Prime Group Realty Trust Announces Modifications to Continental Towers Ownership Structure and Loan from Citicorp USA

Business Wire, Jan 18, 2006

CHICAGO -- Prime Group Realty Trust (NYSE:PGEPRB) (the "Company") announced that (i) on January 10, 2006, the Company's operating partnership, Prime Group Realty, L.P. (the "Operating Partnership"), Roland E. Casati ("Casati"), Richard H. Heise ("Heise") and certain other parties entered into an Amended and Restated Tax Indemnity Agreement (the "Amended Tax Indemnity Agreement") in connection with certain modifications to the ownership structure of Continental Towers (the "Continental Transaction"), which among other things, reduced the estimated maximum liability of the Operating Partnership in the event of the consummation of a taxable transaction relating to Continental Towers, calculated at current tax rates, from approximately $53.2 million to $14.0 million, and (ii) on January 11, 2006, a wholly-owned subsidiary of the Operating Partnership, PGRT Equity LLC ("Prime Equity"), obtained a loan in the original principal amount of $58 million (the "Citicorp Loan") from Citicorp USA Inc. ("Citicorp").

In connection with the Continental Transaction, the Operating Partnership made a payment to Casati of $4.2 million and Casati released the Operating Partnership from all of its obligations under the Amended Tax Indemnity Agreement relating to Casati. The Operating Partnership also transferred its interest in the junior mortgage loan (the "Junior Loan") encumbering Continental Towers to Prime Equity. In addition, the fee title ownership of Continental Towers was modified to among other things, remove Casati from the ownership structure of Continental Towers.

Because Prime Equity receives all of the economic benefits from Continental Towers through its ownership of the Junior Loan, the Company consolidates the operations of Continental Towers in our financial statements and accounts for it as an owned property. In addition, a subsidiary of Prime Equity continues to manage Continental Towers pursuant to a management agreement that has a term that expires on December 31, 2012 and cannot be terminated by the owners of Continental Towers prior to that date.

Under the Amended Tax Indemnity Agreement, the Operating Partnership continues, subject to certain exceptions and conditions contained therein, to indemnify Heise from federal and state income tax payable as a result of any taxable income or gain in his gross income which is caused by a sale, foreclosure or other disposition of Continental Towers or other action by the Operating Partnership prior to January 5, 2013. The amount of the potential tax indemnity to Heise under the Amended Tax Indemnity Agreement, including a gross-up for taxes on any such payment, is estimated to be approximately $14 million using current tax rates, which is an approximately $39.2 million reduction from the estimated maximum liability of $53.2 million to Casati and Heise prior to the execution of the Amended Tax Indemnity Agreement.

In addition, the Operating Partnership and Heise agreed in the Amended Tax Indemnity Agreement to cooperate in good faith with each other if the parties agree, in connection with a specific replacement property, to effect an exchange of Heise's real estate interests in Continental Towers in a transaction pursuant to which no gain is recognized by Heise under Section 1031 of the U.S. Internal Revenue Code of 1986, as amended; provided that the replacement property and the structure of the proposed transaction must be acceptable to the parties.

The Citicorp Loan to Prime Equity closed and funded on January 11, 2006. Simultaneously with the closing of the loan, the Operating Partnership transferred to Prime Equity (i) its interest in the Junior Loan encumbering Continental Towers, (ii) its 50% common membership interest in 77 West Wacker Drive, L.L.C., the owner of 77 West Wacker Drive, Chicago Illinois, (iii) its 100% membership interest in 280 Shuman Boulevard, L.L.C. ("280 Owner") the owner of the property known as the Atrium located at 280 Shuman Boulevard in Naperville, Illinois, (iv) its 100% membership interest in 800 Jorie Blvd. Mezzanine, L.L.C. , the owner of a 49% membership interest in 800 Jorie Blvd, L.L.C., the owner of 800-810 Jorie Blvd., Oak Brook, Illinois, and (v) its 100% membership interest in Prime Group Management, L.L.C. ("Prime Management"), the manager of Continental Towers.

As security for the Citicorp Loan, among other things, (a) the Operating Partnership pledged all of its interests in Prime Equity, (b) Prime Equity pledged all of its interests in the Junior Loan, the membership interests referred to in clause (ii), (iv) and (v) above and its right to receive distributions from all of the property referred to in clauses (i) through (v) above, and (c) 280 Owner granted a mortgage to Citicorp on the Atrium property.

The Citicorp Loan is in the original principal amount of $58 million. The Citicorp Loan documents provide that if Prime Equity is unable to obtain, within 120 days following the closing of the loan, the necessary consents from the senior mortgage lender on the Company's 180 N. LaSalle, Chicago Illinois property, and deliver to Citicorp a pledge and assignment of all of the membership interests in 180 N. LaSalle II, L.L.C., the subsidiary of the Company that owns the 180 N. LaSalle Street property (the "180 Pledge"), then Prime Equity must repay not less than $14.0 million of the loan to Citicorp. There can be no assurances that the consent of the 180 N. LaSalle Street senior lender can be obtained in a timely manner, or if it can be obtained, that the terms for obtaining such consent will be favorable to the Company.