Franklin Street Properties
Annual Report 2014

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FRANKLIN STREET PROPERTIES ANNUAL REPORT 2014 FRANKLIN STREET PROPERTIES CORP. Franklin Street Properties Corp. (the “Company”, “FSP”, “we” or “our”) (NYSE MKT: FSP) is a real estate investment trust that owns and operates a portfolio of high-quality office buildings in select major markets in the U.S. We are focused on long- term value creation, as well as achieving current income, by making property investments in select urban infill and central business district (CBD) locations where we possess extensive first-hand knowledge and experience. Additionally, we seek to invest in markets that exhibit what FSP believes are long-term, domestic and global macroeconomic drivers that have the potential to result in above-average employment growth within those markets. Cities attracting attention from FSP must also demonstrate a track record of committed investment into infill and CBD infrastructure and a diversified local economy. Primary emphasis has been placed on our top five core markets of Atlanta, Dallas, Denver, Houston and Minneapolis. As of December 31, 2014, FSP owned 38 office properties in 13 states, consisting of approximately 9.6 million rentable square feet. Approximately 70% of FSP’s owned portfolio (in square feet) is within these top five core markets. FSP’s portfolio was approximately 92.8% leased as of December 31, 2014. The principal revenue sources from our real estate operations include rental income from tenants who lease our office space, new property development or redevelopment of select locations already owned by us, interest income from secured first mortgage loans made on some of our sponsored office properties and fee income from asset/property management services. In order to create value for stockholders, the Company primarily seeks to grow revenue through higher occupancies and rental rate levels in its directly-owned portfolio, acquire additional high-quality assets below replacement cost with attractive future leasing opportunities and engage in select new development of properties. The Company also continuously reviews and evaluates its real estate property portfolio for potentially advantageous dispositions that may realize investment returns through gains on sale. Based in Wakefield, Massachusetts, FSP is a Maryland corporation. The Company was originally founded in 1997 and has been publicly-traded since mid-2005. To learn more about FSP please visit our website at: www.franklinstreetproperties.com This Annual Report contains “forward-looking statements” within the meaning of federal securities laws. For more information, please refer to the discussion in the first paragraph of Item 7 in the attached Annual Report on Form 10-K for the year ended December 31, 2014. Fellow Stockholders I am pleased to report that our Company’s total revenues rose by $36 million or 16.9% to $249.7 million in 2014. Profits as measured by funds from operations, or FFO1, increased by approximately $11.6 million or 11.5% from 2013, and on a per share basis, FFO grew 4.7% from $1.07 per share in 2013 to $1.12 per share in 2014. Our total growth in FFO per fully-diluted share for the four-year period of 2011 to 2014 has totaled approximately 33.3%, reflecting the overall growth in the size and number of properties in our portfolio, as well as the strong operating results we have been able to achieve. Along with our $0.76 per share dividend, we continue to believe this combination of growth and income is meaningful and attractive to investors. During 2014, the broader U.S. economy continued to make choppy but positive strides toward higher GDP growth and lower unemployment. As a consequence, national office property statistics also continued to show overall improvement in rental rate and occupancy metrics. Our directly-owned portfolio of 38 office properties, totaling approximately 9.6 million square feet, finished 2014 posting 2.2% “same-store” full-year growth and a 92.8% overall leased rate as of December 31, 2014. We believe the most likely outlook for the U.S. economy is one of steady modest growth for the foreseeable future with continued low interest rates prevailing during 2015. The broader U.S. economy in 2015 could be meaningfully affected by economic risks in other large countries, relative global currency values and important geopolitical events. Uncertainty to any U.S. economic forecast is heightened by these interconnected global forces. During 2014, we focused on integrating the large amount of new property acquisitions we made in 2013; but as we look ahead, we believe that in 2015 and 2016 we will resume our asset growth through additional property acquisitions as well as through new property development. Capital for this growth plan will come from property operations, including rental cash flow and targeted non-core property dispositions. Broader capital market availabilities also present the potential for growth capital. These opportunities for resumed growth in our property portfolio over the next two years are primarily presenting themselves within our five core geographic markets of Atlanta, Dallas, Denver, Houston and Minneapolis. However, limited 1 FFO is a non-GAAP financial measure currently used in the real estate industry that we believe provides useful information to investors. Please refer to page A-1 of this Annual Report for a definition of FFO and a reconciliation of net income to FFO. 1 special situations surrounding the redevelopment potential of other properties we currently own are also presenting themselves and may be pursued as well. Also, the recent drop in oil/energy prices may, if maintained at current levels for an extended period of time, provide better pricing for additional property acquisition opportunities within energy-driven markets. Regardless of some of these near-term risks, FSP has a very positive long-term view of the global energy business as a macro driver of jobs and growth in key U.S. office markets. In closing, the team at FSP remains focused on creating value and growth for all our stockholders from efforts within our existing portfolio of office properties, as well as through the acquisition and development of new real estate assets. As 2015 begins, I am confident that our Company is well positioned to provide stockholders with future share price growth and meaningful current dividend income. Thank you for your continued trust, confidence and support. George J. Carter Chairman & Chief Executive Officer 2 Atlanta | Dallas | Denver | Houston | Minneapolis Approximately 70% (in square feet) of FSP’s owned portfolio is within our top five core markets. FSP owns and/or manages approximately 12.9 million square feet of office space located in 15 different states (as of December 31, 2014). Development of Assets FSP has engaged in two successful ground-up developments over the past ten years, and anticipates that select development will continue as a featured component of our real estate investment activities. Of chief importance to FSP in any potential future development will be a long-standing familiarity/expertise in the particular location being considered. Therefore, potential development would most likely occur in one of our five core markets and within locations in those markets that we have owned and observed the dynamics for future growth first-hand. For example, in 2014 FSP announced its intention to develop the location of its four-story building located at 801 Marquette Avenue South in the CBD of Minneapolis. The approximately 170,000 square foot brick building, originally constructed in 1923 and currently 100% leased to TCF Bank through December 31, 2015, is located on the corner of Marquette Avenue Before after 121 South 8th Street, Minneapolis, MN 3 Minneapolis possesses a broadly diversified economy and benefits greatly from its strategic central Midwest position within the ever-growing global demand chain of food production, processing and transportation. Minneapolis is also strong in retail, industrial and medical and financial services. and 8th Street. FSP has owned this property and the adjoining 17-story 305,000 square foot tower located at 121 South 8th Street since July of 2010. FSP believes that the 801 Marquette Avenue South location is one of downtown Minneapolis’ best remaining development sites. Both properties were originally purchased by FSP with the specific intention: 1. To improve, update and continue to operate the approximately 305,000 square foot existing 17-story multi-tenant office tower for a long-term hold. Actions Taken: FSP’s updates to this property have been substantially completed and have included a complete elevator modernization, a brand new skyway level lobby and elevator lobby, a brand new conference center, parking ramp updates, and an ongoing restroom upgrade program. The results have been well received by our tenants and the marketplace. 2. To rebuild and/or completely redevelop the low-rise building upon the end of the TCF Bank lease into a more efficient office property that could command higher rents per square foot than the existing four-story structure. Actions Taken: FSP has assembled a seasoned development team that includes Perkins & Will as architects, CB Richard Ellis as leasing agents, and Ryan Properties as builders. Currently, FSP is very active in development planning and feasibility work. Construction of a new Minneapolis CBD project could not begin until early 2016 and only then if market conditions are favorable and substantial pre-leasing of the project has been completed. Importantly, FSP is already working on space planning with potential office tenants, hotel users and residential firms, analyzing prospective designs that range from a new approximately 170,000 square foot office building up to an approximately 600,000 square foot mixed-use tower that would include office, hotel and/or residential. We believe that a final plan will be publicly announced during the course of 2015. 4 Denver’s Mountain West location offers a diversified economy that shows continued strength in transportation, technology, energy and natural resources. Denver has a highly-educated workforce and has maintained strong population growth. FSP Financial Highlights Total Revenue as of December 31 (in thousands) $138,041 $161,580 $249,683 $213,636 Total Market Capitalization (TMC)* as of December 31 (in thousands) $2,123,739 $2,117,299 $1,637,709 $1,274,227 2011 2012 2013 2014 2011 2012 2013 2014 Funds from Operations (FFO)** as of December 31 (per share) Dividends Paid as of December 31 (per share) $1.07 $1.12 $0.76 $0.76 $0.76 $0.76 $0.97 $0.89 2011 2012 2013 2014 2011 2012 2013 2014 * ** The Company calculates Total Market Capitalization as the sum of the closing share price for the date of the calculation multiplied by the number of shares outstanding on the date of the calculation, plus the sum of debt outstanding on the date of the calculation. Includes Non-GAAP Financial Measures which are defined and reconciled to net income and can be found on Page A-1, which is the last page of this Annual Report. 5 5 Houston possesses a diversified economy that is the global leader in energy. Houston is well-positioned with its significant deep water port, Gulf Coast Sunbelt location, strong international trade/export business and healthcare industries. Houston has a highly-educated workforce and has maintained strong population growth. FSP Financial Highlights Balance Sheet Data – Year Ended December 31 (In thousands, except per share amounts) 2011 2012 2013 2014 Total assets $ 1,407,348 $ 1,526,068 $ 2,044,034 $ 1,936,390 Total liabilities 485,981 661,319 993,868 956,743 Total shareholders’ equity 921,367 864,749 1,050,166 979,647 Shares outstanding at year-end 82,937 82,937 100,187 100,187 Shareholders’ equity per share $ 11.11 $ 10.42 $ 10.48 $ 9.78 Dividends paid for the year ended December 31 $ 62,177 $ 63,032 $ 69,588 $ 76,142 6 Atlanta is regarded as the economic capital of the Southeastern United States with housing as one of its strong macroeconomic drivers. Atlanta’s Sunbelt location has attracted strong population and employment growth. Atlanta possesses a highly-diversified economy and educated workforce. Pathway To Value Through Sustainability During 2014, FSP continued to place a high priority on sustainability initiatives to support our objectives of reducing our environmental footprint and maximizing investor returns. Central to these efforts is the ongoing measurement, benchmarking and analysis of the energy, water and waste consumption of our buildings as well as the continuing review and refinement of FSP’s environmental goals, policies, and procedures. In the past year, FSP participated for the first time in the Global Real Estate Sustainability Benchmark (GRESB) survey. This benchmark assesses the sustainability of real estate portfolios around the world, taking into account data-driven performance indicators as well as broader environmental, social and governance issues. FSP is pleased to participate with a global group of sustainability-focused peers and is actively utilizing the survey insights to further enhance our environmental programs. Energy efficiency continues to be an area of focus for FSP, with our properties being active participants in the EPA’s ENERGY STAR program. As of year-end 2014, approximately 60% of our square footage, either directly owned or asset-managed by FSP, had earned the ENERGY STAR label, denoting that its energy performance is among the top 25% of similar properties. FSP earned special recognition from the EPA in 2014 as a premier member of Certification Nation, further demonstrating FSP’s commitment to the ENERGY STAR program. 7 Dallas’ Central and Sunbelt location is a significant gateway hub for NAFTA commerce between Canada, the United States and Mexico. It possesses a diversified economy that is strong in professional services, transportation, technology and energy. Dallas is also home to many corporate headquarters. During the year, FSP expanded and added to our energy efficiency programs. Successful programs, such as the active third-party monitoring of near real-time energy data, have been expanded. FSP also continued our participation in local demand response programs, whereby participating properties implemented short-term energy reduction measures during grid emergencies, helping the environment and also earning regular quarterly payments. Additionally, FSP began to test the effectiveness of a peak demand predictive tool, which aims to provide insight into the demand charges on our utility bills and to predict when new peak demand charges may be established. FSP proactively investigates new energy efficiency tools as they come to the market to determine their usefulness in minimizing our consumption and costs. An additional tool that FSP uses to measure and track our overall sustainability efforts is the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED®) rating system. Approximately half of the square footage either directly owned or asset-managed by FSP has been awarded LEED certification under one of the various LEED rating systems, recognizing these buildings’ environmental performance in areas such as energy, water and waste management and indoor environmental quality. Furthermore, FSP properties are among the first to utilize the new LEED Dynamic Plaque™ for LEED recertifications, with the aim of regular building benchmarking information and enhanced occupant sustainability engagement. FSP believes that our ongoing progress in the area of sustainability creates a healthier environment for our tenants and our properties’ communities. Simultaneously, through lower operating costs and increased property desirability, FSP is also enhancing investor return. 8 Following is the Annual Report on Form 10-K for the fiscal year ended December 31, 2014 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 001-32470 FRANKLIN STREET PROPERTIES CORP. (Exact name of registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 401 Edgewater Place, Suite 200, Wakefield, Massachusetts (Address of principal executive offices) 04-3578653 (I.R.S. Employer Identification No.) 01880 (Zip Code) Registrant’s telephone number, including area code: (781) 557-1300 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Common Stock, $.0001 par value per share Name of each exchange on which registered: NYSE MKT Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X No __. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes __ No X. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 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 requirements for the past 90 days. Yes X No __. Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes __ No X. The aggregate market value of the voting and non-voting common equity held by non-affiliates based on the closing sale price as reported on NYSE MKT, as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2014, was approximately $1,133,357,746. There were 100,187,405 shares of common stock of the registrant outstanding as of February 10, 2015. Documents incorporated by reference: The registrant intends to file a definitive proxy statement pursuant to Regulation 14A, promulgated under the Securities Exchange Act of 1934, as amended, to be used in connection with the registrant’s Annual Meeting of Stockholders to be held on May 14, 2015 (the “Proxy Statement”). The information required in response to Items 10 – 14 of Part III of this Form 10-K, other than that contained in Part I under the caption, “Directors and Executive Officers of FSP Corp.,” is hereby incorporated by reference to the Proxy Statement. TABLE OF CONTENTS PART I .......................................................................................................................................................................... 