SAUL CENTERS INC (Form: 10-Q, Received: 11/08/2011 15:09:56)

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For The Quarterly Period Ended September 30, 2011

Commission File Number 1-12254

SAUL CENTERS, INC.

(Exact name of registrant as specified in its charter)

Maryland

52-1833074

State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

7501 Wisconsin Avenue, Bethesda, Maryland 20814

(Address of principal executive office) (Zip Code)

Registrant’s telephone number, including area code (301) 986-6200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	¨	Accelerated filer	x

Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

Number of shares of common stock, par value $0.01 per share outstanding as of November 3, 2011: 19,284,000.

SAUL CENTERS, INC.

Table of Contents


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

(a) Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010		4
(b) Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010		5
(c) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2011 and 2010		6
(d) Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2011		7
(e) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010.		8
(f) Notes to Consolidated Financial Statements		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

(a) Critical Accounting Policies		33

(b) Results of Operations Quarter ended September 30, 2011 compared to quarter ended September 30, 2010		36
Nine months ended September 30, 2011 compared to nine months ended September 30, 2010		38

(c) Liquidity and Capital Resources		40

Item 3. Quantitative and Qualitative Disclosures About Market Risk		52

Item 4. Controls and Procedures		53

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		54
Item 1A. Risk Factors		54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		54
Item 3. Defaults Upon Senior Securities		54
Item 4. Reserved		54
Item 5. Other Information		54
Item 6. Exhibits		54
Signatures		60

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PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments necessary for the fair presentation of the financial position and results of operations of Saul Centers, Inc. for the interim periods have been included. All such adjustments are of a normal recurring nature. These consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements of Saul Centers, Inc. for the year ended December 31, 2010, which are included in its Annual Report on Form 10-K. The results of operations for interim periods are not necessarily indicative of results to be expected for the year.

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Saul Centers, Inc.

CONSOLIDATED BALANCE SHEETS


(Dollars in thousands, except per share amounts)	September 30, 2011			December 31, 2010
	*(Unaudited)*
Assets

Real estate investments
Land	$	323,298		$	275,044
Buildings and equipment		1,077,186			870,143
Construction in progress		12,780			78,849

		1,413,264			1,224,036
Accumulated depreciation		(318,117	)		(296,786	)

		1,095,147			927,250
Cash and cash equivalents		11,447			12,968
Accounts receivable and accrued income, net		37,407			36,417
Deferred leasing costs, net		25,010			17,835
Prepaid expenses, net		5,843			3,024
Deferred debt costs, net		6,969			7,192
Other assets		14,702			9,202

Total assets	$	1,196,525		$	1,013,888

Liabilities

Mortgage notes payable	$	826,018		$	601,147
Revolving credit facility payable		8,000			—
Construction loans payable		—			110,242
Dividends and distributions payable		13,162			12,415
Accounts payable, accrued expenses and other liabilities		25,101			23,544
Deferred income		32,300			26,727

Total liabilities		904,581			774,075

Stockholders’ equity
Preferred stock, 1,000,000 shares authorized:
Series A Cumulative Redeemable, 40,000 shares issued and outstanding		100,000			100,000
Series B Cumulative Redeemable, 31,731 shares issued and outstanding		79,328			79,328
Common stock, $0.01 par value, 30,000,000 shares authorized, 19,121,915 and 18,557,059 shares issued and outstanding, respectively		191			186
Additional paid-in capital		211,897			189,787
Accumulated deficit		(141,472	)		(128,926	)
Accumulated other comprehensive loss		(2,674	)		(419	)

Total Saul Centers, Inc. stockholders’ equity		247,270			239,956

Noncontrolling interest		44,674			(143	)

Total stockholders’ equity		291,944			239,813

Total liabilities and stockholders’ equity	$	1,196,525		$	1,013,888

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Saul Centers, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


(Dollars in thousands, except per share amounts)	For The Three Months Ended September 30,						For The Nine Months Ended September 30,
(Dollars in thousands, except per share amounts)	2011			2010			2011			2010
Revenue
Base rent	$	34,390		$	31,243		$	101,280		$	94,713
Expense recoveries		6,994			6,938			21,211			22,583
Percentage rent		209			238			1,037			927
Other		1,285			1,132			3,862			5,028

Total revenue		42,878			39,551			127,390			123,251

Operating expenses
Property operating expenses		5,829			5,199			18,289			17,706
Provision for credit losses		595			345			1,628			699
Real estate taxes		4,743			4,367			13,881			13,498
Interest expense and amortization of deferred debt costs		11,250			8,781			32,714			26,259
Depreciation and amortization of deferred leasing costs		8,512			7,031			25,308			21,365
General and administrative		3,293			3,417			10,402			9,955

Total operating expenses		34,222			29,140			102,222			89,482

Operating Income		8,656			10,411			25,168			33,769
Acquisition related costs		(2,439	)		(170	)		(2,513	)		(170	)
Decrease in fair value of derivatives		(217	)		—			(1,374	)		—
Gain on casualty settlement		—			1,700			198			1,700
Loss on early extinguishment of debt		—			—			—			(4,479	)

Income from continuing operations		6,000			11,941			21,479			30,820

Discontinued Operations
Loss from operations of property sold		—			(29	)		—			(96	)
Gain on sale of property		—			3,591			—			3,591

Income from discontinued operations		—			3,562			—			3,495

Net Income		6,000			15,503			21,479			34,315

Noncontrolling interest
Income attributable to noncontrolling interests		(496	)		(2,672	)		(2,268	)		(5,258	)

Net income attributable to Saul Centers, Inc.		5,504			12,831			19,211			29,057

Preferred dividends		(3,785	)		(3,785	)		(11,355	)		(11,355	)

Net income available to common stockholders	$	1,719		$	9,046		$	7,856		$	17,702

Per share net income available to common stockholders
Basic and Diluted:
Continuing operations	$	0.09		$	0.30		$	0.42		$	0.78
Discontinued operations		—			0.19			—			0.19

	$	0.09		$	0.49		$	0.42		$	0.97

Dividends declared per common share outstanding	$	0.36		$	0.36		$	1.08		$	1.08

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Saul Centers, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	For The Three Months Ended September 30,						For The Nine Months Ended September 30,
(Dollars in thousands)	2011			2010			2011			2010
Net income	$	6,000		$	15,503		$	21,479		$	34,315

Other comprehensive income
Unrealized loss on cash flow hedge		(3,449	)		(3,275	)		(2,906	)		(3,275	)

Total comprehensive income		2,551			12,228			18,573			31,040

Comprehensive income (loss) attributable to noncontrolling interests		(276	)		1,922			1,617			4,508

Total comprehensive income attributable to Saul Centers, Inc.		2,827			10,306			16,956			26,532

Preferred dividends		(3,785	)		(3,785	)		(11,355	)		(11,355	)

Total comprehensive income (loss) available to common stockholders	$	(958	)	$	6,521		$	5,601		$	15,177

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Saul Centers, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


(Dollars in thousands, except per share amounts)	Preferred Stock		Common Stock		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Saul Centers, Inc.			Noncontrolling Interest			Total
Balance, December 31, 2010	$	179,328	$	186	$	189,787	$	(128,926	)	$	(419	)	$	239,956		$	(143	)	$	239,813

Issuance of 564,856 shares of common stock:
186,968 restricted shares		—		2		6,189		—			—			6,191			—			6,191
337,659 shares pursuant to dividend reinvestment plan		—		1		14,160		—			—			14,161			—			14,161
40,229 shares due to exercise of employee stock options and issuance of directors’ deferred stock		—		2		1,761		—			—			1,763			—			1,763
Issuance of 1,497,814 partnership units		—		—		—		—			—			—			49,589			49,589
Net income		—		—		—		19,211						19,211			2,268			21,479
Unrealized loss on cash flow hedge		—		—		—		—			(2,255	)		(2,255	)		(651	)		(2,906	)
Preferred stock distributions:
Series A		—		—		—		(4,000	)		—			(4,000	)		—			(4,000	)
Series B		—		—		—		(3,570	)					(3,570	)		—			(3,570	)
Common stock distributions		—		—		—		(13,514	)		—			(13,514	)		(3,900	)		(17,414	)
Distributions payable preferred stock:
Series A, $50.00 per share		—		—		—		(2,000	)		—			(2,000	)		—			(2,000	)
Series B, $56.25 per share		—		—		—		(1,785	)		—			(1,785	)		—			(1,785	)
Distributions payable common stock ($0.36/share) and distributions payable partnership units ($0.36/unit)		—		—		—		(6,888	)		—			(6,888	)		(2,489	)		(9,377	)

Balance, September 30, 2011	$	179,328	$	191	$	211,897	$	(141,472	)	$	(2,674	)	$	247,270		$	44,674		$	291,944

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Saul Centers, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For The Nine Months Ended September 30,
(Dollars in thousands)	2011			2010
Cash flows from operating activities:
Net income	$	21,479		$	34,315
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on casualty settlement, continuing operations		(198	)		(1,700	)
Gain on sale of property, discontinued operations		—			(3,591	)
Decrease in fair value of derivatives		1,374			—
Depreciation and amortization of deferred leasing costs		25,308			21,452
Amortization of deferred debt costs		1,146			1,099
Non cash compensation costs of stock grants and options		806			813
Provision for credit losses		1,628			699
(Increase) decrease in accounts receivable and accrued income		(3,396	)		945
Increase in deferred leasing costs		(3,747	)		(1,951	)
Increase in prepaid expenses		(2,819	)		(1,758	)
Increase in other assets		(5,500	)		(8,321	)
Increase in accounts payable, accrued expenses and other liabilities		3,946			2,149
Increase (decrease) in deferred income		111			(823	)

Net cash provided by operating activities		40,138			43,328

Cash flows from investing activities:
Acquisitions of real estate investments		(170,100	)		—
Additions to real estate investments		(8,127	)		(4,425	)
Additions to development and redevelopment projects		(19,640	)		(53,730	)
Proceeds from casualty settlement		1,004			250

Net cash used in investing activities		(196,863	)		(57,905	)

Cash flows from financing activities:
Proceeds from mortgage notes payable		236,410			73,144
Repayments on mortgage notes payable		(121,781	)		(41,912	)
Proceeds from revolving credit facility		16,000			—
Repayments on revolving credit facility		(8,000	)		—
Additions to deferred debt costs		(923	)		(329	)
Proceeds from the issuance of:
Common stock		21,309			12,584
Partnership units		49,589			—
Distributions to:
Series A preferred stockholders		(6,000	)		(6,000	)
Series B preferred stockholders		(5,355	)		(5,355	)
Common stockholders		(20,195	)		(19,578	)
Noncontrolling interest		(5,850	)		(5,849	)

Net cash provided by financing activities		155,204			6,705

Net decrease in cash and cash equivalents		(1,521	)		(7,872	)
Cash and cash equivalents, beginning of period		12,968			20,607

Cash and cash equivalents, end of period	$	11,447		$	12,735

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Notes to Consolidated Financial Statements (Unaudited)

1.	Organization, Formation and Structure

Saul Centers, Inc. (“Saul Centers”) was incorporated under the Maryland General Corporation Law on June 10, 1993. Saul Centers operates as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). A REIT is required to annually distribute at least 90% of its REIT taxable income (excluding net capital gains) to its stockholders and meet certain organizational and other requirements. Saul Centers has made and intends to continue to make regular quarterly distributions to its stockholders. Saul Centers, together with its wholly owned subsidiaries and the limited partnerships of which Saul Centers or one of its subsidiaries is the sole general partner, are referred to collectively as the “Company.” B. Francis Saul II serves as Chairman of the Board of Directors and Chief Executive Officer of Saul Centers.

Saul Centers was formed to continue and expand the shopping center business previously owned and conducted by the B.F. Saul Real Estate Investment Trust, the B.F. Saul Company and certain other affiliated entities, each of which is currently controlled by B. Francis Saul II and his family members (collectively, “The Saul Organization”). On August 26, 1993, members of The Saul Organization transferred to Saul Holdings Limited Partnership, a newly formed Maryland limited partnership (the “Operating Partnership”), and two newly formed subsidiary limited partnerships (the “Subsidiary Partnerships,” and collectively with the Operating Partnership, the “Partnerships”), shopping center and mixed-use properties, and the management functions related to the transferred properties. Since its formation, the Company has developed and purchased additional properties.

The following table lists the properties acquired and/or developed by the Company since December 31, 2009.


Name of Property	Location	Type	Date of Acquisition/ Development
Acquisitions
11503 Rockville Pike	Rockville, MD	Shopping Center	2010
Metro Pike Center	Rockville, MD	Shopping Center	2010
4469 Connecticut Ave	Washington, DC	Mixed-Use	2011
Kentlands Square II	Gaithersburg, MD	Shopping Center	2011
Severna Park MarketPlace	Severna Park, MD	Shopping Center	2011
Cranberry Square	Westminster, MD	Shopping Center	2011
Developments
Clarendon Center North	Arlington, VA	Mixed-Use	2011
Clarendon Center South	Arlington, VA	Mixed-Use	2011

As of September 30, 2011, the Company’s properties (the “Current Portfolio Properties”) consisted of 51 operating shopping center properties (the “Shopping Centers”), seven mixed-use properties which are comprised of office, retail and multi-family residential uses (the “Mixed-Use Properties”) and two (non-operating) development properties.

In September 1997, the Company established Saul QRS, Inc., a wholly owned subsidiary of Saul Centers, to facilitate the placement of collateralized mortgage debt. Saul QRS, Inc. was

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created to succeed to the interest of Saul Centers as the sole general partner of Saul Subsidiary I Limited Partnership. The remaining limited partnership interests in Saul Subsidiary I Limited Partnership and Saul Subsidiary II Limited Partnership are held by the Operating Partnership as the sole limited partner. Through this structure, the Company owns 100% of the Current Portfolio Properties.

2.	Summary of Significant Accounting Policies

Nature of Operations

The Company, which conducts all of its activities through its subsidiaries, the Operating Partnership and Subsidiary Partnerships, engages in the ownership, operation, management, leasing, acquisition, renovation, expansion, development and financing of community and neighborhood shopping centers and mixed-use properties, primarily in the Washington, DC/Baltimore metropolitan area.

Because the properties are located primarily in the Washington, DC/Baltimore metropolitan area, the Company is subject to a concentration of credit risk related to these properties. A majority of the Shopping Centers are anchored by several major tenants. As of September 30, 2011, thirty-three of the Shopping Centers were anchored by a grocery store and offer primarily day-to-day necessities and services. Three retail tenants, Giant Food (4.0%), a tenant at ten Shopping Centers, Safeway (3.1%), a tenant at eight Shopping Centers and Capital One Bank (2.6%), a tenant at twenty properties, individually accounted for 2.5% or more of the Company’s total revenue for the nine months ended September 30, 2011.

Principles of Consolidation

The accompanying consolidated financial statements of the Company include the accounts of Saul Centers and its subsidiaries, including the Operating Partnership and Subsidiary Partnerships, which are majority owned by Saul Centers. All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments necessary for the fair presentation of the financial position and results of operations of Saul Centers, Inc. for the interim periods have been included. All such adjustments are of a normal recurring nature. These consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements of Saul Centers, Inc. for the year ended December 31, 2010, which are included in its Annual Report on Form 10-K. The results of operations for interim periods are not necessarily indicative of results to be expected for the year.

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Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Real Estate Investment Properties

The Company purchases real estate investment properties from time to time and allocates the purchase price to various components, such as land, buildings, and intangibles related to in-place leases and customer relationships, based on the fair value of each component. The fair value of buildings is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates. As such, the determination of fair value considers the present value of all cash flows expected to be generated from the property including an initial lease up period. The Company determines the fair value of above and below market intangibles associated with in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. In the case of above and below market leases, the Company considers the remaining contractual lease period and renewal periods, taking into consideration the likelihood of the tenant exercising its renewal options. The fair value of a below market lease component is recorded as deferred income and amortized as additional lease revenue over the remaining contractual lease period and any renewal option periods included in the valuation analysis. The fair value of above market lease intangibles is recorded as a deferred asset and is amortized as a reduction of lease revenue over the remaining contractual lease term. The Company determines the fair value of at-market in-place leases considering the cost of acquiring similar leases, the foregone rents associated with the lease-up period and carrying costs associated with the lease-up period. Intangible assets associated with at-market in-place leases are amortized as additional expense over the remaining contractual lease term. To the extent customer relationship intangibles are present in an acquisition, the fair value of the intangibles is amortized over the life of the customer relationship. The Company has never recorded a customer relationship intangible asset. The Company expenses acquisition-related costs as they are incurred.

If there is an event or change in circumstance that indicates a potential impairment in the value of a real estate investment property, the Company prepares an impairment analysis to determine that the carrying value of the real estate investment property does not exceed its estimated fair value. The Company considers both quantitative and qualitative factors including recurring operating losses, significant decreases in occupancy, and significant adverse changes in legal factors and business climate. If impairment indicators are present, the Company compares the projected cash flows of the property over its remaining useful life, on an undiscounted basis, to the carrying value of that property. The Company assesses its undiscounted projected cash flows based upon estimated capitalization rates, historic operating results and market conditions that may affect the property. If such carrying value is greater than the undiscounted projected cash flows, the Company would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its then estimated fair value. The value of any property is sensitive to the actual results of any of the aforementioned estimated factors, either individually or taken as a whole. Should the actual results differ from management’s projections, the

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valuation could be negatively or positively affected. No impairment loss was recognized during the nine month periods ended September 30, 2011 and 2010.

Interest, real estate taxes, development-related salary costs and other carrying costs are capitalized on projects under development and construction. Once construction is substantially completed and the assets are placed in service, their rental income, real estate tax expense, property operating expenses (consisting of payroll, repairs and maintenance, utilities, insurance and other property related expenses) and depreciation are included in current operations. Property operating expenses are charged to operations as incurred. Interest expense capitalized totaled $1,793,000 and $5,254,000, for the nine month periods ended September 30, 2011 and 2010, respectively. A project is considered substantially complete and available for occupancy upon completion of tenant improvements, but no later than one year from the cessation of major construction activity. Substantially completed portions of a project are accounted for as separate projects.

Depreciation is calculated using the straight-line method and estimated useful lives of 35 to 50 years for base buildings and up to 20 years for certain other improvements that extend the useful lives. In addition, the Company capitalizes leasehold improvements when certain criteria are met, including when the Company supervises construction and will own the improvements. Tenant improvements are amortized, over the shorter of the lives of the related leases or the useful life of the improvements, using the straight-line method. The depreciation component included in depreciation and amortization expense in the consolidated statements of operations totaled $22,106,000 and $18,495,000 for the nine month periods ended September 30, 2011 and 2010, respectively. Repairs and maintenance expense, included in property operating expenses, for the nine month periods ended September 30, 2011 and 2010, was $7,827,000 and $9,439,000, respectively.

Assets Held for Sale

The Company considers properties to be assets held for sale when all of the following criteria are met:

•

management commits to a plan to sell a property;

•

it is unlikely that the disposal plan will be significantly modified or discontinued;

•

the property is available for immediate sale in its present condition;

•

actions required to complete the sale of the property have been initiated;

•

sale of the property is probable and the Company expects the completed sale will occur within one year; and

•

the property is actively being marketed for sale at a price that is reasonable given its current market value.

Upon designation as an asset held for sale, the Company records the carrying value of each property at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and the Company ceases depreciation. As of September 30, 2011, no properties were classified as held for sale.

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Discontinued Operations

On September 30, 2010, the Company sold its Lexington property for $8,132,000 and recognized a gain of $3,591,000. The results of operations for the Lexington property for the three and nine months ended September 30, 2010 are shown in the statements of operations as “Loss from operations of property sold.” The Company has no other discontinued operations.

Deferred Leasing Costs

Deferred leasing costs consist of commissions paid to third-party leasing agents, internal direct costs such as employee compensation and payroll-related fringe benefits directly related to time spent performing leasing-related activities for successful leases and amounts attributed to in place leases associated with acquired properties. Leasing related activities include evaluating the prospective tenant’s financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating lease terms, preparing lease documents and closing the transaction. The carrying amount of these costs is written-off to expense if the applicable lease is terminated prior to expiration of the initial lease term. Deferred leasing costs are amortized over the initial term of the lease or remaining initial term of acquired leases. Collectively, deferred leasing costs totaled $25,010,000 and $17,835,000, net of accumulated amortization of $14,510,000 and $14,968,000, as of September 30, 2011 and December 31, 2010, respectively. Amortization expense, included in depreciation and amortization in the consolidated statements of operations, totaled $3,201,000 and $2,871,000, for the nine months ended September 30, 2011 and 2010, respectively.

Construction In Progress

Construction in progress includes preconstruction costs and development costs of active projects. Preconstruction costs associated with these projects include legal, zoning and permitting costs and other project carrying costs incurred prior to the commencement of construction. Development costs include direct construction costs and indirect costs incurred subsequent to the start of construction such as architectural, engineering, construction management and carrying costs consisting of interest, real estate taxes and insurance. Construction in progress balances as of September 30, 2011 and December 31, 2010 are as follows:

Construction in Progress


(Dollars in thousands)	September 30, 2011		December 31, 2010
Clarendon Center North	$	11,756	$	40,514
Clarendon Center South		—		37,589
Other		1,024		746

Total	$	12,780	$	78,849

As of September 30, 2011, 75% and 100% of the commercial leasable area of Clarendon Center North and Clarendon Center South, respectively, and 100% of the residential area of Clarendon South had been placed into operation. The development costs related to the area in

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operation have been reclassified into land and buildings. The costs reported in Construction in Progress above reflect the costs incurred as of September 30, 2011 for the remaining 25% of commercial leaseable area of Clarendon Center North, and as of December 31, 2010, 100% of the commercial space of both buildings and none of the residential space.

Accounts Receivable, Accrued Income and Allowance for Doubtful Accounts

Accounts receivable includes amounts currently due from tenants in accordance with the terms of the respective leases. Receivables are reviewed monthly and reserves are established with a charge to current period operations when, in the opinion of management, collection of the receivable is doubtful. Accounts receivable in the accompanying financial statements are shown net of an allowance for doubtful accounts of approximately $1,104,000 and $898,000, at September 30, 2011 and December 31, 2010, respectively.

In addition to rents due currently, accounts receivable includes approximately $29,856,000 and $27,227,000, at September 30, 2011 and December 31, 2010, respectively, net of allowance for doubtful accounts totaling $191,000 and $576,000, respectively, representing minimum rental income accrued on a straight-line basis to be paid by tenants over the remaining term of their respective leases.

Cash and Cash Equivalents

Cash and cash equivalents include short-term investments. Short-term investments include money market accounts and other investments which generally mature within three months, measured from the acquisition date, and/or are readily convertible to cash.

Deferred Debt Costs

Deferred debt costs consist of fees and costs incurred to obtain long-term financing, construction financing and the revolving line of credit. These fees and costs are being amortized on a straight-line basis over the terms of the respective loans or agreements, which approximates the effective interest method. Deferred debt costs totaled $6,969,000 and $7,192,000, net of accumulated amortization of $6,513,000 and $5,367,000, at September 30, 2011 and December 31, 2010, respectively.

Deferred Income

Deferred income consists of payments received from tenants prior to the time they are earned and recognized by the Company as revenue, including tenant prepayment of rent for future periods, real estate taxes when the taxing jurisdiction has a fiscal year differing from the calendar year reimbursements specified in the lease agreement and tenant construction work provided by the Company. In addition, deferred income includes the fair value of certain below market leases.

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Revenue Recognition

Rental and interest income is accrued as earned except when doubt exists as to collectability, in which case the accrual is discontinued. Recognition of rental income commences when control of the space has been given to the tenant. When rental payments due under leases vary from a straight-line basis because of free rent periods or scheduled rent increases, income is recognized on a straight-line basis. Expense recoveries represent a portion of property operating expenses billed to tenants, including common area maintenance, real estate taxes and other recoverable costs and are recognized in the period when the expenses are incurred. Rental income based on a tenant’s revenue (“percentage rent”) is accrued when a tenant reports sales that exceed a specified breakpoint, pursuant to the terms of their respective leases.

Income Taxes

The Company made an election to be treated, and intends to continue operating so as to qualify, as a REIT under the Code, commencing with its taxable year ended December 31, 1993. A REIT generally will not be subject to federal income taxation, provided that distributions to its stockholders equal or exceed its REIT taxable income and complies with certain other requirements. Therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements.

Stock-based Employee Compensation, Deferred Compensation and Stock Plan for Directors

The Company uses the fair value method to value and account for employee stock options. The fair value of options granted is determined at the time of each award using the Black-Scholes model, a widely used method for valuing stock-based employee compensation, and the following assumptions: (1) Expected Volatility determined using the most recent trading history of the Company’s common stock (month-end closing prices) corresponding to the average expected term of the options; (2) Average Expected Term of the options is based on prior exercise history, scheduled vesting and the expiration date; (3) Expected Dividend Yield determined by management after considering the Company’s current and historic dividend yield rates, the Company’s yield in relation to other retail REITs and the Company’s market yield at the grant date; and (4) a Risk-free Interest Rate based upon the market yields of US Treasury obligations with maturities corresponding to the average expected term of the options at the grant date. The Company amortizes the value of options granted ratably over the vesting period and includes the amounts as compensation in general and administrative expenses.

At the annual meeting of the Company’s stockholders in 2004, the stockholders approved the adoption of the 2004 stock plan for the purpose of attracting and retaining executive officers, directors and other key personnel. The 2004 stock plan was subsequently amended by the Company’s stockholders at the 2008 Annual Meeting (the “Amended 2004 Plan”) and expires in April 2018. Pursuant to the Amended 2004 Plan, the Compensation Committee established a Deferred Compensation Plan for Directors for the benefit of its directors and their beneficiaries, which replaced a previous Deferred Compensation and Stock Plan for Directors. A director may make an annual election to defer all or part of his or her director’s fees and has the option to have the fees paid in cash, in shares of common stock or in a combination of cash and shares of common stock upon termination from the Board. If the director elects to have fees paid in stock,

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fees earned during a calendar quarter are aggregated and divided by the common stock’s closing market price on the first trading day of the following quarter to determine the number of shares to be allocated to the director. As of September 30, 2011, 228,000 shares had been credited to the directors’ deferred fee accounts.

The Compensation Committee has also approved an annual award of shares of the Company’s common stock as additional compensation to each director serving on the Board of Directors as of the record date for the Annual Meeting of Stockholders. The shares are awarded as of each Annual Meeting of Shareholders, and their issuance may not be deferred. Each director was issued 200 shares as of the 2011 Annual Meeting of Shareholders. The shares were valued at the closing stock price on the date the shares were awarded and included in general and administrative expenses.

Derivative Financial Instruments

The Company may use derivative instruments to manage its exposure to market risk such as changes in interest rates. The Company does not enter into derivative transactions for trading or speculative purposes. Derivative financial instruments are carried at fair value as either assets or liabilities on the consolidated balance sheets. For those derivative instruments that are designated, and qualify, as hedging instruments, the Company designates the hedging instrument, based upon the exposure being hedged, as a fair value hedge or a cash flow hedge. For derivative instruments that do not meet the criteria for hedge accounting, changes in fair value are immediately recognized in earnings. For those derivative instruments that qualify for hedge accounting, the effective portion of the gain or loss on the hedge instruments is reported as a component of accumulated other comprehensive income (loss) and recognized in earnings within the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. To the extent that the financial terms of the hedge instrument and the hedged item exactly match, the Company may employ the so-called “short-cut” method of accounting for the arrangement. In that case, the effectiveness of the hedge is not subsequently evaluated and the impact of the hedge instrument is reported as other comprehensive income.

Derivative financial instruments expose us to credit risk in the event of non-performance by the counterparties under the terms of the derivative instrument. The Company minimizes its credit risk on these transactions by dealing with major, creditworthy financial institutions as determined by management, and therefore, it believes that the likelihood of realizing losses from counterparty non-performance is remote.

Noncontrolling Interest

Saul Centers is the sole general partner of the Operating Partnership, owning a 73.4% common interest as of September 30, 2011. Noncontrolling interest in the Operating Partnership is comprised of limited partnership units owned by The Saul Organization. Noncontrolling interest as reflected on the accompanying consolidated balance sheets is increased for earnings allocated to limited partnership interests and distributions reinvested in additional units, and is decreased for limited partner distributions. Noncontrolling interest as reflected on the consolidated statements of operations represents earnings allocated to limited partnership interests held by the Saul Organization.

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Per Share Data

Per share data for net income (basic and diluted) is computed using weighted average shares of common stock. Convertible limited partnership units and employee stock options are the Company’s potentially dilutive securities. For all periods presented, the convertible limited partnership units are non-dilutive. Certain options are dilutive because the average share price of the Company’s common stock exceeded the exercise prices. The treasury stock method was used to measure the effect of the dilution. As of September 30, 2011, the stock options issued in 2007, 2008 and 2011 are anti-dilutive and are therefore excluded from this measurement.

Basic and Diluted Shares Outstanding


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2011		2010		2011		2010
Weighted average common shares outstanding-Basic		18,893		18,315		18,774		18,201
Effect of dilutive options		44		125		69		105

Weighted average common shares outstanding-Diluted		18,937		18,440		18,843		18,306

Reclassifications

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. The reclassifications have no impact on operating results previously reported.

Legal Contingencies

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Once it has been determined that a loss is probable to occur, the estimated amount of the loss is recorded in the financial statements.

3.	Real Estate Acquired or Developed

11503 Rockville Pike

On October 1, 2010, the Company purchased for $15.1 million a retail property located in Rockville, Maryland, and incurred acquisition costs of $0.5 million.

Metro Pike Center

On December 17, 2010, the Company purchased for $33.6 million (including the assumption of a $16.2 million mortgage loan and a related interest-rate swap with a value of $0.5 million) the Metro Pike Center located in Rockville, Maryland, and incurred acquisition costs of $0.7 million. As of the date of acquisition, management determined the fair value of the mortgage loan equaled its outstanding balance because the terms of the loan were market terms.

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4469 Connecticut Avenue

In February 2011, the Company purchased for $1.6 million 4469 Connecticut Avenue, a one retail space property, currently unleased, located adjacent to Van Ness Square in northwest Washington, DC and incurred acquisition costs of $74,000.

Kentlands Square II

In September 2011, the Company purchased for $74.5 million Kentlands Square II, a retail property located adjacent to the Company’s Kentlands Square I and Kentlands Place shopping centers in Gaithersburg, Maryland, and incurred acquisition costs of $1.1 million.

Severna Park MarketPlace

In September 2011, the Company purchased for $61.0 million Severna Park MarketPlace, a retail property located in Severna Park, Maryland, and incurred acquisition costs of $0.8 million.

Cranberry Square

In September 2011, the Company purchased for $33.0 million Cranberry Square, a retail property located in Westminster, Maryland, and incurred acquisition costs of $0.5 million.

The allocation of the purchase prices for Severna Park MarketPlace, Kentlands Square II, and Cranberry Square to the acquired assets and liabilities based on their fair values was as follows:


(In thousands)
Land	$	39,900
Buildings		127,405
In-Place Leases		6,629
Above Market Rents		28
Below Market Rents		(5,462	)

Total Purchase Price	$	168,500

The revenue and expenses of Kentlands Square II, Severna Park MarketPlace and Cranberry Square have been included in the Statement of Operations for the period subsequent to acquisition. Revenue and earnings (defined as revenue less the sum of operating expenses, provision for credit losses and real estate taxes, all arising from the operation of a property) totaled $247,000 and $217,000, respectively, for the three and nine months ended September 30, 2011.

The following table shows proforma revenue and earnings of the Company assuming the acquisitions occurred as of January 1, 2010. The proforma results for the three and nine months ended September 30, 2011 and 2010 have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have actually occurred had the transaction taken place on January 1, 2010, or of future results of operations.


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2011		2010		2011		2010
Revenue	$	45,567	$	42,345	$	135,847	$	132,244
Earnings		33,772		31,777		99,987		97,894

4.	Noncontrolling Interest - Holders of Convertible Limited Partnership Units in the Operating Partnership

Certain members of The Saul Organization are limited partners of the Operating Partnership, collectively owning a 26.6% common interest as of September 30, 2011, represented by approximately 6,914,000 limited partnership units. Approximately 5,416,000 of the units are convertible into shares of Saul Centers’ common stock, at the option of the unit holder, on a one-for-one basis provided that, in accordance with the Saul Centers, Inc. Articles of Incorporation, the rights may not be exercised at any time that The Saul Organization beneficially owns, directly or indirectly, in the aggregate more than 39.9% of the value of the outstanding common

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stock and preferred stock of Saul Centers (the “Equity Securities”). As of September 30, 2011, approximately 3,790,000 units were convertible into shares of Saul Centers common stock.

The impact of The Saul Organization’s approximately 26.6% limited partnership interest in the Operating Partnership is reflected as Noncontrolling Interest in the accompanying consolidated financial statements. Fully converted partnership units and diluted weighted average shares outstanding for the quarters ended September 30, 2011 and 2010, were approximately 24,353,000 and 23,856,000, respectively, and for the nine months ended September 30, 2011 and 2010, were approximately 24,259,000 and 23,722,000, respectively.

5.	Mortgage Notes Payable, Revolving Credit Facility, Interest and Amortization of Deferred Debt Costs

The Company’s outstanding debt totaled approximately $834,018,000 at September 30, 2011, of which approximately $750,872,000 was fixed-rate debt and approximately $83,146,000 was variable-rate debt.

At September 30, 2011, the Company had a $150 million unsecured revolving credit facility, which can be used for working capital, property acquisitions, development projects or letters of credit. The revolving credit facility matures on June 30, 2012, and may be extended by the Company for one additional year subject to the Company’s satisfaction of certain conditions. Saul Centers and certain consolidated subsidiaries of the Operating Partnership have guaranteed the payment obligations of the Operating Partnership under the revolving credit facility. Letters of credit may be issued under the revolving credit facility. Interest rate pricing under the facility is primarily determined by operating income from the Company’s existing unencumbered properties and, to a lesser extent, certain leverage tests. As of September 30, 2011, operating income from the unencumbered properties determined the interest rate for up to $104,000,000 of the line’s available borrowings, with interest expense to be calculated based upon the 1, 2, 3 or 6 month LIBOR plus a spread of 3.65% to 3.90% determined by certain leverage tests. The interest rate on the remaining availability is determined based upon the Company’s consolidated operating income after debt service. On this portion of the facility, interest accrues at a rate of LIBOR plus a spread of 4.45% to 5.25%, determined by certain leverage tests. The Company may elect to use the 1, 2, 3 or 6 month LIBOR, but in no event shall LIBOR be less than 1.5%. As of September 30, 2011, $130,000,000 was available for borrowing under the facility, $8,000,000 was outstanding, with interest accruing at 5.275%, and $122,000,000 was available for additional borrowing.

