What changed in this filing

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Item 9A. Controls and Procedures

2021-02-16 compared with 2020-02-11 · 115 added, 148 removed, 874 unchanged (23% of the section changed)

3 unchanged sentences

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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Our board of directors has adopted a code of business conduct and ethics that applies to all of our executive officers, directors and employees.

The code was approved by the audit committee of our board of directors and by the full board of directors.

The code was approved by the nominating and corporate governance committee of our board of directors and by the full board of directors.

We have posted a current copy of our code under “Corporate Governance” in the “Investor Relations” section of our website at http://www.fspreit.com.

49 unchanged sentences

Incorporated by reference to Exhibit 3.1 to FSP Corp.’s Quarterly Report on Form 10-Q filed on July 30, 2019 (File No.

Incorporated by reference to Exhibit 3.1 to FSP Corp.’s Current Report on Form 8-K, filed on February 3, 2020 (File No.

Incorporated by reference to Exhibit 3.2 to FSP Corp.’s Current Report on Form 10-Q, filed on August 4, 2020 (File No.

Incorporated by reference to Exhibit 4.1 to FSP Corp.’s Annual Report on Form 10-K, filed on February 11, 2020 (File No.

Incorporated by reference to Exhibit 10.1 to FSP Corp.’s Annual Report on Form 10-K, filed on March 29, 2002 (File No.

38 unchanged sentences

Consolidated Balance Sheets as of December 31, 2020 and 2019

Consolidated Statements of Operations for each of the three years in the period ended December 31, 2019

Consolidated Statements of Other Comprehensive Income for each of the three years in the period ended December 31, 2019

Consolidated Statements of Income for each of the three years in the period ended December 31, 2020

Consolidated Statements of Comprehensive Income (Loss) for each of the three years in the period ended December 31, 2020

Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2020

3 unchanged sentences

All other schedules for which a provision is made in the applicable accounting resolutions of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

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Report of Independent Registered Public Accounting Firm

4 unchanged sentences

(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 consolidated balance sheets of the Company as of December 31, 2019 and 2018, and the related consolidated statements of income, other comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019 and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) and our report dated February 11, 2020 expressed an unqualified opinion thereon.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income (loss), stockholders’ 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)(2) and our report dated February 16, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

21 unchanged sentences

We have audited the accompanying consolidated balance sheets of Franklin Street Properties Corp.

(the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, other comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019 and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”).

(the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income (loss), stockholders’ 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)(2) (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.

21 unchanged sentences

As discussed in Note 2 to the consolidated financial statements, management evaluates whether a loss has been incurred based on expected performance, cash flow and the value of underlying real estate for secured lending.

Auditing the Company’s estimate of the allowance for loan losses for a mortgage loan involved a high degree of subjectivity in evaluating management’s assumptions of the valuation of underlying real estate for secured lending.

Auditing the Company’s estimate of the allowance for loan losses for mortgage loans involved a high degree of subjectivity in evaluating management’s assumptions of the valuation of underlying real estate for secured lending.

How We Addressed the Matter in Our Audit

We tested the Company’s controls over the allowance for loan loss process.

This included controls over the identification of indicators of impairment and the valuation of real estate collateral for secured lending.

We tested the design and operating effectiveness of the Company’s controls over the allowance for loan loss process.

This included controls over the expected performance of the loan and the valuation of real estate collateral for secured lending.

Our testing of the measurement of the related party mortgage loan receivable included, among other procedures, testing the completeness and accuracy of data used in the valuation of real estate collateral and, with the assistance of our valuation specialists, evaluating management’s assumptions used in the valuation of the underlying real estate.

60 unchanged sentences

Franklin Street Properties Corp.

Consolidated Statements of Operations

Consolidated Statements of Income

For the Year Ended

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Total expenses

Gain (loss) on sale of properties

Income (loss) before taxes on income and equity in

income (loss) of non-consolidated REITs

Gain on sale of property

Income before taxes on income and equity in income of non-consolidated REITs

Tax expense on income

Equity in income (loss) of non-consolidated REITs

Net income (loss)

Equity in income of non-consolidated REITs

Weighted average number of shares outstanding, basic and diluted

Net income (loss) per share, basic and diluted

Net income per share, basic and diluted

The accompanying notes are an integral part of these consolidated financial statements.

Franklin Street Properties Corp.

Consolidated Statements of Other Comprehensive Income (Loss)

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

Net income (loss)

Other comprehensive income (loss):

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Comprehensive income

Shares issued for:

Equity-based compensation

Distributions

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Cash flows from operating activities:

Net income (loss)

Adjustments to reconcile net income or loss to net cash provided by operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization expense

1 unchanged sentence

Shares issued as compensation

Hedge ineffectiveness

Loss on sale of properties and properties held for sale

Equity in (income) loss of non-consolidated REITs

Increase (decrease) in allowance for doubtful accounts

Gain on sale of property

Equity in income of non-consolidated REITs

Decrease in allowance for doubtful accounts

and write-off of accounts receivable

11 unchanged sentences

Property improvements, fixtures and equipment

Office computers and furniture

Investment in non-consolidated REITs

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Repayments of bank note payable

Borrowing of Series A & Series B Senior Notes

Repayment on term loan payable

Deferred financing costs

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Collectively, the two REITs are referred to as the “Sponsored REITs”.