1 Item 1. Business. .................................................................................................................................................... 1 Item 1A. Risk Factors. .............................................................................................................................................. 7 Item 1B. Unresolved Staff Comments. ................................................................................................................... 14 Item 2. Properties. ................................................................................................................................................ 15 Item 3. Legal Proceedings .................................................................................................................................... 20 Item 4. Mine Safety Disclosures .......................................................................................................................... 20 PART II ...................................................................................................................................................................... 21 Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .................................................................................................................................. 21 Stock Performance Graph. ....................................................................................................................... 22 Item 6. Selected Financial Data. .......................................................................................................................... 23 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations................... 24 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. ................................................................ 45 Item 8. Financial Statements and Supplementary Data ........................................................................................ 47 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ................. 47 Item 9A. Controls and Procedures. ......................................................................................................................... 47 Item 9B. Other Information .................................................................................................................................... 48 PART III..................................................................................................................................................................... 49 Item 10. Directors, Executive Officers and Corporate Governance ....................................................................... 49 Item 11. Executive Compensation ......................................................................................................................... 49 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 49 Item 13. Certain Relationships and Related Transactions, and Director Independence ......................................... 49 Item 14. Principal Accounting Fees and Services .................................................................................................. 49 PART IV ..................................................................................................................................................................... 50 Item 15. Exhibits, Financial Statement Schedules ................................................................................................. 50 SIGNATURES ............................................................................................................................................................ 51 PART I Item 1. Business History Our company, Franklin Street Properties Corp., which we refer to as FSP Corp., the Company, we or our, is a Maryland corporation that operates in a manner intended to qualify as a real estate investment trust, or REIT, for federal income tax purposes. Our common stock is traded on the NYSE MKT under the symbol “FSP”. FSP Corp. is the successor to Franklin Street Partners Limited Partnership, or the FSP Partnership, which was originally formed as a Massachusetts general partnership in January 1997 as the successor to a Massachusetts general partnership that was formed in 1981. On January 1, 2002, the FSP Partnership converted into FSP Corp., which we refer to as the conversion. As a result of this conversion, the FSP Partnership ceased to exist and we succeeded to the business of the FSP Partnership. In the conversion, each unit of both general and limited partnership interests in the FSP Partnership was converted into one share of our common stock. As a result of the conversion, we hold, directly and indirectly, 100% of the interest in three former subsidiaries of the FSP Partnership: FSP Investments LLC, FSP Property Management LLC, and FSP Holdings LLC. We operate some of our business through these subsidiaries. Our Business We are a REIT focused on commercial real estate investments primarily in office markets and currently operate in only one segment: real estate operations. The principal revenue sources for our real estate operations include rental income from real estate leasing, interest income from secured loans made on office properties, property dispositions and fee income from asset/property management and development. Our current strategy is to invest in select urban infill and central business district properties, with primary emphasis on our top five markets of Atlanta, Dallas, Denver, Houston and Minneapolis. We believe that our top five markets have macro-economic drivers that have the potential to increase occupancies and rents. We will also monitor San Diego, Silicon Valley, Greater Boston, Raleigh-Durham, and Greater Washington, DC, as well as other markets, for opportunistic investments. We seek value-oriented investments with an eye towards long-term growth and appreciation, as well as current income. Previously we also operated in an investment banking segment, which was discontinued in December 2011. Our investment banking segment generated brokerage commissions, loan origination fees, development services and other fees related to the organization of single-purpose entities that own real estate and the private placement of equity in those entities. We refer to these entities, which are organized as corporations and operated in a manner intended to qualify as REITs, as Sponsored REITs. On December 15, 2011, we announced that our broker/dealer subsidiary, FSP Investments LLC, would no longer sponsor the syndication of shares of preferred stock in newly- formed Sponsored REITs. On July 15, 2014, FSP Investments LLC withdrew its registration as a broker/dealer with FINRA. From time-to-time we may acquire real estate or invest in real estate by making secured loans on real estate. We may also pursue on a selective basis the sale of our properties to take advantage of the value creation and demand for our properties, or for geographic or property specific reasons. Real Estate We own and operate a portfolio of real estate consisting of 38 office properties as of December 31, 2014. We derive rental revenue from income paid to us by tenants of these properties. See Item 2 of this Annual Report on Form 10-K for more information about our properties. From time-to-time we dispose of properties generating gains or losses in an ongoing effort to improve and upgrade our portfolio. We also held preferred stock investments in two Sponsored REITs as of December 31, 2014, from which we record our share of income or loss under the equity method of accounting, and from which we receive dividends. We provide asset management, property management, property accounting, investor and/or development services to our portfolio and certain of our Sponsored REITs through our subsidiaries FSP Investments LLC and FSP Property Management LLC. FSP Corp. recognizes revenue from its receipt of fee income from Sponsored 1 REITs that have not been consolidated or acquired by us. Neither FSP Investments LLC nor FSP Property Management LLC receives any rental income. From time-to-time we may make secured loans to Sponsored REITs in the form of mortgage loans or revolving lines of credit to fund construction costs, capital expenditures, leasing costs and for other purposes. We anticipate that these loans will be repaid at their maturity or earlier from long-term financings of the underlying properties, cash flows from the underlying properties or some other capital event. We refer to these loans as Sponsored REIT Loans. We had five Sponsored REIT Loans secured by real estate outstanding as of December 31, 2014, from which we derive interest income. Investment Objectives Our investment objectives are to create shareholder value by increasing revenue from rental, dividend, interest and fee income and net gains from sales of properties and increase the cash available for distribution in the form of dividends to our stockholders. We expect that we will continue to derive real estate revenue from Sponsored REIT Loans and fees from asset management, property management and investor services. We may also acquire additional real properties. From time to time, as market conditions warrant, we may sell properties owned by us. In January 2015, we reached an agreement to sell an office property located in Plano, Texas, which is expected to close in February 2015 at a gain. We sold one office property located in Colorado Springs, Colorado on December 3, 2014 at a gain, one office property located in Richardson, Texas on October 29, 2013 at a gain and one office property located in Southfield, Michigan on December 21, 2012 at a loss. When we sell a property, we either distribute some or all of the sale proceeds to our stockholders as a distribution or retain some or all of such proceeds for investment in real properties or other corporate activities. We may acquire, and have acquired, real properties in any geographic area of the United States and of any property type. We own 38 properties that are located in 13 different states. See Item 2 of this Annual Report on Form 10-K for more information about our properties. We rely on the following principles in selecting real properties for acquisition by FSP Corp. and managing them after acquisition: (cid:120) we seek to buy or develop investment properties at a price which produces value for investors and avoid overpaying for real estate merely to outbid competitors; (cid:120) we seek to buy or develop properties in excellent locations with substantial infrastructure in place around them and avoid investing in locations where the future construction of such infrastructure is speculative; (cid:120) we seek to buy or develop properties that are well-constructed and designed to appeal to a broad base of users and avoid properties where quality has been sacrificed for cost savings in construction or which appeal only to a narrow group of users; (cid:120) we aggressively manage, maintain and upgrade our properties and refuse to neglect or undercapitalize management, maintenance and capital improvement programs; and (cid:120) we believe that we have the ability to hold properties through down cycles because we generally do not have significant leverage on the Company, which could place the properties at risk of foreclosure. As of February 10, 2015, none of our 38 properties was subject to mortgage debt. Competition With respect to our real estate investments, we face competition in each of the markets where our properties are located. In order to establish, maintain or increase the rental revenues for a property, it must be competitive on location, cost and amenities with other buildings of similar use. Some of our competitors may have significantly more resources than we do and may be able to offer more attractive rental rates or services. On the other hand, some of our competitors may be smaller or have less fixed overhead costs, less cash or other resources that make them willing or able to accept lower rents in order to maintain a certain occupancy level. In markets where there is not currently significant existing property competition, our competitors may decide to enter the 2 market and build new buildings to compete with our existing projects or those in a development stage. Our competition is not only with other developers, but also with property users who choose to own their building or a portion of the building in the form of an office condominium. Competitive conditions are affected by larger market forces beyond our control, such as general economic conditions, that may increase competition among landlords for quality tenants, and individual decisions by tenants that are beyond our control. Employees We had 39 employees as of December 31, 2014 and 40 employees as of February 10, 2015. Available Information We are subject to the informational requirements of the Securities Exchange Act of 1934, and, in accordance therewith, we file reports and other information with the SEC. The reports and other information we file can be inspected and copied at the SEC Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Such reports and other information may also be obtained from the web site that the SEC maintains at http://www.sec.gov. Further information about the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. We make available, free of charge through our website http://www.franklinstreetproperties.com our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with the SEC. Reports and other information concerning us may also be obtained electronically through a variety of databases, including, among others, the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) program at http://www.sec.gov, Knight-Ridder Information Inc., Federal Filing/Dow Jones and Lexis/Nexis. We will voluntarily provide paper copies of our filings and code of ethics upon written request received at the address on the cover of this Annual Report on Form 10-K, free of charge. 3 Directors and Executive Officers of FSP Corp. The following table sets forth the names, ages and positions of all our directors and executive officers as of February 10, 2015. Name George J. Carter (6) Barbara J. Fournier (5) Janet Prier Notopoulos (4) John N. Burke (1) (2) (3) (5) (7) Brian N. Hansen (1) (2) (3) (4) (9) Dennis J. McGillicuddy (1) (4) Georgia Murray (2) (3) (6) (8) (10) Barry Silverstein (1) (5) Jeffery B. Carter Scott H. Carter John G. Demeritt Age 66 59 67 53 43 73 64 81 43 43 54 Position President, Chief Executive Officer and Director Executive Vice President, Chief Operating Officer, Treasurer, Secretary and Director Executive Vice President and Director Director Director Director Director Director Executive Vice President and Chief Investment Officer Executive Vice President, General Counsel and Assistant Secretary Executive Vice President and Chief Financial Officer (1) Member of the Audit Committee (2) Member of the Compensation Committee (3) Member of the Nominating and Corporate Governance Committee (4) Class I Director (5) Class II Director (6) Class III Director (7) Chair of the Audit Committee (8) Chair of the Compensation Committee (9) Chair of the Nominating and Corporate Governance Committee (10) Lead Independent Director George J. Carter, age 66, is President, Chief Executive Officer and has been a Director of FSP Corp. since 2002. Mr. Carter is responsible for all aspects of the business of FSP Corp. and its affiliates, with special emphasis on the evaluation, acquisition and structuring of real estate investments. Prior to the conversion, he was President of the general partner of the FSP Partnership (the “General Partner”) and was responsible for all aspects of the business of the FSP Partnership and its affiliates. From 1992 through 1996 he was President of Boston Financial Securities, Inc. (“Boston Financial”). Prior to joining Boston Financial, Mr. Carter was owner and developer of Gloucester Dry Dock, a commercial shipyard in Gloucester, Massachusetts. From 1979 to 1988, Mr. Carter served as Managing Director in charge of marketing at First Winthrop Corporation, a national real estate and investment banking firm headquartered in Boston, Massachusetts. Prior to that, he held a number of positions in the brokerage industry including those with Merrill Lynch & Co. and Loeb Rhodes & Co. Mr. Carter is a graduate of the University of Miami (B.S.). Barbara J. Fournier, age 59, is Executive Vice President, Chief Operating Officer, Treasurer, Secretary and has been a Director of FSP Corp. since 2002. Ms. Fournier has as her primary responsibility, together with Mr. Carter, the management of all operating business affairs of FSP Corp. and its affiliates. Ms. Fournier was the Principal Financial Officer until March 2005. Prior to the conversion, Ms. Fournier was the Vice President, Chief Operating Officer, Treasurer and Secretary of the General Partner. From 1993 through 1996, she was Director of Operations for the private placement division of Boston Financial. Prior