Saul Centers is a guarantor of the revolving credit facility, of which the Operating Partnership is the borrower. Saul Centers is also the guarantor of 50% of the Northrock loan (approximately $7,573,000 of the $15,146,000 outstanding at September 30, 2011). The fixed-rate notes payable are all non-recourse debt except for $3,882,000 of the Great Falls Center and $27,600,000 of the Clarendon Center mortgages, which are guaranteed by Saul Centers. The Clarendon Center guarantee will be eliminated upon the achievement of certain leasing and debt service coverage benchmarks. Saul Centers also has guaranteed the two six-month bridge loans described below.

On September 23, 2011, the Company closed on a 15-year non-recourse mortgage loan in the amount of $38,000,000, secured by Severna Park MarketPlace. The loan matures October 1,

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2026, bears interest at a fixed rate of 4.30%, requires equal monthly principal and interest payments of $206,926, based upon a 25-year principal amortization, and requires a final principal payment of approximately $20,287,000 at maturity. Proceeds from the loan were used to purchase Severna Park MarketPlace.

Also on September 23, 2011, the Company closed on two six-month bridge financing loans in the total amount of $60,000,000, secured by Kentlands Square II and Cranberry Square. The loans mature March 23, 2012 and require month interest-only payments based upon the one-month LIBOR plus 1.75%. Proceeds from the loans were used to purchase Kentlands Square II and Cranberry Square.

On March 23, 2011, the Company closed on a 15-year non-recourse mortgage loan in the amount of $125,000,000, secured by Clarendon Center. The loan matures April 5, 2026, bears interest at a fixed rate of 5.31%, requires equal monthly principal and interest payments of $753,491, based upon a 25-year principal amortization, and requires a final principal payment of approximately $70,477,000 at maturity. Proceeds from the loan were used to repay $104,243,000 outstanding on the Clarendon Center construction loan.

At December 31, 2010, the Company’s outstanding debt totaled approximately $711,389,000, of which $601,147,000 was fixed rate and $110,242,000 was variable-rate debt. No balances were outstanding on the Company’s $150,000,000 unsecured revolving credit facility.

At September 30, 2011, the scheduled maturities of all debt, including scheduled principal amortization, for years ending December 31, were as follows:

Debt Maturity Schedule


(Dollars in thousands)	Balloon Payments			Scheduled Principal Amortization		Total
October 1 through December 31, 2011	$	—		$	5,070	$	5,070
2012		129,960	^(a)		20,374		150,334
2013		70,131			16,334		86,465
2014		13,218			16,473		29,691
2015		15,077			16,834		31,911
2016		—			17,506		17,506
Thereafter		389,361			123,680		513,041

	$	617,747		$	216,271	$	834,018

(a)	Includes $60,000 and $8,000, outstanding on the bridge loans and line of credit, respectively.

Interest expense and amortization of deferred debt costs for the three and nine month periods ended September 30, 2011 and 2010, were as follows:

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Interest Expense and Amortization of Deferred Debt Costs


	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	2011			2010			2011			2010
Interest incurred	$	11,383		$	10,247		$	33,361		$	30,414
Amortization of deferred debt costs		386			367			1,146			1,099
Capitalized interest		(519	)		(1,833	)		(1,793	)		(5,254	)

	$	11,250		$	8,781		$	32,714		$	26,259

6.	Stockholders’ Equity and Noncontrolling Interest

The consolidated statements of operations for the nine months ended September 30, 2011 and 2010 reflect noncontrolling interest of $2,268,000 and $5,258,000, respectively, representing The Saul Organization’s share of net income for each period.

In November 2003, the Company sold 4,000,000 depositary shares, each representing 1/100th of a share of 8% Series A Cumulative Redeemable Preferred Stock. The depositary shares are redeemable, in whole or in part at the Company’s option, from time to time, at $25.00 per share. The depositary shares pay an annual dividend of $2.00 per share, equivalent to 8% of the $25.00 per share liquidation preference. The Series A preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company. Investors in the depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events.

In March 2008, the Company sold 3,173,115 depositary shares, each representing 1/100th of a share of 9% Series B Cumulative Redeemable Preferred Stock. The depositary shares may be redeemed at the Company’s option, on or after March 15, 2013, in whole or in part, at $25.00 per share. The depositary shares pay an annual dividend of $2.25 per share, equivalent to 9% of the $25.00 per share liquidation preference. The Series B preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company. Investors in the depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events.

On September 23, 2011, pursuant to a Stock Purchase Agreement with the B. F. Saul Real Estate Investment Trust dated August 9, 2011, the Company issued 186,968 restricted shares of common stock and 1,497,814 operating partnership units of Saul Centers, at a price of $33.12 per share, determined using the average closing price of the common stock on the New York Stock Exchange for the five days immediately prior to the closing of the acquisition and received net proceeds of $55.8 million. The Stock Purchase Agreement was executed during the acquisition auction for Kentlands Square II, Severna Park MarketPlace and Cranberry Square, which allowed the Company to bid for the properties by providing the certainty for the required equity in the event the acquisition was successful.

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7.	Related Party Transactions

The Chairman and Chief Executive Officer, the President, the Senior Vice President- General Counsel and the Senior Vice President-Chief Accounting Officer of the Company are also officers of various members of The Saul Organization and their management time is shared with The Saul Organization. Their annual compensation is fixed by the Compensation Committee of the Board of Directors, with the exception of the Senior Vice President-Chief Accounting Officer whose share of annual compensation allocated to the Company is determined by the shared services agreement (described below).

The Company participates in a multiemployer 401K plan with entities in The Saul Organization which covers those full-time employees who meet the requirements as specified in the plan. Company contributions, which are included in general and administrative expense or property operating expenses in the consolidated statements of operations, at the discretionary amount of up to six percent of the employee’s cash compensation, subject to certain limits, were $390,000 and $330,000, for the nine months ended September 30, 2011 and 2010, respectively. All amounts deferred by employees and the Company are fully vested.

The Company also participates in a multiemployer nonqualified deferred compensation plan with entities in The Saul Organization which covers those full-time employees who meet the requirements as specified in the plan. According to the plan, which can be modified or discontinued at any time, participating employees defer 2% of their compensation in excess of a specified amount. For the nine months ended September 30, 2011 and 2010, the Company contributed three times the amount deferred by employees. The Company’s expense, included in general and administrative expense, totaled $166,000 and $146,000, for the nine months ended September 30, 2011 and 2010, respectively. All amounts deferred by employees and the Company are fully vested. The cumulative unfunded liability under this plan was $1,802,000 and $1,623,000, at September 30, 2011 and December 31, 2010, respectively, and is included in accounts payable, accrued expenses and other liabilities in the consolidated balance sheets.

The Company has entered into a shared services agreement (the “Agreement”) with The Saul Organization that provides for the sharing of certain personnel and ancillary functions such as computer hardware, software, and support services and certain direct and indirect administrative personnel. The method for determining the cost of the shared services is provided for in the Agreement and is based upon head count, estimates of usage or estimates of time incurred, as applicable. The terms of the Agreement and the payments made thereunder are deemed reasonable by management and are reviewed annually by the Audit Committee of the Board of Directors, which consists entirely of independent directors. Billings by The Saul Organization for the Company’s share of these ancillary costs and expenses for the nine months ended September 30, 2011 and 2010, which included rental expense for the Company’s headquarters lease, totaled approximately $4,487,000 and $4,737,000, respectively. The amounts are expensed as incurred and are primarily reported as general and administrative expenses in the consolidated financial statements. As of September 30, 2011 and December 31, 2010, accounts payable, accrued expenses and other liabilities included approximately $388,000 and $606,000, respectively, representing amounts due to The Saul Organization for the Company’s share of these ancillary costs and expenses.

The Company’s corporate headquarters space is leased by a member of The Saul Organization. The 10-year lease, which commenced in March 2002, provides for base rent

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increases of 3% per year, with payment of a pro-rata share of operating expenses over a base year amount. The Agreement requires each party to pay an allocation of total rental payments based on a percentage proportionate to the number of employees employed by each party. The Company’s rent expense for the nine months ended September 30, 2011 and 2010 was approximately $706,000 and $664,000, respectively, and is included in general and administrative expense.

The B. F. Saul Insurance Agency of Maryland, Inc., a subsidiary of the B. F. Saul Company and a member of The Saul Organization, is a general insurance agency that receives commissions and fees in connection with the Company’s insurance program. Such commissions and fees amounted to $178,000 and $154,000 for the nine months ended September 30, 2011 and 2010, respectively.

8.	Stock Option Plans

The Company has established two stock incentive plans, the 1993 plan and the 2004 plan (together, the “Plans”). Under the Plans, options were granted at an exercise price not less than the market value of the common stock on the date of grant and expire ten years from the date of grant. Officer options vest ratably over four years following the grant and are expensed straight-line over the vesting period. Director options vest immediately and are expensed as of the date of grant.

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The following table summarizes the amount and activity of each grant, the total value and variables used in the computation and the amount expensed and included in general and administrative expense in the Consolidated Statements of Operations for the three and nine months ended September 30, 2011:

Stock options issued


	Directors
Grant date		04/26/2004			05/06/2005			05/01/2006			04/27/2007			04/25/2008			05/07/2010			05/13/2011			Subtotals
Total grant		30,000			30,000			30,000			30,000			30,000			32,500			32,500			247,500
Vested		30,000			30,000			30,000			30,000			30,000			32,500			32,500			247,500
Exercised		6,200			2,500			—			—			—			—			—			11,200
Forfeited		—			—			—			—			—			—			—			—
Exercisable at September 30, 2011		23,800			27,500			30,000			30,000			30,000			32,500			32,500			236,300
Remaining unexercised		23,800			27,500			30,000			30,000			30,000			32,500			32,500			236,300
Exercise price	$	25.78		$	33.22		$	40.35		$	54.17		$	50.15		$	38.76		$	41.82
Volatility		0.183			0.198			0.206			0.225			0.237			0.369			0.358

Expected life (years)		5.0			10.0			9.0			8.0			7.0			5.0			5.0
Assumed yield		5.75	%		6.91	%		5.93	%		4.39	%		4.09	%		4.23	%		4.16	%
Risk-free rate		3.57	%		4.28	%		5.11	%		4.65	%		3.49	%		2.17	%		1.86	%

Total value at grant date	$	66,600		$	71,100		$	143,400		$	285,300		$	254,700		$	287,950		$	297,375		$	1,629,375
Forfeited options		—			—			—			—			—			—			—			—
Expensed in previous years		66,600			71,100			143,400			285,300			254,700			287,950			—			1,332,000
Expensed in 2011		—			—			—			—			—			—			297,375			297,375
Future expense		—			—			—			—			—			—			—			—

	Officers
Grant date		05/23/2003			04/26/2004			05/06/2005			04/27/2007			05/13/2011			Subtotals						Grand Totals
Total grant		220,000			122,500			132,500			135,000			162,500			772,500						1,020,000
Vested		212,500			115,000			118,750			122,500			—			568,750						816,250
Exercised		199,315			48,525			25,125			—			—			272,965						284,165
Forfeited		7,500			7,500			13,750			12,500			—			41,250						41,250
Exercisable at September 30, 2011		13,185			66,475			93,625			122,500			—			295,785						532,085
Remaining unexercised		13,185			66,475			93,625			122,500			162,500			458,285						694,585

Exercise price	$	24.91		$	25.78		$	33.22		$	54.17		$	41.82
Volatility		0.175			0.183			0.207			0.233			0.330
Expected life (years)		7.0			7.0			8.0			6.5			8.0
Assumed yield		7.00	%		5.75	%		6.37	%		4.13	%		4.81	%
Risk-free rate		4.00	%		4.05	%		4.15	%		4.61	%		2.75	%

Total value at grant date	$	332,200		$	292,775		$	413,400		$	1,258,848		$	1,277,794		$	3,575,017					$	5,204,392
Forfeited options		11,325			17,925			35,100			—			—			64,350						64,350
Expensed in previous years		320,875			274,850			378,300			1,153,957			—			2,127,982						3,459,982
Expensed in 2011		—			—			—			104,891			106,484			211,375						508,750
Future expense		—			—			—			—			1,171,310			1,171,310						1,171,310
Remaining term of future expense					3.7			years

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The table below summarizes the option activity for the nine months ended September 30, 2011:


	Number of Shares			Wtd Avg Exercise Price/sh		Aggregate Intrinsic Value
Outstanding at January 1		532,881		$	39.13
Granted		195,000			41.82
Exercised		(33,296	)		28.68	$	644,000
Expired/Forfeited		—			—

Outstanding September 30		694,585			40.38		2,383,000

Exercisable at September 30		532,085			39.95		2,383,000

The intrinsic value measures the price difference between the options’ exercise price and the closing share price quoted by the New York Stock Exchange as of the date of measurement. The intrinsic value for shares exercised during the period was calculated by using the closing share price on the date of exercise. At September 30, 2011, the closing share price of $33.81 was lower than the exercise price of options granted in 2006, 2007, 2008, 2009 and 2011, therefore, those options had no intrinsic value as of September 30, 2011. The weighted average remaining contractual life of the Company’s outstanding and exercisable options is 5.8 and 5.0 years, respectively.

9.	Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value. Based upon management’s estimate of borrowing rates and loan terms currently available to the Company for fixed-rate financing, the aggregate fair value of the notes payable with fixed-rate payment terms, assuming long-term interest rates of approximately 4.50% and 5.25%, would be approximately $822,207,000 and $642,124,000, respectively, compared to the carrying value of $750,872,000 and $601,147,000, at September 30, 2011 and December 31, 2010, respectively.

The Company carries its two interest rate swaps at fair value. The Company has determined the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy with the exception of the impact of counter-party risk, which was determined using Level 3 inputs and are not significant. As of September 30, 2011, the fair value of the interest-rate swaps was approximately $5,124,000 and is included in “Accounts payable, accrued expenses and other liabilities” in the consolidated balance sheet. The Company applies hedge accounting to one of its swaps and not the other.

Effective June 1, 2011, the Company determined that the short-cut method of hedge accounting was not appropriate for one of its interest-rate swaps and, for accounting purposes, the hedge relationship was terminated. Accordingly, changes in fair value of the swap should have been recorded in income rather than other comprehensive income. The Company determined that the errors were immaterial to all previously issued financial statements, and the $26,000 accumulated other comprehensive income as of March 31, 2011 and subsequent changes in the value of the interest rate swap through June 30, 2011, were recognized in earnings. Net income for the three and nine months ended September 30, 2010 was overstated

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by $3.3 million and net income for the year ended December 31, 2010 was understated by $549,000. In reaching its conclusions, management considered the nature of the error, the effect of the error on operating results for the full year, and the effects of the error on important financial statement measures, including related trends. Effective June 30, 2011, the Company determined the interest-rate swap was highly effective and the swap was designated as a cash flow hedge. The swap is carried at fair value with changes in fair value recognized either in income or comprehensive income depending on the effectiveness of the swap. The following chart summarizes the changes in fair value of the Company’s swaps for the indicated periods.


	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	2011			2010			2011			2010
Decrease in fair value:
Recognized in earnings	$	(217	)	$	—		$	(1,374	)	$	—
Recognized in other comprehensive income		(3,449	)		(3,275	)		(2,906	)		(3,275	)

Total	$	(3,666	)	$	(3,275	)	$	(4,280	)	$	(3,275	)

10.

Commitments and Contingencies

Neither the Company nor the Current Portfolio Properties are subject to any material litigation, nor, to management’s knowledge, is any material litigation currently threatened against the Company, other than routine litigation and administrative proceedings arising in the ordinary course of business. Management believes that these items, individually or in the aggregate, will not have a material adverse impact on the Company or the Current Portfolio Properties.

11.

Business Segments

The Company has two reportable business segments: Shopping Centers and Mixed-Use Properties. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The Company evaluates performance based upon income from real estate for the combined properties in each segment. Certain reclassifications have been made to prior year information to conform to the 2011 presentation.

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(Dollars in thousands)	Shopping Centers			Mixed-Use Properties			Corporate and Other			Consolidated Totals
Quarter ended September 30, 2011
Real estate rental operations:
Revenue	$	31,096		$	11,764		$	18		$	42,878
Expenses		(7,558	)		(3,609	)		—			(11,167	)

Income from real estate		23,538			8,155			18			31,711
Interest expense and amortization of deferred debt costs		—			—			(11,250	)		(11,250	)
General and administrative		—			—			(3,293	)		(3,293	)

Subtotal		23,538			8,155			(14,525	)		17,168
Depreciation and amortization of deferred leasing costs		(5,404	)		(3,108	)		—			(8,512	)
Acquisition related costs		—			—			(2,439	)		(2,439	)
Decrease in fair value of derivatives		—			—			(217	)		(217	)
Net income (loss)	$	18,134		$	5,047		$	(17,181	)	$	6,000

Capital investment	$	170,634		$	2,119		$	—		$	172,753

Total assets	$	876,431		$	307,585		$	12,509		$	1,196,525

Quarter ended September 30, 2010
Real estate rental operations:
Revenue	$	30,208		$	9,317		$	26		$	39,551
Expenses		(6,822	)		(3,088	)		(1	)		(9,911	)

Income from real estate		23,386			6,229			25			29,640
Interest expense and amortization of deferred debt costs		—			—			(8,781	)		(8,781	)
General and administrative		—			—			(3,417	)		(3,417	)

Subtotal		23,386			6,229			(12,173	)		17,442
Depreciation and amortization of deferred leasing costs		(5,120	)		(1,911	)		—			(7,031	)
Acquisition related costs		—			—			(170	)		(170	)
Gain on casualty settlement		—			—			1,700			1,700
(Loss) from operations of property sold		—			—			(29	)		(29	)
Gain on property sale		—			—			3,591			3,591

Net income (loss)	$	18,266		$	4,318		$	(7,081	)	$	15,503

Capital investment	$	2,024		$	15,291		$	—		$	17,315

Total assets	$	675,737		$	280,240		$	14,487		$	970,464

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(Dollars in thousands)	Shopping Centers			Mixed-Use Properties			Corporate and Other			Consolidated Totals
Nine months ended September 30,2011
Real estate rental operations:
Revenue	$	94,057		$	33,268		$	65		$	127,390
Expenses		(22,883	)		(10,915	)		—			(33,798	)

Income from real estate		71,174			22,353			65			93,592
Interest expense and amortization of deferred debt costs		—			—			(32,714	)		(32,714	)
General and administrative		—			—			(10,402	)		(10,402	)

Subtotal		71,174			22,353			(43,051	)		50,476
Depreciation and amortization of deferred leasing costs		(16,341	)		(8,967	)		—			(25,308	)
Acquisition related costs		—			—			(2,513	)		(2,513	)
Decrease in fair value of derivatives		—			—			(1,374	)		(1,374	)
Gain on casualty settlement		—			—			198			198
Net income (loss)	$	54,833		$	13,386		$	(46,740	)	$	21,479

Capital investment	$	175,012		$	22,855		$	—		$	197,867

Total assets	$	876,431		$	307,585		$	12,509		$	1,196,525

Nine months ended September 30,2011
Real estate rental operations:
Revenue	$	94,384		$	28,841		$	26		$	123,251
Expenses		(23,041	)		(8,861	)		(1	)		(31,903	)

Income from real estate		71,343			19,980			25			91,348
Interest expense and amortization of deferred debt costs		—			—			(26,259	)		(26,259	)
General and administrative		—			—			(9,955	)		(9,955	)

Subtotal		71,343			19,980			(36,189	)		55,134
Depreciation and amortization of deferred leasing costs		(15,375	)		(5,990	)		—			(21,365	)
Loss on early extinguishment of debt		—			—			(4,479	)		(4,479	)
Acquisition related costs		—			—			(170	)		(170	)
Gain on casualty settlement		—			—			1,700			1,700
(Loss) from operations of property sold		—			—			(96	)		(96	)
Gain on property sale		—			—			3,591			3,591

Net income (loss)	$	55,968		$	13,990		$	(35,643	)	$	34,315

Capital investment	$	4,630		$	53,275		$	—		$	57,905

Total assets	$	675,737		$	280,240		$	14,487		$	970,464

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12.

Subsequent Events

The Company has reviewed operating activities for the period subsequent to September 30, 2011 and prior to the date the financial statements are issued or are available to be issued, and determined the following subsequent events are required to be disclosed.

On October 5, 2011, the Company closed on a 15-year non-recourse mortgage loan in the amount of $43,000,000, secured by Kentlands Square II. The loan matures November 5, 2026, bears interest at a fixed rate of 4.53%, requires equal monthly principal and interest payments of $239,741, based upon a 25-year principal amortization, and requires a final principal payment of approximately $23,100,000 at maturity. Proceeds from the loan were used to repay the $40,000,000 bridge financing used to acquire Kentlands Square II.

On October 31, 2011, the Company received a commitment for a 15-year non-recourse mortgage loan in the amount of $20,000,000, to be secured by Cranberry Square. The loan will mature December 1, 2026, bear interest at a fixed rate of 4.70%, require equal monthly principal and interest payments of $113,449, based upon a 25-year principal amortization, and require a final principal payment of approximately $10,916,000 at maturity. The loan is expected to close during the fourth quarter of 2011 and proceeds from the loan will used to repay the $20,000,000 bridge financing used to acquire Cranberry Square.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section should be read in conjunction with the consolidated financial statements of the Company and the accompanying notes in “Item 1. Financial Statements” of this report and the more detailed information contained in the Company’s Form 10-K for the year ended December 31, 2010. Historical results and percentage relationships set forth in Item 1 and this section should not be taken as indicative of future operations of the Company. Capitalized terms used but not otherwise defined in this section have the meanings given to them in Item 1 of this Form 10-Q.

Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are generally characterized by terms such as “believe,” “expect” and “may.”

Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those given in the forward-looking statements as a result of changes in factors which include, among others, the following:

•

continuing risks related to the challenging domestic and global credit markets and their effect on discretionary spending;

•

risks that the Company’s tenants will not pay rent;

•

risks related to the Company’s reliance on shopping center “anchor” tenants and other significant tenants;

•

risks related to the Company’s substantial relationships with members of The Saul Organization;

•

risks of financing, such as increases in interest rates, restrictions imposed by the Company’s debt, the Company’s ability to meet existing financial covenants and the Company’s ability to consummate planned and additional financings on acceptable terms;

•

risks related to the Company’s development activities;

•

risks that the Company’s growth will be limited if the Company cannot obtain additional capital;

•

risks that planned and additional acquisitions or redevelopments may not be consummated, or if they are consummated, that they will not perform as expected;

•

risks generally incident to the ownership of real property, including adverse changes in economic conditions, changes in the investment climate for real estate, changes in real estate taxes and other operating expenses, adverse changes in governmental rules and fiscal policies, the relative illiquidity of real estate and environmental risks;

•

risks related to the Company’s status as a REIT for federal income tax purposes, such as the existence of complex regulations relating to the Company’s status as a REIT, the effect of future changes in REIT requirements as a result of new legislation and the adverse consequences of the failure to qualify as a REIT; and

•

such other risks as described in Part I, Item 1A of the Company’s Form 10-K for the year ended December 31, 2010.

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General

The following discussion is based primarily on the consolidated financial statements of the Company as of September 30, 2011 and for the three and nine month periods ended September 30, 2011.

Overview

The Company’s principal business activity is the ownership, management and development of income-producing properties. The Company’s long-term objectives are to increase cash flow from operations and to maximize capital appreciation of its real estate investments.

The Company’s primary operating strategy is to focus on its community and neighborhood shopping center business and to operate its properties to achieve both cash flow growth and capital appreciation. Management believes there is potential for long term growth in cash flow as existing leases for space in the Shopping Centers and Mixed-Use Properties expire and are renewed, or newly available or vacant space is leased. The Company intends to renegotiate leases where possible and seek new tenants for available space in order to optimize the mix of uses to improve foot traffic through the Shopping Centers. As leases expire, management expects to revise rental rates, lease terms and conditions, relocate existing tenants, reconfigure tenant spaces and introduce new tenants with the goals of increasing occupancy, improving overall retail sales, and ultimately increasing cash flow as economic conditions improve. In those circumstances in which leases are not otherwise expiring, management selectively attempts to increase cash flow through a variety of means, or in connection with renovations or relocations, recapturing leases with below market rents and re-leasing at market rates, as well as replacing financially troubled tenants. When possible, management also will seek to include scheduled increases in base rent, as well as percentage rental provisions, in its leases.

The Company’s redevelopment and renovation objective is to selectively and opportunistically redevelop and renovate its properties, by replacing leases that have below market rents with strong, traffic-generating anchor stores such as supermarkets and drug stores, as well as other desirable local, regional and national tenants. The Company’s strategy remains focused on continuing the operating performance and internal growth of its existing Shopping Centers, while enhancing this growth with selective retail redevelopments and renovations.

The Company recently acquired three Giant Food-anchored shopping centers located in the Maryland suburbs of the Washington DC and Baltimore metropolitan area. The three centers, Kentlands Square II, Severna Park MarketPlace and Cranberry Square, total 635,000 square feet of leasable area, of which 98% is leased. The $170.9 million purchase price plus acquisition costs was financed with (1) $60.0 million from two bridge loans secured by Kentlands Square II and Cranberry Square, each with an initial term of six months and accruing interest, payable monthly, at a rate equal to LIBOR plus 175 basis points; (2) a $38.0 million non-recourse permanent loan secured by Severna Park MarketPlace; (3) approximately $17.1 million in cash and borrowings from the Company’s revolving credit facility; and (4) $55.8 million from the issuance of equity. In light of the limited amount of quality properties for sale and the escalated pricing of properties that the Company has been presented with or has inquired

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about over the past year, management believes acquisition opportunities for investment in existing and new Shopping Center and Mixed-Use Properties in the near future is uncertain. Because of its conservative capital structure, including its cash and capacity under its revolving credit facility, management believes that the Company is positioned to take advantage of additional investment opportunities as attractive properties are located and market conditions improve. It is management’s view that several of the sub-markets in which the Company operates have or will in the future have attractive supply/demand characteristics. The Company will continue to evaluate acquisition, development and redevelopment as an integral part of its overall business plan.

Although there has been a downturn in the national real estate market, to date, the effects on the office and retail markets in the metropolitan Washington, D.C. area, where the majority of the Company’s properties are located, have generally been less severe. However, continued economic stress in the local economies where the Company’s properties are located may lead to increased tenant bankruptcies, increased vacancies and decreased rental rates.

During 2011, four of the Company’s significant tenants have been involved in bankruptcy proceedings. Blockbuster Video has rejected the leases at two locations. Two other leases were transferred to Dish Network Corp., and store operations have continued. Borders Bookstore is liquidating all remaining stores and in September 2011, closed its single location with the Company at Thruway. Superfresh closed its Lumberton, New Jersey store effective April 18, 2011, rejected this lease and announced its plan to accept the lease at the Company’s Shops at Fairfax, which is currently subleased to Super H Grocery. On November 2, 2011, Syms Corporation filed for bankruptcy protection and announced its intention to close all of its stores in early 2012. The Company is analyzing the potential impact of the closing of its single Syms store at Seven Corners Center. These bankruptcy proceedings are the only known bankruptcies involving the Company’s significant tenants.

With the decline in overall consumer spending, retailers continue to struggle with declining sales and limited access to capital. Vacancies remain elevated compared to pre-2008 levels. Our overall portfolio leasing percentage, on a comparative same center basis, at September 30, 2011 was 89.2%, a decrease from 92.0% at September 30, 2010, an increase in unleased space of approximately 233,000 square feet. Unleased space increased 88,000 square feet since June 30, 2011 and is attributed primarily to the early termination of a 48,055 square foot local grocer at Southdale, the closure of the 25,146 square foot Borders Bookstore at Thruway and the lease termination of a 23,710 square foot tenant at Avenel Business Park.

Because of a conservative capital structure, the Company has not been significantly affected by the recent turmoil in the credit markets. First, the ratio of total debt to the estimated fair value of its assets is less than 50%, which allows the Company to obtain additional secured borrowings if necessary. Second, as of September 30, 2011, amortizing fixed-rate mortgage debt with staggered maturities from 2012 to 2027, represented approximately 90% of the Company’s notes payable, thus minimizing refinancing risk. Third, the Company’s earliest fixed-rate debt maturity is not until October 2012. Of the Company’s $83,146,000 of floating-rate debt at September 30, 2011, $40,000,000 was repaid in October 2011 when the Company closed on a non-recourse permanent loan of $43,000,000, secured by Kentlands Square II. The Company has a commitment for another non-recourse permanent loan of $20,000,000 to be secured by Cranberry Square, the proceeds of which are expected to repay the remaining balance of the secured-bridge loans. The remaining $23,146,000 of floating-rate debt is comprised of a

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$15,146,000 loan secured by Northrock shopping center and $8,000,000 outstanding on the Company’s $150,000,000 unsecured revolving credit facilty.

Although it is management’s present intention to concentrate future acquisition and development activities on community and neighborhood shopping centers and Mixed-Use Properties in the Washington, DC/Baltimore metropolitan area and the southeastern region of the United States, the Company may, in the future, also acquire other types of real estate in other areas of the country as opportunities present themselves. While the Company may diversify in terms of property locations, size and market, the Company does not set any limit on the amount or percentage of Company assets that may be invested in any one property or any one geographic area.

Critical Accounting Policies

The Company’s accounting policies are in conformity with U.S. generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the Company’s financial statements and the reported amounts of revenue and expenses during the reporting periods. If judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of the financial statements. Below is a discussion of accounting policies which the Company considers critical in that they may require judgment in their application or require estimates about matters which are inherently uncertain. Additional discussion of accounting policies which the Company considers significant, including further discussion of the critical accounting policies described below, can be found in the notes to the Consolidated Financial Statements.

Real Estate Investments

Real estate investment properties are stated at historic cost less depreciation. Although the Company intends to own its real estate investment properties over a long term, from time to time it will evaluate its market position, market conditions, and other factors and may elect to sell properties that do not conform to the Company’s investment profile. Management believes that these assets have generally appreciated in value since their acquisition or development and, accordingly, the aggregate current value exceeds their aggregate net book value and also exceeds the value of the Company’s liabilities as reported in these financial statements. Because these financial statements are prepared in conformity with U.S. GAAP, they do not report the current value of the Company’s real estate investment properties.

The Company purchases real estate investment properties from time to time and records assets acquired and liabilities assumed, including land, buildings, and intangibles related to in-place leases and customer relationships based on their fair values. The fair value of buildings is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates and considers the present value of all cash flows expected to be generated from the property including an initial lease up period. The Company determines the fair value of above and below market intangibles associated with in-place leases by assessing the net effective rent and remaining term of the in-place lease relative to market terms for similar leases at acquisition

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taking into consideration the remaining contractual lease period, renewal periods, and the likelihood of the tenant exercising its renewal options. The fair value of a below market lease component is recorded as deferred income and amortized as additional lease revenue over the remaining contractual lease period and any renewal option periods included in the valuation analysis. The fair value of above market lease intangibles is recorded as a deferred asset and is amortized as a reduction of lease revenue over the remaining contractual lease term. The Company determines the fair value of at-market in-place leases considering the cost of acquiring similar leases, the foregone rents associated with the lease-up period and carrying costs associated with the lease-up period. Intangible assets associated with at-market in-place leases are amortized as additional expense over the remaining contractual lease term. To the extent customer relationship intangibles are present in an acquisition, the fair value of the intangibles are amortized over the life of the customer relationship.

If there is an event or change in circumstance that indicates the value of a real estate investment property may be impaired, the Company prepares an analysis to assess the carrying value of the real estate investment property relative to its estimated fair value. The Company considers both quantitative and qualitative factors in identifying impairment indicators including recurring operating losses, significant decreases in occupancy, and significant adverse changes in legal factors and business climate. If impairment indicators are present, the Company compares the projected cash flows of the property over its remaining useful life, on an undiscounted basis, to the carrying value of that property. The Company assesses its undiscounted projected cash flows based upon estimated capitalization rates, historic operating results and market conditions that may affect the property. If the carrying value is greater than the undiscounted projected cash flows, the Company would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its then estimated fair market value. The value of any property is sensitive to the actual results of any of the aforementioned estimated factors, either individually or taken as a whole. Should the actual results differ from management’s projections, the valuation could be negatively or positively affected.

When incurred, the Company capitalizes the cost of improvements that extend the useful life of property and equipment. All repair and maintenance expenditures are expensed when incurred. Leasehold improvements expenditures are capitalized when certain criteria are met, including when we supervise construction and will own the improvement. Tenant improvements we own are depreciated over the life of the respective lease or the estimated useful life of the improvements, whichever is shorter.

Interest, real estate taxes, development-related salary costs and other carrying costs are capitalized on projects under construction. Once construction is substantially complete and the assets are placed in service, rental income, direct operating expenses, and depreciation associated with such properties are included in current operations. Commercial development projects are substantially complete and available for occupancy upon completion of tenant improvements, but no later than one year from the cessation of major construction activity. Residential development projects are considered substantially complete and available for occupancy upon receipt of the certificate of occupancy from the appropriate licensing authority. Substantially completed portions of a project are accounted for as separate projects. Depreciation is calculated using the straight-line method and estimated useful lives of 35 to 50 years for base buildings and up to 20 years for certain other improvements.

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Deferred Leasing Costs

Certain initial direct costs incurred by the Company in negotiating and consummating successful commercial leases are capitalized and amortized over the initial base term of the leases. Deferred leasing costs consist of commissions paid to third-party leasing agents as well as internal direct costs such as employee compensation and payroll-related fringe benefits directly related to time spent performing successful leasing-related activities. Such activities include evaluating prospective tenants’ financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating lease terms, preparing lease documents and closing transactions. In addition, deferred leasing costs include amounts attributed to in-place leases associated with acquisition properties.

Revenue Recognition

Rental and interest income is accrued as earned except when doubt exists as to collectability, in which case the accrual is discontinued. Recognition of rental income commences when control of the space has been given to the tenant. When rental payments due under leases vary from a straight-line basis because of free rent periods or scheduled rent increases, income is recognized on a straight-line basis throughout the initial term of the lease. Expense recoveries represent a portion of property operating expenses billed to tenants, including common area maintenance, real estate taxes and other recoverable costs. Expense recoveries are recognized in the period when the expenses are incurred. Rental income based on a tenant’s revenue, known as percentage rent, is accrued when a tenant reports sales that exceed a specified breakpoint specified in the lease agreement.

Allowance for Doubtful Accounts - Current and Deferred Receivables

Accounts receivable primarily represent amounts accrued and unpaid from tenants in accordance with the terms of the respective leases, subject to the Company’s revenue recognition policy. Receivables are reviewed monthly and reserves are established with a charge to current period operations when, in the opinion of management, collection of the receivable is doubtful. In addition to rents due currently, accounts receivable include amounts representing minimum rental income accrued on a straight-line basis to be paid by tenants over the remaining term of their respective leases. Reserves are established with a charge to income for tenants whose rent payment history or financial condition casts doubt upon the tenant’s ability to perform under its lease obligations.

