not be able to retain or replace our tenants if energy problems in California continue |
| Increases in taxes and regulatory compliance costs may reduce our revenue |
| Therefore, any tax increases may adversely affect our cash flow and our ability to pay or refinance our debt obligations |
| Our properties are also subject to various federal, California and local regulatory requirements, such as requirements of the Americans with Disabilities Act, and California and local fire and life safety requirements |
| Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants |
| We believe that our properties are currently in substantial compliance with these regulatory requirements |
| We cannot assure you, however, that these requirements will not be changed or that new requirements will not be imposed that would require significant unanticipated expenditures by us and could have an adverse effect on our cash flow, the amounts available for distributions and on our business |
| We may acquire properties through partnerships or joint ventures with third parties that could result in financial dependency and management conflicts |
| We may participate with other entities in property ownership through joint ventures or partnerships in the future |
| Depending on the characteristics and business objectives of the joint venture or partnership, we may not have voting control over the joint venture or partnership |
| Partnership or joint venture investments may, under certain circumstances, involve risks not otherwise present, including: • our partners or co-venturers might become bankrupt; • our partners or co-venturers might at any time have economic or other business interests or goals which are inconsistent with our business interests or goals; and • our partners or co-venturers may be in a position to take action contrary to our instructions or requests contrary to our policies or objectives |
| Neither the partnership agreement of our operating partnership nor our governing documents prevent us from participating in joint ventures with our affiliates |
| Because a joint venture with an affiliate may not be negotiated in a traditional arm’s length transaction, terms of the joint venture may not be as favorable to us as we could obtain if we entered into a joint venture with an outside third party |
| We may not be able to successfully integrate or finance our acquisitions |
| As we acquire additional properties, we will be subject to risks associated with managing new properties, including building systems not operating as expected, delay in or failure to lease vacant space and tenants failing to renew leases as they expire |
| In addition, our ability to manage our growth effectively will require us to successfully integrate our new acquisitions into our existing accounting systems and property management structure |
| We cannot assure you that we will be able to succeed with that integration or effectively manage additional properties or that newly acquired properties will perform as expected |
| Changing market conditions, including competition from other purchasers of suburban office properties, may diminish our opportunities for attractive additional acquisitions |
| Moreover, acquisition costs of a property may exceed original estimates, possibly making the property uneconomical |
| Our acquisitions and renovations may not perform as expected |
| Although we currently have no plans to significantly expand or renovate our properties, we may do so in the future, subject to certain restrictions contained in the merger agreement |
| Expansion and renovation projects may inconvenience and displace existing tenants, require us to engage in time consuming up-front planning and engineering activities and expend capital, and require us to obtain various government and other approvals, the receipt of which cannot be assured |
| While our policies with respect to expansion and renovation activities are intended to limit some of the risks otherwise associated with these activities, we will nevertheless incur risks, including expenditures of funds on, and devotion of our time to, projects that may not be completed |
| 10 _________________________________________________________________ [62]Table of Contents Our development activities may be more expensive than anticipated and may not yield our anticipated results |
| We have preliminary architectural designs completed for an additional 475cmam000 net rentable square feet at the Howard Hughes Center in Los Angeles, California and have completed preliminary designs on a build-to-suit office building at our Long Beach Airport Business Park |
| We have entitlements for up to 600 hotel rooms at the Howard Hughes Center |
| We also have a 5-acre developable land parcel in Torrance, California that we are also marketing for a build-to-suit building |
| Certain restrictions contained in the merger agreement limit our ability to move forward on these developments without the approval of GECC We also intend to review, from time to time, other opportunities for developing and constructing office buildings and other commercial properties in accordance with our development and underwriting policies |
| We expect to finance our development activities over the next 24 months, subject to certain restrictions contained in the merger agreement, through net cash provided by operating activities, proceeds from asset sales, proceeds from our lines of credit or other secured borrowings |
| Risks associated with our development activities may include: • abandonment of development opportunities due to a lack of financing or other reasons; • construction costs of a property exceeding original estimates, possibly making the property uneconomical; • occupancy rates and rents at a newly completed property may not be sufficient to make the property profitable; • construction and lease-up may not be completed on schedule, resulting in increased debt service expense and construction costs; and • development activities would also be subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations |
| We are not subject to any limit on the amount or percentage of our assets that may be invested in any single property or any single geographic area |
| Our governing documents do not restrict the amount or percentage of our assets that we may invest in a single property or geographic area |
| All of our properties are currently in Southern California and we have no immediate plans to invest outside of Southern California |
| Although the overall Southern California economy is diverse and well balanced, the geographic concentration of our portfolio may make us more susceptible to changes affecting the Southern California economy and real estate markets or damages from regional events such as earthquakes |
| We may not be able to expand into new markets successfully |
| While our business is currently limited to the Southern California market, it is possible that we will in the future expand our business to new geographic markets |
| We will not initially possess the same level of familiarity with new markets outside of Southern California, which could adversely affect our ability to manage, lease, develop or acquire properties in new localities |
| Financing Risks Our amount of debt could limit our operational flexibility or otherwise adversely affect our financial condition |
| As of December 31, 2005, we had total debt of approximately dlra1dtta6 billion, consisting of approximately dlra419dtta6 million in secured debt and approximately dlra1dtta2 billion of unsecured debt |
| ” Our indebtedness could: • require us to dedicate a substantial portion of our cash flow to pay our debt, thereby reducing the availability of our cash flow to fund distributions, working capital, capital expenditures, acquisition and development activity and other business purposes; • make it more difficult for us to satisfy our debt obligations; • limit our ability to refinance our debt and obtain additional debt financing; and • increase our vulnerability to general adverse economic and real estate industry conditions and limit our flexibility in planning for, or reacting to, changes in our business and the real estate industry |
| 11 _________________________________________________________________ [63]Table of Contents Despite current indebtedness levels, we may still be able to incur substantially more debt in the future, which would increase the risks associated with our substantial leverage |
| Neither the partnership agreement of our operating partnership nor our governing documents limit the amount or the percentage of indebtedness that we may incur |
| We may borrow up to a maximum of dlra330 million under our two lines of credit |
| As of December 31, 2005, we had the ability to borrow an additional dlra70dtta5 million under these two lines of credit |
| If new debt is added to our current debt levels, the related risks that we now face could intensify and could increase the risk of default on our indebtedness |
| Scheduled debt payments could adversely affect our financial condition |
| Our cash flow could be insufficient to meet required payments of principal and interest when due |
| In addition, we may not be able to refinance existing indebtedness, which in virtually all cases requires substantial principal payments at maturity, and, if we can refinance, the terms of the refinancing might not be as favorable as the terms of our existing indebtedness |
| If principal payments cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow will not be sufficient in all years to repay all maturing debt and continue to service and repay our debt obligations |
| Rises in interest rates could adversely affect our financial condition |
| An increase in prevailing interest rates would have an immediate effect on the interest rates charged on our variable rate debt which rise and fall upon changes in interest rates |
| At December 31, 2005, approximately 14prca of our debt was variable rate debt |
| Increases in interest rates would also impact the refinancing of our fixed rate debt |
| If interest rates are higher when our fixed debt becomes due, we may be forced to borrow at the higher rates |
| If prevailing interest rates or other factors result in higher interest rates, the increased interest expense would adversely affect our cash flow and our ability to service our debt |
| As a protection against rising interest rates, we may enter into agreements such as interest rate hedges, caps, floors and other interest rate exchange contracts |
| These agreements, however, increase our risks as to the other parties to the agreements not performing or that the agreements could be unenforceable |
| Many of our properties are subject to mortgage financing which could result in foreclosure if we are unable to pay or refinance the mortgages when due |
| We currently have four outstanding mortgage financings totaling approximately dlra358dtta2 million that are secured by 46 of our properties |
| The properties in each of these financings are fully cross-collateralized and cross-defaulted |
| The cross-defaults can give the lender a number of remedies depending on the circumstances such as the right to increase the interest rate, demand additional collateral, accelerate the maturity date of the mortgages or foreclose on and sell the properties |
| Three additional properties are subject to single property mortgages totaling approximately dlra61dtta5 million at December 31, 2005 |