to joining Boston Financial, Ms. Fournier served as Director of Operations for Schuparra Securities Corp. and as the Sales Administrator for Weston Financial Group. From 1979 through 1986, Ms. Fournier worked at First Winthrop Corporation in administrative and management capacities; including Office Manager, Securities Operations and Partnership Administration. Ms. Fournier attended Northeastern University and the New York Institute of Finance. Ms. Fournier is a member of the 4 NYSE MKT Listed Company Council. Ms. Fournier participates in corporate governance-related continuing education sessions offered by the NYSE affiliate, Corporate Board Member. Janet Prier Notopoulos, age 67, is an Executive Vice President of FSP Corp. and has been a Director of FSP Corp. and President of FSP Property Management since 2002. Ms. Notopoulos has as her primary responsibility the oversight of the management of the real estate assets of FSP Corp. and its affiliates. Prior to the conversion, Ms. Notopoulos was a Vice President of the General Partner. Prior to joining the FSP Partnership in 1997, Ms. Notopoulos was a real estate and marketing consultant for various clients. From 1975 to 1983, she was Vice President of North Coast Properties, Inc., a Boston real estate investment company. Between 1969 and 1973, she was a real estate paralegal at Goodwin, Procter & Hoar. Ms. Notopoulos is a graduate of Wellesley College (B.A.) and the Harvard School of Business Administration (M.B.A). John N.Burke, age 53, has been a Director of FSP Corp. and Chair of the Audit Committee since June 2004. Mr. Burke is a certified public accountant with over 30 years of experience in the practice of public accounting working with both private and publicly traded companies with extensive experience serving clients in the real estate and REIT industry. His experience includes analysis and evaluation of financial reporting, accounting systems, internal controls and audit matters. Mr. Burke has been involved as an advisor on several public offerings, private equity and debt financings and merger and acquisition transactions. Mr. Burke’s consulting experience includes a wide range of accounting, tax and business planning services. Prior to starting his own accounting and consulting firm in 2003, Mr. Burke was a Partner in the Boston office of BDO USA, LLP. Mr. Burke is a member of the American Institute of Certified Public Accountants and the Massachusetts Society of CPAs. Mr. Burke earned an M.S. in Taxation and studied undergraduate accounting at Bentley University. Brian N. Hansen, age 43, has been a Director of FSP Corp. since 2012 and Chair of the Nominating and Corporate Governance Committee since 2013. Since 2007, Mr. Hansen has served as President and Chief Operating Officer of Confluence Investment Management LLC, a St. Louis based Registered Investment Advisor. Prior to founding Confluence in 2007, Mr. Hansen served as a Managing Director in A.G. Edwards’ Financial Institutions & Real Estate Investment Banking practice. While at A.G. Edwards, Mr. Hansen advised a wide variety of Real Estate Investment Trusts on numerous capital markets transactions, including public and private offerings of debt and equity securities as well as the analysis of various merger & acquisition opportunities. Prior to joining A.G. Edwards, Mr. Hansen served as a Manager in Arthur Andersen LLP's Audit & Business Advisory practice. Mr. Hansen serves on the board of a number of non-profit entities and the Investment Committee of the Archdiocese of St. Louis. Mr. Hansen earned his MBA from the Kellogg School of Management at Northwestern University and his Bachelor of Science in Commerce from DePaul University. Mr. Hansen is a Certified Public Accountant. Dennis J. McGillicuddy, age 73, has been a Director of FSP Corp. since May 2002. Mr. McGillicuddy graduated from the University of Florida with a B.A. degree and from the University of Florida Law School with a J.D. degree. In 1968, Mr. McGillicuddy joined Barry Silverstein in founding Coaxial Communications, a cable television company. In 1998 and 1999, Coaxial sold its cable systems. Mr. McGillicuddy has served on the boards of various charitable organizations. He is currently president of the Board of Trustees of Florida Studio Theater, a professional non-profit theater organization, and he serves as a Co-Chair, together with his wife, of Embracing Our Differences, an annual month-long art exhibit that promotes the values of diversity and inclusion. Mr. McGillicuddy also is a member of the Advisory Board to the Center For Mindfulness In Medicine, Health Care & Society, University of Massachusetts Medical School. Georgia Murray, age 64, has been a Director of FSP Corp. since April 2005, Chair of the Compensation Committee since October 2006 and Lead Independent Director since February 2014. Ms. Murray is retired from Lend Lease Real Estate Investments, Inc., where she served as a Principal from November 1999 until May 2000. From 1973 through October 1999, Ms. Murray worked at The Boston Financial Group, Inc., serving as Senior Vice President and a Director at times during her tenure. Boston Financial was an affiliate of the Boston Financial Group, Inc. She is a past Trustee of the Urban Land Institute and a past President of the Multifamily Housing Institute. Ms. Murray previously served on the Board of Directors of Capital Crossing Bank. She also serves on the boards of numerous non-profit entities. Ms. Murray is a graduate of Newton College. 5 Barry Silverstein, age 81, has been a Director of FSP Corp. since May 2002. Mr. Silverstein received his law degree from Yale University in 1957 and subsequently held positions as attorney/officer/director of various privately-held manufacturing companies in Chicago, Illinois. In 1964, he moved to Florida to manage his own portfolio and to teach at the University of Florida Law School. In 1968, Mr. Silverstein became the principal founder and shareholder in Coaxial Communications, a cable television company. In 1998 and 1999, Coaxial sold its cable systems. Since January 2001, Mr. Silverstein has been a private investor. Jeffrey B. Carter, age 43, is Executive Vice President and Chief Investment Officer of FSP Corp. Mr. Carter was appointed to that position in February 2012. Previously, Mr. Carter served as Senior Vice President and Director of Acquisitions of FSP Corp. from 2005 to 2012 and as Vice President - Acquisitions from 2003 to 2005. Mr. Carter is primarily responsible for developing and implementing the Company’s investment strategy, including coordination of acquisitions and dispositions. Prior to joining FSP Corp., Mr. Carter worked in Trust Administration for Northern Trust Bank in Miami, Florida. Mr. Carter is a graduate of Arizona State University (B.A.), The George Washington University (M.A.) and Cornell University (M.B.A.). Mr. Carter’s father, George J. Carter, serves as President, Chief Executive Officer and a Director of FSP Corp. and Mr. Carter’s brother, Scott H. Carter, serves as Executive Vice President, General Counsel and Assistant Secretary of FSP Corp. Scott H. Carter, age 43, is Executive Vice President, General Counsel and Assistant Secretary of FSP Corp. Mr. Carter has served as General Counsel since February 2008. Mr. Carter joined FSP Corp. in October 2005 as Senior Vice President, In-house Counsel and was appointed to the position of Assistant Secretary in May 2006. Mr. Carter has as his primary responsibility the management of all of the legal affairs of FSP Corp. and its affiliates. Prior to joining FSP Corp. in October 2005, Mr. Carter was associated with the law firm of Nixon Peabody LLP, which he originally joined in 1999. At Nixon Peabody LLP, Mr. Carter concentrated his practice on the areas of real estate syndication, acquisitions and finance. Mr. Carter received a Bachelor of Business Administration (B.B.A.) degree in Finance and Marketing and a Juris Doctor (J.D.) degree from the University of Miami. Mr. Carter is admitted to practice law in the Commonwealth of Massachusetts. Mr. Carter’s father, George J. Carter, serves as President, Chief Executive Officer and a Director of FSP Corp. and Mr. Carter’s brother, Jeffery B. Carter, serves as Executive Vice President and Chief Investment Officer of FSP Corp. John G. Demeritt, age 54, is Executive Vice President and Chief Financial Officer of FSP Corp. and has been Chief Financial Officer since March 2005. Mr. Demeritt previously served as Senior Vice President, Finance and Principal Accounting Officer since September 2004. Prior to September 2004, Mr. Demeritt was a Manager with Caturano & Company, an independent accounting firm (which later merged with McGladrey) where he focused on Sarbanes Oxley compliance. Previously, from March 2002 to March 2004 he provided consulting services to public and private companies where he focused on SEC filings, evaluation of business processes and acquisition integration. During 2001 and 2002 he was Vice President of Financial Planning & Analysis at Cabot Industrial Trust, a publicly traded real estate investment trust, which was acquired by CalWest in December 2001. From October 1995 to December 2000 he was Controller and Officer of The Meditrust Companies, a publicly traded real estate investment trust (formerly known as the The La Quinta Companies, which was then acquired by the Blackstone Group), where he was involved with a number of merger and financing transactions. Prior to that, from 1986 to 1995 he had financial and accounting responsibilities at three other public companies, and was previously associated with Laventhol & Horwath, an independent accounting firm from 1983 to 1986. Mr. Demeritt is a Certified Public Accountant and holds a Bachelor of Science degree from Babson College. Each of the above executive officers has been a full-time employee of FSP Corp. for the past five fiscal years. George J. Carter, Barbara J. Fournier and Janet Notopoulos is each also a director of FSP 303 East Wacker Drive Corp., which is a public reporting company and a Sponsored REIT. Each of these directors holds office from the time of his or her election until the next annual meeting and until a successor is elected and qualified, or until such director's earlier death, resignation or removal. 6 Item 1A Risk Factors The following important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by management from time-to-time. Economic conditions in the United States could have a material adverse impact on our earnings and financial condition. Because economic conditions in the United States may affect real estate values, occupancy levels and property income, current and future economic conditions in the United States could have a material adverse impact on our earnings and financial condition. The economy in the United States is continuing to experience a period of slow economic growth, with slowly declining unemployment from recent high levels and increased credit risk premiums for a number of market participants. These conditions may continue or worsen in the future. Economic conditions may be affected by numerous factors, including but not limited to, inflation and employment levels, energy prices, slow growth and/or recessionary concerns, changes in currency exchange rates, fiscal and tax policy uncertainty, geopolitical events, changes in government regulations, regulatory uncertainty, the availability of credit and interest rates. Future economic factors may negatively affect real estate values, occupancy levels and property income. If a Sponsored REIT defaults on a Sponsored REIT Loan, we may be required to keep a balance outstanding on our unsecured credit facilities or use our cash balance to repay our unsecured credit facilities, which may reduce cash available for distribution to our stockholders or for other corporate purposes. From time-to-time, we may draw on the BAML Credit Facility (as defined in Note 4 to the Consolidated Financial Statements) or the BMO Term Loan (as defined in Note 4 to the Consolidated Financial Statements) to make secured loans to Sponsored REITs in the form of mortgage loans or revolving lines of credit to fund construction costs, capital expenditures, leasing costs and for other purposes. We refer to these loans as Sponsored REIT Loans. We anticipate that each Sponsored REIT Loan will be repaid at maturity or earlier from long term financing of the property securing the loan, cash flows from that underlying property or some other capital event. If a Sponsored REIT defaults on a Sponsored REIT Loan, the Sponsored REIT could be unable to fully repay the Sponsored REIT Loan and we would have to satisfy our obligation under the BAML Credit Facility and/or the BMO Term Loan through other means. If we are required to use cash for this purpose, we would have less cash available for distribution to our stockholders or for other corporate purposes. Our operating results and financial condition could be adversely affected if we are unable to refinance the BAML Credit Facility or the BMO Term Loan. There can be no assurance that we will be able to refinance the revolving line of credit portion of the BAML Credit Facility upon its maturity on October 29, 2018 (subject to extension until October 29, 2019), the term loan portion of the BAML Credit Facility upon its maturity on September 27, 2017 or the BMO Term Loan upon its maturity on August 26, 2020, that any such refinancings would be on terms as favorable as the terms of the BAML Credit Facility or the BMO Term Loan, or that we will be able to otherwise obtain funds by selling assets or raising equity to make required payments on the BAML Credit Facility or the BMO Term Loan. If we are unable to refinance the BAML Credit Facility or the BMO Term Loan at maturity or meet our payment obligations, the amount of our distributable cash flow and our financial condition would be adversely affected. Failure to comply with covenants in the BAML Credit Facility and the BMO Term Loan credit agreements could adversely affect our financial condition. The BAML Credit Facility and the BMO Term Loan credit agreements contain customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The BAML Credit Facility and the BMO Term Loan credit agreements also contain financial covenants that require us to maintain a minimum tangible net worth, a maximum leverage ratio, a 7 maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, minimum unsecured interest coverage and a maximum ratio of certain investments to total assets. Our continued ability to borrow under the BAML Credit Facility and the BMO Term Loan is subject to compliance with our financial and other covenants. Failure to comply with such covenants could cause a default under the BAML Credit Facility or the BMO Term Loan, and we may then be required to repay either or both of them with capital from other sources. Under those circumstances, other sources of capital may not be available to us, or be available only on unattractive terms. We may use the BAML Credit Facility or the BMO Term Loan to finance the acquisition of real properties and for other permitted investments; to finance investments associated with Sponsored REITs, to refinance or retire indebtedness and for working capital and other general business purposes, in each case to the extent permitted under the respective credit agreements. If we breach covenants in the BAML Credit Facility or the BMO Term Loan credit agreements, the lenders can declare a default. A default under the BAML Credit Facility or the BMO Term Loan credit agreements could result in difficulty financing growth in our business and could also result in a reduction in the cash available for distribution to our stockholders or for other corporate purposes. A default under the BAML Credit Facility or the BMO Term Loan credit agreements could materially and adversely affect our financial condition and results of operations. An increase in interest rates would increase our interest costs on variable rate debt and could adversely impact our ability to refinance existing debt or sell assets. As of December 31, 2014, we had approximately $268 million of indebtedness under the revolving line of credit portion of our BAML Credit Facility that bears interest at variable rates based on our credit rating, and we may incur more of such indebtedness in the future. Borrowings under the revolving line of credit portion of our BAML Credit Facility may not exceed $500 million outstanding at any time, although such amount may be increased by up to an additional $250 million through the exercise of an accordion feature. The term loan portion of our BAML Credit Facility is for $400 million. On September 27, 2012, we fixed the base LIBOR rate on the term loan portion of our BAML Credit Facility at 0.75% for five years by entering into an interest rate swap agreement. The BMO Term Loan is for $220 million, although such amount may be increased by up to an additional $50 million through the exercise of an accordion feature. On August 26, 2013, we fixed the base LIBOR rate on the BMO Term Loan at 2.32% for seven years by entering into an interest rate swap agreement. In the future, if interest rates increase, then so will the interest costs on our unhedged variable rate debt, which could adversely affect our cash flow, our ability to pay principal and interest on our debt and our ability to make distributions to stockholders. In addition, rising interest rates could limit