UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2006

¨	Transition Report Pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 000-50727

ARC CORPORATE REALTY TRUST, INC.

(Exact name of registrant as specified in its charter)


Maryland		22-3247622
(State of Organization)		(I.R.S. Employer Identification Number)

1401 Broad Street Clifton, New Jersey		07013
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (973) 249-1000

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x

As of August 14, 2006, there were 3,181,540 Class A Common Shares of Beneficial Interest outstanding, par value $0.001 per share.

ARC CORPORATE REALTY TRUST, INC.

Form 10-Q

Index


Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2006 (unaudited) and December 31, 2005		2
Consolidated Statements of Income (Loss) for the three months and six months ended June 30, 2006 and 2005 (unaudited)		3
Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2006 (unaudited)		4
Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (unaudited)		5
Notes to Consolidated Financial Statements (unaudited)		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21

Item 3. Quantitative and Qualitative Disclosures About Market Risk		28

Item 4. Controls and Procedures		28

PART II: OTHER INFORMATION

Item 1. Legal Proceedings		29

Item 1A. Risk Factors		29

Item 2. Changes in Securities, Use of Proceeds and Issuers Purchases of Equity Securities		29

Item 3. Defaults Upon Senior Securities		29

Item 4. Submission of Matters to a Vote of Security Holders		29

Item 5. Other Information		29

Item 6. Exhibits and Reports		29

SIGNATURES		30

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ARC CORPORATE REALTY TRUST, INC.

Consolidated Balance Sheets

As of June 30, 2006 (Unaudited) and December 31, 2005


	2006			2005
Assets
Property:
Land	$	8,449,392		$	12,412,227
Building and improvements		26,430,004			36,653,540

		34,879,396			49,065,767
Less: accumulated depreciation		5,627,678			7,151,201

		29,251,718			41,914,566

Investment in unconsolidated subsidiaries and undivided interests		6,958,266			7,693,231

Total property and investments		36,209,984			49,607,797

Assets held for sale		5,806,616			—

Cash and cash equivalents		4,986,659			711,853

Restricted cash		841,642			517,707

Deferred rent receivable		548,402			1,198,693

Rent receivable		175,819			195,088

Notes receivable-tenants		—			322,923

Prepaid expenses and other assets, net		234,982			270,002

Deferred financing and other fees, net of accumulated amortization of $584,751 and $729,927 for 2006 and 2005, respectively		167,527			271,389

Deferred leasing costs, net of accumulated amortization of $59,525 and $130,518 for 2006 and 2005, respectively		34,462			81,949

Total assets	$	49,006,093		$	53,177,401

Liabilities and Shareholders’ Equity

Liabilities:
Mortgage notes payable	$	13,757,666		$	26,395,027
Liabilities related to assets held for sale		4,082,834			—
Dividends payable-Class B		162,776			—
Due to related parties		90,123			45,061
Unearned rental revenue		31,250			31,250
Accounts payable and accrued expenses		392,423			580,567

Total liabilities		18,517,072			27,051,905

Minority interest		34,832			32,072

Shareholders’ Equity:
Common shares: $.001 par value per share; authorized, 40,000,000 shares
Class A shares-5,000,000 authorized; 3,181,540 issued and outstanding		3,182			3,182
Class B shares-5,000,000 authorized; 166,397 issued and outstanding		166			166
Additional paid-in capital		32,106,429			32,106,429
Deferred compensation plans		1,634,133			747,930
Accumulated distributions in excess of net income		(3,289,721	)		(6,764,283	)

Total shareholders’ equity		30,454,189			26,093,424

Total liabilities and shareholders’ equity	$	49,006,093		$	53,177,401

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

ARC CORPORATE REALTY TRUST, INC.

Consolidated Statements of Income

(Unaudited)

Three Months Ended June 30

Six Months Ended June 30

2006

2005

2006

2005

Revenues:

Rental revenues

962,381

1,125,175

1,924,679

2,080,581

Real estate tax reimbursements

118,208

133,446

233,958

283,131

Interest income

46,152

521

48,860

21,551

Total revenues

1,126,741

1,259,142

2,207,497

2,385,263

Expenses:

Interest expense

378,046

320,834

647,374

638,549

Depreciation and amortization

187,215

196,279

382,441

392,557

Asset management fees-affiliate

163,971

174,619

329,756

349,238

Real estate taxes

115,856

143,004

231,606

283,742

Property operating expenses

36,645

35,702

72,702

80,982

General and administrative expenses

26,165

18,910

64,392

68,716

Stock based compensation

188,554

112,190

886,203

224,379

Professional expenses

191,172

148,509

290,214

257,730

(Gain) loss on interest rate cap, net

(5,505

)

8,773

(8,570

)

6,151

State and local taxes

2,470

2,506

5,319

10,523

Total expenses

1,284,589

1,161,326

2,901,437

2,312,567

Minority interests in earnings from subsidiaries

16,826

15,319

31,394

29,306

Equity in income of unconsolidated subsidiaries and undivided interests

258,047

243,866

522,038

548,507

Gain on sale of investment in unconsolidated subsidiary

1,546,204

—

1,546,204

400,000

Income from continuing operations

1,629,577

326,363

1,342,908

991,897

Income from discontinued operations

2,947,063

189,854

3,058,007

118,831

Net income allocable to Class A and Class B common shareholders

4,576,640

516,217

4,400,915

1,110,728

Basic:

Net income per share from continuing operations

0.49

0.10

0.40

0.30

Net income per share from discontinued operations

0.88

0.05

0.91

0.03

Net income per share

1.37

0.15

1.31

0.33

Diluted:

Net income per share from continuing operations

0.40

0.08

0.33

0.24

Net income per share from discontinued operations

0.73

0.05

0.76

0.03

Net income per share

1.13

0.13

1.09

0.27

Weighted average shares outstanding-basic

3,348,000

Weighted average shares outstanding-diluted

4,042,000

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

ARC CORPORATE REALTY TRUST, INC.

Consolidated Statements of Shareholders' Equity

For the Six Months Ended June 30, 2006 (unaudited)

Class A
Common
Shares

Class B
Common
Shares

Additional
Paid-in
Capital

Deferred
Compensation
Plans

Accumulated
Distributions
in Excess of
Net Income

Total
Shareholders'
Equity

Balance, December 31, 2005

3,182

166

32,106,429

747,930

(6,764,283

)

26,093,424

Increase in deferred compensation, net

—

886,203

—

886,203

Net income

—

4,400,915

Dividends

—

(926,353

)

(926,353

)

Balance, June 30, 2006

3,182

166

32,106,429

1,634,133

(3,289,721

)

30,454,189

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

ARC CORPORATE REALTY TRUST, INC.

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2006 and 2005

(Unaudited)


	2006			2005
Cash Flows from Operating Activities:
Net income		4,400,915			1,110,728
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		475,166			562,113
Stock based compensation		886,203			224,379
Write off of financing costs		20,952			—
Amortization of acquired unfavorable lease		—			(114,527	)
Minority interest in earnings of subsidiaries		3,435,329			115,266
Impairment charge		—			324,000
Gain on sale of investment in unconsolidated subsidiary		(1,546,204	)		(400,000	)
Gain on sale of property		(6,137,479	)		—
Write off of TMD minority interest		—			10,487
(Gain) loss on interest rate cap		(8,570	)		18,412
Equity in income of unconsolidated subsidiaries and undivided interests		(522,038	)		(548,507	)
(Increase) decrease in assets:
Restricted cash		(323,935	)		(62,353	)
Rent receivable		19,269			(33,380	)
Deferred rent receivable		410,176			(206,045	)
Prepaid and other assets, net		30,051			(60,969	)
Increase (decrease) in liabilities:
Due to related parties, net		45,062			—
Accounts payable and accrued expenses		(163,643	)		86,898
Unearned rent		—			86,329

Net cash provided by operating activities		1,021,254			1,112,831

Cash Flows from Investing Activities:
Proceeds from sale of investment in unconsolidated subsidiary		2,351,980			400,000
Net proceeds from sale of property and notes receivable		13,237,255			—
Distributions from unconsolidated subsidiaries and undivided interests		451,225			675,811
Decrease in notes receivable		—			800,000
Decrease in notes receivable-tenants		20,940			22,733

Net cash provided by investing activities		16,061,400			1,898,544

Cash Flows from Financing Activities:
Mortgage notes payable		(362,760	)		(385,919	)
Payoff of principal on mortgage note payable		(9,816,267	)		—
Borrowings under mortgage note payable		1,600,000			—
Lines of credit, net		—			(800,000	)
Deferred financing and other fees		(32,677	)		—
Distributions to minority interest owners		(3,432,567	)		(125,080	)
Dividends paid		(763,577	)		(1,808,000	)

Net cash used in by financing activities		(12,807,848	)		(3,118,999	)

Net increase (decrease) in Cash and Cash Equivalents		4,274,806			(107,624	)
Cash and Cash Equivalents, Beginning of Period		711,853			436,264

Cash and Cash Equivalents, End of Period	$	4,986,659		$	328,640

Supplement Disclosure of Cash Flow Information:
Cash payments for interest	$	1,037,720		$	1,150,797

Non Cash Financing Activities:
Dividends payable-Class B	$	162,776		$	—

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

ARC CORPORATE REALTY TRUST, INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006 AND 2005

(UNAUDITED)

1.	GENERAL

ARC Corporate Realty Trust, Inc. and subsidiaries (“ACRT”) is a corporation which was formed under the laws of the State of Maryland on June 25, 1993. ACRT operates in a manner intended to enable it to qualify as a real estate investment trust (“REIT”) under Sections 856-860 of the Internal Revenue Code (the “Code”). ACRT is managed by its advisor, ARC Capital Advisors L.P. (“Advisor”), which performs services for ACRT pursuant to the terms of an advisory agreement (the “Advisory Agreement”) (Note 12). ACRT was formed to purchase geographically diverse credit lease properties which are general purpose retail, office and industrial properties each 100% leased to one or more creditworthy tenants under a long term lease that generally requires tenants to pay most or all of the operating costs of the property including real estate taxes and insurance.