| If we are unable to meet our obligations under these mortgages, we could be forced to pay higher interest rates or provide additional collateral or the properties subject to the mortgages could be foreclosed upon and sold, which could have a material adverse effect on us and our ability to pay or refinance our debt obligations |
| Tax Risks Our desire to qualify as a REIT restricts our ability to accumulate cash that might be used in future periods to make debt payments or to fund future growth |
| In order to qualify as a REIT and avoid federal income tax liability, we must distribute to our stockholders at least 90prca of our net taxable income, excluding net capital gain, and to avoid income taxation, our distributions must not be less than 100prca of our net taxable income, including capital gains |
| To avoid excise tax liability, our distributions to our stockholders for the year must exceed the sum of 85prca of its ordinary income, 95prca of its capital gain net income, and any undistributed taxable income from prior years |
| As a result of these distribution requirements, we do not expect to accumulate significant amounts of cash |
| Accordingly, these distributions could significantly reduce the cash available to us in subsequent periods to make payments on our debt obligations and to fund future growth |
| Our operating partnership intends to qualify as a partnership, but we cannot guarantee that it will qualify |
| Our operating partnership intends to qualify as a partnership for federal income tax purposes |
| However, if our operating partnership were a “publicly traded partnership,” it would be treated as a corporation instead of a partnership for federal income tax purposes unless at least 90prca of its income is qualifying income as defined in the Internal Revenue Code |
| The income requirements applicable to REITs and the definition of “qualifying income” for purposes of this 90prca test are similar in most respects |
| Qualifying income for the 90prca test generally includes passive income, such as specified types of real property rents, dividends and interest |
| We believe that our operating partnership would meet this 90prca test, but we cannot guarantee that it would |
| If our operating partnership 12 _________________________________________________________________ [64]Table of Contents were to be taxed as a corporation, it would incur substantial tax liabilities and we would fail to qualify as a REIT for federal income tax purposes |
| We may suffer adverse tax consequences and be unable to attract capital if we fail to qualify as a REIT We believe that since our taxable year ended December 31, 1996, we have been organized and operated, and intend to continue to operate, so as to qualify for taxation as a REIT under the Internal Revenue Code |
| Although we believe that we have been and will continue to be organized and have operated and will continue to operate so as to qualify for taxation as a REIT, we cannot assure you that we have been or will continue to be organized or operated in a manner so as to qualify or remain so qualified |
| For us to qualify as a REIT, we must satisfy numerous requirements established under highly technical and complex Internal Revenue Code provisions for which there are only limited judicial and administrative interpretations and tests regarding various factual matters and circumstances not entirely within our control |
| The complexity of these provisions and of the applicable Treasury Regulations that have been promulgated under the Internal Revenue Code is greater in the case of a REIT, like us, that holds its assets through an investment in a partnership |
| No assurance can be given that legislation, new regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to our qualification as a REIT or the federal income tax consequences of qualification |
| We are, however, not aware of any pending legislation that would adversely affect our ability to qualify as a REIT Our qualification and taxation as a REIT depends on our ability to meet, through actual annual operating results, asset diversification, distribution levels and diversity of stock ownership, the various qualification tests imposed under the Internal Revenue Code, the results of which have not been and will not be reviewed by our tax counsel |
| If we failed to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates |
| Moreover, unless entitled to relief under specific statutory provisions, we also would be disqualified as a REIT for the four taxable years following the year during which qualification was lost |
| If we were disqualified as a REIT, our ability to raise additional capital could be significantly impaired |
| This could reduce the funds we would have available to pay distributions to our stockholders and to service our debt |
| Even if we qualify for and maintain our REIT status, we will be subject to certain federal, state and local taxes on our income and property |
| For example, if we have net income from a prohibited transaction, specifically sales or other taxable dispositions of property held primarily for sale to customers in the ordinary course of business, that income will be subject to a 100prca tax |
| Other Risks We are subject to agreements and policies that may deter change in control offers that might be attractive to our stockholders |
| Certain provisions of our charter and bylaws may delay, defer or prevent a third party from making offers to acquire us or assume control over us |
| For example, such provisions may: • deter tender offers for our common stock, which offers may be attractive to the stockholders; and • deter purchases of large blocks of common stock, thereby limiting the opportunity for stockholders to receive a premium for their common stock over then-prevailing market prices |