As of December 31, 2019, the Company owned and operated a portfolio of real estate consisting of 32 operating properties, three redevelopment properties and two managed Sponsored REITs and held one promissory note secured by a mortgage on real estate owned by a Sponsored REIT.

As of December 31, 2020, the Company owned and operated a portfolio of real estate consisting of 32 operating properties, two redevelopment properties and two managed Sponsored REITs and held one promissory note secured by a mortgage on real estate owned by a Sponsored REIT.

From time-to-time, the Company may acquire real estate or make additional secured loans.

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Real estate assets are stated at cost less accumulated depreciation.

If the Company determines that impairment has occurred, the affected assets are reduced to their fair value.

The Company allocates the value of real estate acquired among land, buildings and identified intangible assets or liabilities.

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Routine replacements and ordinary maintenance and repairs that do not extend the life of the asset are expensed as incurred.

Funding for repairs and maintenance items typically is provided by cash flows from operating activities.

Depreciation is computed using the straight-line method over the assets’ estimated useful lives as follows:

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The Company reviews its properties to determine if their carrying amounts will be recovered from future operating cash flows if certain indicators of impairment are identified at those properties.

These indicators may include declining tenant occupancy, weak or declining tenant profitability, cash flows or liquidity, the Company’s decision to dispose of an asset before the end of its estimated useful life or legislative, economic, or market changes that permanently reduce the value of the Company’s investment.

If indicators of impairment are present, the Company evaluates the carrying value of the property by comparing it to its expected future undiscounted cash flow.

If the Company determines that impairment has occurred, the affected assets are reduced to their fair value.

The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods.

12 unchanged sentences

Acquired Unfavorable Real Estate Leases and Amortization

The Company recorded the value of acquired unfavorable leases as a result three acquisitions in 2016 and one acquisition in 2015.

Acquired unfavorable real estate leases represent the value relating to leases with rents below the market rate.

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Tenant rent receivables are expected to be collected within one year .

The Company provides an allowance for doubtful accounts based on collectability.

The Company provided an allowance for doubtful accounts based on collectability.

Lessors recognize the effect of a change in their assessment of whether the collectability of operating lease receivables are probable as an adjustment to lease income rather than bad debt expense.

2 unchanged sentences

Concentration of Credit Risks

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash investments, derivatives and accounts receivable.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash investments, derivatives, related party mortgage loan receivable and accounts receivable.

The Company maintains its cash balances principally in two banks which the Company believes to be creditworthy.

1 unchanged sentence

Cash balances held with various financial institutions frequently exceed the insurance limit of $ 250,000 provided by the Federal Deposit Insurance Corporation.

The derivatives that the Company has are from two interest rate swap agreements that are discussed in Note 5.

The derivatives that the Company has are from three interest rate swap agreements that are discussed in Note 5.

The related party mortgage loan receivable is held with one Sponsored REIT.

The Company performs regular evaluations on the extent and impact of any credit deterioration that could affect the performance and value of the secured property, as well as the financial and operating capability of the borrower.

The Company performs ongoing credit evaluations of its tenants and requires certain tenants to provide security deposits or letters of credit.

8 unchanged sentences

Straight-line rent receivable, which is the cumulative revenue recognized in excess of amounts billed by the Company, was $ 67.8 million and $ 66.9 million at December 31, 2020 and 2019, respectively.

The Company provides an allowance for doubtful accounts based on collectability.

Lessors recognize the effect of a change in their assessment of whether the collectability of operating lease receivables are probable as an adjustment to lease income rather than bad debt expense.

The reserve balance was not changed during 2019, 2018 or 2017, based on such assessment.

Prior to 2020, the Company provided an allowance for doubtful accounts based on collectability.

Lessors recognized the effect of a change in their assessment of whether the collectability of operating lease receivables are probable as an adjustment to lease income rather than bad debt expense.

The reserve was eliminated during 2020 and no changes occurred during 2019 or 2018 based on such assessment.

Deferred Leasing Commissions

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Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the consolidated balance sheets as either an asset or liability.

To the extent hedges are effective, a corresponding amount, adjusted for swap payments, was recorded in accumulated other comprehensive income within stockholders’ equity.

To the extent hedges are effective, a corresponding amount, adjusted for swap payments, is recorded in accumulated other comprehensive income within stockholders’ equity.

Amounts are then reclassified from accumulated other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings.

4 unchanged sentences

Fair values of derivatives are subject to significant variability based on changes in interest rates and counterparty credit risk.

The results of such variability could be a significant increase or decrease in the Company’s derivative assets, derivative liabilities, book equity, and/or earnings.

The results of such variability could be a significant increase or decrease in the Company’s derivative assets, derivative liabilities, equity, and/or earnings.