Legal Contingencies

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, which are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a material adverse effect on its financial position or the results of operations. Once it has been determined that a loss is probable to occur, the estimated amount of the loss is recorded in the financial statements. Both the amount of the loss and the point at which its occurrence is considered probable can be difficult to determine.

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Results of Operations

Quarter ended September 30, 2011 compared to quarter ended September 30, 2010

Revenue


(Dollars in thousands)	Quarter ended September 30,				2011 to 2010 Change
(Dollars in thousands)	2011		2010		$			%
Base rent	$	34,390	$	31,243	$	3,147			10.1	%
Expense recoveries		6,994		6,938		56			0.8	%
Percentage rent		209		238		(29	)		-12.2	%
Other		1,285		1,132		153			13.5	%

Total revenue	$	42,878	$	39,551	$	3,327			8.4	%

Note: (Dollars in thousands)

Base rent includes $700 and $52 for the quarters ended September 30, 2011 and 2010, respectively, to recognize base rent on a straight-line basis. In addition, base rent includes $214 and $251, for the quarters ended September 30, 2011 and 2010, respectively, to recognize income from the amortization of in-place leases acquired in connection with purchased real estate investment properties.

Total revenue increased 8.4% in the quarter ended September 30, 2011 (“2011 Quarter”) compared to the corresponding prior year’s quarter (“2010 Quarter”). The increased revenue resulted primarily from rental income generated by a development property (Clarendon Center) and five acquisition properties (11503 Rockville Pike, Metro Pike Center, Kentlands Square II, Severna Park MarketPlace and Cranberry Square), defined as the “Acquisition Properties” and together with Clarendon Center, the “Development and Acquisition Properties,” (approximately $4,606,000) offset in part by decreased revenue from the Mixed-Use Properties fully in operation during both the 2011 and 2010 Quarters (approximately $957,000), as a result of a decrease in occupancy that occurred in the latter part of 2010 and the first quarter of 2011. A discussion of the components of revenue follows.

Base rent. Base rent increased in the 2011 Quarter compared to the 2010 Quarter primarily due to the Development and Acquisition Properties (approximately $4,205,000) offset in part by lower base rent in three Mixed-Use Properties as a result of a decrease in occupancy that occurred in the latter part of 2010 and the first quarter of 2011 (approximately $813,000).

Other revenue. Other revenue increased in the 2011 Quarter primarily due to the collection of rents previously included as credit loss in prior years and to a lesser extent, increased lease termination fees ($148,000).

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Operating Expenses


(Dollars in thousands)	Quarter ended September 30,				2011 to 2010 Change
(Dollars in thousands)	2011		2010		$			%
Property operating expenses	$	5,829	$	5,199	$	630			12.1	%
Provision for credit losses		595		345		250			72.5	%
Real estate taxes		4,743		4,367		376			8.6	%
Interest expense and amortization of deferred debt costs		11,250		8,781		2,469			28.1	%
Depreciation and amortization of leasing costs		8,512		7,031		1,481			21.1	%
General and administrative		3,293		3,417		(124	)		-3.6	%

Total operating expenses	$	34,222	$	29,140	$	5,082			17.4	%

Total operating expenses increased 17.4% in the 2011 Quarter compared to the 2010 Quarter due primarily to increased interest, depreciation and property operating expense arising from the operation of the Development and Acquisition Properties.

Property operating expenses. Property operating expenses increased in the 2011 Quarter primarily due to the operation of the Development and Acquisition Properties ($794,000).

Real estate taxes. The increase in real estate taxes in the 2011 Quarter was primarily due to the Development and Acquisition Properties ($440,000) offset in part by lower taxes at the Company’s District of Columbia Mixed-Use Properties ($142,000).

Interest expense and amortization of deferred debt. Interest expense increased in the 2011 Quarter compared to the 2010 Quarter primarily because more than 85% of the Clarendon Center development was in-service during the 2011 Quarter, which caused a which caused a $2,513,000 increase in interest expense, net of amounts capitalized, as well as increased interest expense arising from the refinancing in March 2011 of the project’s construction loan with a higher fixed-rate, 15 year mortgage.

Depreciation and amortization of deferred leasing costs . The increase in depreciation and amortization of deferred leasing costs resulted primarily from the Development and Acquisition Properties placed in service during the preceding twelve months.

General and administrative. General and administrative expense decreased during the 2011 Quarter due to a decrease in professional expenses from the 2010 quarter.

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Nine months ended September 30, 2011 compared to nine months ended September 30, 2010

Revenue


(Dollars in thousands)	Nine months ended September 30,				2011 to 2010 Change
(Dollars in thousands)	2011		2010		$			%
Base rent	$	101,280	$	94,713	$	6,567			6.9	%
Expense recoveries		21,211		22,583		(1,372	)		-6.1	%
Percentage rent		1,037		927		110			11.9	%
Other		3,862		5,028		(1,166	)		-23.2	%

Total revenue	$	127,390	$	123,251	$	4,139			3.4	%

Note: (Dollars in thousands)

Base rent includes $2,629 and $71 for the nine months ended September 30, 2011 and 2010, respectively, to recognize base rent on a straight-line basis. In addition, base rent includes $700 and $796, for the nine months ended September 30, 2011 and 2010, respectively, to recognize income from the amortization of in-place leases acquired in connection with purchased real estate investment properties.

Total revenue increased 3.4% in the nine months ended September 30, 2011 (“2011 Period”) compared to the corresponding prior year’s nine months (“2010 Period”). The increased revenue resulted from rental income generated by the Development and Acquisition Properties (approximately $11,292,000) offset in part by decreased revenue from rental properties fully in operation during both the 2011 and 2010 Periods (approximately $7,153,000), the majority arising from the Mixed-Use Properties (approximately $3,656,000) due to a decrease in occupancy that occurred in the latter part of 2010 and the first quarter of 2011, a decrease in other income compared to the 2010 Period, which reported the collection of rent and other damages arising from a long-standing dispute with a tenant over the non-payment of rent over a period of time ($1,939,000), and reduced expense recovery income resulting from substantial snow removal expenses incurred during the 2010 Period. A discussion of the components of revenue follows.

Base rent. The increase in base rent for the 2011 Period compared to the 2010 Period resulted primarily from the Development and Acquisition Properties (approximately $10,116,000) offset in part by the decrease in the same center Mixed-Use Properties (approximately $2,502,000) and the Shopping Centers (approximately $1,047,000).

Expense recoveries. Expense recoveries decreased in the 2011 Period due primarily to $1,200,000 recovery in 2010 of snow removal expenses incurred as a result of severe winter weather impacting the Mid-Atlantic states during February 2010 and, to a lesser extent, reduced real estate tax recovery income caused by lower real estate tax expense.

Other revenue. Other revenue decreased in the 2011 Period primarily due to the collection during the 2010 Period of past due rents and other damages arising from a long-standing dispute with a tenant over the non-payment of rent over a period of time ($1,939,000) offset in part by increased residential tenant fees and parking income (combined $564,000) at Clarendon Center

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during the 2011 Period and to a lesser extent the collection of rents previously included as credit loss in prior years.

Operating Expenses


(Dollars in thousands)	Nine months ended September 30,				2011 to 2010 Change
(Dollars in thousands)	2011		2010		$		%
Property operating expenses	$	18,289	$	17,706	$	583		3.3	%
Provision for credit losses		1,628		699		929		132.9	%
Real estate taxes		13,881		13,498		383		2.8	%
Interest expense and amortization of deferred debt costs		32,714		26,259		6,455		24.6	%
Depreciation and amortization of leasing costs		25,308		21,365		3,943		18.5	%
General and administrative		10,402		9,955		447		4.5	%

Total operating expenses	$	102,222	$	89,482	$	12,740		14.2	%

Total operating expenses increased 14.2% in the 2011 Period compared to the 2010 Period due primarily to increased interest and depreciation expense arising from the operation of the Development and Acquisition Properties.

Property operating expenses. Property operating expenses increased in the 2011 Period primarily due to operating expenses arising from the operation of the Development and Acquisition Properties ($2,350,000) offset in part by a $2,142,000 decrease in snow removal expense and modest increases in non-snow removal same property operating expenses.

Provision for credit losses. The provision for credit losses represents the Company’s estimate of amounts owed by tenants that may not be collectible. The increase in the 2011 Period reflects the continued stress of a stagnant housing market and slowly recovering jobs market in the local economy. Approximately $505,000 of the increase was caused by the SuperFresh and Borders Bookstore bankruptcies and a local grocery store vacancy, and approximately $300,000 of the increase was caused by the failure of several restaurants in the Loudoun County shopping centers.

Interest expense and amortization of deferred debt. Interest expense increased in the 2011 Period compared to the 2010 Period primarily due to Clarendon Center, because more than 85% of the project was placed in-service during the 2011 Period, which caused a $5,970,000 increase in interest expense, net of amounts capitalized, as well as increased interest expense arising from the refinancing in March 2011 of the project’s construction loan with a higher fixed-rate, 15 year mortgage and debt incurred to finance the Acquisition Properties.

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General and administrative. General and administrative expense increased during the 2011 Period due to payroll and related benefits of construction and development personnel no longer capitalized to ongoing development projects and, to a lesser extent, increased personal property taxes.

Acquisition Related Costs. Acquisition related costs of approximately $2,512,000 arose from the Company’s September 23, 2011, purchase of Kentlands Square II, Severna Park MarketPlace and Cranberry Square and the February 17, 2011 purchase of a 3,000 square foot retail property located adjacent to the Company’s Van Ness Square in Washington DC.

Liquidity and Capital Resources

Cash and cash equivalents were $11,447,000 and $12,735,000 at September 30, 2011 and 2010, respectively. The Company’s cash flow is affected by its operating, investing and financing activities, as described below.


(Dollars in thousands)	Nine Months Ended September 30,
(Dollars in thousands)	2011			2010
Net cash provided by operating activities	$	40,138		$	43,328
Net cash used in investing activities		(196,863	)		(57,905	)
Net cash provided by financing activities		155,204			6,705

Decrease in cash and cash equivalents	$	(1,521	)	$	(7,872	)

Operating Activities

Net cash provided by operating activities represents cash received primarily from rental income, plus other income, less property operating expenses, leasing costs, normal recurring general and administrative expenses and interest payments on debt outstanding.

Investing Activities

Net cash used in investing activities includes property acquisitions, developments, redevelopments, tenant improvements and other property capital expenditures. Investing activities for the 2011 and 2010 Periods primarily reflect the development and construction costs of Clarendon Center and the 2011 acquisition of three retail properties (Kentlands Square II, Severna Park MarketPlace and Cranberry Square). Tenant improvement and property capital expenditures totaled $8,127,000 and $4,425,000, for the 2011 and 2010 Periods, respectively.

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2011 primarily reflects:

•

proceeds of $163,000,000 received from mortgage notes payable;

•

proceeds of $60,000,000 received from secured bridge financing loans;

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•

proceeds of $13,410,000 received from construction loan draws;

•

proceeds of $16,000,000 received from revolving credit facility draws;

•

proceeds of $55,780,000 from an equity offering of common stock and limited partnership units in the Operating Partnership; and

•

proceeds of $15,118,000 from the issuance of common stock under the dividend reinvestment program, directors deferred plan and the exercise of stock options;

which was partially offset by:

•

the repayment of construction loans payable totaling $108,465,000;

•

the repayment of mortgage notes payable totaling $13,316,000;

•

the repayment of amounts borrowed under the revolving credit facility of $8,000,000;

•

distributions to common stockholders totaling $20,195,000;

•

distributions to holders of convertible limited partnership units in the Operating Partnership totaling $5,850,000;

•

distributions made to preferred stockholders totaling $11,355,000; and

•

payments of $923,000 for financing costs of mortgage notes payable.

Net cash provided by financing activities for the nine months ended September 30, 2010 primarily reflects:

•

Proceeds of $45,600,000 received from mortgage notes payable;

•

Proceeds of $27,544,000 received from construction loan draws; and

•

proceeds of $12,584,000 received from the issuance of common stock under the dividend reinvestment program, directors deferred plan and the exercise of stock options;

which was partially offset by:

•

the repayment of mortgage notes payable totaling $41,912,000;

•

distributions to common stockholders totaling $19,578,000;

•

distributions to holders of convertible limited partnership units in the Operating Partnership totaling $5,849,000;

•

distributions made to preferred stockholders totaling $11,355,000; and

•

payments of $329,000 for financing costs of mortgage notes payable.

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Liquidity Requirements

Short-term liquidity requirements consist primarily of normal recurring operating expenses and capital expenditures, debt service requirements (including debt service relating to additional and replacement debt), distributions to common and preferred stockholders, distributions to unit holders and amounts required for expansion and renovation of the Current Portfolio Properties and selective acquisition and development of additional properties. In order to qualify as a REIT for federal income tax purposes, the Company must distribute to its stockholders at least 90% of its “real estate investment trust taxable income,” as defined in the Code. The Company expects to meet these short-term liquidity requirements (other than amounts required for additional property acquisitions and developments) through cash provided from operations, available cash and its existing line of credit.

Long-term liquidity requirements consist primarily of obligations under the Company’s long-term debt and dividends paid to the Company’s preferred shareholders. The Company anticipates that long-term liquidity requirements will also include amounts required for property acquisitions and developments. During the remainder of the year, the Company will continue to develop its construction in progress properties and may develop certain freestanding outparcels within certain of the Shopping Centers. Although not currently planned, it is possible that the Company may redevelop certain of the Current Portfolio Properties and may develop expansions within certain of the Shopping Centers.

Acquisition and development of properties are undertaken only after careful analysis and review, and management’s determination that such properties are expected to provide long-term earnings and cash flow growth. During the coming year, developments, expansions or acquisitions (if any) are expected to be funded with available cash, bank borrowings from the Company’s credit line, construction and permanent financing, proceeds from the operation of the Company’s dividend reinvestment plan or other external debt or equity capital resources available to the Company. Borrowings may be at the Saul Centers, Operating Partnership or Subsidiary Partnership level, and securities offerings may include (subject to certain limitations) the issuance of additional limited partnership interests in the Operating Partnership which can be converted into shares of Saul Centers common stock. The availability and terms of any such financing will depend upon market and other conditions.

As of September 30, 2011, the scheduled maturities, including scheduled principal amortization, of all debt for years ended December 31, are as follows:

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Debt Maturity Schedule


(Dollars in thousands)	Balloon Payments			Scheduled Principal Amortization		Total
October 1 through December 31, 2011	$	—		$	5,070	$	5,070
2012		129,960	^(a)		20,374		150,334
2013		70,131			16,334		86,465
2014		13,218			16,473		29,691
2015		15,077			16,834		31,911
2016		—			17,506		17,506
Thereafter		389,361			123,680		513,041

	$	617,747		$	216,271	$	834,018

(a)	Includes $60,000 and $8,000, outstanding on the bridge loans and line of credit, respectively.

Management believes that the Company’s capital resources, which at September 30, 2011 included cash balances of approximately $11,447,000 and borrowing availability of approximately $122,000,000 under its unsecured revolving credit facility, will be sufficient to meet its liquidity needs for the foreseeable future.

Dividend Reinvestments

In December 1995, the Company established a Dividend Reinvestment and Stock Purchase Plan (the “DRIP”) to allow its common stockholders and holders of limited partnership interests an opportunity to buy additional shares of common stock by reinvesting all or a portion of their dividends or distributions. The DRIP provides for investing in newly issued shares of common stock at a 3% discount from market price without payment of any brokerage commissions, service charges or other expenses. All expenses of the DRIP are paid by the Company. The Company issued 331,677 and 305,660 shares under the DRIP at a weighted average discounted price of $41.95 and $38.39 per share, during the nine month periods ended September 30, 2011 and 2010, respectively. The Company also credited 5,982 and 6,333 shares to directors pursuant to the reinvestment of dividends specified by the Directors’ Deferred Compensation Plan at a weighted average discounted price of $41.97 and $38.12 per share, during the nine month periods ended September 30, 2011 and 2010, respectively.

Capital Strategy and Financing Activity

As a general policy, the Company intends to maintain a ratio of its total debt to the estimated fair value of its assets of 50% or less and to actively manage the Company’s leverage and debt expense on an ongoing basis in order to maintain prudent coverage of fixed charges. Asset value is the aggregate fair market value of the Current Portfolio Properties and any subsequently acquired properties as reasonably determined by management by reference to the properties’ aggregate cash flow. Given the Company’s current debt level, it is management’s

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belief that the ratio of the Company’s debt to asset value was below 50% as of September 30, 2011.

The organizational documents of the Company do not limit the absolute amount or percentage of indebtedness that it may incur. The Board of Directors may, from time to time, reevaluate the Company’s debt/capitalization strategy in light of current economic conditions, relative costs of capital, market values of the Company’s property portfolio, opportunities for acquisition, development or expansion, and such other factors as the Board of Directors then deems relevant. The Board of Directors may modify the Company’s debt/capitalization strategy based on such a reevaluation without shareholder approval and consequently, may increase or decrease the Company’s debt to total asset ratio above or below 50% or may waive the strategy for certain periods of time. The Company selectively continues to refinance or renegotiate the terms of its outstanding debt in order to achieve longer maturities, and obtain generally more favorable loan terms, consistent with its long-term plans.

The Company maintains an unsecured revolving credit facility. The facility provides working capital and funds for acquisitions, certain developments, redevelopments and letters of credit, expires on June 30, 2012, and provides for an additional one-year extension at the Company’s option, subject to the Company’s satisfaction of certain conditions. Interest rate pricing under the facility is primarily determined by operating income from the Company’s existing unencumbered properties and, to a lesser extent, certain leverage tests. As of September 30, 2011, operating income from the unencumbered properties determined the interest rate for up to $104,000,000 of the line’s available borrowings, with interest expense to be calculated based upon the 1, 2, 3 or 6 month LIBOR plus a spread of 3.65% to 3.90%, determined by certain leverage tests. The interest rate on the remaining availability is determined based upon the Company’s consolidated operating income after debt service. On this portion of the facility, interest accrues at a rate of LIBOR plus a spread of 4.45% to 5.25%, determined by certain leverage tests. The Company may elect to use the 1, 2, 3 or 6 month LIBOR, but in no event shall LIBOR be less than 1.5%. As of September 30, 2011, $130,000,000 was available for borrowing under the credit facility, $8,000,000 was outstanding, with interest accruing at 5.275%, and $122,000,000 was available for additional borrowing.

The facility requires the Company and its subsidiaries to maintain certain financial covenants. As of September 30, 2011, the material covenants required the Company, on a consolidated basis, to:

•

limit the amount of debt so as to maintain a gross asset value, as defined in the loan agreement, in excess of liabilities of at least $755 million plus 90% of the Company’s future net equity proceeds;

•

limit the amount of debt as a percentage of gross asset value, as defined in the loan agreement, to less than 60% (leverage ratio);

•

limit the amount of debt so that interest coverage will exceed 2.2x on a trailing 12-full calendar month basis (interest expense coverage);

•

limit the amount of debt so that interest and scheduled principal amortization coverage exceeds 1.6x (debt service coverage);

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•

limit the amount of debt so that interest, scheduled principal amortization and preferred dividend coverage exceeds 1.4x (fixed charge coverage);

•

limit the amount of variable-rate debt and debt with initial loan terms of less than five years to no more than 40% of total debt; and

•

limit the outstanding debt plus undrawn loan availability to 8.0x trailing twelve month adjusted EBITDA, as defined in the loan agreement.

As of September 30, 2011, the Company was in compliance with all such covenants.

On October 5, 2011, the Company closed on a new 15-year non-recourse mortgage loan in the amount of $43,000,000, secured by Kentlands Square II. The loan matures November 5, 2026, bears interest at a fixed rate of 4.53%, requires equal monthly principal and interest payments of $239,741, based upon a 25-year principal amortization, and requires a final principal payment of approximately $23,100,000 at maturity. Proceeds from the loan were used to repay the $40,000,000 bridge financing used to acquire Kentlands Square II.

On September 23, 2011, the Company closed on a new 15-year non-recourse mortgage loan in the amount of $38,000,000, secured by Severna Park MarketPlace. The loan matures October 1, 2026, bears interest at a fixed rate of 4.30%, requires equal monthly principal and interest payments of $206,926, based upon a 25-year principal amortization, and requires a final principal payment of approximately $20,287,000 at maturity. Proceeds from the loan were used to purchase Severna Park MarketPlace.

Also on September 23, 2011, the Company closed on two six-month bridge financing loans in the total amount of $60,000,000, secured by Kentlands Square II and Cranberry Square. The loans had a maturity date of March 23, 2012 and required month interest-only payments based upon the one-month LIBOR plus 1.75%. Proceeds from the loans were used to purchase Kentlands Square II and Cranberry Square. The $40,000,000 loan was repaid on October 5,

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2011 with proceeds from the Kentlands Square II permanent financing and the remaining $20,000,000 loan is expected to be repaid during the 2011 fourth quarter using proceeds from the Cranberry Square permanent mortgage financing.

On March 23, 2011, the Company closed on a $125 million, 15-year non-recourse mortgage loan, secured by Clarendon Center. The loan matures April 5, 2026, bears interest at a fixed rate of 5.31%, requires equal monthly principal and interest payments of $753,491, based upon a 25-year principal amortization, and requires a final principal payment of approximately $70,477,000 at maturity. Proceeds from the loan were used to repay $104,243,000 outstanding on the Clarendon Center construction loan.

On July 15, 2011, the Company obtained a commitment to borrow $73,000,000 under a non-recourse mortgage loan secured by Seven Corners. Proceeds from this loan will be used to pay off the remaining balance of existing debt currently secured by Seven Corners and six other shopping center properties which is due to mature October 2012, and provide cash of approximately $10 million. Subject to standard closing requirements, the new 15-year mortgage loan is expected to close in April 2012 and will require monthly principal and interest payments based upon a fixed 5.84% interest rate and 25-year principal amortization. In April 2011, the company paid a $2.8 million refundable good faith deposit.

Common Equity

On September 23, 2011, pursuant to a Stock Purchase Agreement with the B. F. Saul Real Estate Investment Trust dated August 9, 2011, the Company issued 186,968 restricted shares of common stock and 1,497,814 operating partnership units of Saul Centers, at a price of $33.12 per share, determined using the average closing price of the common stock on the New York Stock Exchange for the five days immediately prior to the closing of the transaction and received net proceeds of $55.8 million. The Stock Purchase Agreement was executed during the acquisition auction for Kentlands Square II, Severna Park MarketPlace and Cranberry Square, which allowed the Company to bid for the properties by providing the certainty for the required equity in the event the acquisition was successful.

Preferred Stock

In March 2008, the Company sold 3,173,115 depositary shares, each representing 1/100th of a share of 9% Series B Cumulative Redeemable Preferred Stock. The depositary shares may be redeemed at the Company’s option, in whole or in part, at the $25.00 liquidation preference on or after March 15, 2013. The depositary shares pay an annual dividend of $2.25 per share, equivalent to 9% of the $25.00 liquidation preference. The Series B preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company. Investors in the depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events.

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stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company. Investors in the depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on the Company’s financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Funds From Operations

For the quarter ended September 30, 2011, the Company reported Funds From Operations (FFO) ⁽¹⁾ available to common shareholders of $10,727,000, representing a 20.4% decrease compared to the 2010 quarter’s FFO available to common shareholders. The decrease in FFO during the quarter ended September 30, 2011 is primarily due to $2,439,000 of acquisition related costs. For the nine month period ended September 30, 2011, the Company reported FFO available to common shareholders of $35,234,000, representing a 9.9% decrease from the comparative 2010 Period’s FFO available to common shareholders. The decrease in FFO during the nine months ended September 30, 2011 is primarily due to $2,513,000 of acquisition related costs and $1,374,000 non-cash decrease in the fair value of derivative instruments. The following table presents a reconciliation from net income to FFO available to common stockholders for the periods indicated:

Funds From Operations Reconciliation


(Amounts in thousands)	Three months ended September 30,						Nine months ended September 30,
(Amounts in thousands)	2011			2010			2011			2010
Net income	$	6,000		$	15,503		$	21,479		$	34,315
Subtract:
Gain on casualty settlement		—			(1,700	)		(198	)		(1,700	)
Gain on property sale		—			(3,591	)		—			(3,591	)
Add:
Real property depreciation & amortization		8,512			7,031			25,308			21,365
Real property depreciation-discontinued operations		—			30			—			86

FFO		14,512			17,273			46,589			50,475
Subtract:
Preferred stock dividends		(3,785	)		(3,785	)		(11,355	)		(11,355	)

FFO available to common shareholders	$	10,727		$	13,488		$	35,234		$	39,120

Average shares & units used to compute FFO per share		24,353			23,857			24,259			23,722

(1)

The National Association of Real Estate Investment Trusts (NAREIT) developed FFO as a relative non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO is defined by NAREIT as net income, computed in accordance with GAAP, plus real estate depreciation and amortization, and excluding extraordinary items and gains or losses from property dispositions. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Company’s Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income, its most directly comparable GAAP measure, as an indicator of the Company’s operating performance, or as an alternative to cash flows as a measure of liquidity. Management considers FFO a meaningful supplemental measure of operating performance because it primarily excludes the assumption that the value of the real estate assets diminishes predictably over time (i.e. depreciation), which is contrary to what the Company believes occurs with its assets, and because industry analysts have accepted it as a performance measure. FFO may not be comparable to similarly titled measures employed by other REITs.

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Acquisitions, Redevelopments and Renovations

During the remainder of the year the Company will continue to develop its construction in progress properties and may develop certain freestanding outparcels within certain of the Shopping Centers. Although not currently planned, it is possible that the Company may redevelop certain of the Current Portfolio Properties and may develop expansions within certain of the Shopping Centers. Acquisition and development of properties are undertaken only after careful analysis and review, and management’s determination that such properties are expected to provide long-term earnings and cash flow growth. During the balance of the year, any developments, expansions or acquisitions are expected to be funded with bank borrowings from the Company’s credit line, construction financing, proceeds from the operation of the Company’s dividend reinvestment plan or other external capital resources available to the Company.

The Company has been selectively involved in acquisition, development, redevelopment and renovation activities. It continues to evaluate the acquisition of land parcels for retail and office development and acquisitions of operating properties for opportunities to enhance operating income and cash flow growth. The Company also continues to analyze redevelopment, renovation and expansion opportunities within the portfolio. The following describes the acquisition, development, redevelopment and renovation activities of the Company in 2010 and the nine months ended September 30, 2011.

Ashland Square Phase I

On December 15, 2004, the Company purchased for $6.3 million, a 19.3 acre parcel of land in Manassas, Prince William County, Virginia. The Company received site plan approval during the third quarter of 2006 to develop a grocery-anchored neighborhood shopping center totaling approximately 125,000 square feet of retail space. A site plan for an additional 35,000 square feet of retail and office space was approved during the fourth quarter of 2007. The Company has completed preliminary site work consisting of clearing, grading and site utility construction. Capital One Bank operates a branch on the site and during 2009, the Company executed a lease with CVS, which is subject to the tenant obtaining site plan and special use permits from Prince William County. It is uncertain whether these lease contingencies will be fulfilled as permit submissions are in progress. If successful, CVS is expected to commence operations in late 2012. The balance of the center is being marketed to grocers and other retail businesses, with a development timetable yet to be finalized.

Clarendon Center

At yearend 2010, the Company had substantially completed construction of a mixed-use project which includes approximately 42,000 square feet of retail space, 171,000 square feet of office space, 244 apartments and 600 underground parking spaces, on two city blocks, adjacent to the Clarendon Metro Station in Arlington County, Virginia. Development costs are expected to total approximately $195.0 million, of which approximately $185.2 million has been incurred as of September 30, 2011.

The south block consists of 11 floors of residential area (244 units) alongside 8 floors of office space (76,000 square feet), both atop ground floor retail space (29,000 square feet) leased to Trader Joe’s, Circa Café and Burke & Herbert Bank. Space was turned over to the first office tenant whose occupancy began in mid-December, 2010. The first retail occupancy occurred in January 2011, when Circa Cafe opened. Currently all of the retail tenants are operating, with the exception of Trader Joe’s, which is scheduled to open in the fourth quarter of 2011. The north

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block consists of 5 floors of office space (95,000 square feet) atop ground floor retail (13,000 square feet). The building shell certificate of occupancy was received in early February and Airline Reporting Corporation (68,000 square feet) took occupancy in late March 2011. As of September 30, 2011, the combined project retail and office space leased was 189,000 square feet, or 88.8%.

On December 26, 2010, tenants began occupancy of the apartments. By April 28, 2011 the apartments were 98.8% leased and as of November 3, 2011, all 244 were fully leased and occupied.

Westview Village

In November 2007, the Company purchased for $5.0 million, a 10.4 acre site in the Westview development on Buckeystown Pike (MD Route 85) in Frederick, Maryland. Construction was substantially completed in the second quarter of 2009 on a development that totals approximately 101,000 square feet of commercial space, including 60,000 square feet of retail shop space, 11,000 square feet of retail pads and 30,000 square feet of professional office space. Total construction and development costs, including land, lease-up and tenant improvement costs, are projected to be approximately $26.5 million. As of September 30, 2011, 45,000 square feet of retail space and 11,000 square feet of office space, or approximately 55.3% of the total space, had been leased.

Northrock

In January 2008, the Company purchased for $12.5 million, approximately 15.4 acres of undeveloped land in Warrenton, Virginia, located at the southwest corner of the U. S. Route 29/211 and Fletcher Drive intersection. The Company constructed Northrock shopping center, a neighborhood shopping center totaling approximately 103,000 square feet of leasable area. Approximately 77.7% of the project was leased at September 30, 2011, including a 52,700 square foot Harris Teeter supermarket store, 18,822 square feet of small shop space, and pad leases with Capital One Bank and Longhorn Steakhouse. Total construction and development costs, including land, lease-up and tenant improvement costs, are projected to be approximately $27.9 million.

Seven Corners

During 2010, the Company expanded the Seven Corners shopping center by approximately 6,000 square feet. Red Robin Gourmet Burgers opened in November 2010 in a newly-constructed, free-standing building. The Company also completed construction of parking lot, landscaping and site lighting improvements to enhance the common areas.

11503 Rockville Pike

On October 1, 2010, the Company purchased for $15.6 million, including acquisition costs, approximately 20,000 square feet of retail space located on the east side of Rockville Pike (Route 355), near the White Flint Metro Station in Montgomery County, Maryland. The property, which was fully leased to two tenants at September 30, 2011, is zoned for up to 297,000 square feet of rentable mixed use space. The Company does not anticipate redeveloping the property in the foreseeable future.

Metro Pike Center

On December 17, 2010, the Company purchased for $34.3 million, including acquisition costs, approximately 67,000 square feet of retail space located on the west side of Rockville Pike

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(Route 355) near the White Flint Metro Station in Montgomery County, Maryland. The property was acquired subject to the assumption of a $16.2 million mortgage loan and a corresponding interest rate swap with a fair value of $0.5 million. The property, which was 87.0% leased at acquisition and was 78.6% leased at September 30, 2011 (following the departure of an 8,173 square foot tenant at lease expiration), is zoned for up to 807,000 square feet of rentable mixed use space. The Company does not anticipate redeveloping the property in the foreseeable future.

4469 Connecticut Ave

On February 17, 2011, the Company purchased for $1.7 million, including acquisition costs, approximately 3,000 square feet of retail space located adjacent to the Company’s Van Ness Square in Washington DC. The property is unoccupied as of September 30, 2011.

Kentlands Square II

On September 23, 2011, the Company purchased for $74.5 million Kentlands Square II, and incurred acquisition costs of $1.1 million. Kentlands Square II is a 241,000 square foot neighborhood shopping center located in Gaithersburg, Maryland, in Montgomery County, the state’s most populous and affluent county. More than 38,000 households, with annual household incomes averaging over $114,000, are located within a three-mile radius of the center. The center was constructed in 1993, is 100% leased and is anchored by a 61,000 square foot Giant Food supermarket and a 104,000 square foot Kmart. The property is adjacent to the Company’s Kentlands Square I, which is anchored by Lowe’s Home Improvement and Kentlands Place.

Severna Park MarketPlace

On September 23, 2011, the Company purchased for $61.0 million Severna Park MarketPlace, and incurred acquisition costs of $0.8 million. Severna Park MarketPlace is a 254,000 square foot neighborhood shopping center located in Severna Park, Maryland, in Anne Arundel County. More than 15,000 households, with annual household incomes averaging over $112,000, are located within a three-mile radius of the center. The center was constructed in 1974 and renovated in 2000, is 100% leased and is anchored by a 63,000 square foot Giant Food supermarket and a 92,000 square foot Kohl’s.

Cranberry Square

On September 23, 2011, the Company purchased for $33.0 million Cranberry Square, and incurred acquisition costs of $0.5 million. Cranberry Square is a 140,000 square foot neighborhood shopping center located in Westminster, Maryland, in Carroll County. More than 12,000 households, with annual household incomes averaging over $72,000, are located within a three-mile radius of the center. The center was constructed in 1991, is 91.2% leased and is anchored by a 56,000 square foot Giant Food supermarket and a 24,000 square foot Staples.

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Portfolio Leasing Status

The following chart sets forth certain information regarding commercial leases at our properties.


	Total Properties		Total Square Footage				Percent Leased
As of September 30,	Shopping Centers	Mixed- Use	Shopping Centers		Mixed- Use		Shopping Centers			Mixed- Use
2011	51	7		7,930,000		1,422,000		90.7	%		84.3	%

2010	46	5		7,204,000		1,206,000		92.4	%		89.9	%

As of September 30, 2011, 89.7% of the commercial portfolio (all properties except Clarendon Center’s apartments) was leased compared to 92.0% at September 30, 2010. On a same property basis, 89.2% of the commercial portfolio was leased, compared to the prior year level of 92.0%. The Clarendon Center apartments were 100.0% leased at September 30, 2011. The 2011 commercial leasing percentages were impacted by a net decrease of approximately 233,000 square feet of leased space, of which approximately 70,000 square feet was caused by the SuperFresh and Borders Books bankruptcies, 48,000 square feet resulted from the early lease termination of a local grocer and 75,000 square feet was an increase in office vacancies in the mixed-use properties.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to certain financial market risks, the most predominant being fluctuations in interest rates. Interest rate fluctuations are monitored by management as an integral part of the Company’s overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on the Company’s results of operations.