Through June 30, 2006, ACRT raised $33,678,336 of gross proceeds (net of stock retirements) representing 3,181,540 Class A shares from 674 investors which, net of offering costs, has yielded $30,545,106 to ACRT. In addition, ACRT has raised $1,781,735 of gross proceeds representing 166,397 Class B shares from one investor, which net of offering costs, has yielded $1,564,671 to ACRT.

On December 20, 2004, ACRT entered into a Contract of Purchase and Sale (the “Agreement”), by and among ACRT, certain affiliates of ACRT and HPI/NL Investors LLC (the “Purchaser”). The Agreement provides for the sale to the Purchaser of 14 of ACRT’s 21 properties and a limited partnership interest in an entity that owns a property.

On June 30, 2005, the Agreement became subject to termination. On November 30, 2005, ACRT entered into a Termination and Release Agreement with the Purchaser. The Termination and Release Agreement called for the payment of $150,000 to ACRT from the deposit escrow and an additional payment to ACRTof $37,450 as reimbursement of survey and other costs related to the Agreement. In exchange ACRT released the Purchaser from any further obligations under the Agreement.

In addition to the above, during 2005, ACRT, pursuant to various rights of first refusal and purchase options, entered into various contracts to sell investments not included in the above Agreement, as amended. The purchasers of these investments include joint venture partners, minority interest holders, tenants in common and affiliates of the Advisor. The investments included in these various contracts are:

New York, NY (partnership interest) (see Note 20)

Fort Washington, PA (partnership interest)

Paramus, NJ (partnership interest)

ACRT anticipates that the sale of these investments will close in 2006. Based on the current sales prices, ACRT anticipates that all investments will be sold for amounts in excess of their carrying amounts and, therefore, will result in a gain for financial reporting purposes.

ACRT’s 51% tenant in common interest and the remaining 49% tenant in common interest not owned by ACRT for $19,500,000. This contract was subsequently terminated.

ACRT is again in negotiations with the tenant on purchasing the property. However, at this time ACRT and the tenant have not been able to agree on a purchase price and the tenant, a quasi government entity, has threatened to condemn.

On August 10, 2005, ACRT sold the Philadelphia, Pennsylvania property leased to Barnes and Noble (see Note 3).

On February 8, 2006, the board of directors approved the adoption of a Plan of Liquidation and Dissolution (the “Plan”). The Plan is subject to the approval of ACRT’s common stockholders, by two-thirds vote. ACRT intends to sell its real estate properties on an orderly basis, to pay or provide for its liabilities and to distribute its remaining cash to its shareholders.

On May 23, 2006, ACRT sold its partnership interest in Fort Washington Fitness LP, which owns the property in Fort Washington, Pennsylvania leased to LA Fitness, to it’s joint venture partner for $2,500,000 and recognized a gain for financial reporting purposes of $1,546,204.

ARC CORPORATE REALTY TRUST, INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006 AND 2005

(UNAUDITED)

On June 15, 2006, the property located in Overland Park, Kansas, leased to Borders Books and Bed, Bath and Beyond, was sold for $13,600,000 to an unrelated third party, which resulted in a gain for financial reporting purposes of $6,137,479.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of ACRT, its wholly-owned subsidiaries and those majority-owned subsidiaries in which ACRT can exercise control. Investments in non- controlled entities, which include Triangle Plaza II, LLC (Note 4), Fort Washington Fitness, L.P. (Note 5), Levittown ARC, LP (Note 6), Willow Grove ACRT, LLC (Note 9) and ARC International Fund II, LP (Note 10) are accounted for under the equity method of accounting. Additionally, ACRT’s undivided interests in the Rochelle Park property (Note 7) and the Paramus property (Note 8) are accounted for under the equity method, as ACRT maintains joint control over the properties. Under the equity method, ACRT’s investment increases as a result of contributions and its allocable share of net income and decreases as a result of distributions and its allocable share of net loss. All significant intercompany balances and transactions have been eliminated in consolidation and in the use of the equity method of accounting.

Interim Financial Statements (unaudited) – The unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary to present fairly the financial condition and results of operations for the interim periods. For a more complete understanding of ACRT’s operations and financial position, reference is made to the financial statements (including notes thereto) previously filed with the Securities and Exchange Commission with ACRT’s Form 10-K for the year ended December 31, 2005.

Use of Estimates - The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Properties - Properties are carried at cost which includes the purchase price, acquisition fees, and any other costs incurred in acquiring the properties. Buildings are depreciated on a straight-line basis over their estimated useful lives, which are 40 years. Maintenance and repairs are charged to expense as incurred. Replacements and betterments, which significantly extend the useful lives of a property, are capitalized. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” ACRT is amortizing certain intangible costs associated with property acquisitions over the lives of the leases underlying the properties (see Note 2e).

Purchase Accounting for the Acquisition of Real Estate – In accordance with SFAS No. 141, commencing with properties acquired after June 30, 2002, the fair value of real estate acquired is allocated to the acquired tangible assets, consisting of land and building and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, based in each case on of the tangible assets of an acquired property (which includes land and building) is determined by valuing the property as if it were vacant, and the “as-if vacant” value is then allocated to land and building based on management’s determination of relative fair values of these assets. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenues during expected lease up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions.

In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the difference between the current in-place lease rent and management’s estimate of current market rent.

The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the purchase price paid for a property over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s lease. The value of in-place leases and customer relationships are amortized to expense over the remaining non-cancelable periods of the respective leases.

ARC CORPORATE REALTY TRUST, INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006 AND 2005

(UNAUDITED)

Impairment - ACRT continually assesses the recoverability of its properties by determining whether the costs can be recovered through projected undiscounted cash flows. The amount of impairment, if any, is measured by comparing the carrying amounts to the fair values of such properties. The evaluation includes reviewing anticipated cash flows of the properties, based on current leases in place, coupled with an estimate of proceeds to be realized upon sale. However, estimating future sales proceeds is highly subjective and such estimates could differ materially from actual results.

SFAS No. 144 “Accounting for the Impairment or Disposal of Long Lived Assets” updates and clarifies the accounting and reporting for the impairment of assets held in use and to be disposed of. The Statement, among other things, requires ACRT to classify the operations of properties to be disposed of as discontinued operations.

In 2005, the property located in Philadelphia, Pennsylvania, leased to Barnes and Noble, was designated as to be disposed and an impairment charge of $287,259 was recorded, which included a disposition fee of $116,016. This property was sold on August 10, 2005 for aggregate net proceeds of $7,362,720, which resulted in no gain or loss for financial reporting purposes.

In 2006, the properties located in Charlotte, North Carolina leased to CaroMont Medical Group Inc. were designated to be disposed. Based on the current sales prices, ACRT anticipates that the properties will be sold to an affiliate of the Advisor for amounts in excess of their carrying amounts and, therefore, will result in a gain for financial reporting purposes. At June 30, 2006, aggregate assets held for sale (primarily property) was $5,806,616 and related liabilities (primarily mortgage notes payable) was $4,082,834.

The following presents the operating results for the properties to be disposed of in 2006 and 2005 for the three and six months ended June 30, 2006 and 2005:


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Revenues	$	495,948		$	768,399		$	1,007,853		$	1,524,543
Expenses		(330,978	)		(530,281	)		(683,390	)		(1,319,752	)
Gain on Sale of property		6,137,479			—			6,137,479			—
Minority Interest		(3,355,386	)		(48,264	)		(3,403,935	)		(85,960	)

Net Income	$	2,947,063		$	189,854		$	3,058,007		$	118,831

Properties Held for Sale – ACRT accounts for properties held for sale in accordance with SFAS No. 144. SFAS No. 144 requires that the assets and liabilities of properties that meet various criteria in SFAS No. 144 be presented separately in the balance sheet with assets and liabilities being separately stated. The operating results of these properties are reflected as discontinued operations in the statements of income.

Cash and Cash Equivalents - Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less.

Cash and cash equivalent balances may exceed insurable limits. ACRT believes it mitigates risk by investing in or through major financial institutions.

Restricted Cash - Restricted cash represents cash maintained for real estate taxes, insurance, capital expenditures and various attorney escrows from the sale of the Overland Park, Kansas property.

Rent Receivable – ACRT continuously monitors collections from its tenants and makes a provision for estimated losses based upon historical experience and any specific tenant collection issues that ACRT has identified.

Amortization - Deferred financing costs are amortized using the straight-line method over the life of the related mortgage or line of credit. Deferred leasing costs are amortized using the straight-line method over the life of the related lease. Capitalized costs related to ACRT’s equity investments are amortized over the estimated useful life of the underlying real estate assets.

ARC CORPORATE REALTY TRUST, INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006 AND 2005

(UNAUDITED)

Income Taxes - ACRT operates in a manner intended to enable it to qualify as a REIT under Sections 856-860 of the Code. Under these sections, a real estate investment trust which distributes at least 90% of its real estate investment trust taxable income to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. ACRT pays state taxes, which are not significant, as applicable.

Revenue Recognition - Rental revenue from tenant operating leases which provide for scheduled rental increases are recognized on a straight-line basis over the term of the respective leases.

Gains on sales of real estate are recognized pursuant to the provisions of SFAS No. 66, “Accounting for Sales of Real Estate.” The specific timing of the sale is measured against various criteria in SFAS No. 66 related to the terms of the transactions and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria are not met, the gain is deferred and the finance, installment or cost recovery method, as appropriate, is applied until the sales criteria are met.

Derivative Instruments and Hedging Activities - ACRT follows the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. The Statement generally requires that all derivative instruments be reflected in the consolidated financial statements at their estimated fair value. Changes in the fair value of non-hedging instruments are reported in current period earnings.

Earnings Per Share – Basic net income per share is computed by dividing net income allocable to Class A and B common shareholders by the weighted average number of shares outstanding during the period. Diluted net income per share amounts are similarly computed but include the effect, when dilutive, of in the money common share options.

The following is a reconciliation of the denominator of the basic and diluted weighted average number of common shares outstanding.