| Our charter contains a provision designed to prevent a concentration of ownership among our stockholders that would cause us to fail to qualify as a REIT Under the Internal Revenue Code, not more than 50prca in value of our outstanding shares of common stock may be owned, actually or constructively, by five or fewer individuals, including specific kinds of entities, at any time during the last half of our taxable year |
| In addition, if we, or an owner of 10prca or more of our common stock, actually or constructively owns 10prca or more of a tenant of ours, or a tenant of any partnership in which we are a partner, the rent received by us from that tenant will not be qualifying income for purposes of the REIT gross income tests |
| In order to protect us against the risk of losing REIT status, the ownership limit included in our charter limits actual or constructive ownership of our outstanding shares of common stock by any single stockholder to 9dtta0prca, by value or by number of shares, whichever is more restrictive, of the then outstanding shares of common stock |
| Actual or constructive ownership of shares of common stock in excess of the ownership limit will cause the violative transfer or ownership to be void with respect to the transferee or owner as to that number of shares in excess of the ownership limit and such shares will be automatically transferred to a trust for the exclusive benefit of one or more qualified charitable organizations |
| That transferee or owner will have no right to vote such shares or be entitled to dividends or other distributions with respect to such shares |
| Although our Board of Directors presently has no intention of doing so, except as described below, our Board of Directors could waive this restriction with respect to a particular stockholder if it were satisfied, based upon the advice of counsel or a ruling from the Internal Revenue Service, that ownership by such stockholder in excess of the ownership limit would not jeopardize our status as a REIT and our Board of Directors otherwise decided such action would be in our best interests |
| Our Board of Directors has waived our ownership limit with respect to Mr |
| Ziman, our Chairman and CEO, and certain family members and affiliates and has permitted these parties to actually and constructively own up to 13dtta0prca of the outstanding shares of common stock |
| 13 _________________________________________________________________ [65]Table of Contents Our charter authorizes our Board of Directors to cause us to issue authorized but unissued shares of common stock or preferred stock and to reclassify any unissued shares of common stock or classify any unissued and reclassify any previously classified but unissued shares of preferred stock and, with respect to the preferred stock, to set the preferences, rights and other terms of such classified or unclassified shares |
| Although our Board of Directors has no such intention at the present time, it could establish a series of preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change in control that might involve a premium price for the common stock or otherwise be in the best interest of our stockholders |
| Our Board of Directors is divided into three classes of directors |
| Directors of each class are chosen for three-year terms upon the expiration of their current terms and each year one class of directors will be elected by the stockholders |
| The staggered terms of directors may reduce the possibility of a tender offer or an attempt to change control even though a tender offer or change in control might be in the best interest of our stockholders |
| Losses in excess of our insurance coverage or uninsured losses could adversely affect our cash flow |
| We carry comprehensive liability, fire, extended coverage, terrorism and rental loss insurance policies which currently cover all of our properties with specifications and insured limits that we believe are adequate and appropriate under the circumstances |
| Some losses, however, are generally not insured against because it is not economically feasible to do so |
| Should an uninsured loss or a loss in excess of insured limits occur, we could lose our capital invested in the property, as well as the anticipated future revenue from the property and, in the case of debt which is recourse to us, we would remain obligated for any mortgage debt or other financial obligations related to the property |
| Any loss would adversely affect our cash flow with respect to the property subject to the loss |
| Moreover, we would generally be liable for any unsatisfied obligations other than non-recourse obligations with respect to the property subject to the loss |
| Lack of availability of insurance coverage for biological, chemical or nuclear terrorist attacks could adversely affect our financial condition |
| Our current terrorism insurance policy, which has been extended to March 2007, specifically excludes biological, chemical or nuclear terrorist acts |
| We have been notified by our insurance broker that in the aftermath of the September 11th attacks, insurance carriers will continue to exclude these types of attacks from terrorism insurance policies or offer coverage for biological, chemical or nuclear attacks coverages at prohibitive costs |
| Although we did not derive more than 3dtta5prca of our 2005 net operating income from any one of the properties in our portfolio, a biological, chemical or nuclear terrorist attack damaging several of our properties or negatively impacting the financial condition of our tenants could materially deteriorate our operating results and overall financial condition |
| An earthquake could adversely affect our business |
| All of our properties are located in Southern California, which is a high risk geographical area for earthquakes |
| Depending upon its magnitude, an earthquake could severely damage our properties which would adversely affect our business |
