e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended from June 30, 2007

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File No. 001-32365

FELDMAN MALL PROPERTIES, INC.

(Exact name of registrant as specified in its charter)


Maryland (State or other jurisdiction of incorporation or organization)		13-4284187 (I.R.S. Employer Identification No.)

1010 Northern Boulevard — Suite 314, Great Neck, New York 11021
(Address of principal executive offices — zip code)

(516) 684-1239
(Registrant’s telephone number, including area code)

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 o No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated Filer þ Non-accelerated Filer o

Indicate by checkmark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).

Yes o No þ

The number of shares outstanding of the registrant’s common stock, $0.01 par value, was 13,047,370 at October 15, 2007.

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)


	June 30, 2007			December 31, 2006
	(Unaudited)
ASSETS:
Investments in real estate, net	$	339,265		$	318,440
Investment in unconsolidated real estate partnerships		36,461			32,833
Cash and cash equivalents		3,962			13,036
Restricted cash		31,115			8,159
Rents, deferred rents and other receivables, net		6,433			5,718
Acquired below-market ground lease, net		7,606			7,674
Acquired lease rights, net		8,211			9,262
Acquired in-place lease values, net		7,706			10,049
Deferred charges, net		4,289			3,284
Other assets, net		6,397			5,396

Total Assets	$	451,445		$	413,851

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Mortgage loans payable	$	235,291		$	211,451
Junior subordinated debt obligation		29,380			29,380
Secured line of credit		13,000			—
Due to affiliates		1,654			3,891
Accounts payable, accrued expenses and other liabilities		27,500			25,832
Dividends and distributions payable		175			3,315
Acquired lease obligations, net		5,903			6,823
Deferred gain on partial sale of real estate		3,515			3,515
Negative carrying value of investment in unconsolidated partnership		4,450			4,450

Total liabilities		320,868			288,657
Minority interest		10,719			11,649
Commitments and contingencies
Stockholders’ Equity
Series A 6.85% Cumulative Convertible Preferred Stock; 2,000,000 shares authorized; 600,000 shares issued and outstanding; $25.00 liquidation preference		14,599			—
Common stock ($0.01 par value, 200,000,000 shares authorized, 13,047,370 and 13,155,062 issued and outstanding at June 30, 2007 and December 31, 2006, respectively)		131			132
Additional paid-in capital		120,453			120,163
Distributions in excess of earnings		(16,463	)		(7,637	)
Accumulated other comprehensive income		1,138			887

Total stockholders’ equity		119,858			113,545

Total Liabilities and Stockholders’ Equity	$	451,445		$	413,851

See accompanying notes to consolidated financial statements.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Revenue:
Rental	$	7,687		$	11,787		$	15,396		$	22,477
Tenant reimbursements		3,417			6,326			6,997			11,665
Management, leasing and development services		875			112			1,698			257
Interest and other income		457			265			3,105			769

Total revenue		12,436			18,490			27,196			35,168

Expenses:
Rental property operating and maintenance		4,462			5,701			8,793			11,225
Real estate taxes		1,463			2,518			3,041			4,570
Interest (including amortization of deferred financing costs)		3,529			5,129			6,640			9,303
Loss from early extinguishment of debt		379			357			379			357
Depreciation and amortization		3,451			5,500			6,856			9,947
General and administrative		4,302			1,800			7,239			3,681

Total expenses		17,586			21,005			32,948			39,083

Loss from operations		(5,150	)		(2,515	)		(5,752	)		(3,915	)
Equity in loss of unconsolidated real estate partnerships		(300	)		(139	)		(655	)		(284	)
Gain on partial sale of real estate		—			29,968			—			29,968

Income (loss) before minority interest		(5,450	)		27,314			(6,407	)		25,769
Minority interest		515			(2,962	)		608			(2,795	)

Net income (loss)	$	(4,935	)	$	24,352		$	(5,799	)	$	22,974

Basic income (loss) per share	$	(0.40	)	$	1.90		$	(0.46	)	$	1.79
Diluted income (loss) per share		(0.40	)		1.86			(0.46	)		1.75
Weighted average common shares outstanding:
Basic		12,862			12,802			12,862			12,800
Diluted		12,862			14,693			12,862			14,684

See accompanying notes to consolidated financial statements.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE LOSS
(Amounts in thousands, except share data)
(Unaudited)

Six months ended June 30, 2007


	Number of						Series A					Distributions in			Accumulated Other
	Common			Common			Preferred			Additional Paid-		Excess			Comprehensive					Comprehensive
	Shares			Stock			Stock			In Capital		of Earnings			Income		Total			Loss
Balance at December 31, 2006		13,155,062		$	132		$	—		$	120,163	$	(7,637	)	$	887	$	113,545		$	—
Net loss		—			—						—		(5,799	)		—		(5,799	)		(5,799	)
Preferred shares issued (600,000)		—			—			15,000			—		—			—		15,000			—
Stock issue costs		—			—			(401	)		—		—			—		(401	)		—
Unrealized gain on derivative instruments, net of $18 recorded in interest expense		—			—			—			—		—			251		251			251
Restricted stock granted		5,000			—			—			—		—			—		—			—
Restricted stock forfeited		(112,692	)		(1	)		—			1		—			—		—			—
Share-based compensation expense		—			—			—			289		—			—		289			—
Dividends on forfeited nonvested stock		—			—			—			—		135			—		135			—
Dividends		—			—			—			—		(3,162	)		—		(3,162	)		—

Balance at June 30, 2007		13,047,370		$	131		$	14,599		$	120,453	$	(16,463	)	$	1,138	$	119,858		$	(5,548	)

See accompanying notes to consolidated financial statements.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)


	Six Months Ended June 30,
	2007			2006
Cash Flows From Operating Activities:
Net income (loss)	$	(5,799	)	$	22,974
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Gain on partial sale of real estate		—			(29,968	)
Depreciation and amortization		6,856			9,947
Loss from early extinguishment of debt		179			357
Amortization of deferred financing costs		497			408
Provision for doubtful accounts receivable		622			449
Noncash stock compensation		289			389
Interest expense (accretion) amortization, net		(1,604	)		(1,625	)
Amortization of ground rent		176			68
Minority interest		(608	)		2,795
Equity in loss of unconsolidated real estate partnerships		655			284
Net change in revenue related to acquired lease rights/obligations		131			30
Change in deferred taxes		31			—
Other noncash income		(2,091	)		—
Changes in operating assets and liabilities:
Rents, deferred rents and other receivables		(1,337	)		(1,512	)
Restricted cash relating to operating activities		913			1,211
Other deferred costs		(450	)		(1,322	)
Other assets, net		(605	)		(894	)
Accounts payable, accrued expenses and other liabilities		1,127			(4,388	)

Net cash used in operating activities		(1,018	)		(797	)

Cash Flows From Investing Activities:
Proceeds from partial sale of real estate, net		—			38,905
Expenditures for real estate improvements		(25,563	)		(12,823	)
Real estate acquisitions, net of assumed liabilities		—			(43,235	)
Change in restricted cash relating to investing activities		250			310
Advances to unconsolidated real estate partnerships		(4,283	)		(181	)
Other		—			(880	)

Net cash used in investing activities		(29,596	)		(17,904	)

Cash Flows From Financing Activities:
Proceeds from junior subordinated debt obligations		—			29,380
Proceeds from lines of credit		13,000			—
Proceeds from mortgages and notes payable		104,500			10,000
Repayment of mortgages and notes payable		(79,021	)		(10,825	)
Payment of deferred financing costs		(961	)		(1,367	)
Proceeds from sale of Series A preferred stock, net of issue costs		14,764			—
Change in restricted cash related to financing activities		(24,119	)		(3,028	)
Distributions and dividends		(6,623	)		(6,673	)

Net cash provided by financing activities		21,540			17,487

Net change in cash and cash equivalents		(9,074	)		(1,214	)
Cash and cash equivalents, beginning of period		13,036			14,331

Cash and cash equivalents, end of period	$	3,962		$	13,117

Supplemental disclosures of cash flow information:
Cash paid during the period for interest, net of amounts capitalized	$	8,215		$	10,757
Supplemental disclosures of noncash investing and financing activities:
Accrued renovation costs		9,030			4,436
Unrealized gain on derivative instruments		251			1,837
Dividends and distributions payable		175			3,343
Accrued financing costs		312			—
Accrued preferred stock issuance costs		165			—

See accompanying notes to consolidated financial statements

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

1. Organization and Description of Business

Feldman Equities of Arizona, LLC (our “predecessor”) was organized under the laws of the State of Arizona and commenced operations on April 1, 2002. Feldman Mall Properties, Inc. (“FMP,” the “Company,” “we,” “our,” or “us”) and its affiliates and subsidiaries are principally engaged in the acquisition and management of retail malls. Tenants include national and regional retail chains as well as local retailers.

We operate as a real estate investment trust, or REIT, incorporated in Maryland on July 14, 2004. We closed our initial offering of common stock on December 16, 2004 (our “offering”). Our wholly owned subsidiaries, Feldman Holdings Business Trust I and Feldman Holdings Business Trust II, are the sole general partner and a limited partner, respectively, in and collectively own 90.2% of Feldman Equities Operating Partnership, LP (the “operating partnership”). We have, through such subsidiaries, control over major decisions of the operating partnership, including decisions related to sale or refinancing of the properties. FMP, the operating partnership and Feldman Equities Management, Inc. (the “service company”) were formed to continue to operate and expand the business of the predecessor. We consolidate the assets and liabilities of the operating partnership. Until the completion of the offering, FMP, the operating partnership and the service company had no operations.

In a series of transactions culminating with the closing of our offering, we, our operating partnership and the service company, together with the partners and members of the affiliated partnerships and limited liability companies affiliated with the predecessor and other parties that hold direct or indirect ownership interests in the properties (collectively, the “participants”), engaged in certain formation transactions (the “formation transactions”). The formation transactions were designed to (i) continue the operations of our predecessor, (ii) enable us to raise the necessary capital to acquire interests in certain of the properties, repay mortgage debt relating thereto and pay other indebtedness, (iii) fund costs, capital expenditures and working capital, (iv) provide a vehicle for future acquisitions, (v) enable us to qualify as a REIT and (vi) preserve tax advantages for certain participants.

Pursuant to contribution agreements among the owners of the predecessor and the operating partnership, which were executed on August 13, 2004, our operating partnership received a contribution of interests in the predecessor, which included the property management, leasing and real estate development operations in exchange for limited partnership interests in our operating partnership.

As part of our formation transactions, the owners of our predecessor contributed their ownership interests in our predecessor to the operating partnership. Pursuant to contribution agreements among the owners of the predecessor and our operating partnership, our operating partnership received a contribution of 100% of the interests in our predecessor in exchange for units of limited partnership interests in our operating partnership (“OP units”). The exchange of contributed interests was accounted for as a reorganization of entities under common control; accordingly the contributed assets and assumed liabilities were recorded at our predecessor’s historical cost basis. As of June 30, 2007, these contributors own 9.8% of our operating partnership as limited partners.

As of June 30, 2007, we owned four real estate properties and had minority interests in partnerships owning the Harrisburg Mall in Harrisburg, Pennsylvania, the Foothills Mall in Tucson, Arizona and the Colonie Center Mall in Albany, New York.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

2. Summary of Significant Accounting Policies

Basis of Quarterly Presentation

The accompanying unaudited consolidated financial statements for interim financial information have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.

Accordingly, these interim financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. The 2007 operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the year ended December 31, 2006.

Principles of Accounting and Consolidation and Equity Method of Accounting

The accompanying unaudited consolidated financial statements have been prepared on the accrual method of accounting in accordance with U.S. generally accepted accounting principles and include the accounts of our wholly owned subsidiaries and all partnerships in which we have a controlling interest. All intercompany balances and transactions have been eliminated in consolidation.

The contribution of our predecessor to our operating partnership in our formation transactions in exchange for OP units has been accounted for as a reorganization of entities under common control. Accordingly, the contributed assets and assumed liabilities were recorded at our predecessor’s historical cost basis. The minority interest in one of our predecessor’s subsidiaries was acquired for cash and has been accounted for as a purchase, with the excess of the purchase price over the related historical cost basis of the minority interest being allocated to the assets acquired and the liabilities assumed.

We evaluate our investments in partially owned entities in accordance with the Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, or FIN 46R. If the partially owned entity is a “variable interest entity,” or a “VIE,” and we are the “primary beneficiary” as defined in FIN 46R, we account for such investments as a consolidated subsidiary. We have determined that Feldman Lubert Adler Harrisburg, L.P., FMP Kimco Foothills Member LLC and FMP191 Colonie Center LLC are not VIE’s.

We evaluate the consolidation of entities in which we are a general partner in accordance with EITF Issue 04-05, which provides guidance in determining whether a general partner should consolidate a limited partnership or a limited liability company with characteristics of a partnership. EITF 04-05 states that the general partner in a limited partnership is presumed to control that limited partnership. The presumption may be overcome if the limited partners have either (1) the substantive ability to dissolve the limited partnership or otherwise remove the general partner without cause or (2) substantive participating rights, which provide the limited partners with the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of the limited partnership’s business and thereby preclude the general partner from exercising unilateral control over the partnership. Based on this criterion, we do not consolidate our investments in Feldman Lubert Adler Harrisburg, L.P., FMP Kimco Foothills Member LLC and FMP191 Colonie Center LLC. We account for these investments under the equity method of accounting. These investments are recorded initially at cost and thereafter the carrying amount is increased by our share of comprehensive income and any additional capital contributions and decreased by our share of comprehensive loss and any capital distributions.

The equity in net income or loss and other comprehensive income or loss from real estate joint ventures recognized by us and the carrying value of our investments in real estate joint ventures are generally based on our share of cash that would be distributed to us under the hypothetical liquidation of the joint venture, at the then book value, pursuant to the provisions of their respective operating/partnership agreements. In the case of FMP Kimco Foothills Member LLC, the joint venture that owns the Foothills Mall (the “Foothills JV”), we have suspended the recognition of our share of losses because we have a negative carrying value in our investment in this joint venture. In accordance with APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, if and when the Foothills JV reports net income, we will resume applying the equity method of accounting after our share of that net income equals the share of net losses not recognized during the period that the equity method was suspended.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

2. Summary of Significant Accounting Policies — (Continued)

For a joint venture investment which is not a VIE or in which we are not the general partner, we consider the accounting set forth in AICPA Statement of Position No. 78-9, Accounting for Investments in Real Estate Ventures (“SOP 78-9”) as amended by EITF 04-05. In accordance with this pronouncement, investments in joint ventures are accounted for under the equity method when the ownership interest is less than 50% and we do not exercise direct or indirect control.