Fair Value Measurements

9 unchanged sentences

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability including credit risk, which was not significant to the overall value.

These inputs (See Note 5) were considered and applied to the Company’s derivative, and Level 2 inputs were used to value the interest rate swap.

These inputs (See Notes 3 and 5) were considered and applied to the Company’s derivative instruments and Sponsored REIT Loan.

Level 2 inputs were used to value the interest rate swaps and Level 3 inputs were used to value the Sponsored REIT Loan.

Subsequent Events

1 unchanged sentence

Recent Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2016-02, Leases (“ASU 2016-02”);

in July 2018, the FASB issued ASU No.

2018-10, Codification Improvements to Topic 842, Leases and ASU No.

2018-11, Leases (Topic 842):

Targeted Improvements (“ASU 2018-11”);

and in December 2018, the FASB issued ASU No.

2018-20 Leases (Topic 842), Narrow-Scope Improvements for Lessors.

ASU 2016-02 requires lessees to establish a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term on their balance sheets.

Lessees will continue to recognize lease expenses on their income statements in a manner similar to previous accounting.

The guidance also eliminates current real estate-specific provisions for all entities.

For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases.

This new standard is effective for annual periods beginning after December 15, 2018, and interim periods thereafter with early adoption permitted.

The Company adopted this standard on January 1, 2019 and applied the package of practical expedients that allows an entity to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or existing leases.

Additionally, the Company’s leases met the criteria in ASU 2018-11 to not separate non-lease components from the related lease component, therefore the accounting for these leases remained largely unchanged from the previous standard.

The Company applied the optional transition method in ASU 2018-11, which allows entities to initially apply the new lease standard at the adoption date.

The Company recorded a right-of-use asset of $ 2.1 million and a lease liability of $ 2.2 million upon adoption of this standard.

The presentation and disclosure that is required to be presented under the new lease standard is provided in Note 8.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses.

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13” or “CECL”), which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses.

The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The Company’s Sponsored REIT Loan (as defined in Note 3 below) receivables are within the scope of this standard.

The Company’s Sponsored REIT Loan (as defined in Note 3 below) receivables are within the scope of this standard and the Company’s analysis was completed using a Probability of Default / Loss Given Default Model.

The Company’s receivables associated with its real estate operating leases are not within the scope of this standard.

The Company is currently assessing the potential impact that the adoption of ASU 2016-13 may have on its consolidated financial statements.

In August 2017, the FASB issued ASU No.

2017-12, Derivatives and Hedging (Topic 815):

Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements.

The amendment also eases the application of hedge accounting in certain situations, including eliminating the requirement to separately measure and report hedge ineffectiveness for cash flow hedges.

ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and earlier adoption is permitted.

The Company adopted this new standard in the first quarter of 2019 using the modified retrospective method, which requires the Company to account for ASU 2017-12 as of the date of adoption with any retrospective adjustments applicable to prior periods included as a cumulative-effect adjustment to accumulated other comprehensive loss and retained earnings.

No adjustment was necessary to account for the cumulative effect of the change on the opening balance of each affected component of equity in the consolidated balance sheet as of the date of adoption because there was no cumulative ineffectiveness that had been recorded on the Company’s existing interest rate swaps as of December 31, 2018, and all trades were highly effective.

The amended presentation and disclosure guidance which is required to be presented prospectively under this new standard is provided in Note 5.

The Company adopted this standard on January 1, 2020.

The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No.

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This ASU amends existing fair value measurement disclosure requirements by adding, changing, or removing certain disclosures.

ASU 2018-13 will be effective for the Company as of January 1, 2020, and earlier adoption is permitted.

The Company is currently assessing the potential impact that the adoption of ASU 2018-13 may have on its consolidated financial statements.

The Company adopted this standard on January 1, 2020.

The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In April 2019, the FASB issued ASU No.

1 unchanged sentence

The ASU clarifies areas of guidance related to the recently issued standards on credit losses (Topic 326), derivatives and hedging (Topic 815), and recognition and measurement of financial instruments (Topic 825).

The new guidance is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted.

ASU 2019-04 is effective for fiscal years beginning after December 15, 2019.

The Company adopted this standard on January 1, 2020.

The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”).

The ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts.

The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur.

The Company is currently assessing the potential impact that the adoption of ASU 2020-04 may have on its consolidated financial statements.

13 unchanged sentences

As a result of the sale, the Company recognized a loss on liquidation of $ 0.1 million.

As of December 31, 2019, the Company held a beneficial interest in the Grand Boulevard liquidating trust in the amount of $ 0.1 million, which is included in other assets in the accompanying consolidated balance sheet as of such date.

As of December 31, 2020 and 2019, the Company held a beneficial interest in the Grand Boulevard liquidating trust in the amount of $ 0.1 million, which is included in other assets in the accompanying consolidated balance sheet as of such date.

Equity in income (loss) of investments in non-consolidated REITs were derived from the Company’s share of income or loss in the operations of those entities and includes gain or loss on liquidation.