The Company may, where appropriate, employ derivative instruments, such as interest rate swaps, to mitigate the risk of interest rate fluctuations. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. On June 29, 2010, the Company entered into an interest rate swap agreement with a $45,600,000 notional amount to manage the interest rate risk associated with $45,600,000 of variable-rate mortgage debt. The swap agreement was effective July 1, 2010, terminates on July 1, 2020 and effectively fixes the interest rate on the mortgage debt at 5.83%. In conjunction with the purchase of Metro Pike Center, and the assumption of the related variable-rate mortgage loan, the Company assumed an interest-rate swap agreement with a $16,169,000 notional amount to manage the interest rate risk associated with the loan. The swap agreement was effective as of the closing date, terminates on June 30, 2013 and effectively fixes the interest rate on the mortgage debt at 4.67%. The aggregate fair value of these swaps at September 30, 2011 was approximately $5,124,000 and is reflected in accounts payable, accrued expenses and other liabilities in the consolidated balance sheet.

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The Company is exposed to interest rate fluctuations which will affect the amount of interest expense of its variable-rate debt and the fair value of its fixed-rate debt. As of September 30, 2011, the Company had variable rate indebtedness totaling $83,146,000. If the interest rates on the Company’s variable-rate debt instruments outstanding at September 30, 2011 had been one percent higher, our annual interest expense would have increased by $831,000, based on those balances. As of September 30, 2011, the Company had fixed-rate indebtedness totaling $750,872,000 with a weighted average interest rate of 6.16%. If interest rates on the Company’s fixed-rate debt instruments at September 30, 2011 had been one percent higher, the fair value of those debt instruments on that date would have decreased by approximately $41,379,000.

Item 4.

Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chairman and Chief Executive Officer, its Senior Vice President-Chief Financial Officer, Secretary and Treasurer, and its Senior Vice President-Chief Accounting Officer as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e) promulgated under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including its Chairman and Chief Executive Officer, its Senior Vice President-Chief Financial Officer, Secretary and Treasurer, and its Senior Vice President-Chief Accounting Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2011. Based on the foregoing, the Company’s Chairman and Chief Executive Officer, its Senior Vice President-Chief Financial Officer, Secretary and Treasurer and its Senior Vice President-Chief Accounting Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2011.

During the quarter ended September 30, 2011, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

None

Item 1A.

Risk Factors

The Company has no material updates to the risk factors presented in Item 1A. Risk Factors in the 2010 Annual Report of the Company on Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

B. Francis Saul II, the Company’s Chairman of the Board and Chief Executive Officer, his spouse and entities affiliated with Mr. Saul II, through participation in the Company’s Dividend Reinvestment and Stock Purchase Plan, effective with the July 29, 2011 dividend distribution, acquired 104,000 shares of common stock at a price of $38.30 per share.

On September 23, 2011, pursuant to a Stock Purchase Agreement with the Company dated August 9, 2011, the B. F. Saul Real Estate Investment Trust, an entity affiliated with Mr. Saul II, acquired 186,968 shares of Saul Centers common stock and 1,497,814 operating partnership units of Saul Holdings L.P., in a private placement under section 4(2) of the Securities Act of 1933, as amended, at a price of $33.12 per share, determined using the average closing price of the common stock on the New York Stock Exchange for the five days immediately prior to the closing of the acquisition.

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Reserved

Item 5.

Other Information

None

Item 6.

Exhibits


2.	(a)	Agreement of Purchase and Sale, dated as of August 9, 2011, between Cranberry Retail, Inc. and Saul Holdings Limited Partnership, as amended (filed herewith).*

	(b)	Agreement of Purchase and Sale, dated as of August 9, 2011, between Kentlands Retail, Inc. and Saul Holdings Limited Partnership, as amended (filed herewith).*

	(c)	Agreement of Purchase and Sale, dated as of August 9, 2011, between Severna Retail, Inc. and Saul Holdings Limited Partnership, as amended (filed herewith).*

3.	(a)	First Amended and Restated Articles of Incorporation of Saul Centers, Inc. filed with the Maryland Department of Assessments and Taxation on August 23, 1994 and filed as Exhibit 3.(a) of the 1993 Annual Report of the Company on Form 10-K are hereby incorporated by reference. Articles of Amendment to the First Amended and Restated Articles of

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		Incorporation of Saul Centers, Inc., filed with the Maryland Department of Assessments and Taxation on May 28, 2004 and filed as Exhibit 3.(a) of the June 30, 2004 Quarterly Report of the Company is hereby incorporated by reference. Articles of Amendment to the First Amended and Restated Articles of Incorporation of Saul Centers, Inc., filed with the Maryland Department of Assessments and Taxation on May 26, 2006 and filed as Exhibit 3.(a) of the Company’s Current Report on Form 8-K filed May 30, 2006 is hereby incorporated by reference.

	(b)	Amended and Restated Bylaws of Saul Centers, Inc. as in effect at and after August 24, 1993 and as of August 26, 1993 and filed as Exhibit 3.(b) of the 1993 Annual Report of the Company on Form 10-K are hereby incorporated by reference. Amendment No. 1 to Amended and Restate Bylaws of Saul Centers, Inc. adopted November 29, 2007 and filed as Exhibit 3(b) of the Company’s Current Report on Form 8-K filed December 3, 2007 is hereby incorporated by reference.

	(c)	Articles Supplementary to First Amended and Restated Articles of Incorporation of the Company, dated October 30, 2003, filed as Exhibit 2 to the Company’s Current Report on Form 8-A dated October 31, 2003, is hereby incorporated by reference.

	(d)	Articles Supplementary to First Amended and Restated Articles of Incorporation of the Company, as amended, dated March 26, 2008, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed March 27, 2008, is hereby incorporated by reference.

4.	(a)	Deposit Agreement, dated November 5, 2003, among the Company, Continental Stock Transfer & Trust Company, as Depositary, and the holders of depositary receipts, each representing 1/100th of a share of 8% Series A Cumulative Redeemable Preferred Stock of Saul Centers, Inc. and filed as Exhibit 4 to the Registration Statement on Form 8-A on October 31, 2003 is hereby incorporated by reference.

	(b)	Deposit Agreement, dated March 27, 2008, among the Company, Continental Stock Transfer & Trust Company, as Depositary, and the holders of depositary receipts, each representing 1/100th of a share of 9% Series B Cumulative Redeemable Preferred Stock of Saul Centers, Inc. and filed as Exhibit 4.1 to the Registration Statement on Form 8-A on March 27, 2008 is hereby incorporated by reference.

	(c)	Form specimen of receipt representing the depositary shares, each representing 1/100th of a share of 8% Series A Cumulative Redeemable Preferred Stock of Saul Centers, Inc. and included as part of Exhibit 4 to the Registration Statement on Form 8-A on October 31, 2003 is hereby incorporated by reference.

	(d)	Form specimen of receipt representing the depositary shares, each representing 1/100th of a share of 9% Series B Cumulative Redeemable

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		Preferred Stock of Saul Centers, Inc. and included as part of Exhibit 4.2 to the Registration Statement on Form 8-A on March 27, 2008 is hereby incorporated by reference.

10.	(a)	First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit No. 10.1 to Registration Statement No. 33-64562 is hereby incorporated by reference. The First Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership, the Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership, and the Third Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the 1995 Annual Report of the Company on Form 10-K is hereby incorporated by reference. The Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the March 31, 1997 Quarterly Report of the Company is hereby incorporated by reference. The Fifth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 4.(c) to Registration Statement No. 333-41436, is hereby incorporated by reference. The Sixth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the September 30, 2003 Quarterly Report of the Company on Form 10-Q is hereby incorporated by reference. The Seventh Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the December 31, 2003 Annual Report of the Company on Form 10-K is hereby incorporated by reference. The Eighth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the December 31, 2007 Annual Report of the Company on Form 10-K is hereby incorporated by reference. The Ninth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the March 31, 2008 Quarterly Report of the Company on Form 10-Q is hereby incorporated by reference. The Tenth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the March 31, 2008 Quarterly Report of the Company on Form 10-Q is hereby incorporated by reference. The Eleventh Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership is filed herewith.

	(b)	First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership and Amendment No. 1 thereto filed as Exhibit 10.2 to Registration Statement No. 33-64562 are hereby incorporated by reference. The Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership, the Third Amendment to the First Amended and

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				Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership and the Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership as filed as Exhibit 10.(b) of the 1997 Annual Report of the Company on Form 10-K are hereby incorporated by reference.

		(c)		First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary II Limited Partnership and Amendment No. 1 thereto filed as Exhibit 10.3 to Registration Statement No. 33-64562 are hereby incorporated by reference. The Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary II Limited Partnership filed as Exhibit 10.(c) of the June 30, 2001 Quarterly Report of the Company is hereby incorporated by reference. The Third Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary II Limited Partnership as filed as exhibit 10.(c) of the 2006 Annual Report of the Company on Form 10-K are hereby incorporated by reference. The Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary II Limited Partnership as filed as Exhibit 10.(c) of the 2009 Annual Report of the Company on Form 10-K are hereby incorporated by reference.

		(d)		Property Conveyance Agreement filed as Exhibit 10.4 to Registration Statement No. 33-64562 is hereby incorporated by reference.

		(e)		Management Functions Conveyance Agreement filed as Exhibit 10.5 to Registration Statement No. 33-64562 is hereby incorporated by reference.

		(f)		Registration Rights and Lock-Up Agreement filed as Exhibit 10.6 to Registration Statement No. 33-64562 is hereby incorporated by reference.

		(g)		Exclusivity and Right of First Refusal Agreement filed as Exhibit 10.7 to Registration Statement No. 33-64562 is hereby incorporated by reference.

		(h)		Agreement of Assumption dated as of August 26, 1993 executed by Saul Holdings Limited Partnership and filed as Exhibit 10.(i) of the 1993 Annual Report of the Company on Form 10-K is hereby incorporated by reference.

		(i)		Deferred Compensation Plan for Directors, dated as of April 23, 2004 and filed as Exhibit 10.(k) of the June 30, 2004 Quarterly Report of the Company is hereby incorporated by reference.

		(j)		Revolving Credit Agreement, dated as of December 19, 2007, by and among Saul Holdings Limited Partnership as Borrower; U.S. Bank National Association, as Administrative Agent and Sole Lead Arranger; Wells Fargo Bank National Association, as Syndication Agent; and U.S. Bank National Association, Wells Fargo Bank National Association, Compass Bank, and Sovereign Bank, as Lenders, as filed as Exhibit 10.(b)

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				of the Company’s Current Report on Form 8-K, dated August 11, 2010, is hereby incorporated by reference. Modification to Revolving Credit Agreement, dated April 30, 2009, as filed as Exhibit 10.(l) of the June 30, 2009 Quarterly Report of the Company, is hereby incorporated by reference. Second Modification to Revolving Credit Agreement, dated July 9, 2009, as filed as Exhibit 10.(l) of the June 30, 2009 Quarterly Report of the Company, is hereby incorporated by reference. Third Modification to Revolving Credit Agreement, dated July 28, 2009, as filed as Exhibit 10.(l) of the June 30, 2009 Quarterly Report of the Company, is hereby incorporated by reference. Fourth Modification to Revolving Credit Agreement dated August 30, 2010, as filed as Exhibit 10.(j) of the September 30, 2010 Quarterly Report of the Company, is hereby incorporated by reference.

		(k)		Guaranty, dated as of December 19, 2007, by and between Saul Centers, Inc., as Guarantor, and U.S. Bank National Association, as Administrative Agent and Sole Lead Arranger for itself and other financial institutions as Lenders, as filed as Exhibit 10.(o) of the December 31, 2007 Annual Report of the Company on Form 10-K, is hereby incorporated by reference.

		(l)		The Saul Centers, Inc. 2004 Stock Plan, as filed as Annex A to the Proxy Statement of the Company for its 2004 Annual Meeting of Stockholders, is hereby incorporated by reference. The Amendment to Saul Centers, Inc. 2004 Stock Plan, as filed as Annex A to the Proxy Statement of the Company for its 2008 Annual Meeting of Stockholders, is hereby incorporated by reference.

		(m)		Form of Director Stock Option Agreements, as filed as Exhibit 10.(j) of the September 30, 2004 Quarterly Report of the Company, is hereby incorporated by reference.

		(n)		Form of Officer Stock Option Grant Agreements, as filed as Exhibit 10.(k) of the September 30, 2004 Quarterly Report of the Company, is hereby incorporated by reference.

		(o)		Promissory Note, dated as of March 23, 2011, by Clarendon Center LLC to The Prudential Life Insurance Company of America as filed as Exhibit 10.(a) of the Company’s Current Report on Form 8-K dated April 28, 2011, is hereby incorporated by reference.

		(p)		Deed of Trust, Security Agreement and Fixture Filing, dated as of March 23, 2011, by Clarendon Center LLC to Lawyers Title Realty Services, Inc. as trustee for the benefit of The Prudential Insurance Company of America, as beneficiary, as filed as Exhibit 10.(b) of the Company’s Current Report on Form 8-K dated April 28, 2011, is hereby incorporated by reference.

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	(q)	Shared Services Agreement, dated as of July 1, 2004, between B. F. Saul Company and Saul Centers, Inc., as filed as Exhibit 10. (c) of the Company’s Current Report on Form 8-K dated August 11, 2010, is hereby incorporated by reference.

	(r)	Purchase Agreement, dated as of August 9, 2011, by and among the Company, Saul Holdings Limited Partnership and B. F. Saul Real Estate Investment Trust (filed herewith).

31.		Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer and Chief Financial Officer (filed herewith).

32.		Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer (filed herewith).

99.		Schedule of Portfolio Properties (filed herewith).

*	Certain of the appendices and exhibits to these agreements have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Saul Centers, Inc. hereby undertakes to furnish supplementally to the Securities and Exchange Commission copies of any omitted appendices and exhibits upon request.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


						SAUL CENTERS, INC.
						(Registrant)

Date: November 8, 2011						/s/ B. Francis Saul III
						B. Francis Saul III, President

Date: November 8, 2011						/s/ Scott V. Schneider
						Scott V. Schneider
						Senior Vice President, Chief Financial Officer
						(principal financial officer)

Date: November 8, 2011						/s/ Joel A. Friedman
						Joel A. Friedman
						Senior Vice President, Chief Accounting Officer
						(principal accounting officer)

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Exhibit 2.(a)

AGREEMENT OF PURCHASE AND SALE

between

CRANBERRY RETAIL, INC.,

a Maryland corporation

“Seller”

and

SAUL HOLDINGS LIMITED PARTNERSHIP,

a Maryland limited partnership

“Buyer”

with Deposit Instructions for

Commonwealth Land Title Insurance Company

as Escrow Agent

PROPERTY:

375-405 N. CENTER STREET,

WESTMINSTER, CARROLL COUNTY, MARYLAND

LIST OF EXHIBITS


Exhibit “A”		Description of Land
Exhibit “B-1”		List of Leases
Exhibit “B-2”		Rent Roll
Exhibit “C”		Form of Tenant Notice Letter
Exhibit “D”		List of Contracts
Exhibit “E”		List of Personal Property
Exhibit “F-1”		Form of Articles of Transfer
Exhibit “F-2”		Form of Certificate of Conveyance
Exhibit “F-3”		Form of Confirmatory Deed
Exhibit “G”		Form of Bill of Sale
Exhibit “H”		Form of Assignment and Assumption of Leases
Exhibit “I”		Form of Assignment and Assumption of Contracts, Warranties and Guaranties and Other Intangible Property
Exhibit “J”		Form of Tenant Estoppel Certificates
Exhibit “K”		List of Surveys
Exhibit “L”		Companion Contracts
Exhibit “M”		List of Future Leasing Commissions and Unfunded Tenant Improvement and Other Concession Obligations
Exhibit “N”		Newly Executed Leases Escrow

AGREEMENT OF PURCHASE AND SALE

THIS AGREEMENT OF PURCHASE AND SALE (this “Agreement”), dated as of August 9 ^th , 2011, is between CRANBERRY RETAIL, INC ., a Maryland corporation (“Seller”), and SAUL HOLDINGS LIMITED PARTNERSHIP , a Maryland limited partnership (“Buyer”).

ARTICLE 1 – CERTAIN DEFINITIONS

Section 1.1 Definitions. The parties hereby agree that the following terms shall have the meanings hereinafter set forth, such definitions to be applicable equally to the singular and plural forms, and to the masculine and feminine forms, of such terms.

1.1.1 “Agreement” shall mean this Agreement, as the same may be amended, modified, or supplemented from time to time in writing by the parties hereto.

1.1.2 “Closing” shall have the meaning ascribed in Section 9.2.

1.1.3 “Closing Date” shall mean, TIME BEING OF THE ESSENCE, the date on which the Closing shall occur, but in no event later than the date set forth in Section 9.2.

1.1.4 “Closing Documents” means the documents executed and delivered by Seller at Closing, as set forth in Section 9.3, and the documents executed and delivered by Buyer at Closing, as set forth in Section 9.4.

1.1.5 “Closing Proration Statement” shall have the meaning ascribed in Section 9.6.1(a).

1.1.6 “Companion Contracts” shall mean those two (2) separate Real Estate Contracts of even date herewith entered into between Buyer, as “Buyer”, and an entity owned or controlled by Seller’s sole shareholder, as “Seller”, which are intended to close simultaneously with the Closing. The Companion Contracts, and the property covered by such Companion Contracts, are more generally described in Exhibit “L” attached hereto and made a part hereof.

1.1.7 “Contracts” shall mean any contracts or other agreements in effect for the continuing provision of services, equipment or supplies relating to the construction, maintenance, repair, protection or operation of the Property; excluding any listing agreement by and between Seller and Broker (as defined in Section 9.7), and any contract for services with any affiliate of Seller.

1.1.8 “Deposit” shall have the meaning ascribed in Section 2.3.

1.1.9 “Due Diligence” shall mean the review contemplated by Section 3.1 and related provisions of this Agreement.

1.1.10 “Due Diligence Items” shall mean those items, documents and deliveries actually delivered or made available to Buyer by the time required under Section 3.2.

1.1.11 “Due Diligence Period” shall mean the time period contemplated by Section 3.1 of this Agreement.

1.1.12 “Effective Date” shall mean the date on which Buyer and Seller executed and delivered the letter of intent, which was July 29, 2011.

1.1.13 “Environmental Laws” means all federal, state and local environmental laws, rules, statutes, directives, binding written interpretations, binding written policies, ordinances and regulations issued by any Governmental Entity regulating the generation, storage, transportation, discharge, disposal, release or removal of any hazardous substances and in effect as of the date of this Agreement with respect to or which otherwise pertain to or affect the Real Property or the Improvements, or any portion thereof, the use, ownership, occupancy or operation of the Real Property or the Improvements, or any portion thereof, or Buyer, and as same have been amended, modified or supplemented from time to time prior to the date of this Agreement, including but not limited to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C. § 9601 et seq.), the Hazardous Substances Transportation Act (49 U.S.C. § 1802 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. § 6901 et seq.), the Water Pollution Control Act (33 U.S.C. § 1251 et seq.), the Safe Drinking Water Act (42 U.S.C. § 300f et seq.), the Clean Air Act (42 U.S.C. § 7401 et seq.), the Solid Waste Disposal Act (42 U.S.C. § 6901 et seq.), the Toxic Substances Control Act (15 U.S.C. § 2601 et seq.), the Emergency Planning and Community Right-to-Know Act of 1986 (42 U.S.C. § 11001 et seq.), the Radon and Indoor Air Quality Research Act (42 U.S.C. § 7401 note, et seq.), the Superfund Amendment Reauthorization Act of 1986 (42 U.S.C. § 9601 et seq.), comparable state and local laws, and any and all rules and regulations which have become effective prior to the date of this Agreement under any and all of the aforementioned laws.

1.1.14 “Escrow Agent” shall mean Commonwealth Land Title Insurance Company.

1.1.15 “Fixtures” shall mean the fixtures which are located at and affixed to any of the Improvements as of the Effective Date and the Closing Date, but specifically excluding any trade fixtures of the Tenants under the Leases.

1.1.16 “Governmental Entity” means the various governmental and quasi-governmental bodies or agencies having jurisdiction over Seller, the Real Property or the Improvements or any portion thereof.

1.1.17 “Hazardous Materials” means any pollutants, contaminants, hazardous or toxic substances, materials or wastes (including petroleum, petroleum by-products, radon, asbestos and asbestos containing materials, polychlorinated biphenyls (“PCBs”), PCB-containing equipment, radioactive elements, infectious agents, and urea formaldehyde), as such terms are used in any Environmental Laws (excluding solvents, cleaning fluids and other lawful substances

used in compliance with Environmental Laws in the ordinary operation and maintenance of the Real Property, to the extent in closed containers).

1.1.18 “Improvements” shall mean the buildings, improvements, and structures located on the Real Property including, without limitation, a shopping center building(s) with the address of 375-405 N. Center Street, Westminster, Maryland.

1.1.19 “LaSalle” shall mean LaSalle Investment Management, Inc.

1.1.20 “Land” shall mean that certain parcel of land and appurtenances thereto more particularly described on Exhibit “A” including Seller’s right, title and interest in and to all rights-of-way, open or proposed streets, alleys, easements, strips or gores of land adjacent to such parcel of land.

1.1.21 “Laws” shall mean any and all constitutions, statutes, ordinances, rules, regulations, orders, rulings or decrees of the United States, or of the state, county or any municipality in which the Property is located, or any authority, agency, division, district, court or other authority thereof.

1.1.22 “Leases” shall mean (i) all of the leases, subleases, licenses and other occupancy agreements and any written side agreements with any tenant, together with any and all amendments and modifications thereof including, without limitation, any guaranties and security deposit delivered in connection with any of the foregoing, for the use, possession, or occupancy of any portions of space within the Improvements, all as set forth on the list attached hereto as Exhibit “B-1” and as further set forth in the Rent Roll attached hereto as Exhibit “B-2” and (ii) any New Leases (as defined below) entered into in accordance with the provisions of this Agreement.

1.1.23 “Licensee Parties” shall mean those authorized agents, contractors, consultants and representatives of Buyer and Buyer’s affiliates who shall inspect, investigate, test or evaluate the Property on behalf of Buyer in accordance with this Agreement.

1.1.24 “New Leases” or “New Lease” shall mean, collectively, or singularly, any leases, licenses and other occupancy agreements for the use, possession, or occupancy of any portions of space within the Improvements entered into between the Effective Date and the Closing Date in accordance with the terms of this Agreement.

1.1.25 “Marks” shall mean all of Seller’s intellectual property rights related to the ownership and operation of the Real Property, including the term “Cranberry Square”, any building names, street numbers, telephone numbers, e-mail addresses, marks or other symbols used to identify the Land or Improvements to the extent held and assignable by Seller or otherwise transferable with the Property.

1.1.26 “Operating Expenses” shall mean operating expenses and common area maintenance charges, including utilities, insurance and other charges, whether deemed additional rent or otherwise under the Leases, or any charges for taxes or other assessments.

1.1.27 “Parties” shall mean Buyer and Seller, and their permitted assigns together and “Party” may mean either Buyer or Seller as the case may be.

1.1.28 “Permitted Exceptions” shall mean and include all of the following: applicable zoning and building ordinances and land use regulations applicable to the Property as of the Effective Date, such state of facts as expressly set forth in Buyer’s Survey (to the extent any such item shown on the Survey is not the subject of an objection, or is cured or waived pursuant to Section 4.1), the lien of taxes and assessments not yet due and payable (it being agreed by Buyer and Seller that if any tax or assessment is levied or assessed with respect to the Property after the date hereof and the owner of the Property has the election to pay such tax or assessment either immediately or under a payment plan with interest, Seller may elect to pay under a payment plan, which election shall be binding on Buyer), any exclusions from coverage set forth in the jacket of the Owner’s Policy of Title Insurance or any standard printed exceptions issued pursuant to the Title Commitment, any exceptions caused by Buyer, its agents, representatives or employees, the rights of the tenants under the Leases, and any matters deemed to constitute Permitted Exceptions under Section 4.1 hereof.

1.1.29 “Permitted Outside Parties” shall have the meaning ascribed in Section 3.5.

1.1.30 “Personal Property” shall mean all of the right, title, and interest of Seller in and to the tangible personal property, which is located at and used in connection with any of the Real Property as of the Closing Date, but specifically excluding (a) any personal property owned, financed or leased by the Tenants under the Leases, (b) any computer software which either is licensed to Seller, or Seller deems proprietary, and (c) any tangible personal property owned or leased by any affiliated or unaffiliated on-site property manager. Personal Property shall not include any appraisals, budgets, strategic plans for the Real Property, internal analyses, marketing information, submissions relating to Seller’s obtaining of corporate authorization, attorney and accountant work product, attorney-client privileged documents, or other information not related to Property condition or to the Leases, in the possession or control of Seller or Seller’s property manager or LaSalle which Seller reasonably deems proprietary. Personal Property shall include those items listed on Exhibit “E.”

1.1.31 “Property” shall mean the Real Property, the Personal Property, the Leases, the Contracts, the Marks and, to the extent transferable, all of Seller’s right, title and interest in and to (a) all warranties from any contractor, manufacturer or vendor with respect to the Improvements or the Personal Property, (b) any plans, specifications, engineering studies, reports, drawings, and prints relating to the construction, reconstruction, modification, and alteration of Improvements, and (c) any governmental permits, licenses, agreements, utility contracts, or other rights relating to ownership, use, or operation of the Property.

1.1.32 “Property Manager(s)” shall mean CB Richard Ellis, Inc. (“CBRE”), which manages the Property, or an entity retained by Seller to replace CBRE as the manager of the Property.

1.1.33 “Purchase Price” shall have the meaning ascribed in Section 2.2.

1.1.34 “Real Property” shall mean the Land, Improvements, and Fixtures.

1.1.35 “Rent Roll” shall mean the Rent Roll which is attached hereto as Exhibit “B-2”.

1.1.36 “Rents” shall mean and include fixed monthly rentals, additional rentals, percentage rentals, rents prepaid for any period subsequent to the Closing Date, escalation rentals (which include, without limitation, each Tenant’s proration share of building operation and maintenance costs and expenses as provided for under the applicable Lease, to the extent the same exceeds any expense stop specified in such Lease), retroactive rentals, all administrative charges, utility charges, tenant or real property association dues, storage rentals, special event proceeds, temporary rents, telephone receipts, locker rentals, vending machine receipts and other sums and charges payable by tenants under the Leases or from other occupants or users of the Property, including amounts received for Operating Expenses.

1.1.37 “Survey” or “Surveys” shall mean, individually, or collectively, those certain ALTA surveys (if any) of the real property and improvements prepared by a professional registered land surveyor more particularly described on Exhibit “K” attached hereto and delivered to Buyer as part of the Due Diligence Items. “ Buyer’s Survey ” shall mean an ALTA/ACSM survey of the Property ordered by Buyer pursuant to Section 4.1.

1.1.38 “Tenants” shall mean all persons or entities occupying or entitled to possession of any portion of the Real Property pursuant to the Leases, including tenants, subtenants, and licensees.

1.1.39 “Title Policy” shall have the meaning ascribed in Section 4.2.

1.1.40 “Title Commitment” shall mean a commitment for an owner’s policy of title insurance for the Real Property acquired by Buyer, at its sole cost, from the Title Company after the Effective Date.

1.1.41 “Title Company” shall mean Commonwealth Land Title Insurance Company.

Section 1.2 Rules of Construction. Article and Section captions used in this Agreement are for convenience only and shall not affect the construction of this Agreement. All references to “Article” or “Sections” without reference to a document other than this Agreement, are intended to designate articles and sections of this Agreement, and the words “herein,” “hereof,” “hereunder,” and other words of similar import refer to this Agreement as a whole and not to any particular Article or Section, unless specifically designated otherwise. The use of the term “including” shall mean in all cases “including but not limited to,” unless specifically designated otherwise. No rules of construction against the drafter of this Agreement shall apply in any interpretation or enforcement of this Agreement, any documents or certificates executed pursuant hereto, or any provisions of any of the foregoing.

ARTICLE 2 – PURCHASE PRICE

Section 2.1 Agreement to Purchase and Sell. Seller agrees to sell, transfer and assign to Buyer, and Buyer agrees to purchase, accept and assume subject to the terms and conditions stated herein, all of Seller’s right, title and interest in and to the Property, to the extent such are transferable.

Section 2.2 Purchase Price. Buyer shall pay Seller the purchase price of THIRTY THREE MILLION AND 00/100 DOLLARS ($33,000,000.00) (“Purchase Price”) at Closing. The Purchase Price and such other funds as may be necessary to pay Buyer’s expenses hereunder, less the Deposit, and subject to closing adjustments, shall be deposited with the Escrow Agent on or before the Closing Date and paid to Seller upon satisfaction or permitted waiver of all conditions precedent to the Closing as described herein.

Section 2.3 Deposit. Within two (2) business days following the date of full execution hereof, Buyer shall deposit via wire transfer the sum of One Million AND 00/100 DOLLARS ($1,000,000.00) in immediately available funds as a deposit (the “Initial Deposit”) with Escrow Agent whose address is as indicated in Section 11.3 hereof. Buyer shall deposit an additional ONE MILLION AND 00/100 DOLLARS ($1,000,000.00) (the “Additional Deposit”; the Initial Deposit and the Additional Deposit, collectively, the “Deposit”) in immediately available funds no later than 5:00 p.m. Eastern Time on the first business day following the Due Diligence Period if Buyer does not terminate this Agreement on or before the end of the Due Diligence Period. The Deposit shall be non-refundable except as expressly provided in this Agreement and shall be held and delivered by Escrow Agent in accordance with the provisions of Article 5. Interest, if any, earned on the Deposit shall be considered part of the Deposit. Except as otherwise expressly set forth herein, the Deposit shall be applied against the Purchase Price on the Closing Date. For Escrow Agent’s information, Buyer’s Employer Identification Number is #52-1833076.

Section 2.4 Indivisible Economic Package. Buyer has no right to purchase, and Seller has no obligation to sell, less than all of the Property, it being the express agreement and understanding of Buyer and Seller that, as a material inducement to Seller and Buyer to enter into this Agreement, Buyer has agreed to purchase, and Seller has agreed to sell, all of the Property, subject to and in accordance with the terms and conditions hereof.

the failure of Buyer to perform its obligations pursuant to this Section 2.5, provided that Seller hereby agrees to be responsible for any and all such claims, liens, damages, demands, causes of action, liabilities, lawsuits, judgments, losses, costs and expenses (including but not limited to reasonable attorneys’ fees and expenses) asserted against or incurred by Buyer and arising out of the failure of Seller to perform any of its obligations as landlord under the Leases or as vendee under the Contracts, or as licensee under the licenses and permits, prior to the Closing Date, which failure to perform has not been disclosed to Buyer in the tenant estoppel certificates (or Seller’s certificates in lieu thereof) delivered to Buyer pursuant to Section 9.5, or otherwise disclosed to or discovered by Buyer prior to Closing. The provisions of this Section 2.5 shall survive the Closing for a period of one (1) year. Notwithstanding the foregoing to the contrary, it is expressly understood and agreed that Seller shall retain all its rights and claims against any former tenants of the Property (and the guarantors of the leases of such tenants) with respect to periods prior to Closing, which rights and claims shall include, but are not limited to, unpaid rent, unreimbursed costs and expenses, court costs, and attorneys’ fees and related costs, and may continue and/or initiate litigation (including the filing and/or pursuit of already filed proofs of claim in bankruptcy proceedings.

ARTICLE 3 – BUYER’S DUE DILIGENCE/

CONDITION OF THE PROPERTY

Section 3.1 Buyer’s Inspections and Due Diligence. Buyer acknowledges that commencing on the Effective Date, and continuing until 5:00 p.m. Eastern Time on August 29, 2011 (the “Due Diligence Period”), Buyer has conducted, and shall continue to conduct, its examinations, inspections, testing, studies, and investigations (herein collectively called the “Due Diligence”) of the Property, all information regarding the Property and such documents applicable to the Property, as Seller makes available, as set forth in Section 3.2 below. If any date on which the expiration of the Due Diligence Period would occur by operation of this Agreement is either a weekend day or a federal or state holiday, the expiration of the Due Diligence Period shall occur at 5:00 p.m. Eastern Time on the next business day. Except for any limitations as may be imposed by Section 3.3 below, Buyer may conduct such due diligence activities, inspections, and studies of the Property as it deems, necessary or appropriate, and examine and investigate to its full satisfaction all facts, circumstances, and matters relating to the Property (including, without limitation, the physical condition and use, availability and adequacy of utilities, access, zoning, compliance with applicable laws, environmental conditions, engineering and structural matters), title, survey matters, and any other matters it deems necessary or appropriate for purposes of consummating this transaction. The Due Diligence shall be at Buyer’s sole cost and expense.

Section 3.2 Delivery Period . (a) Buyer expressly acknowledges and confirms that, within two (2) days following the Effective Date, Seller delivered to Buyer, or made available to Buyer via the internet, copies of any and all of the following items pertaining to the Property to the extent they exist and are in Seller’s or its agents’ possession or control: (i) annual operating statements in the form periodically maintained by Seller for the prior three (3) calendar years and for the current year to date; (ii) the Survey; (iii) real estate tax bills for the current year and the two (2) preceding years and any tax appeal product; (iv) the Contracts; (v) the Leases and Rent Roll (which shall include security deposits), tenant delinquency reports for the past two (2) years, sales reports provided by tenants for the past three (3) years, and most recent tenant billing letters

relating to Operating Expenses, taxes and other reimbursables; (vi) copies of existing engineering studies, including environmental reports, prepared by third parties in connection with the Property; (vii) Seller’s existing policy of title insurance for the Property and copies of all Schedule B-2 exception documents; (viii) copies of any licenses, permits, and governmental approvals, and any written governmental conditions or requirements in Seller’s or its agent’s possession or control, with respect to the Property; (ix) as-built plans and specifications (in CAD form if available) and construction and equipment warranties for the Improvements; (x) proof of current property and liability insurance covering the Property and a list of all outstanding claims; and (xi) list of utility providers, including identification number for property and current contact information (collectively, the “Due Diligence Items”).

(b) All Due Diligence Items have been furnished or made available to Buyer for information purposes only and without any representation or warranty by (or recourse to) Seller with respect thereto, express or implied, except as may otherwise be expressly set forth in Section 6.1 below and as limited by Section 6.2 and 7.3.2 below, and. all such Due Diligence Items are expressly understood by Buyer to be subject to the confidentiality provisions of Section 3.5 below.