our ability to both incur new debt and to refinance existing debt when it matures. From time to time, we may enter into interest rate swap agreements and other interest rate hedging contracts, including swaps, caps and floors. While these agreements are intended to lessen the impact of rising interest rates on us, they also expose us to the risks that the other parties to the agreements will not perform, we could incur significant costs associated with the settlement of the agreements, the agreements will be unenforceable and the underlying transactions will fail to qualify as highly-effective cash flow hedges. In addition, an increase in interest rates could decrease the amount third parties are willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in response to changes in economic or other conditions Downgrades in our credit ratings could increase our borrowing costs or reduce our access to funding sources in the credit and capital markets. We are currently assigned a corporate credit rating from Moody’s Investors Service, Inc. (“Moody’s”) based on its evaluation of our creditworthiness. Although our corporate credit rating from Moody’s is currently investment grade, there can be no assurance that we will not be downgraded or that our rating will remain investment grade. If our credit rating is downgraded or other negative action is taken, we could be required, among other things, to pay additional interest and fees on outstanding borrowings under the BAML Credit Facility and the BMO Term Loan. Credit rating reductions by one or more rating agencies could also adversely affect our access to funding sources, the cost and other terms of obtaining funding as well as our overall financial condition, operating results and cash flow. 8 If we are not able to collect sufficient rents from each of our owned real properties, investments in Sponsored REITs or interest on Sponsored REIT Loans we fund, we may suffer significant operating losses or a reduction in cash available for future dividends. A substantial portion of our revenue is generated by the rental income of our real properties and investments in Sponsored REITs. If our properties do not provide us with a steady rental income or we do not collect interest income from Sponsored REIT Loans we fund, our revenues will decrease, which may cause us to incur operating losses in the future and reduce the cash available for distribution to our stockholders. We may not be able to find properties that meet our criteria for purchase. Growth in our portfolio of real estate is dependent on the ability of our acquisition executives to find properties for sale and/or development which meet the applicable investment criteria. To the extent they fail to find such properties, we would be unable to increase the size of our portfolio of real estate, which could reduce the cash otherwise available for distribution to our stockholders. We are dependent on key personnel. We depend on the efforts of George J. Carter, our President and Chief Executive Officer and a Director; Barbara J. Fournier, our Chief Operating Officer, Treasurer, Secretary, an Executive Vice President and a Director; John G. Demeritt, our Chief Financial Officer and an Executive Vice President; Jeffery B. Carter, our Chief Investment Officer and an Executive Vice President; Janet Prier Notopoulos, an Executive Vice President and a Director; and Scott H. Carter, our General Counsel, Assistant Secretary and an Executive Vice President. If any of our executive officers were to resign, our operations could be adversely affected. We do not have employment agreements with any of our executive officers. On July 25, 2014, Ms. Fournier informed us that she will retire from FSP Corp. and resign her positions as our Executive Vice President, Chief Operating Officer, Treasurer and Secretary. We believe that other executives will perform Ms. Fournier’s duties and that there will be no disruptions to our operations, but there can be no assurance that this will be the case. Our level of dividends may fluctuate. Because our real estate occupancy levels and rental rates can fluctuate, there is no predictable recurring level of revenue from such activities. As a result of this, the amount of cash available for distribution may fluctuate, which may result in our not being able to maintain or grow dividend levels in the future. We face risks from tenant defaults or bankruptcies. If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment. In addition, at any time, a tenant of one of our properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant’s lease and thereby cause a reduction in cash available for distribution to our stockholders. The real properties held by us may significantly decrease in value. As of February 10, 2015, we owned 38 properties. Some or all of these properties may decline in value. To the extent our real properties decline in value, our stockholders could lose some or all of the value of their investments. The value of our common stock may be adversely affected if the real properties held by us decline in value since these real properties represent the majority of the tangible assets held by us. Moreover, if we are forced to sell or lease the real property held by us below its initial purchase price or its carrying costs, respectively, or if we are forced to lease real property at below market rates because of the condition of the property, our results of operations would be adversely affected and such negative results of operations may result in lower dividends being paid to holders of our common stock. 9 New acquisitions may fail to perform as expected. We may acquire new properties by purchasing with cash, by drawing on the revolving line of credit portion of our BAML Credit Facility, by assuming existing indebtedness, by entering into new indebtedness, by issuing debt securities, by issuing shares of our stock or by other means. During the year ended December 31, 2014, we did not acquire any properties. During the year ended December 31, 2013, we acquired one property located in Georgia and two properties located in Colorado. During the year ended December 31, 2012, we acquired one property located in Georgia and one property located in Texas. Newly acquired properties may fail to perform as expected, in which case, our results of operations could be adversely affected. We face risks in owning, developing and operating real property. An investment in us is subject to the risks incident to the ownership, development and operation of real estate-related assets. These risks include the fact that real estate investments are generally illiquid, which may affect our ability to vary our portfolio in response to changes in economic and other conditions, as well as the risks normally associated with: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) changes in general and local economic conditions; the supply or demand for particular types of properties in particular markets; changes in market rental rates; the impact of environmental protection laws; changes in tax, real estate and zoning laws; and the impact of obligations and restrictions contained in title-related documents. Certain significant costs, such as real estate taxes, utilities, insurance and maintenance costs, generally are not reduced even when a property’s rental income is reduced. In addition, environmental and tax laws, interest rate levels, the availability of financing and other factors may affect real estate values and property income. Furthermore, the supply of commercial space fluctuates with market conditions. We may encounter significant delays in reletting vacant space, resulting in losses of income. When leases expire, we may incur expenses and may not be able to re-lease the space on the same terms. While we cannot predict when existing vacancy will be leased or if existing tenants with expiring leases will renew their leases or what the terms and conditions of the lease renewals will be, we expect to renew or sign new leases at current market rates for locations in which the buildings are located, which in some cases may be below the expiring rates. Certain leases provide tenants the right to terminate early if they pay a fee. If we are unable to re-lease space promptly, if the terms are significantly less favorable than anticipated or if the costs are higher, we may have to reduce distributions to our stockholders. Typical lease terms range from five to ten years, so up to approximately 20% of our rental revenue from commercial properties could be expected to expire each year. We face risks of tenant-type concentration. As of December 31, 2014, our top twenty tenants leased, based on leased square feet, approximately 38.7% of the total rentable square feet in our owned portfolio of properties. Approximately 26.3% and 20.1% of our top twenty tenants as a percentage of the top twenty tenants rentable square feet (or 10.2% and 7.8% of the total rentable square feet in our portfolio) operated in the energy services industry and the bank and credit services industry, respectively. An economic downturn in these or any industry in which a high concentration of our tenants operate or in which a significant number of our tenants currently or may in the future operate, could negatively impact the financial condition of such tenants and cause them to fail to make timely rental payments or default on lease obligations, fail to renew their leases or renew their leases on terms less favorable to us, become bankrupt or insolvent, or otherwise become unable to satisfy their obligations to us, which could adversely affect our financial condition and results of operations. 10 We face risks from geographic concentration. The properties in our portfolio as of December 31, 2014, by aggregate square footage, are distributed geographically as follows: South – 43.3%, West – 24.1%, Midwest – 17.6% and East – 15.0%. However, within certain of those regions, we hold a larger concentration of our properties in Greater Denver, Colorado – 21.0%, Atlanta, Georgia – 14.6%, Dallas, Texas – 14.1% and Houston, Texas – 12.4%. We are likely to face risks to the extent that any of these areas in which we hold a larger concentration of our properties suffer deteriorating economic conditions. We compete with national, regional and local real estate operators and developers, which could adversely affect our cash flow. Competition exists in every market in which our properties are currently located and in every market in which properties we may acquire in the future will be located. We compete with, among others, national, regional and numerous local real estate operators and developers. Such competition may adversely affect the percentage of leased space and the rental revenues of our properties, which could adversely affect our cash flow from operations and our ability to make expected distributions to our stockholders. Some of our competitors may have more resources than we do or other competitive advantages. Competition may be accelerated by any increase in availability of funds for investment in real estate. For example, decreases in interest rates tend to increase the availability of funds and therefore can increase competition. To the extent that our properties continue to operate profitably, this will likely stimulate new development of competing properties. The extent to which we are affected by competition will depend in significant part on both local market conditions and national and global economic conditions. We are subject to possible liability relating to environmental matters, and we cannot assure you that we have identified all possible liabilities. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Such laws may impose liability without regard to whether the owner or operator knew of, or caused, the release of such hazardous substances. The presence of hazardous substances on a property may adversely affect the owner’s ability to sell such property or to borrow using such property as collateral, and it may cause the owner of the property to incur substantial remediation costs. In addition to claims for cleanup costs, the presence of hazardous substances on a property could result in the owner incurring substantial liabilities as a result of a claim by a private party for personal injury or a claim by an adjacent property owner for property damage. In addition, we cannot assure you that: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) future laws, ordinances or regulations will not impose any material environmental liability; proposed legislation to address climate change will not increase utility and other costs of operating our properties which, if not offset by rising rental income and/or paid by tenants, would materially and adversely affect our financial condition and results of operations; the current environmental conditions of our properties will not be affected by the condition of properties in the vicinity of such properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us; tenants will not violate their leases by introducing hazardous or toxic substances into our properties that could expose us to liability under federal or state environmental laws; or environmental conditions, such as the growth of bacteria and toxic mold in heating and ventilation systems or on walls, will not occur at our properties and pose a threat to human health. We are subject to compliance with the Americans With Disabilities Act and fire and safety regulations, any of which could require us to make significant capital expenditures. All of our properties are required to comply with the Americans With Disabilities Act (ADA), and the regulations, rules and orders that may be issued thereunder. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to 11 persons with disabilities. Compliance with ADA requirements might require, among other things, removal of access barriers and noncompliance could result in the imposition of fines by the U.S. government or an award of damages to private litigants. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. Compliance with such requirements may require us to make substantial capital expenditures, which expenditures would reduce cash otherwise available for distribution to our stockholders. We face risks associated with our tenants being designated “Prohibited Persons” by the Office of Foreign Assets Control. Pursuant to Executive Order 13224 and other laws, the Office of Foreign Assets Control of the United States Department of the Treasury, or OFAC, maintains a list of persons designated as terrorists or who are otherwise blocked or banned, which we refer to as Prohibited Persons. OFAC regulations and other laws prohibit conducting business or engaging in transactions with Prohibited Persons (the “OFAC Requirements”). Our current leases and certain other agreements require the other party to comply with the OFAC Requirements. If a tenant or other party with whom we contract is placed on the OFAC list we may be required by the OFAC Requirements to terminate the lease or other agreement. Any such termination could result in a loss of revenue or a damage claim by the other party that the termination was wrongful. Security breaches and other disruptions could compromise our information and expose us to liability, which could cause our business and reputation to suffer. In the ordinary course of our business, we collect and store sensitive data concerning investors in the Sponsored REITS, tenants and vendors. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings and liability under laws that protect the privacy of personal information, and could damage our reputation. Actual or threatened terrorist attacks may adversely affect our ability to generate revenues and the value of our properties. (cid:3)(cid:3) We have significant investments in markets that may be the targets of actual or threatened terrorism attacks in the future. As a result, some tenants in these markets may choose to relocate their businesses to other markets or to lower-profile office buildings within these markets that may be perceived to be less likely targets of future terrorist activity. This could result in an overall decrease in the demand for office space in these markets generally or in our properties in particular, which could increase vacancies in our properties or necessitate that we lease our properties on less favorable terms or both. In addition, future terrorist attacks in these markets could directly or indirectly damage our properties, both physically and financially, or cause losses that materially exceed our insurance coverage. As a result of the foregoing, our ability to generate revenues and the value of our properties could decline materially. See also “We may lose capital investment or anticipated profits if an uninsured event occurs.” We may lose capital investment or anticipated profits if an uninsured event occurs. We carry, or our tenants carry, comprehensive liability, fire and extended coverage with respect to each of our properties, with policy specification and insured limits customarily carried for similar properties. There are, however, certain types of losses that may be either uninsurable or not economically insurable. Should an uninsured material loss occur, we could lose both capital invested in the property and anticipated profits. 