Elme Communities 10-K

ITEM 9A: CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020. Based on the foregoing, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level. Internal Control over Financial Reporting See the Report of Management in Item 8 of this Form 10-K. See the Reports of Independent Registered Public Accounting Firm in Item 8 of this Form 10-K. During the three months ended December 31, 2020, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B: OTHER INFORMATION Amendment to the Articles of Amendment and Restatement, as amended On February 10, 2021, the Board of Trustees (the “Board”) approved an amendment to our Articles of Amendment and Restatement, as amended (the “Charter”) to increase the number of common shares of beneficial interest, $0.01 par value per share (“Common Shares”), authorized by the Charter from 100,000,000 to 150,000,000, and a corresponding increase in the total number of authorized shares of beneficial interest of the Company from 110,000,000 to 160,000,000 (the “Amendment”). The Company filed the Amendment with the State Department of Assessments and Taxation of Maryland on February 10, 2021, which became effective upon filing. Prior to the filing of the Amendment, the Company had approximately 15.5 million, or less than 16%, of the total number of authorized Common Shares available for future issuance. The Amendment was intended to preserve operational flexibility in the current business environment and ensure the Company has adequate available authorized capacity to take advantage of favorable market conditions and strategic opportunities that may arise, including the ability to access the capital markets, finance the acquisition and development of properties and pursue other opportunities integral to the Company’s growth and success. The foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the complete Amendment, a copy of which is filed as Exhibit 3.2 to this Annual Report on Form 10-K and is incorporated herein by reference. Material U.S. Federal Income Tax Considerations The following is a summary of certain material U.S. federal income tax considerations relating to our qualification and taxation as a real estate investment trust, a “REIT,” and the acquisition, holding, and disposition of (i) our common shares, preferred 49 shares and depositary shares (together with common shares and preferred shares, the “shares”) as well as our warrants and rights, and (ii) certain debt securities that we may offer (together with the shares, the “securities”). For purposes of this discussion, references to “our Company,” “we” and “us” mean only Washington Real Estate Investment Trust and not its subsidiaries or affiliates. This summary is based upon the Internal Revenue Code of 1986, as amended, (the “Code”), the Treasury Regulations, rulings and other administrative interpretations and practices of the Internal Revenue Service (“IRS”) (including administrative interpretations and practices expressed in private letter rulings, which are binding on the IRS only with respect to the particular taxpayers who requested and received those rulings), and judicial decisions, all as currently in effect, and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. We have not sought and will not seek an advance ruling from the IRS regarding any matter discussed in this section. The summary is also based upon the assumption that we will operate the Company and its subsidiaries and affiliated entities in accordance with their applicable organizational documents. This summary is for general information only, and does not purport to discuss all aspects of U.S. federal income taxation that may be important to a particular investor in light of its investment or tax circumstances, or to investors subject to special tax rules, including: • tax-exempt organizations, except to the extent discussed below in “—Taxation of U.S. Shareholders—Taxation of Tax-Exempt Shareholders” and “Taxation of Holders of Debt Securities-Tax-Exempt Holders of Debt Securities,” • broker-dealers, • non-U.S. corporations, non-U.S. partnerships, non-U.S. trusts, non-U.S. estates, or individuals who are not taxed as citizens or residents of the United States, all of which may be referred to collectively as “non-U.S. persons,” except to the extent discussed below in “—Taxation of Non-U.S. Shareholders” and “—Taxation of Holders of Debt Securities—Non-U.S. Holders of Debt Securities,” • trusts and estates, • regulated investment companies (“RICs”) • REITs, financial institutions, • insurance companies, • subchapter S corporations, • foreign (non-U.S. governments), • persons subject to the alternative minimum tax provisions of the Code, • persons holding the shares as part of a “hedge,” “straddle,” “conversion,” “synthetic security” or other integrated investment, • persons holding the shares through a partnership or similar pass-through entity, • persons with a “functional currency” other than the U.S. dollar, • persons holding 10% or more (by vote or value) of the beneficial interest in us, except to the extent discussed below, • persons who do not hold the shares as a “capital asset,” within the meaning of Section 1221 of the Code, • corporations subject to the provisions of Section 7874 of the Code, • U.S. expatriates, or • persons otherwise subject to special tax treatment under the Code. 50 This summary does not address state, local or non-U.S. tax considerations. This summary also does not consider tax considerations that may be relevant with respect to securities we may issue, or selling security holders may sell, other than our shares and certain debt instruments described below. Each time we or selling security holders sell securities, we will provide a prospectus supplement that will contain specific information about the terms of that sale and may add to, modify or update the discussion below, as appropriate. Each prospective investor is advised to consult his or her tax advisor to determine the impact of his or her personal tax situation on the anticipated tax consequences of the acquisition, ownership and sale of our shares, warrants, rights and/or debt securities. This includes the U.S. federal, state, local, foreign and other tax considerations of the ownership and sale of our shares, warrants, rights and/or debt securities, and the potential changes in applicable tax laws. Taxation of the Company as a REIT We elected to be taxed as a REIT, commencing with our first taxable year ended December 31, 1960. A REIT generally is not subject to U.S. federal income tax on the “REIT taxable income” (generally, taxable income of the REIT subject to specified adjustments, including a deduction for dividends paid and excluding net capital gain) that it distributes to shareholders, provided that the REIT meets the annual REIT distribution requirement and the other requirements for qualification as a REIT under the Code. We believe that we are organized and have operated, and we intend to continue to operate, in a manner so as to qualify for taxation as a REIT under the Code. However, qualification and taxation as a REIT depend upon our ability to meet the various qualification tests imposed under the Code, including (through our actual annual (or in some cases quarterly) operating results) requirements relating to income, asset ownership, distribution levels and diversity of share ownership. Given the complex nature of the REIT qualification requirements, the ongoing importance of factual determinations and the possibility of future changes in our circumstances, we cannot provide any assurances that we will be organized or operated in a manner so as to satisfy the requirements for qualification and taxation as a REIT under the Code, or that we will meet such requirements in the future. See “—Failure to Qualify as a REIT.” The sections of the Code that relate to our qualification and taxation as a REIT are highly technical and complex. This discussion sets forth the material aspects of the Code sections that govern the U.S. federal income tax treatment of a REIT and its shareholders. This summary is qualified in its entirety by the applicable Code provisions, relevant rules and Treasury Regulations, and related administrative and judicial interpretations. Taxation of REITs in General For each taxable year in which we qualify for taxation as a REIT, we generally will not be subject to U.S. federal corporate income tax on our “REIT taxable income” (generally, taxable income subject to specified adjustments, including a deduction for dividends paid and excluding our net capital gain) that is distributed currently to our shareholders. This treatment substantially eliminates the “double taxation” at the corporate and shareholder levels that generally results from an investment in a non-REIT C corporation. A non-REIT C corporation is a corporation that generally is required to pay tax at the corporate level. Double taxation means taxation once at the corporate level when income is earned and once again at the shareholder level when the income is distributed. In general, the income that we generate is taxed only at the shareholder level upon a distribution of dividends to our shareholders. U.S. shareholders generally will be subject to taxation on dividends distributed by us (other than designated capital gain dividends and “qualified dividend income”) at rates applicable to ordinary income, instead of at lower capital gain rates. For taxable years beginning before January 1, 2026, generally, U.S. shareholders that are individuals, trusts or estates may deduct 20% of the aggregate amount of ordinary dividends distributed by us, subject to certain limitations. Capital gain dividends and qualified dividend income will continue to be subject to a maximum 20% rate. Any net operating losses, foreign tax credits and other tax attributes of a REIT generally do not pass through to our shareholders, subject to special rules for certain items such as the net capital gain that we recognize. Even if we qualify for taxation as a REIT, we will be subject to U.S. federal income tax in the following circumstances: 1. We will be taxed at regular corporate rates on any undistributed “REIT taxable income,” including any undistributed net capital gain. REIT taxable income is the taxable income of the REIT subject to specified adjustments, including a deduction for dividends paid. 2. If we have (1) net income from the sale or other disposition of “foreclosure property” that is held primarily for sale to customers in the ordinary course of business, or (2) other non-qualifying income from foreclosure property, such income will be subject to tax at the highest corporate rate. 51 3. Our net income from “prohibited transactions” will be subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, other than foreclosure property. 4. If we fail to satisfy either the 75% gross income test or the 95% gross income test, as discussed below, but our failure is due to reasonable cause and not due to willful neglect and we nonetheless maintain our qualification as a REIT because we satisfy specified cure provisions, we will be subject to a 100% tax on an amount equal to (a) the greater of (1) the amount by which we fail the 75% gross income test or (2) the amount by which we fail the 95% gross income test, as the case may be, multiplied by (b) a fraction intended to reflect our profitability. 5. We will be subject to a 4% nondeductible excise tax on the excess of the required calendar year distribution over the sum of the amounts actually distributed, excess distributions from the preceding tax year and amounts retained for which U.S. federal income tax was paid. The required distribution for each calendar year is equal to the sum of: • 85% of our REIT ordinary income for the year; • 95% of our REIT capital gain net income for the year, other than capital gains we elect to retain and pay tax on as described below; and • any undistributed taxable income from prior taxable years. 6. We will be subject to a 100% penalty tax on certain rental income we receive when a taxable REIT subsidiary provides services to our tenants, on certain expenses deducted by a taxable REIT subsidiary on payments made to us and, effective for our taxable years beginning after December 31, 2015, on income for services rendered to us by a taxable REIT subsidiary, if the arrangements among us, our tenants, and our taxable REIT subsidiaries do not reflect arm’s-length terms. 7. If we acquire any assets from a non-REIT C corporation in a carry-over basis transaction, we would be liable for corporate income tax, at the highest applicable corporate rate, on the “built-in gain” inherent in those assets if we disposed of those assets within five years after they were acquired. To the extent that assets are transferred to us in a carry-over basis transaction by a partnership in which a non-REIT C corporation owns an interest, we will be subject to this tax in proportion to the non-REIT C corporation’s interest in the partnership. Built-in gain is the amount by which an asset’s fair market value exceeds its adjusted tax basis at the time we acquire the asset. The results described in this paragraph assume that the non-REIT C corporation or partnership transferor will not elect, in lieu of this treatment, to be subject to an immediate tax when the asset is acquired by us. 8. We may elect to retain and pay U.S. federal income tax on our net long-term capital gain. In that case, a U.S. shareholder would include its proportionate share of our undistributed long-term capital gain (to the extent that we make a timely designation of such gain to the shareholder) in its income, would be deemed to have paid the tax we paid on such gain, and would be allowed a credit for its proportionate share of the tax deemed to have been paid, and an adjustment would be made to increase the basis of the U.S. shareholder in our common shares. 9. If we violate an asset test (other than certain de minimis violations) or other requirements applicable to REITs, as described below, but our failure is due to reasonable cause and not due to willful neglect and we nevertheless maintain our REIT qualification because we satisfy specified cure provisions, we will be subject to a tax equal to the greater of $50,000 or the amount determined by multiplying the net income generated by such non-qualifying assets by the highest rate of tax applicable to non-REIT C corporations during periods when owning such assets would have caused us to fail the relevant asset test. 10. If we fail to satisfy a requirement under the Code and the failure would result in the loss of our REIT qualification, other than a failure to satisfy a gross income test or an asset test, as described above, but nonetheless maintain our qualification as a REIT because the requirements of certain relief provisions are satisfied, we will be subject to a penalty of $50,000 for each such failure. 11. If we fail to comply with the requirement to send annual letters to our shareholders requesting information regarding the actual ownership of our shares and the failure was not due to reasonable cause or was due to willful neglect, we will be subject to a $25,000 penalty or, if the failure is intentional, a $50,000 penalty. 12. The earnings of any subsidiaries that are non-REIT C corporations, including any taxable REIT subsidiaries, are subject to U.S. federal corporate income tax. 52 Notwithstanding our qualification as a REIT, we and our subsidiaries may be subject to a variety of taxes, including payroll taxes and state, local, and foreign income, property and other taxes on our assets, operations and/or net worth. We could also be subject to tax in situations and on transactions not presently contemplated. Requirements for Qualification as a REIT The Code defines a “REIT” as a corporation, trust or association: (1) that is managed by one or more trustees or directors; (2) that issues transferable shares or transferable certificates to evidence its beneficial ownership; (3) that would be taxable as a domestic corporation, but for Sections 856 through 859 of the Code; (4) that is neither a financial institution nor an insurance company within the meaning of certain provisions of the Code; (5) that is beneficially owned by 100 or more persons; (6) not more than 50% in value of the outstanding shares or other beneficial interest of which is owned, actually or constructively, by five or fewer individuals (as defined in the Code to include certain entities and as determined by applying certain attribution rules) during the last half of each taxable year; (7) that makes an election to be a REIT for the current taxable year, or has made such an election for a previous taxable year that has not been revoked or terminated, and that satisfies all relevant filing and other administrative requirements established by the IRS that must be met to elect and maintain REIT status; (8) that uses a calendar year for U.S. federal income tax purposes; (9) that meets other applicable tests, described below, regarding the nature of its income and assets and the amount of its distributions; and (10) that has no earnings and profits from any non-REIT taxable year at the close of any taxable year. The Code provides that conditions (1), (2), (3) and (4) above must be met during the entire taxable year and condition (5) above must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Conditions (5) and (6) do not apply until after the first taxable year for which an election is made to be taxed as a REIT. Condition (6) must be met during the last half of each taxable year. For purposes of determining share ownership under condition (6) above, a supplemental unemployment compensation benefits plan, a private foundation or a portion of a trust permanently set aside or used exclusively for charitable purposes generally is considered an individual. However, a trust that is a qualified trust under Code Section 401(a) generally is not considered an individual, and beneficiaries of a qualified trust are treated as holding shares of a REIT in proportion to their actuarial interests in the trust for purposes of condition (6) above. We believe that we have been organized, have operated and have issued sufficient shares of beneficial interest with sufficient diversity of ownership to allow us to satisfy the above conditions. In addition, our declaration of trust contains restrictions regarding the transfer of shares of beneficial interest that are intended to assist us in continuing to satisfy the share ownership requirements described in conditions (5) and (6) above. If we fail to satisfy these share ownership requirements, we will fail to qualify as a REIT unless we qualify for certain relief provisions described below under “—Requirements for Qualification as a REIT-Relief from Violations; Reasonable Cause.” To monitor our compliance with condition (6) above, we are generally required to maintain records regarding the actual ownership of our shares. To do so, we must demand written statements each year from the record holders of specified percentages of our shares pursuant to which the record holders must disclose the actual owners of the shares (i.e., the persons required to include in gross income the dividends paid by us). We must maintain a list of those persons failing or refusing to comply with this demand as part of our records. We could be subject to monetary penalties if we fail to comply with these record-keeping requirements. A shareholder that fails or refuses to comply with the demand is required by Treasury Regulations to submit a statement with its tax return disclosing the actual ownership of our stock and other information. If we comply with the record-keeping requirement and we do not know or, exercising reasonable diligence, would not have known of our failure to meet condition (6) above, then we will be treated as having met condition (6) above. 53 To qualify as a REIT, we cannot have at the end of any taxable year any undistributed earnings and profits that are attributable to a non-REIT taxable year. We elected to be taxed as a REIT beginning with our first taxable year in 1960 and we have not succeeded to any earnings and profits of a regular corporation. Therefore, we do not believe we have had any undistributed non-REIT earnings and profits. Relief from Violations; Reasonable Cause The Code provides relief from violations of the REIT gross income requirements, as described below under “—Requirements for Qualification as a REIT—Gross Income Tests,” in cases where a violation is due to reasonable cause and not to willful neglect, and other requirements are met, including the payment of a penalty tax that is based upon the magnitude of the violation. In addition, certain provisions of the Code extend similar relief in the case of certain violations of the REIT asset requirements (see “—Requirements for Qualification as a REIT—Asset Tests” below) and other REIT requirements, again provided that the violation is due to reasonable cause and not willful neglect, and other conditions are met, including the payment of a penalty tax. If we did not have reasonable cause for a failure, we would fail to qualify as a REIT. Whether we would have reasonable cause for any such failure cannot be known with certainty, because the determination of whether reasonable cause exists depends on the facts and circumstances at the time and we cannot provide any assurance that we in fact would have reasonable cause for a particular failure or that the IRS would not successfully challenge our view that a failure was due to reasonable cause. Moreover, we may be unable to actually rectify a failure and restore asset test compliance within the required timeframe due to the inability to transfer or otherwise dispose of assets, including as a result of restrictions on transfer imposed by our lenders or undertakings with our co-investors and/or the inability to acquire additional qualifying assets due to transaction risks, access to additional capital or other considerations. If we fail to satisfy any of the various REIT requirements, there can be no assurance that these relief provisions would be available to enable us to maintain our qualification as a REIT, and, if such relief provisions are available, the amount of any resultant penalty tax could be substantial. Effect of Subsidiary Entities Ownership of Partnership Interests. In the case of a REIT that is a partner in an entity that is treated as a partnership for U.S. federal income tax purposes, Treasury Regulations provide that the REIT is deemed to own its proportionate share of the partnership’s assets, and to earn its proportionate share of the partnership’s income, for purposes of the asset and gross income tests applicable to REITs, as described below. A REIT’s proportionate share of a partnership’s assets and income is based on the REIT’s pro rata share of the capital interests in the partnership. The Company’s capital interest in a partnership is calculated based on either the Company’s percentage ownership of the capital of the partnership or based on the allocations provided in the applicable partnership or limited liability company operating agreement, using the more conservative calculation. However, solely for purposes of the 10% value test, described below, the determination of a REIT’s interest in the partnership’s assets is based on the REIT’s proportionate interest in the equity and certain debt securities issued by the partnership. In addition, the assets and gross income of the partnership are deemed to retain the same character in the hands of the REIT. Thus, our proportionate share of the assets and items of income of any of our subsidiary partnerships, which include the assets, liabilities, and items of income of any partnership in which our subsidiary partnership holds an interest, are treated as our assets and items of income for purposes of applying the REIT requirements. Any investment in partnerships involves special tax considerations, including the possibility of a challenge by the IRS of the status of any subsidiary partnership as a partnership, as opposed to an association taxable as a corporation, for U.S. federal income tax purposes. If any of these entities were treated as an association for U.S. federal income tax purposes, it would be taxable as a corporation and therefore could be subject to an entity-level tax on its income. In such a situation, the character of our assets and items of gross income would change and could preclude us from satisfying the REIT asset tests or the gross income tests as discussed in “—Requirements for Qualification as a REIT—Asset Tests” and “—Requirements for Qualification as a REIT—Gross Income Tests,” and in turn could prevent us from qualifying as a REIT, unless we are eligible for relief from the violation pursuant to relief provisions. See “—Requirements for Qualification as a REIT—Relief from Violations; Reasonable Cause” above, and “—Requirements for Qualification as a REIT—Gross Income Tests,” “—Requirements for Qualification as a REIT—Asset Tests” and “—Requirements for Qualification as a REIT— Failure to Qualify as a REIT,” below, for discussion of the effect of failure to satisfy the REIT tests for a taxable year, and of the relief provisions. In addition, any change in the status of any subsidiary partnership for tax purposes might be treated as a taxable event, in which case we could have taxable income that is subject to the REIT distribution requirements without receiving any cash. Under the Bipartisan Budget Act of 2015, liability is imposed on the partnership (rather than its partners) for adjustments to reported partnership taxable income resulting from audits or other tax proceedings. The liability can include an imputed underpayment of tax, calculated by using the highest marginal U.S. federal income tax rate, as well as interest and penalties on such imputed underpayment of tax. Using certain rules, partnerships may be able to transfer these liabilities to their partners. In 54 the event any adjustments are imposed by the IRS on the taxable income reported by any subsidiary partnerships, we intend to utilize certain rules to the extent possible to allow us to transfer any liability with respect to such adjustments to the partners of the subsidiary partnerships who should properly bear such liability. However, there is no assurance that we will qualify under those rules or that we will have the authority to use those rules under the operating agreements for certain of our subsidiary partnerships. Ownership of Disregarded Subsidiaries. If a REIT owns a corporate subsidiary that is a “qualified REIT subsidiary,” or QRS, that subsidiary is generally disregarded for U.S. federal income tax purposes, and all assets, liabilities and items of income, deduction and credit of the subsidiary are treated as assets, liabilities and items of income, deduction and credit of the REIT itself, including for purposes of the gross income and asset tests applicable to REITs, as described below. A QRS is any corporation, other than a taxable REIT subsidiary, that is directly or indirectly wholly owned by a REIT. Other entities that are wholly owned by us, including single member limited liability companies that have not elected to be taxed as corporations for U.S. federal income tax purposes, are also generally disregarded as separate entities for U.S. federal income tax purposes, including for purposes of the REIT income and asset tests. Disregarded subsidiaries, along with any partnerships in which we hold an equity interest, are sometimes referred to herein as “pass-through subsidiaries.” In the event that a disregarded subsidiary ceases to be wholly owned by us (for example, if any equity interest in the subsidiary is acquired by a person other than us or another disregarded subsidiary of ours) the subsidiary’s separate existence would no longer be disregarded for U.S. federal income tax purposes. Instead, the subsidiary would have multiple owners and would be treated as either a partnership or a taxable corporation. Such an event could, depending on the circumstances, adversely affect our ability to satisfy the various asset and gross income requirements applicable to REITs, including the requirement that REITs generally may not own, directly or indirectly, more than 10% of the securities of another corporation unless it is a taxable REIT subsidiary or a QRS. See “—Requirements for Qualification as a REIT—Gross Income Tests” and “—Requirements for Qualification as a REIT—Asset Tests.” Ownership of Interests in Taxable REIT Subsidiaries. A taxable REIT subsidiary of ours is a corporation other than a REIT in which we directly or indirectly hold stock, and that has made a joint election with us to be treated as a taxable REIT subsidiary under Section 856(l) of the Code. A taxable REIT subsidiary also includes any corporation other than a REIT in which a taxable REIT subsidiary of ours owns, directly or indirectly, securities (other than certain “straight debt” securities), which represent more than 35% of the total voting power or value of the outstanding securities of such corporation. Other than some activities relating to lodging and health care facilities, a taxable REIT subsidiary may generally engage in any business, including the provision of customary or non-customary services to our tenants without causing us to receive impermissible tenant service income under the REIT gross income tests. A taxable REIT subsidiary is required to pay regular U.S. federal income tax, and state and local income tax where applicable, as a regular corporation. In addition, a taxable REIT subsidiary may be prevented from deducting interest on debt, including debt funded directly or indirectly by us, if certain tests are not satisfied. If dividends are paid to us by one or more of our taxable REIT subsidiaries, then a portion of the dividends we distribute to shareholders who are taxed at individual rates will generally be eligible for taxation at lower capital gains rates, rather than at ordinary income rates. See “—Taxation of U.S. Shareholders—Taxation of Taxable U.S. Shareholders-Qualified Dividend Income.” Generally, a taxable REIT subsidiary can perform impermissible tenant services without causing us to receive impermissible tenant services income under the REIT income tests. However, several provisions applicable to the arrangements between us and our taxable REIT subsidiaries ensure that such taxable REIT subsidiaries will be subject to an appropriate level of U.S. federal income taxation. For example, taxable REIT subsidiaries are limited in their ability to deduct interest payments in excess of a certain amount, including interest payments made directly or indirectly to us, as described below in “— Interest Deduction Limitation Enacted by the TCJA ” In addition, we will be obligated to pay a 100% penalty tax on some payments we receive or on certain expenses deducted by our taxable REIT subsidiaries, and on income earned by our taxable REIT subsidiaries for services provided to, or on behalf of, us, if the economic arrangements between us, our tenants and such taxable REIT subsidiaries are not comparable to similar arrangements among unrelated parties. Our taxable REIT subsidiaries, and any future taxable REIT subsidiaries acquired by us, may make interest and other payments to us and to third parties in connection with activities related to our properties. There can be no assurance that our taxable REIT subsidiaries will not be limited in their ability to deduct interest payments made to us. In addition, there can be no assurance that the IRS might not seek to impose the 100% excise tax on a portion of payments received by us from, or expenses deducted by, or service income imputed to, our taxable REIT subsidiaries. We own subsidiaries that have elected to be treated as taxable REIT subsidiaries for U.S. federal income tax purposes. Each of our taxable REIT subsidiaries is taxable as a regular corporation and has elected, together with us, to be treated as our taxable REIT subsidiary or is treated as our taxable REIT subsidiary under the 35% subsidiary rule discussed above. We may elect, together with other corporations in which we may own directly or indirectly stock, for those corporations to be treated as our taxable REIT subsidiaries. 55 Gross Income Tests To qualify as a REIT, we must satisfy two gross income tests that are applied on an annual basis. First, in each taxable year, at least 75% of our gross income (excluding gross income from prohibited transactions, certain hedging transactions, as described below, and certain foreign currency transactions) must be derived from investments relating to real property or mortgages on real property, including: • “rents from real property”; • dividends or other distributions on, and gain from the sale of, shares in other REITs; • gain from the sale of real property or mortgages on real property, in either case, not held for sale to customers; • interest income derived from mortgage loans secured by real property; and • income attributable to temporary investments of new capital in stocks and debt instruments during the one-year period following our receipt of new capital that we raise through equity offerings or issuance of debt obligations with at least a five-year term. Second, at least 95% of our gross income in each taxable year (excluding gross income from prohibited transactions, certain hedging transactions, as described below, and certain foreign currency transactions) must be derived from some combination of income that qualifies under the 75% gross income test described above, as well as (a) other dividends, (b) interest (including interest income from debt instruments issued by publicly offered REITs), and (c) gain from the sale or disposition of stock or securities (including gain from the sale or other disposition of debt instruments issued by publicly offered REITs), in either case, not held for sale to customers. Beginning with the Company’s taxable year beginning on or after January 1, 2005, gross income from certain hedging transactions are excluded from gross income for purposes of the 95% gross income requirement. Similarly, gross income from certain hedging transactions is excluded from gross income for purposes of the 75% gross income test. Income from, and gain from the termination of, certain hedging transactions, where the property or indebtedness that was the subject of the prior hedging transaction was extinguished or disposed of, also will be excluded from gross income for purposes of either the 75% gross income test or the 95% gross income test. See “—Requirements for Qualification as a REIT—Gross Income Tests—Income from Hedging Transactions.” Rents from Real Property. Rents we receive will qualify as “rents from real property” for the purpose of satisfying the gross income requirements for a REIT described above only if several conditions are met. These conditions relate to the identity of the tenant, the computation of the rent payable, and the nature of the property lease. • First, the amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount we receive or accrue generally will not be excluded from the term “rents from real property” solely by reason of being based on a fixed percentage or percentages of receipts or sales; • Second, we, or an actual or constructive owner of 10% or more of our shares, must not actually or constructively own 10% or more of the interests in the tenant, or, if the tenant is a corporation, 10% or more of the voting power or value of all classes of stock of the tenant. Rents received from such tenant that is a taxable REIT subsidiary, however, will not be excluded from the definition of “rents from real property” as a result of this condition if either (i) at least 90% of the space at the property to which the rents relate is leased to third parties, and the rents paid by the taxable REIT subsidiary are comparable to rents paid by our other tenants for comparable space or (ii) the property is a qualified lodging facility or a qualified health care property and such property is operated on behalf of the taxable REIT subsidiary by a person who is an “eligible independent contractor” (as described below) and certain other requirements are met; • Third, rent attributable to personal property, leased in connection with a lease of real property, must not be greater than 15% of the total rent received under the lease. If this requirement is not met, then the portion of rent attributable to personal property will not qualify as “rents from real property”; and • Fourth, for rents to qualify as rents from real property for the purpose of satisfying the gross income tests, we generally must not operate or manage the property or furnish or render services to the tenants of such property, other than through an “independent contractor” who is adequately compensated and from whom we derive no revenue or through a taxable REIT subsidiary. To the extent that impermissible services are provided by an independent contractor, the 56 cost of the services generally must be borne by the independent contractor. We anticipate that any services we provide directly to tenants will be “usually or customarily rendered” in connection with the rental of space for occupancy only and not otherwise considered to be provided for the tenants’ convenience. We may provide a minimal amount of “non-customary” services to tenants of our properties, other than through an independent contractor or a taxable REIT subsidiary, but we intend that our income from these services will not exceed 1% of our total gross income from the property. If the impermissible tenant services income exceeds 1% of our total income from a property, then all of the income from that property will fail to qualify as rents from real property. If the total amount of impermissible tenant services income does not exceed 1% of our total income from the property, the services will not “taint” the other income from the property (that is, it will not cause the rent paid by tenants of that property to fail to qualify as rents from real property), but the impermissible tenant services income will not qualify as rents from real property. We will be deemed to have received income from the provision of impermissible services in an amount equal to at least 150% of our direct cost of providing the service. We monitor (and intend to continue to monitor) the activities provided at, and the non-qualifying income arising from, our properties and believe that we have not provided services at levels that will cause us to fail to meet the income tests. We provide services and may provide access to third party service providers at some or all of our properties. Based upon our experience in the markets where the properties are located, we believe that all access to service providers and services provided to tenants by us (other than through a qualified independent contractor or a taxable REIT subsidiary) either are usually or customarily rendered in connection with the rental of real property and not otherwise considered rendered to the occupant, or, if considered impermissible services, will not result in an amount of impermissible tenant service income that will cause us to fail to meet the income test requirements. However, we cannot provide any assurance that the IRS will agree with these positions. Income we receive that is attributable to the rental of parking spaces at the properties will constitute rents from real property for purposes of the REIT gross income tests if the services provided with respect to the parking facilities are performed by independent contractors from whom we derive no income, either directly or indirectly, or by a taxable REIT subsidiary. We believe that the income we receive that is attributable to parking facilities will meet these tests and, accordingly, will constitute rents from real property for purposes of the REIT gross income tests. Interest Income. “Interest” generally will be non-qualifying income for purposes of the 75% or 95% gross income tests if it depends in whole or in part on the income or profits of any person. However, interest based on a fixed percentage or percentages of receipts or sales may still qualify under the gross income tests. We do not expect to derive significant amounts of interest that will not qualify under the 75% and 95% gross income tests. Dividend Income. Our share of any dividends received from any taxable REIT subsidiaries will qualify for purposes of the 95% gross income test but not for purposes of the 75% gross income test. We do not anticipate that we will receive sufficient dividends from any taxable REIT subsidiaries to cause us to exceed the limit on non-qualifying income under the 75% gross income test. Dividends that we receive from other qualifying REITs will qualify for purposes of both REIT income tests. Income from Hedging Transactions. From time to time we may enter into hedging transactions with respect to one or more of our assets or liabilities. Any such hedging transactions could take a variety of forms, including the use of derivative instruments such as interest rate swap or cap agreements, option agreements, and futures or forward contracts. Income of a REIT, including income from a pass-through subsidiary, arising from “clearly identified” hedging transactions that are entered into to manage the risk of interest rate or price changes with respect to borrowings, including gain from the disposition of such hedging transactions, to the extent the hedging transactions hedge indebtedness incurred, or to be incurred, by the REIT to acquire or carry real estate assets (each such hedge, a “Borrowings Hedge”), will not be treated as gross income for purposes of either the 95% gross income test or the 75% gross income test. Income of a REIT arising from hedging transactions that are entered into to manage the risk of currency fluctuations with respect to our investments (each such hedge, a “Currency Hedge”) will not be treated as gross income for purposes of either the 95% gross income test or the 75% gross income test provided that the transaction is “clearly identified.” This exclusion from the 95% and 75% gross income tests also will apply if we previously entered into a Borrowings Hedge or a Currency Hedge, a portion of the hedged indebtedness or property is disposed of, and in connection with such extinguishment or disposition we enter into a new “clearly identified” hedging transaction to offset the prior hedging position. In general, for a hedging transaction to be “clearly identified,” (1) it must be identified as a hedging transaction before the end of the day on which it is acquired, originated, or entered into; and (2) the items of risks being hedged must be identified “substantially contemporaneously” with entering into the hedging transaction (generally not more than 35 days after entering into the hedging transaction). To the extent that we hedge with other types of financial instruments or in other situations, the resultant income will be treated as income that does not qualify under the 95% or 75% gross income tests unless the hedge meets certain requirements and we elect to integrate it with a specified asset and to treat the integrated position as a synthetic debt instrument. We intend to structure any hedging transactions in a manner that does not jeopardize our qualification as a REIT but there can be no assurance we will be successful in this regard. 57 Income from Prohibited Transactions. Any gain that we realize on the sale of any property held as inventory or otherwise held primarily for sale to customers in the ordinary course of business, either directly or through subsidiary partnerships and limited liability companies, will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. Under existing law, whether property is held as inventory or primarily for sale to customers in the ordinary course of a trade or business is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. However, we will not be treated as a dealer in real property for purposes of the 100% tax with respect to a real estate asset that we sell if (i) we have held the property for at least two years for the production of rental income prior to the sale, (ii) capitalized expenditures on the property in the two years preceding the sale are less than 30% of the net selling price of the property, and (iii) we either (a) have seven or fewer sales of property (excluding certain property obtained through foreclosure) for the year of sale or (b) the aggregate adjusted basis of property sold during the year is 10% or less of the aggregate adjusted basis of all of our assets as of the beginning of the taxable year or (c) the fair market value of property sold during the year is 10% or less of the aggregate fair market value of all of our assets as of the beginning of the taxable year, or (d) the aggregate adjusted basis of property sold during the year is 20% or less of the aggregate adjusted basis of all of our assets as of the beginning of the taxable year and the aggregate adjusted basis of property sold during the 3-year period ending with the year of sale is 10% or less of the aggregate tax basis of all of our assets as of the beginning of each of the 3 taxable years ending with the year of sale; or (e) the fair market value of property sold during the year is 20% or less of the aggregate fair market value of all of our assets as of the beginning of the taxable year and the fair market value of property sold during the 3-year period ending with the year of sale is 10% or less of the aggregate fair market value of all of our assets as of the beginning of each of the 3 taxable years ending with the year of sale. If we rely on clauses (b), (c), (d), or (e) in the preceding sentence, substantially all of the marketing and development expenditures with respect to the property sold must be made through an independent contractor from whom we derive no income or, our taxable REIT subsidiary. The sale of more than one property to one buyer as part of one transaction constitutes one sale for purposes of this “safe harbor.” We intend to hold our properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing and owning our properties and to make occasional sales of the properties as are consistent with our investment objectives. However, the IRS may successfully contend that some or all of the sales made by us or subsidiary partnerships or limited liability companies are prohibited transactions. In that case, we would be required to pay the 100% penalty tax on our allocable share of the gains resulting from any such sales. Income from Foreclosure Property. We generally will be subject to tax at the maximum corporate rate (currently 21%) on any net income from foreclosure property, including any gain from the disposition of the foreclosure property, other than income that constitutes qualifying income for purposes of the 75% gross income test. Foreclosure property is real property and any personal property incident to such real property (1) that we acquire as the result of having bid on the property at foreclosure, or having otherwise reduced the property to ownership or possession by agreement or process of law, after a default (or upon imminent default) on a lease of the property or a mortgage loan held by us and secured by the property, (2) for which we acquired the related loan or lease at a time when default was not imminent or anticipated, and (3) with respect to which we made a proper election to treat the property as foreclosure property. Any gain from the sale of property for which a foreclosure property election has been made and remains in place generally will not be subject to the 100% tax on gains from prohibited transactions described above, even if the property would otherwise constitute inventory or dealer property. To the extent that we receive any income from foreclosure property that does not qualify for purposes of the 75% gross income test, we intend to make an election to treat the related property as foreclosure property if the election is available (which may not be the case with respect to any acquired “distressed loans”). Failure to Satisfy the Gross Income Tests. If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for that year if we are entitled to relief under the Code. These relief provisions will be generally available if (1) our failure to meet these tests was due to reasonable cause and not due to willful neglect and (2) following our identification of the failure to meet the 75% and/or 95% gross income tests for any taxable year, we file a schedule with the IRS setting forth a description of each item of our gross income that satisfies the gross income tests for purposes of the 75% or 95% gross income test for such taxable year in accordance with Treasury Regulations. It is not possible, however, to state whether in all circumstances we would be entitled to the benefit of these relief provisions. If these relief provisions are inapplicable to a particular set of circumstances, we will fail to qualify as a REIT. As discussed above, under “—Taxation of the Company as a REIT—General,” even if these relief provisions apply, a tax would be imposed based on the amount of non-qualifying income. We intend to take advantage of any and all relief provisions that are available to us to cure any violation of the income tests applicable to REITs. Any redetermined rents, redetermined deductions, excess interest, or redetermined TRS service income we generate will be subject to a 100% penalty tax. In general, redetermined rents are rents from real property that are overstated as a result of services furnished by one of our taxable REIT subsidiaries to any of our tenants, redetermined deductions and excess interest represent amounts that are deducted by a taxable REIT subsidiary for amounts paid to us that are in excess of the amounts that would have been deducted based on arm’s-length negotiations, and redetermined TRS service income is gross income (less deductions allocable thereto) of a taxable REIT subsidiary attributable to services provided to, or on behalf of, us that is less than the amounts that would have been paid by us to the taxable REIT subsidiary if based on arm’s-length negotiations. Rents we receive will not constitute redetermined rents if they qualify for the safe harbor provisions contained in the Code. Safe 58 harbor provisions are provided where: • amounts are excluded from the definition of impermissible tenant service income as a result of satisfying the 1% de minimis exception; • a taxable REIT subsidiary renders a significant amount of similar services to unrelated parties and the charges for such services are substantially comparable; • rents paid to us by tenants leasing at least 25% of the net leasable space of the REIT’s property who are not receiving services from the taxable REIT subsidiary are substantially comparable to the rents paid by the REIT’s tenants leasing comparable space who are receiving such services from the taxable REIT subsidiary and the charge for the service is separately stated; or • the taxable REIT subsidiary’s gross income from the service is not less than 150% of the taxable REIT subsidiary’s direct cost of furnishing the service. While we anticipate that any fees paid to a taxable REIT subsidiary for tenant services will reflect arm’s-length rates, a taxable REIT subsidiary may under certain circumstances provide tenant services which do not satisfy any of the safe-harbor provisions described above. Nevertheless, these determinations are inherently factual, and the IRS has broad discretion to assert that amounts paid between related parties should be reallocated to clearly reflect their respective incomes. If the IRS successfully made such an assertion, we would be required to pay a 100% penalty tax on the redetermined rent, redetermined deductions or excess interest, as applicable. Asset Tests At the close of each calendar quarter, we must satisfy the following tests relating to the nature and diversification of our assets. For purposes of the asset tests, a REIT is not treated as owning the stock of a qualified REIT subsidiary or an equity interest in any entity treated as a partnership otherwise disregarded for U.S. federal income tax purposes. Instead, a REIT is treated as owning its proportionate share of the assets held by such entity. • At least 75% of the value of our total assets must be represented by some combination of “real estate assets,” cash, cash items, and U.S. government securities. For purposes of this test, real estate assets include interests in real property, such as land and buildings, leasehold interests in real property, stock of other corporations that qualify as REITs and debt instruments issued by publicly offered REITs, some types of mortgage-backed securities, mortgage loans, personal property leased in connection with real property to the extent that rents attributable to such personal property are treated as “rents from real property”, and stock or debt instruments held for less than one year purchased with an offering of our shares or long term debt. Assets that do not qualify for purposes of the 75% asset test are subject to the additional asset tests described below. • Not more than 25% of our total assets may be represented by securities other than those described in the first bullet above. • Except for securities described in the first bullet above and the last bullet below and securities in qualified REIT subsidiaries and taxable REIT subsidiaries, the value of any one issuer’s securities owned by us may not exceed 5% of the value of our total assets. • Except for securities described in the first bullet above and the last bullet below and securities in qualified REIT subsidiaries and taxable REIT subsidiaries, we may not own more than 10% of any one issuer’s outstanding voting securities. • Except for securities described in the first bullet above and the last bullet below and securities in qualified REIT subsidiaries and taxable REIT subsidiaries, and certain types of indebtedness that are not treated as securities for purposes of this test, as discussed below, we may not own more than 10% of the total value of the outstanding securities of any one issuer. • Not more than 20% of the value of our total assets may be represented by the securities of one or more taxable REIT subsidiaries. • Not more than 25% of our total assets may be represented by debt instruments issued by publicly offered REITs that are “nonqualified” debt instruments (e.g., not secured by real property or interests in real property). 59 The 10% value test does not apply to certain “straight debt” and other excluded securities, as described in the Code, including (1) loans to individuals or estates; (2) obligations to pay rent from real property; (3) rental agreements described in Section 467 of the Code; (4) any security issued by other REITs; (5) certain securities issued by a state, the District of Columbia, a foreign government, or a political subdivision of any of the foregoing, or the Commonwealth of Puerto Rico; and (6) any other arrangement as determined by the IRS. In addition, (1) a REIT’s interest as a partner in a partnership is not considered a security for purposes of the 10% value test; (2) any debt instrument issued by a partnership (other than straight debt or other excluded security) will not be considered a security issued by the partnership if at least 75% of the partnership’s gross income is derived from sources that would qualify for the 75% REIT gross income test; and (3) any debt instrument issued by a partnership (other than straight debt or other excluded security) will not be considered a security issued by a partnership to the extent of the REIT’s interest as a partner in the partnership. For purposes of the 10% value test, debt will meet the “straight debt” safe harbor if (1) neither us, nor any of our controlled taxable REIT subsidiaries (i.e., taxable REIT subsidiaries more than 50% of the vote or value of the outstanding stock of which is directly or indirectly owned by us), own any securities not described in the preceding paragraph that have an aggregate value greater than one percent of the issuer’s outstanding securities, as calculated under the Code, (2) the debt is a written unconditional promise to pay on demand or on a specified date a sum certain in money, (3) the debt is not convertible, directly or indirectly, into stock, and (4) the interest rate and the interest payment dates of the debt are not contingent on the profits, the borrower’s discretion or similar factors. However, contingencies regarding time of payment and interest are permissible for purposes of qualifying as a straight debt security if either (1) such contingency does not have the effect of changing the effective yield of maturity, as determined under the Code, other than a change in the annual yield to maturity that does not exceed the greater of (i) 5% of the annual yield to maturity or (ii) 0.25%, or (2) neither the aggregate issue price nor the aggregate face amount of the issuer’s debt instruments held by the REIT exceeds $1,000,000 and not more than 12 months of unaccrued interest can be required to be prepaid thereunder. In addition, debt will not be disqualified from being treated as “straight debt” solely because the time or amount of payment is subject to a contingency upon a default or the exercise of a prepayment right by the issuer of the debt, provided that such contingency is consistent with customary commercial practice. We own subsidiaries that have elected to be treated as taxable REIT subsidiaries for U.S. federal income tax purposes. Each of our taxable REIT subsidiaries is taxable as a non-REIT C corporation and has elected, together with us, to be treated as our taxable REIT subsidiary or is treated as a taxable REIT subsidiary under the 35% subsidiary rule discussed above. So long as each taxable REIT subsidiary qualifies as such, we will not be subject to the 5% asset test, 10% voting securities limitation or 10% value limitation with respect to our ownership interest in each taxable REIT subsidiary. We may acquire securities in other taxable REIT subsidiaries in the future. We believe that the aggregate value of our interests in our taxable REIT subsidiaries does not exceed, and believe that in the future it will not exceed, 20% of the aggregate value of our gross assets. To the extent that we own an interest in an issuer that does not qualify as a REIT, a qualified REIT subsidiary, or a taxable REIT subsidiary, we believe that our pro rata share of the value of the securities, including debt, of any such issuer does not exceed 5% of the total value of our assets. Moreover, with respect to each issuer in which we own an interest that does not qualify as a qualified REIT subsidiary or a taxable REIT subsidiary, we believe that our ownership of the securities of any such issuer complies with the 10% voting securities limitation and 10% value limitation. No independent appraisals have been obtained to support these conclusions. In this regard, however, we cannot provide any assurance that the IRS might disagree with our determinations. Failure to Satisfy the Asset Tests. The asset tests must be satisfied not only on the last day of the calendar quarter in which we, directly or through pass-through subsidiaries, acquire securities in the applicable issuer, but also on the last day of the calendar quarter in which we increase our ownership of securities of such issuer, including as a result of increasing our interest in pass-through subsidiaries. After initially meeting the asset tests at the close of any quarter, we will not lose our status as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reason of changes in the relative values of our assets (including a discrepancy caused solely by the change in the foreign currency exchange rate used to value a foreign asset). If failure to satisfy the asset tests results from an acquisition of securities or other property during a quarter, we can cure this failure by disposing of sufficient non-qualifying assets within 30 days after the close of that quarter. We intend to continue to maintain adequate records of the value of our assets to ensure compliance with the asset tests and to take any available action within 30 days after the close of any quarter as may be required to cure any noncompliance with the asset tests. Although we plan to take steps to ensure that we satisfy such tests for any quarter with respect to which testing is to occur, there can be no assurance that such steps will always be successful. If we fail to timely cure any noncompliance with the asset tests, we would cease to qualify as a REIT, unless we satisfy certain relief provisions. The failure to satisfy the 5% asset test, or the 10% vote or value asset tests can be remedied even after the 30-day cure period under certain circumstances. Specifically, if we fail these asset tests at the end of any quarter and such failure is not cured within 30 days thereafter, we may dispose of sufficient assets (generally within six months after the last day of the quarter in which our identification of the failure to satisfy these asset tests occurred) to cure such a violation that does not exceed the 60 lesser of 1% of our assets at the end of the relevant quarter or $10,000,000. If we fail any of the other asset tests or our failure of the 5% and 10% asset tests is in excess of the de minimis amount described above, as long as such failure was due to reasonable cause and not willful neglect, we are permitted to avoid disqualification as a REIT, after the 30-day cure period, by taking steps including the disposing of sufficient assets to meet the asset test (generally within six months after the last day of the quarter in which our identification of the failure to satisfy the REIT asset test occurred), paying a tax equal to the greater of $50,000 or the highest corporate income tax rate of the net income generated by the non-qualifying assets during the period in which we failed to satisfy the asset test, and filing in accordance with applicable Treasury Regulations a schedule with the IRS that describes the assets that caused us to fail to satisfy the asset test(s). We intend to take advantage of any and all relief provisions that are available to us to cure any violation of the asset tests applicable to REITs. In certain circumstances, utilization of such provisions could result in us being required to pay an excise or penalty tax, which could be significant in amount. Annual Distribution Requirements To qualify as a REIT, we are required to distribute dividends, other than capital gain dividends, to our shareholders each year in an amount at least equal to: • the sum of: (1) 90% of our “REIT taxable income,” computed without regard to the dividends paid deduction and our net capital gain; and (2) 90% of our after tax net income, if any, from foreclosure property; minus • the excess of the sum of specified items of non-cash income over 5% of our REIT taxable income, computed without regard to our net capital gain and the deduction for dividends paid. For purposes of this test, non-cash income means income attributable to leveled stepped rents, original issue discount included in our taxable income without the receipt of a corresponding payment, cancellation of indebtedness or income attributable to a like-kind exchange that is later determined to be taxable. We generally must make dividend distributions in the taxable year to which they relate. Dividend distributions may be made in the following year in two circumstances. First, if we declare a dividend in October, November, or December of any year with a record date in one of these months and pay the dividend on or before January 31 of the following year. Such distributions are treated as both paid by us and received by each shareholder on December 31 of the year in which they are declared. Second, distributions may be made in the following year if they are declared before we timely file our tax return for the year and if made with or before the first regular dividend payment after such declaration. These distributions are taxable to our shareholders in the year in which paid, even though the distributions relate to our prior taxable year for purposes of the 90% distribution requirement. To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100%, of our “REIT taxable income,” as adjusted, we will be required to pay tax on that amount at regular corporate tax rates. We intend to make timely distributions sufficient to satisfy these annual distribution requirements. In certain circumstances we may elect to retain, rather than distribute, our net long-term capital gains and pay tax on such gains. In this case, we could elect for our shareholders to include their proportionate share of such undistributed long-term capital gains in income, and to receive a corresponding credit for their share of the tax that we paid. Our shareholders would then increase their adjusted basis of their stock by the difference between (1) the amounts of capital gain dividends that we designated and that they included in their taxable income, minus (2) the tax that we paid on their behalf with respect to that income. To the extent that in the future we may have available net operating losses carried forward from prior tax years, such losses may reduce the amount of distributions that we must make in order to comply with the REIT distribution requirements. Our deduction for any net operating loss carryforwards arising from losses we sustain in taxable years beginning after December 31, 2017, is limited to 80% of our REIT taxable income (determined without regard to the deduction for dividends paid), and any unused portion of such losses may be carried forward indefinitely. If we fail to distribute during each calendar year at least the sum of (a) 85% of our REIT ordinary income for such year, (b) 95% of our REIT capital gain net income for such year, and (c) any undistributed taxable income from prior periods, we would be subject to a non-deductible 4% excise tax on the excess of such required distribution over the sum of (x) the amounts actually distributed, and (y) the amounts of income we retained and on which we paid corporate income tax. We expect that our REIT taxable income (determined before our deduction for dividends paid) will be less than our cash flow because of depreciation and other non-cash charges included in computing REIT taxable income. Accordingly, we anticipate that we will generally have sufficient cash or liquid assets to enable us to satisfy the distribution requirements described above. However, from time to time, we may not have sufficient cash or other liquid assets to meet these distribution requirements due 61 to timing differences between the actual receipt of income and actual payment of deductible expenses, and the inclusion of income and deduction of expenses in arriving at our taxable income. The Internal Revenue Code limits the deductibility of net interest expense paid or accrued on debt properly allocable to a trade or business to 30% of “adjusted taxable income,” subject to certain exceptions. Any deduction in excess of the limitation is carried forward and may be used in a subsequent year, subject to the 30% limitation. Adjusted taxable income is determined without regard to certain deductions, including those for net interest expense, net operating loss carryforwards and, for taxable years beginning before January 1, 2022, depreciation, amortization and depletion. If we or our subsidiaries, as applicable, are eligible to make a timely election (which is irrevocable), the 30% limitation does not apply to a trade or business involving real property development, redevelopment, construction, reconstruction, rental, operation, acquisition, conversion, disposition, management, leasing or brokerage, within the meaning of Section 469(c)(7)(C) of the Code. If this election is made, depreciable real property (including certain improvements) held by the relevant trade or business must be depreciated under the alternative depreciation system under the Code, which is generally less favorable than the generally applicable system of depreciation under the Code. If we do not make the election or if the election is determined not to be available with respect to all or certain of our business activities, this interest deduction limitation could result in us having more REIT taxable income and thus increase the amount of distributions we must make to comply with the REIT requirements and avoid incurring corporate level tax. Similarly, the limitation could cause our TRSs to have greater taxable income and thus potentially greater corporate tax liability. Furthermore, under amendments to Section 451 of the Code made by the TCJA, subject to certain exceptions, we must accrue income for U.S. federal income tax purposes no later than when such income is taken into account as revenue in our financial statements, which could create additional differences between REIT taxable income and the receipt of cash attributable to such income. In addition, Section 162(m) of the Code places a per-employee limit of $1 million on the amount of compensation that a publicly held corporation may deduct in any one year with respect to its chief executive officer and certain other highly compensated executive officers. Recent changes to Section 162(m) made by the TCJA eliminated an exception that formerly permitted certain performance-based compensation to be deducted even if in excess of $1 million, which may have the effect of increasing our REIT taxable income. If these timing differences occur, we may need to arrange for short-term, or possibly long-term, borrowings or need to pay dividends in the form of taxable stock dividends in order to meet the distribution requirements. We may be able to rectify a failure to meet the distribution requirement for a year by paying “deficiency dividends” to our shareholders in a later year, which may be included in our deduction for dividends paid for the earlier year. Thus, we may be able to avoid being taxed on amounts distributed as deficiency dividends. However, we will be required to pay interest to the IRS based upon the amount of any deduction claimed for deficiency dividends. Record-Keeping Requirements We are required to comply with applicable record-keeping requirements. Failure to comply could result in monetary fines. Failure to Qualify as a REIT If we fail to satisfy one or more requirements for REIT qualification other than gross income and asset tests that have the specific savings clauses, we can avoid termination of our REIT qualification by paying a penalty of $50,000 for each such failure, provided that our noncompliance was due to reasonable cause and not willful neglect. If we fail to qualify for taxation as a REIT in any taxable year and the relief provisions do not apply, we will be subject to tax on our taxable income at regular corporate rates. If we fail to qualify for taxation as a REIT, we will not be required to make any distributions to shareholders, and any distributions that are made to shareholders will not be deductible by us. As a result, our failure to qualify for taxation as a REIT would significantly reduce the cash available for distributions by us to our shareholders. In addition, if we fail to qualify for taxation as a REIT, all distributions to shareholders, to the extent of our current and accumulated earnings and profits, will be taxable as regular corporate dividends. For taxable years beginning after December 31, 2017, and before January 1, 2026, generally U.S. shareholders that are individuals, trusts or estates may deduct 20% of the aggregate amount of ordinary dividends distributed by us, subject to certain limitations. Alternatively, such dividends paid to U.S. shareholders that are individuals, trusts and estates may be taxable at the preferential income tax rates (i.e., the 20% maximum U.S. federal rate) for qualified dividends. In addition, subject to the limitations of the Code, corporate distributees may be eligible for the dividends-received deduction, Unless entitled to relief under specific statutory provisions, we also will be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. In addition, if we merge with another REIT and we are the “successor” to the other REIT, the other REIT’s disqualification from taxation as a REIT would prevent us from being taxed as a REIT for the four taxable years following the year during which the other REIT’s qualification was lost. There can be no assurance that we would be entitled to any statutory relief. We intend to take advantage of any and all relief provisions that are available to us to cure any violation of the requirements applicable to REITs. 62 Taxation of U.S. Shareholders Taxation of Taxable U.S. Shareholders This section summarizes the taxation of U.S. shareholders that are not tax-exempt organizations. For these purposes, the term “U.S. shareholder” is a beneficial owner of our shares that is, for U.S. federal income tax purposes: • a citizen or resident of the United States; • a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or of a political subdivision thereof (including the District of Columbia); • an estate the income of which is subject to U.S. federal income taxation regardless of its source; or • any trust if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (2) it has a valid election in place to be treated as a U.S. person. If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds our shares, the U.S. federal income tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. A partner of a partnership holding our shares should consult its own tax advisor regarding the U.S. federal income tax consequences to the partner of the acquisition, ownership and disposition of our shares by the partnership. Distributions Generally. So long as we qualify as a REIT, distributions out of our current or accumulated earnings and profits that are not designated as capital gains dividends or “qualified dividend income” will be taxable to our taxable U.S. shareholders as ordinary income and will not be eligible for the dividends-received deduction in the case of U.S. shareholders that are corporations. However, for tax years prior to 2026, generally U.S. shareholders that are individuals, trusts or estates may deduct 20% of the aggregate amount of ordinary dividends distributed by us, subject to certain limitations. For purposes of determining whether distributions to holders of shares are out of current or accumulated earnings and profits, our earnings and profits will be allocated first to any outstanding preferred shares and then to our outstanding common shares. Dividends received from REITs are generally not eligible to be taxed at the preferential qualified dividend income rates currently available to individual U.S. shareholders who receive dividends from taxable subchapter “C” corporations. Capital Gain Dividends. We may elect to designate distributions of our net capital gain as “capital gain dividends.” Distributions that we properly designate as “capital gain dividends” will be taxable to our taxable U.S. shareholders as long-term capital gains without regard to the period for which the U.S. shareholder that receives such distribution has held its shares. Designations made by us will only be effective to the extent that they comply with Revenue Ruling 89-81, which requires that distributions made to different classes of shares be composed proportionately of dividends of a particular type. If we designate any portion of a dividend as a capital gain dividend, a U.S. shareholder will receive an IRS Form 1099-DIV indicating the amount that will be taxable to the shareholder as capital gain. Corporate shareholders, however, may be required to treat up to 20% of some capital gain dividends as ordinary income. Recipients of capital gain dividends from us that are taxed at corporate income tax rates will be taxed at the normal corporate income tax rates on these dividends. We may elect to retain and pay taxes on some or all of our net long-term capital gains, in which case U.S. shareholders will be treated as having received, solely for U.S. federal income tax purposes, our undistributed capital gains as well as a corresponding credit or refund, as the case may be, for taxes that we paid on such undistributed capital gains. A U.S. shareholder will increase the basis in its shares by the difference between the amount of capital gain included in its income and the amount of tax it is deemed to have paid. A U.S. shareholder that is a corporation will appropriately adjust its earnings and profits for the retained capital gain in accordance with Treasury Regulations to be prescribed by the IRS. Our earnings and profits will be adjusted appropriately. We will classify portions of any designated capital gain dividend or undistributed capital gain as either: • a long-term capital gain distribution, which would be taxable to non-corporate U.S. shareholders at a maximum rate of 20% (excluding the 3.8% tax on “net investment income”), and taxable to U.S. shareholders that are corporations at a maximum rate of 21%; or • an “unrecaptured Section 1250 gain” distribution, which would be taxable to non-corporate U.S. shareholders at a maximum rate of 25%, to the extent of previously claimed depreciation deductions. 63 Distributions from us in excess of our current and accumulated earnings and profits will not be taxable to a U.S. shareholder to the extent that they do not exceed the adjusted basis of the U.S. shareholder’s shares in respect of which the distributions were made. Rather, the distribution will reduce the adjusted basis of these shares. To the extent that such distributions exceed the adjusted basis of a U.S. shareholder’s shares of our shares, the U.S. shareholder generally must include such distributions in income as long-term capital gain, or short-term capital gain if the shares have been held for one year or less. In addition, any dividend that we declare in October, November or December of any year and that is payable to a shareholder of record on a specified date in any such month will be treated as both paid by us and received by the shareholder on December 31 of such year, provided that we actually pay the dividend before the end of January of the following calendar year. To the extent that we have available net operating losses and capital losses carried forward from prior tax years, such losses may reduce the amount of distributions that we must make in order to comply with the REIT distribution requirements. See “—Taxation of the Company as a REIT” and “—Requirements for Qualification as a REIT—Annual Distribution Requirements.” Such losses, however, are not passed through to U.S. shareholders and do not offset income of U.S. shareholders from other sources, nor would such losses affect the character of any distributions that we make, which are generally subject to tax in the hands of U.S. shareholders to the extent that we have current or accumulated earnings and profits. The maximum amount of dividends that we may designate as capital gain and as “qualified dividend income” (discussed below) with respect to any taxable year (effective for distributions in tax years beginning after December 31, 2014) may not exceed the dividends actually paid by us with respect to such year, including dividends paid by us in the succeeding tax year that relate back to the prior tax year for purposes of determining our dividends paid deduction. Qualified Dividend Income. We may elect to designate a portion of our distributions paid to shareholders as “qualified dividend income.” A portion of a distribution that is properly designated as qualified dividend income is taxable to non-corporate U.S. shareholders as capital gain, provided that the shareholder has held the shares with respect to which the distribution is made for more than 60 days during the 121-day period beginning on the date that is 60 days before the date on which such shares become ex-dividend with respect to the relevant distribution. The maximum amount of our distributions eligible to be designated as qualified dividend income for a taxable year is equal to the sum of: • the qualified dividend income received by us during such taxable year from non-REIT corporations (including our taxable REIT subsidiaries); • the excess of any “undistributed” REIT taxable income recognized during the immediately preceding year over the U.S. federal income tax paid by us with respect to such undistributed REIT taxable income; and • the excess of (i) any income recognized during the immediately preceding year attributable to the sale of a built-in-gain asset that was acquired in a carry-over basis transaction from a “C” corporation with respect to which the Company is required to pay U.S. federal income tax, over (ii) the U.S. federal income tax paid by us with respect to such built-in gain. Generally, dividends that we receive will be treated as qualified dividend income for purposes of the first bullet above if (A) the dividends are received from (i) a U.S. corporation (other than a REIT or a RIC), (ii) any of our taxable REIT subsidiaries, or (iii) a “qualifying foreign corporation,” and (B) specified holding period requirements and other requirements are met. A foreign corporation (other than a “foreign personal holding company,” a “foreign investment company,” or “passive foreign investment company”) will be a qualifying foreign corporation if it is incorporated in a possession of the United States, the corporation is eligible for benefits of an income tax treaty with the United States that the Secretary of Treasury determines is satisfactory, or the stock of the foreign corporation on which the dividend is paid is readily tradable on an established securities market in the United States. We generally expect that an insignificant portion, if any, of our distributions from us will consist of qualified dividend income. If we designate any portion of a dividend as qualified dividend income, a U.S. shareholder will receive an IRS Form 1099-DIV indicating the amount that will be taxable to the shareholder as qualified dividend income. Passive Activity Losses and Investment Interest Limitations. Distributions we make and gain arising from the sale or exchange by a U.S. shareholder of our shares will not be treated as passive activity income. As a result, U.S. shareholders generally will not be able to apply any “passive losses” against this income or gain. Distributions we make, to the extent they do not constitute a return of capital, generally will be treated as investment income for purposes of computing the investment interest limitation. A U.S. shareholder may elect, depending on its particular situation, to treat capital gain dividends, capital gains from the disposition of shares and income designated as qualified dividend income as investment income for purposes of the investment interest limitation, in which case the applicable capital gains will be taxed at ordinary income rates. We will notify shareholders regarding the portions of our distributions for each year that constitute ordinary income, return of capital and qualified dividend income. 64 Distributions to Holders of Depositary Shares. Owners of depositary shares will be treated for U.S. federal income tax purposes as if they were owners of the underlying preferred shares represented by such depositary shares. Accordingly, such owners will be entitled to take into account, for U.S. federal income tax purposes, income and deductions to which they would be entitled if they were direct holders of underlying preferred shares. In addition, (i) no gain or loss will be recognized for U.S. federal income tax purposes upon the withdrawal of certificates evidencing the underlying preferred shares in exchange for depositary receipts, (ii) the tax basis of each share of the underlying preferred shares to an exchanging owner of depositary shares will, upon such exchange, be the same as the aggregate tax basis of the depositary shares exchanged therefor, and (iii) the holding period for the underlying preferred shares in the hands of an exchanging owner of depositary shares will include the period during which such person owned such depositary shares. Dispositions of Our Shares. If a U.S. shareholder sells, redeems or otherwise disposes of its shares in a taxable transaction, it will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount of cash and the fair market value of any property received on the sale or other disposition and the holder’s adjusted basis in the shares for tax purposes. In general, a U.S. shareholder’s adjusted basis will equal the U.S. shareholder’s acquisition cost, increased by the excess for net capital gains deemed distributed to the U.S. shareholder (discussed above) less tax deemed paid on it and reduced by returns on capital. In general, capital gains recognized by individuals and other non-corporate U.S. shareholders upon the sale or disposition of our shares will be subject to a maximum U.S. federal income tax rate of 20% (excluding the 3.8% tax on “net investment income”), if our shares are held for more than one year, and will be taxed at ordinary income rates of up to 37% if the stock is held for one year or less. Gains recognized by U.S. shareholders that are corporations are subject to U.S. federal income tax at a maximum rate of 21%, whether or not such gains are classified as long-term capital gains. The IRS has the authority to prescribe, but has not yet prescribed, Treasury Regulations that would apply a capital gain tax rate of 25% (which is higher than the long-term capital gain tax rates for non-corporate U.S. shareholders) to a portion of capital gain realized by a non-corporate U.S. shareholder on the sale of the Company’s shares that would correspond to the REIT’s “unrecaptured Section 1250 gain.” U.S. shareholders should consult with their own tax advisors with respect to their capital gain tax liability. Capital losses recognized by a U.S. shareholder upon the disposition of our shares that were held for more than one year at the time of disposition will be considered long-term capital losses, and are generally available only to offset capital gain income of the shareholder but not ordinary income (except in the case of individuals, who may offset up to $3,000 of ordinary income each year). In addition, any loss upon a sale or exchange of our shares by a U.S. shareholder who has held the shares for six months or less, after applying holding period rules, will be treated as a long-term capital loss to the extent of distributions that we make that are required to be treated by the U.S. shareholder as long-term capital gain. If a shareholder recognizes a loss upon a subsequent disposition of our shares in an amount that exceeds a prescribed threshold, it is possible that the provisions of Treasury Regulations involving “reportable transactions” could apply, with a resulting requirement to separately disclose the loss-generating transaction to the IRS. These regulations, though directed towards “tax shelters,” are broadly written, and apply to transactions that would not typically be considered tax shelters. The Code imposes significant penalties for failure to comply with these requirements. U.S. shareholders should consult their tax advisors concerning any possible disclosure obligation with respect to the receipt or disposition of our shares, or transactions that we might undertake directly or indirectly. Redemption of Preferred Shares and Depositary Shares. Whenever we redeem any preferred shares held by the depositary, the depositary will redeem as of the same redemption date the number of depositary shares representing the preferred shares so redeemed. The treatment accorded to any redemption by us for cash (as distinguished from a sale, exchange or other disposition) of our preferred shares to a holder of such preferred shares can only be determined on the basis of the particular facts as to each holder at the time of redemption. In general, a holder of our preferred shares will recognize capital gain or loss measured by the difference between the amount received by the holder of such shares upon the redemption and such holder’s adjusted tax basis in the preferred shares redeemed (provided the preferred shares are held as a capital asset) if such redemption (i) is ‘‘not essentially equivalent to a dividend’’ with respect to the holder of the preferred shares under Section 302(b)(1) of the Code, (ii) is a “substantially disproportionate” redemption with respect to the shareholder under Section 302(b)(2) of the Code, or (iii) results in a ‘‘complete termination’’ of the holder’s interest in all classes of our shares under Section 302(b)(3) of the Code. In applying these tests, there must be taken into account not only any series or class of the preferred shares being redeemed, but also such holder’s ownership of other classes of our shares and any options (including stock purchase rights) to acquire any of the foregoing. The holder of our preferred shares also must take into account any such securities (including options) which are considered to be owned by such holder by reason of the constructive ownership rules set forth in Sections 318 and 302(c) of the Code. If the holder of preferred shares owns (actually or constructively) none of our voting shares, or owns an insubstantial amount of our voting shares, based upon current law, it is probable that the redemption of preferred shares from such a holder would be 65 considered to be ‘‘not essentially equivalent to a dividend.’’ However, whether a distribution is ‘‘not essentially equivalent to a dividend’’ depends on all of the facts and circumstances, and a holder of our preferred shares intending to rely on any of these tests at the time of redemption should consult its tax advisor to determine their application to its particular situation. Satisfaction of the “substantially disproportionate” and “complete termination” exceptions is dependent upon compliance with the respective objective tests set forth in Section 302(b)(2) and Section 302(b)(3) of the Code. A distribution to a holder of preferred shares will be “substantially disproportionate” if the percentage of our outstanding voting shares actually and constructively owned by the shareholder immediately following the redemption of preferred shares (treating preferred shares redeemed as not outstanding) is less than 80% of the percentage of our outstanding voting shares actually and constructively owned by the shareholder immediately before the redemption, and immediately following the redemption the shareholder actually and constructively owns less than 50% of the total combined voting power of the Company. Because the Company’s preferred shares are nonvoting shares, a shareholder would have to reduce such holder’s holdings (if any) in our classes of voting shares to satisfy this test. If the redemption does not meet any of the tests under Section 302 of the Code, then the redemption proceeds received from our preferred shares will be treated as a distribution on our shares as described under ‘‘-Taxation of U.S. Shareholders-Taxation of Taxable U.S. Shareholders-Distributions Generally,’’ and ‘‘-Taxation of Non-U.S. Shareholders-Distributions Generally.’’ If the redemption of a holder’s preferred shares is taxed as a dividend, the adjusted basis of such holder’s redeemed preferred shares will be transferred to any other shares held by the holder. If the holder owns no other shares, under certain circumstances, such basis may be transferred to a related person, or it may be lost entirely. With respect to a redemption of our preferred shares that is treated as a distribution with respect to our shares, which is not otherwise taxable as a dividend, the IRS has proposed Treasury Regulations that would require any basis reduction associated with such a redemption to be applied on a share-by-share basis which could result in taxable gain with respect to some shares, even though the holder’s aggregate basis for the shares would be sufficient to absorb the entire amount of the redemption distribution (in excess of any amount of such distribution treated as a dividend). Additionally, these proposed Treasury Regulations would not permit the transfer of basis in the redeemed shares of the preferred shares to the remaining shares held (directly or indirectly) by the redeemed holder. Instead, the unrecovered basis in our preferred shares would be treated as a deferred loss to be recognized when certain conditions are satisfied. These proposed Treasury Regulations would be effective for transactions that occur after the date the regulations are published as final Treasury Regulations. There can, however, be no assurance as to whether, when, and in what particular form such proposed Treasury Regulations will ultimately be finalized. Net Investment Income Tax. In certain circumstances, certain U.S. shareholders that are individuals, estates or trusts are subject to a 3.8% tax on “net investment income,” which includes, among other things, dividends on and gains from the sale or other disposition of REIT shares. U.S. shareholders should consult their own tax advisors regarding this legislation. Expansion of Medicare Tax. The Health Care and Reconciliation Act of 2010 requires that, in certain circumstances, certain U.S. holders that are individuals, estates, and trusts pay a 3.8% tax on “net investment income,” which includes, among other things, dividends on and gains from the sale or other disposition of REIT shares. The temporary 20% deduction allowed by Section 199A of the Code, as added by the TCJA, with respect to ordinary REIT dividends received by non-corporate taxpayers is allowed only for purposes of Chapter 1 of the Code and thus is apparently not allowed as a deduction allocable to such dividends for purposes of determining the amount of net investment income subject to the 3.8% Medicare tax, which is imposed under Chapter 2A of the Code. Prospective investors should consult their own tax advisors regarding this legislation. Taxation of Tax Exempt Shareholders U.S. tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, generally are exempt from U.S. federal income taxation. Such entities, however, may be subject to taxation on their unrelated business taxable income, or UBTI. While some investments in real estate may generate UBTI, the IRS has ruled that dividend distributions from a REIT to a tax-exempt entity generally do not constitute UBTI. Based on that ruling, and provided that (1) a tax-exempt shareholder has not held our shares as “debt financed property” within the meaning of the Code (i.e., where the acquisition or holding of our shares is financed through a borrowing by the U.S. tax-exempt shareholder), (2) our shares are not otherwise used in an unrelated trade or business of a U.S. tax-exempt shareholder, and (3) we do not hold an asset that gives rise to “excess inclusion income,” distributions that we make and income from the sale of our shares generally should not give rise to UBTI to a U.S. tax-exempt shareholder. Tax-exempt shareholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, or qualified group legal services plans exempt from U.S. federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) or (c)(20) of the Code, respectively, or single parent title-holding corporations exempt under Section 501(c)(2) and whose income is payable to any of the aforementioned tax-exempt organizations, are subject to different UBTI rules, which generally 66 require such shareholders to characterize distributions from us as UBTI unless the organization is able to properly claim a deduction for amounts set aside or placed in reserve for certain purposes so as to offset the income generated by its investment in our shares. These shareholders should consult with their tax advisors concerning these set aside and reserve requirements. In certain circumstances, a pension trust (1) that is described in Section 401(a) of the Code, (2) is tax exempt under Section 501(a) of the Code, and (3) that owns more than 10% of the value of our shares could be required to treat a percentage of the dividends as UBTI, if we are a “pension-held REIT.” We will not be a pension-held REIT unless: • either (1) one pension trust owns more than 25% of the value of our stock, or (2) one or more pension trusts, each individually holding more than 10% of the value of our shares, collectively own more than 50% of the value of our shares; and • we would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Code provides that shares owned by such trusts shall be treated, for purposes of the requirement that not more than 50% of the value of the outstanding shares of a REIT is owned, directly or indirectly, by five or fewer “individuals” (as defined in the Code to include certain entities), as owned by the beneficiaries of such trusts. The percentage of any REIT dividend from a “pension-held REIT” that is treated as UBTI is equal to the ratio of the UBTI earned by the REIT, treating the REIT as if it were a pension trust and therefore subject to tax on UBTI, to the total gross income of the REIT. An exception applies where the percentage is less than 5% for any year, in which case none of the dividends would be treated as UBTI. The provisions requiring pension trusts to treat a portion of REIT distributions as UBTI will not apply if the REIT is able to satisfy the “not closely held requirement” without relying upon the “look-through” exception with respect to pension trusts. As a result of certain limitations on the transfer and ownership of our common and preferred shares contained in our declaration of trust, we do not expect to be classified as a “pension-held REIT,” and accordingly, the tax treatment described above with respect to pension-held REITs should be inapplicable to our tax-exempt shareholders. Taxation of Non-U.S. Shareholders The following discussion addresses the rules governing U.S. federal income taxation of non-U.S. shareholders. For purposes of this summary, “non-U.S. shareholder” is a beneficial owner of our shares that is not a U.S. shareholder (as defined above under “—Taxation of U.S. Shareholders—Taxation of Taxable U.S. Shareholders”) or an entity that is treated as a partnership for U.S. federal income tax purposes. These rules are complex, and no attempt is made herein to provide more than a brief summary of such rules. Accordingly, the discussion does not address all aspects of U.S. federal income taxation and does not address state local or foreign tax consequences that may be relevant to a non-U.S. shareholder in light of its particular circumstances. Prospective non-U.S. shareholders are urged to consult their tax advisors to determine the impact of U.S. federal, state, local and foreign income tax laws on their ownership of our common shares or preferred shares, including any reporting requirements. Distributions Generally . As described in the discussion below, distributions paid by us with respect to our common shares, our preferred shares and depositary shares will be treated for U.S. federal income tax purposes as either: • ordinary income dividends; • long-term capital gain; or • return of capital distributions. This discussion assumes that our shares will continue to be considered regularly traded on an established securities market for purposes of the Foreign Investment in Real Property Tax Act of 1980, or FIRPTA, provisions described below. If our shares are no longer regularly traded on an established securities market, the tax considerations described below would materially differ. Ordinary Income Dividends . A distribution paid by us to a non-U.S. shareholder will be treated as an ordinary income dividend if the distribution is payable out of our earnings and profits and: • not attributable to our net capital gain; or • the distribution is attributable to our net capital gain from the sale of U.S. Real Property Interests (“USRPIs”), and the non-U.S. shareholder owns 10% or less of the value of our common shares at all times during the one-year period ending on the date of the distribution. 67 In general, non-U.S. shareholders will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of our shares. In cases where the dividend income from a non-U.S. shareholder’s investment in our shares is, or is treated as, effectively connected with the non-U.S. shareholder’s conduct of a U.S. trade or business, the non-U.S. shareholder generally will be subject to U.S. federal income tax at graduated rates, in the same manner as U.S. shareholders are taxed with respect to such dividends. Such income must generally be reported on a U.S. income tax return filed by or on behalf of the non-U.S. shareholder. The income may also be subject to the 30% branch profits tax in the case of a non-U.S. shareholder that is a corporation. Generally, we will withhold and remit to the IRS 30% (or lower applicable treaty rate) of dividend distributions (including distributions that may later be determined to have been made in excess of current and accumulated earnings and profits) that could not be treated as capital gain distributions with respect to the non-U.S. shareholder (and that are not deemed to be capital gain dividends for purposes of the FIRPTA withholding rules described below) unless: • a lower treaty rate applies and the non-U.S. shareholder files an IRS Form W-8BEN or Form W-8BEN-E, as applicable, evidencing eligibility for that reduced treaty rate with us; or • the non-U.S. shareholder files an IRS Form W-8ECI with us claiming that the distribution is income effectively connected with the non-U.S. shareholder’s trade or business; or • the non-U.S. shareholder is a foreign sovereign or controlled entity of a foreign sovereign and also provides an IRS Form W-8EXP claiming an exemption from withholding under section 892 of the Code. Return of Capital Distributions . Unless (A) our shares constitute a USRPI, as described in “—Dispositions of Our Shares” below, or (B) either (1) the non-U.S. shareholder’s investment in our shares is effectively connected with a U.S. trade or business conducted by such non-U.S. shareholder (in which case the non-U.S. shareholder will be subject to the same treatment as U.S. shareholders with respect to such gain) or (2) the non-U.S. shareholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States (in which case the non-U.S. shareholder will be subject to a 30% tax on the individual’s net capital gain for the year), distributions that we make which are not dividends out of our earnings and profits will not be subject to U.S. federal income tax. If we cannot determine at the time a distribution is made whether or not the distribution will exceed current and accumulated earnings and profits, the distribution will be subject to withholding at the rate applicable to dividends. The non-U.S. shareholder may seek a refund from the IRS of any amounts withheld if it subsequently is determined that the distribution was, in fact, in excess of our current and accumulated earnings and profits. If our shares constitute a USRPI, as described below, distributions that we make in excess of the sum of (1) the non-U.S. shareholder’s proportionate share of our earnings and profits, and (2) the non-U.S. shareholder’s basis in its shares, will be taxed under FIRPTA at the rate of tax, including any applicable capital gains rates, that would apply to a U.S. shareholder of the same type (e.g., an individual or a corporation, as the case may be), and the collection of the tax will be enforced by a refundable withholding tax at a rate of 15% of the amount by which the distribution exceeds the non-U.S. shareholder’s share of our earnings and profits. Capital Gain Dividends . A distribution paid by us to a non-U.S. shareholder will be treated as long-term capital gain if the distribution is paid out of our current or accumulated earnings and profits and: • the distribution is attributable to our net capital gain (other than from the sale of USRPIs) and we timely designate the distribution as a capital gain dividend; or • the distribution is attributable to our net capital gain from the sale of USRPIs and the non-U.S. common shareholder owns more than 10% of the value of common shares at any point during the one-year period ending on the date on which the distribution is paid. Long-term capital gain that a non-U.S. shareholder is deemed to receive from a capital gain dividend that is not attributable to the sale of USRPIs generally will not be subject to U.S. federal income tax in the hands of the non-U.S. shareholder unless: • the non-U.S. shareholder’s investment in our shares is effectively connected with a U.S. trade or business of the non-U.S. shareholder, in which case the non-U.S. shareholder will be subject to the same treatment as U.S. shareholders with respect to any gain, except that a non-U.S. shareholder that is a corporation also may be subject to the 30% (or lower applicable treaty rate) branch profits tax; or • the non-U.S. shareholder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States in which case the nonresident alien individual will be subject to a 30% tax on his capital gains. 68 Under FIRPTA, distributions that are attributable to net capital gain from the sale by us of USRPIs and paid to a non-U.S. shareholder that owns more than 10% of the value of our shares at any time during the one-year period ending on the date on which the distribution is paid will be subject to U.S. tax as income effectively connected with a U.S. trade or business. The FIRPTA tax will apply to these distributions whether or not the distribution is designated as a capital gain dividend, and, in the case of a non-U.S. shareholder that is a corporation, such distributions also may be subject to the 30% (or lower applicable treaty rate) branch profits tax. Any distribution paid by us that is treated as a capital gain dividend or that could be treated as a capital gain dividend with respect to a particular non-U.S. shareholder will be subject to special withholding rules under FIRPTA. We will withhold and remit to the IRS 21% (or, to the extent provided in Treasury Regulations, 20%) of any distribution that could be treated as a capital gain dividend with respect to the non-U.S. shareholder, whether or not the distribution is attributable to the sale by us of USRPIs. The amount withheld is creditable against the non-U.S. shareholder’s U.S. federal income tax liability or refundable when the non-U.S. shareholder properly and timely files a tax return with the IRS. Certain non-U.S. pension funds that are “qualified foreign pension funds” as defined by Section 897(l) of the Internal Revenue Code and certain non-U.S. publicly traded entities that are “qualified shareholders” as defined by Section 897(k) of the Internal Revenue Code may be entitled to exceptions to the FIRPTA tax with respect to distributions we pay. Non-U.S. shareholders should consult with their tax advisors regarding the application of these exceptions. Undistributed Capital Gain . Although the law is not entirely clear on the matter, it appears that amounts designated by us as undistributed capital gains in respect of our shares held by non-U.S. shareholders generally should be treated in the same manner as actual distributions by us of capital gain dividends. Under this approach, the non-U.S. shareholder would be able to offset as a credit against their U.S. federal income tax liability resulting therefrom their proportionate share of the tax paid by us on the undistributed capital gains treated as long-term capital gains to the non-U.S. shareholder, and generally receive from the IRS a refund to the extent their proportionate share of the tax paid by us were to exceed the non-U.S. shareholder’s actual U.S. federal income tax liability on such long-term capital gain. If we were to designate any portion of our net capital gain as undistributed capital gain, a non-U.S. shareholder should consult its tax advisors regarding taxation of such undistributed capital gain. Dispositions of Our Shares . Unless our shares constitute a USRPI, a sale of our shares by a non-U.S. shareholder generally will not be subject to U.S. federal income taxation under FIRPTA. Generally, subject to the discussion below regarding dispositions by “qualified shareholders” and “qualified foreign pension funds,” with respect to any particular shareholder, our shares will constitute a USRPI only if each of the following three statements is true: • Fifty percent or more of our assets on any of certain testing dates during a prescribed testing period consist of interests in real property located within the United States, excluding for this purpose, interests in real property solely in a capacity as creditor; • We are not a “domestically-controlled qualified investment entity.” A domestically-controlled qualified investment entity includes a REIT, less than 50% of value of which is held directly or indirectly by non-U.S. shareholders at all times during a specified testing period. Although we believe that we are and will remain a domestically-controlled REIT, because our shares are publicly traded, we cannot guarantee that we are or will remain a domestically-controlled qualified investment entity; and • Either (a) our shares are not “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market; or (b) our shares are “regularly traded” on an established securities market and the selling non-U.S. shareholder has held over 10% of our outstanding common shares any time during the five-year period ending on the date of the sale. Certain non-U.S. pension funds that are “qualified foreign pension funds” as defined by Section 897(l) of the Internal Revenue Code and certain non-U.S. publicly traded entities that are “qualified shareholders” as defined by Section 897(k) of the Internal Revenue Code may be entitled to exceptions to the FIRPTA tax with respect to the sale of our shares. Non-U.S. shareholders should consult with their tax advisors regarding the application of these exceptions. Specific wash sales rules applicable to sales of shares in a domestically-controlled qualified investment entity could result in gain recognition, taxable under FIRPTA, upon the sale of our shares even if we are a domestically-controlled qualified investment entity. These rules would apply if a non-U.S. shareholder (1) disposes of our shares within a 30-day period preceding the ex-dividend date of a distribution, any portion of which, but for the disposition, would have been taxable to such non-U.S. shareholder as gain from the sale or exchange of a USRPI, (2) acquires, or enters into a contract or option to acquire, other shares of our shares during the 61-day period that begins 30 days prior to such ex-dividend date, and (3) if our shares are “regularly traded” on an established securities market in the United States, such non-US stockholder has owned more than 10% 69 of our outstanding shares at any time during the one-year period ending on the date of such distribution. If gain on the sale of our shares were subject to taxation under FIRPTA, the non-U.S. shareholder would be required to file a U.S. federal income tax return and would be subject to the same treatment as a U.S. shareholder with respect to such gain, subject to the applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals, and, if our common shares were not “regularly traded” on an established securities market, the purchaser of the shares generally would be required to withhold 15% of the purchase price and remit such amount to the IRS. Gain from the sale of our shares that would not otherwise be subject to FIRPTA will nonetheless be taxable in the United States to a non-U.S. shareholder as follows: (1) if the non-U.S. shareholder’s investment in our shares is effectively connected with a U.S. trade or business conducted by such non-U.S. shareholder, the non-U.S. shareholder will be subject to the same treatment as a U.S. shareholder with respect to such gain, or (2) if the non-U.S. shareholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and has a “tax home” in the United States, the nonresident alien individual will be subject to a 30% tax on the individual’s capital gain. Taxation of Holders of Our Warrants and Rights Warrants. Holders of our warrants will not generally recognize gain or loss upon the exercise of a warrant. A holder’s basis in the preferred shares, depositary shares representing preferred shares or common shares, as the case may be, received upon the exercise of the warrant will be equal to the sum of the holder’s adjusted tax basis in the warrant and the exercise price paid. A holder’s holding period in the preferred shares, depositary shares representing preferred shares or common shares, as the case may be, received upon the exercise of the warrant will not include the period during which the warrant was held by the holder. Upon the expiration of a warrant, the holder will recognize a capital loss in an amount equal to the holder’s adjusted tax basis in the warrant. Upon the sale or exchange of a warrant to a person other than us, a holder will recognize gain or loss in an amount equal to the difference between the amount realized on the sale or exchange and the holder’s adjusted tax basis in the warrant. Such gain or loss will be capital gain or loss and will be long-term capital gain or loss if the warrant was held for more than one year. Upon the sale of the warrant to us, the IRS may argue that the holder should recognize ordinary income on the sale. Prospective holders of our warrants should consult their own tax advisors as to the consequences of a sale of a warrant to us. Rights. In the event of a rights offering, the tax consequences of the receipt, expiration, and exercise of the rights we issue will be addressed in detail in a prospectus supplement. Prospective holders of our rights should review the applicable prospectus supplement in connection with the ownership of any rights, and consult their own tax advisors as to the consequences of investing in the rights. Dividend Reinvestment and Share Purchase Plan General We offer shareholders and prospective shareholders the opportunity to participate in our Dividend Reinvestment and Share Purchase Plan, which is referred to herein as the “DRIP.” Although we do not currently offer any discount in connection with the DRIP, nor do we plan to offer such a discount at present, we reserve the right to offer in the future a discount on shares purchased, not to exceed 5%, with reinvested dividends or cash distributions and shares purchased through the optional cash investment feature. This discussion assumes that we do not offer a discount in connection with the DRIP. If we were to offer a discount in connection with the DRIP the tax considerations described below would materially differ. In the event that we offer a discount in connection with the DRIP, shareholders are urged to consult with their tax advisors regarding the tax treatment to them of receiving a discount. Amounts Treated as a Distribution Generally, a DRIP participant will be treated as having received a distribution with respect to our shares for U.S. federal income tax purposes in an amount determined as described below. • A shareholder who participates in the dividend reinvestment feature of the DRIP and whose dividends are reinvested in our shares purchased from us will be treated for U.S. federal income tax purposes as having received a distribution from us with respect to our shares equal to the fair market value of our shares credited to the shareholder’s DRIP account on the date the dividends are reinvested. The amount of the distribution deemed received will be reported on the Form 1099-DIV received by the shareholder. • A shareholder who participates in the dividend reinvestment feature of the DRIP and whose dividends are reinvested in our shares purchased in the open market, will be treated for U.S. federal income tax purposes as having received (and 70 will receive a Form 1099-DIV reporting) a distribution from us with respect to its shares equal to the fair market value of our shares credited to the shareholder’s DRIP account (plus any brokerage fees and any other expenses deducted from the amount of the distribution reinvested) on the date the dividends are reinvested. • A shareholder who participates in the optional cash purchase through the DRIP (or a newly enrolled participant not currently our shareholder making their initial investment in our common shares through the DRIP’s optional cash purchase feature) will not be treated as receiving a distribution from us. We will pay the annual maintenance cost for each shareholder’s DRIP account. Consistent with the conclusion reached by the IRS in a private letter ruling issued to another REIT, we intend to take the position that the administrative costs do not constitute a distribution which is either taxable to a shareholder or which would reduce the shareholder’s basis in their common shares. However, because the private letter ruling was not issued to us, we have no legal right to rely on its conclusions. Thus, it is possible that the IRS might view the shareholder’s share of the administrative costs as constituting a taxable distribution to them and/or a distribution which reduces the basis in their shares. For this and other reasons, we may in the future take a different position with respect to these costs. In the situations described above, a shareholder will be treated as receiving a distribution from us even though no cash distribution is actually received. These distributions will be taxable in the same manner as all other distributions paid by us, as described above under “—Taxation of U.S. Shareholders—Taxation of Taxable U.S. Shareholders,” “—Taxation of U.S. Shareholders—Taxation of Tax-Exempt Shareholders,” or “—Taxation of Non-U.S. Shareholders,” as applicable. Basis and Holding Period in Shares Acquired Pursuant to the DRIP. The tax basis for our shares acquired by reinvesting cash distributions through the DRIP generally will equal the fair market value of our shares on the date of distribution (plus the amount of any brokerage fees paid by the shareholder). The holding period for our shares acquired by reinvesting cash distributions will begin on the day following the date of distribution. The tax basis in our shares acquired through an optional cash investment generally will equal the cost paid by the participant in acquiring our shares, including any brokerage fees paid by the shareholder. The holding period for our shares purchased through the optional cash investment feature of the DRIP generally will begin on the day our shares are purchased for the participant’s account. Withdrawal of Shares from the DRIP. When a participant withdraws stock from the DRIP and receives whole shares, the participant will not realize any taxable income. However, if the participant receives cash for a fractional share, the participant will be required to recognize gain or loss with respect to that fractional share. Effect of Withholding Requirements. Withholding requirements generally applicable to distributions from us will apply to all amounts treated as distributions pursuant to the DRIP. See “—Information Reporting and Backup Withholding Tax Applicable to Shareholders—U.S. Shareholders-Generally” and “—Information Reporting and Backup Withholding Tax Applicable to Shareholders—Non-U.S. Shareholders—Generally” for discussion of the withholding requirements that apply to other distributions that we pay. All withholding amounts will be withheld from distributions before the distributions are reinvested under the DRIP. Therefore, if a U.S. shareholder is subject to withholding, distributions which would otherwise be available for reinvestment under the DRIP will be reduced by the withholding amount. Information Reporting and Backup Withholding Tax Applicable to Shareholders U.S. Shareholders—Generally In general, information-reporting requirements will apply to payments of distributions on our shares and payments of the proceeds of the sale of our shares to some U.S. shareholders, unless an exception applies. Further, the payer will be required to withhold backup withholding tax on such payments at the rate of 28% if: (1) the payee fails to furnish a taxpayer identification number (“TIN”) to the payer or to establish an exemption from backup withholding; (2) the IRS notifies the payer that the TIN furnished by the payee is incorrect; (3) there has been a notified payee under-reporting with respect to interest, dividends or original issue discount described in Section 3406(c) of the Code; or (4) there has been a failure of the payee to certify under the penalty of perjury that the payee is not subject to backup withholding under the Code. 71 Some shareholders may be exempt from backup withholding. Any amounts withheld under the backup withholding rules from a payment to a shareholder will be allowed as a credit against the shareholder’s U.S. federal income tax liability and may entitle the shareholder to a refund, provided that the required information is furnished to the IRS. U.S. Shareholders—Withholding on Payments in Respect of Certain Foreign Accounts. As described below, certain future payments made to “foreign financial institutions” and “non-financial foreign entities” may be subject to withholding at a rate of 30%. U.S. shareholders should consult their tax advisors regarding the effect, if any, of this withholding provision on their ownership and disposition of our common stock. See “—Non-U.S. Shareholders—Withholding on Payments to Certain Foreign Entities” below. Non-U.S. Shareholders—Generally Generally, information reporting will apply to payments or distributions on our shares, and backup withholding described above for a U.S. shareholder will apply, unless the payee certifies that it is not a U.S. person or otherwise establishes an exemption. The payment of the proceeds from the disposition of our shares to or through the U.S. office of a U.S. or foreign broker will be subject to information reporting and, possibly, backup withholding as described above for U.S. shareholders, or the withholding tax for non-U.S. shareholders, as applicable, unless the non-U.S. shareholder certifies as to its non-U.S. status or otherwise establishes an exemption, provided that the broker does not have actual knowledge that the shareholder is a U.S. person or that the conditions of any other exemption are not, in fact, satisfied. The proceeds of the disposition by a non-U.S. shareholder of our shares to or through a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, if the broker is a U.S. person, a controlled foreign corporation for U.S. federal income tax purposes, or a foreign person 50% or more of whose gross income from all sources for specified periods is from activities that are effectively connected with a U.S. trade or business, a foreign partnership 50% or more of whose interests are held by partners who are U.S. persons, or a foreign partnership that is engaged in the conduct of a trade or business in the United States, then information reporting generally will apply as though the payment was made through a U.S. office of a U.S. or foreign broker unless the broker has documentary evidence as to the non-U.S. shareholder’s foreign status and has no actual knowledge to the contrary. Applicable Treasury Regulations provide presumptions regarding the status of shareholders when payments to the shareholders cannot be reliably associated with appropriate documentation provided to the payor. If a non-U.S. shareholder fails to comply with the information reporting requirement, payments to such person may be subject to the full withholding tax even if such person might have been eligible for a reduced rate of withholding or no withholding under an applicable income tax treaty. Because the application of these Treasury Regulations varies depending on the non-U.S. shareholder’s particular circumstances, non-U.S. shareholders are urged to consult their tax advisor regarding the information reporting requirements applicable to them. Backup withholding is not an additional tax. Any amounts that we withhold under the backup withholding rules will be refunded or credited against the non-U.S. shareholder’s U.S. federal income tax liability if certain required information is furnished to the IRS. Non-U.S. shareholders should consult their own tax advisors regarding application of backup withholding in their particular circumstances and the availability of and procedure for obtaining an exemption from backup withholding under current Treasury Regulations. Non-U.S. Shareholders—Withholding on Payments to Certain Foreign Entities The Foreign Account Tax Compliance Act (“FATCA”) imposes a 30% withholding tax on certain types of payments made to “foreign financial institutions” and certain other non-U.S. entities unless certain due diligence, reporting, withholding, and certification obligations requirements are satisfied. As a general matter, FATCA imposes a 30% withholding tax on dividends in respect of our shares if paid to a foreign entity unless either (i) the foreign entity is a “foreign financial institution” that undertakes certain due diligence, reporting, withholding, and certification obligations, or in the case of a foreign financial institution that is a resident in a jurisdiction that has entered into an intergovernmental agreement to implement FATCA, the entity complies with the diligence and reporting requirements of such agreement, (ii) the foreign entity is not a “foreign financial institution” and identifies certain of its U.S. investors, or (iii) the foreign entity otherwise is exempted under FATCA. While withholding under FATCA would have applied to payments of gross proceeds from the sale or other disposition of our shares received after December 31, 2018, proposed Treasury Regulations eliminate FATCA withholding on payments of gross proceeds entirely. Taxpayers may generally rely on these proposed Treasury Regulations until final Treasury Regulations are issued. If withholding is required under FATCA on a payment related to our shares, investors that otherwise would not be subject to withholding (or that otherwise would be entitled to a reduced rate of withholding) generally will be required to seek a refund or credit from the IRS to obtain the benefit of such exemption or reduction (provided that such benefit is available). Prospective 72 investors should consult their tax advisors regarding the effect of FATCA in their particular circumstances. Taxation of Holders of Debt Securities The following discussion summarizes certain U.S. federal income tax considerations relating to the purchase, ownership and disposition of certain debt securities that we may offer. This summary assumes the debt securities will be issued with no more than a de minimis amount of original issue discount for U.S. federal income tax purposes. This summary only applies to investors that will hold their debt securities as “capital assets” (within the meaning of Section 1221 of the Code) and purchase their debt securities in the initial offering at their issue price. If such debt securities are purchased at a price other than the offering price, the amortizable bond premium or market discount rules may apply which are not described herein. Prospective holders should consult their own tax advisors regarding these possibilities. This section also does not apply to any debt securities treated as “equity,” rather than debt, for U.S. federal income tax purposes. The tax consequences of owning any notes issued with more than de minimis original issue discount, floating rate debt securities, convertible or exchangeable notes, indexed notes or other debt securities not covered by this discussion that we offer will be discussed in the applicable prospectus supplement. U.S. Holders of Debt Securities This section summarizes the taxation of U.S. Holders of debt securities that are not tax-exempt organizations. For these purposes, the term “U.S. Holder” is a beneficial owner of our debt securities that is, for U.S. federal income tax purposes: • a citizen or resident of the United States; • a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or of a political subdivision thereof (including the District of Columbia); • an estate the income of which is subject to U.S. federal income taxation regardless of its source; or • any trust if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (2) it has a valid election in place to be treated as a U.S. person. If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds our debt securities, the U.S. federal income tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. A partner of a partnership holding our debt securities should consult its own tax advisor regarding the U.S. federal income tax consequences to the partner of the acquisition, ownership and disposition of our debt securities by the partnership. Payments of Interest . Interest on a note will generally be taxable to a U.S. Holder as ordinary interest income at the time it is received or accrued, in accordance with the U.S. Holder’s regular method of tax accounting for U.S. federal income tax purposes. Sale, Exchange, Retirement, Redemption or Other Taxable Disposition of the Debt Securities . Upon a sale, exchange, retirement, redemption or other taxable disposition of debt securities, a U.S. Holder generally will recognize taxable gain or loss in an amount equal to the difference, if any, between the “amount realized” on the disposition and the U.S. Holder’s adjusted tax basis in such debt securities. The amount realized will include the amount of any cash and the fair market value of any property received for the debt securities (other than any amount attributable to accrued but unpaid interest, which will be taxable as ordinary income (as described above under “—Taxation of Holders of Debt Securities—U.S. Holders of Debt Securities—Payments of Interest”) to the extent not previously included in income). A U.S. Holder’s adjusted tax basis in a note generally will be equal to the cost of the note to such U.S. Holder decreased by any payments received on the note other than stated interest. Any such gain or loss generally will be capital gain or loss, and will be long-term capital gain or loss if the U.S. Holder’s holding period for the note is more than one year at the time of disposition. For non-corporate U.S. Holders, long-term capital gain generally will be subject to reduced rates of taxation. The deductibility of capital losses against ordinary income is subject to certain limitations. Information Reporting and Backup Withholding . Payments of interest on, or the proceeds of the sale, exchange or other taxable disposition (including a retirement or redemption) of, a note are generally subject to information reporting unless the U.S. Holder is an exempt recipient (such as a corporation). Such payments may also be subject to U.S. federal backup withholding unless (1) the U.S. Holder is an exempt recipient (such as a corporation), or (2) prior to payment, the U.S. Holder provides a 73 taxpayer identification number and certifies as required on a duly completed and executed IRS Form W-9 (or permitted substitute or successor form), and otherwise complies with the requirements of the backup withholding rules. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against that U.S. Holder’s U.S. federal income tax liability provided the required information is timely furnished to the IRS. Net Investment Income . In certain circumstances, certain U.S. Holders that are individuals, estates, or trusts are subject to a 3.8% tax on “net investment income, which includes, among other things, interest income and net gains from the sale, exchange or other taxable disposition (including a retirement or redemption) of the debt securities, unless such interest payments or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive activities or securities or commodities trading activities). Investors in debt securities should consult their own tax advisors regarding the applicability of this tax to their income and gain in respect of their investment in the debt securities. Tax-Exempt Holders of Debt Securities In general, a tax-exempt organization is exempt from U.S. federal income tax on its income, except to the extent of its UBTI (as defined above under “—Taxation of U.S. Shareholders-Taxation of U.S. Tax-Exempt Shareholders”). Interest income accrued on the debt securities and gain recognized in connection with dispositions of the debt securities generally will not constitute UBTI unless the tax-exempt organization holds the debt securities as debt-financed property (e.g., the tax-exempt organization has incurred “acquisition indebtedness” with respect to such note). Before making an investment in the debt securities, a tax-exempt investor should consult its tax advisors with regard to UBTI and the suitability of the investment in the debt securities. Non-U.S. Holders of Debt Securities The following discussion addresses the rules governing U.S. federal income taxation of Non-U.S. Holders of debt securities. For purposes of this summary, “Non-U.S. Holder” is a beneficial owner of our debt securities that is not (i) a U.S. Holder (as defined above under “—U.S. Holders of Debt Securities”) or (ii) an entity treated as a partnership for U.S. federal income tax purposes. Payments of Interest . Subject to the discussions below concerning backup withholding and FATCA (as defined below), all payments of interest on the debt securities made to a Non-U.S. Holder will not be subject to U.S. federal income or withholding taxes under the “portfolio interest” exception of the Code, provided that the Non-U.S. Holder: • does not own, actually or constructively, 10% or more of our stock, • is not a controlled foreign corporation with respect to which we are a “related person” (within the meaning of Section 864(d)(4) of the Code), • is not a bank whose receipt of interest on a note is described in Section 881(c)(3)(A) of the Code, and • provides its name and address on an IRS Form W-8BEN or IRS Form W-8BEN-E (or other applicable form) and certifies, under penalties of perjury, that it is not a U.S. Holder. The applicable Treasury Regulations provide alternative methods for satisfying the certification requirement described in this section. In addition, under these Treasury Regulations, special rules apply to pass-through entities and this certification requirement may also apply to beneficial owners of pass-through entities. If a Non-U.S. Holder cannot satisfy the requirements described above, payments of interest will generally be subject to the 30% U.S. federal withholding tax, unless the Non-U.S. Holder provides the applicable withholding agent with a properly executed (1) IRS Form W-8BEN or IRS Form W-8BEN-E (or other applicable form) claiming an exemption from or reduction in withholding under an applicable income tax treaty or (2) IRS Form W-8ECI (or other applicable form) stating that interest paid on the debt securities is not subject to U.S. federal withholding tax because it is effectively connected with the conduct by such Non-U.S. Holder of a trade or business in the United States (as discussed below under “—Non-U.S. Holders of Debt Securities—Income Effectively Connected with a U.S. Trade or Business”). Sale, Exchange, Retirement, Redemption or Other Taxable Disposition of the Debt Securities . Subject to the discussions below concerning backup withholding and FATCA and except with respect to accrued but unpaid interest, which generally will be taxable as interest and may be subject to the rules described above under “—Non-U.S. Holders of Debt Securities—Payments of Interest,” a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on the receipt of payments of principal on a note, or on any gain recognized upon the sale, exchange, retirement, redemption or other taxable disposition of a note, unless: 74 • such gain is effectively connected with the conduct by such Non-U.S. Holder of a trade or business within the United States, in which case such gain will be taxed as described below under “—Non-U.S. Holders of Debt Securities—Income Effectively Connected with a U.S. Trade or Business,” or • such Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of disposition, and certain other conditions are met, in which case such Non-U.S. Holder will be subject to tax at 30% (or, if applicable, a lower treaty rate) on the gain derived from such disposition, which may be offset by U.S. source capital losses. Income Effectively Connected with a U.S. Trade or Business . If a Non-U.S. Holder is engaged in a trade or business in the United States, and if interest on the debt securities or gain realized on the sale, exchange or other taxable disposition (including a retirement or redemption) of the debt securities is effectively connected with the conduct of such trade or business, the Non-U.S. Holder generally will be subject to regular U.S. federal income tax on such income or gain in the same manner as if the Non-U.S. Holder were a U.S. Holder. If the Non-U.S. Holder is eligible for the benefits of an income tax treaty between the United States and the Non-U.S. Holder’s country of residence, any “effectively connected” income or gain generally will be subject to U.S. federal income tax only if it is also attributable to a permanent establishment or fixed base maintained by the Non-U.S. Holder in the United States. In addition, if such a Non-U.S. Holder is a foreign corporation, such holder may also be subject to a branch profits tax equal to 30% (or such lower rate provided by an applicable income tax treaty) of its effectively connected earnings and profits, subject to certain adjustments. Payments of interest that are effectively connected with a U.S. trade or business will not be subject to the 30% U.S. federal withholding tax provided that the Non-U.S. Holder claims exemption from withholding. To claim exemption from withholding, the Non-U.S. Holder must certify its qualification, which generally can be done by filing a properly executed IRS Form W-8ECI (or other applicable form). Information Reporting and Backup Withholding . Generally, we must report annually to the IRS and to Non-U.S. Holders the amount of interest paid to Non-U.S. Holders and the amount of tax, if any, withheld with respect to those payments. Copies of these information returns reporting such interest and withholding may also be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides. In general, a Non-U.S. Holder will not be subject to backup withholding or additional information reporting requirements with respect to payments of interest that we make, provided that the statement described above in last bullet point under “—Non-U.S. Holders of Debt Securities—Interest” has been received and we do not have actual knowledge or reason to know that the holder is a U.S. person, as defined under the Code, that is not an exempt recipient. In addition, proceeds from a sale or other disposition of a note by a Non-U.S. Holder generally will be subject to information reporting and, depending on the circumstances, backup withholding with respect to payments of the proceeds of the sale or disposition (including a retirement or redemption) of a note within the United States or conducted through certain U.S. or U.S.-related financial intermediaries, unless the statement described above has been received and we do not have actual knowledge or reason to know that the holder is a U.S. person. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a non-U.S. holder’s U.S. federal income tax liability if the required information is furnished in a timely manner to the IRS. Additional Withholding Requirements . As discussed above under “—Information Reporting and Backup Withholding Tax Applicable to Shareholders—Non-U.S. Shareholders—Withholding on Payments to Certain Foreign Entities,” FATCA imposes a 30% withholding tax on certain types of payments made to “foreign financial institutions” and certain other non-U.S. entities unless certain due diligence, reporting, withholding, and certification obligations requirements are satisfied. As a general matter, payments to Non-U.S. Holders that are foreign entities (whether as beneficial owner or intermediary) of interest on a debt obligation of a U.S. issuer will be subject to a withholding tax (separate and apart from, but without duplication of, the withholding tax described above) at a rate of 30%, unless various U.S. information reporting and due diligence requirements (generally relating to ownership by U.S. persons of interests in or accounts with those entities) have been satisfied. While withholding under FATCA would have applied to payments of gross proceeds from the sale or other disposition of, a debt obligation of a U.S. issuer received after December 31, 2018, proposed Treasury Regulations eliminate FATCA withholding on payments of gross proceeds entirely. Taxpayers may generally rely on these proposed Treasury Regulations until final Treasury Regulations are issued. If withholding is required under FATCA on a payment related to the debt securities, Non-U.S. Holders that otherwise would not be subject to withholding (or that otherwise would be entitled to a reduced rate of withholding) generally will be required to seek a refund or credit from the IRS to obtain the benefit of such exemption or reduction (provided that such benefit is available). Prospective investors should consult their tax advisors regarding the effect of FATCA in their particular circumstances. Other Tax Considerations State, Local and Foreign Taxes 75 We may be required to pay tax in various state or local jurisdictions, including those in which we transact business, and our shareholders may be required to pay tax in various state or local jurisdictions, including those in which they reside. Our state and local tax treatment may not conform to the U.S. federal income tax consequences discussed above. In addition, a shareholder’s state and local tax treatment may not conform to the U.S. federal income tax consequences discussed above. Consequently, prospective investors should consult with their tax advisors regarding the effect of state and local tax laws on an investment in our shares and depositary shares. A portion of our income is earned through our taxable REIT subsidiaries. The taxable REIT subsidiaries are subject to U.S. federal, state and local income tax at the full applicable corporate rates. In addition, a taxable REIT subsidiary will be limited in its ability to deduct interest payments in excess of a certain amount made directly or indirectly to us. To the extent that our taxable REIT subsidiaries and we are required to pay U.S. federal, state or local taxes, we will have less cash available for distribution to shareholders. Tax Shelter Reporting If a holder recognizes a loss as a result of a transaction with respect to our shares of at least (i) for a holder that is an individual, S corporation, trust or a partnership with at least one non-corporate partner, $2 million or more in a single taxable year or $4 million or more in a combination of taxable years, or (ii) for a holder that is either a corporation or a partnership with only corporate partners, $10 million or more in a single taxable year or $20 million or more in a combination of taxable years, such holder may be required to file a disclosure statement with the IRS on Form 8886. Direct shareholders of portfolio securities are in many cases exempt from this reporting requirement, but shareholders of a REIT currently are not excepted. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances. Legislative or Other Actions Affecting REITs The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. We cannot give you any assurances as to whether, or in what form, any proposals affecting REITs or their shareholders will be enacted. Changes to the U.S. federal tax laws and interpretations thereof could adversely affect an investment in our shares. Shareholders should consult their tax advisors regarding the effect of potential changes to the U.S. federal tax laws and on an investment in our shares. 76 PART III Certain information required by Part III is omitted from this Form 10-K in that we will file a definitive proxy statement pursuant to Regulation 14A with respect to our 2021 Annual Meeting (the “Proxy Statement”) no later than 120 days after the end of the fiscal year covered by this Form 10-K, and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement which specifically address the items set forth herein are incorporated by reference. In addition, we have adopted a code of ethics that applies to all of our trustees, officers and employees, which can be reviewed and printed from our website www.washreit.com . ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE NAME POSITION Trustees Paul T. McDermott Chairman and Chief Executive Officer, WashREIT Edward S. Civera Lead Independent Trustee, WashREIT; Retired Chairman, Catalyst Health Solutions, Inc. Benjamin S. Butcher Chief Executive Officer, President and Chairman of the Board of Directors of STAG Industrial, Inc. William G. Byrnes Retired Managing Director, Alex Brown & Sons Ellen M. Goitia Retired Partner, KPMG Thomas H. Nolan, Jr. Former Chairman of the Board and Chief Executive Officer, Spirit Realty Capital Inc. Vice Adm. Anthony L. Winns (RET.) President, Middle East-Africa Region, Lockheed Martin Corporation Executive Officers Stephen E. Riffee Executive Vice President and Chief Financial Officer Taryn D. Fielder Senior Vice President, General Counsel and Corporate Secretary The other information required by this Item is hereby incorporated herein by reference to our Proxy Statement. ITEM 11: EXECUTIVE COMPENSATION The information required by this Item is hereby incorporated herein by reference to our Proxy Statement. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item is hereby incorporated herein by reference to our Proxy Statement. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item is hereby incorporated herein by reference to our Proxy Statement. ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is hereby incorporated herein by reference to our Proxy Statement. 77 PART IV ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A). The following documents are filed as part of this Form 10-K: 1 Financial Statements Page Management's Report on Internal Control Over Financial Reporting 82 Report of Independent Registered Public Accounting Firm 83 Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting 85 Consolidated Balance Sheets as of December 31, 2020 and 2019 86 Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018 87 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018 88 Consolidated Statements of Equity for the Years Ended December 31, 2020, 2019 and 2018 89 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 90 Notes to Consolidated Financial Statements 92 2 Financial Statement Schedules Schedule II – Valuation and Qualifying Accounts 122 Schedule III – Consolidated Real Estate and Accumulated Depreciation 123 All other schedules are omitted because they are either not required or the required information is shown in the financial statements or notes thereto. 3 Exhibits : Incorporated by Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed Herewith 3.1 Articles of Amendment and Restatement of Declaration of Trust of the Company, as amended X 3.2 Articles of Amendment as filed with the State Department of Assessments and Taxation of Maryland on February 10, 2021 X 3.3 Amended and Restated Bylaws of Washington Real Estate Investment Trust, as adopted on February 8, 2017 10-Q 001-06622 3.2 7/31/2017 4.1 Indenture dated as of August 1, 1996 between Washington REIT and The First National Bank of Chicago 8-K 001-06622 (c) 8/13/1996 4.2 Form of 2028 Notes 8-K 001-06622 99.1 2/25/1998 4.3 Supplemental Indenture by and between Washington REIT and the Bank of New York Trust Company, N.A. dated as of July 3, 2007 8-K 001-06622 4.1 7/5/2007 4.4 Form of 4.95% Senior Notes due October 1, 2020 8-K 001-06622 4.1 9/30/2010 4.5 Officers’ Certificate establishing the terms of the 4.95% Senior Notes due October 1, 2020 8-K 001-06622 4.2 9/30/2010 4.6 Form of 3.95% Senior Notes due October 15, 2022 8-K 001-06622 4.1 9/17/2012 4.7 Officers' Certificate establishing the terms of 3.95% Notes due October 15, 2022 8-K 001-06622 4.2 9/17/2012 4.8 Description of Registrant's Securities X 10.1* Share Purchase Plan 10-Q 001-06622 10(j) 11/14/2002 10.2* Supplemental Executive Retirement Plan 10-Q 001-06622 10(k) 11/14/2002 10.3* Supplemental Executive Retirement Plan 10-K 001-06622 10(p) 3/16/2006 10.4* 2007 Omnibus Long Term Incentive Plan DEF 14A 001-06622 B 4/9/2007 10.5* Deferred Compensation Plan for Officers dated January 1, 2007 10-K 001-06622 10(gg) 2/29/2008 10.6* Supplemental Executive Retirement Plan II dated May 23, 2007 10-K 001-06622 10(hh) 2/29/2008 10.7* Form of Indemnification Agreement by and between Washington REIT and the indemnitee 8-K 001-06622 10(nn) 7/27/2009 10.8* Executive Stock Ownership Policy, adopted October 27, 2010 8-K 001-06622 10.31 11/2/2010 10.9* Amendment to Deferred Compensation Plan for Officers, adopted October 27, 2010 8-K 001-06622 10.32 11/2/2010 78 Incorporated by Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed Herewith 10.10* Amendment to Deferred Compensation Plan for Officers, adopted December 31, 2012 10-K 001-06622 10.37 2/27/2013 10.11* Amendment to Deferred Compensation Plan for Officers, adopted February 13, 2013 10-Q 001-06622 10.45 5/9/2013 10.12* Amendment to Deferred Compensation Plan for Directors, adopted February 13, 2013 10-Q 001-06622 10.46 5/9/2013 10.13* Amendment to Short Term Incentive Plan, adopted as of January 22, 2013 10-Q 001-06622 10.47 5/9/2013 10.14* Amended and Restated Deferred Compensation Plan for Directors, effective October 22, 2013 10-Q 001-06622 10.53 11/1/2013 10.15* Employment Agreement dated August 19, 2013 with Paul T. McDermott 10-Q 001-06622 10.54 11/1/2013 10.16* Change in control agreement dated October 1, 2013 with Paul T. McDermott 10-K 001-06622 10.44 3/3/2014 10.17* Amendment to Deferred Compensation Plan for Officers, adopted February 18, 2014 10-K 001-06622 10.45 3/3/2014 10.18* Amendment to Deferred Compensation Plan for Directors as Amended and Restated, adopted February 18, 2014 10-K 001-06622 10.46 3/3/2014 10.19* Short Term Incentive Compensation Plan (effective January 1, 2014) 10-Q 001-06622 10.47 5/7/2014 10.20* Long Term Incentive Plan (effective January 1, 2014) 10-Q 001-06622 10.50 8/5/2014 10.21* Amendment to Short Term Incentive Plan (effective January 1, 2014) 10-Q 001-06622 10.51 8/5/2014 10.22* Executive Officer Severance Pay Plan, adopted August 4, 2014 10-Q 001-06622 10.54 10/30/2014 10.23* Change in control agreement dated April 1, 2013 with Edward J. Murn IV 10-K 001-06622 10.52 3/2/2015 10.24* Description of Washington REIT Trustee Compensation Plan, effective January 1, 2015 10-K 001-06622 10.54 3/2/2015 10.25* Offer Letter to Stephen E. Riffee 10-K 001-06622 10.55 3/2/2015 10.26* Change in control agreement dated February 27, 2015 with Stephen E. Riffee 10-K 001-06622 10.56 3/2/2015 10.27* Revised Description of Washington REIT Trustee Compensation Plan, effective January 1, 2015 10-Q 001-06622 10.57 5/5/2015 10.28* Statement of Amendment of STIP and LTIP for S. Riffee 10-Q 001-06622 10.58 5/5/2015 10.29* Amendment to Long Term Incentive Plan 10-Q 001-06622 10.60 11/4/2015 10.30* Amended and restated Trustee Deferred Compensation Plan 10-Q 001-06622 10.61 11/4/2015 10.31* 2016 Omnibus Incentive Plan DEF 14A 001-06622 Annex A 3/23/2016 10.32* Revocation of Statement of Amendment of STIP and LTIP 10-K 001-06622 10.49 2/20/2018 10.33* Offer letter to Taryn D. Fielder 10-K 001-06622 10.50 2/20/2018 10.34* Change in control agreement dated July 21,2017 with Taryn D. Fielder 10-Q 001-06622 10.1 7/31/2017 10.35 Amended and Restated Credit Agreement, dated March 29, 2018, by and among Washington Real Estate Investment Trust, as borrower, the financial institutions party thereto as lenders, and Wells Fargo Bank, National Association, as administrative agent 10-Q 001-06622 10.53 5/1/2018 10.36* Amendment Number Two to Washington Real Estate Investment Trust 2014 Long-Term Incentive Plan (effective January 1, 2018) 10-Q 001-06622 10.54 4/30/2018 10.37* Second Amendment to Washington Real Estate Investment Trust Short-Term Incentive Plan 10-Q 001-06622 10.1 4/29/2019 10.38* Separation Agreement and General Release between Thomas Q. Bakke and Washington Real Estate Investment Trust 10-Q 001-06622 10.2 4/29/2019 10.39* Amendment No. 1 to Separation Agreement and General Release between Thomas Q. Bakke and Washington Real Estate Investment Trust 10-Q 001-06622 10.3 4/29/2019 10.40 Purchase and sale agreement, dated April 2, 2019, for the Assembly Portfolio by and among Washington Real Estate Investment Trust and Barton’s Crossing LP, Magazine Carlyle Station LP, Magazine Fox Run LP, Magazine Glen LP, Magazine Lionsgate LP, Magazine Village At McNair Farms LP, and Magazine Watkins Station LP 10-Q 001-06622 10.1 7/29/2019 10.41 First amendment to purchase and sale agreement, dated April 19, 2019, for the Assembly Portfolio 10-Q 001-06622 10.2 7/29/2019 10.42 Purchase and Sale Agreement, dated June 26, 2019, by and between Washington Real Estate Investment Trust and Global Retail Investors, LLC 8-K 001-06622 10.1 7/26/2019 10.43* Washington Real Estate Investment Trust Amended and Restated Executive Short-Term Incentive Plan, effective January 1, 2020 10-K 001-06622 10.45 2/19/20 10.44* Washington Real Estate Investment Trust Amended and Restated Executive Long-Term Incentive Plan, effective January 1, 2020 10-K 001-06622 10.46 2/19/20 10.45 Note Purchase Agreement, dated as of September 30, 2020, by and among Washington Real Estate Investment Trust and other parties named therein as Purchasers 10-Q 001-06622 10.1 10/30/20 79 Incorporated by Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed Herewith 21 Subsidiaries of Registrant X 23 Consent of Independent Registered Public Accounting Firm X 24 Power of Attorney X 31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (“the Exchange Act”) X 31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act X 31.3 Certification of the Chief Accounting Officer pursuant to Rule 13a-14(a) of the Exchange Act X 32 Certification of the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. X 101.SCH Inline XBRL Taxonomy Extension Schema Document X 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document X 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document X 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document X 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document X 104 Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) * Management contracts or compensation plans or arrangements in which trustees or executive officers are eligible to participate. In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K, copies of certain instruments defining the rights of holders of long-term debt of WashREIT or its subsidiaries are not filed herewith. Pursuant to this regulation, we hereby agree to furnish a copy of any such instrument to the SEC upon request. ITEM 16: FORM 10-K SUMMARY We have chosen not to include a Form 10-K Summary. 80 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WASHINGTON REAL ESTATE INVESTMENT TRUST Date: February 16, 2021 By: /s/ Paul T. McDermott Paul T. McDermott President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Paul T. McDermott Chairman and Chief Executive Officer February 16, 2021 Paul T. McDermott /s/ Edward S. Civera* Lead Independent Trustee February 16, 2021 Edward S. Civera /s/ Benjamin S. Butcher* Trustee February 16, 2021 Benjamin S. Butcher /s/ William G. Byrnes* Trustee February 16, 2021 William G. Byrnes /s/ Ellen M. Goitia* Trustee February 16, 2021 Ellen M. Goitia /s/ Thomas H. Nolan, Jr.* Trustee February 16, 2021 Thomas H. Nolan, Jr. /s/ Anthony L. Winns* Trustee February 16, 2021 Anthony L. Winns /s/ Stephen E. Riffee Executive Vice President and February 16, 2021 Stephen E. Riffee Chief Financial Officer (Principal Financial Officer) /s/ W. Drew Hammond Vice President, Chief Accounting Officer and February 16, 2021 W. Drew Hammond Treasurer (Principal Accounting Officer) * By: /s/ W. Drew Hammond through power of attorney W. Drew Hammond 81 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of Washington Real Estate Investment Trust (“WashREIT”) is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal controls over financial reporting. WashREIT’s internal control system over financial reporting is a process designed under the supervision of WashREIT’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions. In connection with the preparation of WashREIT’s annual consolidated financial statements, management has undertaken an assessment of the effectiveness of WashREIT’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (the 2013 COSO Framework). Management’s assessment included an evaluation of the design of WashREIT’s internal control over financial reporting and testing of the operational effectiveness of those controls. Based on this assessment, management has concluded that as of December 31, 2020, WashREIT’s internal control over financial reporting was effective at a reasonable assurance level regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Ernst & Young LLP, the independent registered public accounting firm that audited WashREIT’s consolidated financial statements included in this report, has issued an unqualified opinion on the effectiveness of WashREIT’s internal control over financial reporting, a copy of which appears on page 85 of this annual report. 82 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Trustees of Washington Real Estate Investment Trust Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Washington Real Estate Investment Trust and Subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 16, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Impairment Assessment of Income Producing Properties Description of the Matter The Company had net income producing property of $2.2 billion as of December 31, 2020. As discussed in Note 2 to the consolidated financial statements, real estate is evaluated for recoverability based on estimated cash flows if there are indicators of potential impairment. Auditing the Company's impairment analysis involved a high degree of subjectivity due to the uncertainty around the Company’s estimated cash flows used in the impairment assessment. Estimated future cash flows are based on assumptions, including the projected annual and residual cash flows and the estimated holding period for individual properties, that are forward looking and could be affected by future economic and market conditions. 83 How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process for assessing impairment of income producing properties. For example, we tested controls over management’s review of properties’ expected future cash flows, which is used to evaluate qualitative and quantitative indicators of impairment and in the recoverability evaluation, and we tested management’s review of the sensitivity of assumptions used in their impairment assessment. Our testing of the Company’s impairment assessment included, among other procedures, evaluating the significant assumptions and testing the completeness and accuracy of the underlying data used by the Company to develop its estimated future cash flows for individual income producing properties. We held discussions with management about the current status of potential transactions and about management’s judgments to understand the probability of future events that could affect the holding period and other cash flow assumptions for the properties. We searched for and evaluated information that corroborates or contradicts the Company’s assumptions. We also compared the significant assumptions to current industry, market and economic trends and to the historical results of the properties. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2002. Tysons, Virginia February 16, 2021 84 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Trustees of Washington Real Estate Investment Trust Opinion on Internal Control Over Financial Reporting We have audited Washington Real Estate Investment Trust and Subsidiaries’ internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Washington Real Estate Investment Trust and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2020 consolidated financial statements of the Company and our report dated February 16, 2021 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Tysons, Virginia February 16, 2021 85 WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) December 31, 2020 2019 Assets Land $ 551,578 $ 566,807 Income producing property 2,432,039 2,392,415 2,983,617 2,959,222 Accumulated depreciation and amortization ( 749,014 ) ( 693,610 ) Net income producing property 2,234,603 2,265,612 Properties under development or held for future development 37,615 124,193 Total real estate held for investment, net 2,272,218 2,389,805 Investment in real estate held for sale, net — 57,028 Cash and cash equivalents 7,700 12,939 Restricted cash 603 1,812 Rents and other receivables 58,257 65,259 Prepaid expenses and other assets 71,040 95,149 Other assets related to properties sold or held for sale — 6,336 Total assets $ 2,409,818 $ 2,628,328 Liabilities Notes payable, net $ 945,370 $ 996,722 Mortgage notes payable, net — 47,074 Line of credit 42,000 56,000 Accounts payable and other liabilities 58,773 71,136 Dividend payable 25,361 24,668 Advance rents 7,215 9,353 Tenant security deposits 9,990 10,595 Other liabilities related to properties sold or held for sale — 718 Total liabilities 1,088,709 1,216,266 Equity Shareholders’ equity Preferred shares; $ 0.01 par value; 10,000 shares authorized; no shares issued or outstanding — — Shares of beneficial interest, $ 0.01 par value; 100,000 shares authorized; 84,409 and 82,099 shares issued and outstanding, as of December 31, 2020 and December 31, 2019, respectively 844 821 Additional paid in capital 1,649,366 1,592,487 Distributions in excess of net income ( 298,860 ) ( 183,405 ) Accumulated other comprehensive (loss) income ( 30,563 ) 1,823 Total shareholders’ equity 1,320,787 1,411,726 Noncontrolling interests in subsidiaries 322 336 Total equity 1,321,109 1,412,062 Total liabilities and equity $ 2,409,818 $ 2,628,328 See accompanying notes to the consolidated financial statements. 86 WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) Year Ended December 31, 2020 2019 2018 Revenue Real estate rental revenue $ 294,118 $ 309,180 $ 291,730 Expenses Real estate expenses 112,909 115,580 105,592 Depreciation and amortization 120,030 136,253 111,826 Real estate impairment — 8,374 1,886 General and administrative expenses 23,951 26,068 22,089 256,890 286,275 241,393 Other operating income (Loss) gain on sale of real estate ( 15,009 ) 59,961 2,495 Real estate operating income 22,219 82,866 52,832 Other income (expense) Interest expense ( 37,305 ) ( 53,734 ) ( 50,501 ) Loss on interest rate derivatives ( 560 ) — — Loss on extinguishment of debt ( 34 ) — ( 1,178 ) ( 37,899 ) ( 53,734 ) ( 51,679 ) (Loss) income from continuing operations ( 15,680 ) 29,132 1,153 Discontinued operations: Income from operations of properties sold or held for sale — 16,158 24,477 Gain on sale of real estate — 339,024 — Loss on extinguishment of debt — ( 764 ) — Income from discontinued operations — 354,418 24,477 Net (loss) income $ ( 15,680 ) $ 383,550 $ 25,630 Basic net (loss) income per share Continuing operations $ ( 0.20 ) $ 0.36 $ 0.01 Discontinued operations, including gain on sale of real estate — 4.39 0.31 Net (loss) income per share $ ( 0.20 ) $ 4.75 $ 0.32 Diluted net (loss) income per share Continuing operations $ ( 0.20 ) $ 0.36 $ 0.01 Discontinued operations, including gain on sale of real estate — 4.39 0.31 Net (loss) income per share $ ( 0.20 ) $ 4.75 $ 0.32 Weighted average shares outstanding – basic 82,348 80,257 78,960 Weighted average shares outstanding – diluted 82,348 80,335 79,042 See accompanying notes to the consolidated financial statements. 87 WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (IN THOUSANDS) Year Ended December 31, 2020 2019 2018 Net (loss) income $ ( 15,680 ) $ 383,550 $ 25,630 Other comprehensive (loss) income: Unrealized (loss) gain on interest rate derivatives ( 33,025 ) ( 8,016 ) 420 Reclassification of unrealized loss on interest rate derivatives to earnings 639 — — Comprehensive (loss) income $ ( 48,066 ) $ 375,534 $ 26,050 See accompanying notes to the financial statements. 88 WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (IN THOUSANDS) Shares Shares of Beneficial Interest at Par Value Additional Paid in Capital Distributions in Excess of Net Income Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Non- controlling Interests in Subsidiary Total Equity Balance, December 31, 2017 78,510 $ 785 $ 1,483,980 $ ( 399,213 ) $ 9,419 $ 1,094,971 $ 365 $ 1,095,336 Net income — — — 25,630 — 25,630 — 25,630 Unrealized gain on interest rate derivatives — — — — 420 420 — 420 Distributions to noncontrolling interests — — — — — — ( 14 ) ( 14 ) Dividends ($ 1.20 per common share) — — — ( 95,502 ) — ( 95,502 ) — ( 95,502 ) Equity offerings, net of issuance costs 1,165 11 35,461 — — 35,472 — 35,472 Shares issued under Dividend Reinvestment Program 81 1 1,972 — — 1,973 — 1,973 Share grants, net of forfeitures and tax withholdings 154 2 5,161 — — 5,163 — 5,163 Balance, December 31, 2018 79,910 799 1,526,574 ( 469,085 ) 9,839 1,068,127 351 1,068,478 Cumulative effect of change in accounting principle (see note 4) — — — ( 906 ) — ( 906 ) — ( 906 ) Net income — — — 383,550 — 383,550 — 383,550 Unrealized loss on interest rate derivatives — — — — ( 8,016 ) ( 8,016 ) — ( 8,016 ) Distributions to noncontrolling interests — — — — — — ( 15 ) ( 15 ) Dividends ($ 1.20 per common share) — — — ( 96,964 ) — ( 96,964 ) — ( 96,964 ) Equity offerings, net of issuance costs 1,859 18 54,898 — — 54,916 — 54,916 Shares issued under Dividend Reinvestment Program 173 2 4,753 — — 4,755 — 4,755 Share grants, net of forfeitures and tax withholdings 157 2 6,262 — — 6,264 — 6,264 Balance, December 31, 2019 82,099 821 1,592,487 ( 183,405 ) 1,823 1,411,726 336 1,412,062 Net loss — — — ( 15,680 ) — ( 15,680 ) — ( 15,680 ) Unrealized loss on interest rate derivatives — — — — ( 33,025 ) ( 33,025 ) — ( 33,025 ) Loss on interest rate derivatives — — — — 560 560 — 560 Amortization of swap settlements — — — — 79 79 — 79 Distributions to noncontrolling interests — — — — — — ( 14 ) ( 14 ) Dividends ($ 1.20 per common share) — — — ( 99,775 ) — ( 99,775 ) — ( 99,775 ) Equity offerings, net of issuance costs 2,046 20 48,335 — — 48,355 — 48,355 Shares issued under Dividend Reinvestment Program 90 1 2,120 — — 2,121 — 2,121 Share grants, net of forfeitures and tax withholdings 174 2 6,424 — — 6,426 — 6,426 Balance, December 31, 2020 84,409 $ 844 $ 1,649,366 $ ( 298,860 ) $ ( 30,563 ) $ 1,320,787 $ 322 $ 1,321,109 See accompanying notes to the consolidated financial statements. 89 WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Year Ended December 31, 2020 2019 2018 Cash flows from operating activities Net (loss) income $ ( 15,680 ) $ 383,550 $ 25,630 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 120,030 141,179 121,228 Credit losses (gains) on lease related receivables 5,422 ( 10 ) 2,136 Real estate impairment — 8,374 1,886 Loss (gain) on sale of real estate 15,009 ( 398,985 ) ( 2,495 ) Share-based compensation expense 7,874 7,743 6,746 Amortization of debt premiums, discounts and related financing costs 2,794 3,195 2,101 Loss on interest rate derivatives 560 — — Loss on extinguishment of debt 34 764 1,178 Changes in other assets ( 7,258 ) ( 10,086 ) ( 8,674 ) Changes in other liabilities ( 15,794 ) ( 4,801 ) ( 2,367 ) Net cash provided by operating activities 112,991 130,923 147,369 Cash flows from investing activities Real estate acquisitions, net — ( 528,589 ) ( 106,400 ) Net cash received from sale of real estate 152,889 706,064 174,297 Capital improvements to real estate ( 58,095 ) ( 68,456 ) ( 71,070 ) Development in progress ( 28,812 ) ( 47,492 ) ( 34,806 ) Non-real estate capital improvements ( 222 ) ( 491 ) ( 963 ) Net cash provided by (used in) investing activities 65,760 61,036 ( 38,942 ) Cash flows from financing activities Line of credit (repayments) borrowings, net ( 14,000 ) ( 132,000 ) 22,000 Dividends paid ( 99,080 ) ( 96,361 ) ( 95,059 ) Principal payments – mortgage notes payable ( 46,567 ) ( 12,724 ) ( 170,081 ) Proceeds from notes payable 350,000 — — Repayments of notes payable ( 250,000 ) — — Repayments of unsecured term loan debt ( 300,000 ) ( 450,000 ) ( 150,000 ) Proceeds from term loan 150,000 450,000 250,000 Settlement of interest rate derivatives ( 20,948 ) — — Payment of financing costs ( 3,284 ) ( 1,303 ) ( 5,650 ) Distributions to noncontrolling interests ( 14 ) ( 15 ) ( 14 ) Proceeds from dividend reinvestment program 2,121 4,755 1,973 Net proceeds from equity issuances 48,355 54,916 35,472 Payment of tax withholdings for restricted share awards ( 1,782 ) ( 2,116 ) ( 2,051 ) Net cash used in financing activities ( 185,199 ) ( 184,848 ) ( 113,410 ) Net (decrease) increase in cash, cash equivalents and restricted cash ( 6,448 ) 7,111 ( 4,983 ) Cash, cash equivalents and restricted cash at beginning of year 14,751 7,640 12,623 Cash, cash equivalents and restricted cash at end of year $ 8,303 $ 14,751 $ 7,640 90 WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Year Ended December 31, 2020 2019 2018 Supplemental disclosure of cash flow information: Cash paid for interest, net of capitalized interest expense $ 37,542 $ 50,999 $ 49,058 Change in accrued capital improvements and development costs ( 5,850 ) 7,908 ( 2,769 ) Dividend payable 25,361 24,668 24,022 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 7,700 $ 12,939 $ 6,016 Restricted cash 603 1,812 1,624 Cash, cash equivalents and restricted cash $ 8,303 $ 14,751 $ 7,640 See accompanying notes to the consolidated financial statements. 91 WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018 NOTE 1: NATURE OF BUSINESS Washington Real Estate Investment Trust (“WashREIT”), a Maryland real estate investment trust, is a self-administered equity real estate investment trust, successor to a trust organized in 1960. Our business consists of the ownership and operation of income-producing real estate properties in the greater Washington metro region. We own a portfolio of multifamily and commercial properties. U.S. Federal Income Taxes We believe that we qualify as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"), and intend to continue to qualify as such. To maintain our status as a REIT, we are, among other things, required to distribute 90% of our REIT taxable income (which is generally our ordinary taxable income, with certain modifications), excluding any net capital gains and any deductions for dividends paid to our shareholders on an annual basis. When selling a property, we generally have the option of (a) reinvesting the sales proceeds of property sold in a way that allows us to defer recognition of some or all taxable gain realized on the sale, (b) distributing gains to the shareholders with no tax to us or (c) treating net long-term capital gains as having been distributed to our shareholders, paying the tax on the gain deemed distributed and allocating the tax paid as a credit to our shareholders. During the three years ended December 31, 2020, we sold our interests in the following properties (in thousands): Disposition Date Property Type (Loss) Gain on Sale April 21, 2020 John Marshall II Office $ ( 6,855 ) December 2, 2020 Monument II Office $ ( 8,595 ) December 17, 2020 1227 25th Street Office 1,125 Total 2020 $ ( 14,325 ) June 26, 2019 Quantico Corporate Center (1) Office $ ( 1,046 ) July 23, 2019 Shopping Center Portfolio (2) Retail 333,023 August 21, 2019 Frederick Crossing and Frederick County Square Retail 9,507 August 27, 2019 Centre at Hagerstown Retail ( 3,506 ) December 19, 2019 1776 G Street Office 61,007 Total 2019 $ 398,985 January 19, 2018 Braddock Metro Center Office $ — June 28, 2018 2445 M Street Office 2,495 Total 2018 $ 2,495 ______________________________ (1) Consists of 925 and 1000 Corporate Drive. (2) Consists of five retail properties: Gateway Overlook, Wheaton Park, Olney Village Center, Bradlee Shopping Center and Shoppes of Foxchase. Seven of the eight retail properties sold during 2019 were identified for deferred exchanges under Section 1031 of the Code (see note 3). We acquired eight multifamily replacement properties (see note 3) during 2019. The taxable gains for 1776 G Street and a portion of the Shopping Center Portfolio proceeds not reinvested in the deferred exchange were distributed to shareholders through quarterly dividends in 2019. Generally, and subject to our ongoing qualification as a REIT, no provisions for income taxes are necessary except for taxes on undistributed taxable income and taxes on the income generated by our taxable REIT subsidiaries (“TRSs”). Our TRSs are subject to corporate federal and state income tax on their taxable income at regular statutory rates. As of both December 31, 2020 and 2019, our TRSs had a deferred tax asset of $ 1.4 million that was fully reserved. As of December 31, 2019, we had deferred state and local tax liabilities of $ 0.6 million. These deferred tax liabilities were primarily related to temporary differences in the timing of the recognition of revenue, amortization and depreciation. We did no t have deferred state or local 92 tax liabilities as of December 31, 2020. Beginning in 2018, ordinary taxable income per share is equal to the Section 199A dividend that was created by the Tax Cuts and Jobs Act. The following is a breakdown of the taxable percentage of our dividends for the three years ended December 31, 2020, 2019 and 2018 (unaudited): 2020 2019 2018 Ordinary income/Section 199A dividends 36 % 80 % 29 % Return of capital 64 % 20 % 71 % Qualified dividends — % — % — % Unrecaptured Section 1250 gain — % — % — % Capital gain — % — % — % NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION Principles of Consolidation and Basis of Presentation The accompanying audited consolidated financial statements include the consolidated accounts of WashREIT and our subsidiaries and entities in which WashREIT has a controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation. We have prepared the accompanying audited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Use of Estimates in the Financial Statements The preparation of financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent Accounting Standards Standards Adopted Standard/Description Effective Date and Adoption Considerations Effect on Financial Statements or Other significant Matters ASU 2016-13, Measurement of Credit Losses on Financial Instruments . This standard requires financial assets measured at an amortized cost basis, including trade receivables, to be presented at the net amount expected to be collected. This standard does not apply to receivables arising from operating leases accounted for in accordance with Topic 842. We adopted the new standard as of January 1, 2020. The adoption of the new standard did not have a material impact on our consolidated financial statements. ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software . This standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as assets. We adopted the new standard as of January 1, 2020. The adoption of the new standard did not have a material impact on our consolidated financial statements. 93 Standard/Description Effective Date and Adoption Considerations Effect on Financial Statements or Other significant Matters ASU 2020-04, Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting . This standard contains optional practical expedients and exceptions for applying Generally Accepted Accounting Principles (“GAAP”) to contracts, hedging relations, and other transactions affected by reference rate reform if certain criteria are met. We elected certain optional practical expedients as of January 1, 2020. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. As of January 1, 2020, we have elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur. COVID-19 Lease Modification Accounting Relief In April 2020, the Financial Accounting Standards Board (“FASB”) staff issued a question-and-answer document (“Q&A”) that addresses their belief that the guidance on lease modifications in GAAP does not contemplate concessions being executed as rapidly as they were executed as a result of the major financial crisis arising from the COVID-19 pandemic. Under ASC 842, Leases , we evaluate, on a lease by lease basis, if a lease concession is the result of a new arrangement reached with the tenant, which could result in lease modification accounting, or if a lease concession is contemplated in the existing lease agreement, which is precluded from lease modification accounting. In the Q&A, the staff stated that entities may elect to not evaluate whether a concession provided by a lessor to a lessee in response to the COVID-19 pandemic is a lease modification. This election must be applied consistently to leases with similar characteristics and circumstances. The election permits entities, if certain criteria are met, to account for concessions as if they were contemplated in the existing contract or evaluate the lease concessions for lease modification accounting. If elected, abatement concessions are accounted for as negative variable rental revenue and rent deferrals are accounted for as if the lease is unchanged. We have elected to utilize the relief provided by the FASB staff. This election did not have a material impact on our consolidated financial statements as of December 31, 2020, and we do not expect material impacts in future periods. Revenue Recognition We lease multifamily properties under operating leases with terms of generally one year or less. We lease commercial properties under operating leases with an average term of seven years . Substantially all commercial leases contain fixed escalations or, in some instances, changes based on the Consumer Price Index, which occur at specified times during the term of the lease. In certain commercial leases, variable lease income, such as percentage rent, is recognized when rents are earned. We recognize rental income and rental abatements from our multifamily and commercial leases on a straight-line basis over the lease term. Recognition of rental income commences when control of the leased space has been transferred to the tenant. We recognize gains on sales of real estate when we have executed a contract for sale of the asset, transferred controlling financial interest in the asset to the buyer and determined that it is probable that we will collect substantially all of the consideration for the asset. Our real estate sale transactions typically meet these criteria at closing. We recognize cost reimbursement income from pass-through expenses on an accrual basis over the periods in which the expenses were incurred. Pass-through expenses are comprised of real estate taxes, operating expenses and common area maintenance costs which are reimbursed by tenants in accordance with specific allowable costs per tenant lease agreements. Parking revenues are derived from leases, monthly parking agreements and transient parking. We recognize parking revenues from leases on a straight-line basis over the lease term and monthly parking revenues as earned. We recognize transient parking revenue when our performance obligation is met. Rents and Other Receivables Lease related receivables, which include contractual amounts accrued and unpaid from tenants and accrued straight-line rents receivable, are reduced for credit losses. Such amounts are recognized as a reduction to real estate rental revenues. We evaluate the collectability of lease receivables monthly using several factors including a lessee’s creditworthiness. We recognize the credit loss on lease related receivables when, in the opinion of management, collection of substantially all lease payments is not probable. When collectability is determined not probable, any lease income recognized subsequent to recognizing the credit loss is limited to the lesser of the lease income reflected on a straight-line basis or cash collected. The adoption of ASU 2016-02 94 resulted in an adjustment to our opening distributions in excess of net income balance of $ 0.9 million, associated with lease related receivables where collection of substantially all operating lease payments was not probable as of January 1, 2019. Debt Issuance Costs We amortize external debt issuance costs using the effective interest rate method or the straight-line method, which approximates the effective interest rate method over the estimated life of the related debt. We record debt issuance costs related to notes and mortgage notes, net of amortization, on our consolidated balance sheets as an offset to their related debt. We record debt issuance costs related to revolving lines of credit on our consolidated balance sheets with Prepaid expenses and other assets, regardless of whether a balance on the line of credit is outstanding. We record the amortization of all debt issuance costs as interest expense. Deferred Leasing Costs We capitalize and amortize direct and incremental costs associated with the successful negotiation of leases, both external commissions and internal direct costs, on a straight-line basis over the terms of the respective leases. We record the amortization of deferred leasing costs in Depreciation and amortization on the consolidated statements of operations. If an applicable lease terminates prior to the expiration of its initial lease term, we write off the carrying amount of the costs to amortization expense. We capitalize and amortize leasing incentives associated with the successful negotiation of leases on a straight-line basis against revenue over the terms of the respective leases. We record the amortization of deferred leasing incentives as a reduction in revenue. If an applicable lease terminates prior to the expiration of its initial lease term, we write off the carrying amount of the costs as a reduction in revenue. Real Estate and Depreciation We depreciate buildings on a straight-line basis over estimated useful lives ranging from 28 to 50 years. We capitalize all capital improvements associated with replacements, improvements or major repairs to real property that extend its useful life and depreciate them using the straight-line method over their estimated useful lives ranging from 3 to 40 years. We also capitalize costs incurred in connection with our development projects, including interest incurred on borrowing obligations and other internal costs during periods in which qualifying expenditures have been made and activities necessary to get the development projects ready for their intended use are in progress. Capitalization of these costs begins when the activities and related expenditures commence and ceases when the project is substantially complete and ready for its intended use, at which time the project is placed into service and depreciation commences. In addition, we capitalize tenant leasehold improvements when certain criteria are met, including when we supervise construction and will own the improvements. We depreciate all tenant improvements over the shorter of the useful life of the improvements or the term of the related tenant lease. Real estate depreciation expense from continuing operations was $ 103.4 million, $ 101.7 million and $ 82.9 million during the years ended December 31, 2020, 2019 and 2018, respectively. We charge maintenance and repair costs that do not extend an asset’s useful life to expense as incurred. Interest expense from continuing operations and interest capitalized to real estate assets related to development and major renovation activities for the three years ended December 31, 2020 were as follows (in thousands): Year Ended December 31, 2020 2019 2018 Total interest incurred $ 39,524 $ 56,948 $ 52,592 Capitalized interest ( 2,219 ) ( 3,214 ) ( 2,091 ) Interest expense, net of capitalized interest $ 37,305 $ 53,734 $ 50,501 We recognize impairment losses on long-lived assets used in operations, development assets or land held for future development if indicators of impairment are present and the net undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Estimates of undiscounted cash flows are based on forward-looking assumptions, including annual and residual cash flows and our estimated holding period for each property. Such assumptions involve a high degree of judgment and could be affected by future economic and market conditions. When determining if a property has indicators of impairment, we evaluate the property's occupancy, our expected holding period for the property, 95 strategic decisions regarding the property's future operations or development and other market factors. If such carrying amount is in excess of the estimated undiscounted cash flows from the operation and disposal of the property, we would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair value, calculated in accordance with current GAAP fair value provisions. Assets held for sale are recorded at the lower of cost or fair value less costs to sell. Acquisitions The properties we acquire typically are not businesses as defined by ASU 2017-01, Business Combinations (Topic 805) - Clarifying the Definition of a Business . Per this definition, a set of transferred assets and activities is not a business when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. We therefore account for such acquisitions as asset acquisitions. Acquisition costs are capitalized and identifiable assets (including physical assets and in-place leases), liabilities assumed and any noncontrolling interests are measured by allocating the cost of the acquisition on a relative fair value basis. Acquisitions executed prior to our adoption of ASU 2017-01 as of January 1, 2017 were accounted for as business combinations. We determine the fair values of acquired buildings on an “as-if-vacant” basis considering a variety of factors, including the replacement cost of the property, estimated rental and absorption rates, estimated future cash flows and valuation assumptions consistent with current market conditions. We determine the fair value of land acquired based on comparisons to similar properties that have been recently marketed for sale or sold. The fair value of in-place leases consists of the following components – (a) the estimated cost to replace the leases, including foregone rents during the period of finding a new tenant and foregone recovery of tenant pass-throughs (referred to as “absorption cost”); (b) the estimated cost of tenant improvements and other direct costs associated with obtaining a new tenant (referred to as “tenant origination cost”); (c) estimated leasing commissions associated with obtaining a new tenant (referred to as “leasing commissions”); (d) the above/at/below market cash flow of the leases, determined by comparing the projected cash flows of the leases in place, including consideration of renewal options, to projected cash flows of comparable market-rate leases (referred to as “net lease intangible”); and (e) the value, if any, of customer relationships, determined based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with the tenant (referred to as “customer relationship value”). We have attributed no value to customer relationships as of December 31, 2020 and 2019. We discount the amounts used to calculate net lease intangibles using an interest rate which reflects the risks associated with the leases acquired. We classify tenant origination costs as income producing property on our consolidated balance sheets and amortize the tenant origination costs as depreciation expense on a straight-line basis over the remaining life of the underlying leases. We classify leasing commissions and absorption costs as other assets and amortize leasing commissions and absorption costs as amortization expense on a straight-line basis over the remaining life of the underlying leases. We classify net lease intangible assets as other assets and amortize them on a straight-line basis as a decrease to real estate rental revenue over the remaining term of the underlying leases. We classify net lease intangible liabilities as other liabilities and amortize them on a straight-line basis as an increase to real estate rental revenue over the remaining term of the underlying leases. If any of the fair value of below market lease intangibles includes fair value associated with a renewal option, such amounts are not amortized until the renewal option is executed, else the related value is expensed at that time. Should a tenant terminate its lease prior to the expiration date, we accelerate the amortization of the unamortized portion of the tenant origination cost, leasing commissions, absorption costs and net lease intangible associated with that lease, over its new, shorter term. Software Developed for Internal Use The costs of software developed for internal use that qualify for capitalization are included with Prepaid expenses and other assets on our consolidated balance sheets. These capitalized costs include external direct costs utilized in developing or obtaining the applications and expenses for employees who are directly associated with the development of the applications. Capitalization of such costs begins when the preliminary project stage is complete and continues until the project is substantially complete and is ready for its intended purpose. Completed projects are amortized on a straight-line basis over their estimated useful lives. Held for Sale and Discontinued Operations We classify properties as held for sale when they meet the necessary criteria, which include: (a) senior management commits to a plan to sell the assets; (b) the assets are available for immediate sale in their present condition subject only to terms that are usual and customary for sales of such assets; (c) an active program to locate a buyer and other actions required to complete the plan to sell the assets has been initiated; (d) the sale of the assets is probable and transfer of the assets is expected to qualify for 96 recognition as a completed sale within one year; (e) the assets are being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Depreciation on these properties is discontinued at the time they are classified as held for sale, but operating revenues, operating expenses and interest expense continue to be recognized until the date of sale. Revenues and expenses of properties that are either sold or classified as held for sale are presented as discontinued operations for all periods presented in the consolidated statements of operations if the dispositions represent a strategic shift that has (or will have) a major effect on our operations and financial results. Interest on debt that can be identified as specifically attributed to these properties is included in discontinued operations. If the dispositions do not represent a strategic shift that has (or will have) a major effect on our operations and financial results, then the revenues and expenses of the properties that are classified as sold or held for sale are presented as continuing operations in the consolidated statements of operations for all periods presented. Segments We evaluate performance based upon net operating income from the combined properties in each segment. Our reportable operating segments are consolidations of similar properties. GAAP requires that segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing segments’ performance. Net operating income is a key measurement of our segment profit and loss. Net operating income is defined as segment real estate rental revenue less segment real estate expenses. Cash and Cash Equivalents Cash and cash equivalents include cash and commercial paper with original maturities of 90 days or less. We maintain cash deposits with financial institutions that at times exceed applicable insurance limits. We reduce this risk by maintaining such deposits with high quality financial institutions that management believes are credit-worthy. Restricted Cash Restricted cash includes funds escrowed for tenant security deposits, real estate tax, insurance and mortgage escrows and escrow deposits required by lenders on certain of our properties to be used for future building renovations or tenant improvements. Earnings Per Common Share We determine “Basic earnings per share” using the two-class method as our unvested restricted share awards and units have non-forfeitable rights to dividends, and are therefore considered participating securities. We compute basic earnings per share by dividing net income less the allocation of undistributed earnings to unvested restricted share awards and units by the weighted-average number of common shares outstanding for the period. We also determine “Diluted earnings per share” under the two-class method with respect to the unvested restricted share awards. We further evaluate any other potentially dilutive securities at the end of the period and adjust the basic earnings per share calculation for the impact of those securities that are dilutive. Our dilutive earnings per share calculation includes the dilutive impact of operating partnership units under the if-converted method and our share based awards with performance conditions prior to the grant date and all market condition awards under the contingently issuable method. Stock Based Compensation We currently maintain equity based compensation plans for trustees, officers and employees. We recognize compensation expense for service-based share awards ratably over the period from the service inception date through the vesting period based on the fair market value of the shares on the date of grant. We account for forfeitures as they occur. If an award's service inception date precedes the grant date, we initially measure compensation expense for awards with performance conditions at fair value at the service inception date based on probability of payout, and we remeasure compensation expense at subsequent reporting dates until all of the award’s key terms and conditions are known and the grant date is established. We amortize awards with performance conditions using the graded expense method. We measure compensation expense for awards with market conditions based on the grant date fair value, as determined using a Monte Carlo simulation, and we amortize the expense ratably over the requisite service period, regardless of whether the market conditions 97 are achieved and the awards ultimately vest. Compensation expense for the trustee grants, which fully vest immediately, is fully recognized upon issuance based upon the fair market value of the shares on the date of grant. Accounting for Uncertainty in Income Taxes We can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent that the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that is greater than 50% likely of being recognized upon settlement. As of December 31, 2020 and 2019, we did not have any unrecognized tax benefits. We do not believe that there will be any material changes to our uncertain tax positions over the next twelve months. We are subject to federal income tax as well as income tax of the states of Maryland and Virginia, and the District of Columbia. However, as a REIT, we generally are not subject to income tax on our taxable income to the extent it is distributed as dividends to our shareholders. Tax returns filed for 2017 through 2019 tax years are subject to examination by taxing authorities. We classify interest and penalties related to uncertain tax positions, if any, in our financial statements as a component of general and administrative expenses. Derivatives We borrow funds at a combination of fixed and variable rates. Borrowings under our revolving credit facility and term loans bear interest at variable rates. Our interest rate risk management objectives are to minimize interest rate fluctuation on long-term indebtedness and limit the impact of interest rate changes on earnings and cash flows. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We generally do not hold or issue these derivative contracts for trading or speculative purposes. The interest rate swaps we enter into are recorded at fair value on a recurring basis. We assess the effectiveness of our cash flow hedges both at inception and on an ongoing basis. The effective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recorded in Accumulated other comprehensive income (loss). Our cash flow hedges become ineffective if critical terms of the hedging instrument and the debt instrument, such as notional amounts, settlement dates, reset dates, calculation period and LIBOR do not perfectly match. In addition, we evaluate the default risk of the counterparty by monitoring its creditworthiness. When ineffectiveness of a cash flow hedge exists, the ineffective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recognized in earnings in the period affected. NOTE 3: REAL ESTATE As of December 31, 2020 and 2019, our real estate investment portfolio classified as income producing property that is held and used, at cost, consists of properties valued as follows (in thousands): December 31, 2020 2019 Multifamily $ 1,606,085 $ 1,469,011 Office 1,214,481 1,329,722 Other 163,051 160,489 $ 2,983,617 $ 2,959,222 Our results of operations are dependent on the overall economic health of our markets, tenants and the specific segments in which we own properties. All property types are affected by external economic factors, such as inflation, consumer confidence and unemployment rates, as well as changing tenant and consumer requirements. As of December 31, 2020, no property accounted for more than approximately 10% of total assets. No single property or tenant accounted for more than 10% of real estate rental revenue. 98 We have properties under development/redevelopment and held for current or future development. The cost of our real estate portfolio under development or held for future development as of December 31, 2020 and 2019 is as follows (in thousands): December 31, 2020 2019 Multifamily $ 36,493 $ 123,071 Office 478 478 Other 644 644 $ 37,615 $ 124,193 As of December 31, 2020, we have invested $ 133.5 million, including the cost of acquired land, in Trove, a 401-unit multifamily development adjacent to The Wellington. During 2020, we substantially completed major construction activities for Trove's base building and garage and delivered 374 units. As of December 31, 2020, we have placed into service assets totaling $ 126.4 million. We expect to place the remainder of the Trove development costs into service during the first quarter of 2021. We have also invested $ 28.6 million, including the cost of acquired land, in a multifamily development adjacent to Riverside Apartments. In addition, in our multifamily and office segments, we continue to capitalize qualifying costs on several other projects with minor development activity necessary to ready each project for its intended use. Acquisitions Our current strategy is to recycle legacy assets that lack the income growth potential we seek and to invest in high-quality assets with compelling value-add returns through redevelopment opportunities in our existing portfolio and acquisitions that meet our stringent investment criteria. We focus on properties near major transportation nodes and in areas with strong employment drivers and superior growth demographics. Properties and land for development acquired during the three years ended December 31, 2020 were as follows: Acquisition Date Property Type # of units (unaudited) Rentable Square Feet (unaudited) Contract Purchase Price (in thousands) April 30, 2019 Assembly Portfolio - Virginia (1) Multifamily 1,685 N/A $ 379,100 June 27, 2019 Assembly Portfolio - Maryland (2) Multifamily 428 N/A 82,070 July 23, 2019 Cascade at Landmark Multifamily 277 N/A 69,750 2,390 $ 530,920 January 18, 2018 Arlington Tower Office N/A 391,000 $ 250,000 ______________________________ (1) Consists of Assembly Alexandria, Assembly Manassas, Assembly Dulles, Assembly Leesburg and Assembly Herndon. (2) Consists of Assembly Germantown and Assembly Watkins Mill. The Assembly Portfolio - Virginia and Assembly Portfolio - Maryland properties are collectively the “Assembly Portfolio.” The purchases of the Assembly Portfolio and Cascade at Landmark were structured as exchanges under Section 1031 of the Code in a manner such that legal title was held by a 1031 exchange facilitator until certain identified properties were sold and the deferred exchanges were completed. We retained all of the legal and economic benefits and obligations related to the Assembly Portfolio and Cascade at Landmark. As such, the Assembly Portfolio and Cascade at Landmark were considered to be variable interest entities until legal title was transferred to us upon completion of the 1031 exchanges, which occurred during the third quarter of 2019. We consolidated the assets and liabilities of the Assembly Portfolio and Cascade at Landmark because we determined that WashREIT was the primary beneficiary of these properties. The results of operations from acquired operating properties are included in the consolidated statements of operations as of their acquisition dates. 99 We did no t have any acquisition activity for the year ended December 31, 2020. The revenue and earnings of our acquisitions during their year of acquisition for the two years ended December 31, 2019 are as follows (in thousands): Year Ended December 31, 2019 2018 Real estate rental revenue $ 27,641 $ 22,389 Net (loss) income ( 10,167 ) 3,623 As discussed in note 2, we record the acquired physical assets (land, building and tenant improvements), in-place leases (absorption, tenant origination costs, leasing commissions and net lease intangible assets/liabilities) and any other assumed liabilities on a relative fair value basis. We recorded the total cost of the above acquisitions as follows (in thousands): 2019 2018 Land $ 92,391 $ 63,970 Buildings and improvements 423,663 142,900 Tenant origination costs — 13,625 Leasing commissions/absorption costs 15,474 27,465 Net lease intangible assets — 3,142 Net lease intangible liabilities — ( 545 ) Total $ 531,528 $ 250,557 The difference in the total cost of the 2019 acquisitions of $ 531.5 million and the cash paid for the acquisitions per the consolidated statements of cash flows of $ 528.6 million is primarily due to credits received at settlement totaling $ 2.9 million. The difference in the total contract purchase price of $ 250.0 million for the 2018 acquisition and cash paid for the acquisition per the consolidated statements of cash flows of $ 106.4 million is primarily due to a mortgage note assumed and repaid at settlement ($ 135.5 million), an acquisition deposit made during 2017 ($ 6.3 million) and a net credit to the buyer for certain expenditures ($ 2.4 million), partially offset by capitalized acquisition related costs ($ 0.6 million). Balances, net of accumulated depreciation or amortization, as appropriate, of the components of the fair value of in-place leases at December 31, 2020 and 2019 were as follows (in thousands): December 31, 2020 2019 Gross Carrying Value Accumulated Amortization Net Gross Carrying Value Accumulated Amortization Net Tenant origination costs $ 43,536 $ 30,096 $ 13,440 $ 50,155 $ 33,364 $ 16,791 Leasing commissions/absorption costs 107,102 83,588 23,514 122,348 92,401 29,947 Net lease intangible assets 11,595 9,390 2,205 15,183 11,964 3,219 Net lease intangible liabilities 27,809 20,247 7,562 29,836 20,854 8,982 Below-market ground lease intangible asset 12,080 2,472 9,608 12,080 2,282 9,798 Amortization of these combined components during the three years ended December 31, 2020, 2019 and 2018 was as follows (in thousands): Year Ended December 31, 2020 2019 2018 Depreciation and amortization expense $ 9,997 $ 27,123 $ 22,361 Real estate rental revenue increase, net ( 406 ) ( 924 ) ( 1,225 ) $ 9,591 $ 26,199 $ 21,136 100 Amortization of these combined components over the next five years and thereafter is projected to be as follows (in thousands): Depreciation and amortization expense Real estate rental revenue, net increase Total 2021 $ 8,576 $ ( 547 ) $ 8,029 2022 8,078 ( 736 ) 7,342 2023 6,032 ( 974 ) 5,058 2024 5,264 ( 862 ) 4,402 2025 4,231 ( 777 ) 3,454 Thereafter 14,380 ( 1,460 ) 12,920 Properties Sold and Held for Sale We intend to hold our properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing and owning our properties, and to make occasional sales of the properties that no longer meet our long-term strategy or return objectives and where market conditions for sale are favorable. The proceeds from the sales may be reinvested into other properties, used to fund development operations or to support other corporate needs or distributed to our shareholders. Depreciation on these properties is discontinued when classified as held for sale, but operating revenues, other operating expenses and interest continue to be recognized through the date of sale. We classified as held for sale or sold our interests in the following properties during the three years ended December 31, 2020: Disposition Date Property Type # of units (unaudited) Rentable Square Feet (unaudited) Contract Sale Price (in thousands) (Loss) Gain on Sale (in thousands) April 21, 2020 John Marshall II Office N/A 223,000 $ 57,000 $ ( 6,855 ) December 2, 2020 Monument II Office N/A 207,000 53,000 ( 8,595 ) December 17, 2020 1227 25th Street Office N/A 135,000 53,500 1,125 Total 2020 565,000 $ 163,500 $ ( 14,325 ) June 26, 2019 Quantico Corporate Center (1) Office N/A 272,000 $ 33,000 $ ( 1,046 ) July 23, 2019 Shopping Center Portfolio (2) Retail N/A 800,000 485,250 333,023 August 21, 2019 Frederick Crossing and Frederick County Square Retail N/A 520,000 57,500 9,507 August 27, 2019 Centre at Hagerstown Retail N/A 330,000 23,500 ( 3,506 ) December 19, 2019 1776 G Street Office N/A 262,000 129,500 61,007 Total 2019 2,184,000 $ 728,750 $ 398,985 January 19, 2018 Braddock Metro Center Office N/A 356,000 $ 93,000 $ — June 28, 2018 2445 M Street Office N/A 292,000 101,600 2,495 Total 2018 648,000 $ 194,600 $ 2,495 ______________________________ (1) Consists of 925 and 1000 Corporate Drive. (2) Consists of five retail properties: Gateway Overlook, Wheaton Park, Olney Village Center, Bradlee Shopping Center and Shoppes of Foxchase. We have fully transferred control of the assets associated with these disposed properties and do not have continuing involvement in the operations of these properties. In November 2020, we executed a purchase and sale agreement to sell 1227 25th Street for a contract sale price of $ 53.5 million and closed on the sale on December 17, 2020, recognizing a gain on sale of real estate of $ 1.1 million. In December 2020, we executed a purchase and sale agreement to sell Monument II for a contract sale price of $ 53.0 million and closed on the sale on December 2, 2020, recognizing a loss on sale of real estate of $ 8.6 million. 101 In December 2019, we executed a purchase and sale agreement to sell John Marshall II for a contract sale price of $ 63.4 million. Upon execution of the purchase and sale agreement, the property met the criteria for classification as held for sale. In April 2020, we executed an amendment to the purchase and sale agreement which decreased the contract sale price to $ 57.0 million and closed on the sale on April 21, 2020, recognizing a loss on sale of real estate of $ 6.9 million. During the second quarter of 2019, we sold Quantico Corporate Center, an office property in Stafford, Virginia, consisting of two office buildings totaling 272,000 square feet, for a contract sale price of $ 33.0 million, recognizing a loss on sale of real estate of $ 1.0 million. Prior to the sale, due to the negotiations to sell the property, we evaluated Quantico Corporate Center for impairment and recognized an $ 8.4 million impairment charge during the first quarter of 2019 in order to reduce the carrying value of the property to its estimated fair value. We based this fair valuation on the expected sale price from a potential sale. There were few observable market transactions for similar properties. This fair valuation falls into Level 2 of the fair value hierarchy due to its reliance on a quoted price in a market that is not active. In June 2019, we had entered into two separate purchase and sale agreements with two separate buyers to sell the Shopping Center Portfolio and the Power Center Portfolio (Frederick Crossing, Frederick County Square and Centre at Hagerstown). As of June 30, 2019, we received a non-refundable deposit from the potential buyer of the Shopping Center Portfolio and expected to receive a non-refundable deposit from the potential buyer of the Power Center Portfolio in July 2019, and the properties in the Retail Portfolio (as defined below) met the criteria for classification as held for sale. We closed on the Shopping Center Portfolio sale transaction on July 23, 2019 for a contract sales price of $ 485.3 million, recognizing a gain on sale of real estate of $ 333.0 million. Prior to closing on the disposition of the Shopping Center Portfolio, we prepaid the mortgage note secured by Olney Village Center (a property in the Shopping Center Portfolio), incurring a loss on extinguishment of debt of approximately $ 0.8 million which we recognized in the third quarter of 2019. In the third quarter of 2019, the purchase and sale agreement to sell the Power Center Portfolio was amended to include only Frederick Crossing and Frederick County Square. We closed on the sales of these assets on August 21, 2019 for a contract sales price of $ 57.5 million, recognizing a gain on sale of real estate of $ 9.5 million. Following the amendment to the purchase and sale agreement to sell the Power Center Portfolio, we marketed Centre at Hagerstown for sale and identified a separate buyer. We closed on the sale of this asset on August 27, 2019, recognizing a loss on sale of real estate of $ 3.5 million. References to the “Retail Portfolio” include the Shopping Center Portfolio and the Power Center Portfolio. The disposition of the Retail Portfolio represents a strategic shift that had a major effect on our financial results and we have accordingly reported the Retail Portfolio as discontinued operations. The Retail Portfolio represents assets generating a majority of the revenue from our retail properties and we have determined that our retail line of business is no longer a reportable segment (see note 14). In October 2019, we renewed and extended our lease with the World Bank at 1776 G Street NW, an office property in Washington, D.C., through December 31, 2025. In December 2019, we sold the property to the World Bank for a contract sale price of $ 129.5 million, recognizing a gain on sale of real estate of $ 61.0 million. During the first quarter of 2018, we sold Braddock Metro Center, a 356,000 square foot office property in Alexandria, Virginia for a contract sales price of $ 93.0 million. Due to then-ongoing negotiations to sell the property, we evaluated Braddock Metro Center for impairment and recognized a $ 9.1 million impairment charge during 2017 in order to reduce the carrying value of the property to its estimated fair value, less selling costs. We based this fair valuation on the expected sale price from a potential sale. There are few observable market transactions for similar properties. This fair valuation falls into Level 2 of the fair value hierarchy due to its reliance on a quoted price in a market that is not active. During the first quarter of 2018, we executed a purchase and sale agreement to sell 2445 M Street, a 292,000 square foot office property in Washington, D.C., for a contract sales price of $ 100.0 million, with settlement originally scheduled for the third quarter of 2018. During 2017, we evaluated 2445 M Street for impairment and recognized a $ 24.1 million impairment charge in order to reduce the carrying value of the property to its estimated fair value. Upon execution of the purchase and sale agreement, the property met the criteria for classification as held for sale. Due to the property’s classification as held for sale, we recorded an additional impairment charge of $ 1.9 million in the first quarter of 2018 in order to reduce the carrying value of the property to its estimated fair value, less estimated selling costs. We based this fair value on the expected sales price from a potential sale. There are few observable market transactions for similar properties. This fair valuation falls into Level 2 of the fair value hierarchy due to its reliance on a quoted price in a market that is not active. During the second quarter of 2018, we executed an amendment to the purchase and sale agreement which increased the contract sales price to $ 101.6 million and advanced the settlement date. On June 28, 2018, we sold 2445 M Street, recognizing a gain on sale of real estate of $ 2.5 million. 102 Discontinued Operations The results of the Retail Portfolio are classified as discontinued operations and are summarized as follows (amounts in thousands, except for share data): Year Ended December 31, 2019 2018 Real estate rental revenue $ 28,200 $ 45,160 Real estate expenses ( 6,803 ) ( 10,638 ) Depreciation and amortization ( 4,926 ) ( 9,402 ) Interest expense ( 313 ) ( 643 ) Loss on extinguishment of debt ( 764 ) — Gain on sale of real estate 339,024 — Income from discontinued operations $ 354,418 $ 24,477 Basic net income per share $ 4.39 $ 0.31 Diluted net income per share $ 4.39 $ 0.31 Capital expenditures $ 809 $ 2,138 All assets and liabilities related to the Retail Portfolio were sold as of December 31, 2019. NOTE 4: LEASE ACCOUNTING Leasing as a Lessor Future Minimum Rental Income As of December 31, 2020, non-cancelable commercial operating leases provide for future minimum rental income from continuing operations as follows (in thousands): 2021 $ 122,062 2022 109,939 2023 93,467 2024 80,793 2025 63,923 Thereafter 215,443 $ 685,627 Apartment leases are not included as the terms are generally for one year or less. Rental income under most of these commercial leases increase in future years based on agreed-upon percentages or in some instances, changes in the Consumer Price Index. Leasing as a Lessee 2000 M Street, an office property in Washington, D.C., is subject to an operating ground lease with a remaining term of 50 years. Rental payments under this lease are subject to percentage rent variable payments, which are not included as part of our measurement of straight-line rental expense. We recognized straight-line rental expense of $ 0.3 million during each of the three years ended December 31, 2020. We recognized variable rental payments of $ 0.8 million, $ 0.9 million and $ 0.9 million during the years ended December 31, 2020, 2019 and 2018 respectively. We recognized a right-of-use asset (included in Income producing property) and lease liability (included in Accounts payable and other liabilities) of $ 4.2 million. We used a discount rate of approximately 5.9 %, which was derived from our assessment of securitized rates for similar assets and credit quality. We recognized $ 0.2 million and $ 0.3 million of right-of-use asset and lease liability amortization during the years ended December 31, 2020 and 2019, respectively. 103 The following table sets forth the undiscounted cash flows of our scheduled obligations for future minimum payments on our operating ground lease as of December 31, 2020 and a reconciliation of those cash flows to the operating lease liability as of December 31, 2020 (in thousands): 2021 $ 260 2022 260 2023 260 2024 260 2025 260 Thereafter 11,635 12,935 Imputed interest ( 9,203 ) Lease liability $ 3,732 NOTE 5: MORTGAGE NOTE PAYABLE In January 2020, we prepaid the $ 45.6 million mortgage note secured by Yale West, which was scheduled to mature in 2052. As a result of the transaction, we recognized a gain on extinguishment of debt of $ 0.5 million related to the write-off of an unamortized mortgage premium of $ 1.4 million, partially offset by a prepayment penalty of $ 0.9 million. Following this repayment, we have no outstanding mortgage notes as of December 31, 2020. As of December 31, 2019, we had one outstanding mortgage notes payable, collateralized by a building and related land from our portfolio, as follows (in thousands): Properties Assumption/Issuance Date (1) Effective Interest Rate (2) December 31, 2019 Yale West 2/21/2014 3.75 % $ 45,654 Premiums and discounts, net 1,470 Debt issuance costs, net ( 50 ) $ 47,074 ______________________________ (1) This mortgage was assumed with the acquisition of the collateralized property. We record mortgages assumed in an acquisition at fair value. (2) Yield on the assumption/issuance date, including the effects of any premiums, discounts or fair value adjustments on the notes. Principal and interest were payable monthly until the maturity date, at which time all unpaid principal and interest were payable in full. Total cost basis of the above mortgaged property was $ 77.4 million at December 31, 2019. NOTE 6: UNSECURED LINES OF CREDIT PAYABLE During the first quarter of 2018, we entered into an amended and restated credit agreement (“Credit Agreement”) which provides for a $ 700.0 million unsecured revolving credit facility (“Revolving Credit Facility”), the continuation of an existing $ 150.0 million unsecured term loan (“2015 Term Loan”) and an additional $ 250.0 million unsecured term loan (“2018 Term Loan”). The Revolving Credit Facility has a four-year term ending in March 2022, with two six-month extension options. The Credit Agreement has an accordion feature that allows us to increase the facility up to $ 1.5 billion in the aggregate, to the extent the lenders agree to provide additional revolving loan commitments or term loans. The 2018 Term Loan increases and replaces the $ 150.0 million unsecured term loan, initially entered into on July 22, 2016 (“2016 Term Loan”), that was scheduled to mature in July 2023. The 2018 Term Loan is scheduled to mature in July 2023 and bears interest at a rate of either one month LIBOR plus a margin ranging from 0.85 % to 1.75 % or the base rate plus a margin ranging from 0.0 % to 0.75 % (in each case depending upon WashREIT’s credit rating). We used the $ 100.0 million of additional proceeds from the 2018 Term Loan primarily to repay outstanding borrowings on the Revolving Credit Facility. We had previously used interest rate derivatives to effectively fix the interest rate of the 2016 Term Loan. These interest rate 104 derivatives now effectively fix the interest rate on a $ 150.0 million portion of the 2018 Term Loan at 2.31 %. In March 2018, we entered into interest rate derivatives that commenced on June 29, 2018 to effectively fix the interest rate on the remaining $ 100.0 million of the 2018 Term Loan at 3.71 %. The 2018 Term Loan has an all-in fixed interest rate of 2.87 %. The amount of the Revolving Credit Facility unused and available at December 31, 2020 was as follows (in thousands): Committed capacity $ 700,000 Borrowings outstanding ( 42,000 ) Unused and available $ 658,000 We executed borrowings and repayments on the Revolving Credit Facility during 2020 as follows (in thousands): Balance at December 31, 2019 $ 56,000 Borrowings 732,000 Repayments ( 746,000 ) Balance at December 31, 2020 $ 42,000 The Revolving Credit Facility bears interest at a rate of either one month LIBOR plus a margin ranging from 0.775 % to 1.55 % or the base rate plus a margin ranging from 0.0 % to 0.55 % (in each case depending upon WashREIT’s credit rating). The base rate is the highest of the administrative agent's prime rate, the federal funds rate plus 0.50 % and the LIBOR market index rate plus 1.0 %. In addition, the Revolving Credit Facility requires the payment of a facility fee ranging from 0.10 % to 0.30 % (depending on WashREIT’s credit rating) on the $ 700.0 million committed capacity, without regard to usage. As of December 31, 2020, the interest rate on the facility was LIBOR plus 1.00 %, the one month LIBOR was 0.14 % and the facility fee was 0.20 %. All outstanding advances for the Revolving Credit Facility are due and payable upon maturity in March 2022, unless extended pursuant to one or both of the two six-month extension options. Interest only payments are due and payable generally on a monthly basis. For the three years ended December 31, 2020, we recognized interest expense (excluding facility fees) and facility fees as follows (in thousands): Year Ended December 31, 2020 2019 2018 Interest expense (excluding facility fees) $ 3,035 $ 6,554 $ 6,843 Facility fees 1,423 1,400 1,371 The Revolving Credit Facility contains and the prior unsecured credit facility that it replaced contained certain financial and non-financial covenants, all of which we have met as of December 31, 2020 and 2019. Included in these covenants are limits on our total indebtedness, secured and unsecured indebtedness and required debt service payments. Information related to revolving credit facilities for the three years ended December 31, 2020 as follows (in thousands, except percentage amounts): Year Ended December 31, 2020 2019 2018 Total revolving credit facilities at December 31 $ 700,000 $ 700,000 $ 700,000 Borrowings outstanding at December 31 42,000 56,000 188,000 Weighted average daily borrowings during the year 204,809 196,074 230,934 Maximum daily borrowings during the year 456,000 300,000 429,000 Weighted average interest rate during the year 1.48 % 3.34 % 2.96 % Weighted average interest rate on borrowings outstanding at December 31 1.15 % 2.73 % 3.52 % The covenants under our Credit Agreement require us to insure our properties against loss or damage in amounts customarily maintained by similar businesses or as they may be required by applicable law. The covenants for the notes require us to keep all of our insurable properties insured against loss or damage at least equal to their then full insurable value. We have an 105 insurance policy that has no terrorism exclusion, except for non-certified nuclear, chemical and biological acts of terrorism. Our financial condition and results of operations are subject to the risks associated with acts of terrorism and the potential for uninsured losses as the result of any such acts. Effective November 26, 2002, under this existing coverage, any losses caused by certified acts of terrorism would be partially reimbursed by the United States under a formula established by federal law. Under this formula, the United States pays 85 % of covered terrorism losses exceeding the statutorily established deductible paid by the insurance provider, and insurers pay 10 % until aggregate insured losses from all insurers reach $ 100 billion in a calendar year. If the aggregate amount of insured losses under this program exceeds $ 100 billion during the applicable period for all insured and insurers combined, then each insurance provider will not be liable for payment of any amount which exceeds the aggregate amount of $ 100 billion. On December 20, 2019, The Terrorism Risk Insurance Program Reauthorization Act of 2019 was signed into law, extending the program through December 31, 2027. NOTE 7: NOTES PAYABLE Our unsecured notes and term loans outstanding as of December 31, 2020 and 2019 are as follows (in thousands): Effective December 31, Payoff Date/ Coupon/Stated Rate Rate (1) 2020 2019 Maturity Date (2) 10-Year Unsecured Notes 4.95 % 5.05 % $ — $ 250,000 10/1/2020 2015 Term Loan 1 Month LIBOR + 110 basis points 2.72 % — 150,000 3/15/2021 10-Year Unsecured Notes 3.95 % 4.02 % 300,000 300,000 10/15/2022 2018 Term Loan (3) 1 Month LIBOR + 110 basis points 2.87 % 250,000 250,000 7/21/2023 30-Year Unsecured Notes 7.25 % 7.36 % 50,000 50,000 2/25/2028 Green Bonds 3.44 % 4.09 % 350,000 — 12/29/2030 Total principal 950,000 1,000,000 Premiums and discounts, net ( 456 ) ( 797 ) Deferred issuance costs, net ( 4,174 ) ( 2,481 ) Total $ 945,370 $ 996,722 ______________________________ (1) For fixed rate notes, the effective rate represents the yield on issuance date, including the effects of discounts on the notes. For variable rate notes, the effective rate represents the rate as fixed by interest rate derivatives (see note 8). (2) No principal amounts are due prior to maturity. (3) The 2018 Term Loan increased and replaced the 2016 Term Loan (see note 6). In April 2020, we used borrowings from our Revolving Credit Facility to prepay all $ 250.0 million of our 4.95 % 10 -year unsecured notes without penalty. On May 5, 2020, we entered into a one-year , $ 150.0 million unsecured term loan facility (“2020 Term Loan”), maturing on May 5, 2021 with a one-year extension option. The 2020 Term Loan bears interest at LIBOR + 1.50 %, which margin is subject to change based on our credit ratings, with a 0.50 % floor for the LIBOR rate. We used the proceeds to repay borrowings under our Revolving Credit Facility. We repaid in full the 2020 Term Loan on November 30, 2020. On September 29, 2020, we entered into a note purchase agreement to issue $ 350.0 million aggregate principal amount of 3.44 % senior unsecured 10 -year notes payable (the “Green Bonds”). The effective interest rate under the Green Bonds, including amortization of the associated interest rate swaps (see note 8), is 4.09 %. The closing and full funding of the Green Bonds occurred on December 17, 2020. We incurred $ 2.6 million of debt issuance costs associated with the Green Bonds which are reported on our consolidated balance sheets as an offset to their related debt. The Green Bonds are senior unsecured obligations of WashREIT and rank equal in right to payment with all other senior unsecured indebtedness of WashREIT. The proceeds of the sale of the Green Bonds were and will be used to finance or refinance recently completed and future green building and energy efficiency, sustainable water and wastewater management and renewable energy projects (“Eligible Green Projects”). In the fourth quarter of 2020, we repaid all $ 150.0 million of borrowings on the 2015 Term Loan and all $ 150.0 million of borrowings on the 2020 Term Loan. As a result of these transactions, we recognized a loss on extinguishment of debt of $ 0.3 million. 106 The note purchase agreement contains customary financial covenants, including a maximum total leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a minimum unencumbered interest coverage ratio, and a maximum unencumbered leverage ratio. The note purchase agreement also contains restrictive covenants that, among other things, restrict the ability of WashREIT and its subsidiaries to enter into transactions with affiliates, consolidate or merge or transfer or lease all or substantially all of its assets, create liens, make dividends and distributions if an event of default exists, or substantially change the general nature of our business. Such financial and restrictive covenants are substantially similar to the corresponding covenants contained in our Credit Agreement. The note purchase agreement also contains customary events of default, including payment defaults, cross defaults with certain other indebtedness, breaches of certain covenants and bankruptcy events. In the case of an event of default, we will generally be prohibited from paying any dividends, subject to certain exceptions including payment of dividends necessary to maintain REIT status, and the Purchasers may, among other remedies, accelerate the payment of all obligations. In the event of a change in control of WashREIT, we must offer to prepay the Green Bonds at par. On April 30, 2019, we entered into a six-month , $ 450.0 million unsecured term loan facility (“2019 Term Loan”), maturing on October 30, 2019 with an option to extend for a six-month period. The 2019 Term Loan bore interest, at WashREIT’s option, at a rate of either LIBOR plus a margin ranging from 0.75 % to 1.65 % or the base rate plus a margin ranging 0.0 % to 0.65 % (in each case depending upon WashREIT’s credit rating). The base rate was the highest of the administrative agent’s prime rate, the federal funds rate plus 0.50 % and the daily one-month LIBOR rate plus 1.0 %. At WashREIT’s election, the 2019 Term Loan had an interest rate of one-week LIBOR plus 100 basis points, based on WashREIT’s current unsecured debt rating. The 2019 Term Loan was used to fund the acquisition of the Assembly Portfolio (see note 3). During the third quarter of 2019, we repaid the $ 450.0 million of borrowings on the 2019 Term Loan with proceeds from the sale of the Retail Portfolio (see note 3). The required principal payments on the unsecured notes and term loans as of December 31, 2020 are as follows (in thousands): 2021 $ — 2022 300,000 2023 250,000 2024 — 2025 — Thereafter 400,000 $ 950,000 Interest on these notes is payable semi-annually, except for the term loans, for which interest is payable monthly. These notes contain certain financial and non-financial covenants, all of which we have met as of December 31, 2020. Included in these covenants is the requirement to maintain a minimum level of unencumbered assets, as well as limits on our total indebtedness, secured indebtedness and required debt service payments. NOTE 8: DERIVATIVE INSTRUMENTS On September 15, 2015, we entered into two interest rate swap arrangements with a total notional amount of $ 150.0 million to swap the floating interest rate under the $ 150.0 million 2015 Term Loan (see note 6) to an all-in fixed interest rate of 2.72 % starting on October 15, 2015 and extending until the maturity of the 2015 Term Loan on March 15, 2021. On July 22, 2016, we entered into two forward interest rate swap arrangements with a total notional amount of $ 150.0 million to swap the floating interest rate under the $ 150.0 million 2016 Term Loan (see note 6) to an all-in fixed interest rate of 2.86 %, starting on March 31, 2017 and extending until the scheduled maturity of the 2016 Term Loan on July 21, 2023. On March 29, 2018, we entered into the $ 250.0 million 2018 Term Loan (see note 6) maturing on July 21, 2023, which increased and replaced the 2016 Term Loan. The interest rate swap arrangements that had effectively fixed the 2016 Term Loan now effectively fix the interest rate on a $ 150.0 million portion of the 2018 Term Loan at 2.31 %. On March 29, 2018, we entered into four interest rate swap arrangements with a total notional amount of $ 100.0 million to effectively fix the interest rate on the remaining $ 100.0 million of the 2018 Term Loan at 3.71 %, that commenced on June 29, 2018 and extending until the maturity of the 2018 Term Loan on July 21, 2023. The $ 250.0 million 2018 Term Loan has an all-in fixed interest rate of 2.87 % (see note 6 and note 7). In November 2019, we entered into four forward interest rate swap arrangements, each effective as of April 1, 2020 (“Forward Swaps”) with a total notional amount of $ 200.0 million to reduce our exposure to adverse fluctuations in interest rates on future 107 fixed-rate debt to replace all $ 250.0 million of our 4.95 % 10 -year unsecured notes that were scheduled to mature in October 2020. In April 2020, we used borrowings from our Revolving Credit Facility to prepay all $ 250.0 million of our 4.95 % 10 -year unsecured notes without penalty. In September 2020, in conjunction with the entry into the note purchase agreement to issue the Green Bonds, we terminated the Forward Swaps. At the time of termination, the Forward Swaps had a liability fair value of $ 20.4 million, which will be amortized as interest expense over the 10 -year term of the Green Bonds. On October 2, 2020, we paid the $ 20.4 million liability associated with the termination of the Forward Swaps. In December 2020, in connection with the prepayment of our 2015 Term Loan, we terminated interest rate swap agreements with notional amounts in the aggregate of $ 150.0 million (see note 7). As a result of the termination, the accumulated fair value of the interest rate swaps was reclassified from Accumulated other comprehensive loss to Loss on interest rate derivatives on our consolidated income statements, which resulted in a realized loss of approximately $ 0.6 million. The interest rate swaps qualify as cash flow hedges and are recorded at fair value in accordance with GAAP, based on discounted cash flow methodologies and observable inputs. We record the effective portion of changes in fair value of the cash flow hedges in other comprehensive income. The resulting unrealized loss on the effective portions of the cash flow hedges was the only activity in other comprehensive income (loss) during the periods presented in our consolidated financial statements. We assess the effectiveness of our cash flow hedges both at inception and on an ongoing basis. The cash flow hedges were highly effective for all periods presented. The fair values of the interest rate swaps as of December 31, 2020 and 2019, are as follows (in thousands): Aggregate Notional Amount Effective Date Fair Value Derivative Assets (Liabilities) December 31, Derivative Instrument Maturity Date 2020 2019 Interest rate swaps $ 150,000 October 15, 2015 March 15, 2021 $ — $ ( 62 ) Interest rate swaps 150,000 March 31, 2017 July 21, 2023 ( 4,009 ) 1,825 Interest rate swaps 100,000 June 29, 2018 July 21, 2023 ( 6,246 ) ( 3,664 ) Interest rate swaps 200,000 April 1, 2020 April 1, 2030 — 3,724 $ ( 10,255 ) $ 1,823 We record interest rate swaps on our consolidated balance sheets with prepaid expenses and other assets when in a net asset position, and with accounts payable and other liabilities when in a net liability position. The interest rate swaps have been effective since inception. The gains or losses on the effective swaps are recognized in other comprehensive income, as follows (in thousands): Year Ending December 31, 2020 2019 2018 Unrealized (loss) gain on interest rate hedges $ ( 33,025 ) $ ( 8,016 ) $ 420 Amounts reported in Accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. The gains or losses reclassified from Accumulated other comprehensive income into interest expense for the three years ended December 31, 2020, were as follows (in thousands): Year Ending December 31, 2020 2019 2018 Loss reclassified from Accumulated other comprehensive income (loss) into interest expense $ 79 $ — $ — During the next twelve months, we estimate that $ 6.0 million will be reclassified as an increase to interest expense. We have agreements with each of our derivative counterparties that contain a provision whereby we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of December 31, 2020, we did no t have any derivatives in an asset position and the fair value of the derivative liabilities, including accrued interest, was $ 10.3 million. As of December 31, 2020, we have not posted any collateral related to these agreements. 108 Derivative instruments expose us to credit risk in the event of non-performance by the counterparty under the terms of the interest rate hedge agreement. We believe that we minimize our credit risk on these transactions by dealing with major, creditworthy financial institutions. We monitor the credit ratings of counterparties and our exposure to any single entity, thus minimizing our credit risk concentration. NOTE 9: FAIR VALUE DISCLOSURES Assets and Liabilities Measured at Fair Value For assets and liabilities measured at fair value on a recurring basis, quantitative disclosures about the fair value measurements are required to be disclosed separately for each major category of assets and liabilities, as follows: Level 1: Quoted prices in active markets for identical assets Level 2: Significant other observable inputs Level 3: Significant unobservable inputs The only assets or liabilities we had at December 31, 2020 and 2019 that are recorded at fair value on a recurring basis are the assets held in the Supplemental Executive Retirement Plan ("SERP"), which primarily consists of investments in mutual funds, and the interest rate swaps (see note 8). We base the valuations related to the SERP on assumptions derived from significant other observable inputs and accordingly these valuations fall into Level 2 in the fair value hierarchy. The valuation of the interest rate swaps is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC 820, we incorporate credit valuation adjustments in the fair value measurements to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk. These credit valuation adjustments were concluded to not be significant inputs for the fair value calculations for the periods presented. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as the posting of collateral, thresholds, mutual puts and guarantees. The valuation of interest rate swaps fall into Level 2 in the fair value hierarchy. The fair values of these assets and liabilities at December 31, 2020 and 2019 were as follows (in thousands): December 31, 2020 December 31, 2019 Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: SERP $ 2,433 $ — $ 2,433 $ — $ 1,792 $ — $ 1,792 $ — Interest rate swaps — — — — 5,549 — 5,549 — Liabilities: Interest rate swaps $ ( 10,255 ) $ — $ ( 10,255 ) $ — $ ( 3,726 ) $ — $ ( 3,726 ) $ — Financial Assets and Liabilities Not Measured at Fair Value The following disclosures of estimated fair value were determined by management using available market information and established valuation methodologies, including discounted cash flow models. Many of these estimates involve significant judgment. The estimated fair value disclosed may not necessarily be indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have an effect on the estimated fair value amounts. In addition, fair value estimates are made at a point in time and thus, estimates of fair value subsequent to December 31, 2020 may differ significantly from the amounts presented. 109 Below is a summary of significant methodologies used in estimating fair values and a schedule of fair values at December 31, 2020. Cash and Cash Equivalents and Restricted Cash Cash and cash equivalents and restricted cash include cash and commercial paper with original maturities of less than 90 days, which are valued at the carrying value, which approximates fair value due to the short maturity of these instruments (Level 1 inputs). Debt Mortgage notes payable consist of instruments in which certain of our real estate assets are used for collateral. We estimate the fair value of the mortgage notes payable by discounting the contractual cash flows at a rate equal to the relevant treasury rates (with respect to the timing of each cash flow) plus credit spreads estimated through independent comparisons to real estate assets or loans with similar characteristics. Line of credit payable consist of bank facilities which we use for various purposes including working capital, acquisition funding and capital improvements. The line of credit advances and term loans with floating interest rates are priced at a specified rate plus a spread. We estimate the market value based on a comparison of the spreads of the advances to market given the adjustable base rate. We estimate the fair value of the notes payable by discounting the contractual cash flows at a rate equal to the relevant treasury rates (with respect to the timing of each cash flow) plus credit spreads derived using the relevant securities’ market prices. We classify these fair value measurements as Level 3 as we use significant unobservable inputs and management judgment due to the absence of quoted market prices. As of December 31, 2020 and 2019, the carrying values and estimated fair values of our financial instruments were as follows (in thousands): December 31, 2020 2019 Carrying Value Fair Value Carrying Value Fair Value Cash and cash equivalents $ 7,700 $ 7,700 $ 12,939 $ 12,939 Restricted cash 603 603 1,812 1,812 Mortgage notes payable — — 47,074 47,899 Line of credit payable 42,000 42,000 56,000 56,000 Notes payable 945,370 978,678 996,722 1,022,937 NOTE 10: STOCK BASED COMPENSATION WashREIT maintains short-term and long-term incentive plans that allow for stock-based awards to officers and non-officer employees. Stock based awards are provided to officers and non-officer employees, as well as trustees, under the Washington Real Estate Investment Trust 2016 Omnibus Incentive Plan which allows for awards in the form of restricted shares, restricted share units, options, and other awards up to an aggregate of 2,400,000 shares over the ten year period in which the plan will be in effect. Restricted share units are converted into shares of our stock upon full vesting through the issuance of new shares. There were no options issued or outstanding as of December 31, 2020 and 2019. On February 14, 2020, the board of trustees adopted an Amended and Restated Executive Officer Short-Term Incentive Plan (the “Officer STIP”) and an Amended and Restated Executive Officer Long-Term Incentive Plan (the “Officer LTIP”). Upon adoption by the board of trustees, both plans became effective for the performance periods beginning January 1, 2020. Officer STIP Under the Officer STIP, as revised, all named executive officers will have the opportunity to receive an annual cash bonus based on the achievement of certain performance measures that will be established for each performance period. Each year, the Compensation Committee will establish the threshold, target and high performance goals for each performance measure, as well as the weighting attributable to each such performance measure, with the aggregate weighting for all such performance measures to total 100 %. Such performance measures will consist of one or more financial performance measures and, if determined by the Compensation Committee, individual performance measures. 110 Upon or following completion of a performance period, the degree of achievement of each financial performance measure will be determined by the Compensation Committee. The degree of achievement of any individual financial performance measures will be determined by the Compensation Committee in its discretion with respect to the Chief Executive Officer, and by the Chief Executive Officer or other immediate supervisor in his or her discretion with respect to all other participants (subject to final approval by the Compensation Committee), and the Compensation Committee will evaluate the degree of achievement of the individual performance measures on a scale of below 1 (below threshold), 1 (threshold), 2 (target) or 3 (high) or any fractional number between 1 and 3. Each participant’s total award under the Officer STIP with respect to a performance period will be stated as a percentage of the participant’s annual base salary determined as of the first day of that performance period, which percentage will depend upon the participant’s position and the degree of achievement of threshold, target, and high performance goals for the performance period which, except as otherwise determined by the Compensation Committee, will be as set forth in the table below: Threshold Target High President and Chief Executive Officer 63 % 125 % 188 % Executive Vice President 48 % 93 % 160 % Senior Vice President 35 % 65 % 115 % If a Change in Control (as defined in the Officer STIP) occurs during a performance period while the participant is employed, the participant will receive a prorated award under the Officer STIP calculated based on the actual levels of achievement of the prorated performance goals as of the date of the Change in Control. Officer LTIP Under the Officer LTIP, as revised, all named executive officers will have the opportunity to receive awards based on (i) the achievement of performance measures, which will be established for each performance period, and (ii) continued employment with the Company. The aggregate weighting for the performance measures and the time-based measures, as determined by the Compensation Committee, will total 100 %. The performance measures will consist of one or more shareholder return measures and one or more strategic measures. The awards earned under the Officer LTIP, if any, are payable in our common shares of beneficial interest. Each participant’s total award under the Officer LTIP with respect to a performance period will be stated as a percentage of the participant’s annual base salary determined as of the beginning of that performance period. The percentage will depend upon the participant’s position and the degree of achievement of threshold, target, and high performance goals for the performance period which, except as otherwise determined by the Compensation Committee, will be as set forth in the table below: Threshold Target High President and Chief Executive Officer 198 % 275 % 440 % Executive Vice President 143 % 200 % 295 % Senior Vice President 100 % 143 % 207 % Any time-based awards under the Officer LTIP will be subject to a three-year vesting schedule, with any award vesting in one-third increments on December 15 of each year of the applicable performance period if the participant remains employed by the Company on each of such dates. The Officer LTIP provides that following a performance period, 100 % of any performance-based award will vest immediately upon grant. Each year, the Compensation Committee will establish the threshold, target and high performance goals for each performance measure. Upon or following completion of a performance period, the degree of achievement of each performance measure will be determined by the Compensation Committee in its discretion. If a Change in Control (as defined in the Officer LTIP) occurs during a performance period while the participant is employed, the Officer LTIP provides that all time-based awards which are unvested will become vested, and the participant will receive a pro-rated portion of the shareholder return measure-based awards and the strategic measure-based awards will be calculated at target. Prior Short-Term Incentive Plan ("Prior STIP") 111 Under the Prior STIP, executive officers earned awards, payable 50 % in cash and 50 % in restricted shares, based on a percentage of salary and an achievement rating subject to the discretion of the Compensation Committee of the board of trustees in consideration of various performance conditions and other subjective factors during a one-year performance period. With respect to the 50 % of the Prior STIP award payable in restricted shares, the restricted shares will vest over a three-year period commencing on the January 1 following the end of the one-year performance period. Prior to the adoption of the 2016 Omnibus Incentive Plan, stock based awards to officers, non-officer employees and trustees were issued under the Washington Real Estate Investment Trust 2007 Omnibus Long-Term Incentive Plan which allowed for awards in the form of restricted shares, restricted share units, options and other awards up to an aggregate of 2,000,000 shares while the plan was in effect. The grant date for the 50 % of the Prior STIP award payable in restricted shares was the date on which the Compensation Committee approved the Prior STIP awards. We recognize compensation expense on this 50 % when the grant date occurs at the end of the one-year period through the three-year vesting period. Bonuses payable under the short-term incentive plans for non-executive officers and staff are payable 100 % in cash. Prior Long-Term Incentive Plan ("Prior LTIP") Under the Prior LTIP, executive officers earned awards payable, 75 % in unrestricted shares and 25 % in restricted shares, based on a percentage of salary and the achievement of certain market conditions. For performance periods beginning prior to January 1, 2018, performance was evaluated based 50 % on absolute total shareholder return (“TSR”) and 50 % on relative TSR over a three-year evaluation period with a new three-year period initiating under the existing plan each year. During the first quarter of 2018, we amended the Prior LTIP for executive officers to eliminate the absolute TSR component and only utilize relative TSR in the measurement of market condition performance. Under the amended Prior LTIP, relative TSR was evaluated 50 % relative to a defined population of peer companies and 50 % relative to the FTSE NAREIT Diversified Index. The amendment became effective for three-year performance periods commencing on or after January 1, 2018. The officers' total award opportunities under the Prior LTIP stated as a percentage of base salary ranged from 80 % to 150 % at target level. The unrestricted shares vest immediately at the end of the three-year performance period, and the restricted shares vest over a one-year period commencing on the January 1 following the end of the three-year performance period. We recognize compensation expense ratably (over three years for the 75 % unrestricted shares and over four years for the 25 % restricted shares) based on the grant date fair value, as determined using a Monte Carlo simulation, and regardless of whether the market conditions are achieved and the awards ultimately vest. We use a binomial model which employs the Monte Carlo method as of the grant date to determine the fair value of the officer LTIP awards. For three-year performance periods commencing on or after January 1, 2018, the market condition performance measurement is based on total shareholder return relative to a defined population of peer companies ( 50 % weighting) and relative to the FTSE NAREIT Diversified Index ( 50 % weighting). The model evaluates the awards for changing total shareholder return over the term of the vesting, relative to the peer companies and relative to the FTSE NAREIT Diversified Index, and uses random simulations that are based on past stock characteristics as well as dividend growth and other factors for WashREIT and each of the peer companies. For three-year performance periods commencing prior to January 1, 2018, the market condition performance measurement was based on total shareholder return on an absolute basis ( 50 % weighting) and relative to a defined population of peer companies ( 50 % weighting). The assumptions used to value the TSR portion of the officer LTIP and Prior LTIP awards were as follows: 2020 Awards 2019 Awards 2018 Awards Expected volatility (1) 17.5 % 18.1 % 17.9 % Risk-free interest rate (2) 1.4 % 2.4 % 2.4 % Expected term (3) 3 years 3 and 4 years 3 and 4 years Share price at grant date $ 31.50 $ 23.00 $ 26.06 ______________________________ (1) Expected volatility based upon historical volatility of our daily closing share price. (2) Risk-free interest rate based on U.S. treasury constant maturity bonds on the measurement date with a maturity equal to the market condition performance period. (3) Expected term based on the market condition performance period. The calculated grant date fair value as a percentage of base salary for the officers for the three-year performance period that commenced in 2020 ranged from approximately 20 % to 42 % for the 50 % of the LTIP based on TSR relative to a defined 112 population of peer companies and from 22 % to 46 % for the 50 % of the LTIP based on TSR relative to the FTSE NAREIT Diversified Index. The calculated grant date fair value as a percentage of base salary for the officers for the three-year performance period that commenced in 2019 ranged from approximately 35 % to 68 % for the 50 % of the LTIP based on TSR relative to a defined population of peer companies and from 39 % to 74 % for the 50 % of the LTIP based on TSR relative to the FTSE NAREIT Diversified Index. The calculated grant date fair value as a percentage of base salary for the officers for the three-year performance period that commenced in 2018 ranged from approximately 31 % to 60 % for the 50 % of the LTIP based on TSR relative to a defined population of peer companies and from 35 % to 68 % for the 50 % of the LTIP based on TSR relative to the FTSE NAREIT Diversified Index. During 2017, our chief executive officer was granted a one-time equity award of 100,000 restricted shares. None of the restricted shares vest until the fifth anniversary of the grant date, at which time 100 % of the restricted shares will vest, subject to Mr. McDermott's continued employment with WashREIT until such vesting date. Our non-executive officers and other employees earn restricted share unit awards under a long-term incentive plan for non-executive officers and staff based upon various percentages of their salaries and annual performance calculations. The restricted share unit awards vest ratably over three years from December 15 preceding the grant date based upon continued employment. We recognize compensation expense for these awards according to a graded vesting schedule over the three-year requisite service period. Restricted share awards made to retirement-eligible employees fully vest on the grant date. Employees are considered retirement-eligible when they are both over the age of 55 and have been employed by WashREIT for at least 20 years, or over the age of 65 . We fully recognize compensation expense for such awards as of the grant date. Trustee Awards We award share based compensation to our trustees in the form of restricted shares which vest immediately and are restricted from sale for the period of the trustees' service. The value of share-based compensation for each trustee was $ 100,000 for each of three years ended December 31, 2020. Total Compensation Expense Total compensation expense recognized in the consolidated financial statements for each of the three years ended December 31, 2020 for all share based awards was $ 7.9 million, $ 7.7 million and $ 6.7 million, respectively, net of capitalized stock-based compensation expense of $ 0.4 million, $ 0.2 million and $ 0.3 million, respectively. 113 Restricted Share Awards with Performance and Service Conditions The activity for the three years ended December 31, 2020 related to our restricted share awards, excluding those subject to market conditions, was as follows: Shares Wtd Avg Grant Fair Value Unvested at December 31, 2017 236,694 $ 27.96 Granted 304,087 25.98 Vested during year ( 224,150 ) 27.40 Forfeited ( 5,621 ) 29.43 Unvested at December 31, 2018 311,010 29.07 Granted 213,782 26.26 Vested during year ( 236,013 ) 27.43 Forfeited ( 19,396 ) 26.60 Unvested at December 31, 2019 269,383 28.45 Granted 285,101 30.39 Vested during year ( 239,033 ) 27.54 Forfeited ( 8,456 ) 28.35 Unvested at December 31, 2020 306,995 30.96 The total fair value of share grants vested for each of the three years ended December 31, 2020 was $ 6.6 million, $ 6.5 million and $ 6.1 million, respectively. As of December 31, 2020, the total compensation cost related to non-vested share awards not yet recognized was $ 7.0 million, which we expect to recognize over a weighted average period of 21 months. Restricted and Unrestricted Shares with Market Conditions Stock based awards with market conditions under the LTIP and Prior LTIP were granted in 2020, 2019 and 2018 with fair market values, as determined using a Monte Carlo simulation, as follows (in thousands): 2020 Awards 2019 Awards 2018 Awards Unrestricted (1) Restricted Unrestricted Restricted Unrestricted Relative Peer TSR $ 510 $ 184 $ 552 $ 203 $ 608 Absolute/Index TSR (2) 565 201 602 230 690 The unamortized value of these awards with market conditions as of December 31, 2020 was as follows (in thousands): 2020 Awards 2019 Awards 2018 Awards Unrestricted Restricted Unrestricted Restricted Unrestricted Relative Peer TSR $ 355 $ 92 $ 184 $ 42 $ — Absolute/Index TSR (1) 393 100 201 48 — ______________________________ (1) The 2020 Awards were granted under the 2020 LTIP, whereby all of the shares vest immediately at the end of the three-year performance period. The 2019 and 2018 Awards were granted under the Prior LTIP, whereby the unrestricted shares ( 75 %) vest immediately at the end of the three-year performance period and the restricted shares ( 25 %) vest over a one-year period commencing on the January 1 following the end of the three-year performance period. (2) The performance conditions for the 2020, 2019 and 2018 awards were evaluated based on 50 % on TSR relative to a defined population of peer companies and 50 % on TSR relative to the FTSE NAREIT Diversified Index. 114 NOTE 11: OTHER BENEFIT PLANS We have a Retirement Savings Plan (the “401(k) Plan”), which permits all eligible employees to defer a portion of their compensation in accordance with the Code. Under the 401(k) Plan, we may make discretionary contributions on behalf of eligible employees. For each of the three years ended December 31, 2020, we made contributions to the 401(k) plan of $ 0.4 million, $ 0.5 million and $ 0.5 million, respectively. We have adopted non-qualified deferred compensation plans for the officers and members of the board of trustees. The plans allow for a deferral of a percentage of annual cash compensation and trustee fees. The plans are unfunded and payments are to be made out of the general assets of WashREIT. The deferred compensation liability was $ 0.7 million and $ 0.9 million at December 31, 2020 and 2019, respectively. In November 2005, the board of trustees approved the establishment of a SERP for the benefit of officers. This is a defined contribution plan under which, upon a participant's termination of employment from WashREIT for any reason other than discharge for cause, the participant will be entitled to receive a benefit equal to the participant's accrued benefit times the participant's vested interest. We account for this plan in accordance with ASC 710-10 and ASC 320-10, whereby the investments are reported at fair value, and unrealized holding gains and losses are included in earnings. At December 31, 2020 and 2019, the accrued benefit liability was $ 2.4 million and $ 1.8 million, respectively. For each of the three years ended December 31, 2020, we recognized current service cost of $ 0.2 million, $ 0.2 million and $ 0.3 million, respectively. NOTE 12: EARNINGS PER COMMON SHARE We determine “Basic earnings per share” using the two-class method as our unvested restricted share awards and units have non-forfeitable rights to dividends, and are therefore considered participating securities. We compute basic earnings per share by dividing net income less the allocation of undistributed earnings to unvested restricted share awards and units by the weighted-average number of common shares outstanding for the period. We also determine “Diluted earnings per share” as the more dilutive of the two-class method or the treasury stock method with respect to the unvested restricted share awards. We further evaluate any other potentially dilutive securities at the end of the period and adjust the basic earnings per share calculation for the impact of those securities that are dilutive. Our dilutive earnings per share calculation includes the dilutive impact of operating partnership units under the if-converted method and our share based awards with performance conditions prior to the grant date and all market condition awards under the contingently issuable method. 115 The computation of basic and diluted earnings per share for the three years ended December 31, 2020 was as follows (in thousands, except per share data): Year Ended December 31, 2020 2019 2018 Numerator: (Loss) income from continuing operations $ ( 15,680 ) $ 29,132 $ 1,153 Allocation of distributed earnings to unvested restricted share awards to continuing operations ( 545 ) ( 125 ) ( 526 ) Adjusted (loss) income from continuing operations ( 16,225 ) 29,007 627 Income from discontinued operations, including gain on sale of real estate — 354,418 24,477 Allocation of earnings from discontinued operations to unvested restricted share awards — ( 1,837 ) — Adjusted income from discontinued operations — 352,581 24,477 Adjusted net (loss) income $ ( 16,225 ) $ 381,588 $ 25,104 Denominator: Weighted average shares outstanding – basic 82,348 80,257 78,960 Effect of dilutive securities: Operating partnership units — 12 12 Employee restricted share awards — 66 70 Weighted average shares outstanding – diluted 82,348 80,335 79,042 Earnings per common share, basic: Continuing operations $ ( 0.20 ) $ 0.36 $ 0.01 Discontinued operations — 4.39 0.31 Basic net (loss) income per common share $ ( 0.20 ) $ 4.75 $ 0.32 Earnings per common share, diluted: Continuing operations $ ( 0.20 ) $ 0.36 $ 0.01 Discontinued operations — 4.39 0.31 Diluted net (loss) income per common share $ ( 0.20 ) $ 4.75 $ 0.32 Dividends declared per common share $ 1.20 $ 1.20 $ 1.20 NOTE 13: COMMITMENTS AND CONTINGENCIES Development Commitments At December 31, 2020, we had no committed contracts outstanding with third parties in connection with our development and redevelopment projects. Litigation We are involved from time to time in various legal proceedings, lawsuits, examinations by various tax authorities and claims that have arisen in the ordinary course of business. Management believes that the resolution of any such current matters will not have a material adverse effect on our financial condition or results of operations. 116 NOTE 14: SEGMENT INFORMATION We evaluate real estate performance and allocate resources by property type through two reportable segments: office and multifamily. Office properties provide office space for various types of businesses and professions. Multifamily properties provide rental housing for individuals and families throughout the Washington metro region. We have eight retail properties that do not meet the qualitative or quantitative criteria for a reportable segment and are classified as “Corporate and other” in our segment disclosure tables. We evaluate performance based upon net operating income of the combined properties in each segment. Our reportable operating segments are consolidations of similar properties. GAAP requires that segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing each segment’s performance. Net operating income is a key measurement of our segment profit and loss and is defined as real estate rental revenue less real estate expenses. Real estate rental revenue as a percentage of the total for each of the reportable operating segments for the three years ended December 31, 2020 was as follows: Year Ended December 31, 2020 2019 2018 Multifamily 49 % 41 % 33 % Office 45 % 53 % 61 % Corporate and other 6 % 6 % 6 % The percentage of income producing real estate assets classified as held and used, at cost, for each of the reportable operating segments as of December 31, 2020 and 2019 was as follows: December 31, 2020 2019 Multifamily 54 % 50 % Office 41 % 45 % Corporate and other 5 % 5 % The accounting policies of each of the segments are the same as those described in note 2. 117 The following tables present revenues, net operating income, capital expenditures and total assets for the three years ended December 31, 2020 from these segments, and reconciles net operating income of reportable segments to net (loss) income as reported (in thousands): Year Ended December 31, 2020 Office Multifamily Corporate and Other (1) Consolidated Real estate rental revenue $ 132,327 $ 145,045 $ 16,746 $ 294,118 Real estate expenses 49,452 58,115 5,342 112,909 Net operating income $ 82,875 $ 86,930 $ 11,404 $ 181,209 Depreciation and amortization ( 120,030 ) General and administrative ( 23,951 ) Interest expense ( 37,305 ) Loss on interest rate derivatives ( 560 ) Loss on extinguishment of debt ( 34 ) Loss on sale of real estate ( 15,009 ) Net loss $ ( 15,680 ) Capital expenditures $ 31,148 $ 24,675 $ 2,494 $ 58,317 Total assets $ 940,069 $ 1,333,235 $ 136,514 $ 2,409,818 Year Ended December 31, 2019 Office Multifamily Corporate and Other (1) Consolidated Real estate rental revenue $ 164,059 $ 126,131 $ 18,990 $ 309,180 Real estate expenses 60,923 49,135 5,522 115,580 Net operating income $ 103,136 $ 76,996 $ 13,468 $ 193,600 Depreciation and amortization ( 136,253 ) General and administrative ( 26,068 ) Real estate impairment ( 8,374 ) Interest expense ( 53,734 ) Gain on sale of real estate 59,961 Discontinued operations: Income from properties sold or held for sale 16,158 Gain on sale of real estate 339,024 Loss on extinguishment of debt ( 764 ) Net income $ 383,550 Capital expenditures $ 38,634 $ 25,779 $ 4,534 $ 68,947 Total assets $ 1,134,147 $ 1,340,634 $ 153,547 $ 2,628,328 118 Year Ended December 31, 2018 Office Multifamily Corporate and Other (1) Consolidated Real estate rental revenue $ 178,474 95,194 18,062 $ 291,730 Real estate expenses 63,321 37,235 5,036 105,592 Net operating income $ 115,153 $ 57,959 $ 13,026 $ 186,138 Depreciation and amortization ( 111,826 ) General and administrative ( 22,089 ) Interest expense ( 50,501 ) Real estate impairment ( 1,886 ) Loss on extinguishment of debt ( 1,178 ) Gain on sale of real estate 2,495 Discontinued operations: Income from properties sold or held for sale 24,477 Net income $ 25,630 Capital expenditures $ 42,019 $ 25,117 $ 4,897 $ 72,033 Total assets $ 1,248,673 $ 792,170 $ 376,261 $ 2,417,104 ______________________________ (1) Includes the retail properties not classified as discontinued operations: Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S. Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village, and total assets and capital expenditures include all retail properties, including those classified as discontinued operations. 119 NOTE 15: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Unaudited financial data by quarter in each of the years ended December 31, 2020 and 2019 were as follows (in thousands, except for per share data): Quarter (1), (2) First Second Third Fourth 2020 Real estate rental revenue $ 76,792 $ 72,870 $ 73,227 $ 71,229 Income (loss) from continuing operations $ 1,719 $ ( 5,406 ) $ ( 956 ) $ ( 11,037 ) Net income (loss) $ 1,719 $ ( 5,406 ) $ ( 956 ) $ ( 11,037 ) Income (loss) from continuing operations per share Basic $ 0.02 $ ( 0.07 ) $ ( 0.01 ) $ ( 0.13 ) Diluted $ 0.02 $ ( 0.07 ) $ ( 0.01 ) $ ( 0.13 ) Net income (loss) per share Basic $ 0.02 $ ( 0.07 ) $ ( 0.01 ) $ ( 0.13 ) Diluted $ 0.02 $ ( 0.07 ) $ ( 0.01 ) $ ( 0.13 ) 2019 Real estate rental revenue $ 71,434 $ 76,820 $ 80,259 $ 80,667 (Loss) income from continuing operations $ ( 10,443 ) $ ( 6,191 ) $ ( 8,432 ) $ 54,198 Net (loss) income $ ( 4,405 ) $ 987 $ 332,770 $ 54,198 (Loss) income from continuing operations per share Basic $ ( 0.13 ) $ ( 0.08 ) $ ( 0.10 ) $ 0.66 Diluted $ ( 0.13 ) $ ( 0.08 ) $ ( 0.10 ) $ 0.66 Net (loss) income per share Basic $ ( 0.06 ) $ 0.01 $ 4.14 $ 0.66 Diluted $ ( 0.06 ) $ 0.01 $ 4.14 $ 0.66 ______________________________ (1) With regard to per share calculations, the sum of the quarterly results may not equal full year results due to rounding. (2) The second quarter of 2020 includes loss on sale of real estate of $ 7.5 million. The fourth quarter of 2020 includes loss on sale of real estate of $ 7.5 million. The second quarter of 2019 includes a loss on sale of real estate of $ 1.0 million. The third and fourth quarters of 2019 include gains on sale of real estate of $ 339.0 million and $ 61.0 million, respectively. NOTE 16: SHAREHOLDERS' EQUITY On May 4, 2018, we entered into eight separate equity distribution agreements (collectively, the “2018 Equity Distribution Agreements”) with each of Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Capital One Securities, Inc., Citigroup Global Markets Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc. and Truist Securities Inc., (f/k/a SunTrust Robinson Humphrey, Inc.) relating to the issuance of up to $ 250.0 million of our common shares from time to time under our at-the-market program. Issuances of our common shares are made at market prices prevailing at the time of issuance. We may use net proceeds from the issuance of common shares under this program for general business purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt. Our issuances and net proceeds on the 2018 Equity Distribution Agreements for the three years ended December 31, 2020 were as follows (in thousands, except per share data): Year Ended December 31, 2020 2019 2018 Issuance of common shares 2,000 1,859 1,165 Weighted average price per share $ 23.86 $ 30.00 $ 31.18 Net proceeds $ 48,355 $ 54,916 $ 35,472 We have a dividend reinvestment program, whereby shareholders may use their dividends and optional cash payments to purchase common shares. The common shares sold under this program may either be common shares issued by us or common 120 shares purchased in the open market. Net proceeds under this program are used for general corporate purposes. Our issuances and net proceeds on the dividend reinvestment program for the three years ended December 31, 2020 were as follows (in thousands, except per share data): Year Ended December 31, 2020 2019 2018 Issuance of common shares 89 173 81 Weighted average price per share $ 24.12 $ 27.58 $ 29.18 Net proceeds $ 2,121 $ 4,755 $ 1,973 NOTE 17: DEFERRED COSTS As of December 31, 2020 and 2019, deferred leasing costs and deferred leasing incentives were included in prepaid expenses and other assets as follows (in thousands): December 31, 2020 2019 Gross Carrying Value Accumulated Amortization Net Gross Carrying Value Accumulated Amortization Net Deferred leasing costs $ 55,736 $ 30,700 $ 25,036 $ 60,900 $ 29,580 $ 31,320 Deferred leasing incentives 22,942 18,076 4,866 18,926 11,133 7,793 Amortization, including write-offs, of deferred leasing costs and deferred leasing incentives for the three years ended December 31, 2020 were as follows (in thousands): Year Ended December 31, 2020 2019 2018 Deferred leasing costs amortization $ 5,389 $ 6,599 $ 5,881 Deferred leasing incentives amortization 2,070 2,862 2,811 121 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED December 31, 2020, 2019 AND 2018 (IN THOUSANDS) Balance at Beginning of Year Additions Charged to Expenses Net Recoveries Balance at End of Year Valuation allowance for deferred tax assets 2020 $ 1,402 $ — $ — $ 1,402 2019 $ 1,419 $ — $ ( 17 ) $ 1,402 2018 $ 1,413 $ 6 $ — $ 1,419 122 SCHEDULE III Initial Cost (a) Net Improvements (Retirement) since Acquisition Gross Amounts at Which Carried at December 31, 2020 Accumulated Depreciation at December 31, 2020 Properties Location Land Buildings and Improvements Land Buildings and Improvements Total (b) Year of Construction Date of Acquisition Net Rentable Square Feet Units Depreciation Life (c) Multifamily Properties 3801 Connecticut Avenue Washington, D.C. $ 420,000 $ 2,678,000 $ 20,399,000 $ 420,000 $ 23,077,000 $ 23,497,000 $ 14,646,000 1951 Jan 1963 178,000 307 30 years Roosevelt Towers Virginia 336,000 1,996,000 13,915,000 336,000 15,911,000 16,247,000 12,104,000 1964 May 1965 170,000 191 40 years Park Adams Virginia 287,000 1,654,000 14,053,000 287,000 15,707,000 15,994,000 11,776,000 1959 Jan 1969 173,000 200 35 years The Ashby at McLean (e) Virginia 4,356,000 17,102,000 28,435,000 4,356,000 45,537,000 49,893,000 30,928,000 1982 Aug 1996 274,000 256 30 years Bethesda Hill Apartments Maryland 3,900,000 13,412,000 16,664,000 3,900,000 30,076,000 33,976,000 22,059,000 1986 Nov 1997 225,000 195 30 years Bennett Park Virginia 2,861,000 917,000 82,514,000 4,774,000 81,518,000 86,292,000 43,271,000 2007 Feb 2001 215,000 224 28 years The Clayborne Virginia 269,000 — 31,574,000 699,000 31,144,000 31,843,000 17,936,000 2008 Jun 2003 60,000 74 26 years The Kenmore Washington, D.C. 28,222,000 33,955,000 19,618,000 28,222,000 53,573,000 81,795,000 19,891,000 1948 Sep 2008 268,000 374 30 years The Maxwell Virginia 12,787,000 — 38,240,000 12,848,000 38,179,000 51,027,000 12,541,000 2014 Jun 2011 116,000 163 30 years Yale West Washington, D.C. 14,684,000 62,069,000 1,775,000 14,684,000 63,844,000 78,528,000 15,728,000 2011 Feb 2014 173,000 216 30 years The Paramount (e) Virginia 8,568,000 38,716,000 3,512,000 8,568,000 42,228,000 50,796,000 12,922,000 1984 Oct 2013 141,000 135 30 years The Wellington Virginia 30,548,000 116,563,000 17,815,000 30,548,000 134,378,000 164,926,000 27,667,000 1960 Jul 2015 600,000 711 30 years Trove (d) Virginia 15,000,000 — 117,215,000 15,000,000 117,215,000 132,215,000 3,261,000 2020 Jul 2015 293,000 401 30 years Riverside Apartments Virginia 38,924,000 184,854,000 40,324,000 38,924,000 225,178,000 264,102,000 40,760,000 1971 May 2016 1,001,000 1,222 30 years Riverside Apartments land parcel (d) Virginia 15,968,000 — 12,658,000 — 28,626,000 28,626,000 — n/a May 2016 — n/a n/a Assembly Alexandria Virginia 23,942,000 93,672,000 5,501,000 23,942,000 99,173,000 123,115,000 6,474,000 1990 Jun 2019 437,000 532 30 years Assembly Manassas Virginia 13,586,000 68,802,000 1,741,000 13,586,000 70,543,000 84,129,000 4,975,000 1986 Jun 2019 390,000 408 30 years Assembly Dulles Virginia 12,476,000 66,852,000 1,964,000 12,476,000 68,816,000 81,292,000 4,723,000 2000 Jun 2019 361,000 328 30 years Assembly Leesburg Virginia 4,113,000 21,286,000 387,000 4,113,000 21,673,000 25,786,000 1,679,000 1986 Jun 2019 124,000 134 30 years Assembly Herndon Virginia 11,225,000 51,534,000 4,023,000 11,225,000 55,557,000 66,782,000 3,984,000 1991 Jun 2019 221,000 283 30 years Assembly Germantown Maryland 7,609,000 34,431,000 1,193,000 7,609,000 35,624,000 43,233,000 2,566,000 1990 Jun 2019 211,000 218 30 years Assembly Watkins Mill Maryland 7,151,000 30,851,000 636,000 7,151,000 31,487,000 38,638,000 2,207,000 1975 Jun 2019 193,000 210 30 years Cascade at Landmark Virginia 12,289,000 56,235,000 1,322,000 12,289,000 57,557,000 69,846,000 3,627,000 1988 Jun 2019 273,000 277 30 years $ 269,521,000 $ 897,579,000 $ 475,478,000 $ 255,957,000 $ 1,386,621,000 $ 1,642,578,000 $ 315,725,000 6,097,000 7,059 Office Buildings 1901 Pennsylvania Avenue Washington, D.C. $ 892,000 $ 3,481,000 $ 21,602,000 $ 892,000 $ 25,083,000 $ 25,975,000 $ 19,521,000 1960 May 1977 101,000 28 years 515 King Street Virginia 4,102,000 3,931,000 9,319,000 4,102,000 13,250,000 17,352,000 7,709,000 1966 Jul 1992 75,000 50 years 1220 19th Street Washington, D.C. 7,803,000 11,366,000 18,609,000 7,803,000 29,975,000 37,778,000 20,087,000 1976 Nov 1995 103,000 30 years 1600 Wilson Boulevard Virginia 6,661,000 16,742,000 31,803,000 6,661,000 48,545,000 55,206,000 31,854,000 1973 Oct 1997 171,000 30 years Silverline Center (e) Virginia 12,049,000 71,825,000 104,041,000 12,049,000 175,866,000 187,915,000 112,929,000 1972 Nov 1997 552,000 30 years Courthouse Square Virginia — 17,096,000 10,248,000 — 27,344,000 27,344,000 18,712,000 1979 Oct 2000 121,000 30 years 2000 M Street Washington, D.C. — 61,101,000 42,983,000 — 104,084,000 104,084,000 44,470,000 1971 Dec 2007 233,000 30 years 1140 Connecticut Avenue Washington, D.C. 25,226,000 50,495,000 19,800,000 25,226,000 70,295,000 95,521,000 27,200,000 1966 Jan 2011 184,000 30 years Fairgate at Ballston Virginia 17,750,000 29,885,000 8,289,000 17,750,000 38,174,000 55,924,000 14,375,000 1988 Jun 2012 144,000 30 years Army Navy Building Washington, D.C. 30,796,000 39,315,000 13,116,000 30,796,000 52,431,000 83,227,000 15,831,000 1912 Mar 2014 108,000 30 years 1775 Eye Street, NW Washington, D.C. 48,086,000 51,074,000 20,742,000 48,086,000 71,816,000 119,902,000 20,606,000 1964 May 2014 189,000 30 years Watergate 600 Washington, D.C. 45,981,000 78,325,000 43,902,000 45,751,000 122,457,000 168,208,000 19,068,000 1972 Apr 2017 294,000 30 years Arlington Tower Virginia 63,970,000 156,525,000 16,028,000 63,970,000 172,553,000 236,523,000 22,178,000 1980 Jan 2018 390,000 30 years $ 263,316,000 $ 591,161,000 $ 360,482,000 $ 263,086,000 $ 951,873,000 $ 1,214,959,000 $ 374,540,000 2,665,000 123 Initial Cost (a) Net Improvements (Retirement) since Acquisition Gross Amounts at Which Carried at December 31, 2020 Accumulated Depreciation at December 31, 2020 Properties Location Land Buildings and Improvements Land Buildings and Improvements Total (b) Year of Construction Date of Acquisition Net Rentable Square Feet Units Depreciation Life (c) Retail Centers Westminster Maryland $ 519,000 $ 1,775,000 $ 10,022,000 $ 519,000 $ 11,797,000 $ 12,316,000 $ 8,938,000 1969 Sep 1972 150,000 37 years Concord Centre Virginia 413,000 850,000 7,628,000 413,000 8,478,000 8,891,000 4,353,000 1960 Dec 1973 75,000 33 years Takoma Park (e) Maryland 415,000 1,084,000 302,000 366,000 1,435,000 1,801,000 1,210,000 1962 Jul 1963 51,000 50 years Chevy Chase Metro Plaza Washington, D.C. 1,549,000 4,304,000 8,438,000 1,549,000 12,742,000 14,291,000 8,743,000 1975 Sep 1985 49,000 50 years 800 S. Washington Street Virginia 2,904,000 5,489,000 6,154,000 2,904,000 11,643,000 14,547,000 6,562,000 1955 Jun 1998 46,000 30 years Randolph Shopping Center Maryland 4,928,000 13,025,000 1,436,000 4,928,000 14,461,000 19,389,000 7,369,000 1972 May 2006 83,000 30 years Montrose Shopping Center (e) Maryland 11,612,000 22,410,000 2,604,000 11,020,000 25,606,000 36,626,000 12,723,000 1970 May 2006 151,000 30 years Spring Valley Village Washington, D.C. 10,836,000 32,238,000 12,760,000 10,836,000 44,998,000 55,834,000 8,851,000 1941 Oct 2014 94,000 30 years $ 33,176,000 $ 81,175,000 $ 49,344,000 $ 32,535,000 $ 131,160,000 $ 163,695,000 $ 58,749,000 699,000 Total $ 566,013,000 $ 1,569,915,000 $ 885,304,000 $ 551,578,000 $ 2,469,654,000 $ 3,021,232,000 $ 749,014,000 9,461,000 7,059 ______________________________ a) The purchase cost of real estate investments has been divided between land and buildings and improvements on the basis of management’s determination of the fair values. b) At December 31, 2020, total land, buildings and improvements are carried at $ 1,920.0 million for federal income tax purposes. c) The useful life shown is for the main structure. Buildings and improvements are depreciated over various useful lives ranging from 3 to 50 years. d) As of December 31, 2020, WashREIT had under development multifamily properties, Trove and Riverside Apartments land parcel. The value not yet placed into service at December 31, 2020 was $ 7.1 million and $ 28.6 million, respectively. e) As of December 31, 2020, WashREIT had investments in various development, redevelopment and renovation projects, including The Ashby at McLean, Montrose Shopping Center, Silverline Center, Takoma Park and The Paramount. The total value of these projects, which has not yet been placed in service, is $ 1.9 million at December 31, 2020. 124 WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES SUMMARY OF REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION (IN THOUSANDS) The following is a reconciliation of real estate assets and accumulated depreciation for the three years ended December 31, 2020 (in thousands): Year Ended December 31, 2020 2019 2018 Real estate assets Balance, beginning of period $ 3,159,463 $ 2,973,816 $ 2,831,683 Additions: Property acquisitions (1) — 516,054 220,495 Improvements (1) 81,119 140,109 103,404 Deductions: Impairment write-down — ( 24,432 ) ( 2,177 ) Write-off of disposed assets ( 1,694 ) ( 7,430 ) ( 2,132 ) Property sales ( 217,656 ) ( 438,654 ) ( 177,457 ) Balance, end of period $ 3,021,232 $ 3,159,463 $ 2,973,816 Accumulated depreciation Balance, beginning of period $ 712,630 $ 770,535 $ 690,417 Additions: Depreciation 106,920 107,938 98,141 Deductions: Impairment write-down — ( 16,058 ) ( 291 ) Write-off of disposed assets ( 730 ) ( 2,173 ) ( 1,859 ) Property sales ( 69,806 ) ( 147,612 ) ( 15,873 ) Balance, end of period $ 749,014 $ 712,630 $ 770,535 ______________________________ (1) Includes non-cash accruals for capital items. 125