(c) If this Agreement terminates without Closing, Buyer shall promptly return to Seller each Due Diligence Item provided or made available to Buyer pursuant to this Section 3.2 and diligently undertake either to have delivered to Seller or destroyed every copy, digest or summary made of any such item. The foregoing obligation shall survive any such termination.

insurance in terms and amounts reasonably satisfactory to Seller, but in no event less than such amounts required under that certain Site Access and Indemnification Agreement dated August 9, 2011, by and between Seller and Buyer (the “Confidentiality Agreement”) covering any accident resulting from the presence of Buyer or the other Licensee Parties on the Real Property or Improvements, and deliver a certificate of insurance, which names Seller, LaSalle and the Property Manager(s) as additional insureds thereunder verifying such coverage to Seller prior to entry upon the Real Property or Improvements; (b) promptly pay when due the costs of all entry and inspections and examinations done with regard to the Property; and (c) restore the Real Property and Improvements to the condition in which the same were found before any such entry upon the Real Property and inspection or examination was undertaken. Notwithstanding the foregoing, the terms of the Confidentiality Agreement shall control over the terms of this Section 3.3 to the extent of any inconsistency between them.

Section 3.4 Buyer’s Due Diligence Indemnity. Buyer shall defend, indemnify, and hold harmless Seller, Seller’s partners, shareholders, or members, as applicable, LaSalle and the Property Manager(s) from and against all losses, costs, damages, claims, and liabilities (whether arising out of injury or death to persons or damage to the Property or otherwise) including, but not limited to, costs of remediation, restoration and other similar activities, mechanic’s and materialmen’s liens and attorneys’ fees, arising out of or in connection with Buyer’s Due Diligence or Buyer’s or any Licensee Parties’ entry upon the Real Property, except to the extent any of the same are caused by the negligence or willful misconduct of Seller, Seller’s officers, employees, partners, shareholders or members, as applicable, LaSalle and/or the Property Manager(s). The provisions of this Section 3.4 shall survive the Closing or, if the purchase and sale is not consummated, any termination of this Agreement for a period of one year after such termination or Closing.

Section 3.5 Confidentiality. Buyer agrees that any information obtained by Buyer or its attorneys, partners, accountants, engineers, consultants, appraisers, lenders or investors (collectively, for purposes of this Section 3.5, the “Permitted Outside Parties”) in the conduct of its Due Diligence shall be treated as confidential pursuant to Section 11.11 of this Agreement and the terms of the Confidentiality Agreement. Buyer further agrees that within its organization, or as to the Permitted Outside Parties, the Due Diligence Items will be disclosed and exhibited only to those persons within Buyer’s organization or to those Permitted Outside Parties who are responsible for, or assisting in, determining the feasibility of Buyer’s acquisition of the Property. Buyer further acknowledges that the Due Diligence Items and other information relating to the leasing arrangements between Seller and any tenants or prospective tenants are proprietary and confidential in nature. Buyer agrees not to divulge the contents of such Due Diligence Items or any other information except in strict accordance with the Confidentiality Agreement and Sections 3.5 and 10.11 of this Agreement. In permitting Buyer and the Permitted Outside Parties to review the Due Diligence Items and other information to assist Buyer, Seller has not waived any privilege or claim of confidentiality with respect thereto, and no third party benefits or relationships of any kind, either express or implied, have been offered, intended or created by Seller and any such claims are expressly rejected by Seller and waived by Buyer and the Permitted Outside Parties, for whom, by its execution of this Agreement, Buyer is acting as an agent with regard to such waiver. The foregoing provisions of this Section 3.5 shall survive any termination of this Agreement. Notwithstanding the foregoing, the terms of Section 11.20

below, and of the Confidentiality Agreement, shall control over the terms of this Section 3.5 to the extent of any inconsistency between them.

Section 3.6 Due Diligence Period. In the event Buyer, in its sole and absolute discretion, for any reason or no reason whatsoever, determines that the acquisition, ownership, use or financing of the Property as Buyer intends is not feasible or desirable, then Buyer may, terminate its obligations hereunder without further liability except as expressly described in this Agreement by delivering to Seller on or before the expiration of the Due Diligence Period a written notice of termination (“Notice to Terminate”), in which event the Escrow Agent shall promptly pay the Deposit to Buyer. If Buyer fails to timely deliver the Notice to Terminate, (i) Buyer shall be deemed to have waived its right to terminate this Agreement without cause and shall proceed to Closing, and (ii) the Deposit shall be non-refundable to Buyer except in the event of default by Seller or as otherwise expressly provided for in this Agreement. Promptly after any termination under this Section 3.6 and receipt by Buyer of the Deposit, Buyer shall deliver to Seller copies of all written reports prepared by third party consultants in connection with Buyer’s due diligence hereunder.

ARTICLE 4 – TITLE AND SURVEY

Section 4.1 Certain Exceptions to Title. For a period commencing on the Effective Date and continuing until 5:00 p.m. (EDT) on August 19, 2011, Buyer shall have the right to object in writing to any title matters that are not Permitted Exceptions which are disclosed in the Title Commitment or the Survey (or in any survey or update to the Survey acquired by Buyer in the conduct of its Due Diligence) (herein collectively called “Title Matters”). Buyer shall promptly forward to Seller a copy of the Title Commitment and updated Survey (or the Buyer’s Survey obtained by Buyer, if any) within two (2) business days after receipt. Unless Buyer shall timely object to the Title Matters, all such Title Matters shall be deemed to constitute Permitted Exceptions. Any Title Matters which are timely objected to by Buyer shall be herein collectively called the “Title Objections.” Seller may elect (but shall not be obligated) to remove or cause to be removed at its expense, any Title Objections, and shall be entitled to a reasonable adjournment of the Closing (not to exceed thirty (30) days) for the purpose of such removal, which removal will be deemed effected by the re-issuance or amendment of the Title Commitment eliminating or, at Buyer’s sole discretion, insuring against the effect of such Title Objections. Seller shall notify Buyer in writing within ten (10) days after receipt of Buyer’s notice of Title Objections whether Seller elects to remove the same (“Seller’s Response”). If Seller is unable to remove or if the Title Company is unable or unwilling to endorse or, at Buyer’s sole discretion, insure over any Title Objections prior to the Closing, or if Seller’s Response indicates that Seller elects not to remove one or more Title Objections, Buyer may elect, by providing written notice to Seller within five (5) days after receipt of Seller’s Response either to (a) terminate this Agreement, in which event the Deposit shall be promptly paid to Buyer and, thereafter, the Parties shall have no further rights or obligations hereunder except for those obligations which expressly survive the termination of this Agreement, or (b) waive such Title Objections, in which event such Title Objections shall be deemed additional “Permitted Exceptions” and the Closing shall occur as herein provided without any reduction of or credit against the Purchase Price. Notwithstanding the foregoing, Seller shall be obligated at Closing to cause the release of the liens of any financing obtained by Seller which is secured by the Property and all other monetary liens and mechanics’ liens against the Property that were

voluntarily created or permitted by Seller or by, through or under Seller. Except as expressly provided in this Section 4.1, Seller shall have no obligation to cure any matter affecting title to the Real Property which is objectionable to Buyer.

Section 4.2 Title Insurance. At Closing, the Title Company shall issue to Buyer a standard 2006 ALTA owner’s form title policy (the “Title Policy”), in the amount of the Purchase Price, insuring that fee simple title to the Real Property is vested in Buyer subject only to the Permitted Exceptions. Buyer shall be entitled to request that the Title Company provide such endorsements (or amendments) to the Title Policy as Buyer may reasonably require, provided that (a) such endorsements (or amendments) shall be at no cost to, and shall impose no additional liability on, Seller (except as to customary affidavits and agreements required to issue the Title Policy and reasonably approved by Seller), (b) Buyer’s obligations under this Agreement shall not otherwise be conditioned upon Buyer’s ability to obtain such endorsements and, if Buyer is unable to obtain such endorsements, Buyer shall nevertheless be obligated to proceed to close the transaction contemplated by this Agreement without reduction of or set off against the Purchase Price, and (c) the Closing shall not be delayed as a result of Buyer’s request.

ARTICLE 5 – DEPOSIT AND INSTRUCTIONS

Section 5.1 Permitted Termination; Seller Default. If the sale of the Property is not consummated due to the permitted termination of this Agreement by Buyer as herein expressly provided, the Deposit shall be promptly returned to Buyer and the Parties shall have no further rights or obligations hereunder except for those obligations which expressly survive the termination of this Agreement. If the sale of the Property is not consummated due to Seller’s default hereunder, Buyer shall be entitled, as its sole remedy, to either:

(a) terminate this Agreement by notice to Seller, in which event the Deposit shall be returned to Buyer and the Parties shall have no further rights or obligations hereunder except for those obligations which expressly survive the termination of this Agreement; or

(b) waive the breach or default and proceed to Closing in accordance with the provisions of this Agreement without adjustment of the Purchase Price; or

(c) pursue an action for specific performance only; it being expressly agreed that Buyer shall have no right to pursue an action for damages.

Section 5.2 Buyer Default. If the sale is not consummated due to Buyer’s default hereunder, then Seller, as its sole and exclusive remedy at law or in equity, shall retain the Deposit as liquidated damages, which retention shall operate to terminate this Agreement and release the Parties from any and all liability hereunder, except as expressly provided in this Agreement. The Parties have agreed that Seller’s actual damages, in the event of a failure to consummate this sale due to Buyer’s default, would be extremely difficult or impracticable to determine. After negotiation, the Parties have agreed that, considering all the circumstances existing on the date of this Agreement, the amount of the Deposit is a reasonable estimate of the damages that Seller would incur in such event. By placing their initials below, each Party specifically confirms the accuracy of the statements made above and the fact that each party was represented by counsel who explained, at the time this Agreement was made, the consequences

of this liquidated damages provision. The foregoing is not intended to limit Buyer’s indemnity obligations and Seller’s rights under Sections 3.4, 3.5 and 11.11.


Initials:		Seller				Buyer

Section 5.3 Deposit Instructions. The Escrow Agent joins hereinbelow to evidence its agreement to hold and disburse such funds in accordance with the terms and conditions of this Agreement. Further, the following provisions shall control with respect to the rights, duties and liabilities of the Escrow Agent.

(a) The Escrow Agent acts hereunder as a depository only and is not responsible or liable in any manner whatsoever for the (i) sufficiency, correctness, genuineness or validity of any written instrument, notice or evidence of a party’s receipt of any instruction or notice which is received by the Escrow Agent, or (ii) identity or authority of any person executing such instruction notice or evidence. Whenever in this Agreement Escrow Agent is required to disburse funds “promptly” or “immediately,” such term shall mean not later than two (2) business days after receipt by Escrow Agent and the other Party of notice from the Party entitled to receive such funds.

(b) The Escrow Agent shall have no responsibility hereunder except for the performance by it in good faith of the acts to be performed by it hereunder, and the Escrow Agent shall have no liability except for its own willful misconduct or gross negligence.

(c) The Escrow Agent shall be reimbursed on an equal basis by Buyer and Seller for any reasonable expenses incurred by the Escrow Agent arising from a dispute with respect to the amount held in escrow, including the cost of any reasonable legal expenses and court costs incurred by the Escrow Agent, should the Escrow Agent deem it necessary to retain an attorney with respect to the disposition of the amount held in escrow.

(d) Subject to Section 3.6 of this Agreement, in the event of a dispute between the parties hereto with respect to the disposition of the amount held in escrow, the Escrow Agent shall take no action and shall continue to hold the Escrow Funds until it has received instructions in writing signed by Seller and Buyer or until directed by final order or judgment of a court of competent jurisdiction, whereupon Escrow Agent shall take such action in accordance with such instructions or order. In the event of a dispute or conflicting demands, or instructions with respect to any portion of the Escrow Funds, Escrow Agent shall be entitled, at its own discretion, to interplead such amount to an appropriate court of law pending resolution of the dispute.

(e) The Escrow Agent shall invest the amount in escrow in accounts which are federally insured or which invest solely in government securities and shall be applied in accordance with the terms of this Agreement. Interest, if any, earned thereon shall be added to the funds deposited by Buyer. Escrow Agent shall be entitled to rely upon the accuracy of the taxpayer identification number provided to Escrow Agent and used to establish the account in which the Escrow Funds are held. Escrow Agent shall have no liability in the event of failure, insolvency or inability of the depository to pay such funds.

Section 5.4 Designation of Reporting Person. In order to assure compliance with the requirements of Section 6045 of the Internal Revenue Code of 1986, as amended (for purposes of this Section 5.4, the “Code”), and any related reporting requirements of the Code, the Parties hereto agree as follows:

(a) Provided the Escrow Agent shall execute a statement in writing (in form and substance reasonably acceptable to the parties hereunder) pursuant to which it agrees to assume all responsibilities for information reporting required under Section 6045(e) of the Code, Seller and Buyer shall designate the Escrow Agent as the person to be responsible for all information reporting under Section 6045(e) of the Code (the “Reporting Person”). If the Escrow Agent refuses to execute a statement pursuant to which it agrees to be the Reporting Person, Seller and Buyer shall agree to appoint another third party as the Reporting Person.

(b) Seller and Buyer hereby agree:

(i) to provide to the Reporting Person all information and certifications regarding such party, as reasonably requested by the Reporting Person or otherwise required to be provided by a party to the transaction described herein under Section 6045 of the Code; and

(ii) to provide to the Reporting Person such Party’s taxpayer identification number and a statement (on Internal Revenue Service Form W-9 or an acceptable substitute form, or on any other form the applicable current or future Code sections and regulations might require and/or any form requested by the Reporting Person), signed under penalties of perjury, stating that the taxpayer identification number supplied by such party to the Reporting Person is correct.

(c) Each party hereto agrees to retain this Agreement for not less than four years from the end of the calendar year in which the Closing occurred, and to produce it to the Internal Revenue Service upon a valid request therefor.

ARTICLE 6 – REPRESENTATIONS AND WARRANTIES OF SELLER

Section 6.1 Representations and Warranties of Seller. Subject to the provisions of Sections 6.2 and 7.5, Seller hereby represents and warrants to Buyer that, except as disclosed in any Exhibit to or elsewhere in this Agreement, or in any Due Diligence Item:

(a) Status . Seller is duly incorporated, validly existing and in good standing under the laws of the State of its organization and the State in which the Property is located;

(b) Authority . The execution and delivery of this Agreement and the performance of Seller’s obligations hereunder, including execution of Seller’s Closing Documents, have been or will be duly authorized by all necessary action on the part of Seller, and each provision of this Agreement applicable to Seller constitutes the legal, valid and binding obligation of Seller, subject to equitable principles and principles governing creditors’ rights generally;

(c) Non-Contravention . The execution and delivery of this Agreement by Seller and the consummation by Seller of the transactions contemplated hereby will not, to Seller’s knowledge (i) violate any judgment, order, injunction, decree, regulation or ruling of any court or Governmental Entity or (ii) conflict with, result in a breach of, or constitute a default under the organic documents of Seller, any note or other evidence of indebtedness, any mortgage, deed of trust or indenture, or any lease or other material agreement or instrument to which Seller is a party or by which Seller may be bound;

(d) Suits and Proceedings . There are no legal actions, suits or similar proceedings pending and served, or, to Seller’s knowledge, threatened against Seller or the Property which (i) are not adequately covered by existing insurance or (ii) if adversely determined, would materially and adversely affect the value of the Property, the continued operations thereof, or Seller’s ability to consummate the transactions contemplated hereby in accordance with the terms hereof;

(e) Non-Foreign Entity . Seller is not a “foreign person” or “foreign corporation” as those terms are defined in the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder;

(f) Consents . No consent, waiver, approval or authorization is required from any person or entity (that has not already been obtained) in connection with the execution and delivery of this Agreement by Seller or the performance by Seller of the transactions contemplated hereby;

(g) No Violations . Except as may be included in any Due Diligence Items, Seller has not received any written notification from any Governmental Entity, and Seller has no knowledge (i) that the Property is in violation of applicable fire, health, building, use, occupancy, zoning laws or subdivision laws, or (ii) that any Work is required to be done upon or in connection with the Property where such work remains outstanding and, if unaddressed would have a material adverse affect on the use of the Property as currently owned and operated;

(h) Condemnation . Except as may be included in any Due Diligence Items, Seller has not received any written condemnation notice with respect to all or part of any Property, nor, to Seller’s knowledge, are there any threatened condemnation or similar proceedings with respect to all or part of the Property;

disclosed to Buyer as part of the Due Diligence Items. Except as set forth on Exhibit M, attached hereto and made a part hereof, Seller has fulfilled all obligations to Tenants under the Leases to provide tenant improvements or tenant improvement allowances or other cash allowances, and except those obligations identified on Exhibit M for which Buyer is given a credit at Closing pursuant to Section 6.1(m) below, Buyer shall have no obligation with respect thereto after Closing, Except as set forth on the Rent Roll, to Seller’s knowledge, none of the Tenants has assigned its Lease or sublet all or any part of the premises covered by its Lease. To Seller’s knowledge, the information on tenant delinquencies in the Due Diligence Items is true, accurate and complete;

(j) Contracts. There are no Contracts in effect with respect to the Property other than the Contracts identified on Exhibit “D” attached hereto and made a part hereof, and any management agreement affecting the Property will be terminated by Seller at Closing, at Seller’s sole expense, or may be terminated by Buyer after Closing, at no cost to Buyer, upon not more than thirty (30) days’ notice;

(k) Bankruptcy. Seller has not received notice of any creditors’ attachments or executions, general assignments in collection of debts for the benefit of creditors, or voluntary or involuntary proceedings in bankruptcy which are pending against any Tenant; and

(1) No Other Options. Other than this Agreement, neither the Property nor any portion thereof subject to any outstanding agreement(s) of sale or options, rights of first refusal or other rights of purchase.

(m) Leasing Commission Agreements and Unfunded Tenant Improvement and Other Concession Obligations . Except as disclosed on Exhibit “M” attached hereto and made a part hereof, (i) there are no current or future unsatisfied obligations on the part of Seller for agents’ and brokers’ commissions and fees incurred in connection with the Leases executed prior to the date hereof (including any such commissions or fees attributable to extension, renewal or expansion options under such Leases exercised after the date of Closing), (ii) there are no current or future unfunded tenant improvement or other concession obligations on the part of Seller as landlord under any Leases executed prior to the date hereof, and (iii) there are no current or future unsatisfied obligations on the part of Seller for landlord work, base building or shell construction, or improvements of any kind to any premises under the Leases executed prior to the date hereof. Seller shall pay all agents’ and brokers’ leasing commissions and fees and all current and future unfunded tenant improvement or other concession obligations disclosed on Exhibit “M” on or before the Closing Date or Seller shall provide Buyer with a credit in the amount of such unsatisfied obligations disclosed on Exhibit “M”, whereupon those obligations shall be assumed by and become the sole responsibility of Buyer upon Closing. There are no management, leasing, brokerage or other commission agreements entered into by Seller or by which Seller is bound currently in place in connection with the leasing of the Real Property except as have been or will be delivered to Buyer as part of the Due Diligence Items. All management, leasing, brokerage and other commission agreements affecting the Property will be terminated by Seller at Closing, at Seller’s sole expense.

(n) Security Deposits. The security deposits listed on the Rent Roll are all of the security deposits currently held by Seller under the Leases (collectively, “Security Deposits”), and Seller or its agent has possession or control of all such Security Deposits.

(o) Environmental. Seller has not received written notice of any violation of any Environmental Laws. The Due Diligence Items delivered to Buyer include true, correct, and complete copies of all of the environmental reports, asbestos surveys, lead paint surveys, and other environmental reports and test results relating to environmental matters or hazardous substances located in, on or under, or released from the Property that are in possession or control of Seller or its agents or affiliates.

(p) Operating Statements . The operating statements covering the Property made available to Buyer pursuant to that certain Letter of Intent, dated July 29, 2011 and executed by Buyer and Seller (“LOI”), are true, correct, and complete copies of the operating statements that Seller uses and has used in the ordinary course of the operation of the Property, without any modification thereto.

(q) Special Assessments . Seller has not received written notice of any assessments, special taxes or impact fees (and, to Seller’s knowledge, any threatened assessments) currently affecting the Property that are not of public record, except with respect to any assessments, if any, imposed from time to time pursuant to recorded covenants.

(r) Insurance . The Property is, and shall at all times up to the Closing be, covered by insurance in the amounts and pursuant to the certificate provided to Buyer as part of the Due Diligence Items (the “Required Insurance”).

Section 6.2. Limited Liability. The representations and warranties of Seller set forth in Section 6.1, together with Seller’s liability for any breach before Closing of any of the Seller’s covenants and agreements under Article 8 and 9, shall survive the Closing for a period of one (1) year (the “Contractual Survival Period”). Buyer shall not have any right to bring any action against Seller based on any untruth or inaccuracy of such representations and warranties, or a breach of any representation or warranty (each a “Breach”) unless (i) Buyer’s actual out-of-pocket loss from such Breach exceeds $100,000, (ii) Buyer gives Seller written notice of such claim within the Contractual Survival Period, describing with reasonable particularity in such notice each representation and warranty of Seller which Buyer claims to have been breached and the facts on which such claim is based, and (iii) Buyer commences action on such claim within six (6) months after the end of the Contractual Survival Period; and, provided further, that in no event shall Seller’s aggregate liability to Buyer for all Breaches exceed One Million and 00/100 Dollars ($1,000,000). Further, Seller shall have no liability with respect to any of Seller’s representations, warranties and covenants herein if, prior to the Closing, Buyer has actual knowledge of any breach of a covenant of Seller herein, or Buyer obtains actual knowledge (from whatever source as a result of Buyer’s Due Diligence or written disclosure by Seller or Seller’s agents to Buyer on or after the date hereof) that contradicts any of Seller’s representations and warranties herein, and Buyer nevertheless consummates the transaction contemplated by this Agreement. Notwithstanding anything to the contrary in this Section 6.2, the obligations of Seller and Buyer, as applicable, under Sections 3.4 and 9.7 will survive Closing without limitation unless a specified period is otherwise expressly provided in any of

such Sections. All other representations, warranties, covenants and agreements made or undertaken by Seller under this Agreement, unless otherwise specifically provided herein, will not survive the Closing Date but will be merged into the Deed and other Closing documents delivered at the Closing.

Section 6.3 Seller’s Knowledge. For purposes of this Agreement and any document delivered at Closing, whenever the phrase “to Seller’s knowledge,” “to Seller’s knowledge” or the “knowledge” of Seller or words of similar import are used, they shall be deemed to refer to facts within the actual knowledge only of George W. Duke and Steven J. Schnur and no others, at the times indicated only, upon reasonable investigation of the files in the possession of George W. Duke and Seller and reasonable inquiry of personnel responsible for operation and management of the Property, and not to any constructive knowledge of the foregoing individual or of Seller, any entity that is a partner, stockholder or member in Seller, or any affiliates of any thereof, or to any officer, agent, representative, or employee of Seller, any such constituent partner, stockholder or member or any such affiliate.

Section 6.4 Liability of Representations and Warranties. Buyer acknowledges that the individual named above is named solely for the purpose of defining and narrowing the scope of Seller’s knowledge and not for the purpose of imposing any liability on or creating any duties running from such individual or LaSalle to Buyer. Buyer covenants that it will bring no action of any kind against such individual, any shareholder, partner or member of Seller, as applicable, or LaSalle related to or arising out of these representations and warranties. The individual named is personnel of LaSalle who currently has responsibility for asset management of Seller’s interest in the Real Property.

ARTICLE 7 – REPRESENTATIONS AND WARRANTIES OF BUYER

Section 7.1 Buyer’s Representations and Warranties. Buyer represents and warrants to Seller the following:

(a) Status . Buyer is a limited partnership duly organized and validly existing under the laws of the State of Maryland and at Closing will be in good standing to transact business in the State of Maryland;

(b) Authority . The execution and delivery of this Agreement and the performance of Buyer’s obligations hereunder, including execution of Buyer’s Closing Documents, have been or will be duly authorized by all necessary action on the part of Buyer and this Agreement constitutes the legal, valid and binding obligation of Buyer, subject to equitable principles and principles governing creditors’ rights generally;

(c) Non-Contravention . The execution and delivery of this Agreement by Buyer and the consummation by Buyer of the transactions contemplated hereby will not violate any judgment, order, injunction, decree, regulation or ruling of any court or Governmental Entity or conflict with, result in a breach of, or constitute a default under the organic documents of Buyer, any note or other evidence of indebtedness, any mortgage, deed of trust or indenture, or any lease or other material agreement or instrument to which Buyer is a party or by which it is bound;

(d) Consents . No consent, waiver, approval or authorization is required from any person or entity (that has not already been obtained) in connection with the execution and delivery of this Agreement by Buyer or the performance by Buyer of the transactions contemplated hereby;

(e) Solvency; Ability to Perform Agreement . Buyer is solvent, now has, or at Closing shall have, available funds necessary to pay the Purchase Price without the need to obtain additional financing, and there is no occurrence, event or condition with respect to it that would prevent it from performing this Agreement in all material respects. Buyer will not become insolvent as a result of consummating the transactions contemplated by this Agreement; and

(f) Brokerage. Buyer represents and warrants that there are no claims for brokerage commissions, finders’ fees, or similar compensation in connection with this Purchase Agreement based on any arrangement or agreement entered into by Buyer and binding upon Seller.

Section 7.2 Intentionally deleted.

Section 7.3 Buyer’s Independent Investigation.

7.3.1. Buyer has been given, or will be given before the end of the Due Diligence Period, assuming compliance by Seller with the terms of this Agreement, a full opportunity to inspect and investigate each and every aspect of the Property, either independently or through agents of Buyer’s choosing, including, without limitation:

(a) All matters relating to title, together with all governmental and other legal requirements such as taxes, assessments, zoning, use permit requirements, and building codes;

(b) The physical condition and aspects of the Property, including, without limitation, the interior, the exterior, the square footage within the improvements on the Real Property and within each tenant space therein, the structure, the paving, the utilities, and all other physical and functional aspects of the Property, including, without limitation, an examination for the presence or absence of Hazardous Materials, which shall be performed or arranged by Buyer at Buyer’s sole expense;

(d) The Leases and all matters in connection therewith, including, without limitation, the ability of the tenants to pay rent;

(e) The Contracts and any other documents or agreements of significance affecting the Property; and

(f) All other matters of material significance affecting the Property or delivered to Buyer by Seller in accordance with Article 3 of this Agreement.

7.3.2. THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT HAS BEEN NEGOTIATED BETWEEN SELLER AND BUYER, THIS AGREEMENT REFLECTS THE MUTUAL AGREEMENT OF SELLER AND BUYER, AND BUYER HAS CONDUCTED OR SHALL HAVE CONDUCTED ITS OWN INDEPENDENT EXAMINATION OF THE PROPERTY. OTHER THAN THE MATTERS REPRESENTED IN SECTION 6.1 AND 9.7 HEREOF AS SUCH MAY BE LIMITED BY SECTION 6.2 HEREOF, BUYER HAS NOT RELIED UPON AND WILL NOT RELY UPON, EITHER DIRECTLY OR INDIRECTLY, ANY REPRESENTATION OR WARRANTY OF SELLER OR ANY OF SELLER’S AGENTS OR REPRESENTATIVES, AND BUYER HEREBY ACKNOWLEDGES THAT NO SUCH REPRESENTATIONS HAVE BEEN MADE. OTHER THAN THE MATTERS REPRESENTED IN SECTIONS 6.1 AND 9.7 HEREOF, SELLER SPECIFICALLY DISCLAIMS, AND NEITHER IT NOR ANY OTHER PERSON IS MAKING, ANY REPRESENTATION, WARRANTY OR ASSURANCE WHATSOEVER TO BUYER AND NO WARRANTIES OR REPRESENTATIONS OF ANY KIND OR CHARACTER, EITHER EXPRESS OR IMPLIED, ARE MADE BY SELLER OR RELIED UPON BY BUYER, IN EACH CASE WITH RESPECT TO THE STATUS OF TITLE TO OR THE MAINTENANCE, REPAIR, CONDITION, DESIGN OR MARKETABILITY OF THE PROPERTY, OR ANY PORTION THEREOF, INCLUDING BUT NOT LIMITED TO (a) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, (b) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, (c) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, (d) ANY RIGHTS OF BUYER UNDER APPROPRIATE STATUTES TO CLAIM DIMINUTION OF CONSIDERATION, (e) ANY CLAIM BY BUYER FOR DAMAGES BECAUSE OF DEFECTS, WHETHER KNOWN OR UNKNOWN, WITH RESPECT TO THE IMPROVEMENTS OR THE PERSONAL PROPERTY, (f) THE FINANCIAL CONDITION OR PROSPECTS OF THE PROPERTY AND (g) THE COMPLIANCE OR LACK THEREOF OF THE REAL PROPERTY OR THE IMPROVEMENTS WITH GOVERNMENTAL REGULATIONS, IT BEING THE EXPRESS INTENTION OF SELLER AND BUYER THAT, EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, THE PROPERTY WILL BE CONVEYED AND TRANSFERRED TO BUYER IN ITS PRESENT CONDITION AND STATE OF REPAIR, “AS IS” AND ”WHERE IS”, WITH ALL FAULTS. Buyer represents that it is a knowledgeable, experienced and sophisticated buyer of real estate, and that, except with respect to the warranties expressly set forth herein, it is relying solely on its own expertise and that of Buyer’s consultants in purchasing the Property. Buyer acknowledges and agrees that it will have the opportunity to conduct such inspections, investigations and other independent examinations of the Property and related matters as Buyer may deem necessary, including but not limited to the physical and environmental conditions thereof, during the Due Diligence Period and will rely upon same and not upon any statements of Seller or of any officer, director, employee, agent or attorney of Seller other than the matters represented in Sections 6.1 and 9.7 hereof or in the Closing Documents. Buyer acknowledges that all information obtained by Buyer will be obtained from a variety of sources and Seller will not be deemed to have represented or warranted the completeness, truth or accuracy of any of the Due Diligence Items or other such information heretofore or hereafter furnished to Buyer, except as may be expressly

provided in Section 6.1 hereof. Upon Closing, Buyer will assume the risk, as to matters other than the representations of Seller in Section 6.1 hereof that adverse matters, including, but not limited to, adverse physical and environmental conditions, may not have been revealed by Buyer’s inspections and investigations. Buyer acknowledges and agrees that upon Closing, Seller will sell and convey to Buyer, and Buyer will accept the Property, “AS IS, WHERE IS,” with all faults, except as may be expressly provided in Section 6.1 hereof. Buyer further acknowledges and agrees that there are no oral agreements, warranties or representations, collateral to or affecting the Property, by Seller, any agent of Seller or any third party. Seller is not liable or bound in any manner by any oral or written statements, representations or information pertaining to the Property furnished by any real estate broker, agent, employee, servant or other person, unless the same are specifically set forth or referred to herein. Buyer acknowledges that the Purchase Price reflects the “as is, where is” nature of this sale and any faults, liabilities, defects or other adverse matters that may be associated with the Property, BUYER, WITH BUYER’S COUNSEL, HAS FULLY REVIEWED THE DISCLAIMERS AND WAIVERS SET FORTH IN THIS AGREEMENT, AND UNDERSTANDS THE SIGNIFICANCE AND EFFECT THEREOF. BUYER ACKNOWLEDGES AND AGREES THAT THE DISCLAIMERS AND OTHER AGREEMENTS SET FORTH HEREIN ARE AN INTEGRAL PART OF THIS AGREEMENT, AND THAT SELLER WOULD NOT HAVE AGREED TO SELL THE PROPERTY TO BUYER FOR THE PURCHASE PRICE WITHOUT THE DISCLAIMERS AND OTHER AGREEMENTS SET FORTH IN THIS AGREEMENT. THE TERMS AND CONDITIONS OF THIS SUBSECTION 7.3.2 WILL EXPRESSLY SURVIVE THE CLOSING, WILL NOT MERGE WITH THE PROVISIONS OF ANY CLOSING DOCUMENTS AND WILL BE INCORPORATED INTO THE DEED.

Section 7.4 Buyer’s Release of Seller.

7.4.1 Seller Released From Liability. From and after the Closing, except for claims based upon a showing of actual fraud, intentional misrepresentation, or material breaches of Seller’s representations and warranties under Sections 6.1 and 9.7 hereof or breaches of Seller’s covenants expressly set forth in this Agreement, and except as expressly set forth in Seller’s Closing Documents, Seller (and Seller’s shareholders, affiliates, directors, officers, employees and agents including, without limitation, LaSalle and Broker and their respective members, directors, officers, employees and affiliates) is hereby released from all responsibility and liability to Buyer regarding (a) the condition (including the presence in the soil, air, structures and surface and subsurface waters, of Hazardous Materials or substances that have been or may in the future be determined to be toxic, hazardous, undesirable or subject to regulation and that may need to be specially treated, handled and/or removed from the Property under current or future federal, state and local laws, regulations or guidelines), valuation, salability or utility of the Property, or its suitability for any purpose whatsoever, (b) any matter concerning the Leases or Tenants, (c) the effect or applicability of any Laws (including, without limitation) zoning codes and other Laws governing the use and development of the Real Property), (d) the accuracy or completeness of any statements, representations, warranties, determinations, conclusions, assessments, assertions or other information contained in any of the Due Diligence Items, or any misrepresentation (absent a showing of actual fraud or intentional misrepresentation) failure to disclose information relating to the Property, the Leases or the

Tenants, and (e) and defect, inaccuracy or inadequacy in Seller’s title to the Property, legal description of the Property, covenants, restrictions, encumbrances or encroachments that affect the Property.

7.4.2 Buyer’s Waiver of Objections. Buyer acknowledges that, so long as Seller complies with its obligations under this Agreement, Buyer will have the opportunity during the Due Diligence Period to inspect the Property, observe its physical characteristics and existing conditions and(subject to the provisions of Section 3.3 above) will have the opportunity to conduct such investigation and study on and of said Property and adjacent areas as it deems necessary, and subject to Seller’s responsibility for any breach of the warranties and representations contained in Section 6.1 of this Agreement, hereby waives, absent a showing of actual fraud, any and all objections to or complaints (including but not limited to actions based on federal, state or common law and any private right of action under CERCLA, RCRA or any other state and federal law to which the Property is or may be subject) regarding physical characteristics and existing conditions of the Property, including without limitation structural and geologic conditions, subsurface soil and water conditions and solid and hazardous waste and Hazardous Materials on, under, adjacent to or otherwise affecting the Property. Buyer further hereby assumes the risk of changes in applicable Laws relating to past, present and future environmental conditions on the Property, and the risk that adverse physical characteristics and conditions, including without limitation the presence of Hazardous Materials or other contaminants, may not be revealed by its investigation.

7.4.3 Survival. The foregoing waivers and releases by Buyer shall survive either (a) the Closing and the recordation of the Deed, and shall not be deemed merged into the Deed upon its recordation, or (b) any termination of this Agreement.