The Company exercised influence over, but did not control these entities, and investments were accounted for using the equity method.

During the year ended December 31, 2019 a property owned by a Sponsored REIT, FSP Energy Tower I Corp.(“Energy Tower”), was sold and, thereafter, liquidating distributions for its preferred shareholders were declared and issued.

During the year ended December 31, 2019, a property owned by a Sponsored REIT, FSP Energy Tower I Corp.

(“Energy Tower”), was sold and, thereafter, liquidating distributions for its preferred shareholders were declared and issued.

The Company held a mortgage loan and secured revolving line of credit with this entity, which were secured by the property owned by Energy Tower.

1 unchanged sentence

During the year ended December 31, 2018, a property owned by a Sponsored REIT, FSP Centre Pointe V Corp., was sold and, thereafter, liquidating distributions for its preferred shareholders were declared and issued.

During the year ended December 31, 2017, a property owned by one Sponsored REIT was sold and, thereafter, liquidating distributions for its preferred shareholders were declared and issued.

The Company held a mortgage loan with this entity, which was secured by the property owned by FSP 1441 Main Street Corp.

(“1441 Main”).

The loan with 1441 Main in the principal amount of $ 9.0 million was repaid by the proceeds of the sale.

Equity in income (loss) of investment in non-consolidated REITs:

The following table includes equity in income (loss) of investments in non-consolidated REITs:

Year Ended December 31,

(in thousands)

Equity in income (loss) of East Wacker

Equity in income of East Wacker

Equity in loss of Grand Boulevard

Impairment charge

Equity in income (loss) of East Wacker was derived from the Company’s preferred stock investment in the entity.

Equity in income of East Wacker was derived from the Company’s preferred stock investment in the entity.

In December 2007, the Company purchased 965.75 preferred shares or 43.7 % of the outstanding preferred shares, of East Wacker.

3 unchanged sentences

On July 19, 2018, the property owned by Grand Boulevard was sold at a loss, which is included in equity in income (loss) of non-consolidated REITs on the consolidated statements of income.

At June 30, 2018 and December 31, 2017, the Company recognized impairment charges of $ 0.3 million and $ 2.5 million, respectively, which represented the other-than-temporary decline in the fair value below the carrying value of one of the Company’s investments in non-consolidated REITs.

At June 30, 2018, the Company recognized an impairment charge of $ 0.3 million, which represented the other-than-temporary decline in the fair value below the carrying value of one of the Company’s investments in non-consolidated

The Company estimated the fair value of its equity investment by estimating the fair value of the property, less estimated costs to sell using a purchase and sale agreement to purchase the property made by third parties (Level 3 inputs, as there is no active market).

The following table includes distributions received from non-consolidated REITs:

Year Ended December 31,

(in thousands)

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The operating data below for 2018 includes the operations of the six Sponsored REITs the Company held an interest in during the year ended December 31, 2018.

The operating data below for 2017 includes the operations of the seven Sponsored REITs the Company held an interest in during the year ended December 31, 2017.

Summarized financial information for the Sponsored REITs is as follows:

4 unchanged sentences

Shareholders’ equity

For the Year Ended

(in thousands)

5 unchanged sentences

Interest expense

Gain (loss) on sale

Net income (loss)

Management fees and interest income from loans:

2 unchanged sentences

From time to time the Company may make secured loans (“Sponsored REIT Loans”) to Sponsored REITs in the form of mortgage loans or revolving lines of credit to fund construction costs, capital expenditures, leasing costs and for other purposes.

The Company reviews Sponsored REIT loans for impairment and potential losses each reporting period.

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts recorded on the balance sheet.

The Company regularly evaluates the extent and impact of any credit deterioration that could affect performance and the value of the secured property, as well as the financial and operating capability of the borrower.

The Company reviews the need for an allowance under CECL for Sponsored REIT loans each reporting period.

The Company regularly evaluates the extent and impact of any credit deterioration that could affect performance

and the value of the secured property, as well as the financial and operating capability of the borrower.

A property’s operating results and existing cash balances are considered and used to assess whether cash flows from operations are sufficient to cover the current and future operating and debt service requirements.

12 unchanged sentences

The Company recognized interest income and fees from the Sponsored REIT Loans of approximately $ 1.5 million, $ 3.3 million and $ 4.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The financial instrument was classified within Level 3 of the fair value hierarchy and had a fair value of approximately $ 20.4 million as of December 31, 2020.

On December 6, 2020, the Company entered into a second amendment to the Sponsored REIT Loan which qualified as a troubled debt restructuring.

The amendment extended the maturity date of the loan for two years and increased the interest rate from 7.19 % to 7.51 % .

There were no commitments to lend additional funds to the Sponsored REIT and the loan is fully collateralized by the mortgage held on the Sponsored REIT's property.

Bank Note Payable, Term Note Payable and Private Placements

JPM Term Loan

On August 2, 2018, the Company entered into an Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent and lender (“JPMorgan”), and the other lending institutions party thereto (the “JPM Credit Agreement”), which provides a single unsecured bridge loan in the aggregate principal amount of $ 150 million (the “JPM Term Loan”) that remains fully advanced and outstanding.