12 Our employee retention plan may prevent changes in control. During February 2006, our Board of Directors approved a change in control plan, which included a form of retention agreement and discretionary payment plan. Payments under the discretionary plan are capped at 1% of the market capitalization of FSP Corp. as reduced by the amount paid under the retention plan. The costs associated with these two components of the plan may have the effect of discouraging a third party from making an acquisition proposal for us and may thereby inhibit a change in control under circumstances that could otherwise give the holders of our common stock the opportunity to realize a greater premium over the then-prevailing market prices. Further issuances of equity securities may be dilutive to current stockholders. The interests of our existing stockholders could be diluted if additional equity securities are issued to finance future acquisitions, repay indebtedness or to fund other general corporate purposes. Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing. The price of our common stock may vary. The market prices for our common stock may fluctuate with changes in market and economic conditions, including the market perception of REITs in general, and changes in the financial condition of our securities. Such fluctuations may depress the market price of our common stock independent of the financial performance of FSP Corp. The market conditions for REIT stocks generally could affect the market price of our common stock. We would incur adverse tax consequences if we failed to qualify as a REIT. The provisions of the tax code governing the taxation of real estate investment trusts are very technical and complex, and although we expect that we will be organized and will operate in a manner that will enable us to meet such requirements, no assurance can be given that we will always succeed in doing so. In addition, as a result of our past acquisition of certain Sponsored REITs by merger, which we refer to as target REITs, we might no longer qualify as a real estate investment trust. We could lose our ability to so qualify for a variety of reasons relating to the nature of the assets acquired from the target REITs, the identity of the stockholders of the target REITs who become our stockholders or the failure of one or more of the target REITs to have previously qualified as a real estate investment trust. Moreover, you should note that if one or more of the target REITs that we acquired in May 2008, April 2006, April 2005 or June 2003 did not qualify as a REIT immediately prior to the consummation of its acquisition, we could be disqualified as a REIT as a result of such acquisition. If in any taxable year we do not qualify as a real estate investment trust, we would be taxed as a corporation and distributions to our stockholders would not be deductible by us in computing our taxable income. In addition, if we were to fail to qualify as a real estate investment trust, we could be disqualified from treatment as a real estate investment trust in the year in which such failure occurred and for the next four taxable years and, consequently, we would be taxed as a regular corporation during such years. Failure to qualify for even one taxable year could result in a significant reduction of our cash available for distribution to our stockholders or could require us to incur indebtedness or liquidate investments in order to generate sufficient funds to pay the resulting federal income tax liabilities. Provisions in our organizational documents may prevent changes in control. Our Articles of Incorporation and Bylaws contain provisions, described below, which may have the effect of discouraging a third party from making an acquisition proposal for us and may thereby inhibit a change of control under circumstances that could otherwise give the holders of our common stock the opportunity to realize a premium over the then-prevailing market prices. Ownership Limits. In order for us to maintain our qualification as a real estate investment trust, the holders of our common stock may be limited to owning, either directly or under applicable attribution rules of the Internal Revenue Code, no more than 9.8% of the lesser of the value or the number of our equity shares, and no holder of common stock may acquire or transfer shares that would result in our shares of common stock being beneficially 13 owned by fewer than 100 persons. Such ownership limit may have the effect of preventing an acquisition of control of us without the approval of our board of directors. Our Articles of Incorporation give our board of directors the right to refuse to give effect to the acquisition or transfer of shares by a stockholder in violation of these provisions. Staggered Board. Our board of directors is divided into three classes. The terms of these classes will expire in 2015, 2016 and 2017, respectively. Directors of each class are elected for a three-year term upon the expiration of the initial term of each class. The staggered terms for directors may affect our stockholders’ ability to effect a change in control even if a change in control were in the stockholders’ best interests. Preferred Stock. Our Articles of Incorporation authorize our board of directors to issue up to 20,000,000 shares of preferred stock, par value $.0001 per share, and to establish the preferences and rights of any such shares issued. The issuance of preferred stock could have the effect of delaying or preventing a change in control even if a change in control were in our stockholders’ best interest. Increase of Authorized Stock. Our board of directors, without any vote or consent of the stockholders, may increase the number of authorized shares of any class or series of stock or the aggregate number of authorized shares we have authority to issue. The ability to increase the number of authorized shares and issue such shares could have the effect of delaying or preventing a change in control even if a change in control were in our stockholders’ best interest. Amendment of Bylaws. Our board of directors has the sole power to amend our Bylaws. This power could have the effect of delaying or preventing a change in control even if a change in control were in our stockholders’ best interests. Stockholder Meetings. Our Bylaws require advance notice for stockholder proposals to be considered at annual meetings of stockholders and for stockholder nominations for election of directors at special meetings of stockholders. The advance notice provisions require a proponent to provide us with detailed information about the proponent and/or nominee. Our Bylaws also provide that stockholders entitled to cast more than 50% of all the votes entitled to be cast at a meeting must join in a request by stockholders to call a special meeting of stockholders and that a specific process for the meeting request must be followed. These provisions could have the effect of delaying or preventing a change in control even if a change in control were in the best interests of our stockholders. Supermajority Votes Required. Our Articles of Incorporation require the affirmative vote of the holders of no less than 80% of the shares of capital stock outstanding and entitled to vote in order (i) to amend the provisions of our Articles of Incorporation relating to the classification of directors, removal of directors, limitation of liability of officers and directors or indemnification of officers and directors or (ii) to amend our Articles of Incorporation to impose cumulative voting in the election of directors. These provisions could have the effect of delaying or preventing a change in control even if a change in control were in our stockholders’ best interest. Item 1B. Unresolved Staff Comments. None. 14 Item 2. Properties Set forth below is information regarding our properties as of December 31, 2014: Property Location Office 1515 Mockingbird Lane Charlotte, NC 28209 678-686 Hillview Drive Milpitas, CA 95035 600 Forest Point Circle Charlotte, NC 28273 14151 Park Meadow Drive Chantilly, VA 20151 1370 & 1390 Timberlake Manor Parkway, Chesterfield, MO 63017 501 & 505 South 336th Street Federal Way, WA 98003 50 Northwest Point Rd. Elk Grove Village, IL 60005 1350 Timberlake Manor Parkway Chesterfield, MO 63017 16285 Park Ten Place Houston, TX 77084 2730-2760 Junction Avenue 408-410 East Plumeria San Jose, CA 95134 15601 Dallas Parkway Addison, TX 75001 1500 & 1600 Greenville Ave. Richardson, TX 75080 Date of Purchase (1) Approx. Square Feet Percent Leased as of 12/31/14 Approx. Number of Tenants Major Tenants (2) 8/1/97 109,674 92% 70 Healthgram Inc. 3/9/99 36,288 100% Headway Technologies, Inc. 1 7/8/99 62,212 100% American National Red Cross 1 3/15/01 138,537 93% American Systems Corporation 5 Omniplex World Services Booz Allen Hamilton, Inc. 5/24/01 232,766 98% RGA Reinsurance Company AMDOCS, Inc. 5 9/14/01 117,010 57% 13 SunGard Availability Services, LP 12/5/01 176,848 100% Citicorp Credit Services, Inc. 1 3/4/02 116,197 91% RGA Reinsurance Company 3 AB Mauri Food Inc. d/b/a Fleischmanns Yeast 6/27/02 157,460 63% Bluware, Inc. 7 Subsea Solutions LLC BAE Systems Land & Armaments, LP 8/27/02 145,951 81% County of Santa Clara 2 Spidercloud Wireless, Inc. 9/30/02 293,926 90% 8 Federal National Mortgage Association Behringer Harvard Holdings, LLC Compass Production Partners, LP 3/3/03 300,472 100% ARGO Data Resource Corp. 5 VCE Company, LLC Id Software, LLC 15 Property Location 6550 & 6560 Greenwood Plaza Englewood, CO 80111 3815-3925 River Crossing Pkwy Indianapolis, IN 46240 5055 & 5057 Keller Springs Rd. Addison, TX 75001 2740 North Dallas Parkway Plano, TX 75093 5505 Blue Lagoon Drive Miami, FL 33126 5600, 5620 & 5640 Cox Road Glen Allen, VA 23060 1293 Eldridge Parkway Houston, TX 77077 380 Interlocken Crescent Broomfield, CO 80021 Date of Purchase (1) Approx. Square Feet Percent Leased as of 12/31/14 Approx. Number of Tenants Major Tenants (2) 2/24/05 196,236 100% DIRECTV, Inc. 4 7/6/05 205,059 100% 15 Kaiser Foundation Health Plan Somerset CPAs, P.C. Crowe Horwath, LLP The College Network, Inc. 2/24/06 218,934 91% 31 See Footnote 3 12/15/00 117,050 100% Masergy Communications, Inc. 6 NelsonArchitectural Engineers, Inc. Williston Financial Group Special Insurance Services WR Starky Mortgage, LLP 11/6/03 212,619 100% Burger King Corporation 1 7/16/03 298,456 100% SunTrust Bank 6 General Electric Company ChemTreat, Inc. 1/16/04 248,399 100% CITGO Petroleum Corporation 1 8/15/03 240,185 96% VMWare, Inc. 9 3625 Cumberland Boulevard Atlanta, GA 30339 6/27/06 387,267 86% 24 MWH Americas, Inc Cooley LLP Sierra Financial Services, Inc. Century Business Services, Inc. Bennett Thrasher PC Randstad General Partner (US) Gas South LLC 390 Interlocken Crescent 12/21/06 241,516 72% Vail Holdings, Inc. 8 120 East Baltimore St. Baltimore, MD 21202 16290 Katy Freeway Houston, TX 77094 6/13/07 325,445 82% 17 SunTrust Bank State's Attorney for Baltimore City State Retirement and Pension Systems of Maryland 9/28/05 156,746 100% Murphy Exploration and Production 3 Company 16 Property Location 2291 Ball Drive St Louis, MO 63146 45925 Horseshoe Drive Sterling, VA 20166 4807 Stonecroft Blvd. Chantilly, VA 20151 14800 Charlson Road Eden Praire, MN 55347 121 South Eighth Street and 801 Marquette Ave. S. Minneapolis, MN 55402 4820 Emperor Boulevard Durham, NC 27703 5100 & 5160 Tennyson Pkwy Plano, TX 75024 7500 Dallas Parkway Plano, TX 75024 909 Davis Street Evanston, IL 60201 One Ravinia Drive Atlanta, Georgia 10370 & 10350 Richmond Ave. Houston, TX 77042 1999 Broadway Denver, CO 999 Peachtree Atlanta, GA 1001 17th Street Denver, CO Total Office Date of Purchase (1) Approx. Square Feet Percent Leased as of 12/31/14 Approx. Number of Tenants Major Tenants (2) 12/11/08 127,778 100% Monsanto Company 1 12/26/08 136,658 92% Giesecke & Devrient America, Inc. 2 6/26/09 111,469 100% Northrop Grumman Systems Corp. 1 6/30/09 153,028 100% C.H. Robinson Worldwide, Inc. 1 6/29/10 475,012 91% 42 TCF National Bank 3/4/11 259,531 100% Quintiles Transnational Corp. 1 3/10/11 202,600 100% Denbury Onshore LLC 1 3/24/11 214,110 100% ADS Alliance Data Systems, Inc. 6 Americorp., Inc. d/b/a Altair Global 9/30/11 195,245 98% Houghton Mifflin Harcourt 6 7/31/12 386,603 95% 17 Publishing Company Northshore University Healthsystem T-Mobile South LLC Internap Network Services Corporation Cedar Technologies 11/1/12 629,025 98% 49 Petrobras America, Inc. 5/22/13 676,379 89% 7/1/13 621,946 98% 29 40 Promontory Financial Group, LLC United States Government Sutherland Asbill Brennan LLP Heery International, Inc. 8/28/13 655,420 85% WPX Energy. Inc. 16 Newfield Exploration 9,580,057 93% (1) Date of purchase or merged entity date of purchase. (2) Major tenants that occupy 10% or more of the space in an individual property. (3) No tenant occupies more than 10% of the space. All of the properties listed above are owned, directly or indirectly, by us. None of our properties are subject to any mortgage loans. We have no material undeveloped or unimproved properties, or proposed programs for material renovation, improvement or development of any of our properties in 2015. We believe that our properties are adequately covered by insurance as of December 31, 2014. 17 d e t h g i e w d n a s e i t r e p o r p r u o r o f 4 1 0 2 , 1 3 r e b m e c e D g n i d n e r a e y e h t r o f t o o f e r a u q s r e p t n e r P A A G e g a r e v a d e t h g i e w e h t s e d i v o r p w o l e b d e t n e s e r p n o i t a m r o f n i e h T t u o b a n o i t a m r o f n i e d u l c n i t o n s e o d e l b a t s i h T . s t n e m e s r u b m i e r d n a s n o i s s e c n o c t n a n e t f o t c a p m i e h t s e d u l c n i t n e r P A A G . s e g a t n e c r e p d n a t e e f e r a u q s y c n a p u c c o . s n a o L T I E R d e r o s n o p S d e d i v o r p e v a h e w h c i h w e s o h t r o s T I E R d e t a d i l o s n o c n o n n i s t n e m t s e v n i r u o y b d l e h s e i t r e p o r p e l b a t n e R t e N r o t l i u B r a e Y t e e F e r a u q S d e t a v o n e R e t a t S y t i C e m a N y t r e p o r P 3 4 . 5 1 5 1 . 4 1 7 4 . 7 2 8 2 . 8 1 5 3 . 3 2 7 1 . 6 1 6 4 . 8 3 6 6 . 5 3 6 5 . 4 2 2 5 . 9 1 0 7 . 5 3 8 0 . 3 2 2 3 . 1 2 1 5 . 3 2 0 1 . 6 2 3 7 . 7 2 0 0 . 5 1 0 5 . 2 2 9 1 . 3 2 8 3 . 3 2 9 8 . 0 2 4 6 . 9 2 7 4 . 4 2 9 5 . 4 2 3 2 . 1 3 $ % 2 . 5 8 % 6 . 2 9 % 9 . 9 9 % 7 . 8 7 % 3 . 7 9 % 0 . 0 0 1 % 0 . 0 0 1 % 0 . 0 0 1 % 1 . 3 9 % 0 . 0 0 1 % 9 . 7 9 % 2 . 8 9 % 3 . 8 9 % 0 . 1 9 % 0 . 0 0 1 % 0 . 0 0 1 % 3 . 0 9 % 0 . 6 9 % 0 . 0 0 1 % 8 . 6 9 % 7 . 8 9 % 6 . 2 8 % 6 . 2 9 % 1 . 9 9 % 0 . 0 0 1 ) b ( t e e F e r a u q S ) a ( 4 1 0 2 d e i p u c c O r e p t n e R , 1 3 r e b m e c e D d e t h g i e W e g a r e v A d e t h g i e W d e i p u c c O f o s a e g a t n e c r e P 2 4 4 , 3 9 2 1 2 , 2 6 7 2 3 , 8 2 1 7 8 1 , 8 9 2 0 6 0 , 6 5 2 6 9 9 , 2 3 1 9 6 4 , 1 1 1 1 3 5 , 9 5 2 d e t h g i e W d e i p u c c O . t F . q S 2 1 2 , 2 6 4 7 6 , 9 0 1 7 3 5 , 8 3 1 6 5 4 , 8 9 2 5 4 4 , 5 2 3 8 5 6 , 6 3 1 9 6 4 , 1 1 1 1 3 5 , 9 5 2 8 4 8 , 6 7 1 3 0 2 , 1 9 1 6 8 2 , 1 0 2 2 0 9 , 8 2 2 1 5 7 , 5 0 1 8 7 7 , 7 2 1 8 2 0 , 3 5 1 1 3 0 , 9 2 4 8 4 8 , 6 7 1 5 4 2 , 5 9 1 9 5 0 , 5 0 2 6 6 7 , 2 3 2 7 9 1 , 6 1 1 8 7 7 , 7 2 1 8 2 0 , 3 5 1 2 1 0 , 5 7 4 4 2 2 , 2 4 3 , 1 2 8 9 , 1 4 4 , 1 9 1 6 , 2 1 2 9 2 0 , 5 7 3 2 5 5 , 5 1 1 5 1 0 , 0 3 1 4 6 2 , 2 7 2 8 8 8 , 7 9 2 9 9 3 , 8 4 2 9 1 6 , 2 1 2 7 6 2 , 7 8 3 0 5 0 , 7 1 1 0 6 4 , 7 5 1 6 2 9 , 3 9 2 2 7 4 , 0 0 3 9 9 3 , 8 4 2 7 2 8 , 3 1 6 , 1 3 3 9 , 1 8 6 , 1 9 6 9 1 9 9 9 1 9 9 9 1 9 9 9 1 9 8 9 1 9 9 9 1 8 0 0 2 9 0 0 2 9 9 9 1 2 0 0 2 8 9 9 1 9 9 9 1 0 0 0 2 8 0 0 2 6 0 0 2 4 7 9 1 2 0 0 2 2 0 0 2 9 9 9 1 9 9 9 1 9 9 9 1 9 9 9 1 9 9 9 1 C N C N A V A V D M A V A V C N L I L I N I O M O M O M N M N M L F A G X T X T X T X T X T e t t o l r a h C e t t o l r a h C y l l i t n a h C n e l l A n e l G e r o m i t l a B y l l i t n a h C m a h r u D s e l l u D e g a l l i V e v o r G k l E s t h g i e H d n a l y r a M e r i a r P n e d E s i l o p a e n n i M s i l o p a n a i d n I d l e i f r e t s e h C d l e i f r e t s e h C n o t s n a v E i m a i M a t n a l t A o n a l P n o t s u o H n o s i d d A n o s d r a h c i R n o t s u o H r e t n e C h c e T n u o d u o L d r a v e l u o B r o r e p m E t f o r c e n o t S t n i o P t s e w h t r o N t e e r t S s i v a D 9 0 9 g n i s s o r C r e v i R e k a l r e b m T i l a t o t t s a E g n i s s o r C e d i s e k a L t s a E e k a l r e b m T i f f u l B n e d E t e e r t S h t 8 h t u o S 1 2 1 e v i r D n o o g a L e u l B e c a l P n o t r e v O e n O l a t o t t s e w d i M t n i o P w o d a e M k o o r b s n n I e r o m i t l a B t s a E a c e n e S k r a P k r a P t s e r o F r e t n e C e c i f f O d n e B w o l l i W g n i s s o r C s n i l l o C n e e r G e g d i r d l E e l c r i C n o s i d d A n e T k r a P 18 r u o r o f 4 1 0 2 , 1 3 r e b m e c e D g n i d n e r a e y e h t r o f t o o f e r a u q s r e p t n e r P A A G e g a r e v a d e t h g i e w e h t s e d i v o r p d n a e g a p s u o i v e r p e h t m o r f d e u n i t n o c s i e l b a t g n i w o l l o f e h T e d u l c n i t o n s e o d e l b a t s i h T . s t n e m e s r u b m i e r d n a s n o i s s e c n o c t n a n e t f o t c a p m i e h t s e d u l c n i t n e r P A A G . s e g a t n e c r e p d n a t e e f e r a u q s y c n a p u c c o d e t h g i e w d n a s e i t r e p o r p . s n a o L T I E R d e r o s n o p S d e d i v o r p e v a h e w h c i h w e s o h t r o s T I E R d e t a d i l o s n o c n o n n i s t n e m t s e v n i r u o y b d l e h s e i t r e p o r p t u o b a n o i t a m r o f n i 5 1 . 