Section 7.5 Discharge. Notwithstanding any other provisions contained herein, or in any document or instrument delivered in connection with the transfer contemplated hereby, to the contrary (including, without limitation, any language providing for survival of certain provisions hereof or thereof), Buyer hereby acknowledges and agrees that (a) prior to Closing, Buyer’s sole recourse in the event of a breach by Seller shall be as set forth in Section 5.1 hereof, and (b) Seller shall, upon consummation of Closing, be deemed to have satisfied and fulfilled all of Seller’s covenants and obligations contained in this Agreement, and Seller shall have no further liability to Buyer or otherwise with respect to this Agreement, or the transfers contemplated hereby, except to the extent of any obligation or liability Seller may have under Section 6.1, Sections 8.1 – 8.6 or Section 9.7 as to which Seller’s liability, if any, shall be limited as provided in Section 6.2.

ARTICLE 8 – LEASES; MAINTENANCE OF PROPERTY

From the date hereof until the Closing, and except as otherwise consented to or approved by Buyer, Seller covenants and agrees with Buyer as follows:

within five (5) business days after receipt by Buyer of the information referred to in the next sentence, enter into any New Lease; modify or amend any Lease (except pursuant to the exercise by a Tenant of a renewal, extension or expansion option or other right contained in such Tenant’s Lease); consent to any assignment or sublease in connection with any Lease; or remove any tenant under any Lease, whether by summary proceedings or otherwise. Seller shall furnish Buyer with a written notice of the proposed action which shall contain information regarding the proposed action that Seller believes in good faith is reasonably necessary to enable Buyer to make informed decisions with respect to the advisability of the proposed action. If Buyer fails to object in writing to any such proposed action within five (5) business days after receipt of all of the aforementioned information, Buyer shall be deemed to have approved the proposed action. Notwithstanding the foregoing, prior to the end of the Due Diligence Period, Buyer’s consent shall not be required with respect to construction plans to be approved by Seller under any Lease, provided that Seller shall provide copies of any such plans to Buyer within three (3) business days after receipt thereof. If any Lease requires that the landlord’s consent be given under the applicable circumstances (or not be unreasonably withheld) then, if such circumstances exist, Buyer shall be deemed ipso facto to have approved such action. Any notice from Buyer rejecting the proposed action shall include a description of the reasons for Buyer’s rejection. If Buyer rejects the proposed action, Seller nevertheless retains full right, power and authority to execute such documents as are necessary to effect such action, and Seller shall promptly advise Buyer of the same. The foregoing notwithstanding, in the event Buyer has rejected the proposed action but Seller nonetheless proceeds to effect it, Buyer shall have the right, within five (5) business days after receipt of Seller’s notice that Seller has taken such action, to elect to terminate this Agreement by the delivery to Seller of a written notice of termination, in which case the Deposit shall be paid to Buyer and, thereafter, the parties shall have no further rights or obligations hereunder other than any arising under any section herein which expressly provides that it shall survive the termination of this Agreement. If Buyer fails to notify Seller within such time period, Buyer shall be deemed to have fully waived any rights to terminate this Agreement pursuant to this Section 8.1. Seller shall deliver to Buyer a true and complete copy of each such New Lease, renewal or extension agreement, modification, or amendment, as the case may be, within two (2) business days after the execution and delivery thereof, but in no event later than two (2) business days prior to Closing.

Section 8.2 Lease Enforcement. Subject to the provisions of Section 8.1 above, prior to the Closing Date, Seller shall have the right, but not the obligation (except to the extent that Seller’s failure to act shall constitute a waiver of such rights or remedies), to enforce the rights and remedies of the landlord under any Lease, and to apply all or any portion of any security deposits then held by Seller toward any loss or damage incurred by Seller by reason of any defaults by tenants, and the exercise of any such rights or remedies shall not affect the obligations of Buyer under this Agreement in any manner or entitle Buyer to a reduction in, or credit or allowance against, the Purchase Price or give rise to any other claim on the part of Buyer. Notwithstanding the foregoing, Seller shall not terminate any Lease or remove any tenant without the prior written consent of Buyer, which shall not, prior to the expiration of the Due Diligence Period, be unreasonably withheld. Except to the extent earlier notice is required under Section 8.1, Seller shall give Buyer notice of any action taken under this Section 8.2 within five (5) business days after the date such action is taken, but in no event later than two (2) business days prior to Closing.

Section 8.3 Seller’s Operation of the Property . From and after the Effective Date, Seller shall operate and maintain the Property in a manner generally consistent with the manner in which Seller has operated and maintained the Property prior to the Effective Date and shall maintain the Required Insurance in full force and effect until Closing. Provided Buyer has not delivered a Notice to Terminate, following the expiration of the Due Diligence Period, Seller shall not enter into any new Contract or agreement, or materially modify any Contract, which Contract or amendment could bind Buyer or the Property after the Closing without Buyer’s review and consent in the same manner as provided with respect to New Leases in Section 8.1.

Section 8.4 Termination of Contracts . Within two (2) business days prior to the expiration of the Due Diligence Period, Buyer will advise Seller in writing which Contracts Buyer will assume at Closing (the “Assumed Contracts”) and which Contracts Buyer requires to be terminated at Closing (and Buyer’s failure to so advise Seller in writing shall be deemed to constitute Buyer’s election to assume all such Contracts). Seller shall deliver at Closing notices of termination of all Contracts that are not so assumed. Notwithstanding the foregoing, without any requirement of notice from Buyer, Seller shall cause any then-effective property management agreement (including any agreement with the Property Manager) and any agreements with any Seller-affiliated entity, relating to the Property to be terminated, with no liability or obligation of any kind to buyer, effective as of the Closing Date. Prior to the Closing Date, Seller shall cause the Property Manager to cooperate with Buyer in preparing for the turnover of management of the Property to Buyer.

Section 8.5 Tenant Audit Rights . If any Tenant exercises, before or after Closing, its right under any Lease (or under applicable law with respect to such Lease) to audit the books and records of Seller as landlord for any period of time ending on or prior to the Closing Date, Seller shall, at Seller’s expense, cooperate in the implementation of such audit in accordance with any such audit provision under the Lease with respect to such period. Seller’s obligations under this Section 8.5 shall survive Closing for as long as the Tenants may exercise such rights pursuant to the terms of the Leases.

Section 8.6 Negative Covenants . From the Effective Date until the Closing Date, Seller shall not take any of the following actions without the prior express written consent of Buyer, which consent shall be within Buyer’s sole discretion: (a) make or permit to be made any material alterations to or upon the Real Property or any part of the Real Property except as provided for in the Leases or any of the other Permitted Exceptions; (b) grant any liens or encumbrances upon the Property that will not be terminated and discharged by Seller upon the Closing; (c) remove or permit the removal from the Real Property of any fixtures, mechanical equipment, or any other item included in the Real Property except as provided for in the Leases or any of the Permitted Exceptions; (d) take or cause, or knowingly permit, any action, inaction or circumstance that would cause any representation or warranty of Seller herein to become untrue in any material respect.

agree that a portion of the proceeds of sale hereunder, in an amount equal to the aggregate annual base rent and additional rent (“ Aggregate Rent ”) payable under the Newly Executed Leases (the “ Escrow Amount ”), as shown on Exhibit N , shall be deposited with Escrow Agent at Closing, to be held and released pursuant to the terms of an Escrow Agreement, the form and substance of which is to be negotiated in good faith and agreed upon by the parties prior to the expiration of the Due Diligence Period (the “ Escrow Agreement ”). The Escrow Agreement will provide for monthly releases to Buyer with respect to each Newly Executed Lease in an amount equal to 1/12 of the Aggregate Rent payable under such Lease, commencing on the closing Date (prorated for the partial month in which Closing occurs) and continuing on the first day of each calendar month thereafter until the Tenant thereunder has commenced occupancy of its premises and has commenced payment of rent in accordance with the terms of its Lease, whereupon any remaining Escrow Amount allocable to such Newly Executed Lease shall be released to Seller.

Section 8.8 Contingent Leases: Holdback and Escrow . The parties acknowledge that the Newly Executed Leases include a Lease with Giant Fuel Station that is contingent on certain conditions precedent, the failure of which would entitle such Tenant to terminate its Lease (the “ Contingent Lease ”). To provide for an adjustment of the Purchase Price in the event that such Tenant exercises its right to terminate or otherwise does not commence paying rent in accordance with its Lease, the parties agree that a portion of the proceeds of sale hereunder, in an amount equal to the value attributable to the rental stream under the Contingent Lease (the “ Adjustment Amount ”), shall be deposited with Escrow Agent at Closing, to be held and released pursuant to the terms of an Escrow Agreement, the form and substance of which is to be negotiated in good faith and agreed upon by the parties prior to the expiration of the Due Diligence Period (the “ Adjustment Escrow Agreement ”). The parties agree that the Adjustment Amount to be escrowed is $893,683.00. The Adjustment Escrow Agreement will provide that (i) if the Tenant under the Contingent Lease exercises its right to terminate such Lease, then the Adjustment Amount shall be disbursed in full to Buyer (subject to the credit described below); and (ii) if such Tenant’s termination right expires unexercised and such Tenant commences payment of rent in accordance with the terms of the Lease, then the Adjustment Amount shall be disbursed in full to Seller. If neither of the events described in (i) or (ii) above has occurred on or before the one-year anniversary of the Closing Date, then either (at Seller’s option) (x) Seller shall replenish the Escrow Amount under the Escrow Agreement described in Section 8.7 above by instructing the Escrow Agent to deduct funds from the Adjustment Amount in the amount of the Aggregate Rent payable under the Contingent Lease for the ensuing one year period, in which event such funds would be disbursed over the ensuing 12 months in the same manner as the initial Escrow Amount is to be disbursed thereunder, and the remaining escrow pursuant to this Section 8.8 shall be extended for a period of one year; or (ii) the Adjustment Amount will be disbursed in full to Buyer on the one year anniversary of the Closing Date. In connection with any disbursement of the Adjustment Amount to Buyer pursuant to this Section 8.8, a credit shall be applied against the Adjustment. Amount in the amount of the aggregate of all sums disbursed to Buyer pursuant to the Escrow Agreement referenced in Section 8.7 above and, after the first anniversary of the Closing Date, and, if sums have been transferred from the escrow under this Section 8.8 to the escrow under Section 8.7 as provided above, then any sums remaining in the Escrow Agreement pursuant to Section 8.7 shall be returned to the escrow under this Section 8.8 to be disbursed to Buyer as part of the Adjustment Amount.

ARTICLE 9 – CLOSING AND CONDITIONS

Section 9.1 Escrow Instructions. Upon execution of this Agreement, the parties hereto shall deposit an executed counterpart of this Agreement with the Title Company, and this instrument shall serve as the instructions to the Title Company as the escrow holder for consummation of the purchase and sale contemplated hereby. Seller and Buyer agree to execute such reasonable additional and supplementary escrow instructions as may be appropriate to enable the Title Company to comply with the terms of this Agreement; provided, however, that in the event of any conflict between the provisions of this Agreement and any supplementary escrow instructions, the terms of this Agreement shall control.

Section 9.2 Closing. The closing hereunder (“Closing”) shall be held and delivery of all items to be made at the Closing under the terms of this Agreement shall be at the offices of the Escrow Agent on or before ten (10) days following the expiration of the Due Diligence Period, or such other date and time as Buyer and Seller may mutually agree upon in writing (the “Closing Date”). Such date and time may not be extended without the prior written approval of both Seller and Buyer except as set forth in Section 9.5.3. No later than 10:00 a.m. Eastern Time on the Closing Date, (x) Buyer and Seller shall deposit in escrow with the Escrow Agent fully executed and acknowledged originals of all the Closing Documents required to be delivered by such party, with the documents to be recorded being in form confirmed by the Escrow Agent to be in satisfactory form for recording, and Buyer shall deposit in escrow with the Escrow Agent the Purchase Price (subject to adjustments described in Section 9.6), together with all other costs and amounts to be paid by Buyer at the Closing pursuant to the terms of this Agreement, by Federal Reserve wire transfer of immediately available funds to an account to be designated by the Escrow Agent. No later than 1:00 p.m. Eastern Time on the Closing Date, (a) Buyer will direct the Escrow Agent to (i) pay to Seller by Federal Reserve wire transfer of immediately available funds to an account designated by Seller, the Purchase Price (subject to adjustments described in Section 9.6), less any costs or other amounts to be paid by Seller at Closing pursuant to the terms of this Agreement, all pursuant to the final Settlement Statement, and (ii) pay all appropriate payees the other costs and amounts to be paid by Buyer at Closing pursuant to the terms of this Agreement and (b) Seller will direct the Escrow Agent to pay to the appropriate payees out of the proceeds of Closing payable to Seller, all costs and amounts to be paid by Seller at Closing pursuant to the terms of this Agreement and the Settlement Statement, and to file the Articles of Transfer and record the Deed. It shall constitute a condition precedent to Seller’s obligations to consummate the Closing hereunder that all of the representations, warranties, covenants, and agreements of Buyer contained herein shall be true and correct and/or shall have been performed, as the case may be, in all material respects. It shall constitute a condition precedent to Buyer’s obligations to consummate the Closing hereunder that all of the material representations, warranties, covenants, and agreements of Seller contained herein shall be true and correct and/or shall have been performed, as the case may be, in all material respects. Additionally, it shall be a condition precedent for each of Buyer’s and Seller’s obligation to consummate the Closing that the Companion Contracts close simultaneously with this Agreement. Buyer’s obligation to consummate the Closing hereunder shall also be subject to the following conditions precedent, any of which may be waived by Buyer in its sole, absolute and unreviewable discretion:

(a) There has been no material adverse change to the condition of the Property since the expiration of the Due Diligence Period.

(b) The Title Company shall be in a position, subject only to the payment by Purchaser of the costs and fees related thereto and satisfaction of the other conditions set forth in the Title Commitment, to issue at Closing a Title Policy satisfying the requirements set forth in Section 4.2 of this Agreement.

Section 9.3 Seller’s Closing Documents and Other Items. At or before Closing, Seller shall deposit into escrow the following items:

(a) A duly executed and acknowledged counterpart of the Articles of Transfer in the form attached hereto as Exhibit “F-1” (the “Articles of Transfer”) and a duly executed and acknowledged Certificate of Conveyance in the form attached hereto as Exhibit “F-2” and Confirmatory Deed pursuant to Corporate Articles of Transfer in the form attached hereto as Exhibit “F-3” (the “Deed”);

(b) A duly executed counterpart of the Bill of Sale in the form attached hereto as Exhibit “G” (the “Bill of Sale”);

(c) Three (3) duly executed counterparts of an Assignment and Assumption of Leases in the form attached hereto as Exhibit “H” (the “Assignment and Assumption of Leases”);

(d) Three (3) duly executed counterparts of an Assignment and Assumption of Contracts, Warranties and Guaranties, and Other Intangible Property in the form attached hereto as Exhibit “I” (the “Assignment and Assumption of Contracts”);

(e) An affidavit pursuant to Section 1445(b)(2) of the Code, and on which Buyer is entitled to rely, that Seller is not a “foreign person” within the meaning of Section 1445(f)(3) of the Code;

(f) Notices to each tenant of the Property, signed by Seller that shall disclose that the Property has been sold to Buyer and that, after the Closing, all rents should be paid to Buyer or Buyer’s designee in the form attached hereto as Exhibit “C”;

(g) Seller shall deliver to Buyer a set of keys to the Property on the Closing Date. Location of any of the items referred to in this subsection at the Property on the Closing Date shall be deemed to be delivery to Buyer;

(h) Such other documents as may be reasonably required by the Title Company or as may be agreed upon by Seller and Buyer to consummate the purchase of the Property as contemplated by this Agreement;

(i) If applicable, duly completed and signed real estate transfer tax returns;

(j) A certificate of Seller that each of the representations and warranties of Seller contained in Section 6.1 and 9.7 is true and accurate in all material respects on and as of the Closing Date, all covenants and agreements required to be performed by Seller on or prior to the Closing Date have been performed in all material respects, and (iii) any management agreement for the Property and any contracts with affiliates of Seller affecting or relating to the Property have been terminated effective not later than the Closing;

(k) To the extent the same are in Seller’s possession or available (and not already forwarded to Buyer during the Due Diligence Period) all architectural and engineering drawings and specifications, utilities layout plans, topographical plans and the like in Seller’s possession or control and owned by Seller used in the construction, improvement, alteration or repair of the Land or the Improvements;

(1) An executed version of each tenant estoppel certificate required pursuant to Section 9.5 or substituted Seller certifications permitted under Section 9.5.2 and a Rent Roll certified not later than two (2) business days prior to Closing;

(m) Copies of all usual and customary documentation requested by the Title Company to establish the due authority of Seller to consummate the transaction contemplated by this Agreement;

(n) If applicable, with respect to any Security Deposits which are letters of credit, Seller shall, if the same are assignable, (a) deliver to Buyer at the Closing such letters of credit, (b) execute and deliver, if the letter of credit is not assignable, an assignment of the proceeds thereof in customary form, and if the letter of credit is assignable, execute and deliver such other instruments as the issuers of such letters of credit shall reasonably require to effect such assignment, and (c) cooperate with Buyer to change the named beneficiary under such letters of credit to Buyer, so long as Seller does not incur any additional liability or expense in connection therewith;

(o) To the extent the same are in Seller’s or its property manager’s possession or available (and not already forwarded to Buyer during the Due Diligence Period), originals (or if originals are not available, copies certified by Seller) of all Leases, Contracts, records, original tenant files, other materials identified in the Exhibits hereto, and all other books, records and files maintained by Seller’s property manager relating to the construction, leasing, operation and maintenance of the Property;

(p) Three (3) duly executed counterparts of the Settlement Statement (as defined in Section 9.6.1(a) below;

(q) The original of an unexpired warranty applicable to any portion of the Property, if applicable; and

(r) A fully executed original lien waiver from Broker reflecting full payment of the commission payable with respect to the transaction contemplated hereby.

Section 9.4 Buyer’s Closing Documents and Other Items. At or before Closing, Buyer shall deposit into escrow the following items:

(a) The balance of the Purchase Price and such additional funds as are necessary to pay the amounts due from Buyer as shown on the Settlement Statement;

(b) A duly executed counterpart of the Articles of Transfer;

(d) Three (3) duly executed counterparts of the Assignment and Assumption of Leases;

(e) Three (3) duly executed counterparts of the Assignment and Assumption of Contracts;

(f) Copies of all usual and customary documentation requested by the Title Company to establish the due authority of Buyer’s acquisition of the Property;

(g) Such other documents as may be reasonably required by the Title Company or as may be agreed upon by Seller and Buyer to consummate the purchase of the Property as contemplated by this Agreement;

(h) A certificate of Buyer that each of the representations and warranties of Buyer contained in Sections 7.1 and 9.7 is true and accurate in all material respects on and as of the Closing Date and all covenants and agreements required to be performed by Buyer on or prior to the Closing Date have been performed in all material respects;

(i) If applicable, duly completed and signed real estate transfer tax returns; and

(j) Three (3) duly executed counterparts of the Settlement Statement.

Section 9.5 Estoppel Certificates.

estoppel from tenants, in the aggregate, occupying at least eighty five percent (85%) of the gross leasable area (the “GLA”) of the Shopping Center (including the Major Tenants), and (B) such tenant estoppels (x) are consistent in all material respects with the Rent Roll and the Leases delivered to Buyer as part of the Due Diligence Items and with the substance of any material representation made by Seller in this Agreement, (y) do not identify any material unperformed landlord obligations (except, with respect to New Leases and Pending Leases for landlord obligations expressly set forth in the Due Diligence Items delivered to Buyer or otherwise agreed to in writing by Buyer).

9.5.2 As to any Lease for which Seller is unable to timely obtain an estoppel certificate from any Tenant, Seller shall have the right, but not the obligation, as determined in Seller’s sole discretion, to deliver to Buyer Seller’s own estoppel certificate in the form attached as Exhibit “J” (which shall be completed by Seller and warranted and represented by Seller to Seller’s knowledge), setting forth the matters which should have been covered by such missing estoppel certificate. Notwithstanding the foregoing, in no event may Seller us any Seller estoppels to satisfy the condition to closing set forth in Section 9.5.1. The applicable limits on liability set forth in Section 6.2 shall apply to any representations or warranties provided in any estoppel certificate certified by Seller hereunder. Any claim which Buyer may have which is not so asserted within the Contractual Survival Period shall not be valid or effective and Seller shall have no liability with respect thereto. In the event that, following the Closing Date, Seller obtains an estoppel Certificate with respect to any Lease for which Seller self-certified and such estoppel certificate complies with Section 9.5.1, then Seller shall deliver such estoppel certificate to Buyer and, upon such delivery, Seller shall be automatically released from any liability or obligation under the self-certification previously delivered by Seller with respect to such Lease. In the event that, following the Closing Date, Buyer receives an estoppel certificate with respect to any Lease for which Seller gave its certification and such estoppel certificate complies with Section 9.5.1, then upon such receipt by Buyer, Buyer shall notify Seller and Seller shall be automatically released from any liability or obligation under its certification previously delivered by Seller to Buyer with respect to such Lease.

9.5.3. If Seller fails to obtain and deliver sufficient tenant estoppel certificates as required under Section 9.5.1, or if the tenant estoppel certificates proffered by Seller to satisfy Section 9.5.1 materially differ from the form or provisions therefor prescribed in the applicable lease, or, if no form or specified provisions are so prescribed, from the form attached hereto as Exhibit “J”, as the case may be, then, provided that Seller shall have used commercially reasonable efforts to obtain the required tenant estoppel certificates, Seller shall not be in default under this Agreement by reason thereof, but Buyer may, by written notice given to Seller by 5:00 p.m. Eastern Time on the last business day before the Closing Date, elect to (a) waive said conditions and proceed with the closing, (b) terminate this Agreement and receive a prompt refund of the Deposit, or (c) extend the closing for up to thirty (30) days to allow Seller to make reasonable efforts to obtain the Estoppel Certificates required under Section 9.5.1 or, in the event of material differences, to allow Buyer additional time to review such material differences to determine whether Buyer will proceed with the Closing or terminate the Agreement. If Buyer elects, by written notice to Seller by 5:00 p.m. Eastern Time the last business day before the Closing Date, as the same may have been extended pursuant to this Section 9.5.3, to terminate this Agreement solely because of the failure of Seller to provide the estoppel certificates required by this Section 9.5, the Deposit shall be returned to Buyer pursuant to the terms of this

Agreement and thereafter, neither party shall have any further rights or obligations hereunder except as expressly provided in this Agreement, and the Deposit shall immediately be refunded to Buyer.

Section 9.6 Prorations and Closing Costs.

9.6.1 (a) Seller and Buyer agree to adjust, as of 11:59 p.m. on the day immediately preceding the Closing Date, the following (collectively, the “Proration Items”): real estate and personal property taxes and assessments, utility bills (except as hereinafter provided), collected Rents (subject to the terms of 9.6.1(b) below) and Operating Expenses (subject to the terms of 9.6,1(c) below) payable by the owner of the Property. Seller will be charged and credited for the amounts of all of the Proration Items relating to the period up to but not including the Closing Date, and Buyer will be charged and credited for all of the Proration Items relating to the period from and after the Closing Date, such that Buyer shall be deemed to own the Property and therefore be entitled to any revenue and be responsible for any expenses of the Property for the entire day upon which the Closing occurs. Such preliminary estimated Closing prorations shall be prepared by Seller and submitted to the Title Company and Buyer, for Buyer’s approval, no less than three (3) business days prior to the Closing Date (the “Closing Proration Statement”). The Closing Proration Statement, once agreed upon by Buyer and Seller shall be used by the Title Company in preparing the settlement statement to be executed and delivered by Buyer and Seller at Closing (the “Settlement Statement”) and making the preliminary proration adjustment at Closing subject to the final cash settlement provided for below. The preliminary proration shall be paid at Closing by Buyer to Seller (if the preliminary prorations result in a net credit to Seller) or by Seller to Buyer (if the preliminary prorations result in a net credit to Buyer), in each case by increasing or reducing the cash to be delivered by Buyer in payment of the Purchase Price at the Closing. If the actual amounts of the Proration Items are not known as of three (3) business days prior to the Closing Date, the prorations will be made at Closing on the basis of the best evidence then available; thereafter, when actual figures are received (except as provided in Section 9.6.1(c), not to exceed 120 days after Closing), reprorations will be made on the basis of the actual figures, and a final cash settlement shall be made between Seller and Buyer. The Title Company shall prepare and deliver the Settlement Statement to Buyer and Seller for approval no later than two (2) business days prior to the Closing Date. No prorations will be made in relation to insurance premiums, and Seller’s insurance policies will not be assigned to Buyer. Final readings and final billings for utilities will be made if possible as of the Closing Date, in which event no proration will be made at the Closing with respect to utility bills. Seller will be entitled to recover from the utility providers all deposits presently in effect with the utility providers, and Buyer will be obligated to make its own arrangements for deposits with the utility providers. Except as provided in Section 9.6.1(c), the provisions of this Section 9.6.1(a) will survive the Closing for twelve (12) months.

All sums collected by Buyer or Seller, for a period of ninety (90) days from and after Closing, from each Tenant will be applied first to any Delinquent Rent owed by such Tenant to Buyer for the month in which Closing occurred, then to any Delinquent Rent owed to Seller by such tenant for the month in which Closing occurred, then by such Tenant to Buyer for any Delinquent Rent for the period after the month in which the Closing occurred, and then applied to Delinquent Rents for periods prior to the month in which Closing occurred owed by such Tenant to Seller. Any sums due Seller will be promptly remitted to Seller. Buyer shall use commercially reasonable efforts to collect any sums due Seller from Tenants under the Leases, but shall not be required to exercise any remedies available under the Leases for such purpose. From and after the Closing Date, Buyer shall have the exclusive right to collect any sums due from Tenants under the Leases and Seller hereby relinquishes the right to pursue any Tenant under the Leases for any sums due Seller for periods attributable to such Seller’s ownership of the Property. Any amounts received by Seller from Tenants on and after the Closing Date shall promptly be forwarded by Seller to Buyer. Seller shall not have the right to commence or pursue any legal proceedings against any Tenant or any guarantor of any Lease in effect on or after the Closing Date. The provisions of this Section 9.6.1(b) will survive the Closing for one (1) year.

(c) Seller will prepare a reconciliation as of the Closing Date of the amounts of all billings and charges for Operating Expenses to the Property. Such reconciliation will be delivered to Buyer at least three (3) business days prior to Closing for review, and the parties will reach agreement thereon prior to the Closing Date. If more amounts have been expended for Operating Expenses than have been collected from Tenants for Operating Expenses, Buyer will pay such difference to Seller at Closing. If, as of the Closing Date, more amounts have been collected from Tenants for Operating Expenses than have been expended for Operating Expenses, Seller will pay to Buyer at closing as a credit against the Purchase Price such excess collected amount. A final reconciliation of such amounts shall be made not later than March 31, 2012, and the parties will reach agreement therein, and a final cash settlement shall be made between Seller and Buyer within ten (10) days after such reconciliation. Buyer and Seller agree that such final reconciliation of Operating Expenses will fully relieve Seller from any responsibility to Tenants or Buyer for such matters. In this regard, Buyer will be solely responsible, from and after Closing, for collecting from Tenants the amount of any outstanding Operating Expenses for periods before and after Closing, and where appropriate, reimbursing Tenants for amounts attributable to Operating Expenses, as may be necessary based on annual reconciliations for Operating Expenses. The provisions of this Section 9.6.1(c) shall survive Closing for one (1) year.

(d) Seller shall pay all leasing commissions which are or before Closing become due and payable under any leasing commission or agency agreement which Seller has entered into, with respect to any Lease made prior to Closing. Buyer shall pay, and shall hold harmless, indemnify and defend Seller from and against any claims or liability for, leasing commissions which become due and payable after Closing (including, without limitation, any commissions which become due and payable under any such agreement by reason of the extension, renewal or expansion after Closing of any Lease existing as of Closing). The provisions of this Section 9.6.1(c) shall survive Closing for a period of one year.

(e) All Security Deposits listed on the Rent Roll as of the Closing Date shall be transferred to Buyer at Closing or Buyer shall receive a credit against the Purchase Price in the amount of the Security Deposits, In the event that any Security Deposits are in the form of letters of credit, at Closing, Seller will assign its interest in such letters of credit to Buyer and, following Closing, Seller will reasonably cooperate with Buyer, at no cost to Seller, in causing Buyer to be substituted for Seller as beneficiary under such letters of credit. Buyer will not receive a credit against the Purchase Price for any Security Deposits in the form of letters of credit.

9.6.2 (a) Seller shall pay one-half (1/2) of any state, county, and city documentary stamps, transfer, or recordation taxes applicable to the conveyance of title to the Property. Buyer shall pay one-half (1/2) of any state, county, and city documentary stamps, transfer, or recordation taxes applicable to the conveyance of title to the Property, the escrow fee, all of the costs of the Title Policy including the cost of any endorsements, the cost of any survey (or updated survey) or appraisals, all recording fees, any personal property sales tax applicable to the purchase of the Property and any other expenses of the escrow for the sale of the Property, and all of the recordation and transfer taxes, if any, associated with the recording of any financing instruments associated with Buyer’s financing of the purchase of the Property. Buyer shall reimburse Seller at Closing (or, if not previously paid by Seller shall be responsible for payment at Closing of) the cost of the Survey and any update thereto order by Seller or Buyer.

(b) Seller intends to claim an exemption from Seller’s one-half (1/2) of the transfer and recordation taxes due and owing on the conveyance of title to the Property. Notwithstanding the provisions of Section 9.6.2(a) above, in the event Seller is found to be exempt from its one-half (1/2) of any such transfer and recordation tax, Buyer shall pay the entire amount of such transfer and recordation taxes due and owing upon the sale of the Property after taking into account any such exemption, but in no event shall Buyer be liable for more than one-half (1/2) of the amount of such taxes which would otherwise be payable on the transaction in the absence of any exemption applicable to the Seller. At Closing, the amount of such taxes that would otherwise be payable by Seller pursuant to Section 9.6.2(a) on the transaction in the absence of any exemption shall be held back from the sale proceeds and retained by the Escrow Agent until the Deed shall have been accepted for recording. If the recorder’s office requires the payment of any amount of transfer and recordation taxes that would be due and payable absent any exemption, the Escrow Agent shall be authorized to pay Seller’s share thereof out of the amount held back.

Section 9.7 Brokers. Each of Buyer and Seller represents and warrants to the other that it did not employ or use any broker or finder to arrange or bring about this transaction other than CB Richard Ellis, Inc. (“Broker”), who has acted as Seller’s broker in connection with this Agreement. Seller shall be solely responsible for all amounts payable to the Broker under separate agreement with Seller.

Section 9.8 Expenses. Except as provided in Sections 9.6 and 9.7, each party hereto shall pay its own expenses incurred in connection with this Agreement and the transactions contemplated hereby, including, in the case of Buyer, all third-party engineering and environmental review costs.

ARTICLE 10 – COMPANION CONTRACTS

Section 10.1 Cross-Default. A default by Buyer under any Companion Contract shall constitute a default by Buyer under this Agreement, and Seller shall be entitled to all remedies to which Seller is entitled pursuant to Section 5.2 above as if Buyer defaulted under this Agreement. A default by the party that is the “Seller” under any Companion Contract shall constitute a default by Seller under this Agreement, and Buyer shall be entitled to all remedies to which Buyer is entitled pursuant to Section 5.1 above as if Seller defaulted under this Agreement.

Section 10.2 Contracts Contingent on Each Other. Notwithstanding anything contained in this Agreement or any Companion Contract to the contrary, Seller’s and Buyer’s, obligations under this Agreement are expressly contingent upon the closing of the transactions contemplated by the Companion Contracts being consummated contemporaneously with the Closing hereunder. In that regard, unless the Parties otherwise expressly agree in a writing signed by the Parties, in the event that either of the Companion Contracts are terminated for any reason whatsoever (except as a result of a default by Buyer thereunder, which default shall be governed by Section 10.1 above), this Agreement shall terminate automatically as well, in which event the Deposit shall be promptly returned to Buyer and the Parties shall have no further rights or obligations hereunder except for those obligations which expressly survive termination of this Agreement. Notwithstanding the foregoing or any other provision of this Agreement, if the Closing under one of the Companion Contracts is extended for any reason, relating to tenant estoppels, the Closing Date hereunder shall be deemed extended to the date of the extended Closing under such Companion Contract.

ARTICLE 11 – MISCELLANEOUS

Section 11.1 Amendment and Modification. Subject to applicable law, this Agreement may be amended, modified, or supplemented only by a written agreement signed by Buyer and Seller.

Section 11.2 Risk of Loss and Insurance Proceeds. Seller shall notify Buyer within one (1) business day of any damage or destruction of the Property or any portion thereof occurring after the date hereof, and any notice of condemnation or similar taking received, after the date hereof.

condemnation (other than the proceeds of rent loss or business interruption insurance which are allocable to periods before Closing), plus the amount of any insurance deductible and any uninsured amount of loss, less any sums expended by Seller toward the restoration or repair of the Property or in collecting such insurance proceeds or condemnation awards. If the proceeds or awards have not been collected as of the Closing, then such proceeds or awards shall be assigned to Buyer, except to the extent needed to reimburse Seller for sums expended prior to the Closing to repair or restore the Property or to collect any such proceeds or awards. Notwithstanding the foregoing sentence, if, with respect to the insurance proceeds, Seller’s insurance carrier does not agree in writing, within thirty (30) days after the date of the event giving rise to insurance proceeds, that such event is covered by such insurance, and that such insurance proceeds will be paid by such insurer directly to Buyer, then the cost to repair (to a condition at least as good as prior to the casualty) the remaining damage caused by such casualty, as reasonably determined by Buyer, shall be credited against the Purchase Price at Closing.

11.2.2 Major Loss. If the amount of the damage or destruction or condemnation as specified above exceeds Seven Hundred Fifty Thousand Dollars ($750,000), then Buyer may at its option, to be exercised by written notice to Seller within ten (10) business days of Seller’s notice of the occurrence of the damage or destruction or the commencement of condemnation proceedings, terminate this Agreement. Buyer’s failure to elect to terminate this Agreement within said ten business day period shall be deemed an election by Buyer to consummate this purchase and sale transaction. If Buyer elects to terminate this Agreement within such ten business day period, the Deposit shall be returned to Buyer and neither party shall have any further rights or obligations hereunder except as expressly provided in this Agreement. If Buyer elects or is deemed to have elected to proceed with the purchase, then upon the Closing, there shall be a credit against the Purchase Price due hereunder equal to the amount of any insurance proceeds or condemnation awards collected by Seller as a result of any such damage or destruction or condemnation (other than the proceeds of rent loss or business interruption insurance which are allocable to periods before Closing), plus the amount of any insurance deductible and any uninsured amount of loss, less any sums expended by Seller towards the restoration or repair of the Property or in collecting such insurance proceeds or condemnation awards. If the proceeds or awards have not been collected as of the Closing, then such proceeds or awards shall be assigned to Buyer, except to the extent needed to reimburse Seller for sums expended prior to the Closing to repair or restore the Property or to collect any such proceeds or awards. Notwithstanding the foregoing sentence, if, with respect to the insurance proceeds, Seller’s insurance carrier does not agree in writing, within thirty (30) days after the date of the event giving rise to insurance proceeds, that such event is covered by such insurance, and that such insurance proceeds will be paid by such insurer directly to Buyer, then the cost to repair (to a condition at least as good as prior to the casualty) the remaining damage caused by such casualty, as reasonably determined by Buyer, shall be credited against the Purchase Price at Closing.

