42 MD&A MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS Property operating expenses Property operating expenses consist primarily of repairs and maintenance, utilities, payroll, insurance and other property related expenses. Property operating expenses increased $707,000 for 2004 versus 2003. The Development and Acquisition Properties accounted for a $1,024,000 increase in property operating expenses during 2004 which was offset by an approximately $591,000 decrease in snow removal expenses at the remainder of the property portfolio due to 2003’s unseasonably severe winter weather primarily in the Mid-Atlantic region. The increase in property operating expenses for 2003 versus 2002 resulted primarily from an increase in snow removal expense of $650,000 due to unseasonably severe winter weather primarily in the Mid-Atlantic region. The Company also paid increased property insurance premiums of approximately $190,000 during 2003. In addition, approximately $130,000 of the increase resulted from the settlement of a dispute with  a former tenant at Crosstown Business Park and related legal expenses. The provision for credit losses increased $317,000  for 2004 versus 2003 primarily due to 2003’s absence of any significant tenant bankruptcy or collection difficulties. The 2004 provision for credit loss includes  a $155,000 provision for an anchor tenant at Great Eastern Plaza, a $113,000 provision for a former  tenant at Leesburg Pike, and a $55,000  provision for a tenant at Seven Corners. Provision for credit losses The provision for credit losses decreased for 2003 versus 2002 primarily due to the absence of any significant tenant bankruptcy or collection difficulties  in 2003 as compared to 2002 when the Company established reserves for two office tenants in bankruptcy and a reserve for a rent dispute with another office tenant.  The $1,209,000 increase in real estate taxes for  2004 versus 2003 was primarily attributable to the commencement of operations at the Development  and Acquisition Properties (79% or approximately $958,000). The increase in real estate taxes for 2003 versus 2002 was primarily attributable to the commencement of operations at the newly acquired and developed properties (40% of increase) and increased real estate taxes assessed at 601 Pennsylvania Avenue (30%  of increase). Real estate taxes Depreciation and amortization Interest expense and amortization of deferred debt Of the $449,000 increase from 2004 versus 2003, $322,000 resulted from increased interest expense  and $127,000 resulted from increased amortization of deferred debt expense. Interest expense increased in 2004 versus 2003 due to an increase in average outstanding borrowings of approximately $22,645,000 ($1,608,000 interest expense increase) and an increase in the weighted average interest rate of 12 basis points ($501,000 interest expense increase), reflecting the Company’s repayment of all of its short-term line of credit borrowings with proceeds from new 15-year fixed rate mortgages. As a result of the 2004 financing activity, the allocation of the Company’s average floating rate notes payable balances as a percentage of total indebtedness decreased from 12% in 2003 to 1% in 2004. The increase in interest expense resulting from the new financings was more than offset by an increase in interest capitalized on costs of construction and development work. During 2004 and 2003, $3,227,000 and $1,382,000, was capitalized, respectively ($1,845,000 interest expense decrease). The $735,000 increase in interest expense and amortization of deferred debt for 2003 versus 2002 resulted primarily from the placement of a new $42.5 million, 15 year, 6.01% fixed rate mortgage replacing Washington Square’s construction loan which charged interest at a variable rate averaging 3.5% during the prior year. The increase was partially offset by interest expense savings from lower interest rates on the Company’s variable rate debt and the repayment of amounts borrowed under the revolving credit agreement in November 2003 using proceeds from the preferred stock offering. Amortization of deferred debt expense increased $76,000 in 2003 versus 2002 primarily as a result of the full year’s amortization of additional loan costs in 2003 associated with refinancing the Company’s revolving credit agreement during the third quarter of 2002. The increase in depreciation and amortization expense of $3,486,000 resulted primarily from the Development and Acquisition Properties placed in service during 2003 and 2004. Depreciation and amortization expense was virtually unchanged from 2002 to 2003. The Company recorded new depreciation expense on developments and acquisitions placed in service during 2002 and 2003, which was offset by a $1,311,000 charge-off recorded in 2002, resulting from assets retired based upon a comprehensive review of real estate asset records and the Company’s revision of the assets’ estimated useful lives.