	Three months Ended June 30, (In thousands)		Six months ended June 30, (In thousands)
	2006	2005	2006	2005
Total weighted average Class A common shares	3,182	3,182	3,182	3,182

Total weighted average Class B common shares	166	166	166	166

Weighted average number of common shares used in calculation of basic earnings per share	3,348	3,348	3,348	3,348

Shares issuable on excersise of warrants	104	104	104	104
Shares issuable upon exercise of stock options (15% of outstanding common shares)	590	590	590	590

Weighted average number of common shares used in calculation of diluted earnings per share	4,042	4,042	4,042	4,042

Recent Accounting Pronouncements – In December 2004, the FASB issued Statement No. 123 (revised 2004), Accounting for Stock-Based Compensation (“SFAS 123R”) which supersedes Accounting Principals Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entities equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share based payments transactions. SFAS 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The cost will be recognized over the period in which an employee is required to provide services in exchange for the award. SFAS 123R is effective for fiscal years beginning after January 1, 2006, based on new rules issued by the Securities and Exchange Commission. The adoption of this pronouncement did not have any material impact on ACRT’s consolidated financial statements.

ARC CORPORATE REALTY TRUST, INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006 AND 2005

(UNAUDITED)

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations-an Interpretation of SFAS Statement No. 143” (FIN 47). FIN 47 clarifies the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived asset when the timing and/or method of settlement are conditional on a future event. FIN 47 is effective for fiscal years ending after December 15, 2005. ACRT adopted FIN 47 on December 31, 2005. The adoption did not have any impact on ACRT’s consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” which replaces Accounting Principles Board Opinions No. 20 “Accounting Changes” and SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements –An Amendment of APB Opinion No. 28.” SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

In June 2005, the FASB ratified the Emerging Issues Task Force’s (EITF) consensus on EITF 04-05, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. EITF 04-05 provides a framework for determining whether a general partner controls, and should consolidate, a limited partnership or a similar entity. It was effective after June 29, 2005, for all newly formed limited partnerships and for any pre-existing partnerships that modify their partnership agreements after that date. General partners of all other limited partnerships will apply the consensus no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The adoption of EITF 04-05 did not have any impact on ACRT’s consolidated financial position or results of operations.

In 2005, the EITF released Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements (“EITF 05-6”), which clarifies the period over which leasehold improvements should be amortized. EITF 05-6 requires all leasehold improvements to be amortized over the shorter of the useful life of the assets, or the applicable lease term, as defined. The applicable lease term is determined on the date the leasehold improvements are acquired and includes renewal periods for

which exercise is reasonably assured. EITF 05-6 was effective for leasehold improvements acquired in reporting periods beginning after June 29, 2005. The impact of the adoption of EITF 05-6 did not have a material impact on ACRT’s consolidated financial position or results of operations.

In June 2006, FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB No. 109”. FIN 48 provides guidance on recognition and measurement of uncertainties in income taxes and is applicable for fiscal years beginning after December 15, 2006. The adoption is not expected to have a material impact on ACRT’s consolidated financial statements.

Stock-based Compensation – On May 21, 2004, ACRT shareholders approved revisions to ACRT’s 1997 Stock Option Plan which extended the life of ACRT’s stock options from ten to fifteen years and removed all restrictions on their exercise on April 1, 2008 or upon the occurrence of certain earlier events. However, the total number of options exercised cannot exceed fifteen percent of the outstanding shares at the exercise date.

Accordingly, ACRT will recognize compensation expense ratably over the vesting period for variable stock awards previously granted under the plan.

Compensation expense was calculated thru December 31, 2005 using a market price of $12.00 based on ACRT’s last stock offering which expired on December 31, 2003, and the option price of $8.50 per option. The compensation expense calculation was adjusted in the first quarter of 2006 to reflect the current projected liquidation values on the shares of $13.50 a share. For the six months ended June 30, 2006 and 2005, ACRT recognized stock based compensation expense totaling $886,203 and $224,379, respectively. For the three months ended June 30, 2006 and 2005, ACRT recognized stock based compensation expense totaling $188,554 and $112,190 respectively.

Fair Value of Financial Instruments

Cash Equivalents, Notes Receivable, Rent Receivable and Accounts Payable and Accrued Expenses

ACRT estimates that the fair value approximates carrying value due to the relatively short maturities of the instruments.

ARC CORPORATE REALTY TRUST, INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006 AND 2005

(UNAUDITED)

Mortgage Notes Payable and Lines of Credit

ACRT determines the fair value of these instruments based on a discounted cash flow analysis using a discount rate that approximates the current borrowing rates for instruments of similar maturities. Based on this analysis, ACRT has determined that the fair value of the variable rate instruments approximates their carrying values and the fixed rate instruments are $7.4 and $14.4 million at June 30 2006 and December 31, 2005, respectively.

Industry Segments – ACRT operates in one industry segment, investments in credit lease properties.

Environmental Matters - Based upon management’s ongoing review of its properties, management is not aware of any environmental conditions with respect to any of ACRT’s properties, which would be reasonably likely to have a material adverse effect on ACRT. There can be no assurance, however, that the discovery of environmental conditions which were previously unknown, changes in law, the conduct of tenants or activities relating to properties in the vicinity of ACRT’s properties, will not expose ACRT to material liability in the future. Changes in law increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures or may otherwise adversely affect the operations of ACRT’s tenants, which would adversely affect ACRT’s consolidated financial condition and results of operations.

Reclassifications - Certain reclassifications were made to prior period amounts to conform with the current period presentation.

3.	PROPERTIES AND PROPERTY INVESTMENTS

The following acquisitions, investments and disposals were consummated during 2006 and 2005:

On January 3, 2005, an affiliate of the Advisor exercised its right to purchase ACRT’s property located in Philadelphia, PA for approximately $7.7 million. ACRT has recorded an impairment charge of $287,259 in connection with the transaction in 2005. On August 10, 2005, ACRT sold the Philadelphia, Pennsylvania property leased to Barnes and Noble for $7,734,375 resulting in net proceeds to ACRT of $7,362,720 after costs and expenses, which resulted in no gain or loss for financial reporting purposes.

On February 15, 2005, the Willow Grove outstanding loan balance of $800,000 was repaid plus all outstanding and accrued interest, and as a result, ACRT’s investment in Willow Grove was zero. Additionally, ACRT sold its member interest in Willow Grove to the other Willow Grove member and an affiliate of the Advisor for net proceeds and a gain of $400,000.

4.	INVESTMENT IN TRIANGLE PLAZA II

On June 9, 1998, ACRT, through a wholly owned subsidiary, acquired a 40% interest in Triangle Plaza II, LLC (“Triangle”), for an initial equity investment of $4,473,900 at completion. Triangle owns a 139,294-square-foot retail complex in College Point

(Queens), New York City which was completed in July 1999. The complex is leased to Toys R Us—Delaware Inc. (for use as a Toys R Us and Kids R Us facility) and National Amusements, Inc. In March of 2000, Triangle purchased the land under the property for approximately $10,200,000. The land was previously subject to a ground lease.

ACRT’s investment in Triangle includes costs capitalized by ACRT in the amount of $901,829. This amount, which includes the acquisition fee of $572,520, which was paid to the Advisor per the Advisory Agreement, and capitalized interest totaling $308,830, is not reflected in the underlying equity of Triangle and is being amortized over the estimated useful life of the underlying asset, which is 39 years. Amortization expense in the amount of $5,781 has been recorded in each of 2006 and 2005 and charged against ACRT’s equity in income of unconsolidated subsidiaries and undivided interests, which appears on the accompanying consolidated statements of income. ACRT earns a 12% preferred return on its investment in Triangle in the form

ARC CORPORATE REALTY TRUST, INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006 AND 2005

(UNAUDITED)

of distributions and, after a similar preferred return to the other member, receives 40% of distributable cash flow attributable to base rent and recoveries and 20% of all percentage rents. ACRT received distributions of $0 and $146,986 from cash flows attributable to base rent and recoveries for the six months ended June 30, 2006 and 2005, respectively.

In September 2000, Triangle refinanced the property. The refinancing produced excess distributable capital proceeds of $1,433,409, of which $1,427,156 was distributed to ACRT in 2000, thereby reducing ACRT’s contributed capital to $3,046,744.

In March 2005, ACRT brought suit against its joint venture partner regarding the exercise of a right of first refusal on the purchase of ACRT’s interest in the property (see Note 20).

ACRT’s investment in Triangle as of June 30, 2006 and December 31, 2005 is $3,920,501 and $3,683,237, respectively.

ACRT’s Equity in Earnings for the three months and six months ended June 30, 2006 and 2005 is $118,790, $106,288, $237,264, and $225,051, respectively. ACRT estimated its share of Triangle’s equity in earnings for the three months and six months ended June 30, 2006 based upon the equity in earnings for the period ended September 30, 2005.

5.	INVESTMENT IN FORT WASHINGTON

On December 24, 2002, ACRT through a wholly owned subsidiary, acquired a 50% limited partnership interest in Fort Washington Fitness, LP (“Fort Washington”) for $1,000,000 plus the assumption of its pro rata share of the debt and acquisition fees. ACRT does not have any additional funding obligations to Fort Washington. Fort Washington owns a property located in

Fort Washington, Pennsylvania, which consists of a 41,000-square-foot LA Fitness Center (built by LA Fitness, the tenant). The property was completed in November 2003 and the LA Fitness lease has a rent commencement date of January 2, 2004.

ACRT’s investment in Fort Washington includes the acquisition fee of $105,000 paid to the Advisor per the Advisory Agreement, which is not reflected in the underlying equity of Fort Washington. This amount is being amortized over the estimated useful life of the underlying asset.

ACRT will earn a 12% preferred return on its investment in Fort Washington from the date of investment in the form of distributions and, after a similar preferred return to the other partners, will receive 50% of the remaining distributable cash flow. ACRT received distributions of $232,975 and $60,000 for the six months ended June 30, 2006 and 2005, respectively.