Section 11.3 Notices. All notices required or permitted hereunder shall be in writing and shall be served on the parties at the following address:


If to Seller:		Cranberry Retail, Inc.


		c/o LaSalle Investment Management, Inc. 100 East Pratt Street, 20 ^th Floor Baltimore, Maryland 21202 Attention: George W. Duke Facsimile: (410) 347-0612 e-mail: george.duke@lasalle .com

with Copies to:		Office of the Attorney General Maryland State Retirement & Pension System 120 East Baltimore Street, 14 ^th Floor Baltimore, Maryland 21202 Attention: Melissa Allison Warren Facsimile: (410) 468-1705 e-mail: mwarren@sra.state.md.us

and to:		Rosenberg \| Martin \| Greenberg, LLP 25 S. Charles Street, Suite 2115 Baltimore, Maryland 21201 Attention: Hilary J. O’Connor Patrick M. Martyn Facsimile: (410) 727-1115 e-mail: hoconnor@rosenbergmartin.com pmartyn@rosenbergmartin.com

If to Buyer:		Saul Holdings Limited Partnership 7501 Wisconsin Avenue, Suite 1500 Bethesda, MD 20814 Fax No.: (301) 986-6217 Attention: John F. Collich e-mail: john.collich@centers.com

and:		B.F. Saul Company 7501 Wisconsin Avenue, Suite 1500 Bethesda, MD 20814 Fax No.: (301) 986-6023 Attention: Victoria J. Perkins Robin F. Gonzales e-mail: victoria.perkins@bfsaulco.com robin.gonzales@bfsaulco.com

with a copy to:		Pillsbury Winthrop Shaw Pittman 2300 N Street, NW Washington, D.C. 20037 Fax No.: (202) 663-8007 Attention: Diane S. Richer e-mail: diane.richer@pillsburylaw .com

If to Escrow Agent:

Commonwealth Land Title Insurance Company

1015 15 ^th Street, N.W., Suite 300

Washington, D.C. 20005

Attention: David P. Nelson

email: david.nelson@cltic .com

Any such notices may be sent by (a) certified mail, return receipt requested, in which case notice shall be deemed received upon actual delivery, (b) a nationally recognized overnight courier, in which case notice shall be deemed delivered one (1) business day after deposit with such courier, (c) facsimile transmission (provided notice is also delivered pursuant to one of the above methods), in which case notice shall be deemed delivered upon electronic verification that transmission to recipient was completed, or (d) electronic mail (provided notice is also delivered pursuant to one of the methods set forth in Clause (a) or (b) above) in which case notice shall be deemed delivered upon receipt of a confirmation that the electronic mail message was delivered. The above addresses and facsimile numbers may be changed by written notice to the other party; provided that no notice of a change of address or facsimile number shall be effective until actual receipt of such notice. Copies of notices are for informational purposes only, and a failure to give or receive copies of any notice shall not be deemed a failure to give notice.

Section 11.4 Assignment. This Agreement may not be assigned by Seller; provided, however, that Seller reserves the right to assign this Agreement to the Board of Trustees of the Maryland State Retirement and Pension System or its nominee, Seller’s sole stockholder. This Agreement may not be assigned by Buyer without the prior written consent of Seller provided that Buyer may, without Seller’s consent but after written notice to Seller at least five (5) days prior to Closing, (i) assign this Agreement to an entity that is controlled by Buyer, or (ii) direct that the Articles of Transfer, Certificate of Conveyance and Confirmatory Deed and related assignment documents be granted to an entity that is controlled by Buyer.

Section 11.5 Governing Law and Consent to Jurisdiction. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO ANY OTHERWISE APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS. ANY ACTION ARISING OUT OF THIS AGREEMENT MUST BE COMMENCED BY BUYER OR SELLER IN THE STATE COURTS OF THE STATE OF MARYLAND OR IN THE CIRCUIT COURT OF BALTIMORE CITY, MARYLAND AND EACH PARTY HEREBY CONSENTS TO THE JURISDICTION OF THE ABOVE COURTS IN ANY SUCH ACTION AND TO THE LAYING OF VENUE IN THE STATE OF MARYLAND. ANY PROCESS IN ANY SUCH ACTION SHALL BE DULY SERVED IF MAILED BY REGISTERED MAIL, POSTAGE PREPAID, TO THE PARTIES AT THEIR RESPECTIVE ADDRESS DESCRIBED IN SECTION 11.3 HEREOF.

Section 11.6 Counterparts. This Agreement may be executed in two or more fully or partially executed counterparts, each of which will be deemed an original binding the signer thereof against the other signing parties, but all counterparts together will constitute one and the same instrument.

Section 11.7 Entire Agreement. This Agreement and any other document to be furnished pursuant to the provisions hereof embody the entire agreement and understanding of the parties hereto as to the subject matter contained herein. There are no restrictions, promises, representations, warranties, covenants, or undertakings other than those expressly set forth or referred to in such documents. This Agreement and such documents supersede all prior agreements and understandings among the parties with respect to the subject matter hereof, including, without limitation, the Confidentiality Agreement (except as provided for in Section 3.5 of this Agreement).

Section 11.8 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any jurisdiction will, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement, or affecting the validity or enforceability of any of the terms or provisions of this Agreement.

Section 11.9 Attorneys Fees. Except as expressly provided in this Agreement, if any action is brought by either Party against the other Party hereto, relating to or arising out of this Agreement, the transaction described herein or the enforcement hereof, each Party shall be solely responsible for its own attorneys’ fees.

Section 11.10 Payment of Fees and Expenses. Each Party to this Agreement will be responsible for, and will pay, all of its own fees and expenses, including those of its counsel and accountants, incurred in the negotiation, preparation, and consummation of this Agreement and the transaction contemplated hereunder.

Section 11.11 Confidential Information. The Parties acknowledge that the transaction described herein is of a confidential nature and shall not be disclosed except to Permitted Outside Party or as required by law. No Party shall make any public disclosure of the specific terms of this Agreement or the identity of the Parties to this Agreement, except as required by law including, without limitation, securities laws of the United States. In connection with the negotiation of this Agreement and the preparation for the consummation of the transactions contemplated hereby, each Party acknowledges that it will have access to confidential information relating to the other Party. Each Party shall treat such information as confidential, preserve the confidentiality thereof, and not publish, circulate, duplicate or use such information, except to Permitted Outside Parties in connection with the transactions contemplated hereby. The Parties agree that they will not issue any news releases to the public press or any publication wholly or partly disclosing the business terms of or identity of the Parties to this Agreement without first obtaining the written consent of the other, except as the public press or any publication may have access to and obtain any such information as a result of such information being of public record and except as otherwise required by law. In the event of the termination of this Agreement for any reason whatsoever, Buyer shall return to Seller, all Due Diligence Items and other documents, work papers, engineering and environmental studies and reports and all other materials (including all copies thereof obtained from Seller in connection with the transactions contemplated hereby), and each Party shall use commercially reasonable efforts, including instructing its employees and others who have had access to such information, to keep confidential and not to use any such information. However, nothing in this Agreement shall preclude a Party from making any disclosure required by law or in connection with a lawsuit

involving one or the other Party or both Parties or otherwise arising from or related to the transaction contemplated hereby. The provisions of this Section 11.11 shall survive the Closing or, if the purchase and sale is hot consummated, any termination of this Agreement for a period of one (1) year. Notwithstanding the foregoing, the terms of the Confidentiality Agreement shall control over the terms of this Section 11.11, to the extent of any inconsistency between them.

Section 11.12 No Rule of Construction. This Agreement has been negotiated at arms length by both Seller and Buyer, and no rule of construction shall be invoked against either party with respect to the authorship thereof or of any of the documents to be delivered by the respective parties at the Closing.

Section 11.13 TIME OF THE ESSENCE. TIME, WHEREVER SPECIFIED HEREIN FOR THE PERFORMANCE BY SELLER OR BUYER OF ANY OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER OR THE EXERCISE OF ANY OF THEIR RESPECTIVE RIGHTS HEREUNDER IS HEREBY MADE AND DECLARED TO BE OF THE ESSENCE OF THIS AGREEMENT.

Section 11.14 Agreement Not To Be Recorded. This Agreement shall not be filed of record by or on behalf of Buyer in any office or place of public record. If Buyer fails to comply with the terms hereof by recording or attempting to record this Agreement or a notice thereof, such act shall not operate to bind or cloud title to the Real Property. Seller shall, nevertheless, have the right forthwith to institute appropriate legal proceedings to have the same removed from record. If Buyer or any agent, broker or counsel acting for Buyer shall cause or permit this Agreement or a copy thereof to be filed in an office or place of public record, Seller, at its option, and in addition to Seller’s other rights and remedies, may treat such act as a default of this Agreement on the part of Buyer. However, the filing of this Agreement in any lawsuit or other proceedings in which such document is relevant or material shall not be deemed to be a violation of this section.

Section 11.15 Payment or Performance on Saturday, Sunday or Holiday. Whenever the provision of this Agreement calls for any payment or the performance of any act on or by a date that is Saturday, Sunday or an official holiday for employees of the State of Maryland, including the expiration date of any cure periods provided herein, then such payment or such performance will be required on or by the immediately succeeding business day.

Section 11.16 No Personal Liability. The obligations of Seller contained herein are intended to be binding only on Seller’s interest in the Property and shall not otherwise be personally binding upon, nor shall any resort be had to, any of its employees, officers, directors, stockholders, trustees, its investment manager, general partners, or any employees or agents of the foregoing parties. All other documents to be executed by Seller in connection with this transaction shall also contain the foregoing exculpation. From and after the Closing Date, the obligations of Buyer contained herein are intended to be binding only on Buyer’s interest in the Property and shall not otherwise be personally binding upon, nor shall any resort be had to, any of its or its affiliates’ employees, officers, directors, partners, members or managers. All other documents to be executed by Buyer in connection with this transaction shall also contain the foregoing exculpation.

Section 11.17 Payments to the State of Maryland; Bribery. In addition to Buyer’s representations and warranties set forth in Section 7.1 above, Buyer further represents and warrants and to Seller that (i) Buyer is not in arrears with respect to the payment of any monies due and owing the State of Maryland, or any department or unit thereof, including but not limited to, the payment of taxes and employee benefits; and (ii) neither Buyer nor any officer, director or partner of Buyer or any partner thereof nor any employee of Buyer or any partner thereof directly involved in obtaining contracts with the State of Maryland, or any county or other subdivisions of the State of Maryland, has been convicted of bribery, attempted bribery or conspiracy to bribe, nor has engaged in conduct, or by any acts or omissions, made admissions, in writing or under oath during the course of any official investigation or other proceeding, since July 1,1977, which would constitute an offense or offenses of bribery, attempted bribery, or conspiracy to bribe under the laws of any state or the federal government. As used herein, the word “convicted” includes an accepted plea of nolo contendere .

Section 11.18 Disclosure of Beneficial Ownership. Buyer shall comply with the provisions of Section 13-221 of the State Finance and Procurement Article, Annotated Code of Maryland, which requires that every business that enters into contracts, leases, or other agreements with the State of Maryland, or its agencies during a calendar year under which the business is to receive in the aggregate One Hundred Thousand and 00/100 Dollars ($100,000) or more, shall, within thirty (30) days of the time when the aggregate value of these contracts, leases or other agreements reaches One Hundred Thousand and 00/100 Dollars ($100,000), file with the Secretary of State of Maryland certain specified information to include disclosures of beneficial ownership of the business.

Section 11.19 Disclosure of Political Contributions. Buyer shall comply with Election Law Article, §§ 14-101-14-108 of the Annotated Code of Maryland, which requires that every person that enters into contracts, leases, or other agreements with the State of Maryland, a county, or an incorporated municipality, or their agencies, during a calendar year in which the person receives in the aggregate $100,000 or more, shall file with the State Board of Elections a statement disclosing contributions in excess of $500 made during a reporting period to a candidate for elective office in any primary or general election. The statement shall be filed with the State Board of Elections (1) before a purchase or execution of a lease or contract by the State, a county, an incorporated municipality, or their agencies, and shall cover the preceding two calendar years; and (2) if the contribution is made after the execution of a lease or contract, than twice a year, throughout the contract term, on; (a) February 5, to cover the six month period ending January 31, and (b) August 5, to cover the six month period ending July 31.

Section 11.20 Seller’s Compliance with Buyer’s SEC Financial Reporting Requirements . Seller understands that Buyer’s general partner is a publicly traded company and is required to file reports with the Securities and Exchange Commission (the “SEC”), and that one or more of such reports may require Buyer to include audited or other financial information of the Property that Seller may not previously have provided to Buyer. For a period beginning on the Closing Date and until such time as Saul Centers, Inc. files with the SEC its Annual Report on Form 10-K for the current fiscal year, or any amendment and restatement thereof as may be required, but in no event longer than four years after the date of filing, and at no cost or liability to Seller, Seller shall (i) cooperate with Buyer, its counsel, accountants, agents, and representatives, provide them with access to Seller’s books and records with respect

to the ownership, management, maintenance and operation of the Property for the applicable period, and permit them to copy the same, and (ii) furnish Buyer with such additional information concerning the same as Buyer shall reasonably request, provided, however, Seller shall not be required to generate any special reports not otherwise in Seller’s possession. Buyer will pay all of the costs associated with such audit. The provisions of this Section 11.24 shall survive the Closing for the period necessary to permit Buyer’s general partner to comply with all legal requirements.

Section 11.21 Post Closing Support . Seller acknowledges that Seller is a single asset entity with no assets or sources of income other than the Property, and that Seller may, after the Closing, transfer all or any portion of the proceeds received by Seller hereunder to another entity. Accordingly, in order to support Seller’s obligations under this Agreement that survive the Closing, Seller agrees that at all times during the period extending one (1) year following the Closing Date (the “Survival Period”), Seller shall maintain at a bank or other financial institution identified to Buyer a minimum liquid tangible net worth (the “Minimum Net Worth”) of at least Five Hundred Thousand Dollars ($500,000.00). Seller shall cause an officer of Seller to certify and deliver to Buyer at Closing, a current statement from the financial institution at which these funds are held, evidencing the existence and liquidity of the funds designated to satisfy such requirement. Seller represents, warrants and covenants that such funds representing the Minimum Net Worth have not been and will not be pledged or made available to, or set aside or designated for the benefit of, another creditor or potential creditors, or provided as credit support as they have been hereunder to satisfy any other debts or liabilities, contingent or otherwise, and shall be fully available to satisfy any claims of Buyer hereunder throughout the Survival Period (and any additional period during which the Minimum Net Worth is to be maintained as provided below.) Upon Buyer’s request, on the first day of the third full calendar month following the Closing Date and quarterly thereafter during the Survival Period (and any additional period during which the Minimum Net Worth is to be maintained as provided below), an officer of Seller shall certify to Buyer in writing Seller’s continuing compliance with the requirements of this Section 11.21. The Minimum Net Worth need not be maintained following the Survival Period, provided, however, if Buyer has instituted judicial proceedings during the Survival Period asserting a claim in good faith against Seller for a default or other claim available to Buyer under this Agreement or any document executed by Seller at the Closing. Seller agrees to continue to maintain the Minimum Net Worth, and to provide the quarterly certifications set forth above in this Section 11.21, until such claim has been fully resolved.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year set forth below.


SELLER:	CRANBERRY RETAIL, INC., a Maryland corporation

	By:	/s/ George W. Duke
		Name:	George W. Duke
		Title:	President
		Date:	August 9, 2011

BUYER:	SAUL HOLDINGS LIMITED PARTNERSHIP, a Maryland limited partnership

	By:	Saul Centers, Inc., its general partner

	By:	/s/ B. Francis Saul III
		Name:	B. Francis Saul III
		Title:	President
		Date:	August 9, 2011

ESCROW AGENT:	COMMONWEALTH LAND TITLE INSURANCE COMPANY

	By:	/s/ David P. Nelson
		Name:	David P. Nelson
		Title:	Vice President
		Date:	August 9, 2011

The Escrow Agent is executing this Agreement to evidence its agreement to hold the Deposit, and to perform the Closing, in accordance with the terms and conditions of this Agreement.

FIRST AMENDMENT TO AGREEMENT OF PURCHASE AND SALE

(Cranberry Square, Westminster, Carroll County, Maryland)

THIS FIRST AMENDMENT TO AGREEMENT OF PURCHASE AND SALE (this “ Amendment ”) is made as of the 24th day of August, 2011, by and between CRANBERRY RETAIL, INC., a Maryland corporation (“ Seller ”), and SAUL HOLDINGS LIMITED PARTNERSHIP, a Maryland limited partnership (“ Buyer ”).

RECITALS:

A. Seller and Buyer entered into that certain Agreement of Purchase and Sale dated as of August 9, 2011 (the “ Agreement ”), for the purchase and sale of real property, as more particularly described in the Agreement.

B. Seller and Buyer desire to amend the Agreement to, among other things, extend the Due Diligence Period for purposes of certain additional environmental investigations and extend the Closing Date, subject to the terms and conditions set forth below.

C. Capitalized terms not otherwise defined herein shall have the meanings provided in the Agreement.

NOW, THEREFORE, in consideration of the foregoing and of the mutual agreement of the parties herein, the parties agree as follows:

1. Due Diligence Period Extension . The Due Diligence Period specified in Section 3.1 of the Agreement is hereby extended until 5:00 p.m. Eastern Time on Thursday, September 15, 2011 (the “ Environmental Due Diligence Period Expiration ”) for the limited purpose of affording Buyer additional time to conduct a Phase II investigation of the environmental condition of the Property (the “ Phase II ”). The Due Diligence Period for all other purposes under the Agreement shall remain August 29, 2011, as specified in the Agreement, such that if the Agreement is not terminated before the end of the Due Diligence Period, Buyer shall deposit the Additional Deposit with Escrow Agent on or before 5:00 p.m. Eastern Time on August 30, 2011, as provided in Section 2.3 of the Agreement. Notwithstanding anything in the Agreement to the contrary, if the Phase II indicates a potential violation of any Environmental Laws or presence of any Hazardous Materials at a level requiring reporting, investigation or corrective action under any federal, state or local laws or guidelines, then Buyer shall have the right, at its option, to terminate the Agreement, without further liability (except as expressly provided in the Agreement), by delivering a Notice to Terminate to Seller prior to the Environmental Due Diligence Period Expiration, in which event the Escrow Agent shall promptly return the Deposit to Buyer.

2. Extension of Closing Date . The first sentence of Section 9.2 of the Agreement (Closing) is hereby amended and restated as follows:

The closing hereunder (“ Closing ”) shall be held and delivery of all items to be made at the Closing under the terms of this Agreement shall be at the offices of the Escrow Agent on or before Monday, September 26, 2011, or such other date as Buyer and Seller may mutually agree upon in writing (the “ Closing Date ”).

3. Estoppels . The parties acknowledge and agree that any required tenant estoppels that would have been deemed acceptable and delivered within the proper time frame if the Closing Date had not been extended will remain acceptable and will not need to be refreshed or reissued notwithstanding that they may be dated more than 30 days prior to the Closing Date, as extended hereby.

4. Exhibit M — Future Lease Commissions and Tenant Improvement Allowance Obligations . Exhibit M to the Agreement is hereby deleted and replaced in its entirety by replacement Exhibit M attached hereto, thus adding leasing commissions and tenant improvement allowances for the newly executed East Moon Lease to such Exhibit.

5. Title and Survey Objections . The parties acknowledge that Buyer provided to Seller a notice of Title Objections dated August 19, 2011 (the “ Objections Notice ”), and Seller provided to Buyer a response thereto in the form of a letter dated August 24, 2011 from Patrick M. Martyn, as counsel to Seller (“ Seller’s Response ”). Notwithstanding anything contained in the penultimate paragraph of Seller’s Response to the contrary, the parties agree that the parties’ rights and obligations with respect to title and survey related matters, as set forth in the Agreement, shall be deemed modified to the extent of the actions and matters to which Seller agreed pursuant to the numbered paragraphs of Seller’s Response.

6. Ratification of Agreement . The Agreement, as amended by this Amendment, is hereby ratified and affirmed and remains in full force and effect.

7. Counterparts . This Amendment may be executed in multiple counterparts, each of which shall be an original and all of which, together, shall constitute one and the same document.

[no further text; signature page follows]

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.


SELLER:

CRANBERRY RETAIL, INC., a Maryland corporation

By:	/s/ George Duke		(Seal)
Name:	George W. Duke
Title:	President

BUYER:

SAUL HOLDINGS LIMITED PARTNERSHIP, a Maryland limited partnership

By:	Saul Centers, Inc., a Maryland corporation, its General Partner

	By:	/s/ John Collich	(Seal)
	Name:	John Collich
	Title:	Senior Vice President

SECOND AMENDMENT TO AGREEMENT OF PURCHASE AND SALE

(Cranberry Square, Westminster, Carroll County, Maryland)

THIS SECOND AMENDMENT TO AGREEMENT OF PURCHASE AND SALE (this “ Amendment ”) is made as of the 29th day of August, 2011, by and between CRANBERRY RETAIL, INC., a Maryland corporation (“ Seller ”), and SAUL HOLDINGS LIMITED PARTNERSHIP, a Maryland limited partnership (“ Buyer ”).

RECITALS:

A. Seller and Buyer entered into that certain Agreement of Purchase and Sale dated as of August 9, 2011, as amended by a First Amendment to Agreement of Purchase and Sale dated as of August 24, 2011 (as so amended, the “ Agreement ”), for the purchase and sale of real property, as more particularly described in the Agreement.

B. Seller and Buyer desire to further amend the Agreement to evidence their agreement on the form and substance of the Escrow Agreement, subject to the terms and conditions set forth below.

C. Capitalized terms not otherwise defined herein shall have the meanings provided in the Agreement.

NOW, THEREFORE, in consideration of the foregoing and of the mutual agreement of the parties herein, the parties agree as follows:

1. Form of Escrow Agreement. Buyer and Seller hereby agree that the Escrow Agreement attached hereto as Exhibit 1 is the agreed upon form of the Escrow Agreement and the Adjustment Escrow Agreement contemplated by Sections 8.7 and 8.8 of the Agreement and to be entered into at Closing (as so consolidated into a single escrow agreement, the “ Escrow Agreement ”).

2. Ratification of Agreement . The Agreement, as amended by this Amendment, is hereby ratified and affirmed and remains in full force and effect.

3. Counterparts . This Amendment may be executed in multiple counterparts, each of which shall be an original and all of which, together, shall constitute one and the same document.

[no further text; signature page follows]

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.


SELLER:

CRANBERRY RETAIL, INC., a Maryland corporation

By:	/s/ George Duke		(Seal)
Name:	George W. Duke
Title:	President

BUYER:

SAUL HOLDINGS LIMITED PARTNERSHIP, a Maryland limited partnership

By:	Saul Centers, Inc., a Maryland corporation, its General Partner

	By:	/s/ John Collich	(Seal)
	Name:	John Collich
	Title:	Senior Vice President

Exhibit 2.(b)

AGREEMENT OF PURCHASE AND SALE

between

KENTLANDS RETAIL, INC.,

a Maryland corporation

“Seller”

and

SAUL HOLDINGS LIMITED PARTNERSHIP,

a Maryland limited partnership

“Buyer”

with Deposit Instructions for

Commonwealth Land Title Insurance Company

as Escrow Agent

PROPERTY:

209-285 KENTLANDS BOULEVARD AND

104-128 MAIN STREET,

GAITHERSBURG, MONTGOMERY COUNTY, MARYLAND

LIST OF EXHIBITS


Exhibit “A”		Description of Land
Exhibit “B-1”		List of Leases
Exhibit “B-2”		Rent Roll
Exhibit “C”		Form of Tenant Notice Letter
Exhibit “D”		List of Contracts
Exhibit “E”		List of Personal Property
Exhibit “F-1”		Form of Articles of Transfer
Exhibit “F-2”		Form of Certificate of Conveyance
Exhibit “F-3”		Form of Confirmatory Deed
Exhibit “G”		Form of Bill of Sale
Exhibit “H”		Form of Assignment and Assumption of Leases
Exhibit “I”		Form of Assignment and Assumption of Contracts, Warranties and Guaranties and Other Intangible Property
Exhibit “J”		Form of Tenant Estoppel Certificates
Exhibit “K”		List of Surveys
Exhibit “L”		Companion Contracts
Exhibit “M”		List of Future Leasing Commissions and Unfunded Tenant Improvement and Other Concession Obligations
Exhibit “N”		Newly Executed Leases Escrow

AGREEMENT OF PURCHASE AND SALE

THIS AGREEMENT OF PURCHASE AND SALE (this “Agreement”), dated as of August 9 ^th , 2011, is between KENTLANDS RETAIL, INC., a Maryland corporation (“Seller”), and SAUL HOLDINGS LIMITED PARTNERSHIP, a Maryland limited partnership (“Buyer”).

ARTICLE 1 - CERTAIN DEFINITIONS

1.1.1 “Agreement” shall mean this Agreement, as the same may be amended, modified, or supplemented from time to time in writing by the parties hereto.

1.1.2 “Closing” shall have the meaning ascribed in Section 9.2.

1.1.3 “Closing Date” shall mean, TIME BEING OF THE ESSENCE, the date on which the Closing shall occur, but in no event later than the date set forth in Section 9.2.

1.1.5 “Closing Proration Statement” shall have the meaning ascribed in Section 9.6.1(a).

1.1.7 “Contracts” shall mean any contacts or other agreements in effect for the continuing provision of services, equipment or supplies relating to the construction, maintenance, repair, protection or operation of the Property; excluding any listing agreement by and between Seller and Broker (as defined in Section 9.7), and any contract for services with any affiliate of Seller.

1.1.8 “Deposit” shall have the meaning ascribed in Section 2.3.

1.1.9 “Due Diligence” shall mean the review contemplated by Section 3.1 and related provisions of this Agreement.

1.1.10 “Due Diligence Items” shall mean those items, documents and deliveries actually delivered or made available to Buyer by the time required under Section 3.2.

1.1.11 “Due Diligence Period” shall mean the time period contemplated by Section 3.1 of this Agreement.

1.1.12 “Effective Date” shall mean the date on which Buyer and Seller executed and delivered the letter of intent, which was July 29, 2011.

1.1.13 “Environmental Laws” means all federal, state and local environmental laws, rules, statutes, directives, binding written interpretations, binding written policies, ordinances and regulations issued by any Governmental Entity regulating the generation, storage, transportation, discharge, disposal, release or removal of any hazardous substances and in effect as of the date of this Agreement with respect to or which otherwise pertain to or affect the Real Property or the Improvements, or any portion thereof, the use, ownership, occupancy of operation of the Real Property or the Improvements, or any portion thereof, or Buyer, and as same have been amended, modified or supplemented from time to time prior to the date of this Agreement, including but not limited to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C. § 9601 et seq.), the Hazardous Substances Transportation Act (49 U.S.C. § 1802 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. § 6901 et seq.), the Water Pollution Control Act (33 U.S.C. § 1251 et seq.), the Safe Drinking Water Act (42 U.S.C. § 300f et seq.), the Clean Air Act (42 U.S.C. § 7401 et seq.), the Solid Waste Disposal Act (42 U.S.C. § 6901 et seq.), the Toxic Substances Control Act (15 U.S.C. § 2601 et seq.), the Emergency Planning and Community Right-to-Know Act of 1986 (42 U.S.C. § 11001 et seq.), the Radon and Indoor Air Quality Research Act (42 U.S.C. § 7401 note, et seq.), the Superfund Amendment Reauthorization Act of 1986 (42 U.S.C. § 9601 et seq.), comparable state and local laws, and any and all rules and regulations which have become effective prior to the date of this Agreement under any and all of the aforementioned laws.

1.1.14 “Escrow Agent” shall mean Commonwealth Land Title Insurance Company.

1.1.17 “Hazardous Materials” means any pollutants, contaminants, hazardous or toxic substances, materials or wastes (including petroleum, petroleum by-products, radon, asbestos and asbestos containing materials, polychlorinated biphenyls (“PCBs”), PCB-containing equipment, radioactive elements, infectious, agents, and urea formaldehyde), as such terms are used in any Environmental Laws (excluding solvents, cleaning fluids and other lawful substances used in compliance with Environmental Laws in the ordinary operation and maintenance of the Real Property, to the extent in closed containers).

1.1.19 “LaSalle” shall mean LaSalle Investment Management, Inc.

1.1.24 “New Leases” or “New Lease” shall mean, collectively, or singularly, any leases, licenses and other occupancy agreements for the use, possession, or occupancy of any portions of space within the Improvements entered into between the Effective Date and the Closing Date in accordance with the terms of this Agreement.

1.1.25 “Marks” shall mean all of Seller’s intellectual property rights related to the ownership and operation of the Real Property, including the term “Kentlands Square”, any building names, street numbers, telephone numbers, e-mail addresses, marks or other symbols used to identify the Land or Improvements to the extent held and assignable by Seller or otherwise transferable with the Property.

1.1.26. “Operating Expenses” shall mean operating expenses and common area maintenance charges, including utilities, insurance and other charges, whether deemed additional rent or otherwise under the Leases, or any charges for taxes or other assessments.

1.1.27 ”Parties” shall mean Buyer and Seller, and their permitted assigns together and “Party” may mean either Buyer or Seller as the case may be.

Property after the date hereof and the owner of the Property has the election to pay such tax or assessment either immediately or under a payment plan with interest, Seller may elect to pay under a payment plan, which election shall be binding on Buyer), any exclusions from coverage set forth in the jacket of the Owner’s Policy of Title Insurance or any standard printed exceptions issued pursuant to the Title Commitment, any exceptions caused by Buyer, its agents, representatives or employees, the rights of the tenants under the Leases, and any matters deemed to constitute Permitted Exceptions under Section 4.1 hereof.

1.1.29 “Permitted Outside Parties” shall have the meaning ascribed in Section 3.5.

1.1.32 “Property Manager(s)” shall mean CB Richard Ellis, Inc. (“CBRE”), which manages the Property, or an entity retained by Seller to replace CBRE as the manager of the Property.

1.1.33 “Purchase Price” shall have the meaning ascribed in Section 2.2.

1.1.34 “Real Property” shall mean the Land, Improvements, and Fixtures.

1.1.35 “Rent Roll” shall mean the Rent Roll which is attached hereto as Exhibit “B-2”.

proceeds, temporary rents, telephone receipts, locker rentals, vending machine receipts and other sums and charges payable by tenants under the Leases or from other occupants or users of the Property, including amounts received for Operating Expenses.

1.1.37 “Survey” or “Surveys” shall mean, individually, or collectively, those certain ALTA surveys (if any) of the real property and improvements prepared by a professional registered land surveyor more particularly described on Exhibit “K” attached hereto and delivered to Buyer as part of the Due Diligence Items. “Buyer’s Survey” shall mean an ALTA/ACSM survey of the Property ordered by Buyer pursuant to Section 4.1.

1.1.39 “Title Policy” shall have the meaning ascribed in Section 4.2.

1.1.41 “Title Company” shall mean Commonwealth Land Title Insurance Company.

ARTICLE 2 - PURCHASE PRICE

Section 2.2 Purchase Price. Buyer shall pay Seller the purchase price of SEVENTY FOUR MILLION FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($74,500,000.00) (“Purchase Price”) at Closing. The Purchase Price and such other funds as may be necessary to pay Buyer’s expenses hereunder, less the Deposit, and subject to closing adjustments, shall be deposited with the Escrow Agent on or before the Closing Date and paid to Seller upon satisfaction or permitted waiver of all conditions precedent to the Closing as described herein.

Section 2.5 Assumption of Obligations. As additional consideration for the purchase and sale of the Property and subject to Section 9.6, at Closing Buyer will: (a) assume and perform all of the covenants and obligations of Seller pursuant to the Leases and those Contracts Buyer has elected to assume pursuant to Section 8.4 hereof, including without limitation, those relating to any tenant deposits delivered or credited to Buyer at Closing, and the physical or environmental condition of the Property, which arise on or after the Closing Date; and (b) assume and agree to discharge, perform and comply with each and every liability, duty, covenant, debt or obligation of Seller resulting from, arising out of, or in any way related to any licenses or permits and arising on or after the Closing Date. Buyer hereby indemnifies and holds Seller harmless from and against any and all claims, liens, damages, demands, causes of action, liabilities, lawsuits, judgments, losses, costs and expenses (including but not limited to reasonable attorneys’ fees and expenses) asserted against or incurred by Seller and arising out of the failure of Buyer to perform its obligations pursuant to this Section 2.5, provided that Seller hereby agrees to be responsible for any and all such claims, liens, damages, demands, causes of action, liabilities, lawsuits, judgments, losses, costs and expenses (including but not limited to reasonable attorneys’ fees and expenses) asserted against or incurred by Buyer and arising out of the failure of Seller to perform any of its obligations as landlord under the Leases or as vendee under the Contracts, or as licensee under the licenses and permits, prior to the Closing Date, which failure to perform has not been disclosed to Buyer in the tenant estoppel certificates (or Seller’s certificates in. lieu thereof) delivered to Buyer pursuant to Section 9.5, or otherwise disclosed to or discovered by Buyer prior to Closing. The provisions of this Section 2.5 shall survive the Closing for a period of one (1) year. Notwithstanding the foregoing to the contrary, it is expressly understood and agreed that Seller shall retain all its rights and claims against any former tenants of the Property (and the guarantors of the leases of such tenants) with respect to periods prior to Closing, which rights and claims shall include, but are not limited to, unpaid rent, unreimbursed costs and expenses, court costs, and attorneys’ fees and related costs, and

may continue and/or initiate litigation (including the filing and/or pursuit of already filed proofs of claim in bankruptcy proceedings.