The JPM Term Loan matures on November 30, 2021.

On December 24, 2020 the Company repaid a $ 50 million portion of the JPM Term Loan with a portion of the proceeds from the December 23, 2020 sale of its Durham, North Carolina property, and $ 100 million remains fully advanced and outstanding under the JPM Term Loan.

The JPM Term Loan matures on November 30, 2021, which maturity date may be extended by two additional six-month periods, or until November 30, 2022 (subject to specified exceptions).

The JPM Term Loan was previously evidenced by a Credit Agreement, dated November 30, 2016, among the Company, JPMorgan, as administrative agent and lender, and the other lending institutions party thereto, as amended by a First Amendment, dated October 18, 2017.

7 unchanged sentences

Although the interest rate on the JPM Term Loan is variable under the JPM Credit Agreement, the Company fixed the LIBOR-based rate on a portion of the JPM Term Loan by entering into interest rate swap transactions.

On March 7, 2019, the Company entered into ISDA Master Agreements with various financial institutions to hedge a $ 100 million

portion of the future LIBOR-based rate risk under the JPM Credit Agreement.

On March 7, 2019, the Company entered into ISDA Master Agreements with various financial institutions to hedge a $ 100 million portion of the future LIBOR-based rate risk under the JPM Credit Agreement.

Effective March 29, 2019, the Company fixed the LIBOR-based rate at 2.44 % per annum on a $ 100 million portion of the JPM Term Loan until November 30, 2021.

Accordingly, based upon the Company’s credit rating, as of December 31, 2019, the effective interest rate on a $ 100 million portion of the JPM Term Loan was 3.69 % per annum.

Based upon the Company’s credit rating, as of December 31, 2019, the effective interest rate on the unhedged $ 50 million portion of the JPM Term Loan was 3.06 % per annum.

Accordingly, based upon the Company’s credit rating, as of December 31, 2020, the effective interest rate on the remaining $ 100 million portion of the JPM Term Loan was 3.69 % per annum.

The weighted average interest rate on the unhedged $ 50 million portion of the JPM Term Loan during the year ended December 31, 2020 was approximately 1.90 % per annum.

11 unchanged sentences

The tranche A term loan matures on November 30, 2021 and the tranche B term loan matures on January 31, 2024.

The BMO Credit Agreement also includes an accordion feature that allows up to $ 100 million of additional loans, subject to receipt of lender commitments and satisfaction of certain customary conditions.

The BMO Credit Agreement also includes an accordion feature that

allows up to $ 100 million of additional loans, subject to receipt of lender commitments and satisfaction of certain customary conditions.

The BMO Term Loan was previously evidenced by an Amended and Restated Credit Agreement, dated October 29, 2014, among the Company, BMO, as administrative agent and lender, and the other lending institutions party thereto, as amended by a First Amendment, dated July 21, 2016, and a Second Amendment, dated October 18, 2017.

2 unchanged sentences

For purposes of the BMO Term Loan, base rate means, for any day, a fluctuating rate per annum equal to the highest of:

(i) the bank’s prime rate for such day, (ii) the Federal Funds Rate for such day, plus 0.50 %, and (iii) the one month

LIBOR based rate for such day plus 1.00 %.

(i) the bank’s prime rate for such day, (ii) the Federal Funds Rate for such day, plus 0.50 %, and (iii) the one month LIBOR based rate for such day plus 1.00 %.

As of December 31, 2020, the Company’s credit rating from Moody’s Investors Service was Baa3.

Although the interest rate on the BMO Term Loan is variable under the BMO Credit Agreement, the Company fixed the base LIBOR interest rate by entering into interest rate swap transactions.

On August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the BMO Term Loan at 2.32 % per annum until August 26, 2020.

On August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the BMO Term Loan at 2.32 % per annum, which matured on August 26, 2020.

On February 20, 2019, the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the BMO Term Loan at 2.39 % per annum for the period beginning on August 26, 2020 and ending January 31, 2024.

7 unchanged sentences

BAML Credit Facility

On July 21, 2016, the Company entered into a First Amendment (the “BAML First Amendment”), and on October 18, 2017, the Company entered into a Second Amendment (the “BAML Second Amendment”), to the Second Amended and Restated Credit Agreement dated October 29, 2014 among the Company, the lending institutions party thereto and Bank of America, N.A., as administrative agent, L/C Issuer and Swing Line Lender (as amended by the BAML First Amendment and the BAML Second Amendment, the “BAML Credit Facility”) that continued an existing unsecured revolving line of credit (the “BAML Revolver”) and extended the maturity of a term loan (the “BAML Term Loan”).

Amendment and the BAML Second Amendment, the “BAML Credit Facility”) that continued an existing unsecured revolving line of credit (the “BAML Revolver”) and extended the maturity of a term loan (the “BAML Term Loan”).