The following is the summary balance sheet information of Fort Washington as of December 31, 2005:


	December 31, 2005
Total Assets	$	6,397,442
Total Liabilities		4,932,413

ACRT’s Investment		991,349

The following is the summary income statement information of Fort Washington for the two and five months ended May 30, 2006 and three and six months ended June 30, 2005:


	April 1 to May 23, 2006		Three Months Ended June 30, 2005		January 1, to May 23, 2006		Six Months Ended June 30, 2005
Rental Revenue	$	123,600	$	185,400	$	309,000	$	370,800
Operating Expenses		6,608		6,782		13,068		10,490
Interest Expense		61,819		89,327		150.879		169,090
Depreciation and Amortization		17,161		28,658		48,006		60,961

Net Income	$	38,012	$	60,633	$	97,047	$	130,259

ACRT’s Equity in Earnings	$	18,559	$	29,643	$	47,403	$	63,783

ARC CORPORATE REALTY TRUST, INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006 AND 2005

(UNAUDITED)

6.	INVESTMENT IN LEVITTOWN

On March 7, 2003, ACRT acquired a 20% limited partnership interest in Levittown ARC, LP (“Levittown”) for $200,000 plus the assumption of its pro rata share of the debt and acquisition fees. ACRT does not have any additional funding obligations to Levittown. Levittown owns a property located in Levittown, Pennsylvania which is currently leased to Giant Food, Inc.

ACRT’s investment in Levittown includes the acquisition fee of $17,408 paid to the Advisor per the Advisory Agreement, which is not reflected in the underlying equity of Levittown. This amount is being amortized over the estimated useful life of the underlying asset, which is 39 years.

ACRT will earn a 9% preferred return on its investment in Levittown in the form of distributions and, after a similar preferred return to the other limited partners, all distributions in excess of 9% are allocated 50% to the limited partners and 50% to Levittown ARC Residual Partners, of which ACRT owns 63%. ACRT has received $9,000 in distributions for the six months ended June 30, 2006 and 2005, respectively.

The following is the summary balance sheet information of Levittown as of June 30, 2006 and December 31, 2005:


	June 30, 2006		December 31, 2005
Total Assets	$	3,168,025	$	3,230,738
Total Liabilities		2,498,059		2,530,074

ACRT’s Investment		153,566		160,197

The following is the summary income statement information of Levittown for the three and six months ended June 30, 2006 and 2005:


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006		2005
Rental Revenue	$	83,007		$	83,007		$	166,014	$	166,014
Operating Expenses		5,527			7,858			10,110		14,029
Interest Expense		45,910			45,551			74,628		90,775
Depreciation and Amortization		34,155			34,155			68,310		68,310

Net Income (Loss)	$	(2,585	)	$	(4,557	)	$	12,966	$	(7,100	)

ACRT’s Equity in Earnings (Loss)	$	(629	)	$	(1,023	)	$	2,370	$	(1,644	)

ACRT expects to sell its investment in this property in 2006.

7.	INVESTMENT IN ROCHELLE PARK PROPERTY

On April 1, 2003, ACRT converted its 51% limited partnership interest in Rochelle Park Investors, LP into a 51% undivided interest in the property held by Rochelle ACRT 1, LLC and Rochelle ACRT 2, LLC, both wholly owned subsidiaries of ACRT.

This conversion resulted in the deconsolidation of Rochelle Park Investors LP in the consolidated financial statements of ACRT. ACRT’s undivided interest is reflected on the consolidated financial statements under the equity method of accounting.

On April 1, 2003, the property was refinanced. The refinancing produced excess distributable capital proceeds of approximately $2,200,000, which were distributed to ACRT. ACRT has received distributions of $76,000 and $141,000 for the six months ended June 30, 2006 and 2005, respectively.

ARC CORPORATE REALTY TRUST, INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006 AND 2005

(UNAUDITED)

The following is the combined summary balance sheet information of Rochelle ACRT 1 and 2’s 51% undivided interests as of June 30, 2006 and December 31, 2005:


	June 30, 2006			December 31, 2005
Total Assets	$	4,905,280		$	4,974,889
Total Liabilities		5,531,059			5,591,252

ACRT’s Investment		(539,207	)		(561,090	)

The following is the combined summary income statement information of Rochelle ACRT 1 and 2’s 51% undivided interests for the three and six months ended June 30, 2006 and 2005:


	Three Months Ended June 30,					Six Months Ended June 30,
	2006			2005		2006			2005
Rental Revenue	$	289,551		$	305,727	$	573,038		$	576,940
(Gain) Loss on Interest Rate Cap		(13,012	)		40,570		(30,734	)		(11,106	)
Operating Expenses		123,471			106,732		254,887			232,601
Interest Expense		85,945			74,955		170,841			147,610
Depreciation and Amortization		40,080			40,080		80,161			80,161

Net Income	$	53,067		$	43,390	$	97,883		$	127,674

ACRT expects to sell its investment in this property in 2006.

8.	INVESTMENT IN PARAMUS PROPERTY

On May 21, 2003, ACRT acquired, through Paramus ACRT, LLC (a wholly owned subsidiary), a 40% undivided interest in a 154,768 square foot retail and warehouse property located in Paramus, New Jersey for $2,400,000 cash plus the assumption of its pro rata share of the debt and acquisition fees. The property is leased to Baby’s R Us, Levitz Furniture and Wade Odell Wade Padded Van Services. ACRT has received $133,250 and $124,300 in distributions for the six months ended June 30, 2006 and 2005, respectively.

The following is the summary balance sheet information of the Paramus ACRT’s 40% undivided interest as of June 30, 2006 and December 31, 2005:


	June 30, 2006		December 31, 2005
Total Assets	$	8,060,904	$	8,164,397
Total Liabilities		5,730,244		5,765,331

ACRT’s Investment		2,633,421		2,659,051

The following is the summary income statement information of the Paramus ACRT’s 40% undivided interest for the three and six months ended June 30, 2006 and 2005:


	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Rental Revenue	$	247,158	$	244,035	$	491,976	$	488,069
Operating Expenses		39,192		36,844		75,306		72,078
Interest Expense		108,253		109,470		215,646		218,044
Depreciation and Amortization		45,102		45,102		90,204		90,204

Net Income	$	54,611	$	52,619	$	110,820	$	107,743

ACRT’s Equity in Earnings	$	53,012	$	51,020	$	107,621	$	104,544

ACRT expects to sell its investment in this property in 2006.

ARC CORPORATE REALTY TRUST, INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006 AND 2005

(UNAUDITED)

9.	INVESTMENT IN WILLOW GROVE

On October 3, 2003, ACRT, through Willow Grove ACRT, LLC (“Willow Grove ACRT”), a wholly owned subsidiary of ACRT, entered into an operating agreement with Willow Grove, LLC. Willow Grove ACRT has a 25% member interest in Willow Grove, LLC. Additionally, Willow Grove ACRT will fund up to a maximum of $550,000 in the form of a loan (the “Willow Grove Loan”), to Willow Grove, LLC at an interest rate of 12% per annum payable monthly. The Willow Grove Loan was to mature on April 1, 2006. The purpose of the Willow Grove Loan was to fund pre-construction costs in connection with the development of 12 acres of land located in Willow Grove, Pennsylvania. The Willow Grove Loan was secured by a second mortgage on 42 acres of land held by an affiliate of the managing member of Willow Grove, LLC. Willow Grove ACRT was not required to make any capital contributions beyond the maximum amount of the Willow Grove Loan.

On October 5, 2004, the operating agreement with Willow Grove, LLC was amended to increase the maximum loan amount to $650,000. On October 21, 2004, the operating agreement with Willow Grove, LLC was further amended to increase the maximum loan amount to $800,000. All other terms and conditions set forth in the original agreement remain unchanged.

On January 20, 2005, the board of directors agreed to amend the Willow Grove agreement to accept repayment of the outstanding loan balance of $800,000 plus all outstanding and accrued interest within ninety days in lieu of waiting the remaining fifteen months outstanding, as stated in the original agreement. After the repayment, ACRT’s investment in Willow Grove was zero. Additionally, ACRT agreed to sell its member interest in Willow Grove to the other Willow Grove member and an affiliate of the Advisor for net proceeds and a gain of $400,000. This transaction was completed on February 15, 2005.

10.

INVESTMENT IN ARC INTERNATIONAL FUND II, LP

On March 31, 2004, ACRT acquired an 11.2% limited partnership interest in ARC International Fund II, LP (“ARC International”) for $691,000 plus the assumption of its prorata share of the debt and acquisition fees. ACRT does not have any additional funding obligations to ARC International. ARC International owns a property located in Woodcliff Lake, New Jersey, which is leased to Great Atlantic and Pacific Tea Co.

ACRT’s investment in ARC International includes the acquisition fee of $62,655, paid to the Advisor per the Advisory Agreement, which is not reflected in the underlying equity of ARC International. This amount is being amortized over the estimated useful life of the underlying asset, which is 39 years.

ACRT will earn a 9.0% return on its investment in ARC International in the form of distributions. ACRT has received $0 distributions for the six months ended June 30, 2006 and 2005.

The following is the summary balance sheet information of ARC International as of June 30, 2006 and December 31, 2005:


	June 30, 2006		December 31, 2005
Total Assets	$	20,066,746	$	20,011,100
Total Liabilities		12,025,573		12,143,461

ACRT’s Investment		789,985		760,487

The following is the summary income statement information of ARC International for the three and six months ended June 30, 2006 and 2005:


	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Rental Revenue	$	455,129	$	449,303	$	898,465	$	898,232
Operating Expenses		24,164		23,412		50,083		46,845
Interest Expense		209,717		213,722		420,462		427,020
Depreciation and Amortization		78,686		78,685		157,373		157,373

Net Income	$	142,562	$	133,484	$	270,547	$	266,994

ACRT’s Equity in Earnings	$	15,565	$	14,548	$	29,497	$	29,099

ARC CORPORATE REALTY TRUST, INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006 AND 2005

(UNAUDITED)

11.

NOTE RECEIVABLE -TENANTS

ACRT had a note receivable from a tenant totaling $0 and $322,923 at June 30, 2006 and December 31, 2005, respectively. On June 15, 2006, the note receivable and the property located in Overland Park, Kansas, leased to Borders Books and Bed, Bath and Beyond, was sold for $13,600,000 to an unrelated third party (Note 3).

12.

RELATED PARTY TRANSACTIONS

The Advisor performs services for ACRT pursuant to the terms of the Advisory Agreement. Such services include serving as ACRT’s investment and financial advisor and providing consultation, analysis and supervision of ACRT’s activities in acquiring, financing, managing and disposing of properties. The Advisor also performs and supervises the various administrative duties of ACRT such as maintaining the books and records. The Chairman and President of ACRT is an affiliate of the Advisor.

For the six months ended June 30, 2006 and 2005, ACRT incurred the following fees and reimbursements payable to the Advisor:

Acquisition Fee - The acquisition fee is equal to 3% of the purchase price of the investment. No acquisition fees were incurred in 2006 or 2005.

Financing Fee –The financing fee is generally equal to .5% of the principal amount financed. No financing fees were incurred in 2006 or 2005.

Asset Management Fees - Asset management fees of $329,756 and $349,238 for the six months ended June 30, 2006 and 2005, respectively, were incurred and are payable to the Advisor. The annual asset management fee is equal to 1% of the first

$36,049,000 of ACRT’s average invested assets (the base amount, as defined in the Advisory Agreement). One half of this fee, the subordinated asset management fee, is withheld by ACRT until the shareholders have been paid the Preferred Return (as defined in the Advisory Agreement). For assets in excess of the first $36,049,000, the asset management fee is equal to 0.5% of

the ACRT’s average invested assets. Pursuant to the Advisory Agreement, beginning in 1999, average invested assets were subject to periodic valuation performed by a third party (as defined in the Advisory Agreement). It was agreed by the Advisor, that the 2004 valuation, which would have resulted in an increase in asset management fees, would not be used to calculate the asset management fees. Accordingly, asset management fees were calculated using the 2003 valuation.

Unpaid asset management fees included in due to related parties on the consolidated balance sheets were $90,122 and $45,061 at June 30, 2006 and December 31, 2005, respectively.

Disposition Fee – On May 23, 2006, ACRT incurred a disposition fee in the amount of $148,020 and $203,796 on the sale of the Fort Washington, Pennsylvania investment and the sale of the Overland Park, Kansas property. On August 10, 2005, ACRT incurred a disposition fee in the amount of $116,015 on the sale of the Philadelphia, Pennsylvania property leased to Barnes and Noble. The disposition fee on this sale was equal to 1.5% of the contract sales price. The disposition fee is generally equal to 3% of the contract sales price of each portfolio property, provided that 50% of the disposition fee will be paid only if the property is sold at a gain, pursuant to the Advisory Agreement.

Incentive Fee – ACRT has also agreed to pay the Advisor incentive compensation in the amount of 20% of amounts distributed to our stockholders after our stockholders have received distributions equal to the amount of their initial investment in shares of Common Stock plus a preferred return of 8%.

Stock Ownership - As of June 30, 2006, principals of the Advisor owned 44,760 shares of Class A Common Stock, which represents approximately 1.4% of the outstanding shares of Class A Common Stock of ACRT. The total amounts purchased, net of commissions, were $414,030.

Miscellaneous - ACRT agreed to reimburse the Advisor $1,250 per month for various legal functions connected with stock transfers and filings of ACRT. The reimbursements were discontinued in May 2005. These reimbursements totaled $6,250 for the six months ended 2005, and are included in professional expenses on the accompanying consolidated statements of income.

ARC CORPORATE REALTY TRUST, INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006 AND 2005

(UNAUDITED)

13.

LEASES

ACRT is entitled to certain rentals relating to the properties it owns. In addition to the base rent, the tenants are generally required to pay all operating costs related to the properties. Future minimum annual base rentals due under the non-cancelable operating leases in effect as of June 30, 2006, are as follows:


2006	$	2,189,590
2007		4,416,164
2008		4,282,843
2009		4,187,626
2010		4,077,256
Thereafter		18,178,659

	$	37,332,138

ACRT seeks to reduce its operating and leasing risks through diversification achieved by geographic distribution of its properties, tenant industry diversification, avoiding dependency on a single property and the creditworthiness of its tenants. For the six months ended June 30, 2006 and 2005, the following tenants accounted for greater than 10% of rental revenues:


	2006		2005
Sports Authority	16.1	%	13.8	%
Bed, Bath and Beyond	11.3		11.1
Barnes and Noble	—		11.5
Office Max	10.0		8.6
CaroMont Medical	11.5		10.0

14.

MORTGAGES PAYABLE

ACRT had fixed rate mortgages totaling $9,739,716 and $18,179,843 at June 30, 2006 and at December 31, 2005, respectively. These mortgages are secured by the respective properties with a total net book value of $12,192,864 and $21,358,469 at June 30, 2006 and at December 31, 2005, respectively. The fixed rate mortgages have interest rates ranging from 6.86% to 8.65% and have maturities at various dates through July 1, 2017.

On January 6, 2006, the fixed rate mortgage on the San Antonio, Texas property of $1,608,000 matured and was repaid. The repayment was made by drawing down $1,610,000 on ACRT’s existing line of credit.

On March 1, 2006, the fixed rate mortgage on the Overland Park, Kansas property of $6,627,000 matured and was extended for 120 days. On April 11, 2006, the loan on the Overland Park, Kansas property of $6,627,000 was repaid. The repayment was made by securing a $1,600,000 short term loan on the property and by drawing down $5,065,000 on ACRT’s line of credit. The $1,600,000 short term loan on the property and the $5,065,000 draw down on ACRT’s line of credit were repaid on the sale of the Overland Park, Kansas property.

ACRT had variable rate mortgages totaling $8,076,284 and $8,215,184 at June 30, 2006 and December 31, 2005, respectively. The mortgages carry variable interest rates of 206 and 225 basis points over LIBOR (4.62% at June 30, 2006). The variable rate mortgages are secured by two properties with a combined net book value of $ 9,106,229 and $9,171,429 at June 30, 2006 and December 31, 2005, respectively.

ARC CORPORATE REALTY TRUST, INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006 AND 2005

(UNAUDITED)

At June 30, 2006, the payment of principal under the fixed and variable rate mortgages for the next five years and thereafter is as follows:


	Scheduled Amortization		Balloon Payments		Total
2006	$	322,521		—	$	322,521
2007		597,818	$	3,897,539		4,495,357
2008		576,742		—		576,742
2009		453,255		3,747,919		4,201,174
2010		479,848		—		479,848
Thereafter		1,081,129		6,659,229		7,740,358

	$	3,511,313	$	14,304,687	$	17,816,000

15.

DERIVATIVE INSTRUMENTS

On January 15, 2003, in connection with ACRT’s variable rate mortgage totaling $4,414,500 (Note 14), ACRT entered into an interest rate cap agreement with a third party. The cap is coterminous with the mortgage loan and its notional amount equals the outstanding principal balance on the mortgage loan. The cap agreement was entered into as part of ACRT’s management of interest rate exposure and effectively limits the amount of interest rate risk that may be taken on its variable rate mortgage. In accordance with SFAS No. 133, the interest rate cap is reflected at its fair value. The carrying amount of the interest rate cap, included in prepaid expenses and other assets, net was reported as an asset of $15,356 and $6,786, as of June 30, 2006 and December 31, 2005, respectively, based on information supplied by the counter party to the cap contract, and the change in the fair value of the interest rate cap of $8,570 and ($6,151) has been recorded as a gain (loss) on interest rate cap, net on the accompanying consolidated statements of income (loss) for the six months ended June 30, 2006 and 2005, respectively.

On March 4, 2004, in connection with ACRT’s variable rate mortgage totaling $5,300,000 (Note 14) on the Philadelphia, Pennsylvania property leased to Barnes and Noble, ACRT entered into an interest rate cap agreement and an interest rate swap agreement with a third party. The cap was coterminous with the mortgage loan. The cap had a notional amount of $2,650,000. In accordance with SFAS No. 133, the interest rate cap was reflected at its fair value. In connection with the sale of the Philadelphia, Pennsylvania property on August 10, 2005 (Note 3), the interest rate cap was written off.

16.

LINES OF CREDIT

On April 1, 2003, ACRT renewed and converted its two credit facility agreements into a single credit facility. The new credit facility agreement totals $5,500,000 and replaces the previous credit facility agreements, which had total amounts available of $6,500,000. Interest is payable at LIBOR plus 2% on the new credit facility and ACRT is also required to pay a commitment fee equal to 0.5% per annum on the unused portion of the commitment. The new facility is for a period of three years and amounts available are reduced by $125,000 per quarter from its inception.

On April 30, 2004, with the sale of the Memphis, Tennessee property leased to Federal Express Corp., the credit facility was reduced by $1,652,387 which represented the collateral value of this property in the loan agreement. In addition, the quarterly reduction in the amount available under the loan was reduced from $125,000 to $84,150.

On April 1, 2006, this credit facility matured and was extended on a temporary basis for 60 days under the existing terms. ACRT has determined that with the board of directors decision to adopt a Plan of Liquidation, this credit facilty will not be renewed.

On June 17, 2004, ACRT established an additional secured credit facility, which provides for additional borrowing of up to $5,500,000 and decreases by $100,000 per annum. This credit facility bears interest at LIBOR plus 225 basis points and matures in five years. ACRT is required to pay an annual commitment fee equal to 0.5% on the unused portion of the facility. On April 11, 2006 $5,065,000 was drawn down on this credit faclilty and used to pay off the Overland Park, Kansas mortgage. On June 15, 2006, the property located in Overland Park, Kansas was sold and the credit facility was paid off. The total amount available under this facility at June 30, 2006 was $5,300,000.

ARC CORPORATE REALTY TRUST, INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006 AND 2005

(UNAUDITED)

17.

STOCK OPTION PLANS

ACRT established, with the approval of the Shareholders, the 1997 Stock Option Plan (the “Plan”) for the purposes of encouraging and enabling ACRT’s officers, employees, directors and advisors to acquire a proprietary interest in ACRT. The Plan provides for administration by the Compensation Committee (the “Committee”) of the Board of Directors. A maximum of seven hundred and fifty thousand Class A common shares have been reserved under the Plan. The Plan authorized (i) the grant of stock options that qualify as Incentive stock options (“ISO”) under section 422 of the Code (ii) the grant of stock options that do not so qualify and (iii) grants of shares upon the attainment of performance goals or subject to restrictions.

Options granted under the Plan may be subject to various restrictions on exercise including vesting provisions and a requirement that the Class A common shares be listed on a national exchange or quoted on NASDAQ and/or the requirement that the options when exercised will not constitute an amount greater than a specified percentage of ACRT’s issued and outstanding stock. On January 21, 1998, ACRT, pursuant to the Plan previously approved by the shareholders, granted 25,000 nonqualified stock options to purchase Class A common stock to the five non-employee directors and 650,000 nonqualified stock options to purchase Class A common stock to the advisor at an exercise price of $8.50. In January 2000 and October 2003, ACRT granted each of its three additional non-employee directors an option under the Option Plan to purchase 5,000 shares of Class A common stock at an exercise price of $8.50. Each of these will vest as to 25% of such option for each full year that the non-employee Director has previously served and continues to serve as a Director of ACRT. In 1998 and 2003, three non-employee directors holding a total of 15,000 stock options retired with their stock options unexercised. These stock options were retired and are available to be re-granted. The options are not exercisable unless and until both of the following requirements are met: (a) either (i) the Class A common stock is listed for trading on any national securities exchange or quoted on any tier of the NASDAQ Stock Market or (ii) the occurrence of a Change of Control of ACRT, as defined in the Plan, the sale of all or substantially all of ACRT’s assets or adoption of a plan of liquidation by ACRT and (b) immediately prior to such exercise the number of shares of Class A common stock issued and outstanding, as a result of the exercise of the options granted under the plan, shall not exceed fifteen percent of the issued and outstanding shares of Class A common stock. At June 30, 2006, no stock options under the Plan have been exercised, all but 2,500 of the stock options granted have been vested and 75,000 are available for grant. Amendments to the Plan were recommended by the Board of Directors and approved by the shareholders of ACRT at the annual meeting held in May 2004. The Plan now allows for grants of options until March 31, 2013. In addition, the current term of outstanding stock options awarded pursuant to the Plan were extended from 10 years to 15 years and all future stock options awarded pursuant to the Plan will have a term that ends in 2013. The restrictions applicable to the exercise of the options will be removed effective April 1, 2008 or upon the occurrence of one of the events noted above.

Other Awards under the Option Plan. In addition to the incentive and non-qualified stock options available for grant under the Option Plan, the compensation committee may also award:

•

stock appreciation rights;

•

restricted stock awards;

•

phantom stock unit awards; and

•

performance share units.

There are options outstanding as of June 30, 2006, and December 31, 2005 for 675,000 shares at a weighted exercise price of $8.50.

The following are disclosures for common stock options outstanding at June 30, 2006:


Options Outstanding				Exercisable Options
Number	Exercise Price		Remaining Life (Years)	Number	Exercise Price
660,000	$	8.50	2.00	660,000	$	8.50
10,000		8.50	4.00	10,000		8.50
5,000		8.50	7.80	2,500		8.50

675,000	$	8.50		672,500	$	8.50

ARC CORPORATE REALTY TRUST, INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006 AND 2005

(UNAUDITED)

18.

CREDIT EVENTS

On October 11, 2005, Levitz Furniture, one of the tenants in the Paramus, New Jersey property, declared bankruptcy under Chapter 11 of the U.S. Bankruptcy code. At the time of declaration, October rent totaling $99,572 was unpaid. All subsequent months have been paid. On June 16, 2006, Levitz paid all outstanding rents related to October 2005 and is now current on all rent.

On March 4, 2006, OfficeMax, one of the tenants in the Lilburn, Georgia property, closed its store at this location. OfficeMax is still responsible for all rent payments and all minimum rent payments are current under the lease, which runs through 2016.

19.

CLASS B COMMON STOCK

In 2004, ACRT approved dividends to the holders of Class B common stock for the year ending 2003. The dividends, totaling $118,077, were paid on April 25, 2005. In 2005, ACRT approved dividends to the holders of Class B common stock for the year ending 2004. These dividends, totaling $162,769, were paid on April 25, 2005.

On February 8, 2006, the board of directors declared dividends to common stock shareholders-class B for 2005 totaling $162,770. The payment of these dividends were subject to the receipt of various tax documents due from the class B shareholders, which were not provided in the second quarter of 2006.

20.

LEGAL MATTER

On March 25, 2005, Whitestone Triangle LP (“Whitestone”), a wholly owned subsidiary of ACRT, brought suit against its joint venture partner in the New York, NY property (Note 4) regarding the exercise of a right of first refusal to purchase ACRT’s

interest in the property. On January 5, 2005, Whitestone sent to the joint venture partner a notice of right of first refusal to purchase Whitestone’s interest in the property at a price and other terms as set forth in the notice, subject to an attached form of

contract that required both shareholder and board of director approval. Subsequently, ACRT discovered that the calculation used to allocate capital proceeds in the contemplated sale, prepared by a third party, was incorrectly allocated and as a result

management and the board of directors of ACRT did not approve the terms of the sale. In addition, ACRT believes the joint venture partner, due to their unique insight into the value of the interest as the manager of the property, was aware that the

capital proceeds were incorrectly allocated. The joint venture partner has refused to accept a revised purchase price calculation, which necessitated ACRT bringing suit to halt the sale.

On April 1, 2005, ACRT’s joint venture partner filed a separate lawsuit against Whitestone compelling a sale of ACRT’s interest under the terms of the original right of first refusal.

On October 31, 2005, ACRT’s request for summary judgment against its joint venture partner regarding the joint venture partner’s exercise of a right of first refusal to purchase ACRT’s interest in the New York, NY property was denied. Summary judgment was found in favor of its joint venture partner in enforcement of the right of first refusal to purchase ACRT’s interest as now written. ACRT plans to appeal this ruling. ACRT’s management does not believe that the ruling will have a material adverse impact on ACRT’s consolidated financial position or results of operations.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Certain information included or incorporated by reference in this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act, and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “project,” or the negative of these words or other similar words or terms. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in economic conditions generally and the real estate market specifically, adverse developments with respect to our tenants, legislative/regulatory changes including changes to laws governing the taxation of REITs, availability of debt and equity capital, interest rates, competition, supply and demand for properties in our current and proposed market areas and policies and guidelines applicable to REITs. These risks and uncertainties should be considered in evaluating any forward-looking statements contained in this Form 10-Q.

The following should be read in conjunction with the unaudited consolidated financial statements of ACRT including the respective notes thereto, all of which are included in this Form 10-Q.

General

ACRT was formed as a Maryland corporation in June 1993 and is an externally advised real estate investment trust (“REIT”) under the Internal Revenue Code of 1986. It has operated as a REIT since its inception. ACRT is managed by its advisor, ARC Capital Advisors, L.P., an affiliate of Robert Ambrosi, ACRT’s Chairman, President and a director. The advisor performs services for ACRT pursuant to the terms of an advisory agreement. Such services include serving as ACRT’s investment and financial advisor and providing consultation, analysis and supervision of ACRT’s activities in acquiring, financing, managing and disposing of properties. The advisor also performs and supervises the various administrative duties of ACRT, such as maintaining its books and records.

ACRT was formed to purchase geographically diverse credit lease properties, which are general purpose retail, office and industrial properties. Each property is 100% leased to one or more creditworthy tenants under a long-term lease that generally requires tenants to pay most or all of the operating costs of the property, including real estate taxes and insurance.

On June 30, 2005, the Agreement became subject to termination. On November 30, 2005, ACRT entered into a Termination and Release Agreement with the Purchaser. The Termination and Release Agreement called for the payment of $150,000 to ACRT from the deposit escrow and an additional payment to ACRT of $37,450 as reimbursement of survey and other costs related to the Agreement. In exchange ACRT released the Purchaser from any further obligations under the Agreement.

In addition to the above, during 2005, ACRT, pursuant to various rights of first refusal and purchase agreements, entered into various contracts to sell investments not included in the above Agreement. The purchasers of these properties include joint venture partners, minority interest holders, tenants in common and affiliates of the Advisor. The investments included in these various contracts are:

New York, NY (partnership interest)

Fort Washington, PA (partnership interest)

Paramus, NJ (partnership interest)

ACRT anticipates that the sale of these investments will close in 2006. Based on the current sales prices, ACRT anticipates that the above three investments will be sold for amounts in excess of their carrying amounts and, therefore, will result in a gain for financial reporting purposes.

On January 25, 2005, the tenant in the Rochelle Park, NJ property, who had filed suit against ACRT, signed a stipulation of settlement agreeing to dismiss the suit against ACRT. As part of the settlement, the tenant entered into a contract to purchase ACRT’s 51% tenant in common interest and the remaining 49% tenant in common interest not owned by ACRT for $19,500,000. This contract was subsequently terminated.

ACRT is again in negotiations with the tenant on purchasing the property. However, at this time ACRT and the tenant have not been able to agree on a purchase price.

On February 8, 2006, the board of directors approved the adoption of a Plan of Liquidation and Dissolution (the “Plan”). The Plan is subject to the approval of ACRT’s Common stockholders, by two-thirds vote. ACRT intends to sell its real estate properties on an orderly basis, to pay or provide for its liabilities and to distribute its remaining cash to its shareholders.

On June 15, 2006, the property located in Overland Park, Kansas, which is partially owned by ACRT, leased to Borders Books and Bed, Bath and Beyond, was sold for $13,600,000 to an unrelated third party, which resulted in a gain for financial reporting purposes of $6,137,479.

As of June 30, 2006, ACRT owned or had interests in 18 real estate properties encompassing 927,495 rentable square feet.

Critical Accounting Issues

ACRT’s accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates that effect the amounts of revenues, expenses, assets and liabilities reported. The following are critical accounting policies which are important to the understanding of ACRT’s financial condition and results of operations and which require some of management’s most difficult, subjective and complex judgments. The accounting for these matters involves the making of estimates based on current facts, circumstances and assumptions which could change in a manner that would materially affect management’s future estimates with respect to such matters. Accordingly, future reported financial conditions and results could differ materially from the current financial condition and results of operations reported based on management’s current estimates.

Revenue Recognition. Rental revenue from tenant operating leases which provide for scheduled rental increases are recognized in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 13, on a straight-line basis over the term of the respective leases.

Gains on sales of real estate are recognized pursuant to the provisions of SFAS No. 66, “Accounting for Sales of Real Estate.” The specific timing of the sale is measured against various criteria in SFAS No. 66 related to the terms of the transactions and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria are not met, the gain is deferred and the finance, installment or cost recovery method, as appropriate, is applied until the sales criteria are met.

Rent Receivable. ACRT continuously monitors collections from its tenants and makes a provision for estimated losses based upon historical experience and any specific tenant collection issues that ACRT has identified.

Purchase Accounting for the Acquisition of Real Estate. In accordance with SFAS No. 141, commencing with properties acquired after June 30, 2002, the fair value of real estate acquired is allocated to the acquired tangible assets, consisting of land and building, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, based in each case on their fair values.

The fair value of the tangible assets of an acquired property (which includes land and building) is determined by valuing the property as if it were vacant, and the “as-if vacant” value is then allocated to land and building based on management’s determination of relative fair values of these assets. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease up periods, considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenues during expected lease up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions.

The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (1) the purchase price paid for a property over (2) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s lease. The value of in-place leases and customer relationships are amortized to expense over the remaining non-cancelable periods of the respective leases.

Industry Segments. ACRT currently operates in one industry segment - investments in credit lease properties.

Impairment. ACRT continually assesses the recoverability of its properties by determining whether the costs can be recovered through projected undiscounted cash flows. The amount of impairment, if any, is measured by comparing the carrying amounts to the fair values of such properties. Based on ACRT’s analysis, management does not believe that any of its properties are impaired. SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets,” updates and clarifies the accounting and reporting for the impairment of assets held in use and to be disposed of. The Statement, among other things, requires ACRT to classify the operations and cash flow of properties to be disposed of as discontinued operations.

For the six months ended June 30, 2006 and 2005, ACRT incurred an impairment charge of $0 and $275,000, respectively. The impairment charge in 2005 was on the Philadelphia, Pennsylvania property leased to Barnes and Noble, which is included in discontinued operations.

ACRT accounts for properties held for sale in accordance with SFAS No. 144. SFAS No. 144 requires that the assets and liabilities of properties that meet various criteria in SFAS No. 144 be presented separately in the balance sheet with assets and liabilities being separately stated. The operating results of these properties are reflected as discontinued operations in the statement of income (loss).

Liquidity and Capital Resources

ACRT’s main source of capital for growth has been the private placement equity market, selective secured indebtedness, its secured credit facility and undistributed funds from operations. ACRT expects to continue to have access to and use these sources in the future; however, there are factors that may have a material adverse effect on ACRT’s access to capital sources. ACRT’s ability to incur additional debt to fund acquisitions is dependent upon its existing leverage, the value of the assets ACRT is attempting to leverage and general economic conditions, which may be outside management’s control.

ACRT’s $5.5 million variable rate secured line-of-credit facility, which was scheduled to expire in April 2006, is available to finance acquisitions on a temporary basis until selective secured indebtedness can be obtained and to meet any short-term capital requirements. Interest is payable at the London Interbank Offered Rate (“LIBOR”) plus 2% on the facility and ACRT is also required to pay a commitment fee equal to 0.5% per year on the unused portion of the commitment. On April 30, 2004, with the sale of the Memphis, Tennesse property leased to Federal Express Corp., the credit facility was reduced by $1,652,387 which represented the collateral value of the Memphis property in the loan agreement. In addition, the quarterly reduction in the amount available under the loan was reduced from $125,000 to $84,150.

Since 1993, ACRT has raised, through the issuance of shares of Class A common stock, aggregate capital of approximately $30.6 million, and through the issuance of shares of Class B common stock, aggregate capital of approximately $1.56 million. The capital raised was used primarily to acquire properties and to retire indebtedness.

During 2006, ACRT has not sold any additional Class A or Class B common shares. As a result of the Plan of Liquidation it is unlikely that ACRT will raise any additional capital through the issuance of common stock. Furthermore, liquidity will be primarily based upon the sales of existing properties.

See the comments under the General section regarding the sale of certain assets.

Dividends. On February 8, 2006 the board of directors approved the adoption of a Plan of Liquidation and Dissolution (the “Plan”). The Plan is subject to the approval of ACRT’s Common stockholders, by two-thirds vote. ACRT intends to sell its real estate properties on an orderly basis, to pay or provide for its liabilities and to distribute its remaining cash to its shareholders.

Pursuant to the Plan, ACRT plans to stop future regular quarterly dividend payments.

Dividends paid to common shareholders were $763,577 and $1,808,000 for the six months ended June 30, 2006 and 2005, respectively.

In the first quarter of 2006, ACRT paid dividends of $763,577 of which Net Cash Flow from Operations funded $580,112 and the remainder of $183,465 was funded primarily from distributions from unconsolidated subsidiaries and undivided interests of $244,700. For the six months ended June 30, 2005, Net Cash Flow from Operations funded $1,112,831 of the total dividends paid of $1,808,000 with the remainder of $695,169 being funded primarily from distributions from unconsolidated subsidiaries and undivided interests of $675,000 and cash on hand and borrowing from ACRT’s lines of credit.

ACRT believes that cash flow from operations and distributions from unconsolidated subsidiaries will provide a portion of the capital to fund operating and administrative expenses and debt service. In addition, ACRT anticipates that cash on hand and borrowings under its secured facilities will assist in providing funds for these expenses and costs. Upon the approval of the shareholders of the Plan of Liquidation, dividends will only be paid from the proceeds of the sale of properties or upon final liquidation, as determined by the board of directors. Cash flows from operations as reported in the consolidated statements of cash flows were $1,021,254 and $1,112,831 for the six months ended June 30, 2006 and 2005, respectively.

Net cash provided by investing activities was $16,061,400 and $1,898,544 for the six months ended June 30, 2006 and 2005, respectively. Net cash provided by investing activities is related primarily to sale of properties or investments and repayments of notes receivable.

Net cash used in financing activities was $12,807,848 and $3,118,999 for the six months ended June 30, 2006 and 2005, respectively. Net cash used in financing activities is primarily dividends paid, distributions to minority interest owners and debt service payments including paydown of a mortgage loan and the line of credit.

Debt Service Requirements

ACRT’s principal liquidity needs are payments of interest and principal on outstanding indebtedness. As of June 30, 2006, a total of five of ACRT’s seven consolidated properties were subject to outstanding mortgages which had an aggregate principal amount outstanding of $17.8 million, including $8.1 million in variable interest rate mortgages. As of June 30, 2006, the weighted averaged interest rate on ACRT’s outstanding mortgages was 7.83%. The scheduled principal payments as of June 30, 2006 for the next five years are as follows:


2006	$	322,521
2007		597,818
2008		576,742
2009		453,255
2010		479,848

Balloon payment amounts, due in the next five years, excluding the secured credit facility, are as follows:


2007	$	3,897,539
2009		3,747,919

The interest rates on ACRT’s outstanding indebtedness range from 6.7% (variable rate at June 30, 2006) to 8.65%. The ability of ACRT to make its balloon payments will depend upon its ability to refinance the mortgages related thereto, sell the related property, have amounts available under its secured credit facility or obtain access to other sources of capital. The ability of ACRT to accomplish this will be affected by the availability and cost of mortgage debt at that time, ACRT’s equity in the mortgaged properties, the financial condition of ACRT, the operating history of the mortgaged properties, the then current tax laws and general national, regional and local economic conditions.

ACRT expects to continue to use property specific, non-recourse mortgages as it believes that by properly matching a debt obligation, including the balloon maturity risk, with a lease expiration, ACRT’s cash-on-cash returns increase and the exposure to residual valuation risk is reduced.

ACRT has also purchased an interest rate cap in connection with its variable rate mortgage on the Sacramento, California property. The Sacramento interest rate cap is coterminous with the mortgage and its notional amount equals the outstanding balance on the mortgage.

Lease Obligations

Since ACRT’s tenants bear all or substantially all of the cost of property operations and maintenance and repairs, ACRT does not anticipate significant need for cash for these costs. For two of the thirteen consolidated properties, ACRT has a certain level of property operating expense responsibility. To the extent there is a vacancy in a property, ACRT would be obligated to pay for all operating expenses, including real estate taxes and insurance.

Results of Operations for the Three Months Ended June 30, 2006 and 2005


Selected Income Statement Data	2006			2005		Favorable (Unfavorable) 2006-2005
	(Dollars in thousands)
Rental revenues and reimbursements	$	1,081		$	1,259	$	(178	)
Interest income		46			1		45
Interest expense		378			321		(57	)
Depreciation and amortization expense		187			196		9
Management fees-affiliate		164			175		11
Real estate taxes		116			143		27
Property operating expenses		37			36		(1	)
General and administrative taxes		26			19		(7	)
Stock based compensation		189			112		(77	)
Professional expenses		191			149		(42	)
(Gain) Loss on interest rate cap, net		(6	)		9		15
Other expenses		2			3		1
Minority interest in earnings of subsidiaries		17			15		(2	)
Equity in income of unconsolidated subsidiaries and undivided interests		258			244		14
Gain on sale of unconsolidated subsidiaries and undivided interests		1,546			—		1,546

Income from discontinued operations		2,947			190		2,757
Net income		4,577			516		4,061

Rental revenues decreased by $178,000 which is primarily attributable to $160,000 of rent in 2005 on the Montgomeryville property, and to lower real estate tax reimbursements in 2006 on the Wichita, Kansas property. The decrease in real estate tax reimbursements is offset by a similar decrease in real estate tax expense.

Interest income increased by $45,000 due mainly to interest income from the loan from ACRT’s line of credit to the Overland Park, Kansas property.

Interest expense increased by $57,000 primarily due to higher interest rates in 2006 and a slightly higher average outstanding loan balance on the line of credit.

Depreciation and amortization expense decreased by $9,000 due to the slightly lower amortization of deferred financing costs in 2006.

Management fees –affiliate decreased by $11,000 due to having less properties in 2006 due to sales in 2006 and the second half of 2005.

Real estate taxes decreased by $27,000 due to lower real estate taxes on the Wichita Kansas property (see rental revenues).

General expense increased by $7,000 due primarily to higher D&O insurance.

Stock based compensation increased $77,000 due to changes in the estimated fair value of ACRT’s common stock from $12.00 to $13.50 per share in 2006.

Professional expense increased by $42,000 due to increased legal and accounting fees associated with the proxy preparation and lawsuits.

Equity in income of unconsolidated subsidiaries and undivided interests increased by $14,000 primarily due to slightly higher income from the Rochelle investment offset due primarily to gains on the value of the interest rate cap and swap offset by lower income from the Fort Washington, Pennsylvania investment due to its sale in May 2006.

Gain on sale of unconsolidated subsidiaries and undivided interests increased by $1,546,000 due to the sale of the Fort Washington, Pennsylvania investment.

Income from discontinued operations increased by $2,757,000 due primarily to the sale of the Overland Park, Kansas property.

Results of Operations for the Six Months Ended June 30, 2006 and 2005


Selected Income Statement Data	2006			2005		Favorable (Unfavorable) 2006-2005
	(Dollars in thousands)
Rental revenues and reimbursement	$	2,159		$	2,364	$	(205	)
Interest income		49			22		27
Interest Expense		647			639		(8	)
Depreciation and amortization expense		383			393		10
Asset management fees-affiliate		330			349		19
Real estate taxes		232			284		52
Property operating expenses		73			81		8
General and administrative expenses		64			69		5
Stock based compensation		886			224		(662	)
Professional expenses		290			258		(32	)
(Gain) on interest rate cap, net		(8	)		6		14
Other expenses		5			11		6
Minority interest in earnings of subsidiaries		31			29		(2	)
Equity in income of unconsolidated subsidiaries and undivided interest		522			549		(27	)
Gain on sale of investment in unconsolidated subsidiaries		1,546			400		1,146
Income (loss) from discontinued operations		3,058			119		2,939
Net (loss) income		4,401			1,111		3,290

Rental revenues decreased by $205,000 due to $160,000 of rent in 2005 on the Montgomeryville property and to lower real estate tax reimbursements on the Wichita, Kansas property. The decrease in real estate tax reimbursements is offset by a similar decrease in real estate tax expense.

Interest income increased by $27,000 due primarily to interest income from the loan from ACRT’s line of credit to the Overland Park, Kansas property.

Interest expense increased by $8,000 primarily due to the higher interest rates.

Depreciation and amortization expense decreased by $10,000 due to the slightly lower amortization of deferred financing costs in 2006.

Management fees –affiliate decreased by $19,000 due to having less properties in 2006 due to sales in 2006 and the second half of 2005.

Real estate taxes decreased by $52,000 to lower real estate taxes on the Wichita Kansas property (see rental revenues).

Stock based compensation increased by $662,000 due to changes in the estimated fair value of ACRT’s common stock from $12.00 to $13.50 per share in 2006.

Professional expenses increased by $32,000 due to increased legal and accounting fees associated with the proxy preparation and lawsuits.

Equity in income of unconsolidated subsidiaries and undivided interests decreased by $27,000 primarily due to lower income on the Rochelle Park investment due to higher interest expense and legal expense and by lower income from the Fort Washington, Pennsylvania investment due to its sale in May 2006.

Gain on sale of investment in unconsolidated subsidiaries was $1,546,000 in 2006 from the sale of the Fort Washington, Pennsylvania investment and $400,000 in 2005 from the sale of the Willow Grove, Pennsylvania investment.

Income from discontinued operations increased by $2,939,000 due primarily to the gain on the sale of the Overland Park, Kansas property.

Environmental Matters

Based upon management’s ongoing review of its properties, management is not aware of any environmental conditions with respect to any of ACRT’s properties, which would be reasonably likely to have a material adverse effect on ACRT. There can be no assurance, however, that the discovery of environmental conditions which were previously unknown, changes in law, the conduct of tenants or activities relating to properties in the vicinity of ACRT’s properties, will not expose ACRT to material liability in the future. Changes in law increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures or may otherwise adversely affect the operations of ACRT’s tenants, which would adversely affect ACRT’s consolidated financial condition and results of operations.

Off-Balance Sheet Arrangements

Unconsolidated Real Estate Joint Ventures and Undivided Interests

ACRT has investments in various real estate joint ventures with varying structures. These investments include ACRT’s non-controlling interests in Triangle Plaza II, LLC, Fort Washington Fitness, L.P., Levittown ARC, LP, Willow Grove ACRT, LLC and ARC International Fund II, LP and its undivided interests in the Rochelle Park property and the Paramus property. See Item 1 Notes 4 to 10 of Notes to Consolidated Financial Statements (unaudited) for information on these investments.

The properties owned by the joint ventures and the undivided interests are financed with individual non-recourse mortgage loans. Non-recourse mortgage debt is generally defined as debt whereby the lenders’ sole recourse with respect to borrower defaults is limited to the value of the property collateralized by the mortgage. The lender generally does not have recourse against any other assets owned by the borrower or any of the members of the borrower, except for certain specified expectations listed in the particular loan documents. These exceptions generally relate to limited circumstances including breaches of material representations. ACRT invests in joint ventures with third parties to increase portfolio diversification, reduce the amount of equity invested in any one property and to increase returns on equity due to the realization of advisory fees. See the footnotes to the consolidated financial statements referenced above for summary balance sheet and income statement data.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures about Market Risk

ACRT’s exposure to market risk relates to its variable rate debt. At June 30, 2006, ACRT had two variable rate mortgages outstanding totaling $8.076 million and $0 outstanding on its variable rate line of credit. The mortgages bear interest at LIBOR plus 206 basis points (7.17% on $4.018 million) and LIBOR plus 225 basis points (7.36% on $4.058 million) and the line of credit bear interest at LIBOR plus 200 basis points. Had the LIBOR rate been 100 basis points higher during the six months ended June 30, 2006, ACRT’s net income would have been reduced by approximately $40,000. ACRT also entered into an interest rate cap agreement on a notional amount equal to the $4.018 million mortgage balance at June 30, 2006, which effectively caps the LIBOR rate at 7.45% per year.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

(a)

Disclosure Controls and Procedures. ACRT’s management, with the participation of ACRT’s Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of ACRT’s disclosure controls and procedures (as such term is defined in Rules 13a-15 (e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, ACRT’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, ACRT’s disclosure controls and procedures are effective.

Internal Control Over Financial Reporting

(b)

Internal Control Over Financial Reporting. There have not been any changes in ACRT’s internal control over financial reporting during the second quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, ACRT’s internal control over financial reporting.

PART II - OTHER INFORMATION


ITEM 1.		Legal Proceedings - On March 25, 2005, Whitestone Triangle LP (“Whitestone”), a wholly owned subsidiary of ACRT, brought suit against the joint venture partner in the New York, NY property (see Note 4 of Notes to Consolidated Financial Statements) regarding the exercise of a right of first refusal to purchase ACRT’s interest in the property. On January 5, 2005, Whitestone sent to the joint venture partner a notice of right of first refusal to purchase Whitestones’s interest in the property at a price and other terms as set forth in the notice, subject to an attached form of contract that required both shareholder and board of director approval. Subsequently, ACRT discovered that the calculation used to allocate capital proceeds in the contemplated sale, prepared by a third party firm, was incorrectly allocated and as a result management and the board of directors of ACRT did not approve the terms of the sale. In addition, ACRT believes the joint venture partner, due to their unique insight into the value of the interest as the manager of the property, was aware that the capital proceeds were incorrectly allocated. The joint venture partner has refused to accept a revised purchase price calculation, which necessitated ACRT bringing suit to halt the sale.

		On April 1, 2005, the joint venture partner filed a separate lawsuit against Whitestone compelling a sale of ACRT’s interest under the terms of the original right of first refusal.

		On October 31, 2005, ACRT’s request for summary judgment against its joint venture partner regarding the joint venture partner’s exercise of a right of first refusal to purchase ACRT’s interest in the New York, NY property was denied. Summary judgment was found in favor of its joint venture partner in enforcement of the right of first refusal to purchase ACRT’s interest as now written. ACRT plans to appeal this ruling. ACRT’s management does not believe that the ruling will have a material adverse impact on ACRT’s consolidated financial position or results of operations.

ITEM 1A.		There has been no material changes in ACRT’s risk factors from those disclosed in our Annual Report on Form 10K/A for the year ended December 31, 2005

ITEM 2.		Changes in Securities, Use of Proceeds and Issuers Purchase of Equity Securities- not applicable

ITEM 3.		Defaults Upon Senior Securities-not applicable

ITEM 4.		Submission of Matters to a Vote of Security Holders- not applicable

ITEM 5.		Other information- not applicable

ITEM 6.		Exhibits and Reports

		31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

		31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

		32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

		32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

SIGNATURES

Pursuant to the requirements 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, on this 14th day of August 2006.


ARC CORPORATE REALTY TRUST, INC.

By:		/s/ Robert J. Ambrosi
Name:		Robert J. Ambrosi
Title:		Chairman and President

By:		/s/ Bruce Nelson
Name:		Bruce Nelson
Title:		Chief Financial Officer

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ARC CORPORATE REALTY TRUST INC 10-Q