ARTICLE 3 - BUYER’S DUE DILIGENCE/ CONDITION OF THE PROPERTY

Section 3.1 Buyer’s Inspections and Due Diligence. Buyer acknowledges that commencing on the Effective Date, and continuing until 5:00 p.m. Eastern Time on August 29, 2011 (the “Due Diligence Period”), Buyer has conducted, and shall continue to conduct, its examinations, inspections, testing, studies and investigations (herein collectively called the “Due Diligence”) of the Property, all information regarding the Property and such documents applicable to the Property, as Seller makes available, as set forth in Section 3.2 below. If any date on which the expiration of the Due Diligence Period would occur by operation of this Agreement is either a weekend day or a federal or state holiday, the expiration of the Due Diligence Period shall occur at 5:00 p.m. Eastern Time on the next business day, Except for any limitations as may be imposed by Section 3.3 below, Buyer may conduct such due diligence activities, inspections, and studies of the Property as it deems necessary or appropriate, and examine and investigate to its full satisfaction all facts, circumstances, and matters relating to the Property (including, without limitation, the physical condition and use, availability and adequacy of utilities, access, zoning, compliance with applicable laws, environmental conditions, engineering and structural matters), title, survey matters, and any other matters it deems necessary or appropriate for purposes of consummating this transaction. The Due Diligence shall be at Buyer’s sole cost and expense.

Section 3.2 Delivery Period. (a) Buyer expressly acknowledges and confirms that, within two (2) days following the Effective Date, Seller delivered to Buyer, or made available to Buyer via the internet, copies of any and all of the following items pertaining to the Property to the extent they exist and are in Seller’s or its agents’ possession or control: (i) annual operating statements in the form periodically maintained by Seller for the prior three (3) calendar years and for the current year to date; (ii) the Survey; (iii) real estate tax bills for the current year and the two (2) preceding years and any tax appeal product; (iv) the Contracts; (v) the Leases and Rent Roll (which shall include security deposits), tenant delinquency reports for the past two (2) years, sales reports provided by tenants for the past three (3) years, and most recent tenant billing letters relating to Operating Expenses, taxes and other reimbursables; (vi) copies of existing engineering studies, including environmental reports, prepared by third parties in connection with the Property; (vii) Seller’s existing policy of title insurance for the Property and copies of all Schedule B-2 exception documents; (viii) copies of any licenses, permits, and governmental approvals, and any written governmental conditions or requirements in Seller’s or its agent’s possession or control, with respect to the Property; (ix) as-built plans and specifications (in CAD form if available) and construction and equipment warranties for the Improvements; (x) proof of current property and liability insurance covering the Property and a list of all outstanding claims; and (xi) list of utility providers, including identification number for property and current contact information (collectively, the “Due Diligence Items”).

Items are expressly understood by Buyer to be subject to the confidentiality provisions of Section 3.5 below.

Section 3.3 Site Visits. Buyer and its Licensee Parties shall have reasonable access to the Real Property during normal business hours for the purposes set forth in Section 3.1 on at least one (1) business day’s prior written notice to Seller during the Due Diligence Period. Such notice shall describe the scope of the Due Diligence Buyer intends to conduct during Buyer’s access to the Real Property. Seller shall make reasonable efforts to have an agent available to accompany Buyer or any Licensee Parties, and in all events Seller shall have the right to have a representative present during any visits to or inspections of any Real Property by Buyer or any Licensee Parties. Buyer will conduct its Due Diligence in a manner which is not unreasonably disruptive to Tenants or the normal operation of the Real Property. Buyer will not enter the Real Property or contact any leasing agents or Property Manager of the Real Property without Seller’s prior consent, which consent shall not be unreasonably withheld or delayed. Buyer or any Licensee Parties may contact any Tenants at the Real Property or make any inquiries of such Tenants which relate to the Real Property or to Seller, provided that Buyer or any Licensee Parties obtain Seller’s prior consent. In the event Buyer desires to conduct any physically intrusive Due Diligence, such as sampling of soils, other media, building materials, or the like, Buyer will identify in writing exactly what procedures Buyer desires to perform and request Seller’s express written consent. Seller may withhold or condition consent to any physically intrusive Due Diligence in Seller’s sole and absolute discretion. Seller will promptly respond to any such request. Upon receipt of Seller’s written consent, Buyer and all Licensee Parties shall, in performing such Due Diligence, comply with the agreed upon procedures and with any and all laws, ordinances, rules, and regulations applicable to the Property and will not engage in any activities which would violate any permit, license, or environmental law or regulation. Buyer and any Licensee Parties will: (a) maintain comprehensive general liability (occurrence) insurance in terms and amounts reasonably satisfactory to Seller, but in no event less than such amounts required under that certain Site Access and Indemnification Agreement dated August 9, 2011, by and between Seller and Buyer (the “Confidentiality Agreement”) covering any accident resulting from the presence of Buyer or the other Licensee Parties on the Real Property or Improvements, and deliver a certificate of insurance, which names Seller, LaSalle and the Property Manager(s) as additional insureds thereunder verifying such coverage to Seller prior to entry upon the Real Property or Improvements; (b) promptly pay when due the costs of all entry and inspections and examinations done with regard to the Property; and (c) restore the Real Property and Improvements to the condition in which the same were found before any such entry upon the Real Property and inspection or examination was undertaken. Notwithstanding the foregoing, the terms of the Confidentiality Agreement shall control over the terms of this Section 3.3 to the extent of any inconsistency between them.

not limited to, costs of remediation, restoration and other similar activities, mechanic’s and materialmen’s liens and attorneys’ fees, arising out of or in connection with Buyer’s Due Diligence or Buyer’s or any Licensee Parties’ entry upon the Real Property, except to the extent any of the same are caused by the negligence or willful misconduct of Seller, Seller’s officers, employees, partners, shareholders or members, as applicable, LaSalle and/or the Property Manager(s). The provisions of this Section 3.4 shall survive the Closing or, if the purchase and sale is not consummated, any termination of this Agreement for a period of one year after such termination or Closing.

Section 3.5 Confidentiality. Buyer agrees that any information obtained by Buyer or its attorneys, partners, accountants, engineers, consultants, appraisers, lenders or investors (collectively, for purposes of this Section 3.5, the “Permitted Outside Parties”) in the conduct of its Due Diligence shall be treated as confidential pursuant to Section 11.11 of this Agreement and the terms of the Confidentiality Agreement. Buyer further agrees that within its organization, or as to the Permitted Outside Parties, the Due Diligence Items will be disclosed and exhibited only to those persons within Buyer’s organization or to those Permitted Outside Parties who are responsible for, or assisting in, determining the feasibility of Buyer’s acquisition of the Property. Buyer further acknowledges that the Due Diligence Items and other information relating to the leasing arrangements between Seller and any tenants or prospective tenants are proprietary and confidential in nature. Buyer agrees not to divulge the contents of such Due Diligence Items or any other information except in strict accordance with the Confidentiality Agreement and Sections 3.5 and 10.11 of this Agreement. In permitting Buyer and the Permitted Outside Parties to review the Due Diligence Items and other information to assist Buyer, Seller has not waived any privilege or claim of confidentiality with respect thereto, and no third party benefits or relationships of any kind, either express or implied, have been offered, intended or created by Seller and any such claims are expressly rejected by Seller and waived by Buyer and the Permitted Outside Parties, for whom, by its execution of this Agreement. Buyer is acting as an agent with regard to such waiver. The foregoing provisions of this Section 3.5 shall survive any termination of this Agreement. Notwithstanding the foregoing, the terms of Section 11.20 below, and of the Confidentiality Agreement, shall control over the terms of this Section 3.5 to the extent of any inconsistency between them.

ARTICLE 4 - TITLE AND SURVEY

Section 4.1 Certain Exceptions to Title . For a period commencing on the Effective Date and continuing until 5:00 p.m. (EDT) on August 19, 2011, Buyer shall have the right to object in writing to any title matters that are not Permitted Exceptions which are disclosed in the Title Commitment or the Survey (or in any survey or update to the Survey acquired by Buyer in the conduct of its Due Diligence) (herein collectively called “Title Matters”). Buyer shall promptly forward to Seller a copy of the Title Commitment and updated Survey (or the Buyer’s Survey obtained by Buyer, if any) within two (2) business days after receipt. Unless Buyer shall timely object to the Title Matters, all such Title Matters shall be deemed to constitute Permitted Exceptions. Any Title Matters which are timely objected to by Buyer shall be herein collectively called the “Title Objections.” Seller may elect (but shall not be obligated) to remove or cause to be removed at its expense, any Title Objections, and shall be entitled to a reasonable adjournment of the Closing (not to exceed thirty (30) days) for the purpose of such removal, which removal will be deemed effected by the re-issuance or amendment of the Title Commitment eliminating or, at Buyer’s sole discretion, insuring against the effect of such Title Objections. Seller shall notify Buyer in writing within ten (10) days after receipt of Buyer’s notice of Title Objections whether Seller elects to remove the same (“Seller’s Response”). If Seller is unable to remove or if the Title Company is unable or unwilling to endorse or, at Buyer’s sole discretion, insure over any Title Objections prior to the Closing, or if Seller’s Response indicates that Seller elects not to remove one or more Title Objections, Buyer may elect, by providing written notice to Seller within five (5) days after receipt of Seller’s Response either to (a) terminate this Agreement, in which event the Deposit shall be promptly paid to Buyer and, thereafter, the Parties shall have no further rights or obligations hereunder except for those obligations which expressly survive the termination of this Agreement, or (b) waive such Title Objections, in which event such Title Objections shall be deemed additional “Permitted Exceptions” and the Closing shall occur as herein provided without any reduction of or credit against the Purchase Price. Notwithstanding the foregoing, Seller shall be obligated at Closing to cause the release of the liens of any financing obtained by Seller which is secured by the Property and all other monetary liens and mechanics’ liens against the Property that were voluntarily created or permitted by Seller or by, through or under Seller. Except as expressly provided in this Section 4.1, Seller shall have no obligation to cure any matter affecting title to the Real Property which is objectionable to Buyer.

Section 4.2 Title Insurance . At Closing, the Title Company shall issue to Buyer a standard 2006 ALTA owner’s form title policy (the “Title Policy”), in the amount of the Purchase Price, insuring that fee simple title to the Real Property is vested in Buyer subject only to the Permitted Exceptions. Buyer shall be entitled to request that the Title Company provide such endorsements (or amendments) to the Title Policy as Buyer may reasonably require, provided that (a) such endorsements (or amendments) shall be at no cost to, and shall impose no additional liability on, Seller (except as to customary affidavits and agreements required to issue the Title Policy and reasonably approved by Seller), (b) Buyer’s obligations under this Agreement shall not otherwise be conditioned upon Buyer’s ability to obtain such endorsements and, if Buyer is unable to obtain such endorsements, Buyer shall nevertheless be obligated to proceed to close the transaction contemplated by this Agreement without reduction of or set off against the Purchase Price, and (c) the Closing shall not be delayed as a result of Buyer’s request.

ARTICLE 5 - DEPOSIT AND INSTRUCTIONS

(b) waive the breach or default and proceed to Closing in accordance with the provisions of this Agreement without adjustment of the Purchase Price; or

(c) pursue an action for specific performance only; it being expressly agreed that Buyer shall have no right to pursue an action for damages.


Initials:		Seller				Buyer

(e) The Escrow Agent shall invest the amount in escrow in accounts which are federally insured or which invest solely in government securities and shall be applied in accordance with the terms of this Agreement Interest, if any, earned thereon shall be added to the funds deposited by Buyer. Escrow Agent shall be entitled to rely upon the accuracy of the taxpayer identification number provided to Escrow Agent and used to establish the account in which the Escrow Funds are held. Escrow Agent shall have no liability in the event of failure, insolvency or inability of the depository to pay such funds.

Section 5.4 Designation of Reporting Person. In order to assure compliance with the requirements Of Section 6045 of the Internal Revenue Code of 1986, as amended (for purposes of this Section 5.4, the “Code”), and any related reporting requirements of the Code, the Parties hereto agree as follows:

(b) Seller and Buyer hereby agree:

(ii) to provide to the Reporting Person such Party’s taxpayer identification number and a statement (on Internal Revenue Service Form W-9 or an acceptable substitute

form, or on any other form the applicable current or future Code sections and regulations might require and/or any form requested by the Reporting Person), signed under penalties of perjury, stating that the taxpayer identification number supplied by such party to the Reporting Person is correct.

ARTICLE 6 - REPRESENTATIONS AND WARRANTIES OF SELLER

(a) Status . Seller is duly incorporated, validly existing and in good standing under the laws of the State of its organization and the State in which the Property is located;

(g) No Violations. Except as may be included in any Due Diligence Items, Seller has not received any written notification from any Governmental Entity, and Seller has no knowledge (i) that the Property is in violation of applicable fire, health, building, use, occupancy, zoning laws or subdivision laws, or (ii) that any work is required to be done upon or in connection with the Property where such work remains outstanding and, if unaddressed would have a material adverse affect on the use of the Property as currently owned and operated;

(h) Condemnation. Except as may be included in any Due Diligence Items, Seller has not received any written condemnation notice with respect to all or part of any Property, nor, to Seller’s knowledge, are there any threatened condemnation or similar proceedings with respect to all or part of the Property;

(i) Leases. There are no leases or occupancy agreements currently in effect which affect the Property other than the Leases, and no person is in possession of or has any possessory rights with respect to any portion of the Property except the Tenants under the Leases. True, correct and complete copies of all Leases have been delivered to Buyer as part of the Due Diligence Items. To Seller’s knowledge, all of the Leases are in full force and effect. No rentals or other amounts due under the Leases have been paid more than one month in advance (except for the security deposits, if any, listed on the Rent Roll). All security and other deposits of any type required under the Leases have been paid in full, are being held by or on behalf of Seller and are accurately shown on the Rent Roll. To Seller’s knowledge, there is no material default by Seller or any Tenant under any of the Leases and none of the Tenants under the Leases has asserted any defenses, set offs or claims that have not been resolved and/or disclosed to Buyer as part of the Due Diligence Items. Except as set forth on Exhibit M, attached hereto and made a part hereof, Seller has fulfilled all obligations to Tenants under the Leases to provide tenant improvements or tenant improvement allowances or other cash allowances, and except those obligations identified on Exhibit M for which Buyer is given a credit at Closing pursuant to Section 6.1(m) below, Buyer shall have no obligation with respect thereto after Closing. Except as set forth on the Rent Roll, to Seller’s knowledge, none of the Tenants has assigned its Lease or sublet all or any part of the premises covered by its Lease. To Seller’s knowledge, the information on tenant delinquencies in the Due Diligence Items is true, accurate and complete;

(l) No Other Options. Other than this Agreement, neither the Property nor any portion thereof subject to any outstanding agreement(s) of sale or options, rights of first refusal or other rights of purchase.

(m) Leasing Commission Agreements and Unfunded Tenant Improvement and Other Concession Obligations. Except as disclosed on Exhibit “M”

attached hereto and made a part hereof, (i) there are no current or future unsatisfied obligations on the part of Seller for agents’ and brokers’ commissions and fees incurred in connection with the Leases executed prior to the date hereof (including any such commissions or fees attributable to extension, renewal or expansion options under such Leases exercised after the date of Closing), (ii) there are no current or future unfunded tenant improvement or other concession obligations on the part of Seller as landlord under any Leases executed prior to the date hereof, and (iii) there are no current or future unsatisfied obligations on the part of Seller for landlord work, base building or shell construction, or improvements of any kind to any premises under the Leases executed prior to the date hereof. Seller shall pay all agents’ and brokers’ leasing commissions and fees and all current and future unfunded tenant improvement or other concession obligations disclosed on Exhibit “M” on or before the Closing Date or Seller shall provide Buyer with a credit in the amount of such unsatisfied obligations disclosed on Exhibit “M”, whereupon those obligations shall be assumed by and become the sole responsibility of Buyer upon Closing. There are no management, leasing, brokerage or other commission agreements entered into by Seller or by which Seller is bound currently in place in connection with the leasing of the Real Property except as have been or will be delivered to Buyer as part of the Due Diligence Items. All management, leasing, brokerage and other commission agreements affecting the Property will be terminated by Seller at Closing, at Seller’s sole expense.

(p) Operating Statements. The operating statements covering the Property made available to Buyer pursuant to that certain Letter of Intent, dated July 29, 2011 and executed by Buyer and Seller (“LOI”), are true, correct, and complete copies of the operating statements that Seller uses and has used in the ordinary course of the operation of the Property, without any modification thereto.

(q) Special Assessments. Seller has not received written notice of any assessments, special taxes or impact fees (and, to Seller’s knowledge, any threatened assessments) currently affecting the Property that are not of public record, except with respect to any assessments, if any, imposed from time to time pursuant to recorded covenants.

Section 6.2 Limited Liability. The representations and warranties of Seller set forth in Section 6.1, together with Seller’s liability for any breach before Closing of any of the Seller’s covenants and agreements under Article 8 and 9, shall survive the Closing for a period of one (1)

year (the “Contractual Survival Period”). Buyer shall not have any right to bring any action against Seller based on any untruth or inaccuracy of such representations and warranties, or a breach of any representation or warranty (each a “Breach”) unless (i) Buyer’s actual out-of-pocket loss from such Breach exceeds $100,000, (ii) Buyer gives Seller written notice of such claim within the Contractual Survival Period, describing with reasonable particularity in such notice each representation and warranty of Seller which Buyer claims to have been breached and the facts on which such claim is based, and (iii) Buyer commences action on such claim within six (6) months after the end of the Contractual Survival Period; and, provided further, that in no event shall Seller’s aggregate liability to Buyer for all Breaches exceed One Million and 00/100 Dollars ($1,000,000). Further, Seller shall have no liability with respect to any of Seller’s representations, warranties and covenants herein if, prior to the Closing, Buyer has actual knowledge of any breach of a covenant of Seller herein, or Buyer obtains actual knowledge (from whatever source as a result of Buyer’s Due Diligence or written disclosure by Seller or Seller’s agents to Buyer on or after the date hereof) that contradicts any of Seller’s representations and warranties herein, and Buyer nevertheless consummates the transaction contemplated by this Agreement. Notwithstanding anything to the contrary in this Section 6.2, the obligations of Seller and Buyer, as applicable, under Sections 3.4 and 9.7 will survive Closing without limitation unless a specified period is otherwise expressly provided in any of such Sections. All other representations, warranties, covenants and agreements made or undertaken by Seller under this Agreement, unless otherwise specifically provided herein, will not survive the Closing Date but will be merged into the Deed and other Closing documents delivered at the Closing.

Section 6.4 Liability of Representations and Warranties. Buyer acknowledges that the individual named above is named solely for the purpose of defining and narrowing the scope of Seller’s knowledge and not for the purpose of imposing any liability on or creating any duties running from such individual or LaSalle to Buyer, Buyer covenants that it will bring no action of any kind against such individual, any shareholder, partner or member of Seller, as applicable, or LaSalle related to or arising out of these representations and warranties. The individual named is personnel of LaSalle who currently has responsibility for asset management of Seller’s interest in the Real Property.

ARTICLE 7 - REPRESENTATIONS AND WARRANTIES OF BUYER

Section 7.1 Buyer’s Representations and Warranties. Buyer represents and warrants to Seller the following:

Section 7.2 Intentionally deleted.

Section 7.3 Buyer’s Independent Investigation.

(a) All matters relating to title, together with all governmental and other legal requirements such as taxes, assessments, zoning, use permit requirements, and building codes;

(d) The Leases and all matters in connection therewith, including, without limitation, the ability of the tenants to pay rent;

(e) The Contracts and any other documents or agreements of significance affecting the Property; and

(f) All other matters of material significance affecting the Property or delivered to Buyer by Seller in accordance with Article 3 of this Agreement.

PROPERTY, (f) THE FINANCIAL CONDITION OR PROSPECTS OF THE PROPERTY AND (g) THE COMPLIANCE OR LACK THEREOF OF THE REAL PROPERTY OR THE IMPROVEMENTS WITH GOVERNMENTAL REGULATIONS, IT BEING THE EXPRESS INTENTION OF SELLER AND BUYER THAT, EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, THE PROPERTY WILL BE CONVEYED AND TRANSFERRED TO BUYER IN ITS PRESENT CONDITION AND STATE OF REPAIR, “AS IS” AND “WHERE IS”, WITH ALL FAULTS. Buyer represents that it is a knowledgeable, experienced and sophisticated buyer of real estate, and that, except with respect to the warranties expressly set forth herein, it is relying solely on its own expertise and that of Buyer’s consultants in purchasing the Property. Buyer acknowledges and agrees that it will have the opportunity to conduct such inspections, investigations and other independent examinations of the Property and related matters as Buyer may deem necessary, including but not limited to the physical and environmental conditions thereof, during the Due Diligence Period and will rely upon same and not upon any statements of Seller or of any officer, director, employee, agent or attorney of Seller other than the matters represented in Sections 6.1 and 9.7 hereof or in the Closing Documents. Buyer acknowledges that all information obtained by Buyer will be obtained from a variety of sources and Seller will not be deemed to have represented or warranted the completeness, truth or accuracy of any of the Due Diligence Items or other such information heretofore or hereafter furnished to Buyer, except as may be expressly provided in Section 6.1 hereof. Upon Closing, Buyer will assume the risk, as to matters other than the representations of Seller in Section 6.1 hereof that adverse matters, including, but not limited to, adverse physical and environmental conditions, may not have been revealed by Buyer’s inspections and investigations. Buyer acknowledges and agrees that upon Closing, Seller will sell and convey to Buyer, and Buyer will accept the Property, “AS IS, WHERE IS,” with all faults, except as may be expressly provided in Section 6.1 hereof. Buyer further acknowledges and agrees that there are no oral agreements, warranties or representations, collateral to or affecting the Property, by Seller, any agent of Seller or any third party. Seller is not liable or bound in any manner by any oral or written statements, representations or information pertaining to the Property furnished by any real estate broker, agent, employee, servant or other person, unless the same are specifically set forth or referred to herein. Buyer acknowledges that the Purchase Price reflects the “as is, where is” nature of this sale and any faults, liabilities, defects or other adverse matters that may be associated with the Property. BUYER, WITH BUYER’S COUNSEL, HAS FULLY REVIEWED THE DISCLAIMERS AND WAIVERS SET FORTH IN THIS AGREEMENT, AND UNDERSTANDS THE SIGNIFICANCE AND EFFECT THEREOF. BUYER ACKNOWLEDGES AND AGREES THAT THE DISCLAIMERS AND OTHER AGREEMENTS SET FORTH HEREIN ARE AN INTEGRAL PART OF THIS AGREEMENT, AND THAT SELLER WOULD NOT HAVE AGREED TO SELL THE PROPERTY TO BUYER FOR THE PURCHASE PRICE WITHOUT THE DISCLAIMERS AND OTHER AGREEMENTS SET FORTH IN THIS AGREEMENT. THE TERMS AND CONDITIONS OF THIS SUBSECTION 7.3.2 WILL EXPRESSLY SURVIVE THE CLOSING, WILL NOT MERGE WITH THE PROVISIONS OF ANY CLOSING DOCUMENTS AND WILL BE INCORPORATED INTO THE DEED.

Section 7.4 Buyer’s Release of Seller.

7.4.2 Buyer’s Waiver of Objections. Buyer acknowledges that, so long as Seller complies with its obligations under this Agreement, Buyer will have the opportunity during the Due Diligence Period to inspect the Property, observe its physical characteristics and existing conditions and (subject to the provisions of Section 3.3 above) will have the opportunity to conduct such investigation and study on and of said Property and adjacent areas as it deems necessary, and subject to Seller’s responsibility for any breach of the warranties and representations contained in Section 6.1 of this Agreement, hereby waives, absent a showing of actual fraud, any and all objections to or complaints (including but not limited to actions based on federal, state or common law and any private right of action under CERCLA, RCRA or any other state and federal law to which the Property is or may be subject) regarding physical characteristics and existing conditions of the Property, including without limitation structural and geologic conditions, subsurface soil and water conditions and solid and hazardous waste and Hazardous Materials on, under, adjacent to or otherwise affecting the Property. Buyer further hereby assumes the risk of changes in applicable Laws relating to past, present and future environmental conditions on the Property, and the risk that adverse physical characteristics and conditions, including without limitation the presence of Hazardous Materials or other contaminants, may not be revealed by its investigation.

Buyer’s sole recourse in the event of a breach by Seller shall be as set forth in Section 5.1 hereof, and (b) Seller shall, upon consummation of Closing, be deemed to have satisfied and fulfilled all of Seller’s covenants and obligations contained in this Agreement, and Seller shall have no further liability to Buyer or otherwise with respect to this Agreement, or the transfers contemplated hereby, except to the extent of any obligation or liability Seller may have under Section 6.1, Sections 8.1 - 8.6 or Section 9.7 as to which Seller’s liability, if any, shall be limited as provided in Section 6.2.

ARTICLE 8 - LEASES; MAINTENANCE OF PROPERTY

From the date hereof until the Closing, and except as otherwise consented to or approved by Buyer, Seller covenants and agrees with Buyer as follows:

Section 8.1 New Leases; Lease Modifications. From and after the Effective Date, Seller shall not, without Buyer’s prior written consent in each instance, which consent shall, prior to the expiration of the Due Diligence Period; not be unreasonably withheld and shall be given or denied in good faith, with the reasons for such denial specified in reasonable detail, within five (5) business days after receipt by Buyer of the information referred to in the next sentence, enter into any New Lease; modify or amend any Lease (except pursuant to the exercise by a Tenant of a renewal, extension or expansion option or other right contained in such Tenant’s Lease); consent to any assignment or sublease in connection with any Lease; or remove any tenant under any Lease, whether by summary proceedings or otherwise, Seller shall furnish Buyer with a written notice of the proposed action which shall contain information regarding the proposed action that Seller believes in good faith is reasonably necessary to enable Buyer to make informed decisions with respect to the advisability of the proposed action. If Buyer fails to object in writing to any such proposed action within five (5) business days after receipt of all of the aforementioned information, Buyer shall be deemed to have approved the proposed action. Notwithstanding the foregoing, prior to the end of the Due Diligence Period, Buyer’s consent shall not be required with respect to construction plans to be approved by Seller under any Lease, provided that Seller shall provide copies of any such plans to Buyer within three (3) business days after receipt thereof. If any Lease requires that the landlord’s consent be given under the applicable circumstances (or not be unreasonably withheld) then, if such circumstances exist, Buyer shall be deemed ipso facto to have approved such action. Any notice from Buyer rejecting the proposed action shall include a description of the reasons for Buyer’s rejection. If Buyer rejects the proposed action, Seller nevertheless retains full right, power and authority to execute such documents as are necessary to effect such action, and Seller shall promptly advise Buyer of the same. The foregoing notwithstanding, in the event Buyer has rejected the proposed action but Seller nonetheless proceeds to effect it, Buyer, shall have the right, within five (5) business days after receipt of Seller’s notice that Seller has taken such action, to elect to terminate this Agreement by the delivery to Seller of a written notice of termination, in which case the Deposit shall be paid to Buyer and, thereafter, the parties shall have no further rights or obligations hereunder other than any arising under any section herein which expressly provides that it shall survive the termination of this Agreement. If Buyer fails to notify Seller within such time period, Buyer shall be deemed to have fully waived any rights to terminate this Agreement pursuant to this Section 8.1. Seller shall, deliver to Buyer a true and complete copy of each such New Lease, renewal or extension agreement, modification, or amendment, as the case may be, within two (2) business days after the execution and delivery thereof, but in no event later than two (2) business days prior to Closing.

Section 8.3 Seller’s Operation of the Property. From and after the Effective Date, Seller shall operate and maintain the Property in a manner generally consistent with the manner in which Seller has operated and maintained the Property prior to the Effective Date and shall maintain the Required Insurance in full force and effect until Closing. Provided Buyer has not delivered a Notice to Terminate, following the expiration of the Due Diligence Period, Seller shall not enter into any new Contract or agreement, or materially modify any Contract, which Contract or amendment could bind Buyer or the Property after the Closing without Buyer’s review and consent in the same manner as provided with respect to New Leases in Section 8.1.

Section 8.4 Termination of Contracts. Within two (2) business days prior to the expiration of the Due Diligence Period, Buyer will advise Seller in writing which Contracts Buyer will assume at Closing (the “Assumed Contracts”) and which Contracts Buyer requires to be terminated at Closing (and Buyer’s failure to so advise Seller in writing shall be deemed to constitute Buyer’s election to assume all such Contracts). Seller shall deliver at Closing notices of termination of all Contracts that are not so assumed. Notwithstanding the foregoing, without any requirement of notice from Buyer, Seller shall cause any then-effective property management agreement (including any agreement with the Property Manager) and any agreements with any Seller-affiliated entity, relating to the Property to be terminated, with no liability or obligation of any kind to buyer, effective as of the Closing Date. Prior to the Closing Date, Seller shall cause the Property Manager to cooperate with Buyer in preparing for the turnover of management of the Property to Buyer.

Section 8.5 Tenant Audit Rights. If any Tenant exercises, before or after Closing, its right under any Lease (or under applicable law with respect to such Lease) to audit the books and records of Seller as landlord for any period of time ending on or prior to the Closing Date, Seller shall, at Seller’s expense, cooperate in the implementation of such audit in accordance with any such audit provision under the Lease with respect to such period. Seller’s obligations under this Section 8.5 shall survive Closing for as long as the Tenants may exercise such rights pursuant to the terms of the Leases.

Section 8.6 Negative Covenants. From the Effective Date until the Closing Date, Seller shall not take any of the following actions without the prior express written consent of Buyer, which consent shall be within Buyer’s sole discretion: (a) make or permit to be made any material alterations to or upon the Real Property or any part of the Real Property except as

provided for in the Leases or any of the other Permitted Exceptions; (b) grant any liens or encumbrances upon the Property that will not be terminated and discharged by Seller upon the Closing; (c) remove or permit the removal from the Real Property of any fixtures, mechanical equipment, or any other item included in the Real Property except as provided for in the Leases or any of the Permitted Exceptions; (d) take or cause, or knowingly permit, any action, inaction or circumstance that would cause any representation or warranty of Seller herein to become untrue in any material respect.

Section 8.7 Newly Executed Leases: Holdback and Escrow covering Rents. The parties acknowledge that the Leases include those Leases that are identified on Exhibit N hereto, which are newly executed Leases under which the Tenants are not yet in occupancy and/or paying rent (the “Newly Executed Leases”). Because Buyer’s bid to purchase the Property assumed that rent would be payable under all such Leases as of the Closing Date, the parties agree that a portion of the proceeds of sale hereunder, in an amount equal to the aggregate annual base rent and additional rent (“Aggregate Rent”) payable under the Newly Executed Leases (the “Escrow Amount”), as shown on Exhibit N, shall be deposited with Escrow Agent at Closing, to be held and released pursuant to the terms of an Escrow Agreement, the form and substance of which is to be negotiated in good faith and agreed upon by the parties prior to the expiration of the Due Diligence Period (the “Escrow Agreement”). The Escrow Agreement will provide for monthly releases to Buyer with respect to each Newly Executed Lease in an amount equal to 1/12 of the Aggregate Rent payable under such Lease, commencing on the closing Date (prorated for the partial month in which Closing occurs) and continuing on the first day of each calendar month thereafter until the Tenant thereunder has commenced occupancy of its premises and has commenced payment of rent in accordance with the terms of its Lease, whereupon any remaining Escrow Amount allocable to such Newly Executed Lease shall be released to Seller.

ARTICLE 9 – CLOSING AND CONDITIONS

the Purchase Price (subject to adjustments described in Section 9.6), together with all other costs and amounts to be paid by Buyer at the Closing pursuant to the terms of this Agreement, by Federal Reserve wire transfer of immediately available funds to an account to be designated by the Escrow Agent. No later than 1:00 p.m. Eastern Time on the Closing Date, (a) Buyer will direct the Escrow Agent to (i) pay to Seller by Federal Reserve wire transfer of immediately available funds to an account designated by Seller, the Purchase Price (subject to adjustments described in Section 9.6), less any costs or other amounts to be paid by Seller at Closing pursuant to the terms of this Agreement, all pursuant to the final Settlement Statement, and (ii) pay all appropriate payees the other costs and amounts to be paid by Buyer at Closing pursuant to the terms of this Agreement and (b) Seller will direct the Escrow Agent to pay to the appropriate payees out of the proceeds of Closing payable to Seller, all costs and amounts to be paid by Seller at Closing pursuant to the terms of this Agreement and the Settlement Statement, and to file the Articles of Transfer and record the Deed. It shall constitute a condition precedent to Seller’s obligations to consummate the Closing hereunder that all of the representations, warranties, covenants, and agreements of Buyer contained herein shall be true and correct and/or shall have been performed, as the case may be, in all material respects. It shall constitute a condition precedent to Buyer’s obligations to consummate the Closing hereunder that all of the material representations, warranties, covenants, and agreements of Seller contained herein shall be true and correct and/or shall have been performed, as the case may be, in all material respects. Additionally, it shall be a condition precedent for each of Buyer’s and Seller’s obligation to consummate the Closing that the Companion Contracts close simultaneously with this Agreement. Buyer’s obligation to consummate the Closing hereunder shall also be subject to the following conditions precedent, any of which may be waived by Buyer in its sole, absolute and unreviewable discretion:

(a) There has been no material adverse change to the condition of the Property since the expiration of the Due Diligence Period.

Section 9.3 Seller’s Closing Documents and Other Items. At or before Closing, Seller shall deposit into escrow the following items:

(b) A duly executed counterpart of the Bill of Sale in the form attached hereto as Exhibit “G” (the “Bill of Sale”);

(c) Three (3) duly executed counterparts of an Assignment and Assumption of Leases in the form attached hereto as Exhibit “H” (the “Assignment and Assumption of Leases”);

(e) An affidavit pursuant to Section 1445(b)(2) of the Code, and on which Buyer is entitled to rely, that Seller is not a “foreign person” within the meaning of Section 1445(f)(3) of the Code;

(h) Such other documents as may be reasonably required by the Title Company or as may be agreed upon by Seller and Buyer to consummate the purchase of the Property as contemplated by this Agreement;

(i) If applicable, duly completed and signed real estate transfer tax returns;

(l) An executed version of each tenant estoppel certificate required pursuant to Section 9.5 or substituted Seller certifications permitted under Section 9.5.2 and a Rent Roll certified not later than two (2) business days prior to Closing;

(m) Copies of all usual and customary documentation requested by the Title Company to establish the due authority of Seller to consummate the transaction contemplated by this Agreement;

proceeds thereof in customary form, and if the letter of credit is assignable, execute and deliver such other instruments as the issuers of such letters of credit shall reasonably require to effect such assignment, and (c) cooperate with Buyer to change the named beneficiary under such letters of credit to Buyer, so long as Seller does not incur any additional liability or expense in connection therewith;

(o) To the extent the same are in Seller’s or its property manager’s possession or available (and not already forwarded to Buyer during the Due Diligence Period), originals (or if originals are not available, copies certified by Seller) of all Leases, Contracts, records, original tenant files, other materials identified in Exhibits hereto, and all other books, records and files maintained by Seller’s property manager relating to the construction, leasing, operation and maintenance of the Property;