| We maintain earthquake insurance for our properties and the resulting business interruption |
| We cannot assure you that our insurance will be sufficient if there is a major earthquake |
| Our properties may be subject to environmental liabilities |
| Under federal, state and local environmental laws, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at the property and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean-up costs in connection with the contamination |
| These laws typically impose clean-up responsibility and liability without regard to whether the owner knew of or caused the presence of the contaminants, and the liability under these laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility |
| These costs may be substantial, and the presence of these substances, or the failure to remediate the contamination on the property, may adversely affect the owner’s ability to sell or rent the property or to borrow against the property |
| Finally, third parties may have claims against the owner of the site based on damages and costs resulting from environmental contamination emanating from that site |
| Specific federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos-containing materials when those materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building |
| These laws may impose liability for release of asbestos-containing material and may provide for third parties to seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials |
| In connection with the ownership and operation of our properties, we may be potentially liable for those costs |
| In the past few years, independent environmental consultants have conducted or updated Phase I environmental assessments and other environmental investigations as appropriate at some of our properties |
| The environmental site assessments and investigations have identified 38 properties in our portfolio, representing approximately 43prca of the total rentable square feet in the portfolio, affected by environmental concerns |
| These environmental concerns include properties that may be impacted by known or 14 _________________________________________________________________ [66]Table of Contents suspected (a) contamination caused by third party sources or (b) soil and/or groundwater contamination which has been remediated, and (c) those containing underground storage tanks or asbestos |
| Of these properties, four are believed to be affected by contamination caused by third party sources and two of these also house an underground storage tank, two contain friable asbestos, twenty contain non-friable asbestos, and twelve house underground storage tanks only |
| The properties affected by contamination are primarily affected by petroleum and solvent substances, and in each case a third party has indemnified us for any and all problems associated with this contamination |
| With regard to those properties affected by asbestos, asbestos does not pose a health hazard if it is not disturbed in such a way to cause an airborne release of asbestos |
| Asbestos is friable when it can be crumbled, pulverized or reduced to powder by hand pressure, and non-friable when hand pressure cannot release encapsulated asbestos fibers |
| Friable asbestos is more likely to be released into the air than non-friable asbestos |
| We manage all asbestos in ways that minimize its potential to become airborne or otherwise threaten human health |
| Regarding underground storage tanks, subsurface leakage of the materials contained within the tank constitutes the primary risk posed by these devices |
| Of the fourteen underground storage tanks, two are currently being removed and no known UST-related regulatory violations or outstanding compliance issues exist with the remainder |
| We have also implemented a program to ensure appropriate double-wall construction, testing protocols, placement of tanks within bermed areas, and the installation of leak and spill detection equipment at relevant sites |
| Environmental site assessments and investigations completed to date have not, however, revealed any environmental liability that we believe would have a material adverse effect on our business, assets or results of operations taken as a whole, nor are we aware of any material environmental liability |
| Nevertheless, it is possible that our environmental site assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which we are unaware |
| We believe that our properties are in compliance in all material respects with all federal, state and local laws regarding hazardous or toxic substances or petroleum products, except as noted above |
| We have not been notified by any governmental authority, and are not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of our present properties, other than as noted above |
| It is possible that future laws will impose material environmental liabilities on us and that the current environmental condition of our properties will be affected by tenants, by the condition of land or operations in the vicinity of our properties, such as the presence of underground storage tanks, or by third parties unrelated to us |
| We may incur increased costs as a result of enacted and proposed changes in laws and regulations |
| Enacted and proposed changes in the law and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules proposed by the SEC and by the New York Stock Exchange has resulted in significant increased compliance costs to us as we evaluate the implications of any new rules and comply to their requirements |
| The new rules could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage |
| The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers |
| The compliance with and the provisions of the Sarbanes-Oxley Act in future years will result in significant continuing costs to us |