Rental properties and properties under development are individually evaluated for impairment when conditions exist which may indicate that it is probable that the sum of expected future undiscounted cash flows is less than its carrying amount. Upon determina- tion that an impairment has occurred, a write-down is recorded to reduce the carrying amount of the property to its estimated fair value. We capitalize direct construction and development costs, including predevelopment costs, interest, property taxes, insurance and indirect project costs, including payroll and other costs directly associated with the acquisition, development or construction of a proj- ect. Payroll costs not related to the construction, development or redevelopment of a project, or acquisition of a property that will be classified as operating at the date of acquisition, are expensed as incurred. Costs incurred after a project is substantially complete and ready for its intended use are expensed as incurred. Costs previously capitalized related to abandoned acquisition or development opportunities are written-off. Should development activity cease, a portion of interest, property taxes, insurance and certain costs would no longer be eligible for capitalization, and would be expensed as incurred. As of December 31, 2003, we had one property designated as “held for sale” under the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). During the year ended December 31, 2003, we sold three properties, two of which were designated as “held for sale” as of December 31, 2002. See Note 13, Discontinued Operations. Fees and costs incurred in obtaining long-term financing are amortized over the terms of the related loans and included in interest expense. Loan fees and costs, net of related amortization, totaled $11,556,000 and $8,545,000 as of December 31, 2003 and 2002, respectively, and are included in other assets on our balance sheets. Rental income from leases with scheduled rent increases, free rent and other rent adjustments are recognized on a straight-line basis over the respective lease terms. We include amounts currently recognized as income, and expected to be received in later years, in deferred rent on our balance sheets. Amounts received currently, but recognized as income in future years, are included in accrued expenses as unearned rent on our balance sheets. Interest income was $108,000, $298,000 and $923,000 in 2003, 2002 and 2001, respectively, and is included in other income in the accompanying statements of income. The carrying amounts of cash and cash equivalents and unsecured line of credit and unsecured term loan approximate fair value. The fair value of our secured notes payable was estimated using discounted cash flows analyses based on borrowing rates we believe we could obtain with similar terms and maturities. As of December 31, 2003 and 2002, the fair value of our secured notes payable was approximately $338,620,000 and $292,745,000, respectively. Leasing costs are amortized on a straight-line basis over the terms of the related leases. Leasing costs, net of related amortization, totaled $18,665,000 and $16,189,000 as of December 31, 2003 and 2002, respectively, and are included in other assets on our balance sheets. 41 Tenant Security Deposits and Restricted Cash Tenant security deposits and restricted cash consists of the following (in thousands): Loan Fees and Costs Rental Income Interest Income Leasing Costs Fair Value of Financial Instruments December 31, 2003 2002 Funds held in trust under the terms of certain secured notes payable $ 8,665 $ 5,692 Security deposit funds based on the terms of certain lease agreements 2,029 1,967 Other funds held in escrow 363 361 $11,057 $ 8,020