BAML Revolver Highlights

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● The BAML Credit Facility includes an accordion feature that allows for an aggregate amount of up to $ 500 million of additional borrowing capacity applicable to the BAML Revolver and/or the BAML Term Loan subject to receipt of lender commitments and satisfaction of certain customary conditions.

As of December 31, 2019, there were no borrowings outstanding under the BAML Revolver.

As of December 31, 2020 and December 31, 2019, there were $ 3.5 million and no borrowings outstanding under the BAML Revolver, respectively.

The BAML Revolver bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating ( 1.20 % over LIBOR at December 31, 2020) or (ii) a margin over the base rate depending on the Company’s credit rating ( 0.20 % over the base rate at December 31, 2020).

The BAML Credit Facility also obligates the Company to pay an annual facility fee in an amount that is also based on the Company’s credit rating.

The facility fee is assessed against the total amount of the

BAML Revolver, or $ 600 million ( 0.25 % at December 31, 2019).

The facility fee is assessed against the total amount of the BAML Revolver, or $ 600 million ( 0.25 % at December 31, 2020).

The amount of any applicable facility fee, and the margin over LIBOR rate or base rate is determined based on the Company’s credit rating pursuant to the following grid:

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The weighted average interest rate on all amounts outstanding on the BAML Revolver during the year ended December 31, 2020 was approximately 1.65 % per annum.

As of December 31, 2018, there were borrowings of $ 25 million outstanding under the BAML Revolver at an interest rate of 3.63 % per annum.

The weighted average interest rate on all amounts outstanding on the BAML Revolver during the year ended December 31, 2019 was approximately 3.67 % per annum.

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● On September 27, 2012, the Company drew down the entire $ 400 million under the BAML Term Loan and such amount remains fully advanced and outstanding under the BAML Term Loan.

The BAML Term Loan bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating ( 1.35 % over LIBOR at December 31, 2019) or (ii) a margin over the base rate depending on the Company’s credit rating ( 0.35 % over the base rate at December 31, 2019).

The BAML Term Loan bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating ( 1.35 % over LIBOR at December 31, 2020) or (ii) a margin over the base rate depending on the Company’s credit rating

( 0.35 % over the base rate at December 31, 2020).

The margin over LIBOR rate or base rate is determined based on the Company’s credit rating pursuant to the following grid:

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Although the interest rate on the BAML Credit Facility is variable, the Company fixed the base LIBOR interest rate on the BAML Term Loan by entering into interest rate swap transactions.

On July 22, 2016, the Company entered into

ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the BAML Term Loan at 1.12 % per annum for the period beginning on September 27, 2017 and ending on September 27, 2021.

On July 22, 2016, the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the BAML Term Loan at 1.12 % per annum for the period beginning on September 27, 2017 and ending on September 27, 2021.

Accordingly, based upon the Company’s credit rating, as of December 31, 2020, the effective interest rate on the BAML Term Loan was 2.47 % per annum.

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On October 24, 2017, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with the various purchasers named therein (the “Purchasers”) in connection with a private placement of senior unsecured notes.

Under the Note Purchase Agreement, the Company agreed to sell to the Purchasers an aggregate principal amount of $ 200,000,000 of senior unsecured notes consisting of (i) 3.99 % Series A Senior Notes due December 20, 2024 in an aggregate principal amount of $ 116 million (the “Series A Notes”) and (ii) 4.26 % Series B Senior Notes due December 20, 2027 in an aggregate principal amount of $ 84 million (the “Series B Notes,” and, together with the Series A Notes, the “Senior Notes”).

the “Senior Notes”).

On December 20, 2017, the Senior Notes were funded and the proceeds were used to reduce the outstanding balance of the BAML Revolver.

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On July 22, 2016, the Company fixed the interest rate for the period beginning on September 27, 2017 and ending on September 27, 2021 on the BAML Term Loan (the “2017 Interest Rate Swap”).

On August 26, 2013, the Company fixed the interest rate until August 26, 2020 on the BMO Term Loan (the “2013 BMO Interest Rate Swap”).

On March 7, 2019, the Company fixed the interest rate for the period beginning on March 29, 2019 and ending on November 30, 2021 on a $ 100 million portion of the JPM Term Loan (the “2019 JPM Interest Rate Swap”).

On February 20, 2019, the Company fixed the interest rate for the period beginning August 26, 2020 and ending January 31, 2024 on the BMO Term Loan (the “2019 BMO Interest Rate Swap”).

The variable rates that were fixed under the 2017 Interest Rate Swap, the 2013 BMO Interest Rate Swap, the 2019 JPM Interest Rate Swap and the 2019 BMO Interest Rate Swap (collectively referred to as the “Interest Rate Swaps”) are described in Note 4.

The variable rates that were fixed under the 2017 Interest Rate Swap, the 2019 JPM Interest Rate Swap and the 2019 BMO Interest Rate Swap (collectively referred to as the “Interest Rate Swaps”) are described in Note 4.

The Interest Rate Swaps qualify as cash flow hedges and have been recognized on the consolidated balance sheets at fair value.

