opportunities for us to release spaces at higher rents to tenants with enhanced sales performance. We have demonstrated an  ability to successfully retenant anchor and in line store locations during soft economic cycles. While these factors reflect some  of the inherent strengths of our portfolio in a difficult retail environment, we cannot assure you that we will successfully  execute our releasing strategy. We maintain commercial general liability, fire, flood, extended coverage and rental loss insurance on our Properties.  Rosewood Indemnity, Ltd, a wholly-owned subsidiary of the Management Company, has agreed to indemnify our general  liability carrier for a specific layer of losses. The carrier has, in turn, agreed to provide evidence of coverage for this layer of losses  under the terms and conditions of the carrier’s policy. A similar policy written through Rosewood Indemnity, Ltd. also provides  a portion of our initial coverage for property insurance and certain windstorm risks at the Properties located in Florida. The events of September 11, 2001 affected our insurance programs. Although insurance rates remain high, since  the President signed into Law the Terrorism Risk Insurance Act (TRIA) in November of 2002, the price of terrorism  insurance has steadily decreased, while the available capacity has been substantially increased. As a result, we have purchased  two separate terrorism insurance programs, one for an individual Property and a second covering all other Properties.  Each program provides limits up to $600 million per occurrence and covers both Certified (Foreign) and Non-Certified  (Domestic) acts of terrorism. The coverage is written on an “all risk” policy form that eliminates the policy aggregates  associated with our previous terrorism policies. These policies are in place throughout the remainder of 2004. Inflation has remained relatively low in recent years and has had minimal impact on the operating performance of  the Properties. Nonetheless, substantially all of the tenants’ leases contain provisions designed to lessen our exposure to the  impact of inflation. These provisions include clauses enabling us to receive percentage rentals based on tenants’ gross sales,  which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of  the leases. In addition, many of the leases are for terms of less than ten years, which may enable us to replace existing leases  with new leases at higher base and/or percentage rentals if rents of the existing leases are below the then-existing market rate.  Substantially all of the leases, other than those for anchors, require the tenants to pay a proportionate share of operating  expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to increases  in costs and operating expenses resulting from inflation. However, inflation may have a negative impact on some of our other operating items. Interest and general and  administrative expenses may be adversely affected by inflation as these specified costs could increase at a rate higher than  rents. Also, for tenant leases with stated rent increases, inflation may have a negative effect as the stated rent increases in these  leases could be lower than the increase in inflation at any given time. The shopping center industry is seasonal in nature, particularly in the fourth quarter during the holiday season, when  tenant occupancy and retail sales are typically at their highest levels. In addition, shopping malls achieve most of their temporary  tenant rents during the holiday season. As a result, our earnings are generally highest in the fourth quarter of each year. In addition, given the number of Properties in warm summer climates our utility expenses are typically higher in the  months of June through September due to higher electricity costs to supply air conditioning to our Properties. As a result  some seasonality results in increased property operating expenses during these months; however, the majority of these costs  are recoverable from tenants. Nearly all of the Properties have been subjected to Phase I or similar environmental audits. Such audits have not  revealed nor is management aware of any environmental liability that we believe would have a material adverse impact  on our financial position or results of operations. We are unaware of any instances in which we would incur significant  environmental costs if any or all Properties were sold, disposed of or abandoned. Insurance Inflation  Seasonality Environmental Matters 42 simon property group, inc. Management’s Discussion & Analysis of Financial Condition and Results of Operations 