Factors we consider in determining whether or not we exercise control include rights of partners in significant business decisions, including dispositions and acquisitions of assets, financing and operating and capital budgets, board and management representation and authority and other contractual rights of our partners. To the extent that we are deemed to control these entities, these entities are consolidated.

On a periodic basis, we assess whether there are any indicators that the value of our investments in unconsolidated joint ventures may be impaired. An investment’s value is impaired only if our estimate of the fair value of the investment is less than the carrying value of the investment. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of our investment over the estimated fair value of our investment.

Gains on Disposition of Real Estate

Gains on the disposition of real estate assets are recorded when the recognition criteria have been met, generally at the time title is transferred and we no longer have substantial continuing involvement with the real estate asset sold. Gains on the disposition of real estate assets are deferred if we continue to have substantial continuing involvement with the real estate asset sold.

When we contribute a property to a joint venture in which we have retained an ownership interest, we do not recognize a portion of the proceeds in the computation of the gain resulting from the contribution. The amount of gain not recognized is based on our continuing ownership interest in the contributed property that arises due to our ownership interest in the joint venture acquiring the property.

Critical Accounting Policies and Management’s Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions. Our estimates and assumptions affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. They also affect reported amounts of revenues and expenses during the reporting period. Actual results could differ from these amounts.

We have identified certain critical accounting policies that affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. On an ongoing basis, we evaluate estimates related to critical accounting policies, including those related to revenue recognition, the allowance for doubtful accounts receivable, investments in real estate and asset impairment. The estimates are based on information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances.

We make estimates related to the collectibility of accounts receivable related to minimum rent, deferred rent, expense reimbursements, lease termination fees and other income. We specifically analyze accounts receivable and historical bad debts, tenant concentrations, tenant creditworthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts receivable. These estimates have a direct impact on net income (loss) because a higher bad debt allowance would result in lower net income.

We are required to make subjective assessments as to the useful lives of the properties for purposes of determining the amount of depreciation to record on an annual basis with respect to the investments in real estate. These assessments have a direct impact on net income (loss) because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate such investments over fewer years, resulting in more depreciation expense and lower net income or higher net loss on an annual basis.

We are required to make subjective assessments as to whether there are impairments in the values of our investments in real estate, including real estate held by any unconsolidated real estate entities accounted for using the equity method. These assessments have a direct impact on our net income (loss) because recording an impairment loss results in an immediate negative adjustment to income.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

2. Summary of Significant Accounting Policies — (Continued)

We are required to make subjective assessments as to the fair value of assets and liabilities in connection with purchase accounting related to real estate acquired. These assessments have a direct impact on our net income (loss) subsequent to the acquisitions as a result of depreciation and amortization being recorded on these assets and liabilities over the expected lives of the related assets and liabilities.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, we consider short-term investments with maturities of 90 days or less when purchased to be cash equivalents.

Restricted Cash

Restricted cash includes escrowed funds and other restricted deposits in conjunction with our loan agreements and cash restricted for property level marketing funds.

Revenue Recognition and Tenant Receivables

Base rental revenue from rental retail property is recognized on a straight-line basis over the noncancelable terms, including bargain renewal options, if any, of the related leases, which are all accounted for as operating leases. As of June 30, 2007 and December 31, 2006, approximately $1,225 and $891, respectively, has been recognized as straight-line rents receivable (representing the current net cumulative rents recognized prior to the date when billed and collectible as provided by the terms of the lease). These amounts are included in deferred rents receivable in the accompanying consolidated financial statements. “Percentage rent,” or rental revenue that is based upon a percentage of the sales recorded by our tenants, is recognized in the period such sales are earned by the respective tenants.

As part of the leasing process, we may provide the lessee with an allowance for the construction of leasehold improvements. Leasehold improvements are capitalized as part of the building and recorded as tenant improvements and depreciated over the shorter of the useful life of the improvements or the lease term. If the allowance represents a payment for a purpose other than funding leasehold improvements, or in the event we are not considered the owner of the improvements, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue. Factors considered during this evaluation include, among others, who holds legal title to the improvements, and other controlling rights provided by the lease agreement (e.g. unilateral control of the tenant space during the build-out process). Determination of the appropriate accounting for a tenant allowance is made on a case-by-case basis, considering the facts and circumstances of the individual tenant lease. Lease revenue recognition commences when the lessee is given possession of the leased space upon completion of tenant improvements when we are the owner of the leasehold improvements; however, when the leasehold improvements are owned by the tenant, the lease inception date is when the tenant obtains possession of the leased space for purposes of constructing its leasehold improvements.

Reimbursements from tenants related to real estate taxes, insurance and other shopping center operating expenses are recognized as revenue, based on a predetermined formula, in the period the applicable costs are incurred. Lease termination fees, net of deferred rent and related intangibles, which are included in interest and other income in the accompanying consolidated statements of operations, are recognized when the related leases are cancelled, the tenant surrenders the space and we have no continuing obligation to provide services to such former tenants. We recorded $104 and $17 of lease termination fees for the three months ended June 30, 2007 and 2006 and $104 and $303 for the six months ended June 30, 2007 and 2006, respectively.

Our other sources of revenue come from providing management services to third parties, including property management, brokerage, leasing and development. Management fees generally are a percentage of cash receipts from managed properties and are recorded when earned as services are provided. Leasing and brokerage fees are earned and recognized in installments as follows: one-third upon lease execution, one-third upon delivery of the premises and one-third upon the commencement of rent. Development fees are earned and recognized over the time period of the development activity. These activities are referred to as “management, leasing and development services” in the consolidated statements of operations.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

2. Summary of Significant Accounting Policies — (Continued)

We provide an allowance for doubtful accounts receivable against the portion of tenant receivables that is estimated to be uncollectible. Management reviews its allowance for doubtful accounts receivable monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Tenant receivables in the accompanying consolidated balance sheets are shown net of an allowance for doubtful accounts of $1,667 at June 30, 2007 and $1,088 at December 31, 2006.

Deferred Charges

Deferred leasing commissions and other direct costs associated with the acquisition of tenants are capitalized and amortized on a straight-line basis over the terms of the related leases. Loan costs are capitalized and amortized to interest expense over the terms of the related loans using a method that approximates the effective-interest method. We have a number of employees who are responsible for tenant leasing activity and it’s our policy to capitalize employee compensation that is directly allocable to these leasing services. A portion of their compensation, approximating $177 and $388 for the three months ended June 30, 2007 and 2006 and $361 and $679 for the six months ended June 30, 2007 and 2006, respectively, was capitalized and is being amortized over an estimated weighted average lease term. The related amortization expense for the three and six months ended June 30, 2007 and 2006 was $40, $65, $13 and $18, respectively.

Issuance Costs

Costs that represent expenditures related to the issuance of common stock, including underwriting commissions and public offering costs, were charged to equity upon completion of the issuance and are recorded as a reduction to additional paid-in capital.

Investments in Real Estate and Depreciation

Investments in real estate are stated at historical cost, less accumulated depreciation. The building and improvements thereon are depreciated on the straight-line basis over their estimated useful lives ranging from three to 39 years. Tenant improvements are depreciated on the straight-line basis over the shorter of the lease term or their estimated useful life. Equipment is being depreciated on a straight-line basis over the estimated useful lives of three to seven years.

For redevelopment of existing operating properties, the net carrying value of the existing property under redevelopment plus the cost for the construction and improvements incurred in connection with the redevelopment are capitalized to the extent the capitalized costs do not exceed the estimated fair value of the redeveloped property when complete. Real estate taxes and insurance costs incurred during construction periods are capitalized and amortized on the same basis as the related assets. Interest costs are capitalized during periods of active construction for qualified expenditures based upon interest rates in place during the construction period until construction is substantially complete. Capitalized interest costs are amortized over lives consistent with constructed assets. We capitalized the following costs:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Interest	$	387	$	176	$	659	$	232
Real estate taxes		88		86		167		155
Insurance		7		9		15		16

Total	$	482	$	271	$	841	$	403

Certain of our employees provide construction services to the properties. It’s our policy to capitalize employee compensation directly allocable to these construction services. A portion of their compensation, approximately $65, $168, $143 and $253 for the three and six months ended June 30, 2007 and 2006, respectively, has been capitalized into these construction projects and will be amortized over the estimated useful lives of these redevelopment projects.

Predevelopment costs, which generally include legal and professional fees and other third-party costs related directly to the acquisition of a property, are capitalized as part of the property being developed. In the event a development is no longer deemed to be probable, the costs previously capitalized are written off as a component of operating expenses.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

2. Summary of Significant Accounting Policies — (Continued)

Improvements and replacements are capitalized when they extend the useful life or improve the efficiency of the asset. Repairs and maintenance are charged to expense as incurred.

At June 30, 2007 and December 31, 2006, investments in real estate consisted of the following:


	June 30, 2007			December 31, 2006
Buildings and improvements	$	291,490		$	257,598
Tenant improvements		20,842			19,015
Furniture, fixtures and equipment		7,473			1,497
Construction in progress		5,015			20,685
Land		34,609			34,609

Total investments in real estate		359,429			333,404
Accumulated depreciation		(20,164	)		(14,964	)

Investments in real estate, net	$	339,265		$	318,440

Conditional Asset Retirement Obligations

We own certain properties that contain asbestos and could require us to perform future remediation. Although we may have a legal obligation to remediate any asbestos contained in any of our investment properties, either in the course of future remodeling, demolition or tenant construction, or as a transferred liability to a buyer, we do not believe that the current estimation of that liability and the related asset and cumulative catch-up of any accretion or depreciation is material to our consolidated financial statements. There is currently no obligation to perform any amount of such work that is material to the consolidated financial statements in conjunction with any current renovation or construction project. Accordingly, these amounts are not material to our consolidated financial statements.

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, investment properties are reviewed for impairment on a property-by-property basis or whenever events or changes in circumstances indicate that the carrying value of investment properties may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. We believe no impairment in the net carrying values of the investments in real estate and investment in unconsolidated real estate partnership has occurred.

Derivative Instruments

In the normal course of business, we use derivative instruments to manage, or hedge, interest rate risk. We require that hedging derivative instruments are effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Some derivative instruments are associated with forecasted cash flows. In those cases, hedge effectiveness criteria also require that it be probable that the underlying forecasted cash flows will occur. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract.

To determine the fair values of derivative instruments, we may use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis are used to determine fair value. All methods of assessing fair value result in a general approximation of value and such value may never actually be realized.

In the normal course of business, we are exposed to the effect of interest rate changes and limit these risks by following risk management policies and procedures including the use of derivatives. To address exposure to interest rates, derivatives are used primarily to fix the rate on debt based on floating-rate indices and manage the cost of borrowing obligations.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

2. Summary of Significant Accounting Policies — (Continued)

Hedges that are reported at fair value and presented on the balance sheet could be characterized as either cash flow hedges or fair value hedges. Cash flow hedges address the risk associated with future cash flows of debt transactions. All hedges held by us are deemed to be fully effective in meeting the hedging objectives established by our corporate policy governing interest rate risk management and as such no net gains or losses were reported in earnings. The changes in fair value of hedge instruments are reflected in accumulated other comprehensive income. For derivative instruments not designated as hedging instruments, the gain or loss resulting from the change in the estimated fair value of the derivative instruments is recognized in current earnings during the period of change. Changes in the fair value of our derivative instruments may increase or decrease our reported net income and stockholders’ equity prospectively, depending on future levels of LIBOR interest rates and other variables, but will have no effect on cash flows.

Purchase Accounting for Acquisition of Interests in Real Estate Entities

We allocate the purchase price of properties to tangible and identified intangible assets acquired based on their fair value in accordance with the provisions of SFAS No. 141, Business Combinations. The fair value of the tangible assets of an acquired property (which includes land, building and tenant improvements) is determined by valuing the property as if it were vacant and the “as-if-vacant” value is then allocated to land, building and related improvements based on management’s determination of the relative fair values of these assets. We have determined the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors we considered 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 revenue during the expected lease-up periods based on current market demand. We also estimate costs to execute similar leases including leasing commissions, legal and other related costs. Since June 2005, we determine the as-if vacant value by using a replacement cost method adjusted by both physical condition and possible obsolescence of the property acquired. Under this method, we obtain valuations from a qualified third party utilizing relevant third party property condition and Phase I environmental reports. We believe the replacement cost method closely approximates our previous methodology and is a better determination of the as-if vacant fair value.

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 present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining noncancelable term of the lease. The capitalized above-market lease values (included in acquired lease rights in the accompanying consolidated balance sheets) are amortized as a reduction of rental income over the remaining noncancelable terms of the respective leases. The capitalized below-market lease values (presented as acquired lease obligations in the accompanying consolidated balance sheets) are amortized as an increase to rental income over the initial term and any fixed rate/bargain renewal periods in the respective leases.

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 after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as-if-vacant, which is 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; however, the value of tenant relationships has not been separated from in-place lease value for the additional interests in real estate entities acquired by us because such value and its consequence to amortization expense is immaterial for these particular acquisitions. Should future acquisitions of properties result in allocating material amounts to the value of tenant relationships, an amount would be separately allocated and amortized over the estimated life of the relationship. The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining noncancelable terms of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off.

Other acquired intangible assets and liabilities include above-market fixed rate mortgage debt and a below-market ground lease. Above-market debt is measured by adjusting the existing fixed rate mortgage to market fixed rate debt and amortizing the acquired liability over the weighted-average term of the acquired mortgage using the interest method. The liability is being amortized as a reduction to our interest expense. The below-market ground lease asset is being amortized over the estimated length of the ground lease as an increase to ground rent expense.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

2. Summary of Significant Accounting Policies — (Continued)

Purchase accounting was applied to the assets and liabilities related to the real estate properties we acquired after our offering. The fair value of the real estate acquired was allocated to the acquired tangible assets, consisting of land, building and improvements and identified intangible assets and liabilities, consisting of above-market and below-market leases and in-place leases, based in each case on their fair values.