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The notional value is an indication of the extent of our involvement in these instruments at that time, but does not represent exposure to credit, interest rate or market risks.

Fair Value (2) at December 31,

(in thousands)

2017 Interest Rate Swap

2013 BMO Interest Rate Swap

2019 JPM Interest Rate Swap

2019 BMO Interest Rate Swap (1)

2013 BMO Interest Rate Swap

(1) The Notional Value will decrease to $ 165 million on November 30, 2021.

On December 31, 2019, the 2017 Interest Rate Swap was reported as an asset at its fair value of approximately $ 3.0 million, which is included in other assets:

derivative asset on the consolidated balance sheet at December 31, 2019.

The 2013 BMO Interest Rate Swap, 2019 JPM Interest Rate Swap and 2019 BMO Interest Rate Swap were reported as liabilities with an aggregate fair value of approximately $ 7.7 million and are included in other liabilities:

(2) Classified within Level 2 of the fair value hierarchy.

On December 31, 2020, the 2017 Interest Rate Swap, 2019 JPM Interest Rate Swap and 2019 BMO Interest Rate Swap were reported as liabilities with an aggregate fair value of approximately $ 17.3 million and are included in other liabilities:

derivative liabilities in the consolidated balance sheet at December 31, 2020.

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Amounts of previously recorded gain/(loss) reclassified from OCI into Interest Expense

Total amount of Interest Expense presented in the consolidated statements of income

Total amount of Interest Expense presented in the consolidated statements of operations

Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified into earnings as an increase or reduction to interest expense in the same periods in which the hedged interest payments affect earnings.

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The fair value of the Company’s derivative instruments are determined using the net discounted cash flows of the expected cash flows of the derivative based on the market based interest rate curve and are adjusted to reflect credit or nonperformance risk.

The risk is estimated by the Company using credit spreads and risk premiums that are observable in the market.

The risk is estimated by the Company using credit spreads and risk premiums that are observable

in the market.

These financial instruments were classified within Level 2 of the fair value hierarchy and were classified as an asset or liability on the consolidated balance sheets.

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derivative liability in the consolidated balance sheets and the effective portion of the derivatives’ fair value is recorded to other comprehensive income in the consolidated statements of other comprehensive income (loss) and prior to January 1, 2019, the ineffective portion of the derivatives’ fair value was recognized directly into earnings as other in the consolidated statements of income.

The interest rate swaps effectively fix the interest rate on the BAML Term Loan and BMO Term Loan;

however, prior to October 18, 2017, there was no floor on the variable interest rate of the swap whereas the BAML Term Loan and BMO Term Loan were subject to a zero percent floor.

As a result there was a mismatch and the ineffective portion of the derivatives’ changes in fair value were recognized directly into earnings.

On October 18, 2017, the Company amended the BMO Term Loan and BAML Term Loan to, among other changes, provide that the deemed zero percent interest rate floor is not applicable to any loan where there is a corresponding interest rate swap contract in place.

Stockholders’ Equity

Equity Offerings

On August 16, 2016, the Company completed an underwritten public offering of 7,043,750 shares of its common stock (including 918,750 shares issued as a result of the full exercise of an overallotment option by the underwriter) at a price to the public of $ 12.35 per share.

The proceeds from this public offering, net of underwriter discounts and offering costs, totaled approximately $ 82.9 million.

Equity-Based Compensation

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Awards under the Plan are made at the discretion of the Company’s Board of Directors, and have no vesting requirements.

Upon granting an Award, the Company will recognize compensation cost equal to the fair value of the Company’s common stock, as determined by the Company’s Board of Directors, on the date

of the grant.

Upon granting an Award, the Company will recognize compensation cost equal to the fair value of the Company’s common stock, as determined by the Company’s Board of Directors, on the date of the grant.

The Company granted 55,572 shares under the Plan between 2002 and 2005 and made no grants between 2006 and 2018.

On December 10, 2019, the Company granted 38,046 shares under the Plan to non-employee directors at a compensation cost of approximately $ 337,000 , which is included in general and administrative expenses in the consolidated statements of income.

On June 4, 2020 and December 10, 2019, the Company granted 58,998 and 38,046 shares, respectively, under the Plan to non-employee directors at a compensation cost of approximately $ 337,000 at each grant date, which is included in general and administrative expenses in the consolidated statements of income.

Such shares were fully vested on the date of issuance.

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Balance December 31, 2019

Shares granted 2020

Balance December 31, 2020

Federal Income Tax Reporting

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In the case of TRSs, the Company’s ownership of securities in all TRSs generally cannot exceed 20 % ( 25 % of taxable years beginning on or before December 31, 2017) of the value of all of the Company’s assets and, when considered together with other non-real estate assets, cannot exceed 25 % of the value of all of the Company’s assets.

FSP Investments LLC and FSP Protective TRS Corp.

FSP Investments LLC and FSP

Protective TRS Corp.

are the Company’s taxable REIT subsidiaries operating as taxable corporations under the Code.