1 3 3 6 . 0 2 9 5 . 7 1 0 1 . 3 3 4 0 . 3 2 2 8 . 2 3 3 2 . 9 2 2 8 . 6 2 6 5 . 9 2 1 8 . 0 3 8 7 . 1 3 5 6 . 3 2 0 5 . 7 2 0 1 . 6 1 6 4 . 8 1 2 1 . 6 1 3 3 . 8 2 4 0 . 6 2 % 8 . 3 9 % 0 . 0 0 1 % 0 . 0 0 1 % 0 . 0 0 1 % 1 . 2 9 % 9 . 6 9 % 6 . 3 9 % 9 . 5 9 % 6 . 2 9 % 8 . 0 9 % 0 . 5 8 % 0 . 0 0 1 % 0 . 0 7 % 0 . 0 0 1 % 7 . 4 5 % 0 . 9 8 % 2 . 6 8 % 1 . 3 9 d e t h g i e W e g a r e v A d e i p u c c O r e p t n e R ) b ( t e e F e r a u q S d e t h g i e W d e i p u c c O f o s a e g a t n e c r e P , 1 3 r e b m e c e D ) a ( 4 1 0 2 6 4 7 , 6 5 1 1 5 2 , 5 0 2 0 0 6 , 2 0 2 0 1 1 , 4 1 2 5 4 9 , 5 5 3 4 7 2 , 9 0 6 8 2 3 , 2 8 5 d e t h g i e W d e i p u c c O . t F . q S 6 4 7 , 6 5 1 4 3 9 , 8 1 2 0 0 6 , 2 0 2 0 1 1 , 4 1 2 3 0 6 , 6 8 3 5 2 0 , 9 2 6 6 4 9 , 1 2 6 9 1 0 , 8 7 9 , 3 7 5 1 , 7 4 1 , 4 3 8 4 , 2 2 2 7 8 2 , 4 1 6 9 6 3 , 7 5 5 6 3 2 , 6 9 1 1 6 0 , 9 6 1 8 8 2 , 6 3 9 6 9 , 3 6 7 6 8 , 9 2 1 2 6 5 , 9 8 9 , 1 5 8 1 , 0 4 2 9 7 3 , 6 7 6 0 2 4 , 5 5 6 6 3 2 , 6 9 1 6 1 5 , 1 4 2 8 8 2 , 6 3 0 1 0 , 7 1 1 1 5 9 , 5 4 1 5 8 9 , 8 0 3 , 2 2 3 6 , 3 2 9 , 8 7 5 0 , 0 8 5 , 9 e l b a t n e R t e N r o t l i u B r a e Y t e e F e r a u q S d e t a v o n e R e t a t S y t i C e m a N y t r e p o r P 6 0 0 2 5 8 9 1 8 0 0 2 / 9 9 9 1 8 0 0 2 5 8 9 1 8 0 0 2 / 3 8 9 1 7 8 9 1 0 0 0 2 6 8 9 1 6 0 0 2 / 7 7 9 1 0 0 0 2 2 0 0 2 4 8 9 1 2 8 9 1 2 8 9 1 X T X T X T X T A G X T A G O C O C O C O C O C A C A W A C n o t s u o H n o s i d d A a t n a l t A n o t s u o H a t n a l t A o n a l P o n a l P d l e i f m o o r B r e v n e D r e v n e D d o o w e l g n E d l e i f m o o r B s a t i p l i M y a W l a r e d e F e s o J n a S r e t n e C n o s y n n e T y c a g e L I I e s a h P n e T k r a P a z a l P y t r e b i L e l c r i C y c a g e L e n O e v i r D a i n i v a R e n O I I & I e s a h c t s e W e e r t h c a e P 9 9 9 l a t o T h t u o S n e k c o l r e t n I 0 8 3 y a w d a o r B 9 9 9 1 t e e r t S h t 7 1 1 0 0 1 a z a l P d o o w n e e r G n e k c o l r e t n I 0 9 3 r e t n e C w e i v l l i H y a W l a r e d e F r e t n e C s s e n i s u B e u g a t n o M l a t o T t s e W l a t o T d n a r G 19 , s t n a n e t h t n o m - o t - h t n o m g n i d u l c n i , 4 1 0 2 , 1 3 r e b m e c e D d e d n e r a e y e h t r o f t e e f e r a u q s d e i p u c c o d e t h g i e w n o d e s a B ) a ( . e g a t o o f e r a u q s e l b a t n e r ' t e n s y t r e p o r P e h t y b d e d i v i d . t o o f e r a u q s d e i p u c c o d e t h g i e w r e p 4 1 0 2 , r e b m e c e D d e d n e r a e y e h t r o f e u n e v e r l a t n e r P A A G d e z i l a u n n a s t n e s e r p e R ) b ( Item 3. Legal Proceedings From time to time, we may be subject to legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions (or settlements) may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position, cash flows or results of operations. Item 4. Mine Safety Disclosures Not applicable. 20 PART II Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is listed on the NYSE MKT under the symbol “FSP”. The following table sets forth the high and low sales prices on the NYSE MKT for the quarterly periods indicated. Three Months Ended December 31, 2014 September 30, 2014 June 30, 2014 March 31, 2014 December 31, 2013 September 30, 2013 June 30, 2013 March 31, 2013 High $ $ $ $ 12.76 12.76 12.95 13.18 $ $ $ $ 13.77 14.44 15.27 14.80 Range Low $ $ $ $ $ $ $ $ 11.19 11.14 11.04 11.69 11.70 11.55 12.34 12.55 As of February 10, 2015, there were 9,312 holders of our common stock, including both holders of record and participants in securities position listings. On January 9, 2015, our board of directors declared a dividend of $0.19 per share of our common stock payable to stockholders of record as of January 23, 2015 that was paid on February 12, 2015. Set forth below are the distributions per share of common stock made by FSP Corp. in each quarter since 2013. Quarter Ended December 31, 2014 September 30, 2014 June 30, 2014 March 31, 2014 Distribution Per Share of Common Stock of FSP Corp. $0.19 $0.19 $0.19 $0.19 December 31, 2013 September 30, 2013 June 30, 2013 March 31, 2013 $0.19 $0.19 $0.19 $0.19 While not guaranteed, we expect that cash dividends on our common stock comparable to our most recent quarterly dividend will continue to be paid in the future. See Part I, Item 1A Risk Factors, “Our level of dividends may fluctuate.”, for additional information. 21 STOCK PERFORMANCE GRAPH The following graph compares the cumulative total stockholder return on the Company’s common stock between December 31, 2009 and December 31, 2014 with the cumulative total return of (1) the NAREIT Equity Index, (2) the Standard & Poor’s 500 Composite Stock Price Index (“S&P 500”) and (3) the Russell 2000 Total Return Index over the same period. This graph assumes the investment of $100.00 on December 31, 2009 and assumes that any distributions are reinvested. FSP NAREIT Equity S&P 500 Russell 2000 2009 $ 100 100 100 100 2010 $ 103 128 115 127 As of December 31, 2012 $ 2011 $ 76 139 117 122 2013 $ 104 171 180 196 $ 2014 114 218 205 206 102 166 136 141 Notes to Graph: The above performance graph and related information shall not be deemed "soliciting material" or to be "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act, as amended of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing. 22 Item 6. Selected Financial Data The following selected financial information is derived from the historical consolidated financial statements of FSP Corp. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and with FSP Corp.’s consolidated financial statements and related notes thereto included in Item 8. (In thousands, except per share amounts) 2014 Year Ended December 31, 2012 2013 2011 2010 Operating Data: Total revenue Income from: Income from continuing operations Income from discontinued operations Net income Basic and diluted income per share: Continuing operations Discontinued operations Total Distributions declared per share outstanding: Balance Sheet Data: Total assets Total liabilities Total shareholders' equity $ 249,683 $ 213,636 $ 161,580 $ 138,041 $ 115,802 13,148 - 13,148 17,294 2,533 19,827 22,950 (15,317) 7,633 19,357 24,167 43,524 17,729 4,364 22,093 $ 0.13 $ 0.18 - 0.03 $ 0.21 $ 0.13 $ 0.28 (0.19) $ 0.09 $ 0.24 0.29 $ 0.53 $ 0.22 0.06 $ 0.28 $ 0.76 $ 0.76 $ 0.76 $ 0.76 $ 0.76 2014 2013 As of December 31, 2012 2011 2010 $ 1,936,390 956,743 979,647 $ 2,044,034 993,868 1,050,166 $ 1,526,068 661,319 864,749 $ 1,407,348 485,981 921,367 $ 1,238,735 317,177 921,558 23 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. Historical results and percentage relationships set forth in the consolidated financial statements, including trends which might appear, should not be taken as necessarily indicative of future operations. The following discussion and other parts of this Annual Report on Form 10-K may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation, economic conditions in the United States, disruptions in the debt markets, economic conditions in the markets in which we own properties, risks of a lessening of demand for the types of real estate owned by us, uncertainties relating to fiscal policy, changes in government regulations and regulatory uncertainty, geopolitical events, and expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments. See “Risk Factors” in Item 1A. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We may not update any of the forward-looking statements after the date this Annual Report on Form 10-K is filed to conform them to actual results or to changes in our expectations that occur after such date, other than as required by law. Overview FSP Corp., or we or the Company, operates in the real estate operations segment. The real estate operations segment involves real estate rental operations, leasing, secured financing of real estate and services provided for asset management, property management, property acquisitions, dispositions and development. Our current strategy is to invest in select urban infill and central business district properties, with primary emphasis on our top five markets of Atlanta, Dallas, Denver, Houston and Minneapolis. We believe that our top five markets have macro- economic drivers that have the potential to increase occupancies and rents. We will also monitor San Diego, Silicon Valley, Greater Boston, Raleigh-Durham, and Greater Washington, DC, as well as other markets, for opportunistic investments. FSP Corp. seeks value-oriented investments with an eye towards long-term growth and appreciation, as well as current income. The main factor that affects our real estate operations is the broad economic market conditions in the United States. These market conditions affect the occupancy levels and the rent levels on both a national and local level. We have no influence on broader economic/market conditions. We look to acquire and/or develop quality properties in good locations in order to lessen the impact of downturns in the market and to take advantage of upturns when they occur. Trends and Uncertainties Economic Conditions The economy in the United States is continuing to experience a period of slow economic growth, with slowly declining unemployment from recent high levels, which directly affects the demand for office space, our primary income producing asset. The broad economic market conditions in the United States are affected by numerous factors, including but not limited to, inflation and employment levels, energy prices, slow economic growth and/or recessionary concerns, uncertainty about government fiscal and tax policy, changes in currency exchange rates, geopolitical events, the regulatory environment, the availability of credit and interest rates. In addition, the Federal Reserve Bank’s current reduction in its quantitative easing program (or QE), has been generally received as a harbinger of real improvement, which could bode well for our real estate operations. We could benefit from any further improved economic fundamentals and increasing levels of employment. We believe that the economy is in the early stages of a cyclically-slower but prolonged broad-based upswing. However, future economic factors may negatively affect real estate values, occupancy levels and property income. 24 Real Estate Operations Leasing Our real estate portfolio was approximately 92.8% leased as of December 31, 2014 and approximately 94.1% leased as of December 31, 2013. The 1.3% decrease in leased space was a result of lease expirations and terminations during 2014 that were not leased at December 31, 2014. As of December 31, 2014 we had 689,000 square feet of vacancy in our portfolio compared to 571,000 at December 31, 2013. During the year ended December 31, 2014, we leased approximately 784,000 square feet of office space, of which approximately 635,000 square feet were with existing tenants, at a weighted average term of 6.25 years. On average, tenant improvements for such leases were $16.40 per square foot, lease commissions were $7.66 per square foot and rent concessions were approximately three months of free rent. Average GAAP base rents under such leases were $26.89 per square foot, or 11.8% higher than average rents in the respective properties as applicable compared to the year ended December 31, 2013. As of December 31, 2014, leases for approximately 7.4% and 10.0% of the square footage in our portfolio are scheduled to expire during 2015 and 2016, respectively. As the first quarter of 2015 begins, we believe that our property portfolio is well stabilized, with a balanced lease expiration schedule. We believe that most of our largest property markets are now experiencing generally steady or improving rental conditions. While we cannot generally predict when existing vacancy in our real estate portfolio will be leased or if existing tenants with expiring leases will renew their leases or what the terms and conditions of the lease renewals will be, we expect to renew or sign new leases at then-current market rates for locations in which the buildings are located, which could be above or below the expiring rates. Also, even as the economy recovers, we believe the potential for any of our tenants to default on its lease or to seek the protection of bankruptcy still exists. If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment. In addition, at any time, a tenant of one of our properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant’s lease and thereby cause a reduction in cash available for distribution to our stockholders. Real Estate Acquisition and Investment Activity During 2014: (cid:120) we funded advances on Sponsored REIT Loans for revolving lines of credit in the aggregate (cid:120) (cid:120) amount of approximately $11.2 million; on June 19, we received approximately $13.9 million from FSP Galleria North Corp. as repayment in full of a Sponsored REIT Loan; and on December 23, we received approximately $3.4 million from FSP Highland Place I Corp. as repayment in full of a Sponsored REIT Loan. Additional potential real estate investment opportunities are actively being explored and we would anticipate further real estate investments in the future. During 2013: (cid:120) (cid:120) (cid:120) (cid:120) on May 22, we acquired an office property with approximately 680,277 rentable square feet of space for $183.0 million located in the central business district of Denver, Colorado; on July 1, we acquired an office property with approximately 621,007 rentable square feet for $157.9 million located in the midtown submarket of Atlanta, Georgia; on August 28, we acquired an office property with approximately 655,565 rentable square feet of space for $217.0 million located in the central business district of Denver, Colorado; on December 6, we received approximately $2.35 million from FSP 505 Waterford Corp. as repayment in full of a Sponsored REIT Loan; and (cid:120) we funded advances on Sponsored REIT Loans for revolving lines of credit in the aggregate amount of approximately $8.2 million. 25 During 2012, we: (cid:120) (cid:120) (cid:120) acquired two properties directly into our portfolio with a total of approximately 1,016,000 rentable square feet at an aggregate purchase price of approximately $207.6 million. On July 31, 2012, we acquired an office property with approximately 387,000 square feet for approximately $52.8 million in Atlanta, Georgia and on November 1, 2012 we acquired an office property with approximately 629,000 square feet for approximately $154.8 million in Houston, Texas; funded advances on Sponsored REIT Loans for revolving lines of credit of an aggregate of approximately $41.6 million including $30 million during March 2012 to FSP 50 South Tenth Street Corp., and $11.6 million for revolving lines of credit made during the year ended December 31, 2012; received repayments on Sponsored REIT Loans of $121.2 million, including $106.2 million on July 27, 2012 from a first mortgage loan on a property owned by FSP 50 South Tenth Street Corp., and $15.0 million on December 20, 2012 from a secured revolving line of credit with FSP Phoenix Tower Corp.; and (cid:120) made and funded a Sponsored REIT Loan on July 5, 2012, in the form of a first mortgage loan in the principal amount of $33 million to a wholly-owned subsidiary of a Sponsored REIT, FSP Energy Tower I Corp., which owns a property in Houston, Texas. Dispositions and Discontinued Operations During 2014, the Company early adopted Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU No. 2014-08 clarifies that discontinued operations presentation applies only to disposals representing a strategic shift that has (or will have) a major effect on an entity’s operations and financial results (e.g., a disposal of a major geographical area, a major line of business, a major equity method investment or other major parts of an entity). This ASU standard establishes criteria to evaluate whether transactions should be classified as discontinued operations and requires additional disclosure for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. This standard was applied prospectively during 2014. For periods prior to 2014, the Company reported as discontinued operations, the income and expenses associated with a disposal group (i) that qualified as a component of an entity, (ii) for which cash flows were eliminated from the ongoing operations of the entity, and (iii) in which the Company will not have significant continuing involvement. Comparability between 2014 and prior years is affected as a result of the adoption of the new standard. The rental revenues, operating and maintenance expenses and depreciation and amortization for a property sold in 2014 are included in income from continuing operations. For 2013 and 2012 properties sold were presented as discontinued operations, which required reclassifications of rental revenues, operating and maintenance expenses and depreciation and amortization to income or loss from discontinued operations. Property Dispositions The Company reached an agreement to sell an office property in Plano, Texas, which is expected to close in February 2015. The sales price is approximately $20.8 million and the property has a carrying value of approximately $19.2 million at December 31, 2014. The disposal of the property does not represent a strategic shift that has a major effect on the Company's operations and financial results. Accordingly, the property remains classified within continuing operations for all periods presented. The Company sold an office property containing approximately 110,000 rentable square feet located in Colorado Springs, Colorado on December 3, 2014 at a $0.9 million gain. The disposal of the property does not represent a strategic shift that has a major effect on the Company's operations and financial results. Accordingly, the property remains classified within continuing operations for all periods presented. We sold an office property located in Richardson, Texas on October 29, 2013 at a $2.2 million gain. During the three months ended September 30, 2012, we reached a decision to classify our office property located in Southfield, Michigan as an asset held for sale. In evaluating the Southfield, Michigan property, management considered various subjective factors, including the time, cost and likelihood of successfully leasing the property, the effect of the property’s results on its unencumbered asset value, which was part of the leverage ratio used to calculate interest rates under the Original BAML Credit Agreement (as defined below) and future capital costs to upgrade and reposition the multi-tenant property and to lease up the building, recent leasing and 26 economic activity in the local area, and offers to purchase the property. We concluded that selling the property was the more prudent decision and outweighed the potential future benefit of continuing to hold the property. The property was expected to sell within one year at a loss, which was recorded as a provision for loss on a property held for sale of $14.3 million net of applicable income taxes and was classified as an asset held for sale of $0.7 million at September 30, 2012. We sold the property on December 21, 2012 for $0.3 million resulting in a total loss of $14.8 million. We will continue to evaluate our portfolio, and in the future may decide to dispose of additional properties from time-to-time in the ordinary course of business. We believe that the current property sales environment is improving in many markets relative to both liquidity and pricing. We believe that both improving office property fundamentals as well as attractive financing availability will likely be required to continue to be an improvement in the marketplace for potential property dispositions. As an important part of our total return strategy, we intend to be active in property dispositions when we believe that market conditions warrant such activity and, as a consequence, we continuously review and evaluate our portfolio of properties for potentially advantageous dispositions. Critical Accounting Policies We have certain critical accounting policies that are subject to judgments and estimates by our management and uncertainties of outcome that affect the application of these policies. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. The accounting policies that we believe are most critical to the understanding of our financial position and results of operations, and that require significant management estimates and judgments, are discussed below. Significant estimates in the consolidated financial statements include the allowance for doubtful accounts, purchase price allocations, useful lives of fixed assets, impairment considerations and valuation of derivatives. Critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and estimates are consistently applied and produce financial information that fairly presents our results of operations. Our most critical accounting policies involve our investments in Sponsored REITs and our investments in real property. These policies affect our: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) allocation of purchase price; allowance for doubtful accounts; assessment of the carrying values and impairments of long lived assets; useful lives of fixed assets and intangibles; valuation of derivatives; classification of leases; and ownership of stock in a Sponsored REIT and related interests. These policies involve significant judgments made based upon our experience, including judgments about current valuations, ultimate realizable value, estimated useful lives, salvage or residual value, the ability of our tenants to perform their obligations to us, current and future economic conditions and competitive factors in the markets in which our properties are located. Competition, economic conditions and other factors may cause occupancy declines in the future. In the future we may need to revise our carrying value assessments to incorporate information which is not now known and such revisions could increase or decrease our depreciation expense related to properties we own, result in the classification of our leases as other than operating leases or decrease the carrying values of our assets. Allocation of Purchase Price We allocate the value of real estate acquired among land, buildings, improvements and identified intangible assets and liabilities, which may consist of the value of above market and below market leases, the value of in-place leases, and the value of tenant relationships. Purchase price allocations and the determination of the useful lives are based on management’s estimates. Under some circumstances we may rely upon studies commissioned from independent real estate appraisal firms in determining the purchase price allocations. 27 Purchase price allocated to land and building and improvements is based on management’s determination of the relative fair values of these assets assuming the property was vacant. Management determines the fair value of a property using methods similar to those used by independent appraisers. Purchase price allocated to above or below market leases is based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases including consideration of potential lease renewals and (ii) our estimate of fair market lease rates for the corresponding leases, measured over a period equal to the remaining non-cancelable terms of the respective leases. This aggregate value is allocated between in-place lease values and tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s lease; however, the value of tenant relationships has not been separated from in-place lease value because such value and its consequence to amortization expense is immaterial for acquisitions reflected in our financial statements. Factors considered by us in performing these analyses include (i) an estimate of carrying costs during the expected lease-up periods, including real estate taxes, insurance and other operating income and expenses, and (ii) costs to execute similar leases in current market conditions, such as leasing commissions, legal and other related costs. If future acquisitions result in our allocating material amounts to the value of tenant relationships, those amounts would be separately allocated and amortized over the estimated life of the relationships. Allowance for Doubtful Accounts We provide an allowance for doubtful accounts based on our estimate of a tenant’s ability to make future rent payments. The computation of this allowance is based in part on the tenants’ payment history and current credit status. Impairment We periodically evaluate our real estate properties for impairment indicators. These indicators may include declining tenant occupancy, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life or legislative, economic or market changes that permanently reduce the value of our investments. If indicators of impairment are present, we evaluate the carrying value of the property by comparing it to its expected future undiscounted cash flows. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the property to the present value of these expected future cash flows. This analysis requires us to judge whether indicators of impairment exist and to estimate likely future cash flows. If we misjudge or estimate incorrectly or if future tenant profitability, market or industry factors differ from our expectations, we may record an impairment charge which is inappropriate or fail to record a charge when we should have done so, or the amount of such charges may be inaccurate. Depreciation and Amortization Expense We compute depreciation expense using the straight-line method over estimated useful lives of up to 39 years for buildings and improvements, and up to 15 years for personal property. Costs incurred in connection with leasing (primarily tenant improvements and leasing commissions) are capitalized and amortized over the lease period. The allocated cost of land is not depreciated. The value of above or below-market leases is amortized over the remaining non-cancelable periods of the respective leases as an adjustment to rental income. The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is also amortized over the remaining non-cancelable periods of the respective leases. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are written off. Inappropriate allocation of acquisition costs, or incorrect estimates of useful lives, could result in depreciation and amortization expenses which do not appropriately reflect the allocation of our capital expenditures over future periods, as is required by generally accepted accounting principles. 28 Derivative Instruments We recognize derivatives on the balance sheet at fair value. Derivatives that do not qualify, or are not designated as hedge relationships, must be adjusted to fair value through income. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability. To the extent hedges are effective, a corresponding amount, adjusted for swap payments, is recorded in accumulated other comprehensive income within stockholders’ equity. Amounts are then reclassified from accumulated other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. Ineffectiveness, if any, is recorded in the income statement. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. We currently have no fair value hedges outstanding. Fair values of derivatives are subject to significant variability based on changes in interest rates and counterparty credit risk. To the extent we enter into fair value hedges in the future, the results of such variability could be a significant increase or decrease in our derivative assets, derivative liabilities, book equity, and/or earnings. Lease Classification Some of our real estate properties are leased on a triple net basis, pursuant to non-cancelable, fixed term, operating leases. Each time we enter a new lease or materially modify an existing lease we evaluate whether it is appropriately classified as a capital lease or as an operating lease. The classification of a lease as capital or operating affects the carrying value of a property, as well as our recognition of rental payments as revenue. These evaluations require us to make estimates of, among other things, the remaining useful life and market value of a property, discount rates and future cash flows. Incorrect assumptions or estimates may result in misclassification of our leases. Ownership of Stock in a Sponsored REIT and Related Interests We currently hold preferred stock interests in two Sponsored REITs. As a result of our common and preferred stock interests in these two Sponsored REITs, we exercise influence over, but do not control these entities. These preferred stock interests are accounted for using the equity method. Under the equity method of accounting our cost basis is adjusted by our share of the Sponsored REITs' operations and distributions received. We also agreed to vote our preferred shares (i) with respect to any merger in the same manner that a majority of the other stockholders of the Sponsored REIT vote for or against the merger and (ii) with respect to any other matter presented to a vote by the stockholders of these Sponsored REITs in the same proportion as shares voted by other stockholders of that Sponsored REIT. We also previously held a preferred stock interest in a third Sponsored REIT, FSP Phoenix Tower Corp., which we refer to as Phoenix Tower. On December 20, 2012, the property owned by Phoenix Tower was sold and, thereafter, Phoenix Tower declared and issued a liquidating distribution for its preferred shareholders, from which we were entitled to $4,862,000. As a result of the sale, we recognized our share of the gain of $1,582,000. We received $4,752,000 on January 4, 2013 and $96,000 on September 30, 2013. As of December 31, 2014, we held a beneficial interest in the Phoenix Tower liquidating trust in the amount of approximately $18,000 in connection with its preferred shares ownership. The equity investments in Sponsored REITS are reviewed for impairment each reporting period. The Company records impairment charges when events or circumstances indicate a decline in the fair value below the carrying value of the investment has occurred and such decline is other-than-temporary. The ultimate realization of the equity investments in Sponsored REITS is dependent on a number of factors, including the performance of each investment and market conditions. An impairment charge is recorded if its determined that a decline in the value below the carrying value of an equity investment in a Sponsored REIT is other than temporary. 29 Results of Operations Impact of Real Estate Acquisition and Investment Activity: The results of operations for each of the acquired properties are included in our operating results as of their respective purchase dates and the funding and repayment dates for mortgage investments. Increases in rental revenues, interest income from loans and expenses for the year ended December 31, 2014 compared to the year ended December 31, 2013, or the year ended December 31, 2013 compared to the year ended December 31, 2012 are primarily a result of the timing of these acquisitions and subsequent contribution of these acquired properties as well as the affect on interest income from the dates of funding and repayment on our mortgage investments. Sales of Real Estate: We sold an office property located in Colorado Springs, Colorado on December 3, 2014 at a $0.9 million gain and we sold an office property located in Richardson, Texas on October 29, 2013 at a $2.2 million gain. On December 21, 2012, we sold an office property located in Southfield, Michigan at a $14.8 million loss. The operating results of properties sold before 2014 are classified as discontinued operations in our consolidated financial statements for all periods presented. The following table shows financial results for the years ended December 31, 2014 and 2013. (in thousands) Revenues: Rental Related party revenue: Management fees and interest income from loans Other Total revenues Expenses: Real estate operating expenses Real estate taxes and insurance Depreciation and amortization Selling, general and administrative Interest Total expenses Income before interest income, equity in earnings (losses) Interest income Equity in earnings of non-consolidated REITs Gain on sale of property, less applicable income tax Income before taxes on income Taxes on income Income from continuing operations Discontinued operations: Income from discontinued operations, net of income tax Gain on sale of property, less applicable income tax Total discontinued operations 2014 243,341 $ 2013 206,926 $ Change $ 36,415 6,241 101 249,683 62,032 36,857 95,915 12,983 27,433 235,220 14,463 3 (1,760) 940 6,646 64 213,636 (405) 37 36,047 51,100 31,616 78,839 11,911 21,054 194,520 10,932 5,241 17,076 1,072 6,379 40,700 19,116 16 (1,358) - (4,653) (13) (402) 940 13,646 17,774 (4,128) 18 498 480 13,148 17,294 (4,146) - - (375) (2,158) - 2,533 (2,533) 375 2,158 Net income $ 13,148 $ 19,827 $ (6,679) 30 Comparison of the year ended December 31, 2014 to the year ended December 31, 2013 Revenues Total revenues increased by $36.0 million to $249.7 million for the year ended December 31, 2014, as compared to the year ended December 31, 2013. The increase was primarily a result of: o An increase in rental revenue of approximately $36.4 million arising primarily from property acquisitions in May 2013, July 2013 and August 2013, which were included in the year ended December 31, 2014; and was partially offset by lower leased space of approximately 1.3% in the real estate portfolio at December 31, 2014 compared to December 31, 2013. o The increase in revenues was partially offset by a decrease of approximately $0.4 million in interest income from Sponsored REIT Loans that was principally the result of a $13.9 million repayment loan received in June 2014 and to a lesser extent the result of a $3.4 million repayment received in December 2014. Expenses Total expenses increased by $40.7 million to $235.2 million for the year ended December 31, 2014, as compared to the year ended December 31, 2013. The increase was primarily a result of: o An increase in real estate operating expenses and real estate taxes and insurance of approximately $16.1 million, and depreciation and amortization of $17.1 million, which were primarily from property acquisitions in May 2013, July 2013 and August 2013 and were included in the year ended December 31, 2014. o An increase to interest expense of approximately $6.4 million to $27.4 million during the year ended December 31, 2014 compared to the same period in 2013. The increase was primarily attributable the BMO Term Loan for the full year of 2014 that we originally entered into in August of 2013. o An increase in selling, general and administrative expenses of approximately $1.1 million, which was primarily the result of increased personnel related expenses and professional fees. We had 39 and 37 employees as of December 31, 2014 and 2013, respectively, at our headquarters in Wakefield, Massachusetts. Equity in losses of non-consolidated REITs Equity in losses from non-consolidated REITs increased approximately $0.4 million to a loss of $1.8 million during the year ended December 31, 2014 compared to the same period in 2013. The increase was primarily because equity in loss from our preferred stock investment in a Sponsored REIT, FSP 303 East Wacker Drive Corp., increased $0.5 million and was partially offset by a decrease in loss from our preferred stock investment in a Sponsored REIT, FSP Grand Boulevard Corp., of $0.1 million during the during the year ended December 31, 2014 compared to the same period in 2013. Gain on sale of property, less applicable income tax On December 3, 2014, we sold an office property located in Colorado Springs, Colorado at a gain of approximately $0.9 million. Gains or losses on sales of real estate prior to 2014 are reported in discontinued operations. Taxes on income Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties that increased $12,000 and federal income taxes that increased $6,000 for the year ended December 31, 2014, compared to the year ended December 31, 2013. 31 Income from continuing operations Income from continuing operations for the year ended December 31, 2014 was $13.1 million compared to $17.3 million for the year ended December 31, 2013, for the reasons described above. Discontinued operations and gain (loss) on sale Income from discontinued operations decreased $2.5 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. On October 29, 2013 we sold an office property located in Richardson, Texas at a gain of approximately $2.2 million, which resulted in a reclassification of real estate income and expenses of this property to discontinued operations for 2013. Net income Net income for the year ended December 31, 2014 was $13.1 million compared to $19.8 million for the year ended December 31, 2013, for the reasons described above. The following table shows financial results for the years ended December 31, 2013 and 2012. (in thousands) Revenues: Rental Related party revenue: Management fees and interest income from loans Other Total revenues Expenses: Real estate operating expenses Real estate taxes and insurance Depreciation and amortization Selling, general and administrative Interest Total expenses 2013 206,926 $ 2012 150,434 $ Change $ 56,492 6,646 64 213,636 51,100 31,616 78,839 11,911 21,054 194,520 10,947 199 161,580 (4,301) (135) 52,056 37,440 22,904 54,051 9,916 16,068 140,379 13,660 8,712 24,788 1,995 4,986 54,141 Income before interest income, equity in earnings (losses) Interest income Equity in earnings (losses) of non-consolidated REITs 19,116 16 (1,358) 21,201 51 2,033 (2,085) (35) (3,391) Income before taxes on income Taxes on income Income from continuing operations Discontinued operations: Income from discontinued operations, net of income tax Gain (loss) on sale or properties, less applicable income tax Total discontinued operations 17,774 23,285 (5,511) 145 480 335 17,294 22,950 (5,656) 375 2,158 866 16,984 2,533 (15,317) 17,850 (491) (14,826) Net income $ 19,827 $ 7,633 $ 12,194 32 Comparison of the year ended December 31, 2013 to the year ended December 31, 2012 Revenues Total revenues increased by $52.1 million to $213.6 million for the year ended December 31, 2013, as compared to the year ended December 31, 2012. The increase was primarily a result of: o An increase in rental revenue of approximately $56.5 million arising primarily from property acquisitions in July 2012, November 2012, May 2013, July 2013 and August 2013, which were included in the year ended December 31, 2013; and to a lesser extent, an increase in the occupancy rate of approximately 0.1% to 94.1% in the continuing real estate portfolio at December 31, 2013 compared to December 31, 2012. o The increase was partially offset by a $4.3 million decrease in interest income from loans to Sponsored REITs, which was primarily a result of repayment of two loans in July and December 2012, respectively. These repayments resulted in lower average loan receivable balances from which interest income is derived, during the year ended December 31, 2013, as compared to the year ended December 31, 2012. Expenses Total expenses increased by $54.1 million to $194.5 million for the year ended December 31, 2013, as compared to the year ended December 31, 2012. The increase was primarily a result of: o An increase in real estate operating expenses and real estate taxes and insurance of approximately $22.3 million, and depreciation and amortization of $24.8 million, which were primarily from property acquisitions in July 2012, November 2012, May 2013, July 2013 and August 2013, which were included in the year ended December 31, 2013. o An increase to interest expense of approximately $5.0 million to $21.1 million for the year ended December 31, 2013 compared to the same period in 2012. The increase was primarily attributable to a greater amount of debt outstanding. o An increase in selling, general and administrative expenses of approximately $2.0 million, which was primarily the result of increased personnel related expenses of $0.9 milllion, professional fees of $0.5 million, acquisition costs of $0.3 million and franchise taxes of $0.3 million. We had 37 and 35 employees as of December 31, 2013 and 2012, respectively, at our headquarters in Wakefield, Massachusetts. Equity in earnings of non-consolidated REITs Equity in earnings (losses) from non-consolidated REITs decreased approximately $3.4 million to a loss of $1.4 million during the year ended December 31, 2013 compared to the same period in 2012. The decrease was primarily because equity in income from our preferred stock investment in a Sponsored REIT, FSP 303 East Wacker Drive Corp., which we refer to as East Wacker, decreased $1.7 million during the year ended December 31, 2013 compared to the same period in 2012; and we had a $1.6 million gain included in equity in income in 2012 from our preferred stock investment in FSP Phoenix Tower Corp, which sold its property on December 20, 2012. Taxes on income Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties that increased $132,000 and federal income taxes of $13,000 that increased during the year ended December 31, 2013 compared to the year ended December 31, 2012. Income from continuing operations Income from continuing operations for the year ended December 31, 2013 was $17.3 million compared to $23.0 million for the year ended December 31, 2012, for the reasons described above. 33 Discontinued operations and gain (loss) on sale Income from discontinued operations increased $17.9 million for the year ended December 31, 2013 compared to the year ended December 31, 2012. On October 29, 2013 we sold an office property located in Richardson, Texas at a gain of approximately $2.2 million. On December 21, 2012, we sold one office property located in Southfield, Michigan at a loss of $14.8 million. To a lesser extent, the increase also included an increase in the income from operations of properties we sold for $375,000 for the year ended December 31, 2013 compared to a loss from operations of properties sold for $491,000 for the year ended December 31, 2012. These assets are classified as held for sale on our balance sheet and resulted in a reclassification of real estate income and expenses of these properties to discontinued operations for all periods presented. Net income Net income for the year ended December 31, 2013 was $19.8 million compared to $7.6 million for the year ended December 31, 2012, for the reasons described above. 34 Non-GAAP Financial Measures Funds From Operations The Company evaluates performance based on Funds From Operations, which we refer to as FFO, as management believes that FFO represents the most accurate measure of activity and is the basis for distributions paid to equity holders. The Company defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property and acquisition costs of newly acquired properties that are not capitalized, plus depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges on properties or investments in non-consolidated REITs, and after adjustments to exclude equity in income or losses from, and, to include the proportionate share of FFO from, non-consolidated REITs. FFO should not be considered as an alternative to net income (determined in accordance with GAAP), nor as an indicator of the Company’s financial performance, nor as an alternative to cash flows from operating activities (determined in accordance with GAAP), nor as a measure of the Company’s liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company’s needs. Other real estate companies and the National Association of Real Estate Investment Trusts, or NAREIT may define this term in a different manner. We have included the NAREIT FFO definition in our table and note that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than we do. We believe that in order to facilitate a clear understanding of the results of the Company, FFO should be examined in connection with net income and cash flows from operating, investing and financing activities in the consolidated financial statements. The calculations of FFO are shown in the following table: (in thousands): Net income (loss) (Gain) loss on sale, less applicable income tax Equity in (earnings) losses of non-consolidated REITs FFO from non-consolidated REITs Depreciation and amortization NAREIT FFO Acquisition costs of new properties For the Year Ended December 31, 2012 2013 2014 $ 13,148 $ 19,827 $ 7,633 (940) (2,158) 14,826 1,358 (2,033) 1,760 1,930 2,148 4,124 96,550 79,090 55,518 100,265 80,068 112,448 14 568 287 Funds From Operations $ 112,462 $ 100,833 $ 80,355 Net Operating Income (NOI) The Company provides property performance based on Net Operating Income, which we refer to as NOI. Management believes that investors are interested in this information. NOI is a non-GAAP financial measure that the Company defines as net income (the most directly comparable GAAP financial measure) plus selling, general and administrative expenses, depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges, interest expense, less equity in earnings of nonconsolidated REITs, interest income, management fee income, gains or losses on the sale of assets and excludes non-property specific income and expenses. The information presented includes footnotes and the data is shown by region with properties owned in both periods, which we call Same Store. The Comparative Same Store results include properties held for the periods presented and exclude significant nonrecurring income such as bankruptcy settlements and lease termination fees. NOI, as defined by the Company, may not be comparable to NOI reported by other REITs that define NOI differently. NOI should not be considered an alternative to net income as an indication of our performance or to cash flows as a measure of the Company's liquidity or its ability to make distributions. The calculations of NOI are shown in the following table: 35 (in thousands) Region East MidWest South West Same Store Acquisitions Property NOI from the portfolio Property NOI on assets sold Property NOI Same Store Less Nonrecurring Items in NOI (a) Comparative Same Store Reconciliation to Net income Net Income Add (deduct): Discontinued operations Loss provision or (gain) on sale of assets Management fee income Depreciation and amortization Amortization of above/below market leases Selling, general and administrative Interest expense Interest income Equity in earnings of non-consolidated REITs Non-property specific items, net Property NOI from the continuing portfolio Property NOI classified in discontinued operations Property NOI Net Operating Income (NOI)* Rentable Year Ended $ Square Feet 31-Dec-14 18,973 20,213 55,352 9,719 104,257 1,442 1,682 3,525 977 7,626 Year Ended 31-Dec-13 20,260 $ 19,865 53,132 8,589 101,846 $ Inc (Dec) (1,287) 348 2,220 1,130 2,411 1,954 9,580 37,797 142,054 999 143,053 $ 19,232 121,078 18,565 20,976 1,862 122,940 $ (863) 20,113 $ % Change -6.4% 1.8% 4.2% 13.2% 2.4% 14.9% 17.3% -0.8% 16.4% $ 104,257 $ 101,846 $ 2,411 2.4% 1,223 998 225 -0.2% $ 103,034 $ 100,848 $ 2,186 2.2% Year Ended 31-Dec-14 Year Ended 31-Dec-13 $ 13,148 $ 19,827 - (940) (2,596) 95,915 635 12,983 27,433 (5,298) 1,760 13 (375) (2,158) (2,538) 78,840 (215) 11,929 21,054 (5,584) 1,358 (38) 143,053 122,100 - 840 $ 143,053 $ 122,940 (a) Nonrecurring Items in NOI include proceeds from bankruptcies, lease termination fees or other significant nonrecurring income or expenses, which may affect comparability. *Excludes NOI from investments in and interest income from secured loans to non-consolidated REITs. 36 Liquidity and Capital Resources Cash and cash equivalents were $7.5 million and $19.6 million at December 31, 2014 and December 31, 2013, respectively. The decrease of $12.1 million is attributable to $103.2 million provided by operating activities plus $1.8 million from investing activities, less $117.1 million used in financing activities. Management believes that existing cash, cash anticipated to be generated internally by operations and our existing debt financing will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months. Although there is no guarantee that we will be able to obtain the funds necessary for our future growth, we anticipate generating funds from continuing real estate operations. We believe that we have adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses. Our ability to maintain or increase our level of dividends to stockholders, however, depends in significant part upon the level of rental income from our real properties. Operating Activities The cash provided by our operating activities of $103.2 million is primarily attributable to net income of $13.1 million, less $0.9 million from a gain on sale of a property, plus the add backs of $95.8 million of non-cash activities, a $1.0 million increase in accounts payable and accrued expenses, a $0.7 million decrease in prepaid expenses and other assets, a $0.2 million increase from tenant security deposits and a $0.1 million decrease in tenant rent receivables. These increases were partially offset by a $6.3 million in payments of deferred leasing commissions, a $0.4 million increase in lease acquisition costs and a $0.1 million increase in restricted cash. Investing Activities Our cash from investing activities for the year ended December 31, 2014 of $1.8 million is primarily attributable to $17.3 million in repayments of Sponsored REIT loans, $14.2 million of proceeds on the sale of a property and $0.1 million of distributions in excess of earnings from non-consolidated REITs, which were partially offset by $18.6 million in additions to real estate investments and office equipment and an $11.2 million increase in Sponsored REIT Loans. Financing Activities Our cash used by financing activities for the year ended December 31, 2014 of $117.1 million is primarily attributable to distributions paid to stockholders of $76.1 million, repayments of borrowings on the BAML Revolver (as defined below) of $53.5 million and financing costs of $2.5 million, which were partially offset by borrowings under the BAML Revolver of $15.0 million. BMO Term Loan On October 29, 2014, the Company entered into an Amended and Restated Credit Agreement (the “BMO Credit Agreement”) with the lending institutions referenced in the BMO Credit Agreement and Bank of Montreal, as administrative agent (in such capacity, the “BMO Administrative Agent”), that continued a single, unsecured term loan borrowing in the amount of $220 million (the “BMO Term Loan”). The BMO Term Loan was previously evidenced by a Credit Agreement dated August 26, 2013 by and among the Company, certain of the Company’s wholly-owned subsidiaries, the BMO Administrative Agent and those lenders from time to time a party thereto (the “Original BMO Credit Agreement”). The purpose of the BMO Credit Agreement was to amend and restate the Original BMO Credit Agreement in its entirety to provide, among other things, for the Company to become the sole borrower and for changes to certain financial covenants. On August 26, 2013, the Company drew down the entire $220 million under the BMO Term Loan, which remains fully advanced and outstanding under the BMO Credit Agreement. The BMO Term Loan continues to have a seven year term that matures on August 26, 2020. The BMO Credit Agreement also continues to include an accordion feature that allows up to $50 million of additional loans, subject to receipt of lender commitments and satisfaction of certain customary conditions. The BMO Term Loan bears interest at either (i) a number of basis points over LIBOR depending on the Company’s credit rating (165 basis points over LIBOR at December 31, 2014) or (ii) a number of basis points over the base rate depending on the Company’s credit rating (65 basis points over the base rate at December 31, 2014). 37 The actual margin over LIBOR rate or base rate is determined based on the Company’s credit rating pursuant to the following grid: LEVEL I II III IV V CREDIT RATING LIBOR RATE MARGIN A-/A3 (or higher) BBB+/Baa1 BBB/Baa2 BBB-/Baa3

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