Accumulated amortization for acquired lease rights was $4,537 and $3,486 at June 30, 2007 and December 31, 2006, respectively. Accumulated amortization for in-place lease values was $6,820 and $5,474 at June 30, 2007 and December 31, 2006, respectively. Accumulated amortization of acquired lease obligations was $4,384 and $3,464 at June 30, 2007 and December 31, 2006, respectively.

On April 5, 2006, we acquired the Golden Triangle Mall in the Dallas suburb of Denton, Texas. The following are the amounts assigned to each major asset and liability caption at the acquisition date:


	Golden
	Triangle
Land	$	9,198
Building and improvements		30,473
Acquired lease rights		992
In-place lease values		791
Acquired lease obligations		(1,254	)

Total purchase price	$	40,200

In June 2007, we paid $1,000 of additional purchase consideration in accordance with an earn-out provision in the purchase agreement, which was recorded as an addition to in-place lease values in 2006.

Income Taxes

We have elected to be treated and believe that we have operated in a manner that has enabled us to qualify as a Real Estate Investment Trust, or REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986 (the “Code”), as amended. As a REIT, we generally are not required to pay federal corporate income taxes on our taxable income to the extent it is currently distributed to our stockholders. However, qualification and taxation as a REIT depends upon our ability to meet the various qualification tests imposed under the Code, including tests related to annual operating results, asset composition, distribution levels and diversity of stock ownership. Accordingly, no assurance can be given that we will be organized or be able to operate in a manner so as to qualify or remain qualified as a REIT. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates.

We have elected that our management company subsidiary and certain corporations that held small interests in the Foothills Mall be treated as a “taxable REIT subsidiary” or TRS. In general, a TRS may perform noncustomary services for tenants, hold assets that we cannot hold directly and generally may engage in any real estate or non-real estate related business (except for the operation or management of health care facilities or lodging facilities or the provision to any person, under a franchise, license or otherwise, of rights to any brand name under which any lodging facility or health care facility is operated). Our TRS’ are subject to corporate federal and state income taxes based on their taxable income. These rates are generally those rates which are charged for regular corporate entities. Income taxes are recorded using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded against the combined federal and state net deferred taxes reducing the deferred tax asset to a net amount. As of December 31, 2006, we had net operating loss carry-forwards of approximately $490 which, based on our historical and projected TRS income, we expect to fully utilize in fiscal 2008. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

2. Summary of Significant Accounting Policies — (Continued)

For the six months ended June 30, 2007, we recorded income tax expense of $44, of which $31 was deferred and $13 was recorded as a current liability. For the three months ended June 30, 2007, we recorded a deferred income tax benefit of $6 and a current state provision of $6. Our income tax expense and benefit is included in general and administrative expenses in our consolidated statement of operations. There was no income tax expense or benefit for the three and six months ended June 30, 2006.

As a REIT, we are permitted to deduct dividends paid to our stockholders, eliminating the federal taxation of income represented by such dividends. REITs are subject to a number of organizational and operational requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal and state income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates. The predecessor and its subsidiaries were limited liability partnerships or limited liability companies. As such, no federal or state income tax expense was recorded as items of income or expense by the predecessor as these amounts were recorded on the members’/partners’ individual tax returns.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. Under FIN 48, tax positions shall initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. Our tax returns for fiscal years 2004, 2005 and 2006 remain subject to examination by the relevant tax jurisdictions. We adopted this interpretation effective January 1, 2007 and the adoption of FIN 48 did not have a material effect on our consolidated financial statements.

Earnings (Loss) Per Share

We present both basic and diluted earnings (loss) per share, or EPS. Basic EPS excludes potentially dilutive securities and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS or greater loss per share amount. Our computation of loss per share for the three and six months ended June 30, 2007 excludes weighted average unvested share awards and OP units in the aggregate amount of 1,613,712 and 1,642,415, respectively, because their effect is antidilutive.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

The following is the computation of our basic and diluted income (loss) per share for the following periods:


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2007			2006		2007			2006
Net income (loss)	$	(4,935	)	$	24,352	$	(5,799	)	$	22,974
Less preferred stock dividends, net of minority interest ($17)		(158	)		—		(158	)		—

Net income (loss) available to common stockholders—basic		(5,093	)		24,352		(5,957	)		22,974
Add back minority interest		—			2,962		—			2,795

Net income (loss) attributable to common stockholders—diluted	$	(5,093	)	$	27,314	$	(5,957	)	$	25,769


Basic weighted average common shares		12,861,661			12,801,854		12,861,633			12,800,092
Plus: weighted average unvested restricted shares		—			297,535		—			290,839
Plus: weighted average OP units		—			1,593,464		—			1,593,464

Diluted weighted average common shares		12,861,661			14,692,853		12,861,633			14,684,395


Basic income (loss) per share	$	(0.40	)	$	1.90	$	(0.46	)	$	1.79
Diluted income (loss) per share		(0.40	)		1.86		(0.46	)		1.75

Segment Information

Our Company is a REIT engaged in owning, managing, leasing and repositioning Class B regional malls and has one reportable segment, which is retail mall real estate.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, or SFAS No. 157. SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability. SFAS No. 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data. SFAS No. 157 applies whenever other standards require assets or liabilities to be measured at fair value. This statement is effective in fiscal years beginning after November 15, 2007, although early application is allowed. We are in the process of assessing the impact that the adoption of this standard on January 1, 2008 may have on our consolidated financial statements.

In February 2007, the FASB Issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. Statement No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, although early application is allowed if an entity also adopts SFAS No. 157. We do not believe that the adoption of SFAS No. 159 will have a material effect on our consolidated financial statements.

Share-Based Deferred Compensation

We have a deferred compensation plan under which we are authorized to issue up to 469,221 shares of common stock to employees. As of June 30, 2007, we had granted 279,100 shares of restricted common stock, net of forfeitures, which vest annually over periods ranging from two to five years.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

2. Summary of Significant Accounting Policies — (Continued)

Restricted stock awards entitle the holder to shares of common stock as the award vests. We measure the fair value of restricted shares based upon the closing market price of the Company’s common stock on the date of grant. Restricted stock awards that vest in accordance with service conditions are amortized over their applicable vesting period using the straight-line method.

The following describes the shares of unvested common stock for the six months ended June 30, 2007 and 2006:


	Number of Unvested Shares						Weighted Average Share Price
	2007			2006			2007		2006
Beginning balance		326,074			285,100		$	11.28	$	11.23
Shares granted		5,000			48,030			11.31		11.60
Shares vested		(32,675	)		(40,790	)		12.27		11.76
Shares forfeited		(112,692	)		—			9.90		—

Ending balance		185,707			292,340			11.93		11.23

Share-based compensation expense included in net income (loss) for the three and six months ended June 30, 2007 and 2006 was $120, $245, $103 and $207, respectively. Gross share-based compensation was $139, $289, $199 and $389 for the three and six months ended June 30, 2007 and 2006, respectively. It’s our policy to capitalize employee compensation, including share-based compensation, allocated to construction and leasing services, of which $19, $44, $96 and $182 were capitalized for the three and six months ended June 30, 2007 and 2006, respectively.

As of June 30, 2007, there was $1,898 of total unrecognized compensation costs related to nonvested restricted stock awards granted under the plan, which are expected to be recognized over a weighted-average period of 1.8 years. The total fair value of shares that vested during the three and six months ended June 30, 2007 was $401.

Reclassification

Certain prior period balances have been reclassified to conform to the current period presentation.

3. Mortgage Loans Payable

Mortgage loans payable consisted of the following:


	June 30, 2007		December 31, 2006
Mortgage loan payable — interest only at 115 basis points over LIBOR (6.47% at June 30, 2007) payable monthly, due May 2010, secured by Stratford Square Mall property	$	104,500	$	—

Mortgage loan payable — interest only at 125 basis points over LIBOR (6.625% at December 31, 2006) payable monthly, due January 2008, secured by Stratford Square Mall property		—		75,000

Mortgage loan payable — interest at 8.60% payable monthly, due July 11, 2029, anticipated repayment on July 11, 2009, secured by the Tallahassee Mall property		44,821		45,100

Mortgage loan payable — interest at 6.60% payable monthly, due October 11, 2032, anticipated prepayment date of November 11, 2012, secured by the Northgate Mall property		77,661		78,201

Mortgage loan payable — interest at 5.15% payable monthly, due November 1, 2013, secured by the JCPenney Parcel at the Stratford Square Mall		—		3,202

Total mortgages outstanding		226,982		201,503

Assumed above-market mortgage premiums, net		8,309		9,948

Total mortgage loans payable	$	235,291	$	211,451

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

3. Mortgage Loans Payable — (Continued)

On April 5, 2006, we assumed a $3,455 promissory note in connection with the acquisition of the JCPenney Parcel. The stated interest on the note was 5.15%. We determined this rate to be above-market and, in applying purchase accounting, determined the fair market value interest rate to be 4.87%. The above-market premium of $47 was being amortized over the remaining term of the acquired loan using the effective interest method. The amortization of the above-market premium was $1, $4 $3 and $3 for the three and six months ended June 30, 2007 and 2006, respectively. This loan was repaid in May 2007 in connection with the refinancing of the Stratford Square Mall mortgage as described below.

On July 12, 2005, we assumed a $79,605 first mortgage in connection with the acquisition of the Northgate Mall. The stated interest on the mortgage is 6.60%. We determined this rate to be above market and, in applying purchase accounting, determined the fair market value interest rate to be 5.37%. The above-market premium was initially $8,243 and is being amortized over the remaining term of the acquired loan using the effective interest method. The amortization of the above-market premium totaled $349, $700, $358 and $709 for the three and six months ended June 30, 2007 and 2006, respectively.

On June 28, 2005, we assumed a $45,848 first mortgage in connection with the acquisition of the Tallahassee Mall. The stated interest rate on the mortgage is 8.60%. We determined this rate to be above market and, in applying purchase accounting, determined the fair market value interest rate to be 5.16%. The above-market premium was initially $6,533 and is being amortized over the remaining term of the acquired loan using the effective interest method. The amortization of the above-market premium totaled $450, $901, $456 and $913 for the three and six months ended June 30, 2007 and 2006, respectively.

In January 2005, we completed a $75,000, three-year first mortgage financing collateralized by the Stratford Square Mall. On May 8, 2007, we closed on a $104,500 first mortgage loan secured by the Stratford Square Mall. The loan has an initial term of 36 months and bears interest at a floating rate of 115 basis points over the London Interbank Offered Rate (“LIBOR”). The loan has two one-year extension options. On the closing date, $75,000 of the loan proceeds was used to retire Stratford Square’s outstanding $75,000 first mortgage and $3,040 was used to repay the JCPenney Parcel note. The balance of the proceeds was placed into escrow and will be released to us to fund the completion of the mall’s redevelopment project. As of June 30, 2007, the balance of funds in escrow was $24,120. In connection with this transaction, we recorded a $379 loss on early extinguishment of debt, which represents prepayment penalties and the write-off of deferred financing costs related to the existing mortgage that was repaid.

In connection with the Stratford Square Mall mortgage financing, during January 2005, we entered into a $75,000 interest rate swap commencing February 2005 with a final maturity date in January 2008. The effect of the swap is to fix the all-in interest rate of the Stratford Square mortgage loan at 5.0% per annum. In connection with the refinancing of the Stratford Square Mall mortgage in May 2007, we entered into an additional $29,500 swap that matures in May 2010. The effect of this swap is to fix the all-in interest rate of $29,500 of the mortgage at 6.65% per annum.

During December 2005, we entered into a $75,000 swap which commences February 2008 and has a final maturity date in January 2011. The effect of the swap is to fix the all-in interest rate of our forecasted cashflows on LIBOR-based loans at 4.91% per annum.

Aggregate principal payments of our mortgage loans as of June 30, 2007 are as follows:


2007 (six months)	$	825
2008		1,744
2009		45,179
2010		105,824
2011		1,415
2012 and thereafter		71,995

Total principal payments		226,982
Assumed above-market mortgage premiums, net		8,309

Total	$	235,291

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

3. Mortgage Loans Payable — (Continued)

Certain of our mortgage loans payable contain various financial covenants requiring us to maintain certain financial debt coverage ratios, among other requirements. As of and for the period ended June 30, 2007, we were in compliance with these debt covenants.

4. Junior Subordinated Debt Obligation

During March 2006, we completed the issuance and sale in a private placement of $28,500 in aggregate principal amount of preferred securities issued by our wholly owned subsidiary, Feldman Mall Properties Statutory Trust I (the “Trust”). The Trust simultaneously issued 880 of its common securities to the operating partnership for a purchase price of $880, which constitutes all of the issued and outstanding common securities of the Trust. The Trust used the proceeds from the sale of the trust preferred securities together with the proceeds from the sale of the common securities to purchase $29,380 in aggregate principal amount of unsecured fixed/floating rate junior subordinated notes due April 2036, issued by us. The junior subordinated notes, the common and the trust preferred securities have substantially identical terms, requiring quarterly interest payments calculated at a fixed interest rate equal to 8.70% per annum through April 2011 and subsequently (after April 2011) at a variable interest rate equal to LIBOR plus 3.45% per annum. The notes mature in April 2036 and may be redeemed, in whole or in part, at par, at our option, beginning after April 2011. The preferred securities do not have a stated maturity date; however, the preferred and common securities are subject to mandatory redemption upon the redemption or maturity of the notes.

The principal amount of the junior subordinated notes of $29,380 is reported as an obligation on our consolidated balance sheet. However, because we are not deemed to be the primary beneficiary of the Trust under FIN46R, we account for our investment under the equity method of accounting and record our investment in the Trust’s common shares of $880 as part of other assets on our consolidated balance sheet.

We have entered into a parent guarantee agreement for the purpose of guaranteeing the payment, after the expiration of any grace or cure period, of any amounts required to be paid. Our obligations under the parent guarantee agreement constitute unsecured obligations and rank subordinate and junior to all of our senior debt. The parent guarantee agreement will terminate upon the full payment of the redemption price for the trust preferred securities or full payment of the junior subordinated notes upon liquidation of the trust.

In July 2007, we received a notice of default from the holders of the common and preferred securities of the Trust due to our failure to timely deliver our June 30, 2007 financial statements. We have been granted limited waivers of this default and the cure period for both the first and second quarter financial statements was extended to October 16, 2007. To date, we have not received a notice of default.

5. Secured Line of Credit

On April 5, 2006, in connection with the acquisition of the Golden Triangle Mall, we entered into a $24,600 secured line of credit (the “line”). Loan draws and repayments are at our option. Interest is payable monthly at a rate equal to LIBOR plus a margin ranging from 1.40% to 2.00% or, at our option, the prime rate plus a margin ranging from zero to 0.25%. The applicable margins depend on our debt coverage ratio as specified in the loan agreement. Commitment fees are paid monthly at the rate of 0.125% to 0.25% of the average unused borrowing capacity.

In October 2006, we entered into a modification agreement that provides for the issuance of letters of credit in the aggregate amount of up to $13,000 for a fee of 0.5% of the face amount. As of June 30, 2007, letters of credit outstanding under this agreement amounted to $10,250 and are renewable through the maturity date of the loan.

On April 20, 2007, we increased the line from $24,600 to $30,000. The maturity date of the line is April 2009 and the line is recourse to us if the fixed charge ratio of the property is higher than 1.5.

The line contains customary covenants that require us to, among other things, maintain certain financial coverage ratios. As of June 30, 2007, we were in compliance with the covenant requirements. The outstanding balance on the line at June 30, 2007 was $13,000 with interest rates on the tranches ranging from 6.775% to 8.25%.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

5. Secured Line of Credit — (Continued)

$25,000 Credit Facility

On April 16, 2007, we announced the execution of a promissory note (the “Note”) providing for loans aggregating up to $25,000 from Kimco Realty Corp. (“Kimco”). As of June 30, 2007, there were no outstanding borrowings under the Note.

Loans drawn under the Note are optional and will bear interest at the rate of 7.0% per annum, payable monthly. Any outstanding principal amount will be due and payable on April 10, 2008, provided that the maturity of the Note may be extended to April 10, 2009 if we deliver to Kimco, on or before March 17, 2008, a notice of extension and further provided that we comply with certain performance criteria. We may prepay the outstanding principal amount under the Note in whole or in part at any time. In addition to the interest on the Note, Kimco will be paid a variable fee equal to (i) $500, multiplied by (ii) (a) the volume weighted average price of our common stock as of a five-day period chosen by Kimco, minus (b) $13.00 per common share. If Kimco does not select a date for determination of the fee prior to termination of the Note, we will instead pay to Kimco $250 in additional interest. We are accounting for the variable fee as an embedded derivative and, accordingly, have recorded the fair value of this instrument as a deferred loan fee and as a derivative liability in the amount of $312. Changes in the fair value of the derivative liability in future periods, if any, will be recorded in operating income.

We intend to utilize the net proceeds from the offering to provide capital for the redevelopment of our malls, to repay borrowings under our line of credit and for general corporate purposes.

6. Related Party Transactions

We provide certain property management, leasing and development services to our unconsolidated real estate partnerships for an annual management fee, ranging from 2% to 3.5% of gross receipts, and a construction management fee of 3% on the amount of capital improvements, as defined by their agreements. In addition, we earn customary brokerage commission fees as a percentage of contractual rents on new leases and lease renewals. Total fees earned from such partnerships aggregated $875, $1,698, $112 and $257 for the three and six months ended June 30, 2007 and 2006, respectively. These fees are recorded in management, leasing and development services in the consolidated statements of operations.

In July 2005, we entered into a consulting contract with Ed Feldman, the father of our chairman and CEO, Larry Feldman, to provide professional services. Ed Feldman is assisting us in our efforts to secure government grants, various incentives and tax rebates. The agreement pays Mr. Feldman $3 per month. For the three and six months ended June 30, 2007 and 2006, Mr. Feldman received $9, $18, $12 and $18, respectively.

7. Rentals Under Operating Leases

We receive rental income from the leasing of retail shopping center space under operating leases. We recognize income from our tenant operating leases on a straight-line basis over the respective lease terms and, accordingly, rental income in a given period will vary from actual contractual rental amounts due. Our rental revenue will also be reduced by amortization of capitalized above-market lease values and increased by the amortization of below-market leases. Amounts included in rental revenue based on recording lease income on the straight-line basis were $185, $353, $254 and $441 for the three and six months ended June 30, 2007 and 2006, respectively.

The minimum future base rentals under non-cancelable operating leases as of June 30, 2007 are as follows:


Year Ending December 31,
2007 six months	$	13,287
2008		24,135
2009		21,263
2010		19,205
2011		15,982
2012 and thereafter		63,578

Total future minimum base rentals	$	157,450

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

7. Rentals Under Operating Leases — (Continued)

Minimum future rentals do not include amounts which are payable by certain tenants based upon certain reimbursable shopping center operating expenses. The tenant base includes national and regional chains and local retailers; consequently, our credit risk is concentrated in the retail industry. For the six months ended June 30, 2007 and 2006, no tenant exceeded 10% of rental revenues.

8. Due to Affiliates

At June 30, 2007 and December 31, 2006, amounts due to affiliates primarily reflect obligations to make payments to certain owners of the predecessor in connection with the formation transactions. As part of the formation transactions, Messrs. Feldman, Bourg and Jensen have the right to receive additional OP units for ownership interests contributed as part of the formation transactions upon our achieving a 15% internal rate of return from the Harrisburg joint venture on or prior to December 31, 2009. The right to receive such additional OP units is a financial instrument that we recorded as an obligation of the offering that is adjusted to fair value each reporting period until the thresholds have been achieved and the OP units have been issued. The more significant assumptions used in determining the fair value of the obligation are (i) refinancing the property, (ii) a probability weighted sale date of the property, and (iii) sales proceeds estimated by management based upon an estimated multiple of future net operating income. Based on the expected operating performance of the Harrisburg Mall, and the significant valuation assumptions noted above, the fair value is estimated to be $1,654 and $3,891 at June 30, 2007 and December 31, 2006, respectively, and is included in due to affiliates. The reduction in the fair value estimate for the three months ended March 31, 2007 totaling $2,253 has been reflected in interest and other income in the accompanying consolidated statement of operations. The liability increased by $16 for the three months ended June 30, 2007 due to accretion of the fair value of the obligation, which has been recorded in interest expense. The reduction in the liability in 2007 was caused by our reduction of the anticipated return we will receive on the project. The decrease in our anticipated return is due to a decrease in anticipated construction financing proceeds and delays in the timing of certain redevelopment plans. These assumptions remained unchanged from March 31, 2007 to June 30, 2007. The fair value of this obligation is assessed by management on a quarterly basis.

9. Stockholders’ Equity

Our authorized capital stock consists of 250,000,000 shares, $.01 par value, consisting of up to 200,000,000 shares of common stock, $.01 par value per share and up to 50,000,000 shares of preferred stock, $.01 par value per share. As of June 30, 2007 and December 31, 2006, 13,047,370 and 13,155,062 shares of common stock were issued and outstanding, respectively.

Effective April 10, 2007, we entered into an agreement to issue up to $50,000 of convertible preferred stock through the private placement of 2,000,000 shares of 6.85% Series A Cumulative Convertible Preferred Shares to Inland American Real Estate Trust, Inc., a public non-listed REIT sponsored by an affiliate of the Inland Real Estate Group of Companies. We issued $15,000, or 600,000 shares, of preferred stock on April 30, 2007. We are required to issue a total of $50,000 by April 2008. See note 15, Subsequent Events.

Under the terms of this transaction, and in accordance with New York Stock Exchange rules, we will seek shareholder approval to permit conversion of the preferred shares into common stock. Assuming an affirmative vote of our shareholders, Inland American Real Estate Trust will have the option after June 30, 2009 to convert some or all of its outstanding preferred shares. Each preferred share is being issued at a price of $25.00 per share and, assuming an affirmative vote of our shareholders, will be convertible, in whole or in part, at a conversion ratio of 1.77305 common shares to preferred shares. This conversion ratio is based upon a common share price of $14.10 per share.

In connection with the offering, we also amended our operating partnership agreement in order to issue 600,000 of the partnership’s 6.85% Preferred Units to Feldman Holdings Business Trust II (see note 1). The dividend rate, liquidation value and other terms of the Preferred Units are the same as those of the preferred shares described above.

We intend to utilize the net proceeds from the offering to provide capital for the redevelopment of our malls, to repay borrowings under our line of credit and for general corporate purposes.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

10. Minority Interest

Minority interest relates to the interests in the operating partnership that are not owned by us, which were approximately 9.8% as of June 30, 2007 and 9.7% as of December 31, 2006. In conjunction with our formation, certain persons and entities contributing ownership interests in our predecessor to the operating partnership received OP units. Limited partners who acquired OP units in our formation transactions have the right to require our operating partnership to redeem part or all of their OP units for cash, or, at our option, an equivalent number of shares of our common stock at the time of the redemption. Alternatively, we may elect to acquire those OP units in exchange for shares of our common stock on a one-for-one basis subject to adjustment in the event of stock splits, stock dividends, issuance of stock rights, specified extraordinary distributions and similar events.

11. Commitment and Contingencies

In the normal course of business, we become involved in legal actions relating to the ownership and operations of its properties and the properties it manages for third parties. In management’s opinion, the resolutions of these legal actions are not expected to have a material adverse effect on our consolidated financial position or results of operations.

All of our malls that have nonowned parcels sharing common areas are subject to reciprocal easement agreements that address use and maintenance of common areas and often address other issues, including use restrictions and operating covenants. These agreements are recorded against the properties and are long term in nature.

Adjacent to the Stratford Square Mall are five third-party owned anchor tenant spaces. We have entered into an operating agreement with these six anchor tenants to share certain operating expenses based on allocated amounts per square foot. The agreements terminate in March 2031.

At June 30, 2007, we have commitments to make tenant improvements and other capital expenditures in 2007 in the amount of approximately $940. In addition, in connection with leases that have been signed through June 30, 2007 included in the redevelopment expansion plans of the malls and current redevelopment activity, we are committed to spend approximately $12,200 in the remainder of 2007 and $6,400 thereafter.

In connection with the formation transactions, we entered into agreements with Messrs. Feldman, Bourg and Jensen that indemnify them with respect to certain tax liabilities intended to be deferred in the formation transactions, if those liabilities are triggered either as a result of a taxable disposition of a property by us, or if we fail to offer the opportunity for the contributors to guarantee or otherwise bear the risk of loss with respect to certain amounts of our debt for tax purposes (the “contributor-guaranteed debt”). With respect to tax liabilities arising out of property sales, the indemnity will cover 100% of any such liability until December 31, 2009 and will be reduced by 20% of the aggregate liability on each of the five following year-ends thereafter.

We also have agreed to maintain approximately $10,000 of indebtedness and to offer the contributors the option to guarantee $10,000 of the operating partnership’s indebtedness, in order to enable them to continue to defer certain tax liabilities. The obligation to maintain such indebtedness extends to 2013, but will be extended by an additional five years for any contributor that holds (together with his affiliates) at that time at least 25% of the initial ownership interest in the operating partnership issued to them in the formation transactions. As of June 30, 2007, Feldman Partners, LLC, an affiliate of Larry Feldman, guarantees $8,000 of the loan secured by the Stratford Square Mall.

Effective April 17, 2007, we entered into an agreement with Lloyd Miller, our former Executive Vice President of Leasing since November 2005, pursuant to which he agreed to resign from the Company and we made a severance payment to Mr. Miller in the amount of $147 and also agreed to repurchase 15,500 of Mr. Miller’s shares of our common stock at a price of $12.50 per share, which is consistent with the prices at which our stock was trading during this time. Subsequent to the execution of this agreement, Mr. Miller notified us that he had exercised his right to rescind the agreement. He also threatened to make a claim against us alleging breach of his employment contract with the Company. We are in discussions with Mr. Miller but have not entered into any settlement agreement.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

12. Investments in Unconsolidated Partnerships

Foothills Mall

During February 2006, we entered into a contribution agreement with a subsidiary of Kimco in connection with the Foothills Mall, located in the suburbs of Tucson, Arizona. Under the terms of the contribution agreement, we contributed the Foothills Mall to a limited liability company at an agreed value of $104,000, plus certain closing costs (the “Foothills JV”). The transaction closed on June 29, 2006. We accounted for the transaction as a partial sale of real estate, which resulted in us recognizing a gain of $29,968 in June 2006, which was adjusted in the 2006 third quarter to $29,397. Pursuant to the terms of the contribution agreement, we received approximately $38,900 in net proceeds from the transaction. Because we received cash in excess of our net basis contributed to the Foothills JV, we recorded negative carrying value of our investment in the amount of $4,450.

On the closing date, the Foothills JV extinguished the existing first mortgage loan totaling $54,750 and refinanced the property with an $81,000 non-recourse first mortgage loan. The $81,000 first mortgage loan matures in July 2016 and bears interest at 6.08%. The loan may not be prepaid until the earlier of three years from the first interest payment or two years from date of loan syndication and has no principal payments for the first five years and then loan principal amortizes on a 30-year basis thereafter. The mortgage loan contains customary loan covenants and the Foothills JV is in compliance with all such covenants as of and for the period ended June 30, 2007. Simultaneous with the refinancing, Kimco contributed cash in the amount of $14,757 to the Foothills JV. Kimco will receive a preferred return of 8.0% on its capital from the Foothills Mall’s cash flow. Kimco may be required to make additional capital contributions to the Foothills JV for additional tenant improvements and leasing commissions, as defined in the limited liability company agreement, which in the aggregate shall not exceed $2,000. Upon the first to occur of a sale of the property or June 2010, Kimco will make an additional capital contribution to the Foothills JV in an amount equal to the unfunded portion (if any), which will be distributed to us. Upon a sale or refinancing of the Foothills Mall, Kimco is also entitled to receive a priority return of its capital together with any unpaid accrued preferred return. After certain adjustments, we are next entitled to receive an 8% preferred return on and a return of capital. Thereafter, all surplus proceeds will be split 20% to Kimco and 80% to us. Additionally, we agreed to serve as the managing member of the Foothills JV and will retain primary management, leasing and construction oversight, for which we will receive customary fees. We have determined the Foothills JV is not a VIE and account for our investment in the joint venture under the equity method.

The Foothills JV agreement includes “buy-sell” provisions commencing in June 2008 for us and after May 2010 allowing either Foothills JV partner to acquire the interests of the other. Either partner to the Foothills JV may initiate a “buy-sell” proceeding, which may enable it to acquire the interests of the other partner. However, the partner receiving an offer to be bought out will have the right to buy out such offering partner at the same price offered. The Foothills JV agreement does not limit our ability to enter into real estate ventures or co-investments with other third parties.

As of June 30, 2007, the Foothills JV has commitments for tenant improvements, renovation costs and other capital needs in the amount of approximately $6,750 in 2007 and intends to fund them from operating cash flow and capital contributions in accordance with the Foothills JV agreement.

Harrisburg Mall

We have a 24% limited partnership interest and a 1% general partnership interest in Feldman Lubert Adler Harrisburg, LP (the “partnership”). The partnership purchased a regional mall in Harrisburg, Pennsylvania on September 29, 2003.

The Harrisburg Mall was purchased with the proceeds of a mortgage loan and cash contributions from the predecessor and its joint venture partner. The mortgage loan is a line of credit with a maximum commitment of $50,000 and no principal payments until the maturity date in March 2008. The interest rate is LIBOR plus 1.625% per annum. The effective rates on the loan at June 30, 2007 and December 31, 2006 were 6.945% and 6.975%, respectively.

Under certain circumstances the partnership may extend the maturity of the loan for three, one-year periods. The partnership may prepay the loan at any time, without incurring any prepayment penalty. The loan presently has a limited recourse of $5,000 of which our joint venture partner is liable for $3,150 or 63% and we are liable for $1,850 or 37%.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

12. Investments in Unconsolidated Partnerships — (Continued)

The balance outstanding under the loan was $49,750 as of June 30, 2007 and December 31, 2006. We are required to maintain cash balances with the lender averaging $5,000. If the balances fall below $5,000 in any one month, the interest rate on the loan increases to LIBOR plus 1.875%.

The partnership agreement includes a “buy-sell” provision allowing either joint venture partner to acquire the interests of the other. Either partner may initiate a “buy-sell” proceeding, which may enable it to acquire the interests of the other partner. However, the partner receiving an offer to be bought out will have the right to buy out such offering partner at the same price offered.

As of June 30, 2007, the partnership has commitments for tenant improvements, renovation costs and other capital expenditures of approximately $10,900 in 2007 and $3,360 in 2008. The partnership will fund these costs with additional financing activity, state and local government grants or equity contributions.

Colonie Center Mall

On September 29, 2006, we entered into a joint venture agreement with a subsidiary of Heitman LLC (“Heitman”) in connection with the Colonie Center Mall located in Albany, New York. Under the terms of the contribution agreement, we contributed the property to FMP Colonie LLC, a new Delaware limited liability company (the “Colonie JV”). Heitman’s contribution of $47,000 to the venture represents approximately 75% of the equity in the property. Our contribution to the venture was valued at approximately $15,667, representing approximately 25% of the equity in the property. In addition, we have made preferred capital contributions of approximately $16,700 as of June 30, 2007 that were used primarily to fund construction costs. We have also agreed to a cost guarantee related to certain redevelopment costs of the property’s redevelopment project totaling approximately $46,000. To the extent these costs exceed $46,000, our preferred equity contributions will be recharacterized as subordinated capital contributions. These subordinated equity contributions may not be distributed to us until Heitman receives a 15% return on and a return of its invested equity capital.

We accounted for our contribution to the Colonie JV as a partial sale of the real estate and, due to our continuing involvement in the property, deferred the $3,515 gain. This deferred gain is recorded as a liability in our consolidated balance sheet.

The LLC Agreement between us and Heitman allows a buy-sell process to be initiated by us at any time on or after January 30, 2010 or by Heitman at any time on or after November 1, 2010. There are additional provisions regarding disputes, defaults and change in management that allow Heitman to initiate a buy-sell process. The member initiating the buy-sell must specify a total purchase price for the property and the amount of the purchase price that would be distributed to each of the two members, with the allocation of the total purchase price being subject to arbitration if the parties disagree. The member receiving the buy-sell notice must elect within 60 days to either allow the initiating member to purchase the recipient’s interest in the Colonie JV for the price stated in the notice or to purchase the initiating member’s interest in the joint venture.

In connection with the recapitalization of the property, the Colonie JV refinanced the property with a new construction facility (the “Loan”) with a maximum loan commitment of $109,800 and repaid the existing $50,766 mortgage loan on the property. On February 13, 2007, the Colonie JV borrowed an additional $50,055 under the Loan and on February 27, 2007, the Loan was increased by $6,500 to $116,300. We received a partial return of our preferred capital contributions in the amount of $6,500 with the proceeds from borrowings under the Loan.

The Loan bears interest at 180 basis points over LIBOR and matures in October 2008. The Loan may be extended beyond 2008, subject to certain customary requirements, for up to two additional years. In connection with the Loan, the Colonie JV entered into a two-year interest rate protection agreement fixing the initial $50,766 of the Loan at all-in interest rate of 6.84%. The Colonie JV has entered into a LIBOR-based interest rate cap agreement on notional amounts ranging from $21,233 in October 2006 to $59,054 through October 2008 for anticipated borrowings related to capital expenditures. The LIBOR caps range from 5.75% to 6.25%. The Loan is an interest only loan. The Loan has no lockout period, however, the Loan is subject to prepayment fees ranging from 1.0% to 1.5% through March 2008. The Loan contains financial covenants requiring the Colonie JV to maintain certain financial debt service coverage ratios, among other requirements. As of June 30, 2007, the Colonie JV was in compliance with all required loan covenants.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

12. Investments in Unconsolidated Partnerships — (Continued)

As of June 30, 2007, the Colonie JV has commitments for tenant improvements, renovation costs and other capital expenditures in the amount of approximately $32,200 to be incurred during 2007 and $2,100 thereafter. The Colonie JV intends to fund these commitments from loan proceeds, equity contributions and operating cash flow.

We are the managing member of the Colonie JV and are responsible for the management, leasing and construction of the property and charge customary market fees for such services.

Condensed combined balance sheets for our unconsolidated joint ventures are as follows:


	June 30, 2007		December 31, 2006
Investment in real estate, net	$	287,166	$	257,041
Receivables including deferred rents		1,884		5,768
Other assets		36,953		31,865

Total assets	$	326,003	$	294,674

Mortgage loans payable	$	210,243	$	181,516
Other liabilities		36,555		34,525

Owners’ equity		79,205		78,633

Total liabilities and owners’ equity	$	326,003	$	294,674

The Company’s share of owners’ equity	$	20,195	$	20,159

Condensed combined statements of operations for our unconsolidated joint ventures are as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Revenue	$	9,102		$	2,617		$	18,212		$	5,290
Operating and other expenses		(4,829	)		(1,475	)		(9,973	)		(3,104	)
Interest expense (including the amortization of deferred financing costs)		(3,132	)		(861	)		(6,191	)		(1,653	)
Depreciation and amortization		(2,644	)		(837	)		(5,748	)		(1,670	)

Net loss	$	(1,503	)	$	(556	)	$	(3,700	)	$	(1,137	)


The Company’s share of net loss	$	(300	)	$	(139	)	$	(655	)	$	(284	)

The difference between our investments in unconsolidated joint ventures and our share of the owners’ equity is due primarily to the suspension of losses recognized related to the Foothills JV (note 2) and net amounts receivable from and preferred equity investment in the joint ventures that are included in investments in unconsolidated real estate partnerships in the consolidated balance sheets.

13. Fair Value of Financial Instruments

As of June 30, 2007 and December 31, 2006, the fair values of our mortgage and other loans payable were approximately the carrying values, as the terms are similar to those currently available to us for debt with similar risk and the same remaining maturities. The carrying amounts for cash and cash equivalents, restricted cash, rents and other receivables, and accounts payable and other liabilities approximate fair value because of the short-term nature of these instruments.

FELDMAN MALL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
June 30, 2007
(Dollar amounts in thousands, except share and per share data)

14. Financial Instruments — Derivatives and Hedging

The following summarizes the notional and fair value of our derivative financial instruments at June 30, 2007. The notional value is an indication of the extent of our involvement in these instruments at that time, but does not represent exposure to credit, interest rate or market risks.


	Notional		Strike			Effective		Expiration		Fair
	Value		Rate			Date		Date		Value
Interest Rate Swap	$	75,000		3.75	%		2/2005		1/2008	$	598
Interest Rate Swap		75,000		4.91	%		1/2008		1/2011		702
Interest Rate Swap		29,500		5.50	%		6/2007		5/2010		(207	)

On June 30, 2007, the fair values of the derivative instruments were recorded in other assets and accounts payable, accrued expenses and other liabilities. Over time, the unrealized gain of $1,138 held in accumulated other comprehensive income will be reclassified into operations as interest expense in the same periods in which the hedged interest payments affect earnings. We estimate that approximately $588 will be reclassified between accumulated other comprehensive income and earnings within the next 12 months.

We hedge our exposure to variability in anticipated future interest payments on existing variable rate debt.

15. Subsequent Events

Series A Preferred Stock

On October 22, 2007, we issued $20,000, or 800,000 shares, of our 6.85% Series A preferred stock to Inland. We used the proceeds to fund redevelopment costs and to repay borrowings under our line of credit. Concurrent with this offering our operating partnership issued to us 800,000 of its 6.85% Preferred Units. See note 9, Stockholders’ Equity.

Executive Management Restructuring

On October 26, 2007, we announced the following management restructuring which was effective immediately:

	•		Larry Feldman has given up his position as CEO and the accompanying management responsibilities so that he may focus significantly all of his energy on the critical real estate imperatives facing our Company including leasing, anchor tenant retention and replacement, redevelopment and construction, and strategic direction and planning for our Company. He remains Chairman of the Board.

	•		Tom Wirth has been named President and remains CFO. Tom assumed management responsibilities for our Company with a focus on public company obligations including timely financial reporting.

	•		Jim Bourg retains his position as Chief Operating Officer.

	•		To provide support to, and more direct oversight of management, the independent board members have formed an executive committee led by Bruce Moore. The executive committee will remain in place until such time as we have retained additional executive talent, or the committee deems its assistance is no longer required.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a fully integrated, self-administered and self-managed real estate company formed in July 2004 to continue the business of our predecessor to acquire, renovate and reposition shopping malls. Our investment strategy is to opportunistically acquire underperforming or distressed malls and transform them into physically attractive and profitable Class A or near Class A malls through comprehensive renovation and repositioning efforts aimed at increasing shopper traffic and tenant sales. Through these renovation and repositioning efforts, we expect to raise occupancy levels, rental income and property cash flow.

We derive revenues primarily from rent and reimbursement payments received by our operating partnership from tenants under existing leases at each of our properties. Our operating results, therefore, will depend materially on the ability of our tenants to make required payments and overall real estate market conditions.

Critical Accounting Policies

A summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, are set forth below. Certain of the accounting policies used in the preparation of these consolidated financial statements are particularly important for an understanding of our financial position and results of operations. These policies require the application of judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Actual results could differ from these estimates.

Revenue Recognition

Base rental revenues from rental retail properties are recognized on a straight-line basis over the noncancelable terms of the related leases. Deferred rent represents the aggregate excess of rental revenue recognized on a straight-line basis over cash received under applicable lease provisions. “Percentage rent”, or rental revenue that is based upon a percentage of the sales recorded by tenants, is recognized in the period such sales are earned by the respective tenants.

Reimbursements from tenants related to real estate taxes, insurance and other shopping center operating expenses are recognized as revenue, based on a predetermined formula, in the period the applicable costs are incurred. Lease termination fees, net of deferred rent and related intangibles, which are included in interest and other income in the accompanying consolidated statements of operations, are recognized when the related leases are cancelled, the tenant surrenders the space and the company has no continuing obligation to provide services to such former tenants.

Additional revenue is derived from providing management services to third parties, including property management, brokerage, leasing and development. Management fees generally are a percentage of managed property cash receipts. Leasing and brokerage fees are earned and recognized in installments as follows: one-third upon lease execution, one-third upon delivery of the premises and one-third upon the commencement of rent. Development fees are earned over the time period of the development activity.

We must also make estimates related to the collectibility of our accounts receivable related to minimum rent, deferred rent, tenant reimbursements, lease termination fees, management and development fees and other income. We analyze accounts receivable and historical bad debts, tenant concentrations, tenant credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts receivable. These estimates have a direct impact on net income, because a higher bad debt allowance would result in lower net income.

Principles of Consolidation and Equity Method of Accounting

Our unaudited consolidated financial statements include all of the accounts of the wholly owned subsidiaries of our operating partnership. All intercompany balances and transactions have been eliminated in consolidation.

Property interests contributed to our operating partnership in the formation transactions in exchange for OP units have been accounted for as a reorganization of entities under common control. Accordingly, the contributed assets and assumed liabilities were recorded at our predecessor’s historical cost basis. The combination did not require any material adjustments to conform the accounting principles of the separate entities. The remaining interests, which were acquired for cash, have been accounted for as a purchase and the excess of the purchase price over the related historical cost basis has been allocated to the assets acquired and the liabilities assumed.

We evaluate our investments in partially owned entities in accordance with FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, or FIN 46R. If the investment is a “variable interest entity,” or a “VIE,” and we are the “primary beneficiary,” as defined in FIN 46R, we account for such investment as if it were a consolidated subsidiary. We have determined that Feldman Lubert Adler Harrisburg L.P., FMP Kimco Foothills LLC and FMP191 Colonie Center LLC are not VIE’s.

We evaluate the consolidation of entities in which we are a general partner in accordance with EITF Issue 04-05, which provides guidance in determining whether a general partner should consolidate a limited partnership or a limited liability company with characteristics of a partnership. EITF 04-05 states that the general partner in a limited partnership is presumed to control that limited partnership. The presumption may be overcome if the limited partners have either (1) the substantive ability to dissolve the limited partnership or otherwise remove the general partner without cause or (2) substantive participating rights, which provide the limited partners with the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of the limited partnership’s business and thereby preclude the general partner from exercising unilateral control over the partnership. Based on these criteria, we do not consolidate our investments in the Harrisburg, Foothills and Colonie joint ventures. We account for our investment in these joint ventures under the equity method of accounting. These investments were recorded initially at cost and thereafter the carrying amount is increased by our share of comprehensive income and any additional capital contributions and decreased by our share of comprehensive loss and capital distributions.

The equity in net income or loss and other comprehensive income or loss from real estate joint ventures recognized by us and the carrying value of our investments in real estate joint ventures are generally based on our share of cash that would be distributed to us under the hypothetical liquidation of the joint venture, at the then book value, pursuant to the provisions of the respective operating/partnership agreements. In the case of FMP Kimco Foothills Member LLC, the joint venture that owns the Foothills Mall (the “Foothills JV”), we have suspended the recognition of our share of losses because we have a negative carrying value in our investment in this joint venture. In accordance with APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, if and when the Foothills JV reports net income, we will resume applying the equity method of accounting after our share of that net income equals the share of net losses not recognized during the period that the equity method was suspended.

For a joint venture investment which is not a VIE or in which we are not the general partner, we follow the accounting set forth in AICPA Statement of Position No. 78-9, Accounting for Investments in Real Estate Ventures (“SOP 78-9”) as amended by EITF 04-05. In accordance with this pronouncement, investments in joint ventures are accounted for under the equity method when our ownership interest is less than 50% and we do not exercise direct or indirect control.

Factors we consider in determining whether or not we exercise control include rights of partners in significant business decisions, including dispositions and acquisitions of assets, financing, operating and capital budgets, board and management representation and authority and other contractual rights of our partners. To the extent that we are deemed to control these entities, these entities are consolidated.

On a periodic basis, we assess whether there are any indicators that the value of an investment in unconsolidated joint ventures may be impaired. An investment’s value is impaired if management’s estimate of the fair value of the investment is less than the carrying value of the investment. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the estimated fair value of the investment.

Investments in Real Estate and Real Estate Entities

Real estate is stated at historical cost, less accumulated depreciation. Improvements and replacements are capitalized when they extend the useful life or improve the efficiency of the asset. Repairs and maintenance are charged to expense as incurred.

The building and improvements thereon are depreciated on the straight-line basis over an estimated useful life ranging from three to 39 years. Tenant improvements are depreciated on the straight-line basis over the shorter of the lease term or their estimated useful life. Equipment is being depreciated on a straight-line basis over estimated useful lives of three to seven years.

It is our policy to capitalize interest, insurance and real estate taxes related to properties under redevelopment and to depreciate these costs over the life of the related assets. Predevelopment costs, which generally include legal and professional fees and other third-party costs related directly to the acquisition of a property, are capitalized as part of the property being developed. In the event a development is no longer deemed to be probable, the costs previously capitalized are written off as a component of operating expenses.

In accordance with SFAS No. 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, investment properties are reviewed for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying value of investment properties may not be recoverable. Impairment losses for investment properties are recorded when the undiscounted cash flows estimated to be generated by the investment properties during the expected hold period are less than the carrying amounts of those assets.

Impairment losses are measured as the difference between the carrying value and the fair value of the asset. We are required to assess whether there are impairments in the values of our investments in real estate, including indirect investments in real estate through entities which we do not control and are accounted for using the equity method of accounting.

In connection with the formation transactions, we acquired our predecessor in exchange for the issuance of OP units in our operating partnership and shares of our common stock. This exchange has been accounted for as a reorganization of entities under common control; accordingly, we recorded the contributed assets and liabilities at our predecessor’s historical cost.

Gains on Disposition of Real Estate

When we contribute a property to a joint venture in which we have retained an ownership interest, we do not recognize a portion of the proceeds in the computation of the gain resulting from the contribution. The amount of gain not recognized is based on our continuing ownership interest in the contributed property that arises due to the ownership interest in the joint venture acquiring the property.

Purchase Price Allocation

We allocate the purchase price of properties to tangible and identified intangible assets acquired based on their fair values in accordance with the provisions of SFAS No. 141, Business Combinations. In making estimates of fair values for the purpose of allocating purchase price, management utilized a number of sources. We also consider information about each property obtained as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of tangible and intangible assets acquired.

We allocate a portion of the purchase price to tangible assets including the fair value of the building on an as-if-vacant basis and to land determined either by real estate tax assessments, third-party appraisals or other relevant data. Since June 2005, we determine the as-if-vacant value by using a replacement cost method. Under this method we obtain valuations from a qualified third party utilizing relevant-third party property condition and Phase I environmental reports. We believe the replacement cost method closely approximates our previous methodology and is a better determination of the as-if vacant fair value.

A portion of the purchase price is allocated to above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining noncancelable term of the lease. The capitalized above-market and below-market lease values are amortized as a reduction of or an addition to rental income over the remaining noncancelable terms of the respective leases. Should a tenant terminate its lease, the unamortized portion of the lease intangibles would be charged or credited to income.

A portion of the purchase price is also allocated to the value of leases acquired and management utilizes independent sources or management’s determination of the relative fair values of the respective in-place lease values. Our estimates of value are made using methods similar to those used by independent appraisers. 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 revenue during the expected lease-up periods based on current market demand. We also estimate costs to execute similar leases including leasing commissions, legal expenses and other related costs.

Depreciation

The U.S. federal tax basis for the Foothills and Harrisburg malls, used to determine depreciation for U.S. federal income tax purposes, is the carryover basis for such malls. The tax basis for all other properties is our acquisition cost. For U.S. federal income tax purposes, depreciation with respect to the real property components of our malls (other than land) generally will be computed using the straight-line method over a useful life of 39 years.

Derivative Instruments

To determine the fair values of derivative instruments, we may use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, are used to determine fair value. All methods of assessing fair value result in a general approximation of value and such value may never actually be realized.

Results of Operations

Overview

The discussion below relates to our results of operations which, throughout the periods discussed below, were engaged in comprehensive mall renovation and repositioning projects, including the Foothills Mall (“Foothills”), Harrisburg Mall (“Harrisburg”), Stratford Square Mall (“Stratford”), Colonie Center Mall (“Colonie”), Northgate Mall (“Northgate”), Tallahassee Mall (“Tallahassee”) and Golden Triangle Mall, (“Golden Triangle”). During the redevelopment and repositioning period, some of our properties may experience decreases in occupancy and corresponding net operating income. For the following reasons, the results of operations of our Company for the six months ended June 30, 2007 may not be comparable to the corresponding period in 2006:

•		During March 2006, we completed the issuance and sale in a private placement of $29.4 million in aggregate principal amount of junior subordinated debt obligations (the “Notes”). The Notes require quarterly interest payments calculated at a fixed interest rate equal to 8.70% per annum through April 2011 and subsequent to April 2011 at a variable interest rate equal to LIBOR plus 3.45% per annum. The Notes mature in April 2036 and may be redeemed, in whole or in part, at par, at our option, beginning after April 2011.

•		On April 5, 2006, we acquired Golden Triangle in the Dallas suburb of Denton, Texas, for approximately $41.2 million (including $1.0 million of additional consideration paid in accordance with an earn-out provision in the purchase agreement). Including non-owned anchors, Golden Triangle is a 765,000 square-foot regional mall.

•		On April 5, 2006, in connection with the acquisition of Golden Triangle, we entered into a $24.6 million secured line of credit which bears interest at 140 basis points over LIBOR and matures in April 2008. As of June 30, 2007, the outstanding balance was $13,000.

•		On April, 7, 2006, we acquired the building occupied by JCPenney and related acreage at Stratford Square for a price of $6.7 million. The purchase price included assumption of a loan secured by the property and had a principal balance of approximately $3.5 million. On May 8, 2007, we repaid this loan in connection with the Stratford Square mortgage refinancing described below.

•		On June 29, 2006, we contributed Foothills to a joint venture and retained a 30.8% interest. In connection with this transaction, the joint venture refinanced the existing $54.8 million first mortgage with an $81.0 million first mortgage. As a result of these transactions, we received approximately $38.9 million and recognized a $29.4 million gain on the partial sale of the property. A portion of the proceeds from the transaction was used to repay $24.6 million outstanding on our secured line of credit and $5.0 million outstanding on our credit facility provided by Kimco Realty Corp.

•		On September 29, 2006, we contributed Colonie to a joint venture and retained a 25.0% interest. In connection with this transaction, the joint venture refinanced the existing $50.8 million first mortgage bridge loan with a first mortgage and construction facility with a maximum capacity commitment of $109.8 million. As a result of these transactions, we received approximately $41.2 million and recorded a $3.5 million deferred gain. A portion of the proceeds from the transaction were used to repay $4.0 million outstanding on our secured line of credit on October 2, 2006.

•		On April 30, 2007, we issued $15.0 million in preferred stock.

•		On May 8, 2007, we closed on a $104.5 million first mortgage loan secured by Stratford. On the closing date, $75.0 million of the proceeds were used to retire Stratford’s outstanding $75.0 million first mortgage.

Comparison of the Three Months Ended June 30, 2007 to the Three Months Ended June 30, 2006

Revenues

Rental revenues decreased approximately $4.1 million, or 34.8%, to $7.7 million for the three months ended June 30, 2007 compared to $11.8 million for the prior year period. The decrease resulted from $4.1 million due to the partial sales of Colonie and Foothills.

Lease Termination

We have received constructive notice that Dillard’s, one of our anchor tenants at Tallahassee, will vacate its leased space (totaling approximately 204,000 square feet) on or before their lease expiration date. The Dillard’s lease expires on January 31, 2008 and currently pays annual base rent totaling $280,000. Currently, we are searching for an anchor to replace Dillard’s. In addition, certain tenants at Tallahassee have provisions in their leases that could result in rental revenue reductions if Dillard’s is not replaced within certain time periods.

Revenues from tenant reimbursements decreased approximately $2.9 million, or 46.0%, to $3.4 million for the three months ended June 30, 2007 compared to $6.3 million for the prior year period. The decrease was primarily due to the partial sales of Colonie and Foothills, which combined accounted for $2.4 million of prior year revenues, and a decrease of $265,000 at Golden Triangle.

Revenues from management, leasing and development services increased approximately $763,000 to $875,000 for the three months ended June 30, 2007 compared to $112,000 for the prior year period. The increase is primarily due to fees charged to the Colonie and Foothills joint ventures.

Interest and other income increased approximately $192,000 to $457,000 for the three months ended June 30, 2007 compared to $265,000 for the prior year period. The increase was primarily due to higher lease termination fees ($87,000) and an increase in income representing a return on preferred capital contributions to the Colonie joint venture ($191,000), net of a decrease in interest income of $77,000.

Expenses

Rental property operating and maintenance expenses decreased $1.2 million, or 21.7%, to $4.5 million for the 2007 first quarter compared to $5.7 million for the prior year period. The decrease is due primarily to the partial sales of Colonie and Foothills, which combined accounted for $2.0 million of 2006 first quarter expense. Expenses that increased over the prior year period include bad debt expense ($295,000), salaries and wages ($140,000), professional fees ($105,000) and various other rental property operating and maintenance expenses ($243,000).

Real estate taxes decreased approximately $1.1 million, or 41.9%, to $1.5 million for the three months ended June 30, 2007 compared to $2.5 million for the prior year period. The decrease in real estate taxes was primarily due to $868,000 recorded by Colonie and Foothills in the prior year ended and a decrease of $119,000 at Golden Triangle.

Interest expense decreased $1.6 million, or 31.2%, to $3.5 million for the three months ended June 30, 2007 compared to $5.1 million for the prior year period. The decrease was due primarily to the partial sales of Colonie and Foothills, which combined accounted for $1.4 million of mortgage interest expense in the prior year period, and a $211,000 increase in capitalized interest.

We recorded a loss on the early extinguishment of debt in the 2007 period in the amount of $379,000 in connection with the refinancing of the Stratford first mortgage. The loss represents prepayment penalties and the write-off of deferred financing costs related to the existing mortgage that was repaid. In the 2006 period, we recorded a $357,000 loss on early extinguishment of debt in connection with the contribution of Foothills to the joint venture and related payoff of that mortgage.

Depreciation and amortization expense decreased $2.0 million, or 37.3%, to $3.5 million for the 2007 first quarter compared to $5.5 million for the prior year period. The decrease is primarily due to a $1.4 million decrease related to the partial sales of Colonie and Foothills and $585,000 from lower in-place lease amortization throughout the portfolio as some acquired leases expired.

General and administrative expenses increased approximately $2.5 million, or 139.0%, to $4.3 million for the three months ended June 30, 2007 compared to $1.8 million for the 2006 first quarter. The increase was primarily due to an increase in personnel costs due to growth in staff in connection our increased redevelopment and joint venture activity ($349,000), increases in construction management, consulting, Sarbanes-Oxley related and other professional fees, ($1.4 million), costs associated with special construction audits and lease audits ($249,000) and severance and related costs totaling $591,000 in connection with the resignation of Lloyd Miller.

Other

Equity in loss of unconsolidated real estate partnerships represents our share of the equity in the earnings of the joint ventures owning Harrisburg and, in the current year period, Colonie. The equity in loss of unconsolidated real estate partnerships totaled $300,000 for the three months ended June 30, 2007 as compared to $139,000 for the prior year period; most of the increase was related to Colonie.

We recorded a $30.0 million gain on the partial sale of real estate in the 2006 period arising from the contribution of Foothills to a joint venture on June 29, 2006. We currently have a 30.8% interest in the joint venture.

Minority interest for the three months ended June 30, 2007 and 2006 represents the unit holders in our operating partnership which represents 9.8% and 10.9%, respectively, of our income.

Comparison of the Six Months Ended June 30, 2007 to the Six Months Ended June 30, 2006

Revenues

Rental revenues decreased approximately $7.1 million, or 31.5%, to $15.4 million for the six months ended June 30, 2007 compared to $22.5 million for the prior year period. The decrease resulted from $8.2 million due to the partial sales of Colonie and Foothills, offset in part by an increase in revenue of $1.0 million from Golden Triangle, which we acquired on April 5, 2006.

Revenues from tenant reimbursements decreased approximately $4.7 million, or 40.0%, to $7.0 million for the six months ended June 30, 2007 compared to $11.7 million for the prior year period. The decrease was primarily due to the partial sales of Colonie and Foothills, which combined accounted for $4.7 million of prior year revenues, offset in part by a $219,000 increase in revenue from Golden Triangle.

Revenues from management, leasing and development services increased approximately $1.4 million to $1.7 million for the six months ended June 30, 2007 compared to $257,000 for the prior year period. The increase is primarily due to fees charged to the Colonie and Foothills joint ventures.

Interest and other income increased approximately $2.3 million to $3.1 million for the six months ended June 30, 2007 compared to $769,000 for the prior year period. The increase was primarily due to a $2.3 million reduction in the 2007 first quarter in the estimated fair value of our obligation to the OP unit holders related to the Harrisburg partnership. The reduction was due primarily to lower estimated construction loan proceeds and projected delays in the sale of the property. In addition, we recorded an increase in income representing a return on preferred capital contributions to the Colonie joint venture ($436,000) offset by a decrease in lease termination fees ($199,000) and interest income ($94,000).

Expenses

Rental property operating and maintenance expenses decreased $2.4 million, or 21.7%, to $8.8 million for the six months ended June 30, 2007 compared to $11.2 million for the prior year period. The decrease is due primarily to the partial sales of Colonie and Foothills, which combined accounted for $4.4 million of the expense for the prior year period, offset in part by a $797,000 increase in expense at Golden Triangle. Expenses of our other malls that increased over the prior year period include bad debt expense ($301,000), utilities ($212,000) and various other rental property operating and maintenance expenses ($699,000).

Real estate taxes decreased approximately $1.5 million, or 33.5%, to $3.0 million for the six months ended June 30, 2007 compared to $4.6 million for the prior year period. The decrease in real estate taxes was primarily due to $1.8 million recorded by Colonie and Foothills in the prior year ended. The decrease was partially offset by increases in taxes at the other malls.

Interest expense decreased $2.7 million, or 28.6%, to $6.6 million for the 2007 first quarter compared to $9.3 million for the prior year period. The decrease was due primarily to the partial sales of Colonie and Foothills, which combined accounted for $2.9 million of mortgage interest expense in the prior year period, and a $427,000 increase in capitalized interest. These decreases were offset in part by $494,000 of interest on the Notes. Interest expense will increase in future periods due to increases in borrowings and a decrease in interest capitalized.

Depreciation and amortization expense decreased $3.1 million, or 31.1%, to $6.9 million for the 2007 first quarter compared to $10.0 million for the prior year period. The decrease is primarily due to a $2.8 million decrease related to the partial sales of Colonie and Foothills and $752,000 from lower in-place lease amortization throughout the portfolio as some acquired leases expired. The decrease was partially offset by an increase in amortization of deferred leasing costs of $107,000 and an increase in depreciation expense of $379,000 due to an increase in tenant and building improvements.

General and administrative expenses increased approximately $3.5 million, or 96.7%, to $7.2 million for the six months ended June 30, 2007 compared to $3.7 million for the 2006 first quarter. The increase was primarily due to an increase in personnel costs due to growth in staff in connection our increased redevelopment and joint venture activity ($655,000) increases in construction management, consulting, Sarbanes-Oxley related and other professional fees, ($2.2 million), costs associated with special construction audits and lease audits ($249,000) and severance and related costs totaling $591,000 in connection with the resignation of Lloyd Miller.

Other

Equity in loss of unconsolidated real estate partnerships represents our share of the equity in the earnings of the joint ventures owning Harrisburg and, in the current year period, Colonie. The equity in loss of unconsolidated real estate partnerships totaled $655,000 for the six months ended June 30, 2007 as compared to $284,000 for the prior year period; most of the increase was related to Colonie.

Minority interest for the six months ended June 30, 2007 and 2006 represents the unit holders in our operating partnership which represents 9.8% and 10.9%, respectively, of our income.

Cash Flows

Comparison of the Six Months Ended June 30, 2007 to the Six Months Ended June 30, 2006

Cash and cash equivalents were $4.0 million and $13.1 million at June 30, 2007 and 2006, respectively, and were $13.0 million at December 31, 2006.

Cash used in operating activities totaled $1.0 million for the six months ended June 30, 2007, as compared $797,000 for the prior year period. The decrease in cash flow from operating activities is primarily due to the increase in general and administrative costs totaling $3.5 million and a $7.0 million decrease in cash operating income as a result of the contribution of Colonie and Foothills to joint ventures, net of a $436,000 increase in cash operating income from Golden Triangle and a $1.4 million increase in fee income from management, leasing and development services. The remaining increase is due to increases in accounts receivable and other operating assets and the timing of payment of accounts payable and other liabilities, as set forth in the consolidated statement of cash flows.

Net cash used in investing activities increased to $29.6 million for the six months ended June 30, 2007 as compared to $17.9 million for the prior year period, as our real estate development expenditures increased by $12.7 million. In the prior year period, we received cash proceeds from the contribution of the Foothills Mall to the joint venture of $38.9 million and expended $43.2 million to purchase Golden Triangle and $880,000 to purchase the shares in our wholly owned statutory trust (see note 4 to the consolidated financial statements). In the current year period, cash advances to our joint ventures totaled $4.3 million compared to $181,000 in the prior year period.

Net cash provided by financing activities totaled $21.5 million for the six months ended June 30, 2007 as compared to $17.5 million for the prior year period. In the current year period, net cash from financing activities was provided by draws on our secured line of credit ($13.0 million), the sale of our Series A preferred stock ($14.8 million, net) and the refinancing of the mortgage on Stratford Square ($4.4 million, net of fees and escrows). We paid cash dividends and distributions in the 2007 period totaling $6.6 million. During the six months ended June 30, 2006, we received cash proceeds of $29.4 million from the sale of junior subordinated notes, paid dividends and distributions of $6.7 million and paid $1.4 million in financing costs.

Liquidity and Capital Resources

As of June 30, 2007, we had approximately $4.0 million in cash and cash equivalents on hand. In addition, we had $6.8 million of availability under our line of credit secured by Golden Triangle. At June 30, 2007, our total consolidated indebtedness outstanding was approximately $269.4 million, or 59.7% of our total assets.

We intend to maintain a flexible financing position by maintaining a prudent level of leverage consistent with the level of debt typical in the mall industry. We intend to finance our acquisition, renovation and repositioning projects with the most advantageous source of capital available to us at the time of the transaction including traditional floating rate construction financing. We expect that once we have completed the renovation and repositioning of a specific mall asset, we will replace construction financing with medium to long-term fixed rate financing.

We are required to distribute 90% of our REIT taxable income (excluding capital gains) on an annual basis in order to qualify as a REIT for federal income tax purposes. We may be required to use borrowings under the credit facility, if necessary, to meet REIT distribution requirements and maintain our REIT status. We consider market factors and our performance in addition to REIT requirements in determining distribution levels. Amounts accumulated for distribution to stockholders and unit holders are invested primarily in interest-bearing accounts and short-term interest-bearing securities, which are consistent with our intention to maintain our qualification as a REIT.

In light of current market conditions and to enhance the redevelopment of our malls, our board of directors has suspended the common dividend and does not expect to declare any additional common dividends in the foreseeable future except as may be required to maintain REIT status.

Short-Term Liquidity Requirements

Our short-term liquidity needs include funds to pay dividends to our stockholders required to maintain our REIT status, distributions to our OP unit holders, funds for capital expenditures and funds for potential acquisitions. Our properties require periodic investments of capital for tenant-related capital expenditures and for general capital improvements. As of June 30, 2007, we have commitments to make tenant improvements and other recurring capital expenditures at our portfolio in the amount of approximately $940,000 to be incurred during 2007, which we intend to fund from existing cash and cash from operating activities. We believe that our net cash provided by operations and our available cash and restricted cash will be adequate to fund operating requirements, pay interest on our borrowings and fund distributions in accordance with the REIT requirements of the federal income tax laws.

In addition to the capital requirements for recurring capital expenditures, tenant improvements and leasing commissions, we will have expenditures for redevelopment and renovation of our properties. Those renovation costs will include, among other items, increasing the size of the properties by developing additional rentable square feet. As of June 30, 2007, our commitments for

redevelopment and renovation costs are approximately $12.2 million for the remainder of the year ending December 31, 2007; however, we expect to spend approximately $22.7 million during the remainder of 2007 and a total of $97.9 million in 2008 and 2009. We believe that our current cash on hand, the capital transactions above and the additional corporate-level financing activity, property-level construction loans and secured line of credit will be adequate to fund operating and capital requirements.

In addition, as of June 30, 2007, the partnership owning Harrisburg has commitments for tenant improvements renovation costs and other capital expenditures of approximately $10.9 million in 2007 and $3.4 million in 2008. We expect that total renovation costs will amount to approximately $11.8 million in 2007 and $8.1 million thereafter. We are responsible for 25% of any necessary equity contributions. Subject to the joint venture’s approval, we may be responsible for more than 25% of certain specific renovation costs.

As of June 30, 2007, the joint venture owning Colonie has commitments for tenant improvements, renovation costs and other capital expenditures in the amount of $34.3 million, of which $32.2 million will be spent in 2007 and $2.1 million in 2008. We expect that total renovation costs will amount to approximately $32.2 million in 2007 and $12.0 million thereafter. The joint venture intends to fund these commitments from additional borrowing on an existing construction loan commitment, operating cash flow and cash on hand. If additional equity contributions are required, we are responsible for 25% of any necessary requirements. In addition, we are required to fund 100% of any renovation hard cost overruns, as defined by the joint venture contribution agreement. Subsequent to the closing of the joint venture, we contributed additional equity totaling $16.7 million, most of which was used to fund such cost overruns, and have also issued a $10.25 million letter of credit against our unsecured line of credit that will remain outstanding until the project is complete. We do not expect additional significant equity contributions will be required in the short or long term. We have agreed to guarantee that certain property redevelopment project costs will not exceed $46 million. To the extent these costs exceed $46 million, our preferred equity contributions, and any funds drawn from our letter of credit, will be recharacterized as subordinated capital contributions. These subordinated equity contributions may not be distributed to us until Heitman receives a 15% return on and a return of its invested equity capital.

As of June 30, 2007, the joint venture owning Foothills has commitments for tenant improvements, renovation costs and other capital expenditures in the amount of $6.7 million, which will be incurred in the remainder of 2007. The joint venture intends to fund these commitments from operating cash flow and cash on hand. If additional equity contributions are required, we are responsible for 25% of any necessary requirements. In addition, we are required to fund any cost overruns up to $350,000 related to the construction of a 15,550 square-foot junior anchor tenant.

Secured Line of Credit

On April 5, 2006, in connection with the acquisition of Golden Triangle, we entered into a $24.6 million secured line of credit which bears interest at 140 basis points over LIBOR. The outstanding balance on the secured line of credit at June 30, 2007 was $13,000 and the interest rate was 6.78%. As of December 31, 2006, there was no outstanding balance on our secured line of credit. The secured line of credit allows for the issuance of letters of credit up to $13.0 million at 50 basis points over LIBOR. As of June 30, 2007, letters of credit outstanding under this agreement amounted to $10.25 million and are renewable through the maturity date of the loan. The secured line of credit contains customary covenants requiring us to, among other things, maintain certain financial coverage ratios. As of June 30, 2007, we were in compliance with the covenant requirements.

On April 20, 2007, we increased our borrowing capacity under the secured line of credit from $24.6 million to $30.0 million. The maturity date of the secured line of credit was extended from April 2008 to April 2009. The secured line of credit is recourse to us if the fixed charge coverage ratio related to Golden Triangle is higher than 1.5.

Convertible Preferred Equity Financing

Effective April 10, 2007, we entered into an agreement to issue up to $50 million of convertible preferred stock through the private placement of 2 million shares of 6.85% Series A Cumulative Convertible Preferred Shares to Inland American Real Estate Trust, Inc., a public non-listed REIT sponsored by an affiliate of the Inland Real Estate Group of Companies. We issued $15 million in preferred stock on April 30, 2007. We are required to issue a total of $50 million by the end of the 12-month period following the close of this transaction.

On October 22, 2007, we issued $20.0 million, or 800,000 shares, of our 6.85% Series A preferred stock to Inland. We used the proceeds to fund redevelopment costs and to repay borrowings under our line of credit. Concurrent with this offering our operating partnership issued to us 800,000 of its 6.85% Preferred Units.

We intend to utilize the net proceeds from the offering to provide capital for the short-term and long-term redevelopment of our malls, to repay borrowings under our secured line of credit and for general corporate purposes.

$25 Million Credit Facility

On April 16, 2007, we announced the execution of a promissory note (the “Note”) providing for loans aggregating up to $25 million from Kimco Capital Corp. (“Kimco”). Loan draws under the Note are optional and will bear interest at the rate of 7.0% per annum, payable monthly. Any outstanding principal amount will be due and payable on April 10, 2008, provided that the maturity of the Note may be extended to April 10, 2009 if we deliver to Kimco, on or before March 17, 2008, a notice of extension and further provided that we comply with certain performance criteria. We may prepay the outstanding principal amount under the Note in whole or in part at any time. In addition to the interest on the Note, Kimco will be paid a variable fee equal to (i) $500,000, multiplied by (ii) (a) the volume weighted average price of our common stock as of a five-day period chosen by Kimco, minus (b) $13.00 per common share. If Kimco does not select a date for determination of the fee prior to termination of the Note, we will instead pay to Kimco $250,000 in additional interest.

We intend to utilize the net proceeds from the Note to provide capital for the redevelopment of our malls, to repay borrowings under our secured line of credit and for general corporate purposes. To date, we have no borrowings under the Note.

$104.5 Million Stratford Square Refinancing

On May 8, 2007, we closed on a $104.5 million first mortgage loan secured by Stratford. The loan has an initial term of 36 months and bears interest at a floating rate of 115 basis points over LIBOR. The loan has two one-year extension options. On the closing date, $75.0 million of the loan proceeds were used to retire Stratford’s outstanding $75.0 million first mortgage. The balance of the proceeds was placed into escrow and will be released to us to fund the completion of the mall’s redevelopment project. As of June 30, 2007, the balance of funds in escrow was $24.1 million.

In connection with the refinancing of the Stratford mortgage in May 2007, we entered into an additional $29.5 million swap that matures in May 2010. The effect of this swap is to fix the all-in interest rate of $29.5 million of the mortgage at 6.65% per annum.

Also, see “Long-Term Liquidity Requirements — Mortgage Loans” for additional discussions on potential early refinancing activity.

Long-Term Liquidity Requirements

Our long-term liquidity requirements consist primarily of funds necessary for acquisition, renovation and repositioning of new properties, nonrecurring capital expenditures and payment of indebtedness at maturity. We expect to meet our other long-term liquidity requirements through net cash from operations, existing cash, additional long-term secured and unsecured borrowings, the issuance of additional equity or debt securities and additional property-level joint ventures.

In the future, we may seek to increase the amount of our mortgages, negotiate credit facilities or issue corporate debt instruments. Any debt incurred or issued by us may be secured or unsecured, long-term or short-term, fixed or variable interest rate and may be subject to such other terms as we deem prudent.

While our charter does not limit the amount of debt we can incur, we intend to preserve a flexible financing position by maintaining a prudent level of leverage. We will consider a number of factors in evaluating our actual level of indebtedness, both fixed and variable rate and in making financial decisions. We intend to finance our acquisition, renovation and repositioning projects with the most advantageous source of capital available to us at the time of the transaction, including traditional floating rate construction financing. We expect that once we have completed our renovation and repositioning of a specific mall asset we will replace construction financing with medium to long-term fixed rate financing. In addition, we may also finance our activities through any combination of sales of common or preferred shares or debt securities and/or additional secured or unsecured borrowings.

In addition, we may also finance our acquisition, renovation and repositioning projects through joint ventures. Through these joint ventures, we will seek to enhance our returns by supplementing the cash flow we receive from our properties with additional management, leasing, development and incentive fees from the joint ventures. We may also acquire properties in exchange for our OP units.

At any time, we may be in preliminary discussions with a number of potential sellers of mall properties. We currently have no binding agreement to invest in any property other than the properties we currently own and have announced to acquire. There can be no assurance that we will make any investments in any other properties that meet our investment criteria.

Contractual Obligations

The following table summarizes our contractual payment obligations due to third parties as of June 30, 2007 (in thousands):


			Our Share of				Our Share of
			Capital Expenditure				Long-Term
	Consolidated		Commitments in		Consolidated		Debt in
	Capital Expenditure		Unconsolidated		Long-Term		Unconsolidated		Operating and
Year	Commitments		Joint Ventures		Debt(1)		Joint Ventures(1)		Ground Leases		Total
2007(six months)	$	12,210	$	12,858	$	9,304	$	1,898	$	303	$	36,573
2008		6,393		1,372		18,607		35,097		578		62,047
2009		—		—		58,079		1,517		510		60,106
2010		—		—		115,055		1,517		429		117,001
2011		—		—		8,763		1,640		331		10,734
2012 and thereafter		—		—		167,745		31,651		23,571		222,967

Total	$	18,603	$	14,230	$	377,553	$	73,320	$	25,722	$	509,428


(1)		Amounts include interest payments based on contractual terms and current interest rates for variable rate debt.

Mortgage Loans

Northgate Mall

On July 12, 2005, we assumed a $79.6 million first mortgage in connection with the acquisition of Northgate. The stated interest on the mortgage is 6.60%. We determined this rate to be above market and, in applying purchase accounting, determined the fair market value interest rate to be 5.37%. The above-market premium was initially $8.2 million and is being amortized over the remaining term of the acquired loan using the effective interest method. The loan has an initial prepayment date in November 2012; however, we intend to refinance the loan prior to the prepayment date.

Tallahassee Mall

On June 28, 2005, we assumed a $45.8 million first mortgage in connection with the acquisition of Tallahassee. The stated interest rate on the mortgage is 8.60%. We determined this rate to be above market and, in applying purchase accounting, determined the fair market value interest rate to be 5.16%. The above-market premium was initially $6.5 million and is being amortized over the remaining term of the acquired loan using the effective interest method. The loan has an initial prepayment date in July 2009; however, we intend to refinance the loan prior to the prepayment date.

Stratford Square Mall

In January 2005, we completed a $75.0 million, three-year first mortgage financing collateralized by Stratford. The mortgage bore interest at a rate of LIBOR plus 125 basis points. On May 8, 2007, we refinanced this loan with a $104.5 million first mortgage loan as discussed above.

Colonie Center Mall Joint Venture

In connection with the recapitalization of Colonie, the joint venture refinanced the property with a new construction facility (the “Loan”) with a maximum capacity of $109.8 million and repaid the existing $50.8 million mortgage loan on the property. On February 13, 2007, the joint venture borrowed $50.1 million under the Loan and on February 27, 2007, the Loan was increased by $6.5 million to $116.3 million. The Loan bears interest at 180 basis points over LIBOR and matures in October 2008. The Loan may be extended beyond 2008, subject to certain customary requirements for up to two additional years. In connection with the Loan, the joint venture entered into a two-year interest rate protection agreement fixing the initial $50.8 million of the Loan at an all-in interest rate of 6.84%. The Loan is an interest-only loan.

We have agreed to guarantee that certain property redevelopment costs will not exceed $46 million. If required, we will fund these additional costs as subordinated capital contributions.

Foothills Mall Joint Venture

In June 2006, we completed a contribution with a subsidiary in connection with Foothills, located in Tuscon Arizona. In connection with the contribution agreement we retained a 30.8% interest in Foothills. In connection with the contribution agreement closing, we refinanced Foothills with an $81.0 million non-recourse first mortgage. The first mortgage matures in July 2016 and bears interest at 6.08%. The loan may not be prepaid until the earlier of three years from the first interest payment or two years from the date of loan syndication and has no principal payments for the first five years and the loan principal amortizes on a 30-year basis thereafter. We intend to refinance the loan on the maturity date.

Harrisburg Mall Joint Venture

Under certain circumstances our operating partnership may extend the maturity of the loan for three one-year periods. We may prepay the loan at any time, without incurring any prepayment penalty. The loan presently has a limited recourse of $5.0 million of which our joint venture partner is liable for $3.1 million, or 63%, and we are liable for $1.9 million, or 37%.

The balance outstanding under the loan was $49.8 million as of June 30, 2007 and December 31, 2006. We are required to maintain cash balances with the lender averaging $5.0 million. If the balances fall below $5.0 million in any one month, the interest rate on the loan increases to LIBOR plus 1.875%. We intend to refinance the loan prior to the maturity date.

Capital Expenditures

We are required to maintain each retail property in good repair and condition and in conformity with applicable laws and regulations and in accordance with the tenant’s standards and the agreed upon requirements in our lease agreements. The cost of all such routine maintenance, repairs and alterations may be paid out of a capital expenditures reserve, which will be funded by cash flow. Routine repairs and maintenance will be administered by our subsidiary management company.

Off-Balance Sheet Arrangements

Loan Guarantees

See our loan guarantees described on the Harrisburg loan above.

Forward Swap Contracts

In connection with the Stratford mortgage financing, during January 2005, we entered into a $75.0 million swap commencing February 2005 with a final maturity date in January 2008. The effect of the swap is to fix the all-in interest rate of the Stratford mortgage loan at 5.0% per annum. In connection with the refinancing of the Stratford mortgage in May 2007, we entered into an additional $29.5 million swap that matures in May 2010. The effect of this swap is to fix the all-in interest rate of $29.5 million of the mortgage at 6.65% per annum.

During December 2005, we entered into a $75.0 million swap which commences February 2008 and has a final maturity date in January 2011. The effect of the swap is to fix the all-in interest rate of our forecasted cash flow on LIBOR-based loans at 4.91% per annum.

Tax Indemnifications

In connection with the formation transactions, we entered into agreements with Messrs. Feldman, Bourg and Jensen that indemnify them with respect to certain tax liabilities intended to be deferred in the formation transactions, if those liabilities are triggered either as a result of a taxable disposition of a property by the Company, or if we fail to offer the opportunity for the contributors to guarantee or otherwise bear the risk of loss, with respect to certain amounts of the Company’s debt for tax purposes (the “contributor-guaranteed debt”). With respect to tax liabilities arising out of property sales, the indemnity will cover 100% of any such liability until December 31, 2009 and will be reduced by 20% of the aggregate liability on each of the five following year ends thereafter.

We have also agreed to maintain approximately $10.0 million of indebtedness and to offer the contributors the option to guarantee $10.0 million of the operating partnership’s indebtedness, in order to enable them to continue to defer certain tax liabilities. The obligation to maintain such indebtedness extends to 2013, but will be extended by an additional five years for any contributor that holds (together with his affiliates) at that time at least 25% of the initial ownership interest in the operating partnership issued to them in the formation transactions.

Funds From Operations

The revised White Paper on Funds From Operations, or FFO, issued by NAREIT in 2002 defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains or losses from the sale of property, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We believe that FFO is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of our ability to incur and service debt, to make capital expenditures and to fund other cash needs. We compute FFO in accordance with the current standards established by NAREIT, which may not be

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments depend upon interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates.

Market Risk Related to Fixed Rate Debt

We had approximately $269.4 million of outstanding indebtedness as of June 30, 2007, including the Notes described below, of which $151.9 million bears interest at fixed rates for some portion or all of the terms of the loans ranging from 6.47% to 8.70% and $117.5 million that bears interest on a floating rate basis of LIBOR plus a margin. Upon the maturity of our debt, there is a market rate risk as to the prevailing rates at the time of refinancing. Changes in market rates on our fixed-rate debt affects the fair market value of our debt but it has no impact on interest expense incurred or cash flow. A 100 basis point increase or decrease in interest rates on our floating/fixed rate debt would increase or decrease our annual interest expense by approximately $2.7 million, as the case may be.

We currently have two $75 million swap contracts that run consecutively through January 2011 and a $29.5 million swap contract that matures in May 2010. A 100 basis point increase in interest rates would increase the fair value of these two swaps by approximately $3.0 million and a 100 basis point decrease in interest rates would decrease the fair value of these swap contracts by approximately $3.1 million.

We currently have $29.4 million in aggregate principal amount of fixed/floating rate junior subordinated debt obligations (the “Notes”). The Notes require quarterly interest payments calculated at a fixed interest rate equal to 8.70% per annum through April 2011 and subsequently at a variable interest rate equal to LIBOR plus 3.45% per annum. The notes mature April 2036 and may be redeemed, in whole or in part, at par, at our option, beginning after April 2011.

Market Risk Related to Other Obligations

At June 30, 2007 we had an obligation to make payments to certain owners of the predecessor in connection with the formation transactions. As part of the formation transactions, Messrs. Feldman, Bourg and Jensen have the right to receive additional OP units for ownership interests contributed as part of the formation transactions upon our achieving a 15% internal rate of return from the Harrisburg joint venture on or prior to December 31, 2009. The right to receive such additional OP units is a financial instrument that we recorded as an obligation of the offering that is adjusted to fair value each reporting period until the thresholds have been achieved and the OP units have been issued. The more significant assumptions used in determining the fair value of the obligation are (i) refinancing the property with a $70.0 million loan, as compared to $80 million at December 31, 2006, (ii) probability weighted sale of the property in the middle of 2009, as compared to a probability weighted sale in early 2009 at December 31, 2006, and (iii) sales proceeds totaling approximately $125.7 million, which is based upon an estimated multiple of 15 times future net operating income (6.75% cap rate). Based on the expected operating performance of the Harrisburg Mall, and the significant valuation assumptions noted above, the fair value is estimated to be $1.7 million at June 30, 2007.

A 25 basis point decrease in the multiple paid by a potential buyer for the projected cash flow of the property would decrease our obligation by $0.9 million and a 25 basis point increase in this multiple would increase our obligation by $1.0 million.

Inflation

Most of our leases contain provisions designed to mitigate the adverse impact of inflation by requiring the tenant to pay its share of operating expenses, including common area maintenance, real estate taxes and insurance. The leases also include clauses enabling us to receive percentage rents based on gross sales of tenants, which generally increase as prices rise. This reduces our exposure to increases in costs and operating expenses resulting from inflation.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chairman and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

There was no change in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during the second quarter of 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chairman and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chairman and Chief Financial Officer concluded that our disclosure controls and procedures were not effective, as a result of the material weakness in internal control over financial reporting for the period ending June 30, 2007, as described below.

In our annual report on Form 10-K, we reported that we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2006 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, we concluded that, as of December 31, 2006, we had the following material weakness:

• We lacked personnel possessing technical accounting expertise adequate to ensure that our financial statements were prepared accurately and on a timely basis. As a result, certain controls and reconciliations associated with financial statement account balances were not performed on a timely basis, journal entries were recorded without adequate support, and review and approval procedures associated with critical financial reporting process controls were not documented. This material weakness in internal control over financial reporting resulted in misstatements deemed to be immaterial in 2006 and could have resulted in material misstatements to the Company’s annual and interim financial statements.

Management concluded that, as a result of the material weakness noted above, the Company did not maintain effective internal control over financial reporting as December 31, 2006 based on criteria set forth in the COSO framework. While we have taken remedial actions, as described below, this material weakness continued for the period ending June 30, 2007.

Management’s Remedial Actions

During 2007, management has hired a CPA as the Director of Financial Reporting; hired additional experienced property accountants; is designing templates, forms, logs, checklists, standard procedures, and operating instructions for centralized processing; is conducting staff training on control processes; and is updating an approved Delegation of Authority Matrix for all positions and processes.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 1A. RISK FACTORS

There were no material changes from the risk factors previously disclosed in Part I, “Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2006.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Effective April 10, 2007, we entered into an agreement to issue up to $50.0 million of convertible preferred stock through the private placement of 2,000,000 shares of 6.85% Series A Cumulative Convertible Preferred Shares to Inland American Real Estate

Trust, Inc., a public non-listed REIT sponsored by an affiliate of the Inland Real Estate Group of Companies. We issued $15.0 million in preferred stock on April 30, 2007. We are required to issue a total of $50.0 million by April 2008.

We intend to utilize the net proceeds from the offering to provide capital for the redevelopment of our malls, to repay borrowings under our line of credit and for general corporate purposes.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS


	31.1			Certification by the Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 filed herewith.

	31.2			Certification by the Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 filed herewith.

	32.1			Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 202 filed herewith.



PART I.	FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

Feldman Mall Properties, Inc. and Subsidiaries

Consolidated Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006		3

Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006 (unaudited)		4

Consolidated Statement of Stockholders’ Equity and Comprehensive Loss for the six months ended June 30, 2007 (unaudited)		5

Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006 (unaudited)		6

Notes to Consolidated Financial Statements (unaudited)		7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	27

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	39

ITEM 4.	CONTROLS AND PROCEDURES	40

PART II.	OTHER INFORMATION	40

ITEM 1.	LEGAL PROCEEDINGS	40

ITEM 1A.	RISK FACTORS	40

ITEM 2.	UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS	40

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	41

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	41

ITEM 5.	OTHER INFORMATION	41

ITEM 6.	EXHIBITS	41

Signatures		42
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1


Date: October 30, 2007	FELDMAN MALL PROPERTIES, INC.
	By:	/s/ Thomas Wirth
		Name:	Thomas Wirth
		Title:	President and Chief Financial Officer


	31.1			Certification by the Chairman of the Board pursuant to section 302 of the Sarbanes-Oxley Act of 2002 filed herewith.
	31.2			Certification by the President and Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 filed herewith.
	32.1			Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 202 filed herewith.