The TRSs have gross amounts of net operating losses (“NOLs”) available to those taxable corporations of $ 4.4 million, $ 4.2 million and $ 4.0 million as of each of December 31, 2019, 2018 and 2017, respectively.

The TRSs have gross amounts of net operating losses (“NOLs”) available to those taxable corporations of $ 4.6 million and $ 4.4 million as of each of December 31, 2020 and 2019, respectively.

The NOLs created prior to 2018 will expire between 2030 and 2047 and the NOLs generated after 2017 will not expire.

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Some of the Company’s leases allow reimbursement by tenants for these amounts because the Revised Texas Franchise Tax replaces a portion of the property tax for school districts.

Because the tax base on the Revised Texas Franchise Tax is derived from an income

based measure, it is considered an income tax.

Because the tax base on the Revised Texas Franchise Tax is derived from an income based measure, it is considered an income tax.

The Company recorded a provision for the Revised Texas Franchise Tax of $ 0.3 million, $ 0.4 million and $ 0.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.

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At December 31, 2020, the Company’s net tax basis of its real estate assets is more than the amount set forth in the Company’s consolidated balance sheets by $ 253.0 million and at December 31, 2019, the Company’s net tax basis of its real estate assets is more than the amount set forth in the Company’s consolidated balance sheets by $ 195.0 million.

Reconciliation Between GAAP Net Income (Loss) and Taxable Income

The following reconciles GAAP net income (loss) to taxable income for the years ended December 31, 2019, 2018 and 2017.

Reconciliation Between GAAP Net Income and Taxable Income

The following reconciles GAAP net income to taxable income for the years ended December 31, 2020, 2019 and 2018.

For the year ended December 31,

(in thousands)

Net income (loss) per GAAP

Adjustments to GAAP net income (loss):

Net income per GAAP

Adjustments to GAAP net income:

GAAP depreciation and amortization

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As of December 31, 2020, the Company’s right-of-use asset was $ 1.4 million, which is included in prepaid and other assets on the consolidated balance sheet as of December 31, 2020.

The Company has an option to extend the terms of its office space lease with one 5-year extension.

The Company has an option to extend the terms of its office space lease with one 5-year extension option.

As of December 31, 2020, the exercise of the extension option was not reasonably certain.

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December 31, 2020

December 31, 2019

Operating lease cost

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Although increases in the CPI are not estimated as part of the Company’s measurement of straight-line rent revenue, to the extent that the actual CPI is greater or less than the CPI at lease commencement, there could be changes to realized income or loss.

For the year ended December 31, 2019, the Company recognized the following amounts of income relating to lease payments:

For the year ended December 31, 2020 and 2019, the Company recognized the following amounts of income relating to lease payments:

Income relating to lease payments:

1 unchanged sentence

December 31, 2020

December 31, 2019

Income from leases (1)

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2026 and thereafter

(1) Amount from variable lease payments $ 64,421

(1) Amounts recognized from variable lease payments were variable lease payments $ 61,310 and $ 64,421 for the years ended December 31, 2020 and 2019, respectively.

Retirement Plan

5 unchanged sentences

Dispositions of Property

During the three months ended June 30, 2017, the Company reached a decision to classify an office property located in Baltimore, Maryland as an asset held for sale.

In evaluating the Baltimore, Maryland property, management considered various subjective factors, including the time, cost and likelihood of successfully leasing the property, the effect of the property’s results on its unencumbered asset value, which is part of the leverage ratio used to compare to a maximum leverage covenant in the JPM Term Loan, BMO Term Loan and the BAML Credit Facility, future capital costs to upgrade and reposition the multi-tenant property and to lease up the building, recent leasing and economic activity in the local area, and offers to purchase the property.

The Company concluded that selling the property was the more prudent decision and outweighed the potential future benefit of continuing to hold the property.

The property was expected to sell within one year at a loss, which was recorded as a provision for loss on a property held for sale of $ 20.5 million and was classified as an asset held for sale of $ 31.9 million at June 30, 2017.

During the three months ended September 30, 2017, the Company increased the provision for loss by $ 0.3 million to $ 20.7 million, and the property was classified as an asset held for sale in the amount of $ 31.6 million at September 30, 2017.

The Company sold the property on October 20, 2017 for net proceeds of $ 31.6 million resulting in a total loss of $ 20.8 million.

During the three months ended December 31, 2016, the Company reached an agreement to sell an office property located in Milpitas, California.

The property was classified as an asset held for sale at December 31, 2016 and was sold on January 6, 2017 at approximately a $ 2.3 million gain.

The Company sold an office property located in Durham, North Carolina on December 23, 2020 with a sales price of approximately $ 89.7 million, at a gain of approximately $ 41.9 million.

Subsequent Events

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(in thousands, except per share data)

Basic and diluted net income per share

Net income (loss)

Basic and diluted net income (loss) per share

Weighted average number of shares outstanding

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909 Davis, Evanston, IL

Emperor Boulevard, Durham, NC

Legacy Tennyson Center, Plano, TX

22 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures