KILROY REALTY CORP, S-11, 1997-07-29

KILROY REALTY CORP
S-11, 1997-07-29
REAL ESTATE INVESTMENT TRUSTS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 28, 1997

REGISTRATION NO. 333-

----------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

----------------
KILROY REALTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
2250 EAST IMPERIAL HIGHWAY
EL SEGUNDO, CALIFORNIA 90245
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

----------------
RICHARD E. MORAN JR.
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND SECRETARY
KILROY REALTY CORPORATION
2250 EAST IMPERIAL HIGHWAY
EL SEGUNDO, CALIFORNIA 90245
(NAME AND ADDRESS OF AGENT FOR SERVICE)

----------------
COPIES TO:

EDWARD SONNENSCHEIN, JR., ESQ. GREGG A. NOEL, ESQ.
J. SCOTT HODGKINS, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
LATHAM & WATKINS 300 SOUTH GRAND AVENUE
633 WEST FIFTH STREET LOS ANGELES, CALIFORNIA 90071
LOS ANGELES, CALIFORNIA 90071 (213) 687-5000
(213) 485-1234

----------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement of the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

----------------

CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
AGGREGATE OFFERING AMOUNT OF
TITLE OF SECURITIES BEING REGISTERED PRICE (1) REGISTRATION FEE
- -------------------------------------------------------------------------------
<S> <C> <C>
11,500,000 Shares of Common Stock, par
value $.01 per share...................... $296,125,000 $89,735
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933.

----------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
FORM S-11 ITEM NO. AND HEADING LOCATION OR HEADING IN PROSPECTUS
------------------------------ ---------------------------------
<S> <C>
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus....... Outside Front Cover Page

2. Inside Front and Outside Back
Cover Pages of Prospectus...... Inside Front Cover Page; Outside Back Cover
Page
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges............... Prospectus Summary; Risk Factors; Price
Range of Common Stock and Distribution
History; Business and Properties; Certain
Relationships and Related Transactions

4. Determination of Offering
Price.......................... Underwriting

5. Dilution....................... Dilution

6. Selling Security Holders....... Not applicable

7. Plan of Distribution........... Underwriting

8. Use of Proceeds................ Use of Proceeds

9. Selected Financial Data........ Selected Financial Data

10. Management's Discussion and
Analysis of Financial Condition
and Results of Operations...... Management's Discussion and Analysis of
Financial Condition and Results of
Operations

11. General Information as to
Registrant..................... Prospectus Summary; Business and
Properties; Management; Principal
Stockholders; Certain Provisions of
Maryland Law and of the Company's Articles
of Incorporation and Bylaws

12. Policy with Respect to Certain
Activities..................... Policies With Respect to Certain Activities

13. Investment Policies of
Registrant..................... Policies With Respect to Certain Activities

14. Description of Real Estate..... Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business and Properties

15. Operating Data................. Business and Properties

16. Tax Treatment of Registrant and
Its Security Holders........... Federal Income Tax Consequences

17. Market Price of and Dividends
on the Registrant's Common
Equity and Related Stockholder
Matters........................ Risk Factors; Principal Stockholders; Price
Range of Common Stock and Distribution
History; Shares Eligible for Future Sale

18. Description of Registrant's
Securities..................... Description of Capital Stock; Certain
Provisions of Maryland Law and the
Company's Articles of Incorporation and
Bylaws

19. Legal Proceedings.............. Business and Properties--Legal Proceedings

20. Security Ownership of Certain
Beneficial Owners and
Management..................... Principal Stockholders

21. Directors and Executive
Officers....................... Management

22. Executive Compensation......... Management

23. Certain Relationships and
Related Transactions........... Risk Factors; Business and Properties;
Management; Certain Relationships and
Related Transactions; Principal
</TABLE> Stockholders
<PAGE>

<TABLE>
<CAPTION>
FORM S-11 ITEM NO. AND HEADING LOCATION OR HEADING IN PROSPECTUS
------------------------------ ---------------------------------
<S> <C>
24. Selection, Management and
Custody of Registrant's
Investments.................... Risk Factors; Business and Properties;
Policies With Respect to Certain Activities

25. Policies with Respect to
Certain Transactions........... Risk Factors; Business and Properties;
Policies With Respect to Certain
Activities; Management; Certain
Relationships and Related Transactions;
Principal Stockholders

26. Limitations of Liability....... Management; Certain Provisions of Maryland
Law and of the Company's Articles of
Incorporation and Bylaws

27. Financial Statements and
Information.................... Index to Financial Statements

28. Interests of Named Experts and
Counsel........................ Not Applicable

29. Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities..... Not Applicable

30. Quantitative and Qualitative
Disclosures About Market Risk.. Risk Factors

</TABLE>
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--DATED JULY 28, 1997
PROSPECTUS
- --------------------------------------------------------------------------------

10,000,000 Shares

[LOGO OF KILROY
REALTY CORPORATION]

KILROY REALTY CORPORATION

Common Stock

- --------------------------------------------------------------------------------
Kilroy Realty Corporation and its subsidiaries (the "Company") are engaged in
the business of owning, acquiring, developing, managing and leasing principally
Class A suburban office and industrial buildings in prime locations, primarily
in Southern California. The Company's portfolio, including the Pending
Acquisition (as defined), is comprised of 33 suburban office buildings (the
"Office Properties"), encompassing approximately 2.9 million rentable square
feet, and 44 industrial buildings (the "Industrial Properties"), encompassing
approximately 3.0 million rentable square feet (collectively, the
"Properties"). All but four of the Properties are located in Southern
California. As of June 30, 1997, the Office Properties were 88.1% leased to 206
tenants, and the Industrial Properties were 96.9% leased to 170 tenants. Since
completion of its IPO in January 1997 (as defined), the Company has acquired 19
suburban Office Properties, encompassing an aggregate of approximately 900,000
rentable square feet, and 32 industrial properties, including the Pending
Acquisition, encompassing approximately 1.7 million rentable square feet
(collectively, the "Acquired Properties"), for an aggregate acquisition cost of
approximately $208.6 million. The Company is self-administered and self-managed
and expects to qualify as a real estate investment trust ("REIT") beginning
with the tax year ending December 31, 1997.

All of the shares of common stock of the Company, par value $.01 per share (the
"Common Stock"), offered hereby are being sold by the Company (the "Offering").
To assist the Company in maintaining its qualification as a REIT for federal
income tax purposes, ownership by any person generally is limited to 7.0% of
the then outstanding Common Stock, which limit can be waived by the Board of
Directors. See "Description of Capital Stock--Restrictions on Ownership and
Transfer."

The Common Stock is listed on the New York Stock Exchange (the "NYSE") under
the symbol "KRC." On July 24, 1997, the last reported sales price of the Common
Stock on the NYSE was $26.0625 per share. See "Price Range of Common Stock and
Distribution History." See "Glossary" beginning on page 175 for definitions of
certain terms used in this Prospectus.

SEE "RISK FACTORS" ON PAGES 23 TO 38 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY, INCLUDING:

. Conflicts of interest with, and material benefits to, affiliates of the
Company, including certain officers and directors, in connection with the
operation of the Company's ongoing businesses, including conflicts
associated with the tax consequences of sales and refinancings of the
Company's properties.

. Taxation of the Company as a corporation if it fails to qualify as a REIT
for federal income tax purposes and the resulting decreases in cash
available for distribution.

. The inability of the Company to control the operations of Kilroy Services,
Inc., which could result in decisions that do not reflect the Company's
interest.

. A portion of the Company's anticipated cash flow may be generated from
development activities which are partially dependent on the availability of
development opportunities, and are subject to the risks inherent with
development, which in turn may negatively impact the Company's ability to
make distributions.

. Dependence on demand for office and industrial space in the Southern
California market, thereby increasing the risk that the Company will be
materially adversely affected by general economic conditions in a single
market.

. Dependence on certain significant tenants, particularly Hughes Electronics
Corporation's Space & Communications Company, thereby increasing the
potential negative impact to the Company of downturns in the business of, or
its relationship with, such tenants.

. The distribution requirements of REITs may limit the Company's ability to
finance future developments, acquisitions and expansions without additional
debt or equity financing necessary to achieve the Company's business plan,
which in turn may adversely affect the price of the Common Stock.
- --------------------------------------------------------------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $ $ $
- --------------------------------------------------------------------------------
Total(3)................................ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
to be $ .
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 1,500,000 additional shares of Common Stock on the
same terms and conditions as set forth above. If all such additional shares
are purchased by the Underwriters, the total Price to Public will be $ ,
the total Underwriting Discounts and Commissions will be $ and the total
Proceeds to Company will be $ . See "Underwriting."
- --------------------------------------------------------------------------------

The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and
to withdrawal, cancellation or modification of the offer without notice.
Delivery of the shares to the Underwriters is expected to be made at the office
of Prudential Securities Incorporated, One New York Plaza, New York, New York,
on or about , 1997.

PRUDENTIAL SECURITIES INCORPORATED

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

MERRILL LYNCH & CO.

J.P. MORGAN & CO.

SMITH BARNEY INC.

, 1997
<PAGE>

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY....................................................... 1
General.................................................................. 1
Recent Results of Operations............................................. 1
Recent Developments...................................................... 1
The Company.............................................................. 5
Risk Factors............................................................. 7
Formation and Structure of the Company................................... 10
Structural Chart......................................................... 11
Growth Strategies........................................................ 11
The Properties........................................................... 15
The Company's Southern California Submarkets............................. 19
The Offering............................................................. 19
Summary Financial Data................................................... 20
RISK FACTORS............................................................. 23
Conflicts of Interest.................................................... 23
Adverse Consequences of Failure to Qualify as a REIT..................... 25
Risks of Development Business and Related Activities Being Conducted by
the Services Company.................................................... 26
Cash Flow from Development Activities is Uncertain....................... 26
Dependence on Southern California Market................................. 26
Dependence on Significant Tenants........................................ 27
Distributions to Stockholders Affected by Many Factors................... 27
Real Estate Investment Considerations.................................... 28
Real Estate Financing Risks.............................................. 31
Changes in Investment and Financing Policies Without Stockholder Vote.... 31
Risk of Operations Conducted Through the Operating Partnership........... 32
Influence of Certain Unitholders......................................... 32
Limits on Ownership and Change in Control................................ 32
Dependence on Key Personnel.............................................. 33
Distribution Payout Percentage........................................... 33
Historical Operating Losses of the Existing Office and Industrial
Properties.............................................................. 34
No Limitation on Debt.................................................... 34
Government Regulations................................................... 34
Effect of Market Interest Rates on Price of Common Stock................. 36
Shares Eligible for Future Sale.......................................... 36
THE COMPANY.............................................................. 39
General.................................................................. 39
Growth Strategies........................................................ 41
USE OF PROCEEDS.......................................................... 45
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY..................... 46
CAPITALIZATION........................................................... 48
SELECTED FINANCIAL DATA.................................................. 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 52
Results of Operations.................................................... 52
Liquidity and Capital Resources.......................................... 54
Historical Cash Flows.................................................... 56
Funds from Operations.................................................... 57
Inflation................................................................ 57
Adoption of Accounting Standards......................................... 57
BUSINESS AND PROPERTIES.................................................. 59
General.................................................................. 59
The Properties........................................................... 62
Occupancy and Rental Information......................................... 66
Lease Expirations........................................................ 67
Tenant Information....................................................... 81
Office Properties........................................................ 82
Industrial Properties.................................................... 88
Acquired Properties...................................................... 88
Pending Acquisition...................................................... 91
Option Properties........................................................ 91
Development, Leasing and Management Activities........................... 92
The Company's Southern California Submarkets............................. 95
Seattle Market........................................................... 114
Insurance................................................................ 115
Uninsured Losses from Seismic Activity................................... 115
Government Regulations................................................... 115
Mortgage Debt............................................................ 117
Management and Employees................................................. 118
Legal Proceedings........................................................ 118
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES.............................. 119
Investment Policies...................................................... 119
Dispositions............................................................. 120
Financing................................................................ 120
Working Capital Reserves................................................. 121
Conflict of Interest Policies............................................ 121
Other Policies........................................................... 123
MANAGEMENT............................................................... 124
Directors and Executive Officers......................................... 124
Committees of the Board of Directors..................................... 126
Compensation of Directors................................................ 127
Executive Compensation................................................... 127
</TABLE>

i
<PAGE>

TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Employment Agreements.................................................... 128
Stock Incentive Plan..................................................... 129
Section 401(k) Plan...................................................... 132
Indemnification.......................................................... 132
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 133
Partnership Agreement.................................................... 133
Assignment of Lease; Various Services Provided by the Services Company to
the Kilroy Group........................................................ 133
Options to Purchase Certain Properties................................... 133
PRINCIPAL STOCKHOLDERS................................................... 135
FORMATION AND STRUCTURE OF THE COMPANY................................... 136
Formation Transactions................................................... 136
Advantages and Disadvantages of the Formation Transactions to
Unaffiliated Stockholders............................................... 137
Benefits of the Formation Transactions to the Kilroy Group............... 137
Formation of Kilroy Services, Inc........................................ 138
Formation of Kilroy Realty Finance, Inc. and Kilroy Realty Finance
Partnership, L.P........................................................ 138
DESCRIPTION OF CAPITAL STOCK............................................. 139
General.................................................................. 139
Common Stock............................................................. 139
Transfer Agent and Registrar............................................. 140
Preferred Stock.......................................................... 140
Restrictions on Ownership and Transfer................................... 140
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE ARTICLES OF INCORPORATION
AND BYLAWS.............................................................. 143
The Board of Directors................................................... 143
Removal of Directors..................................................... 143
Business Combinations.................................................... 144
Control Share Acquisitions............................................... 144
Amendment to the Articles of Incorporation and Bylaws.................... 145
Meetings of Stockholders................................................. 145
Advance Notice of Director Nominations and New Business.................. 145
Dissolution of the Company............................................... 146
Limitation of Directors' and Officers' Liability......................... 146
Indemnification Agreements............................................... 147
PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP....................... 148
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management............................................................... 148
Indemnification.......................................................... 148
Transferability of Interests............................................. 148
Issuance of Additional Units............................................. 149
Capital Contribution..................................................... 149
Awards Under Stock Incentive Plan........................................ 150
Redemption/Exchange Rights............................................... 150
Registration Rights...................................................... 150
Tax Matters.............................................................. 150
Operations............................................................... 150
Duties and Conflicts..................................................... 151
Certain Limited Partner Approval Rights.................................. 151
Term..................................................................... 151
DESCRIPTION OF INDEBTEDNESS.............................................. 152
The Credit Facility...................................................... 152
The $84.0 Million Loan................................................... 152
The SeaTac Loan.......................................................... 153
SHARES ELIGIBLE FOR FUTURE SALE.......................................... 154
General.................................................................. 154
Redemption/Exchange Rights and Registration Rights....................... 155
Reinvestment and Share Purchase Plan..................................... 155
FEDERAL INCOME TAX CONSEQUENCES.......................................... 156
Taxation of the Company.................................................. 156
Failure to Qualify....................................................... 161
Taxation of Taxable U.S. Stockholders Generally.......................... 162
Backup Withholding....................................................... 163
Taxation of Tax-Exempt Stockholders...................................... 163
Taxation of Non-U.S. Stockholders........................................ 164
Tax Aspects of the Operating Partnerships................................ 166
Services Company......................................................... 168
OTHER TAX CONSEQUENCES................................................... 169
ERISA CONSIDERATIONS..................................................... 169
Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs.......... 169
Status of the Company, the Operating Partnership and the Services Company
Under ERISA............................................................. 170
UNDERWRITING............................................................. 171
LEGAL MATTERS............................................................ 173
EXPERTS.................................................................. 173
ADDITIONAL INFORMATION................................................... 173
GLOSSARY................................................................. 175
</TABLE>

ii
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial data, including the financial statements and notes
thereto, set forth elsewhere in this Prospectus. Unless otherwise indicated,
all calculations and information contained in this Prospectus assume that (i)
the Underwriters' over-allotment option will not be exercised and (ii) a market
price for the common stock, $.01 par value (the "Common Stock"), of $26.0625
per share (the last reported sales price of the Common Stock on the New York
Stock Exchange (the "NYSE") on July 24, 1997). Unless the context otherwise
requires, (i) the "Company" shall mean Kilroy Realty Corporation, a Maryland
corporation, its Subsidiaries and the operating history of the Kilroy Group
(ii) the "Subsidiaries" shall mean, collectively, Kilroy Realty, L.P., a
Delaware limited partnership (the "Operating Partnership"), Kilroy Services,
Inc., a Maryland corporation (the "Services Company"), Kilroy Realty Finance,
Inc., a Delaware corporation (the "Finance Company") and Kilroy Realty Finance
Partnership, L.P., a Delaware limited partnership (the "Finance Partnership")
and (iii) the "Kilroy Group" shall mean the Company's predecessors comprised of
Kilroy Industries, a California corporation ("KI"), and certain affiliated
partnerships, limited liability companies and trusts. See "Formation and
Structure of the Company--Formation Transactions." Any reference to the
Company's ownership in the Operating Partnership includes the Company's
interests in the subsidiaries of the Operating Partnership. All references to
the Company as a REIT assume that the Company will qualify as a REIT beginning
with the tax year ending December 31, 1997. See "Business and Properties--
Office Properties--Kilroy LAX" and Note 5 to the Combined Financial Statements
of the Kilroy Group. Additional capitalized terms shall have the meanings set
forth herein and in the Glossary beginning on page 175.

GENERAL

Kilroy Realty Corporation and its Subsidiaries are engaged in the business of
owning, acquiring, developing, managing and leasing principally Class A
suburban office and industrial buildings in prime locations, primarily in
Southern California, continuing the 50-year real estate business established by
the Kilroy Group. The Company's portfolio, including the Pending Acquisition
discussed below, is comprised of 33 suburban office properties (the "Office
Properties"), encompassing approximately 2.9 million rentable square feet, and
44 industrial properties (the "Industrial Properties"), encompassing
approximately 3.0 million rentable square feet (collectively, the
"Properties"). All but four of the Properties are located in Southern
California. At June 30, 1997, the Office Properties were 88.1% leased to 206
tenants (95.3% leased to 207 tenants giving effect to the lease with The Boeing
Company ("Boeing") which was executed in June 1997, and which provides for
occupancy by December 31, 1997 (the "Boeing Lease")) and the Industrial
Properties were 96.9% leased to 170 tenants. The Company is self-administered
and self-managed and expects to qualify as a real estate investment trust
("REIT") beginning with the tax year ending December 31, 1997.

RECENT RESULTS OF OPERATIONS

For the five-month period beginning February 1, 1997 (following consummation
of the IPO) and ending June 30, 1997, the Company had revenues of $23.5
million, net income of $6.8 million or $0.47 per share, and Funds from
Operations of $13.0 million. For the three-month period ending June 30, 1997,
the Company had revenues of $14.6 million, net income of $4.1 million or $0.28
per share, and Funds from Operations of $8.0 million.

RECENT DEVELOPMENTS

Since completion of the initial public offering of its Common Stock (the
"IPO"), the Company successfully has implemented its growth strategy through
the following activities.

. Acquisitions. The Company acquired (including the Pending Acquisition)
19 suburban office buildings encompassing approximately 900,000 rentable
square feet and 32 industrial buildings encompassing approximately 1.7
million rentable square feet, representing an aggregate investment of
$208.6 million and increasing the Company's aggregate rentable square
feet of office and industrial space by approximately 43.0% and 126.2%
respectively.

1
<PAGE>

. Leasing. In June 1997, the Company entered into a lease with Boeing for
approximately 211,000 rentable square feet of available office space at
Kilroy Airport Center, SeaTac (the "SeaTac Office Center").

. Enhanced Management Team. The Company added five officers to enhance the
strength of its management team in the areas of acquisition, property
management and finance activities. These officers collectively have an
average of 12 years of experience in the real estate industry.

. Finance. The Company entered into a revolving credit facility, with a
present commitment of $200.0 million, enhancing the Company's ability to
finance its property acquisition program and providing additional
working capital.

As a result of these activities, the Company believes that it is well
positioned to continue its growth strategy.

ACQUISITIONS

Since the completion of its IPO, the Company acquired (including the Pending
Acquisition) 19 suburban office buildings encompassing approximately 900,000
rentable square feet for an aggregate acquisition cost (including expenses,
closing costs and anticipated capital expenditures) of $108.2 million, and 32
industrial buildings encompassing approximately 1.7 million rentable square
feet for an aggregate acquisition cost (including expenses, closing costs and
anticipated capital expenditures) of approximately $90.6 million. As of the
date of this Prospectus, the Company is under contract to acquire one
additional industrial property (comprised of three buildings) encompassing
approximately 165,000 rentable square feet for an acquisition cost (including
expenses, closing costs and anticipated capital expenditures) of approximately
$9.8 million (the "Pending Acquisition"). All of such properties are located in
Southern California. Of the Acquired Properties, 28 are located in submarkets
in which the Company already owned office or industrial property at the
completion of its IPO, and 23 are located in new submarkets within Los Angeles
County, North Orange County, South Orange County and Western San Bernardino
County. See "Business and Properties--The Company's Southern California
Submarkets." As a result of these acquisitions, the Company's aggregate
rentable square feet of office and industrial space increased by approximately
43.0% and 126.2%, respectively. In addition, the Company is currently in active
negotiations to purchase an additional 15 properties in Southern California
(the "Pipeline Properties") for an aggregate acquisition cost (including
expenses, closing costs and anticipated capital expenditures) of
$114.4 million, including the assumption of $14.0 million of mortgage
indebtedness. No assurance can be given that the Pending Acquisition or the
acquisition of any of the Pipeline Properties will be consummated. See "Risk
Factors--Real Estate Investment Considerations--Risks of Real Estate
Acquisitions and Development" and "Business and Properties--Acquired
Properties" and "--Pending Acquisition."

2
<PAGE>

The following table sets forth certain information relating to each of the
Acquired Properties and Pending Acquisition:

<TABLE>
<CAPTION>
PERCENTAGE
RENTABLE ACQUISITION LEASED
SQUARE NUMBER OF COST($) AS OF MONTH
PROPERTY CITY LOCATION FOOTAGE BUILDINGS (IN MILLIONS) 6/30/97 (%) ACQUIRED
-------- ---- -------- --------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OFFICE
Existing Submarkets:
701-741 E. Ball Road.... Anaheim N. Orange County 114,726 5 8.0 88.2 April 1997
26541 Agoura Road....... Calabasas W. San Fernando 90,878 1 11.6 100.0 April 1997
Valley
5151-5155 Camino Ruiz... Camarillo S. Ventura County 276,216 4 24.1 100.0 May 1997
23600-23610 Telo Ave-
nue.................... Torrance Los Angeles County 79,967 2 5.7 100.0 June 1997
--------- --- ------
Existing Submarkets
Subtotal............... 561,787 12 49.4
--------- --- ------
New Submarkets:
2100 Colorado Avenue.... Santa Monica Los Angeles County 94,844 3 31.6 100.0 June 1997
111 Pacifica Avenue..... Irvine S. Orange County 67,425 1 8.7 100.0 June 1997
2501 Pullman Avenue/
1700 Carnegie Avenue... Santa Ana S. Orange County 124,921 2 15.5 100.0 July 1997
9401 Toledo Way......... Irvine S. Orange County 27,200 1 3.0 100.0 July 1997
--------- --- ------
New Submarkets
Subtotal............... 314,390 7 58.8
--------- --- ------
TOTAL ACQUIRED OFFICE
PROPERTIES............. 876,177 19 108.2
--------- --- ------
INDUSTRIAL
Existing Submarkets:
5325 East Hunter Ave-
nue.................... Anaheim N. Orange County 109,449 1 5.3 100.0 May 1997
Brea Industrial Proper-
ties (1)............... Brea N. Orange County 276,278 7 16.4 97.8 June 1997
Garden Grove Industrial
Properties (2)......... Garden Grove N. Orange County 275,971 6 14.1 100.0 June 1997
7421 Orangewood Avenue.. Garden Grove N. Orange County 82,602 1 4.5 100.0 July 1997
12400 Industry Street... Garden Grove N. Orange County 64,296 1 3.0 100.0 July 1997
--------- --- ------
Existing Submarkets
Subtotal............... 808,596 16 43.3
--------- --- ------
New Submarkets:
17150 Von Karman........ Irvine S. Orange County 157,548 1 12.1 100.0 May 1997
821 South Rockefeller... Ontario W. San Bernardino 153,566 1 4.9 100.0 June 1997
County
184-220 Technology
Drive.................. Irvine S. Orange County 159,034 10 16.2 84.3 June 1997
9451 Toledo Way......... Irvine S. Orange County 244,800 1 14.1 100.0 July 1997
20553 Walnut Drive (3).. Diamond Bar Los Angeles County 165,049 3 9.8 100.0 August 1997
--------- --- ------
New Submarkets
Subtotal............... 879,997 16 57.1
--------- --- ------
TOTAL ACQUIRED
INDUSTRIAL PROPERTIES
AND PENDING
ACQUISITION............ 1,688,593 32 100.4
--------- --- ------
TOTAL ACQUIRED
PROPERTIES AND PENDING
ACQUISITION--OFFICE
AND INDUSTRIAL......... 2,564,770 51 $208.6
========= === ======
</TABLE>
- --------
(1) Brea Industrial Properties consists of 660 Puente Street, 1050 West
Central, 1150 West Central, 950 West Central, 895 Beacon Street, 955 Beacon
Street and 1125 Beacon Street.
(2) Garden Grove Industrial Properties consists of 12442 Knott Avenue, 7091
Belgrave Avenue, 12311-21 Industry Street, 12241-71 Industry Street, 7261
Lampson Avenue and 12472 Edison Way.
(3) 20553 Walnut Drive in Diamond Bar, California comprises the Pending
Acquisition.

3
<PAGE>

LEASING

In June 1997, the Company entered into a lease with Boeing for approximately
211,000 rentable square feet of office space at the SeaTac Office Center. The
seven-year lease to Boeing provides for occupancy by December 31, 1997. As of
June 30, 1997, approximately 96,000 rentable square feet of office space was
still available at the SeaTac Office Center. In addition, during the fourth
quarter of 1996, the Company entered into certain lease transactions pursuant
to which the tenants under the respective leases began occupancy in the first
quarter of 1997.

ENHANCED MANAGEMENT TEAM

Since the consummation of the IPO, the Company has added several key
experienced executives to its management team. Collectively, the new officers
have an average of 12 years of experience in the real estate industry. Alan S.
Pekarcik joined the Company in March 1997 as Senior Vice President,
Acquisitions. Previously, he worked for 17 years as a real estate broker in
Southern California. Tyler H. Rose joined the Company in March 1997 as Senior
Vice President and Treasurer. Prior to joining the Company, Mr. Rose was Senior
Vice President, Corporate Finance and Treasurer of Irvine Apartment Communities
and, prior to that, spent eight years in corporate finance at J.P. Morgan & Co.
Ann Marie Whitney was appointed Vice President and Controller of the Company in
May 1997 after spending eight years at Deloitte & Touche LLP, most recently as
a manager specializing in real estate. John T. Fucci and James P. Axtell joined
the Company in July 1997 as Vice President, Asset Management and Director,
Asset Management, respectively. Mr. Fucci, who has 14 years of experience in
property management, was previously a director at Catellus Development
Corporation. Mr. Axtell joined the Company from the Mission Land Company. The
Company believes that these new executives significantly augment the real
estate and finance experience of the management team. See "Management."

FINANCE

For the two-month period from February 1, 1997 to March 31, 1997, the Company
achieved total revenues of approximately $9.0 million, net income of
approximately $2.7 million and Funds from Operations of approximately
$5.0 million. On May 30, 1997, the Company paid a distribution to its
stockholders of $0.2583 per share for the two-month period from February 1,
1997 through March 31, 1997. On July 10, 1997, the Company paid a distribution
to its stockholders of $0.3875 per share for the quarter ended June 30, 1997.

On July 22, 1997, the Company received a commitment to increase its secured
revolving line of credit to $200.0 million from $150.0 million (the "Credit
Facility"). The Credit Facility matures in May 1999 and is underwritten by
Morgan Guaranty Trust Company of New York ("MGT"). The Credit Facility is used
to finance property acquisitions and development and for general corporate
purposes. The facility bears interest at LIBOR plus 1.50% and includes a one-
year option to extend the term. Upon completion of this Offering and the
application of the use of the net proceeds therefrom, all outstanding
borrowings under the Credit Facility will be repaid. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Description of Indebtedness."

OTHER ACTIVITIES

The Company currently owns or has exclusive rights to develop approximately
60 acres of developable land in six of its existing submarkets. The Company
intends to commence development of three projects in 1997 which comprise an
aggregate of approximately 500,000 rentable square feet at a total budgeted
cost of approximately $25.0 million. See "Business and Properties--Development,
Leasing and Management Activities."

4
<PAGE>

THE COMPANY

Kilroy Realty Corporation was incorporated in September 1996 and commenced
operations upon the completion of its initial public offering on January 31,
1997. The Company was formed to continue and expand the real estate business of
the Kilroy Group, which, since 1947, has been engaged in the business of real
estate ownership, acquisition, development, leasing and management of primarily
Class A suburban office and industrial buildings in prime locations,
principally in Southern California. On January 31, 1997, the Company completed
an initial public offering of 12,500,000 shares of Common Stock. The initial
public offering price was $23.00 per share resulting in gross proceeds of
$287.5 million. On February 4, 1997, in connection with the initial public
offering, the underwriters exercised an over-allotment option and on February
7, 1997, pursuant to the terms of such over-allotment option, the Company
issued an additional 1,875,000 shares of Common Stock which resulted in gross
proceeds of $43,125,000. The aggregate proceeds to the Company of the IPO,
including the exercise of the underwriters' over-allotment option, net of
underwriters' discounts and commissions, advisory fees and offering costs, were
approximately $302.8 million. The Company operates as a self-administered and
self-managed real estate company and expects to qualify as a REIT for federal
and state income tax purposes beginning with the year ended December 31, 1997.
See "Federal Income Tax Consequences--Taxation of the Company."

The Company's strategy has been to own, develop, acquire, lease and manage
Class A properties in select locations in key suburban submarkets, primarily in
Southern California, that the Company believes have strategic advantages
compared to neighboring submarkets. The Properties offer tenants: (i) lower
business taxes and operating expenses than in adjoining submarkets; (ii) access
to highly skilled labor markets; (iii) strategic access to major transportation
facilities such as freeways and airports; (iv) proximity to the Los Angeles-
Long Beach port complex, which presently ranks as the largest commercial port
in the United States; and (v) for tenants with their names on certain
Properties, visibility to freeway and airplane travelers. As a result, the
Properties attract major corporate tenants and historically have achieved among
the highest occupancy, tenant retention and rental rates, both within their
respective submarkets and as compared to their respective neighboring
submarkets. See "Business and Properties."

The Company's portfolio of properties includes 33 office buildings
encompassing an aggregate of approximately 2.9 million rentable square feet and
44 industrial buildings encompassing an aggregate of approximately 3.0 million
rentable square feet. Thirty of the office buildings and 33 of the industrial
buildings are located in prime Southern California suburban submarkets
(including a complex of three Office Properties located in El Segundo, adjacent
to the Los Angeles International Airport ("LAX"), presently the nation's second
largest air-cargo port, and a complex of five office buildings located adjacent
to the Long Beach Municipal Airport (the "Long Beach Airport")). The SeaTac
Office Center is comprised of three office buildings located adjacent to the
Seattle-Tacoma International Airport. The weighted average age of the Office
Properties is approximately 14 years and the weighted average age of the
Industrial Properties is approximately 22 years. As of June 30, 1997, the
Office Properties were approximately 88.1% leased to 206 tenants, and the
Industrial Properties were approximately 96.9% leased to 170 tenants.

The Company's major tenants include, among others, Hughes Electronics
Corporation's Space & Communications Company ("Hughes Space & Communications"),
a tenant since 1984, which is engaged in high-technology commercial activities
including satellite development and related applications such as DirecTV, and
other major tenants such as Sony Music Entertainment, Boeing (giving effect to
the Boeing Lease), M/R Systems, McDonnell Douglas Corporation, Mattel, Inc.,
Northwest Airlines, Inc. and Caltrans. The Company's strong relationships with
its tenants is evidenced by its average tenant retention rate (based upon
rentable square feet) for the period beginning January 1, 1994 and ending June
30, 1997, which was 77.7% for the Properties owned as of the date of the IPO
that were located in the counties of Los Angeles, Orange, Riverside, San
Bernardino and Ventura (the "Southern California Area").

5
<PAGE>

(including expenses, closing costs and anticipated capital expenditures) of
approximately $108.2 million, and 32 industrial buildings encompassing
approximately 1.7 million rentable square feet for an aggregate acquisition
cost (including expenses, closing costs and anticipated capital expenditures)
of approximately $100.4 million. For one Acquired Property, the acquisition
cost was paid, in part, with the issuance of 165,102 limited partnership units
in the Operating Partnership. The issuance of the units in the Operating
Partnership ("Units") permits sellers of properties to defer the recognition of
all or part of the taxable gain, if any, on the disposition of such properties.
All of the Acquired Properties are located in Southern California. Of the
Acquired Properties, 28 are located in submarkets in which the Company already
owned office or industrial property at the completion of the IPO, and 23 are
located in new submarkets within Los Angeles County, North Orange County, South
Orange County and Western San Bernardino County. Management believes that each
of these new submarkets offers significant growth opportunities. See "Business
and Properties--The Company's Southern California Submarkets." As a result of
these acquisitions, the Company's aggregate rentable square feet of office and
industrial space increased by approximately 43.0% and 126.2%, respectively. In
addition, the Company is currently in active negotiations to purchase 15
Pipeline Properties, all of which are located in Southern California, for an
aggregate acquisition cost of $114.4 million. No assurance can be given that
the Pending Acquisition or the acquisition of the Pipeline Properties will be
consummated. See "Risk Factors--Real Estate Investment Considerations--Risks of
Real Estate Acquisitions and Development" and "Business and Properties--
Acquired Properties" and "--Pending Acquisition."

The Company currently owns or has exclusive rights to develop approximately
60 acres of developable land (net of the acreage required for streets),
including (i) ten acres in Brea, California, (ii) 15 acres in Foothill Ranch in
Orange County, California, (iii) two and one-half acres in Anaheim, California,
(iv) three and one-half acres in Irvine, (v) five acres in Camarillo and (vi)
24 acres at Kilroy Airport Center Long Beach (collectively, the "Development
Properties"). Management believes that it can build up to 1.6 million rentable
square feet on the Development Properties, subject to required entitlements and
other governmental approvals, of which approximately 500,000 rentable square
feet is planned for development beginning in 1997. The Company may engage in
the development of office or industrial properties when market conditions
support a favorable risk-adjusted rate of return on such development. No
assurance can be given that the Company will commence any development, or that,
if commenced, any such development will be completed. See "Risk Factors--Real
Estate Investment Considerations--Risks of Real Estate Acquisition and
Development" and "Business and Properties--Development, Leasing and Management
Activities--Kilroy Airport Center Long Beach."

The Company believes, based on independent economic surveys, that the
Southern California office and industrial real estate market is recovering
after experiencing a downturn over the last several years. Vacancy rates in the
Class A office space market in the Southern California Area have decreased from
a high of nearly 20.0% in 1991 and 1992 to under 17.0% at the end of 1996.
Vacancy rates in the industrial space market in the Southern California Area
have also decreased from a high of nearly 14.0% in 1992 to 7.6% at the end of
1996. See "--The Company's Southern California Submarkets." Management believes
that the ongoing economic recovery in its submarkets will continue the trend of
increasing occupancy rates and should apply some upward pressure on rents for
Class A office buildings and industrial buildings. See "--Growth Strategies"
and "The Company--Growth Strategies."

The Company believes that the foundation for its growth in future years will
be the strengthening Southern California economy, the quality and strategic
location of its Properties, the economic benefits of its submarkets to tenants,
its conservative capital structure, its access to public capital markets, the
lack of new construction of office properties in its submarkets, its access to
developable properties, the knowledge and experience of its senior management
team and its long-term relationships with large Southern California corporate
tenants, municipalities, landowners and institutional sellers. In addition, the
Company believes that it is one of a limited number of REITs focusing on office
and industrial properties and that it is the only REIT with a 50-year operating
history concentrating primarily on the acquisition and development of suburban
Southern California office and industrial properties.

6
<PAGE>

During the remainder of the Company's first year of operations, the Company
expects sources of potential growth in cash available for distribution through:
(i) the further leasing of its available space of approximately 230,000
rentable square feet, as of June 30, 1997; (ii) the renewal of leases at higher
rents; and (iii) the acquisition of strategic properties with Units and/or
available cash and borrowings under the Credit Facility and the Company's
approximately $141.4 million of cash available for acquisitions and property
development upon consummation of the Offering. In the Company's second year of
operations, the Company expects sources of potential growth in cash available
for distribution through: (i) contractual increases in base rent payments from
tenants; (ii) continued leasing of available space; (iii) the acquisition of
strategic properties; and (iv) the contemplated completion of certain
development activities. Although the Company paid distributions to holders of
its Common Stock for the periods ended March 31 and June 30, 1997, there can be
no assurance that the Company will achieve any growth in cash available for
distribution, that available space will be leased, that leases scheduled to
expire will be renewed or that the Company will successfully acquire additional
properties or complete any of its planned development activities. See "Risk
Factors--Real Estate Investment Considerations--Risks of Real Estate
Acquisition and Development."

As of June 30, 1997, the Company (primarily through the Operating Partnership
and the Services Company) employed 58 persons, 43 of whom are located at the
Company's headquarters at Kilroy Airport Center in El Segundo, California. The
Company believes that relations with its employees are good. The Company's
executive officers have been with the Company for an average of approximately
13 years. As of June 30, 1997, after giving effect to the Offering, the
Company's executive officers and directors (and certain of their affiliates)
owned in the aggregate 10.1% of the Common Stock (or interests exchangeable
therefor).

RISK FACTORS

When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), regarding events, conditions and financial trends
that may affect the Company's future plans of operations, business strategy,
results of operations and financial position. Prospective investors are
cautioned that any forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties and that actual results
may differ materially from those included within the forward-looking statements
as a result of various factors. Factors that could cause or contribute to such
differences include, but are not limited to, those described below, under the
heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Prospectus.

An investment in the shares of Common Stock involves various material risks.
Prospective investors should carefully consider the following risk factors, in
addition to the other information set forth in this Prospectus, before making
an investment decision regarding the shares of Common Stock offered hereby.
Each of these matters could have adverse consequences to the Company. Such
risks include, among others:

. conflicts of interest, particularly with the limited partners (including
John B. Kilroy, Sr. and John B. Kilroy, Jr.) of the Operating
Partnership (the "Unitholders") who hold the Units, including members of
the Kilroy Group, in connection with the (i) operation of the Company's
ongoing businesses, including conflicts associated with the tax
consequences to certain Unitholders of sales or refinancings of certain
Properties, which, together with provisions of the agreement of the
Operating Partnership ("the Partnership Agreement"), may influence the
Company's decision to sell or refinance, or to prepay debt secured by,
certain Properties, (ii) potential election by the Company to exercise
its option to purchase any of the properties owned or controlled by one
or more of the Unitholders which the Company has the option to acquire
(the "Option Properties") and (iii) enforcement of agreements with
affiliates of the Company, any of which could result in decisions
affecting the Company that do not fully reflect interests of all of the
Company's stockholders;

7
<PAGE>

. limitations on Kilroy Realty Corporation's ability to withdraw as
general partner of the Operating Partnership, transfer or assign its
interest in the Operating Partnership without the consent of at least
60% of the Units (including Units held by Kilroy Realty Corporation
which, after giving effect to the Offering and the contribution of the
net proceeds to the Operating Partnership, represent 89.7% of all Units
outstanding) and without meeting certain criteria with respect to the
consideration to be paid to the Unitholders, or to dissolve the
Operating Partnership or sell the Office Property located at
2260 E. Imperial Highway, El Segundo, California, at Kilroy Airport
Center at El Segundo without the consent of more than 50% of the Units
held by limited partners (excluding Units held by Kilroy Realty
Corporation), which may in each case result in the Company taking action
that is not in the best interest of all stockholders;

. taxation of the Company as a corporation if it fails to qualify as a
REIT for federal income tax purposes, the Company's liability for
certain federal, state and local income taxes in such event and the
resulting decrease in cash available for distribution;

. the inability of the Company to control the operations of the Services
Company, which could result in decisions that do not reflect the
Company's interest because the Company does not control the election of
directors or the selection of officers of the Services Company;

. a portion of the Company's anticipated cash flow may be generated from
development activities, which are partially dependent on the
availability of development opportunities, and are subject to the risks
inherent in development as well as general economic conditions and
limitations on such activities imposed by the REIT tests, which in turn
may negatively impact the Company's ability to make distributions;

. geographic concentration of 73 of the Company's 77 buildings in Southern
California, creating a dependence on demand for office and industrial
space in such market and increasing the risk that the Company will be
materially adversely affected by general economic conditions in a single
market;

. the Company's results of operations are dependent on certain key
tenants, particularly Hughes Space & Communications, which accounted for
approximately 16.9% of the Company's total base rent for the year ended
December 31, 1996 giving pro forma effect to the acquisition of the
Acquired Properties and the Boeing Lease, thereby increasing the
potential negative impact to the Company of downturns in the business
of, or its relationship with, such tenants. The base periods of the
Hughes Space & Communications' leases expire beginning in January 1999;

. the possibility that acquisitions of office or industrial properties,
including the Pending Acquisition, will fail to be consummated, or that
any such acquired properties will fail to perform in accordance with
management's expectations, including the possibility that estimates of
the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may prove
inaccurate;

. the distribution requirements for REITs under federal income tax laws
may limit the Company's ability to finance future acquisitions,
developments and expansions without additional debt or equity financing
and may limit cash available for distribution;

. real estate investment considerations such as the effect of economic and
other conditions on real estate values, the general lack of liquidity of
investments in real estate, the ability of tenants to pay rents, the
possibility that leases may not be renewed or will be renewed on terms
less favorable to the Company, the possibility of uninsured losses,
including losses associated with earthquakes, the ability of the
Properties to generate sufficient cash flow to meet operating expenses,
including debt service, and competition in seeking properties for
acquisition and in seeking tenants, which, individually or in the
aggregate, may negatively impact the Company's ability to make
distributions;

8
<PAGE>

. risks associated with debt financing, including the potential inability
to refinance mortgage indebtedness upon maturity and the potential
increase in the level of indebtedness incurred by the Company since its
organizational documents do not limit the amount of indebtedness which
the Company may incur, which may adversely affect the ability of the
Company to repay debt, particularly in the event of a downturn in the
Company's business;

. substantial influence over the affairs of the Company by certain
Unitholders who are directors and executive officers of the Company, and
the ability of the Company's board of directors (the "Board of
Directors") to change the investment policies of the Company (including
the Company's ratio of debt to total market capitalization) without the
consent of stockholders, which may result in a decline in the market
value of the Common Stock;

. potential anti-takeover effects of provisions generally limiting the
actual or constructive ownership by any one person or entity of Common
Stock to 7.0% of the outstanding shares, a classified board of directors
and other charter and statutory provisions and provisions in the
Partnership Agreement that may have the effect of inhibiting a change of
control of the Company or making it more difficult to effect a change in
management or limiting the opportunity for stockholders to receive a
premium over the market price for the Common Stock;

. dependence on key personnel;

. the Company's cash available for distribution may be less than the
Company expects and may decrease in future periods from historical
levels, materially adversely affecting the Company's ability to sustain
its historical distribution rate in the future;

. the Company's historical operating losses for financial reporting
purposes;

. the ability of the Company to incur more debt, thereby increasing its
debt service, which could adversely affect the Company's cash flow;

. the potential liability of the Company for environmental matters and the
costs of compliance with certain governmental regulations, which may
negatively impact the Company's financial condition, results of
operations and cash available for distribution;

. the public market for the shares of Common Stock might not be
maintained, which may negatively impact the price at which shares of
Common Stock may be resold;

. potential adverse effects on the value of the shares of Common Stock of
fluctuations in interest rates or equity markets, which may negatively
impact the price at which shares of Common Stock may be resold and may
limit the Company's ability to raise additional equity to finance
acquisitions and future development; and

. the possible issuance of additional shares of Common Stock, including
2,817,476 shares of Common Stock issuable upon exchange of the Units
presently outstanding, which may adversely affect the market price of
the shares of Common Stock or result in dilution on a per share basis of
cash available for distribution.

9
<PAGE>

FORMATION AND STRUCTURE OF THE COMPANY

Kilroy Realty Corporation was formed in September 1996, and the Operating
Partnership was formed in October 1996. The Services Company was formed in
January 1997 to succeed to the development activities of the Kilroy Group and
to perform development activities for the Company and third parties, and the
Finance Company and the Finance Partnership were formed in January 1997 in
connection with the $84 million mortgage loan (the "$84 Million Loan").
Concurrent with the consummation of the IPO, the Company and the Unitholders
who are members of the Kilroy Group engaged in certain transactions (the
"Formation Transactions"), designed to enable the Company to continue and
expand the real estate operations of the Kilroy Group, to facilitate the IPO,
to enable the Company to qualify as a REIT for federal income tax purposes
commencing with its taxable year ending December 31, 1997 and to preserve
certain tax advantages for certain Unitholders. Certain Unitholders, including
members of management, some of whom are also directors, received benefits in
connection with the IPO and the Formation Transactions. See "Formation and
Structure of the Company--Formation Transactions."

STRUCTURE

Kilroy Realty Corporation's operations are conducted through a number of
subsidiaries. Kilroy Realty Corporation is the sole general partner of the
Operating Partnership and the Unitholders are limited partners. See "Formation
and Structure of the Company--Formation Transactions."

After giving effect to the Offering, all of the net proceeds of which will be
contributed to the Operating Partnership for additional Units, Kilroy Realty
Corporation will own a 89.7% general partner interest in the Operating
Partnership and will continue to be its sole general partner. The remaining
10.3% interest in the Operating Partnership will be owned by the Unitholders,
all of which are limited partners. All of the limited partnership Units are
redeemable for cash or, if requested by the Unitholder, and at the Company's
option, exchangeable for shares of Common Stock on a one-for-one basis, subject
to certain anti-dilution adjustments and certain other exceptions, beginning
January 31, 1999 (other than certain holders who are corporations or limited
liability companies who may require the Company to issue shares of Common Stock
in lieu of cash). Assuming the exchange of all outstanding limited partnership
Units for shares of Common Stock, and after giving effect to the Offering, the
Company's executive officers and directors, and Unitholders who are members of
the Kilroy Group, will own approximately 9.7% of the Common Stock.

The Finance Company is a wholly-owned subsidiary of the Kilroy Realty
Corporation and serves as the 1.0% sole general partner of the Finance
Partnership. The Operating Partnership is the 99.0% limited partner of the
Finance Partnership. The Finance Partnership is the obligor on the $84 Million
Loan and the owner of the Properties that secure such indebtedness. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business and Properties--
Mortgage Debt."

John B. Kilroy, Sr. and John B. Kilroy, Jr. together own 100.0% of the voting
common stock of the Services Company, representing 5.0% of its economic value.
The Operating Partnership owns 100.0% of the nonvoting preferred stock of the
Services Company, representing 95.0% of its economic value. The ownership
structure of the Services Company is necessary to permit the Company to share
in the income of the activities of the Services Company and also maintain its
status as a REIT. Although the Company receives substantially all of the
economic benefit of the businesses carried on by the Services Company through
the Company's right to receive dividends through the Operating Partnership's
investment in the Services Company's nonvoting preferred stock, the Company is
not able to elect the Services Company's officers or directors, and
consequently may not have the ability to influence the operations of the
Services Company. See "Risk Factors--Risk of Development Business and Related
Activities Being Conducted by the Services Company--Adverse Consequences of
Lack of Control Over the Businesses of the Services Company."

10
<PAGE>

The following diagram illustrates the structure of the Company:

ORGANIZATIONAL CHART OF THE COMPANY AND ITS SUBSIDIARIES

[CHART APPEARS HERE]

GROWTH STRATEGIES

The Company's objectives are to maximize growth in cash available for
distribution and to enhance the value of its portfolio through effective
management, operating, acquisition and development strategies. The Company
believes that opportunities exist to increase cash available for distribution:
(i) by acquiring office and industrial properties with attractive returns in
strategic suburban submarkets where such properties complement its existing
portfolio; (ii) from contractual increases in base rent; (iii) as a result of
increasing rental and occupancy rates and decreasing concessions and tenant
installation costs; and (iv) by developing properties for the benefit of the
Company where such development will result in a favorable risk-adjusted return
on investment. The Company's ability to achieve its growth strategy will be
aided by its available cash of approximately $141.4 million upon consummation
of the Offering.

The Company believes that a number of factors will enable it to achieve its
business objectives, including: (i) the opportunity to lease available space at
attractive rental rates because of increasing demand and, with respect to
office properties, the present lack of new construction in the Southern
California submarkets in which most of the Properties are located; (ii) the
presence of inadvertent owners (through foreclosure or otherwise) of office and
industrial properties in the Company's submarkets, as well as the Company's
ability to acquire properties with Units (thereby permitting the seller to
defer taxable gain), both of which create enhanced acquisition opportunities;
(iii) the quality and location of the Properties; and (iv) the Company's access
to

11
<PAGE>

acquisition and development opportunities as a result of its significant
relationships with large Southern California corporate tenants, municipalities
and landowners and the Company's 50-year presence in the Southern California
market. Management believes that the Company is well positioned to exploit
existing opportunities because of its extensive experience in certain of its
submarkets, its seasoned management team and its proven ability to acquire,
develop, lease and efficiently manage office and industrial properties. In
addition, the Company believes that public ownership and its conservative
capital structure will provide new opportunities for growth. There can be no
assurance, however, that the Company will be able to lease available space,
complete any property acquisitions, successfully develop any land acquired or
improve the operating results of any developed properties that are acquired.
See "Business and Properties--Development, Leasing and Management Activities."

Operating Strategies. The Company focuses on enhancing growth in cash
available for distribution by: (i) maximizing cash flow from the Properties
through active leasing, contractual base rent increases and effective property
management; (ii) managing operating expenses through the use of in-house
management, leasing, marketing, financing, accounting, legal, construction
management and data processing functions; (iii) maintaining and developing
long-term relationships with a diverse tenant group; (iv) attracting and
retaining motivated employees by providing financial and other incentives to
meet the Company's operating and financial goals; and (v) continuing to
emphasize capital improvements to enhance the Properties' competitive
advantages in their markets.

The Company believes that the strength of its leasing is demonstrated by the
Company's leasing activity since 1993. In the period from January 1, 1993 to
June 30, 1997, the Company leased or renewed leases for an aggregate of
approximately 1.2 million rentable square feet of office space and
approximately 781,000 rentable square feet of industrial space. As of June 30,
1997, the Office Properties located in the Southern California Area were
approximately 90.6% leased. As of March 31, 1997, occupancy rates for all
office properties were approximately 83.7% for the Southern California Area,
81.5% for the El Segundo submarket and 86.2% for the Long Beach submarket. In
addition, as of June 30, 1997, the Industrial Properties were approximately
96.8% leased as compared to 92.7% for all industrial properties located in the
Southern California Area as of March 31, 1997. See "Business and Properties--
General" and "--Occupancy and Rental Information."

The Company's 20 largest tenants represented approximately 56.3% of annual
base rent for the year ended December 31, 1996 (giving pro forma effect to the
Boeing Lease). Of this amount, its largest tenant, Hughes Space &
Communications, currently leases approximately 530,000 rentable square feet of
office space, representing approximately 16.9% of the Company's total base rent
for the year ended December 31, 1996 giving pro forma effect to the acquisition
of the Acquired Properties and the Boeing Lease. The base periods of the Hughes
Space & Communications leases expire beginning in January 1999. The Company's
revenues and cash available for distribution to stockholders would be
disproportionately and materially adversely affected in the event of bankruptcy
or insolvency of, or a downturn in the business of, or the nonrenewal of leases
by, any of its significant tenants, or the renewal of such leases on terms less
favorable to the Company than their current terms.

Approximately 1.0 million aggregate rentable square feet in the Properties,
owned by the Company as of the date of its IPO, was leased by the Company from
January 1, 1992 through December 31, 1994, a period which management
characterizes as recessionary. Based on the leases the Company signed in 1996,
and the findings in an independent study of the Southern California real estate
market commissioned by the Company, management believes that the recent trend
toward increasing rental rates in Class A office and industrial buildings in
the Company's Southern California submarkets presents significant opportunities
for growth. In addition, as of June 30, 1997, approximately 58.5% of the
Company's rentable square feet is subject to leases expiring in 2000 or beyond,
when management expects asking rents for the respective Properties to be higher
than the rents paid pursuant to such leases. In addition, as of June 30, 1997,
approximately 32.1% of the Company's total base rent (representing
approximately 22.1% of the aggregate rentable square feet of the Properties)
was attributable

12
<PAGE>

to leases with Consumer Price Index increases and approximately 25.6% of the
Company's total base rent (representing approximately 36.6% of the aggregate
rentable square feet of the Properties) was attributable to leases with other
specified contractual increases. No assurance can be given, however, that new
leases will reflect rental rates greater than or equal to current rental rates
or that current or future economic conditions will support higher rental rates.
See "Risk Factors--Real Estate Investment Considerations."

Acquisition Strategies. The Company seeks to increase its cash available for
distribution by acquiring additional quality office and industrial properties,
including properties that: (i) may provide attractive initial yields with
significant potential for growth in cash flow from property operations; (ii)
are strategically located, of high quality and competitive in their respective
submarkets; (iii) are located in the Company's existing submarkets and/or in
other strategic submarkets where the demand for office and industrial space
exceeds available supply; or (iv) have been under-managed or are otherwise
capable of improved performance through intensive management and leasing that
will result in increased occupancy and rental revenues. The Company believes
that the Southern California market is an established and mature real estate
market in which property owners generally have a low tax basis (and,
accordingly, the potential for large taxable gains) in their properties.
Management believes that the Company's significant Southern California
relationships, extensive experience, conservative capital structure and ability
to acquire properties for Units, and thereby defer a seller's taxable gain, if
any, will enhance the ability of the Company to consummate transactions quickly
and to structure more competitive acquisitions than other real estate companies
in the market which lack its access to capital or the ability to issue Units.
See "Business and Properties--Development, Leasing and Management Activities."

As of June 30, 1997, the Company contracted to acquire the Pending
Acquisition, one Los Angeles County industrial property encompassing
approximately 165,000 rentable square feet for an aggregate acquisition cost of
approximately $9.8 million. In addition, the Company is currently in active
negotiations to purchase 15 Pipeline Properties for an aggregate acquisition
cost of $114.4 million, including the assumption of $14.0 million of mortgage
indebtedness. There can be no assurance, however, that the Company will be able
to complete any property acquisitions, successfully develop any land acquired
or improve the operating results of any developed properties that are acquired.
See "--Recent Developments--Acquisitions" and "Business and Properties--
Acquired Properties."

Development Strategies. Since 1947, the Company and its predecessors have
developed millions of rentable square feet of office and industrial space,
including high technology facilities, primarily located in Southern California,
for its own portfolio and for third parties. The Company currently owns an
aggregate of approximately 36 acres of developable land and has the exclusive
right to develop an additional 24 acres of developable land which provide it
with significant growth opportunities. All of the developable land is located
in Southern California. The Company owns ten acres of developable land in Brea,
15 acres in Foothill Ranch in Orange County, two and one-half acres in Anaheim,
three and one-half acres in Irvine and five acres in Camarillo. The Company is
the master ground lessee of, and has sole development rights to the 24 acres of
developable land entitled for office, research and development, light
industrial and other commercial projects at Kilroy Airport Center, Long Beach.

The Company presently plans to develop an aggregate of up to 1.6 million
rentable square feet of office or industrial space on the Development
Properties, subject to required entitlements. Of this amount, the Company plans
to commence development of 500,000 rentable square feet of industrial space in
1997 at a total budgeted cost of approximately $25.0 million. No assurance can
be given that the Company will commence any development, or that, if commenced,
any such development will be completed. See "Risk Factors--Real Estate
Investment Considerations--Risks of Real Estate Acquisition and Development"
and "Business and Properties--Development, Leasing and Management Activities--
Kilroy Airport Center, Long Beach."

13
<PAGE>

The Company may engage in the development of other office and/or industrial
properties primarily in Southern California submarkets when market conditions
support a favorable risk-adjusted return on such development. The Company's
activities with third-party owners in Southern California are expected to give
the Company further access to development opportunities. There can be no
assurance, however, that the Company will be able to successfully develop any
of the Development Properties or any other properties. See "Business and
Properties--Development, Leasing and Management Activities."

Financing Policies. The Company's financing policies and objectives are
determined by the Board of Directors. The Company presently limits the ratio of
debt to total market capitalization (total debt of the Company as a percentage
of the market value of issued and outstanding shares of Common Stock, including
interests exchangeable therefor, plus total debt) to approximately 50%.
However, such objectives may be altered without the consent of the Company's
stockholders, and the Company's organizational documents do not limit the
amount of indebtedness that the Company may incur. The total debt constituted,
as of March 31, 1997, approximately 17.4% of the total market capitalization of
the Company and increased, as of June 30, 1997, to approximately 30.1% of the
total market capitalization of the Company. Giving pro forma effect to the
Offering and the application of the net proceeds from the Offering, total debt,
as of July 25, 1997, would have constituted approximately 11.9% of the total
market capitalization of the Company. The Company intends to utilize one or
more sources of capital for future acquisitions, development and capital
improvements, which may include undistributed cash flow, borrowings under the
Credit Facility, the Company's approximately $141.4 million of cash available
for acquisition and development out of the net proceeds of the Offering,
issuance of debt or equity securities and other bank and/or institutional
borrowings. There can be no assurance, however, that the Company will be able
to obtain capital for any such acquisitions, developments or improvements on
terms favorable to the Company. See "--Growth Strategies," "The Company--Growth
Strategies" and "Business and Properties--Development, Leasing and Management
Activities."

14
<PAGE>

THE PROPERTIES

The following table sets forth certain information relating to each of the
Properties as of December 31, 1996, unless indicated otherwise. This table
gives pro forma effect to (i) the November 1996 extension of one of the leases
with Hughes Space & Communications with respect to two of the Office Properties
located at Kilroy Airport Center at El Segundo as if such lease renewal had
occurred on January 1, 1996 and (ii) the acquisition of the Acquired Properties
and the Pending Acquisition, as if such acquisitions had occurred on January 1,
1996. During the fourth quarter of 1996, the Company entered into certain lease
transactions pursuant to which the tenants under the respective leases began
occupancy in the first quarter of 1997. Consequently, total occupancy data as
of June 30, 1997 reflects the higher occupancy as a result of these
transactions which are reflected in the Company's leasing activity for the year
ended December 31, 1996, and not in the first quarter of 1997. See "Business
and Properties--General--Existing Office Properties" and "--Existing Industrial
Properties." In addition, the table does not reflect the lease of 211,000
rentable square feet of office space with Boeing at the SeaTac Office Center,
entered into as of June 20, 1997. The Company (through the Operating
Partnership and Finance Partnership) owns a 100% interest in all of the
Properties other than the five Office Properties located at Kilroy Airport
Center Long Beach and the three Office Properties located at the SeaTac Office
Center, each of which are held subject to ground leases expiring in 2035 and
2064 (assuming the exercise of the Company's options to extend such lease),
respectively.
<TABLE>
<CAPTION>
AVERAGE
PERCENTAGE PERCENTAGE BASE PERCENTAGE
LEASED AS 1996 OF 1996 RENT EFFECTIVE LEASED
RENTABLE OF 1996 BASE EFFECTIVE TOTAL BASE PER RENT PER AS OF
YEAR SQUARE 12/31/96 RENT RENT RENT SQ. FT. SQ. FT. 6/30/97
PROPERTY LOCATION BUILT FEET (%)(1) ($000)(2) ($000)(3) (%)(4) ($)(5) ($)(6) (%)(7)
- ----------------- ----- -------- ---------- --------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Existing Office
Properties:
Kilroy Airport
Center at El
Segundo
2250 E. Imperial 1983 291,187 86.5 4,561 4,293 7.8 18.12 17.05 95.7
Highway(9).....
2260 E. Imperial 1983 291,187 100.0 7,160 6,668 12.3 24.59 22.90 100.0
Highway(10)....
2240 E. Imperial
Highway 1983 118,933 100.0 1,292 1,283 2.2 10.87 10.79 100.0
El Segundo, California(11)..
Kilroy Airport
Center Long
Beach
3900 Kilroy 1987 126,840 94.0 2,412 2,223 4.1 20.23 18.64 98.9
Airport Way....
3880 Kilroy 1987 98,243 100.0 1,296 1,022 2.2 13.19 10.40 100.0
Airport Way....
3760 Kilroy 1989 165,278 72.2 3,564 2,901 6.1 29.85 24.30 97.9
Airport Way....
3780 Kilroy 1989 219,745 93.8 4,908 4,286 8.4 23.81 20.79 97.9
Airport Way....
3750 Kilroy
Airport Way 1989 10,457 100.0 75 28 0.1 7.21 2.66 100.0
Long Beach, California..
La Palma Business
Center
4175 E. La Palma
Avenue 1985 42,790 93.2 557 536 1.0 13.97 13.45 89.1
Anaheim, California..
2829 Townsgate
Road 1990 81,158 100.0 1,888 1,760 3.2 23.26 21.69 100.0
Thousand Oaks, California..
185 S. Douglas
Street 1978 60,000 100.0 1,313 898 2.3 21.89 14.96 100.0
El Segundo, California(12)..
<CAPTION>
TENANTS LEASING
10% OR MORE OF
RENTABLE SQUARE
FEET PER PROPERTY
PROPERTY LOCATION AS OF 6/30/97(8)
- ----------------- ------------------
<S> <C>
Existing Office
Properties:
Kilroy Airport
Center at El
Segundo
2250 E. Imperial Hughes Space &
Highway(9)..... Communications
(42.5%)
2260 E. Imperial Hughes Space &
Highway(10).... Communications
(100.0%)
2240 E. Imperial
Highway Hughes Space &
El Segundo, California(11)..Communications
(96.3%)
Kilroy Airport
Center Long
Beach
3900 Kilroy McDonnell Douglas
Airport Way.... Corporation
(50.9%),
Olympus America,
Inc. (18.6%)
3880 Kilroy Devry, Inc.
Airport Way.... (100.0%)
3760 Kilroy McDonnell Douglas
Airport Way.... Aircraft (25.7%)
3780 Kilroy SCAN Health Plan
Airport Way.... (23.3%),
Zelda Fay Walls
(12.7%)
3750 Kilroy
Airport Way Oasis Cafe
Long Beach, California.. (37.1%),
Keywanfar &
Baroukhim (16.1%),
SR Impressions
(15.0%)
La Palma Business
Center
4175 E. La Palma
Avenue Peryam & Kroll
Anaheim, California.. (26.2%),
DMV/VPI Insurance
Group (26.1%),
Midcom Corporation
(15.3%)
2829 Townsgate
Road Worldcom, Inc.
Thousand Oaks, California.. (34.2%),
Data Select
Systems, Inc.
(13.0%),
Pepperdine
University
(12.7%),
Anheuser Busch,
Inc. (12.0%)
185 S. Douglas
Street Northwest
El Segundo, California(12)..Airlines, Inc.
(100.0%)
</TABLE>

(continued on next page)

15
<PAGE>

16
<PAGE>

17
<PAGE>

<TABLE>
<CAPTION>
AVERAGE
PERCENTAGE PERCENTAGE BASE PERCENTAGE
LEASED AS 1996 OF 1996 RENT EFFECTIVE LEASED
RENTABLE OF 1996 BASE EFFECTIVE TOTAL BASE PER RENT PER AS OF
PROPERTY YEAR SQUARE 12/31/96 RENT RENT RENT SQ. FT. SQ. FT. 6/30/97
LOCATION BUILT FEET (%)(1) ($000)(2) ($000)(3) (%)(4) ($)(5) ($)(6) (%)(7)
-------- ----- --------- ---------- --------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12400 Industry
Street 1972 64,296 100.0 321 321 0.5 4.99 4.99 100.0
Garden Grove, California..
20553 Walnut
Drive
Diamond Bar, California(18).. 1987 165,049 95.7 920 920 1.6 5.82 5.82 100.0
--------- ----- ------ ------ ----- -----
Subtotal/Weighted
Average of
Acquired
Industrial
Properties and
the Pending
Acquisition.... 1,688,593 93.9 7,685 7,685 13.2 4.77 4.77 98.2
--------- ----- ------ ------ ----- -----
Subtotal/Weighted
Average of
Acquired
Properties and
the Pending
Acquisition.... 2,564,770 94.4 18,597 18,597 31.8 7.60 7.60 98.3
--------- ----- ------ ------ ----- -----
Total/Weighted
Average All
Properties 5,940,715 90.9 58,402 54,104 100.0 9.83 9.11 92.6
========= ===== ====== ====== ===== =====
<CAPTION>
TENANTS LEASING
10% OR MORE OF
RENTABLE SQUARE
PROPERTY FEET PER PROPERTY
LOCATION AS OF 6/30/97(8)
-------- ------------------
<S> <C>
12400 Industry
Street Container Supply
Garden Grove, California.. Company, Inc.
(100.0%)
20553 Walnut
Drive Parnex, Inc.
Diamond Bar, California(18).. (10.1%)
Subtotal/Weighted
Average of
Acquired
Industrial
Properties and
the Pending
Acquisition....
Subtotal/Weighted
Average of
Acquired
Properties and
the Pending
Acquisition....
Total/Weighted
Average All
Properties
</TABLE>
- -------
(1) Based on all leases at the respective Properties in effect as of December
31, 1996.
(2) Total base rent for the year ended December 31, 1996, determined in
accordance with generally accepted accounting principles ("GAAP"). All
leases at the Industrial Properties are written on a triple net basis.
Unless otherwise indicated, all leases at the Office Properties are
written on a full service gross basis, with the landlord obligated to pay
the tenant's proportionate share of taxes, insurance and operating
expenses up to the amount incurred during the tenant's first year of
occupancy ("Base Year") or a negotiated amount approximating the tenant's
pro rata share of real estate taxes, insurance and operating expenses
("Expense Stop"). Each tenant pays its pro rata share of increases in
expenses above the Base Year or Expense Stop.
(3) Aggregate base rent received over the respective lease term from all lease
transactions in effect at December 31, 1996 minus all tenant improvements,
leasing commissions and other concessions for all such leases, paid or
payable by the Company, divided by the terms in months for such leases,
multiplied by 12. Tenant improvements, leasing commissions and other
concessions are estimated using the same methodology used to calculate
effective rent for the Properties as a whole in the charts set forth under
the caption "Business and Properties--General."
(4) The percentage of 1996 total base rent is calculated as the base rent of
the respective Property for the year ended December 31, 1996 divided by
the combined base rent for all of the Properties (including the Acquired
Properties and the Pending Acquisition) for the year ended December 31,
1996.
(5) Base rent for the year ended December 31, 1996 divided by rentable square
feet leased at December 31, 1996.
(6) Effective rent at December 31, 1996 divided by rentable square feet leased
at December 31, 1996.
(7) Based on all leases at the respective Properties dated on or before June
30, 1997.
(8) Excludes office space leased by the Company.
(9) For this Property, leases with Hughes Space & Communications, for
approximately 96,000 rentable square feet, and with SDRC Software Products
Marketing Division, Inc., for approximately 6,800 rentable square feet,
are written on a full service gross basis except that there is no Expense
Stop.
(10) For this Property, the lease with Hughes Space & Communications is written
on a modified full service gross basis under which Hughes Space &
Communications pays for all utilities and other internal maintenance costs
with respect to the leased space and, in addition, pays its pro rata share
of real estate taxes, insurance, and certain other expenses including
common area expenses.
(11) For this Property, leases with Hughes Space & Communications for
approximately 101,000 rentable square feet are written on a full service
gross basis except that there is no Expense Stop.
(12) For this Property, the lease is written on a triple net basis.
(13) The data does not reflect the lease of 211,000 rentable square feet of
office space with Boeing at the SeaTac Office Center, entered into as of
June 20, 1997 and effective as of January 1, 1998. See "Business and
Properties--Office Properties--Kilroy Airport Center, SeaTac."
(14) This Industrial Property was vacant until April 1996. The tenant began
paying rent in mid-October 1996 at an annual rate of $4.40 per rentable
square foot.
(15) The tenant subleased this Industrial Property on May 15, 1996 to RGB
Systems, Inc. (doing business as Extron Electronics), the tenant of the
Property located at 1230 S. Lewis Street, Anaheim, California, which is
adjacent to this Property. The sublease is at an amount less than the
current lease rate, and the tenant is paying the difference between the
current lease rate and the sublease rate. The lease and the sublease
terminate in April 1998. Extron Electronics has executed a lease for this
space from May 1998 through April 2005 at the current lease rate. Extron
Electronics continues to occupy the space located at 1230 S. Lewis Street.
(16) This Industrial Property was originally designed for multi-tenant use and
currently is leased to a single tenant and utilized as an indoor multi-
vendor retail marketplace.
(17) The leases for this Industrial Property are written on a modified triple
net basis, with the tenants responsible for estimated allocated common
area expenses.
(18) As of the date of this filing, the Company has not completed the
acquisition of this Property.
(19) Brea Industrial Properties consists of 660 Puente Street, 1050 West
Central, 1150 West Central, 950 West Central, 895 Beacon Street,
955 Beacon Street and 1125 Beacon Street.
(20) Garden Grove Industrial Properties consists of 12442 Knott Avenue, 7091
Belgrave Avenue, 12311-21 Industry Street, 12241-71 Industry Street, 7261
Lampson Avenue and 12472 Edison Way.
(21) Financial information, for the year ended December 31, 1996, for 9401 and
9451 Toledo Way, Irvine, California is not available since the Property
was 100.0% owner-occupied. Concurrent with the Company's acquisition of
the Property, a lease was signed by the former owner for a continued
100.0% occupancy of the Property.
(22) Subsequent to June 30, 1997, this tenant terminated its lease and the
portion of the office space previously occupied by such tenant is now
available for lease.

18
<PAGE>

THE COMPANY'S SOUTHERN CALIFORNIA SUBMARKETS

In connection with the Offering, the Company retained Robert Charles Lesser &
Co. ("Lesser"), nationally recognized experts in real estate consulting and
urban economics, to study the Company's Southern California submarkets, and the
discussion of such submarkets below is based upon Lesser's findings. While the
Company believes that these estimates of economic trends are reasonable, there
can be no assurance that these trends will in fact continue.

The Properties are primarily located in Los Angeles, Orange and Ventura
Counties which, together with Riverside and San Bernardino Counties, comprise
the second largest Consolidated Metropolitan Statistical Area in the United
States. Management believes that the region's economy, which in 1994 commenced
recovery from a four-year economic recession, and the continuing growth in the
region's foreign trade, tourism and entertainment industries, provide an
attractive environment for owning and operating Class A office and industrial
properties since occupancy rates and asking rents generally are increasing. In
addition, since 1992 there has been virtually no increase in the region's
office space, while the region's demand for quality industrial space
accompanied by low vacancy rates has spurred modest new construction of
industrial properties.

Vacancy rates in the office space market in the Southern California Area are
trending downward from a high of nearly 20.0% in 1991 and 1992 to 16.3% at
March 31, 1997. At June 30, 1997, the vacancy rate for the Southern California
Area office properties was approximately 7.3%. Vacancy rates in the industrial
space market in the Southern California Area have decreased from a high of
nearly 14% in 1992 to approximately 7.3% at March 31, 1997. At June 30, 1997,
the vacancy rate for the Southern California Area industrial properties was
approximately 1.8%.

The Southern California Area population in 1996 was estimated at 15.7 million
people which accounted for approximately 5.9% of the total U.S. population.
Beginning in 1990, annual population growth in the region has averaged
approximately 192,000 persons. Of the total 1996 population, approximately 9.3
million and 2.6 million persons lived in Los Angeles and Orange Counties,
respectively, the counties in which all but six of the Properties are located.
Annual estimated growth in population over the next five years in these
counties is expected to be approximately 79,000 and 35,000 persons,
respectively. See "Business and Properties--The Company's Southern California
Submarkets."

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered Hereby.......... 10,000,000 shares
Common Stock to be Outstanding after
the Offering........................ 27,292,476 shares(1)
Use of Proceeds...................... Approximately $95.0 million for the
reduction of the outstanding borrowings
under the Credit Facility, approximately
$9.8 million for the acquisition of the
Pending Acquisition and approximately
$141.4 million of cash for acquisitions,
development and working capital.
NYSE Symbol.......................... KRC
</TABLE>
- --------
(1) Includes 2,817,476 Units (calculated on an as-exchanged basis) issued in
connection with the Formation Transactions and the purchase of a certain
Acquired Property, but excludes 1,400,000 additional shares of Common Stock
reserved for issuance as restricted shares of Common Stock, or upon the
exercise of options granted, pursuant to the Stock Incentive Plan (as
defined herein). See "Management--Stock Incentive Plan" and "Shares
Eligible for Future Sale."

19
<PAGE>

SUMMARY FINANCIAL DATA

The following table sets forth certain financial data on a historical and pro
forma basis for the Company, and on an historical basis for the Kilroy Group,
which consist of the Consolidated Financial Statements of Kilroy Realty
Corporation and the Combined Financial Statements of the Kilroy Group (the
"Consolidated and Combined Financial Statements") whose financial results are
consolidated in the historical and pro forma financial statements of the
Company. The financial data should be read in conjunction with the historical
and pro forma financial statements and notes thereto included in this
Prospectus. The combined historical summary financial data as of December 31,
1995 and 1996 and for each of the three years in the period ended December 31,
1996 have been derived from the Combined Financial Statements of the Kilroy
Group audited by Deloitte & Touche LLP, independent public accountants, whose
report with respect thereto is included elsewhere in this Prospectus. The
summary combined historical financial and operating information as of December
31, 1992, 1993 and 1994, and for the years ended December 31, 1992 and 1993,
the three months ended March 31, 1996, and the period from January 1, 1997 to
January 31, 1997 have been derived from the unaudited Combined Financial
Statements of the Kilroy Group and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of operating information for the unaudited periods. The summary
consolidated historical financial and operating information as of March 31,
1997 and for the two-month period from February 1, 1997 to March 31, 1997 have
been derived from the unaudited Consolidated Financial Statements of the
Company and, in the opinion of management, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of the
operating information for the unaudited period. For a discussion of the
adjusted three months ended March 31, 1997 assuming the IPO and the Formation
Transactions had been consummated on January 1, 1997 (but not adjusted to
reflect the Acquired Properties) see "Management's Discussion and Analysis of
Financial Conditions and Results of Operation--Results of Operations--Adjusted
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31,
1997." From March 31, 1997 through July 28, 1997, the Company incurred
$95.0 million of indebtedness under the Credit Facility to complete the
purchase of the Acquired Properties (other than the Pending Acquisition). The
pro forma data assume the consummation of the Offering and use of the aggregate
net proceeds therefrom to purchase the Acquired Properties and Pending
Acquisition as of the beginning of the periods presented for the operating data
and as of the balance sheet date for the balance sheet data. The pro forma
financial data are not necessarily indicative of what the actual financial
position or results of operations of the Company would have been as of and for
the periods indicated, nor does it purport to represent the future financial
position and results of operations.

20
<PAGE>

THE COMPANY AND KILROY GROUP
(IN THOUSANDS, EXCEPT SQUARE FOOTAGE AND SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
CONSOLIDATED/COMBINED HISTORICAL COMBINED HISTORICAL
---------------------------------- -------------------------------------------
KILROY GROUP
PRO FORMA KILROY ---------------------
THREE REALTY CORP. THREE
MONTHS FEBRUARY 1, JANUARY 1, MONTHS
ENDED 1997 TO 1997 TO ENDED
MARCH 31, MARCH 31, JANUARY 31, MARCH 31, PRO FORMA
1997 1997 1997 1996 1996 1996 1995 1994 1993 1992
--------- ------------ ----------- --------- --------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Rental income....... $15,511 $7,110 $2,760 $ 8,785 $61,273 $35,022 $33,896 $32,577 $35,599 $34,274
Tenant
reimbursements..... 1,703 706 275 862 6,804 3,380 3,002 1,643 4,916 5,076
Development and
management fees.... -- -- 14 263 -- 698 1,156 919 751 882
Sale of air rights.. -- -- -- -- -- -- 4,456 -- -- --
Lease termination
fees............... -- -- -- -- -- -- 100 300 5,190 48
Interest income..... -- 971 -- -- -- -- -- -- -- --
Other income........ 192 185 4 11 667 76 298 784 188 221
------- ------ ------ ------- ------- ------- ------- ------- ------- -------
Total revenues...... 17,406 8,972 3,053 9,921 68,744 39,176 42,908 36,223 46,644 40,501
------- ------ ------ ------- ------- ------- ------- ------- ------- -------
Property expenses... 2,667 1,239 579 1,533 11,934 6,788 6,834 6,000 6,391 6,384
Real estate taxes
(refunds).......... 912 353 106 300 3,425 1,301 1,416 (448) 2,984 3,781
General and
administrative expense.. 1,419 725 78 528 5,672 2,383 2,152 2,467 1,113 1,115
Ground leases....... 277 185 64 193 1,106 768 789 913 941 854
Development
expenses........... -- -- 46 197 -- 650 737 468 581 429
Option buy-out
cost............... -- -- -- -- 3,150 3,150 -- -- -- --
Interest expense.... 2,052 1,531 1,895 5,227 8,200 21,853 24,159 25,376 25,805 26,293
Depreciation and
amortization....... 3,723 1,744 787 2,281 14,727 9,111 9,474 9,962 10,905 10,325
------- ------ ------ ------- ------- ------- ------- ------- ------- -------
Total expenses...... 11,050 5,777 3,555 10,259 48,214 46,004 45,561 44,738 48,720 49,181
------- ------ ------ ------- ------- ------- ------- ------- ------- -------
Income (loss) before
equity in loss of
subsidiary,
minority interest
and extraordinary
item............... 6,356 3,195 (502) (338) 20,530 (6,828) (2,653) (8,515) (2,076) (8,680)
Equity in loss
of subsidiary...... (87) (57) -- -- (6) -- -- -- -- --
Minority interest... (646) (486) -- -- (2,114) -- -- -- -- --
Extraordinary Item--
Extinguishment of
debt............... -- -- 3,204 -- -- 20,095 15,267 1,847 -- --
------- ------ ------ ------- ------- ------- ------- ------- ------- -------
Net income (loss)... $ 5,623 $2,652 $2,702 $ (338) $18,410 $13,267 $12,614 $(6,668) $(2,076) $(8,680)
======= ====== ====== ======= ======= ======= ======= ======= ======= =======
Net income
per common
share(1)........... $ .23 $ .18 $ .75
======= ====== =======
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31,
---------------------- -----------------------------------------------------
COMBINED HISTORICAL
CONSOLIDATED -----------------------------------------------------
PRO FORMA HISTORICAL 1996 1995 1994 1993 1992
--------- ------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate assets, be-
fore accumulated de-
preciation and amorti-
zation................ $500,557 $285,402 $227,337 $ 224,983 $ 223,821 $ 222,056 $ 221,423
Total assets........... 560,558 310,382 128,339 132,857 143,251 148,386 161,008
Mortgages and Loans.... 95,917 95,917 223,297 233,857 250,059 248,043 250,792
Total liabilities...... 109,433 109,433 242,116 254,683 273,585 263,346 263,156
Minority interest...... 46,466 31,127 -- -- -- -- --
Stockholders' equity
(deficit)............. 404,659 169,822 (113,777) (121,826) (130,334) (114,960) (102,148)
</TABLE>

21
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------ -----------------------------------------
CONSOLIDATED/
COMBINED HISTORICAL COMBINED HISTORICAL
PRO FORMA -------------------- PRO FORMA -------------------------------
1997 1997 1996 1996 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from
Operations(2)(3)....... $ 10,107 $ 5,244 $ 1,943 $ 35,711 $ 5,433 $ 2,365 $ 1,447
Cash Flows from(3):
Operating activities... -- 227 4,354 -- 5,520 10,071 6,607
Investing activities... -- (59,606) (76) -- (2,354) (1,162) (1,765)
Financing activities... -- 175,542 (4,278) -- (3,166) (8,909) (4,842)
Office Properties:
Rentable square
footage............... 2,914,425 2,037,414 1,688,383 2,914,425 1,688,383 1,688,383 1,688,383
Occupancy.............. 87.9% 83.5% 79.4% 85.1% 76.0% 72.8% 73.3%
Industrial Properties:
Rentable square
footage............... 3,026,290 1,337,697 916,570 3,026,290 916,570 916,570 916,570
Occupancy.............. 97.6% 98.0% 98.4% 96.9% 97.6% 98.4% 79.7%
</TABLE>
- -------
(1) Pro forma net income per share equals pro forma net income divided by the
24,475,000 shares of Common Stock outstanding after the Offering.
(2) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), "Funds from Operations" represents net income (loss) before
minority interest of unit holders (computed in accordance with GAAP),
excluding gains (or losses) from debt restructuring and sales of property,
plus real estate related depreciation and amortization (excluding
amortization of deferred financing costs) and after adjustments for
unconsolidated partnerships and joint ventures. Non-cash adjustments to
Funds from Operations were as follows: in all periods, depreciation and
amortization; in 1996, 1995 and 1994, gains on extinguishment of debt; and
in pro forma 1997 and 1996 and in the three months ended March 31, 1997,
non-cash compensation. Further, in 1996 and 1995 non-recurring items (sale
of air rights and option buy-out cost) were excluded. Management considers
Funds from Operations an appropriate measure of performance of an equity
REIT because industry analysts have accepted it as such. The Company
computes Funds from Operations in accordance with standards established by
the Board of Governors of NAREIT in its March 1995 White Paper, which may
differ from the methodology for calculating Funds from Operations utilized
by other equity REITs and, accordingly, may not be comparable to such other
REITs. Further, Funds from Operations does not represent amounts available
for management's discretionary use because of needed capital replacement or
expansion, debt service obligations, or other commitments and
uncertainties. See the notes to the historical financial statements of the
Kilroy Group. Funds from Operations should not be considered as an
alternative for net income as a measure of profitability nor is it
comparable to cash flows provided by operating activities determined in
accordance with GAAP.
(3) Funds from operations and cash flow information is comprised of Kilroy
Group for the period January 1, 1997 to January 31, 1997 and Kilroy Realty
Corporation for the period February 1, 1997 to March 31, 1997.

22
<PAGE>

RISK FACTORS

An investment in the shares of Common Stock involves various material risks.
Prospective investors should carefully consider the following risk factors, in
addition to the other information set forth in this Prospectus, in connection
with an investment in the shares of Common Stock offered hereby.

When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, regarding
events, conditions and financial trends that may affect the Company's future
plans of operations, business strategy, results of operations and financial
position. Prospective investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks
and uncertainties and that actual results may differ materially from those
included within the forward-looking statements as a result of various factors.
Factors that could cause or contribute to such differences include, but are
not limited to, those described below, under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Prospectus.

CONFLICTS OF INTEREST

Certain Limited Partner Approval Rights. While Kilroy Realty Corporation is
the sole general partner of the Operating Partnership, and generally has full
and exclusive responsibility and discretion in the management and control of
the Operating Partnership, certain provisions of the Partnership Agreement
place limitations on Kilroy Realty Corporation's ability to act with respect
to the Operating Partnership. The Partnership Agreement provides that if the
limited partners own at least 5% of the outstanding Units (including Units
held by Kilroy Realty Corporation which upon consummation of the Offering will
represent 89.7% of all Units outstanding), Kilroy Realty Corporation shall
not, on behalf of the Operating Partnership, take any of the following actions
without the prior consent of the holders of more than 50% of the Units
representing limited partner interests (excluding Units held by Kilroy Realty
Corporation): (i) dissolve the Operating Partnership, other than incident to a
merger or sale of substantially all of the Company's assets; or (ii) prior to
January 31, 2004, sell the Office Property located at 2260 E. Imperial Highway
at Kilroy Airport Center at El Segundo, other than incident to a merger or
sale of substantially all of the Company's assets. Furthermore, the
Partnership Agreement provides that, except in connection with certain
transactions, Kilroy Realty Corporation may not voluntarily withdraw from the
Operating Partnership, or transfer or assign its interest in the Operating
Partnership, without the consent of the holders of at least 60% of the Units
(including Units held by Kilroy Realty Corporation) and without meeting
certain other criteria with respect to the consideration to be received by the
limited partners. In addition, Kilroy Realty Corporation has agreed to use its
commercially reasonable efforts to structure certain merger transactions to
avoid causing the limited partners to recognize gain for federal income tax
purposes by virtue of the occurrence of or their participation in such
transactions. The restrictions on Kilroy Realty Corporation's ability to act
as described above may result in Kilroy Realty Corporation being precluded
from taking action which the Board of Directors believes is in the best
interest of all stockholders. See "Partnership Agreement of the Operating
Partnership--Transferability of Interests" and "--Certain Limited Partner
Approval Rights."

Tax Consequences Upon Sale or Refinancing. Unlike persons acquiring shares
of Common Stock in the Offering, Unitholders may suffer different and more
adverse tax consequences than the Company upon the sale or refinancing of
certain of the properties owned by the Operating Partnership, and therefore
such holders may have different objectives regarding the appropriate pricing
and timing of any sale or refinancing of such properties. While the Company,
as the sole general partner of the Operating Partnership, has the authority
(subject to certain limited partner approval rights described above) to
determine whether and on what terms to sell or refinance each property owned
solely by the Operating Partnership, those directors and officers of the
Company who hold Units may seek to influence the Company not to sell or
refinance the properties, even though such a sale might otherwise be
financially advantageous to the Company, or may seek to influence the Company
to refinance a property with a higher level of debt. The Partnership Agreement
provides that if the limited partners own at least 5% of the outstanding Units
(including Units held by the Company which will represent

23
<PAGE>

89.7% of all Units outstanding), the Company shall not, on behalf of the
Operating Partnership, take any of the following actions without the prior
consent of the holders of more than 50% of the Units (excluding Units held by
the Company) representing limited partner interests: (i) dissolve the
Operating Partnership, other than incident to a merger or sale of
substantially all of the Company's assets; or (ii) prior to January 31, 2004,
sell the Office Property at 2260 E. Imperial Highway at Kilroy Airport Center
at El Segundo, other than incident to a merger or sale of substantially all of
the Company's assets. The Operating Partnership will also use commercially
reasonable efforts to cooperate with the limited partners to minimize any
taxes payable in connection with any repayment, refinancing, replacement or
restructuring of indebtedness, or any sale, exchange or any other disposition
of assets, of the Operating Partnership. See "Partnership Agreement of the
Operating Partnership--Transferability of Interests" and "--Certain Limited
Partner Approval Rights."

Failure to Enforce Terms of Certain Agreements. As Unitholders, John B.
Kilroy, Sr., as Chairman of the Board of Directors, and John B. Kilroy, Jr.,
as the Company's President and Chief Executive Officer and a director of the
Company, have a conflict of interest with respect to their obligations as
directors or officers of the Company to enforce the terms of the agreements
relating to the Company's option to purchase certain properties owned by
entities controlled by them. See "Business and Properties--Option Properties."
The failure to enforce the material terms of those agreements (which would
require the approval of the Independent Directors) could result in a monetary
loss to the Company, which loss could have a material effect on the Company's
financial condition or results of operations. While certain Unitholders
provide indemnities in connection with such transfers, such indemnities would
be impaired to the extent that such Unitholders have other obligations,
including obligations for taxes arising from prior transactions, which they
may not have sufficient assets to satisfy.

Policies with Respect to Conflicts of Interest. The Company has adopted
certain policies designed to eliminate or minimize conflicts of interest.
These policies include (i) provisions in the Company's articles of
incorporation (the "Articles of Incorporation") and bylaws (the "Bylaws")
which require that at least a majority of the directors be Independent
Directors, (ii) provisions in the Bylaws which require that a majority of the
Independent Directors approve transactions between the Company and certain
Unitholders, including the exercise of the options with respect to the Option
Properties, and the sale or refinancing of the Properties and (iii) the
requirement that the members of the Board of Directors that are Unitholders
(John B. Kilroy, Jr. and John B. Kilroy, Sr.) abide by their respective
noncompetition agreements with the Company. The provisions contained in the
Articles of Incorporation can be modified only with the approval of two-thirds
of the shares of the Company's capital stock outstanding and entitled to vote
thereon, and the provisions contained in the Bylaws can be modified only with
the approval of a majority of either the Board of Directors or the shares of
the Company's capital stock outstanding and entitled to vote thereon. However,
there can be no assurance that these policies will not be changed in the
future or that they otherwise always will be successful in eliminating the
influence of such conflicts, and, if they are not successful, decisions could
be made that might fail to reflect fully the interests of all stockholders.
See "Policies with Respect to Certain Activities--Conflict of Interest
Policies."

Competitive Real Estate Activities of Management. John B. Kilroy, Sr. and
John B. Kilroy, Jr. have controlling ownership interests in a complex of three
office properties which are located in the El Segundo submarket in which four
of the Office Properties and four of the Industrial Properties are located.
These properties and Calabasas Park Centre, an approximately 66-acre
undeveloped site (representing approximately 45 developable acres, net of
acreage required for streets and contractually required open areas) are
managed by the Operating Partnership, and certain of the Company's officers,
directors and employees spend an immaterial portion of their time and effort
managing these interests. The Company is actively marketing the sale of all
but 18 acres of Calabasas Park Centre. Certain of the Company's officers,
directors and employees spend an immaterial amount of time in connection with
any sales of such parcels.

Each of these properties is currently owned by partnerships owned and
controlled by John B. Kilroy, Sr. and John B. Kilroy, Jr. The complex of three
office properties located on North Sepulveda Boulevard in El Segundo are
managed by the Operating Partnership pursuant to a management agreement on
market terms. Calabasas Park Centre is managed by the Services Company
pursuant to a management agreement on market

24
<PAGE>

terms. Certain partnerships and trusts affiliated with the Company's
predecessor, KI, hold certain other real estate interests which were not
contributed to the Company as part of the Formation Transactions. All of such
other real estate interests relate to miscellaneous properties and property
rights that the Company believes are not of a type appropriate for inclusion
in the Company's portfolio and the properties are not consistent with the
Company's strategy. See "Business and Properties--Option Properties."

ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT

Tax Liabilities as a Consequence of Failure to Qualify as a REIT. The
Company intends to operate so as to qualify as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its taxable year ending December 31, 1997. Although management
believes that the Company is organized and operates in such a manner, no
assurance can be given that the Company will continue to be organized or be
able to operate in a manner so as to qualify or remain so qualified.
Qualification as a REIT involves the satisfaction of numerous requirements
established under highly technical and complex Code provisions for which there
are only limited judicial and administrative interpretations, and involves the
determination of various factual matters and circumstances not entirely within
the Company's control. For example, in order to qualify as a REIT, at least
95% of the Company's gross income in any year must be derived from qualifying
sources and the Company must pay distributions to stockholders aggregating
annually at least 95% of its REIT taxable income (determined without regard to
the dividends paid deduction and by excluding net capital gains). The
complexity of these provisions and of the applicable Treasury Regulations that
have been promulgated under the Code is greater in the case of a REIT that
holds its assets in partnership form. No assurance can be given that
legislation, new regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to
qualification as a REIT or the federal income tax consequences of such
qualification. The Company is relying on the opinion of Latham & Watkins, tax
counsel to the Company, regarding various issues affecting the Company's
ability to qualify, and continue to qualify, as a REIT. See "Federal Income
Tax Consequences--Taxation of the Company" and "Legal Matters." Such legal
opinion is based on various assumptions and factual representations by the
Company regarding the Company's ability to meet the various requirements for
qualification as a REIT, and no assurance can be given that actual operating
results will meet these requirements. Such legal opinion is not binding on the
Internal Revenue Service (the "IRS") or any court.

Among the requirements for REIT qualification is that the value of any one
issuer's securities held by a REIT may not exceed 5% of the REIT's total
assets on certain testing dates. See "Federal Income Tax Consequences--
Taxation of the Company--Requirements for Qualification." The Company believes
that its allocable share of the aggregate value of the securities of the
Services Company held by the Operating Partnership will be less than 5% of the
value of the Company's total assets. In rendering its opinion as to the
qualification of the Company as a REIT, Latham & Watkins relied on the
conclusions of the Company regarding the value of the Services Company.

If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates and
would not be allowed a deduction in computing its taxable income for amounts
distributed to its stockholders. Moreover, unless entitled to relief under
certain statutory provisions, the Company also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This treatment would reduce the net earnings of the
Company available for investment or distribution to stockholders because of
the additional tax liability to the Company for the years involved. In
addition, distributions to stockholders would no longer be required to be
made. See "Federal Income Tax Consequences--Taxation of the Company--
Requirements for Qualification."

Other Tax Liabilities. Even if the Company qualifies for and maintains its
REIT status, it is subject to certain federal, state and local taxes on its
income and property. For example, if the Company has net income from a
prohibited transaction, such income will be subject to a 100% tax. In
addition, net income, if any, from

25
<PAGE>

the third-party development conducted through the Services Company is subject
to federal income tax at regular corporate tax rates. See "Federal Income Tax
Consequences--Services Company."

RISKS OF DEVELOPMENT BUSINESS AND RELATED ACTIVITIES BEING CONDUCTED BY THE
SERVICES COMPANY

Tax Liabilities. The Services Company is subject to federal and state income
tax on its taxable income at regular corporate rates. Any federal, state or
local income taxes that the Services Company is required to pay will reduce
the cash available for distribution by the Services Company to the Operating
Partnership.

Adverse Consequences of Lack of Control Over the Businesses of the Services
Company. To comply with the REIT asset tests that restrict ownership of shares
of other corporations, the Operating Partnership owns 100% of the nonvoting
preferred stock of the Services Company (representing approximately 95.0% of
its economic value) and John B. Kilroy, Sr. and John B. Kilroy, Jr. own all
the outstanding voting common stock of the Services Company (representing
approximately 5.0% of its economic value). This ownership structure is
necessary to permit the Company to share in the income of the Services Company
and also maintain its status as a REIT. Although the Company receives
substantially all of the economic benefit of the businesses carried on by the
Services Company through the Company's right to receive dividends through the
Operating Partnership, the Company is not able to elect directors or officers
of the Services Company and, therefore, the Company does not have the ability
to influence the operations of the Services Company or require that the
Services Company's board of directors declare and pay a cash dividend on the
nonvoting preferred stock of the Services Company held by the Operating
Partnership. As a result, the board of directors and management of the
Services Company may implement business policies or decisions that would not
have been implemented by persons controlled by the Company and that are
adverse to the interests of the Company or that lead to adverse financial
results, which could adversely impact the Company's net operating income and
cash flow. See "Formation and Structure of the Company."

Adverse Consequence of REIT Status on the Businesses of the Services
Company. Certain requirements for REIT qualification may in the future limit
the Company's ability to receive increased distributions from the fee
development operations conducted and related services offered by the Services
Company. See "--Adverse Consequences of Failure to Qualify as a REIT."

CASH FLOW FROM DEVELOPMENT ACTIVITIES IS UNCERTAIN. A portion of the
Company's anticipated cash flow is generated from development activities which
are partially dependent on the availability of development opportunities and
which are subject to the risks inherent with development and general economic
conditions. In addition, development activities are subject to limitations
imposed by the REIT tests. See "Federal Income Tax Consequences--Taxation of
the Company--Income Tests." There can be no assurance that the Company will
realize completely such anticipated cash flows. See "Risk Factors--Real Estate
Investment Considerations--Risks of Real Estate Acquisition and Development."
Also, these development activities generally are conducted by the Services
Company. Accordingly, cash flow from these activities is further dependent
upon the decision of the Services Company's board of directors to declare and
pay a cash dividend on the nonvoting preferred stock held by the Operating
Partnership. See "--Risks of Development Business and Related Activities Being
Conducted by the Services Company."

DEPENDENCE ON SOUTHERN CALIFORNIA MARKET. The Company's portfolio is
comprised of 77 buildings, 73 of which are located in Southern California and
encompass an aggregate of approximately 5.3 million rentable square feet
(representing approximately 88.8% of the aggregate rentable square feet of all
of the Properties). Consequently, the Company's performance is linked to
economic conditions and the demand for office, industrial and retail space in
this region. The Southern California economy has experienced significant
recessionary conditions in the past several years, primarily as a result of
the downsizing of the aerospace and defense industries; there is still a
dependence on these industries in the Company's El Segundo and Long Beach
Airport area submarkets. The recessionary conditions resulted in a general
increase in vacancies and a general decrease in net absorption and rental
rates in the Company's El Segundo and Long Beach Airport area submarkets.
Although the recently announced disposition of defense and satellite services
businesses of Hughes Electronics

26
<PAGE>

Corporation does not involve tenants at the Properties, any resulting vacancy
in the Company's submarkets may have an adverse effect on rental rates and
occupancy at the Properties. Any decline in the Southern California economy
generally may result in a material decline in the demand for office, industrial
and retail space, may have a material adverse effect greater than if the
Company had a more geographically diverse portfolio of properties, and may
materially and adversely affect the ability of the Company to make
distributions to stockholders.

In addition, eight Office Properties, representing approximately 20.3% of the
aggregate office space of all of the Office Properties, are located in two
office parks in El Segundo, California, and Long Beach, California,
respectively.

DEPENDENCE ON SIGNIFICANT TENANTS. The Company's 20 largest tenants
represented approximately 56.3% of total base rent revenues for the year ended
December 31, 1996 and 54.8% of total base rent revenues for the three months
ended March 31, 1997. Of these amounts, its largest tenant, Hughes Space &
Communications, currently leases approximately 530,000 rentable square feet of
office space in Kilroy Airport Center at El Segundo, representing approximately
16.9% of the Company's total rent for the year ended December 31, 1996, giving
pro forma effect to (i) the acquisition of the Acquired Properties and (ii) the
Boeing Lease. The base periods of the Hughes Space & Communications leases
expire beginning in January 1999. The Company's revenues and cash available for
distribution to stockholders would be disproportionately and materially
adversely affected in the event of bankruptcy or insolvency of, or a downturn
in the business of, or the nonrenewal of leases by, any of its significant
tenants, or the renewal of such leases on terms less favorable to the Company
than their current terms.

DISTRIBUTIONS TO STOCKHOLDERS AFFECTED BY MANY FACTORS. Distributions by the
Company to its stockholders are based principally on cash available for
distribution from the Properties. Contractual increases in base rent under
existing leases, reductions in mortgage indebtedness or decreases in applicable
interest rates each could have the effect of increasing cash available for
distribution. Similarly, and by way of example, increases in interest rates,
the issuance of Common Stock or Units in connection with the acquisition of
properties with cash flow levels lower than that for the Properties and the use
of internally generated cash to fund, in whole or in part, any development
activities or property acquisitions, each could have the effect of decreasing
cash available for distribution. However, in the event of a default or a lease
termination by a lessee, there could be a decrease or cessation of rental
payments and thereby a decrease in cash available for distribution. In
addition, the amount available to make distributions may decrease if properties
acquired in the future yield lower than expected returns.

The distribution requirements for REITs under federal income tax laws may
limit the Company's ability to finance future developments, acquisitions and
expansions without additional debt or equity financing. If the Company incurs
additional indebtedness in the future, it will require additional funds to
service such indebtedness and as a result amounts available to make
distributions may decrease. Distributions by the Company are also dependent on
a number of other factors, including the Company's financial condition, any
decision to reinvest funds rather than to distribute such funds, capital
expenditures, the annual distribution requirements under the REIT provisions of
the Code and such other factors as the Company deems relevant. In addition, the
Company may issue from time to time additional Units or shares of Common Stock
in connection with the acquisition of properties or in certain other
circumstances. No prediction can be made as to the number of such Units or
shares of Common Stock which may be issued, if any, and, if issued, the effect
on cash available for distribution on a per share basis to holders of Common
Stock. Such issuances, if any, may have a dilutive effect on cash available for
distribution on a per share basis to holders of Common Stock. See "The
Company--Growth Strategies." The possibility exists that actual results of the
Company may differ from the assumptions used by the Board of Directors in
determining the initial distribution rate.

To obtain the favorable tax treatment associated with REITs, the Company
generally is required to distribute to its stockholders at least 95% of its
taxable income (determined without regard to the dividends paid deduction and
by excluding net capital gains) each year. In addition, the Company is subject
to tax at regular corporate rates to the extent that it distributes less than
100% of its taxable income (including net capital gains) each year.

27
<PAGE>

The Company is also subject to a 4% nondeductible excise tax on the amount, if
any, by which certain distributions paid by it with respect to any calendar
year are less than the sum of 85% of its ordinary income, 95% of its capital
gain net income and 100% of its undistributed income from prior years.

The Company intends to continue to make distributions to its stockholders to
comply with the distribution requirements of the Code and to reduce exposure
to federal income taxes and the nondeductible excise tax. Differences in
timing between the receipt of income and the payment of expenses in arriving
at taxable income and the effect of required debt amortization payments could
require the Company to borrow funds on a short-term basis to meet the
distribution requirements that are necessary to achieve the tax benefits
associated with qualifying as a REIT.

REAL ESTATE INVESTMENT CONSIDERATIONS

General. Real property investments are subject to varying degrees of risk.
The yields available from equity investments in real estate depend on the
amount of income earned and capital appreciation generated by the related
properties as well as the expenses incurred in connection therewith. If the
Properties do not generate income sufficient to meet operating expenses,
including debt service and capital expenditures, the ability to make
distributions to the Company's stockholders could be adversely affected.
Income from, and the value of, the Properties may be adversely affected by the
general economic climate, local conditions such as oversupply of office,
industrial or retail space or a reduction in demand for office, industrial or
retail space in the area, the attractiveness of the Properties to potential
tenants, competition from other office, industrial and retail buildings, and
the ability of the Company to provide adequate maintenance and insurance and
increased operating costs (including insurance premiums, utilities and real
estate taxes). In addition, revenues from properties and real estate values
are also affected by such factors as the cost of compliance with regulations
and the potential for liability under applicable laws, including changes in
tax laws, interest rate levels and the availability of financing. The
Company's income would be adversely affected if a significant number of
tenants were unable to pay rent or if office, industrial or retail space could
not be rented on favorable terms. Certain significant expenditures associated
with an investment in real estate (such as mortgage payments, real estate
taxes and maintenance costs) generally are not reduced when circumstances
cause a reduction in income from the investment.

Illiquidity of Real Estate. Real estate investments are relatively illiquid
and, therefore, the Company has a limited ability to vary its portfolio
quickly in response to changes in economic or other conditions. In addition,
the prohibition in the Code and related regulations on a REIT holding property
for sale may affect the Company's ability to sell properties without adversely
affecting distributions to the Company's stockholders.

Competition. The Company plans to continue to expand, primarily through the
acquisition and development of additional office and industrial buildings in
Southern California and other markets where the acquisition and/or development
of property would, in the opinion of management, result in a favorable risk-
adjusted return on investment. There are a number of office and industrial
building developers and real estate companies that compete with the Company in
seeking properties for acquisition, prospective tenants and land for
development. Substantially all of the Properties are in developed areas where
there are generally other properties of the same type. Competition from other
office, industrial and retail properties may affect the Company's ability to
attract and retain tenants, rental rates and expenses of operation
(particularly in light of the higher vacancy rates of many competing
properties which may result in lower-priced space being available in such
properties). The Company may be competing with other entities that have
greater financial and other resources than the Company. During the period
beginning January 1, 1994 and ending June 30, 1997, the weighted average
renewal rate, based on rentable square footage, was 77.7% for the Properties
owned by the Company upon consummation of the IPO located in the Southern
California Area and 64.9% for the Properties overall. The lower overall
retention rate is due primarily to the termination in 1993 of a lease,
scheduled to expire in 1995, for 211,000 rentable square feet at the SeaTac
Office Center.

Lease Expirations. Certain leases expiring during the first several years
following the Offering are at rental rates higher than those attained by the
Company in its recent leasing activity. Such leases, or other leases of the

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Company, may not be renewed or, if renewed, may be renewed at rental rates
lower than rental rates in effect immediately prior to expiration. Decreases in
the rental rates for the Company's properties, the failure of tenants to renew
any such leases or the failure of the Company to re-lease any of the Company's
space could materially adversely affect the Company and its ability to make
distributions. During the three calendar years ending December 31, 1999, the
Company will have expiring leases for its Office Properties covering
approximately 875,000 rentable square feet, and expiring leases for Industrial
Properties covering approximately 906,000 rentable square feet. For the year
ended December 31, 1996, the expiring leases for the Office Properties and the
Industrial Properties had a weighted average annual base rent per rentable
square foot of approximately $16.12 and $5.32, respectively. For the 12-month
period ending December 31, 1996, the Company entered into 47 Office Property
lease transactions for approximately 491,000 rentable square feet with an
initial annual base rent per rentable square foot of $18.62. For the 12-month
period ending December 31, 1996, the Company entered into one Industrial
Property lease transaction for approximately 62,500 rentable square feet with
an initial annual base rent per rentable square foot of $6.36. For the three-
month period ended March 31, 1997, the Company entered into six office property
lease transactions for an aggregate of approximately 33,000 rentable square
feet with a weighted average initial annual base rent per rentable square foot
of approximately $15.70. Of this amount, approximately 27,000 rentable square
feet was leased to one tenant at the SeaTac Office Center at an average rent
per square foot of approximately $13.88. The remaining approximately 6,000
rentable square feet was leased at various properties at an average rent per
square foot of $24.80. For the three-month period ended March 31, 1997, the
Company entered into no lease transactions for Industrial Properties. See
"Business and Properties--General" and "--Lease Expirations."

Ground Leases. The eight Office Properties located at Kilroy Airport Center
in Long Beach and the SeaTac Office Center are held subject to ground leases. A
default by the Company under the terms of a ground lease could result in the
loss of such Properties located on the respective parcel, with the landowner
becoming the owner of such Properties unless the default under the lease is
cured or waived. In addition, upon expiration of the ground leases, including
the options thereon, there is no assurance that the Company will be able to
negotiate new ground leases at all or, if any leases were renewed, that they
will be on terms consistent with or more favorable than existing terms, which
may result in the loss of such Properties or increased rental expense to the
Company. The ground leases for the Kilroy Airport Center Long Beach will expire
in 2035. See "Business and Properties--Office Properties--Kilroy Airport
Center, Long Beach." The ground leases for the SeaTac Office Center (including
renewal options) will expire in 2062. See "Business and Properties--Office
Properties--Kilroy Airport Center, SeaTac."

Capital Improvements. The Properties vary in age and require capital
improvements regularly. If the cost of improvements, whether required to
attract and retain tenants or to comply with governmental requirements,
substantially exceeds management's expectations, cash available for
distribution could be reduced.

Risks of Real Estate Acquisition and Development. The Company intends to
continue to actively seek to acquire office and industrial properties to the
extent that they can be acquired on advantageous terms and meet the Company's
investment criteria. Acquisitions of office and industrial properties entail
risks that investments will fail to perform in accordance with expectations.
Estimates of the costs of improvements to bring an acquired property up to
standards established for the market position intended for that property may
prove inaccurate. In addition, there are general investment risks associated
with any new real estate investment.

In addition to the Development Properties, the Company will continue to
pursue other development opportunities both for ownership by the Company and on
a fee basis. The real estate development business involves significant risks in
addition to those involved in the ownership and operation of established office
or industrial buildings, including the risks that financing may not be
available on favorable terms for development projects and construction may not
be completed on schedule or within budget, resulting in increased debt service
expense and construction costs and delays in leasing such properties and
generating cash flow. In addition, new development activities, regardless of
whether or not they are ultimately successful, typically require a substantial
portion of management's time and attention. Development activities are also
subject to risks relating to the inability to obtain, or delays in obtaining,
all necessary zoning, land-use, building, occupancy, and other required
governmental permits and authorizations.

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The Company anticipates that additional future acquisitions and developments
will be financed, in whole or in part, through additional equity offerings,
lines of credit and other forms of secured or unsecured financing. If new
developments are financed through construction loans, there is a risk that,
upon completion of construction, permanent financing for newly developed
properties may not be available or may be available only on disadvantageous
terms. Equity, rather than debt, financing of future acquisitions or
developments may have a dilutive effect on the interests of existing
stockholders of the Company.

While the Company has focused primarily on the development and ownership of
office and industrial properties, the Company may in the future develop
properties, part or all of which will be for retail use. In addition, while
the Company has historically limited its ownership of properties primarily to
the Southern California market, the Company in the future may expand its
business to geographic markets other than Southern California, where the
acquisition and/or development of property would, in the opinion of
management, result in a favorable risk-adjusted return on investment. The
Company does not possess the same level of familiarity with retail development
or markets outside of those in which the Properties presently are located,
which could adversely affect its ability to acquire or develop properties in
any new localities or to realize expected performance.

Uninsured Losses. Management believes that the Properties are covered by
adequate comprehensive liability, rental loss and all-risk insurance provided
by reputable companies and with commercially reasonable deductibles, limits
and policy specifications customarily carried for similar properties. Certain
types of losses, however, may be either uninsurable or not economically
insurable, such as losses due to floods, riots or acts of war, or may be
insured subject to certain limitations including large deductibles or co-
payments, such as losses due to seismic activity. See discussion of uninsured
losses from seismic activity below. Should an uninsured loss or a loss in
excess of insured limits occur, the Company could lose its investment in and
anticipated profits and cash flow from a property and would continue to be
obligated on any mortgage indebtedness or other obligations related to such
property. Any such loss would adversely affect the Company and its ability to
make distributions.

Uninsured Losses from Seismic Activity. The Properties are located in areas
that are subject to earthquake activity including concentrations of Properties
located in southwest Los Angeles County which represented approximately 50.1%
of the Company's aggregate base rent for the year ended December 31, 1996,
giving pro forma effect for the acquisition of the Acquired Properties
(including the Pending Acquisition). Although the Company has earthquake
insurance on a substantial portion of its Properties, such insurance is not
replacement cost and should any Property sustain damage as a result of an
earthquake, or should losses exceed the amount of such coverage, the Company
would incur uninsured losses or losses due to deductibles or co-payments on
insured losses. See "Business and Properties--Uninsured Losses from Seismic
Activity."

Risks of Tenant Bankruptcy. At any time, tenants of the Properties may
become unable to pay their rent or meet their obligations to the Company,
otherwise default under their leases or become debtors in cases under the
Bankruptcy Code. If any tenant becomes a debtor in a case under the Bankruptcy
Code, the Company would not be permitted to evict the tenant solely because of
its bankruptcy, but the bankruptcy court could authorize the tenant to reject
and terminate its lease with the Company. The Company's claim against such a
tenant for unpaid, future rent would be subject to a statutory cap that could
be substantially less than the remaining rent actually owned under the lease.
In any event, the Company's claim for unpaid rent (as capped) would likely not
be paid in full, which could adversely affect the Company's cash flow and its
ability to make distributions to stockholders. Although the Company has not
experienced material losses from tenant bankruptcies, no assurance can be
given that tenants will not file for bankruptcy protection in the future or,
if any tenants file, that they will affirm their leases and continue to make
rental payments in a timely manner.

Risks Involved in Property Ownership Through Partnerships and Joint
Ventures. Although the Company owns fee simple interests in the Properties
(other than Kilroy Airport Center Long Beach and the SeaTac Office Center,
which are held subject to long-term ground leases), in the future the Company
may also participate with other entities in property ownership through joint
ventures or partnerships. Partnership or joint venture investments may, under
certain circumstances, involve risks not otherwise present, including the
possibility that the Company's partners or co-venturers might become bankrupt
which could result in the Company becoming responsible for the liabilities of
the joint venture or partnership, that such partners or co-venturers might at
any time have economic or other business interests or goals which are
inconsistent with the business interests or goals

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<PAGE>

of the Company, and that such partners or co-venturers may be in a position to
take action contrary to the instructions or the requests of the Company or
contrary to the Company's policies or objectives, including the Company's
policy with respect to maintaining its qualification as a REIT. The Company,
however, will seek to maintain sufficient control of such partnerships or
joint ventures to permit the Company's business objectives to be achieved.
There is no limitation under the Company's organizational documents as to the
amount of available funds that may be invested in partnerships or joint
ventures.

REAL ESTATE FINANCING RISKS. The Company is subject to the risks normally
associated with debt financing, including the risk that the Company's cash
flow will be insufficient to meet required payments of principal and interest,
the risk that indebtedness on the Properties will not be refinanced at
maturity or that the terms of such refinancing will not be as favorable as the
terms of such indebtedness. If the Company were unable to refinance its
indebtedness on acceptable terms, or at all, the Company might be forced to
dispose of one or more of the Properties upon disadvantageous terms, which
might result in losses to the Company and might adversely affect the cash
available for distribution. If prevailing interest rates or other factors at
the time of refinancing result in higher interest rates on refinancings, the
Company's interest expense would increase, which would adversely affect the
Company's cash flow and its ability to pay expected distributions to
stockholders. Further, if a Property is mortgaged to secure payment of
indebtedness and the Company is unable to meet mortgage payments, or is in
default under the related mortgage or deed of trust, such Property could be
transferred to the mortgagee, the mortgagee could foreclose upon the Property,
appoint a receiver and receive an assignment of rents and leases or pursue
other remedies, all with a consequent loss of income and asset value to the
Company. The Credit Facility and the Mortgage Loans each are secured by
portions of the Property portfolio. Consequently, a default by the Company
related to the Credit Facility or the Mortgage Loans could result in
foreclosure on the Properties securing such loan. In addition, because the
Credit Facilities and the Mortgage Loans contain cross default provisions, a
default related to either the Credit Facility or the Mortgage Loan could
result in a default of such other indebtedness. Foreclosures could also create
taxable income without accompanying cash proceeds, thereby hindering the
Company's ability to meet the REIT distribution requirements of the Code. See
"Description of Indebtedness."

CHANGES IN INVESTMENT AND FINANCING POLICIES WITHOUT STOCKHOLDER
VOTE. Subject to the Company's fundamental investment policy to maintain its
qualification as a REIT (unless a change is approved by the Board of Directors
and stockholders), the Board of Directors determines its investment and
financing policies, its growth strategy, and its debt, capitalization,
distribution and operating policies. Although the Board of Directors has no
present intention to revise or amend these strategies and policies, the Board
of Directors may do so at any time without a vote of the Company's
stockholders. See "Policies With Respect to Certain Activities--Other
Policies." Accordingly, stockholders will have no control over changes in
strategies and policies of the Company, and such changes may not serve the
interests of all stockholders and could adversely affect the Company's
financial condition or results of operations, including its ability to
distribute cash to stockholders.

Issuance of Additional Securities. The Company has authority to offer its
Common Stock or other equity or debt securities in exchange for property or
otherwise. Similarly, the Company may cause the Operating Partnership to offer
additional Units or preferred units of the Operating Partnership, including
offers in exchange for property to sellers who seek to defer certain of the
tax consequences relating to a property transfer. Such issuances could dilute
the ownership interest of the Company in the Operating Partnership. Existing
stockholders have no preemptive rights to acquire any such securities, and any
such issuance of equity securities could result in dilution in an existing
stockholder's investment in the Company.

Risks Involved in Investments in Securities Related to Real Estate. The
Company may pursue its investment objectives through the ownership of
securities of entities engaged in the ownership of real estate. Ownership of
such securities may not entitle the Company to control the ownership,
operation and management of the underlying real estate. In addition, the
Company may have no ability to control the distributions with respect to such
securities, which may adversely affect the Company's ability to make required
distributions to stockholders. Furthermore, if the Company desires to control
an issuer of securities, it may be prevented from doing so by the limitations
on percentage ownership and gross income tests which must be satisfied by the
Company in order for the Company to qualify as a REIT. See "Federal Income Tax
Consequences--Taxation of the Company--Requirements for Qualification as a
REIT." The Company operates its business in a manner that

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<PAGE>

does not require the Company to register under the Investment Company Act of
1940 and stockholders do therefore not have the protection of that act.

The Company may also invest in mortgages and may do so as a strategy for
ultimately acquiring the underlying property. In general, investments in
mortgages include the risk that borrowers may not be able to make debt service
payments or pay principal when due, the risk that the value of the mortgaged
property may be less than the principal amount of the mortgage note securing
such property and the risk that interest rates payable on the mortgages may be
lower than the Company's cost of funds to acquire these mortgages. In any of
these events, Funds from Operations and the Company's ability to make required
distributions to stockholders could be adversely affected.

RISK OF OPERATIONS CONDUCTED THROUGH THE OPERATING PARTNERSHIP. The Company,
through its subsidiaries, will own upon consummation of the Offering an
approximately 89.7% economic interest in the Properties. The remaining
interests in the Operating Partnership are owned by the Unitholders. Although
the number of limited partnership Units is designed to result in a
distribution per Unit equal to a distribution per share of Common Stock, such
distributions are equal only if the Company distributes to stockholders all
amounts it receives in distributions from the Operating Partnership. See
"Formation and Structure of the Company--Formation Transactions." In addition,
under the terms of the Partnership Agreement, the limited partners of the
Operating Partnership have certain approval rights with respect to certain
transactions that affect all stockholders. See "--Conflicts of Interest--
Certain Limited Partner Approval Rights."

INFLUENCE OF CERTAIN UNITHOLDERS. John B. Kilroy, Sr., the Chairman of the
Board of Directors, and John B. Kilroy, Jr., the Company's President and Chief
Executive Officer and one of its directors, will own, together with the other
Unitholders, Units exchangeable for shares of Common Stock equal to
approximately 10.3% of the total outstanding shares, after giving effect to
the Offering (and, together with options exercisable for shares of Common
Stock, 10.1% of the total outstanding shares, after giving effect to the
Offering). In addition, the Messrs. Kilroy hold two of the Company's five
seats on the Board of Directors. Under the terms of the Company's charter, no
other stockholder presently is permitted to own, actually or constructively,
in excess of 7.0% of the Common Stock. In addition, although the Messrs.
Kilroy will not be able to take action on behalf of the Company without the
concurrence of other members of the Board of Directors, they will, for so long
as limited partners of the Operating Partnership own at least 5% of the
outstanding Units, be able to block (i) the dissolution of the Operating
Partnership, or (ii) prior to January 31, 2004, the sale of the Office
Property located at 2260 E. Imperial Highway at Kilroy Airport Center at El
Segundo, in each case other than incident to a merger or sale of all or
substantially all of the Company's assets, and be able to exert substantial
influence over the Company's affairs.

LIMITS ON OWNERSHIP AND CHANGE IN CONTROL. Certain provisions of the
Maryland General Corporation Law (the "MGCL") and the Articles of
Incorporation and Bylaws, and certain provisions of the Partnership Agreement,
could have the effect of delaying, deferring or preventing a change in control
of the Company or the removal of existing management and, as a result, could
prevent the stockholders of the Company from being paid a premium for their
shares of Common Stock over then prevailing market prices.

Limits on Ownership of Common Stock. In order for the Company to maintain
its qualification as a REIT, not more than 50% in value of the outstanding
shares of its capital stock may be owned, actually or constructively, by five
or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year (other than the first year for which
the election to be treated as a REIT has been made). Furthermore, after the
first taxable year for which a REIT election is made, the Company's shares of
Common Stock must be held by a minimum of 100 persons for at least 335 days of
a 12-month taxable year (or a proportionate part of a short tax year). In
addition, if the Company, or an owner of 10% or more of the Company, actually
or constructively, owns 10% or more of a tenant of the Company (or a tenant of
any partnership in which the Company is a partner), the rent received by the
Company (either directly or through any such partnership) from such tenant
will not be qualifying income for purposes of the REIT gross income tests of
the Code. See "Federal Income Tax Consequences--Taxation of the Company." In
order to protect the Company

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against the risk of losing REIT status due to a concentration of ownership
among its stockholders, the Articles of Incorporation limit actual or
constructive ownership of the outstanding shares of Common Stock by any single
stockholder to 7.0% (the "Ownership Limit") of the then outstanding shares of
Common Stock. See "Description of Capital Stock--Restrictions on Ownership and
Transfer." The Board of Directors will consider waiving the Ownership Limit
with respect to a particular stockholder if it is satisfied, based upon the
advice of tax counsel or otherwise, that ownership by such stockholder in
excess of the Ownership Limit would not jeopardize the Company's status as a
REIT and the Board of Directors otherwise decided such action would be in the
best interests of the Company. The Board of Directors has waived the Ownership
Limit with respect to John B. Kilroy, Sr., John B. Kilroy, Jr., members of
their families and certain affiliated entities and has permitted such
individuals and entities to actually or constructively own, in the aggregate,
up to 19.6% of the outstanding Common Stock.

Actual or constructive ownership of shares of Common Stock in excess of the
Ownership Limit, or, with the consent of the Board of Directors, such other
limit, will cause the violative transfer or ownership to be void with respect
to the transferee or owner as to that number of shares in excess of the
Ownership Limit, or, with the consent of the Board of Directors, such other
limit, as applicable, and such shares will be automatically transferred to a
trust for the benefit of a qualified charitable organization. Such purported
transferee or owner shall have no right to vote such shares or be entitled to
dividends or other distributions with respect to such shares. See "Description
of Capital Stock--Restrictions on Ownership and Transfer" for additional
information regarding the Ownership Limit.

Staggered Board. The Board of Directors is divided into three classes
serving staggered three-year terms. The terms of the first, second and third
classes expire in 1998, 1999 and 2000, respectively. Directors for each class
will be chosen for a three-year term upon expiration of the term of the
current class, beginning in 1998. In addition, the Articles of Incorporation
authorize the Board of Directors to issue up to 150,000,000 shares of Common
Stock and 30,000,000 shares of preferred stock and to establish the rights and
preferences of any shares of preferred stock issued. No shares of preferred
stock are currently issued or outstanding. See "Description of Capital Stock--
Preferred Stock." Under the Articles of Incorporation, stockholders do not
have cumulative voting rights.

The Ownership Limit, the staggered terms for directors, the issuance of
additional common or preferred stock in the future and the absence of
cumulative voting rights could have the effect of (i) delaying or preventing a
change of control of the Company even if a change of control were in the
stockholders' interest, (ii) deterring tender offers for the Common Stock that
may be beneficial to the stockholders, or (iii) limiting the opportunity for
stockholders to receive a premium for their Common Stock that might otherwise
exist if an investor attempted to assemble a block of shares of Common Stock
in excess of the Ownership Limit or otherwise to effect a change of control of
the Company. See "Management" and "Description of Capital Stock."

DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts of its
executive officers and directors, particularly John B. Kilroy, Sr., the
Chairman of the Board of Directors, and John B. Kilroy, Jr., the Company's
President and Chief Executive Officer, for strategic business direction and
experience in the Southern California real estate market. While the Company
believes that it could find replacements for these key personnel, the loss of
their services could have an adverse effect on the operations of the Company.
Since January 31, 1997, the Company has entered into employment agreements
with John B. Kilroy, Jr., President and Chief Executive Officer, Jeffrey C.
Hawken, Executive Vice President and Chief Operating Officer, Richard E. Moran
Jr., Executive Vice President, Chief Financial Officer and Secretary, Campbell
Hugh Greenup, General Counsel, and Tyler H. Rose, Senior Vice President and
Treasurer. See "Management--Employment Agreements."

DISTRIBUTION PAYOUT PERCENTAGE. The Company paid distributions per share of
Common Stock of $0.2583 for the two months ended March 31, 1997, and $0.3875
for the second quarter of 1997. A failure to make expected distributions could
result in a decrease in the market price of the Common Stock. See "Price Range
of Common Stock and Distribution History."

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HISTORICAL OPERATING LOSSES OF THE OFFICE AND INDUSTRIAL
PROPERTIES. Although the Office and Industrial Properties developed by the
Company after their construction and initial lease-up periods have
historically generated positive net cash flow, the effect of depreciation,
amortization and other non-cash charges has resulted in losses before equity
in income of subsidiary, minority interest and extraordinary item for
financial reporting purposes in each of the last five fiscal years. Historical
operating results of the Office and Industrial Properties may not be
comparable to future operating results of the Company because, prior to the
completion of the IPO and the Formation Transactions on January 31, 1997, the
Office and Industrial Properties were encumbered with greater levels of debt
(which has the effect of reducing net income) than that with which the Company
currently operates. In addition, the historical results of operations do not
reflect the acquisition and development of any of the Acquired Properties. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." No assurance can be given that any of the Properties will have
profitable results from operations and will not experience losses in the
future.

NO LIMITATION ON DEBT. The Board of Directors currently funds acquisition
opportunities and development partially through short-term borrowings, as well
as out of undistributed cash available for distribution and other available
cash. The Board of Directors expects to refinance projects purchased or
developed with short-term debt either with long-term indebtedness or equity
financing depending upon the economic conditions at the time of refinancing.
The total debt constituted, as of March 31, 1997, approximately 17.4% of the
total market capitalization of the Company and increased, as of June 30, 1997,
to approximately 30.1% (and 11.9% as of July 25, 1997 after giving pro forma
effect to the Offering and the application of the estimated net proceeds
therefrom) of the total market capitalization of the Company. The Board of
Directors has adopted a policy of limiting its indebtedness to approximately
50% of its total market capitalization (i.e., the market value of the issued
and outstanding shares of Common Stock, including interests exchangeable
therefor, plus total debt), but the organizational documents of the Company do
not contain any limitation on the amount or percentage of indebtedness, funded
or otherwise, that the Company may incur. The Board of Directors, without the
vote of the Company's stockholders, could alter or eliminate its current
policy on borrowing at any time at its discretion. If this policy were
changed, the Company could become more highly leveraged, resulting in an
increase in debt service that could adversely affect the Company's cash flow
and its ability to make expected distributions to its stockholders and an
increased risk of default on the Company's obligations. See "Policies With
Respect to Certain Activities--Financing."

The Company has established its debt policy relative to the market
capitalization of the Company rather than to the book value of its assets, a
ratio that is frequently employed. The Company has used total market
capitalization because it believes that the book value of its assets (which to
a large extent is the depreciated value of real property, the Company's
primary tangible asset) does not accurately reflect its ability to borrow and
to meet debt service requirements. The total market capitalization of the
Company, however, is more variable than book value, and does not necessarily
reflect the fair market value of the underlying assets of the Company at all
times. Although the Company will consider factors other than total market
capitalization in making decisions regarding the incurrence of indebtedness
(such as the acquisition cost of properties to be acquired with debt
financing, the estimated market value of such properties upon refinancing and
the ability of particular properties and the Company as a whole to generate
cash flow to cover expected debt service), there can be no assurance that the
ratio of indebtedness to total market capitalization (or to any other measure
of asset value) will be consistent with the expected level of distributions to
the Company's stockholders.

GOVERNMENT REGULATIONS. Many laws and governmental regulations are
applicable to the Properties and changes in these laws and regulations, or
their interpretation by agencies and the courts, occur frequently.

Costs of Compliance with Americans with Disabilities Act. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. Compliance with the ADA might require
removal of structural barriers to handicapped access in certain public areas
where such removal is "readily achievable." Noncompliance with the ADA could
result in the imposition of fines or an award of damages to private litigants.
The impact of application of the ADA to the Properties, including the extent
and timing of required renovations, is uncertain. If

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required changes involve a greater amount of expenditures than the Company
currently anticipates or if the changes must be made on a more accelerated
schedule than the Company currently anticipates, the Company's ability to make
expected distributions to stockholders could be adversely affected.

Environmental Matters. Under various federal, state and local laws,
ordinances and regulations relating to the protection of the environment, an
owner or operator of real estate may be held liable for the costs of removal
or remediation of certain hazardous or toxic substances located on or in the
property. These laws often impose liability without regard to whether the
owner was responsible for, or even knew of, the presence of such hazardous or
toxic substances. The costs of investigation, removal or remediation of such
substances may be substantial, and the presence of such substances may
adversely affect the owner's ability to rent or sell the property or to borrow
using such property as collateral and may expose it to liability resulting
from any release of or exposure to such substances. Persons who arrange for
the disposal or treatment of hazardous or toxic substances at another location
may also be liable for the costs of removal or remediation of such substances
at the disposal or treatment facility, whether or not such facility is owned
or operated by such person. Certain environmental laws impose liability for
release of asbestos-containing materials into the air, and third parties may
also seek recovery from owners or operators of real properties for personal
injury associated with asbestos-containing materials and other hazardous or
toxic substances. In connection with the ownership (direct or indirect),
operation, management and development of real properties, the Company may be
considered an owner or operator of such properties or as having arranged for
the disposal or treatment of hazardous or toxic substances and, therefore,
potentially liable for removal or remediation costs, as well as certain other
related costs, including governmental penalties and injuries to persons and
property.

Certain of the Company's tenants routinely handle hazardous substances and
wastes as part of their operations on the Company's properties. Such tenants
are subject to environmental laws and regulations governing the use, storage,
handling and disposal of such materials and such laws and regulations also
could subject the Company to liability resulting from such activities. The
Company's leases generally provide that the tenant must comply with such laws
and regulations and indemnify the Company for any related liabilities. As a
result, the Company does not believe that such matters will have a material
adverse effect on its operations. The Company has not been notified by any
governmental authority, and is not otherwise aware, of any material
noncompliance, liability or claim relating to hazardous or toxic substances or
petroleum products in connection with any of its Properties.

All of the Properties have been subject to Phase I or similar environmental
assessments by independent environmental consultants. Phase I assessments are
intended to discover information regarding, and to evaluate the environmental
condition of, the surveyed property and surrounding properties. Phase I
assessments generally include an historical review, a public records review,
an investigation of the surveyed site and surrounding properties, and
preparation and issuance of a written report, but do not include soil sampling
or subsurface investigations. Such reports have revealed that historical
operations at or in the vicinity of certain of the Existing and Acquired
Properties, including the operation of underground storage tanks, may have
caused soil or groundwater contamination on such properties. The Company is
not aware of any existing contamination that is required to be remediated
under current environmental laws. For example, with respect to Kilroy Long
Beach Phase I, the Company's environmental investigations revealed the site's
possible prior use as a Nike air defense command center or missile storage
facility and the existence and use of former and current underground storage
tanks on or near the property. The Company's investigation included whether
the site might have been used previously for the storage of missiles
containing nuclear warheads, and did not reveal any facts that would indicate
that the prior use of the site would result in a material risk of
environmental liability. Consequently, the Company does not believe that this
site constitutes a risk of a liability that would have a material adverse
effect on the Company's financial condition or results of operations taken as
a whole. In connection with the preparation of the Phase I environmental
survey with respect to the Industrial Property located at 12752-12822 Monarch
Street, soil sampling revealed trace elements of contamination with cleaning
solvents. However, based on the level of contamination noted in the
environmental survey, management does not believe that such contamination will
have a material adverse effect on the Company's financial condition or results
of operations taken as a whole.

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None of the Company's environmental assessments of the other Properties has
revealed any environmental liability that the Company believes would have a
material adverse effect on the Company's financial condition or results of
operations taken as a whole, nor is the Company aware of any such material
environmental liability. Nonetheless, it is possible that the Company's
assessments do not reveal all environmental liabilities or that there are
material environmental liabilities of which the Company is unaware. Moreover,
there can be no assurance that (i) future laws, ordinances or regulations will
not impose any material environmental liability or (ii) the current
environmental condition of the Properties will not be affected by tenants, by
the condition of land or operations in the vicinity of the Properties (such as
the presence of underground storage tanks), or by third parties unrelated to
the Company. If compliance with the various laws and regulations, now existing
or hereafter adopted, exceeds the Company's budgets for such items, the
Company's ability to make expected distributions to stockholders could be
adversely affected.

Other Regulations. The Properties are also subject to various federal, state
and local regulatory requirements such as state and local fire and life safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that the Properties are currently in
material compliance with all such regulatory requirements. However, there can
be no assurance that these requirements will not be changed or that new
requirements will not be imposed which would require significant unanticipated
expenditures by the Company and could have an adverse effect on the Funds from
Operations and expected distributions.

The City of Los Angeles has enacted certain regulations relating to the
repair of welded steel moment frame buildings located in certain areas damaged
as a result of the Northridge earthquake in Southern California on January 17,
1994. As currently enacted, such regulations do not apply to the Properties.
There can be no assurance, however, that similar regulations will not be
adopted by governmental agencies with the ability to regulate the Properties,
that the Company will not acquire properties which may be subject to such
regulation or that other requirements affecting the Properties will not be
imposed which would require significant unanticipated expenditures by the
Company and could have a material adverse effect on the Funds from Operations
and cash available for distribution. The Company believes, based in part on
recent engineering reports, that its Properties are in good condition. See
"Business and Properties--Uninsured Losses from Seismic Activity."

Except as described in this Prospectus, there are no other laws or
regulations which have a material effect on the Company's operations, other
than typical state and local laws affecting the development and operation of
real property, such as zoning laws. See "Certain Provisions of Maryland Law
and of the Articles of Incorporation and Bylaws," "Partnership Agreement of
the Operating Partnership," "Federal Income Tax Consequences" and "ERISA
Considerations."

EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK. One of the factors
that will influence the market price of the Common Stock in public markets
will be the annual yield on the price paid for shares from distributions by
the Company. An increase in prevailing market interest rates on fixed income
securities may lead prospective purchasers of the Common Stock to demand a
higher annual yield from future distributions. Such an increase in the
required yield from distributions may adversely affect the market price of the
Common Stock. In addition, the market for equity securities can be volatile
and the trading price of the Common Stock could be subject to wide
fluctuations in response to operating results, news announcements, trading
volume, general market trends, changes in interest rates, governmental
regulatory action and changes in tax laws.

SHARES ELIGIBLE FOR FUTURE SALE. No prediction can be made as to the effect,
if any, that future sales of shares, or the availability of shares for future
sale, will have on the market price of the Common Stock. Sales of substantial
amounts of shares of Common Stock in the public market (or upon exchange of
Units) or the perception that such sales might occur could adversely affect
the market price of the shares of Common Stock.

Upon the consummation of the Offering, the Company will have 24,475,000
shares of Common Stock outstanding, of which all but the 100,000 restricted
shares of Common Stock will be freely tradable in the public market by persons
other than "affiliates" of the Company without restriction or registration
under the Securities

36
<PAGE>

Act. The remaining 100,000 restricted shares of Common Stock and all of the
shares of Common Stock that are issuable upon the redemption of limited
partnership Units will be deemed to be "restricted securities" within the
meaning of Rule 144 promulgated under the Securities Act ("Rule 144") and may
not be transferred unless registered under the Securities Act or an exemption
from registration is available, including any exemption from registration
provided under Rule 144. In general, upon satisfaction of certain conditions,
Rule 144 permits the sale of certain amounts of restricted securities one year
following the date of acquisition of the restricted securities from the
Company and, after two years, permits unlimited sales by persons unaffiliated
with the Company. In addition, the Commission has recently proposed further
revisions to the holding and volume limitations contained in Rule 144. The
adoption of amendments effecting such proposed revisions may result in resales
of restricted securities sooner than would be the case under Rule 144 and Rule
144(k) as currently in effect. However, there can be no assurance of when, if
ever, such amendments will be proposed or adopted.

The Operating Partnership presently has an aggregate of 2,817,476 limited
partnership Units issued and outstanding which may be redeemed by the
Operating Partnership on or after January 31, 1999 at the request of the
holders thereof for cash (based on the fair market value of an equivalent
number of shares of Common Stock at the time of such redemption) or, at the
Company's option, exchanged for an equal number of shares of Common Stock,
subject to certain anti-dilution adjustments and, with respect to 50% of the
Units issued to John B. Kilroy, Sr., John B. Kilroy, Jr. and KI, the
obligation of such Unitholders to indemnify the Company in connection with the
Formation Transactions. However, if the Company does not elect to exchange
such Units for shares, a Unitholder that is a corporation or a limited
liability company may require the Company to issue shares of Common Stock in
lieu of cash, subject to the Ownership Limit or, with the consent of the Board
of Directors, such other limit which does not result in the failure of the
Company to qualify as a REIT. See "Formation and Structure of the Company" and
"Shares Eligible for Future Sale--Redemption/Exchange Rights and Registration
Rights." The Company has granted options to purchase an aggregate of
approximately 1,185,000 shares of Common Stock to certain directors, executive
officers and other employees of the Company and an additional approximately
215,000 shares of Common Stock have been reserved for issuance either as
restricted shares of Common Stock or upon the exercise of options granted
under the Stock Incentive Plan. See "Management--Stock Incentive Plan." In
addition, the Company may issue from time to time additional shares of Common
Stock or Units in connection with the acquisition of properties, including the
possible issuance of Units upon the exercise of options to acquire the Option
Properties. See "Prospectus Summary--Recent Developments--Acquisitions," "The
Company--Growth Strategies," "Business and Properties--Acquired Properties"
and "Business and Properties--Option Properties." The Company has agreed to
file and generally will keep continuously effective beginning on January 31,
1999 a registration statement covering the issuance of shares upon the
exchange of Units and the resale thereof and has agreed to provide piggyback
registration rights with respect to shares of Common Stock which may be
acquired by the Unitholders and certain other persons. See "Shares Eligible
for Future Sale." The Company plans to file a registration statement with
respect to the shares of Common Stock issuable under the Stock Incentive Plan.
Such registration statements and registration rights generally will allow
shares of Common Stock covered thereby, including shares of Common Stock
issuable upon exchange of limited partnership Units or the exercise of options
or restricted shares of Common Stock to be transferred or resold without
restriction under the Securities Act.

In addition to the limits placed on the sale of shares of Common Stock by
operation of Rule 144 and other provisions of the Securities Act, (i) all but
four of the Unitholders (who hold an aggregate of 165,102 Units) have agreed
not to, directly or indirectly, offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise dispose or transfer (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of
any option to purchase or other disposition or transfer) of any Units or
shares of Common Stock or other capital stock of the Company, or any
securities convertible or exercisable or exchangeable for any Units or shares
of Common Stock or other capital stock of the Company, or any securities
substantially similar thereto, for a period of two years from January 28, 1997
and (ii) four Unitholders who hold a total of 165,102 limited partnership
Units agreed in connection with the issuance of such Units not to exchange
such Units for shares of Common Stock prior to January 29, 1999. In addition,
in connection with this Offering, the Company has agreed not to offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose

37
<PAGE>

(or announce any offer, sale, offer of sale, contract of sale, pledge, grant
of any option to purchase or other sale or disposition) of any (other than
pursuant to the Stock Incentive Plan) shares of Common Stock or other capital
stock of the Company, or any securities convertible or exercisable or
exchangeable for any Units or shares of Common Stock or other capital stock of
the Company, for a period of 180 days from the date of this Prospectus, in
each case without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, subject to certain limited
exceptions. Prudential Securities Incorporated may, at any time and without
notice, release all or any portion of the securities subject to such lock-up
agreements. At the conclusion of such two-year period on January 28, 1999,
Common Stock issued upon the subsequent exchange of Units may be sold in the
public market pursuant to the registration rights described above.
Notwithstanding the foregoing, 50% of the Units received by John B. Kilroy,
Sr., John B. Kilroy, Jr. and KI in connection with the Formation Transactions
have been pledged to secure their indemnification obligations pursuant to an
agreement with the Company. Future sales of the shares of Common Stock could
have an adverse effect on the market price of the shares of Common Stock and
the existence of Units, options, shares of Common Stock reserved for issuance
as restricted shares of Common Stock or upon exchange of Units and the
exercise of options and registration may adversely affect the terms upon which
the Company may be able to obtain additional capital through the sale of
equity securities. See "Shares Eligible for Future Sale" and "Underwriting."

38
<PAGE>

THE COMPANY

GENERAL

Kilroy Realty Corporation was incorporated in September 1996 and commenced
operations upon the completion of its initial public offering on January 31,
1997. The Company was formed to continue and expand the real estate business
of the Kilroy Group, which, since 1947, has been engaged in the business of
real estate ownership, acquisition, development, leasing and management of
primarily Class A suburban office and industrial buildings in prime locations,
principally in Southern California. On January 31, 1997, the Company completed
an initial public offering of 12,500,000 shares of Common Stock. The initial
public offering price was $23.00 per share resulting in gross proceeds of
$287.5 million. On February 4, 1997, in connection with the initial public
offering, the underwriters exercised an over-allotment option and on February
7, 1997, pursuant to the terms of such over-allotment option, the Company
issued an additional 1,875,000 shares of Common Stock which resulted in gross
proceeds of $43,125,000. The aggregate proceeds to the Company of the IPO,
including the exercise of the underwriters' over-allotment option, net of
underwriters' discounts and commissions, advisory fees and offering costs,
were approximately $302.8 million. The Company operates as a self-administered
and self-managed real estate company and expects to qualify as a REIT for
federal and state income tax purposes beginning with the year ended December
31, 1997. See "Federal Income Tax Consequences--Taxation of the Company."

The Company's strategy has been to own, develop, acquire, lease and manage
Class A properties in select locations in key suburban submarkets, primarily
in Southern California, that the Company believes have strategic advantages
compared to neighboring submarkets. The Properties offer tenants: (i) lower
business taxes and operating expenses than in adjoining submarkets; (ii)
access to highly skilled labor markets; (iii) strategic access to major
transportation facilities such as freeways and airports; (iv) proximity to the
Los Angeles-Long Beach port complex, which presently ranks as the largest
commercial port in the United States; and (v) for tenants with their names on
certain Properties, visibility to freeway and airplane travelers. As a result,
the Properties attract major corporate tenants and historically have achieved
among the highest occupancy, tenant retention and rental rates, both within
their respective submarkets and as compared to their respective neighboring
submarkets. See "Business and Properties."

The Company's major tenants include, among others, Hughes Space &
Communications, a tenant since 1984, which is engaged in high-technology
commercial activities including satellite development and related applications
such as DirecTV, and other major tenants such as Sony Music Entertainment,
Boeing (giving effect to the Boeing Lease), M/R Systems, McDonnell Douglas
Corporation, Mattel, Inc., Northwest Airlines, Inc. and Caltrans. The
Company's strong relationships with its tenants is evidenced by its average
tenant retention rate (based upon rentable square feet) for the period
beginning January 1, 1994 and ending June 30, 1997, which was 77.7% for the
Properties owned as of the date of the IPO that were located in the counties
of Los Angeles, Orange, Riverside, San Bernardino and Ventura.

Since the completion of its IPO, the Company acquired (including the Pending
Acquisition) 19 suburban office properties encompassing approximately 900,000
rentable square feet for an aggregate acquisition cost (including expenses,
closing costs and anticipated capital expenditures) of approximately
$108.2 million, and 32

39
<PAGE>

industrial properties encompassing approximately 1.7 million rentable square
feet for an aggregate acquisition cost (including expenses, closing costs and
anticipated capital expenditures) of approximately $100.4 million. For one
Acquired Property, the acquisition cost was paid, in part, with the issuance
of 165,102 limited partnership Units. The issuance of the Units permits
sellers of properties to defer the recognition of all or part of the taxable
gain, if any, on the disposition of such properties. All of the Acquired
Properties are located in Southern California. Of the Acquired Properties, 28
are located in submarkets in which the Company already owned office or
industrial property at the completion of the IPO, and 23 are located in new
submarkets within Los Angeles County, North Orange County, South Orange County
and Western San Bernardino County. Management believes that each of these new
submarkets offers significant growth opportunities. See "Business and
Properties--The Company's Southern California Submarkets." As a result of
these acquisitions, the Company's aggregate rentable square feet of office and
industrial space increased by approximately 43.0% and 126.2%, respectively. In
addition, the Company is currently in active negotiations to purchase 15
Pipeline Properties for an aggregate acquisition cost of $114.4 million. No
assurance can be given that the Pending Acquisition or the acquisition of the
Pipeline Properties will be consummated. See "Risk Factors--Real Estate
Investment Considerations--Risks of Real Estate Acquisitions and Development"
and "Business and Properties--Acquired Properties" and "--Pending
Acquisition."

The Company currently owns or has exclusive rights to develop approximately
60 acres of developable land (net of the acreage required for streets),
including (i) ten acres in Brea, California, (ii) 15 acres in Foothill Ranch
in Orange County, California, (iii) two and one-half acres in Anaheim,
California, (iv) three and one-half acres in Irvine, (v) five acres in
Camarillo and (vi) 24 acres at Kilroy Airport Center Long Beach. Management
believes that it can build up to 1.6 million rentable square feet on the
Development Properties, subject to required entitlements and other
governmental approvals, of which approximately 500,000 rentable square feet is
planned for development beginning in 1997. The Company may engage in the
development of office or industrial properties when market conditions support
a favorable risk-adjusted rate of return on such development. No assurance can
be given that the Company will commence any development, or that, if
commenced, any such development will be completed. See "Risk Factors--Real
Estate Investment Considerations--Risks of Real Estate Acquisition and
Development" and "Business and Properties--Development, Leasing and Management
Activities--Kilroy Airport Center Long Beach."

The Company also has focused on the design and construction of its projects.
The Office Properties developed by the Company (Kilroy Airport Center at El
Segundo, Kilroy Airport Center Long Beach and SeaTac Office Center) were
designed and developed to above-standard specifications, with an emphasis on
long-term operating efficiency and tenant comfort. The Industrial Properties
developed by the Company also were designed and developed to provide above-
standard quality and meet the long-term needs of tenants and were designed as
multi-use facilities to satisfy various types of manufacturing, distribution
and office uses. As a result, these Industrial Properties continue to serve
the evolving needs of their tenants, some of which have recently invested
substantially in long-term tenant improvements. See "Business and Properties--
Office Properties" and "--Industrial Properties."

The Company has created value by effectively working with municipalities,
large landowners and other members of the real estate community in Southern
California, and has maintained strong relationships at all levels of
government, as well as with financial institutions and major corporate
tenants. In 1981, the Company initiated the El Segundo Employers' Association,
a traffic and management organization composed of major employers in the El
Segundo area in which the Company owns four Office Properties and four
Industrial Properties. The organization has worked with local government and
has been instrumental in the furtherance of infrastructure developments in El
Segundo and throughout the surrounding area, including two recent developments
that management believes will have a substantial economic benefit to the El
Segundo submarket. First, in October 1994, Interstate Highway I-105 (the "I-
105 Freeway") opened, which crosses Los Angeles from east to west and provides
substantially improved access to El Segundo and LAX. A second infrastructure
development in the El Segundo submarket is a major east-west grade-separated
light rail commuter line (the "Green Line"). The Green Line runs adjacent to
Kilroy Airport Center at El Segundo. Management believes that the Green Line,
which opened in August 1995, will add significant value to the El Segundo
submarket.

40
<PAGE>

The Company believes that the foundation for its growth in future years will
be the strengthening Southern California economy, the quality and strategic
location of its Properties, the economic benefits of its submarkets to
tenants, its conservative capital structure, its access to public capital
markets, the lack of new construction of office properties in its submarkets,
its access to developable properties, the knowledge and experience of its
senior management team and its long-term relationships with large Southern
California corporate tenants, municipalities, landowners and institutional
sellers. In addition, the Company believes that it is one of a limited number
of REITs focusing on office and industrial properties and that it is the only
REIT with a 50-year operating history concentrating primarily on the
acquisition and development of suburban Southern California office and
industrial properties.

During the remainder of the Company's first year of operations, the Company
expects sources of potential growth in cash available for distribution
through: (i) the further leasing of its available space of approximately
230,000 rentable square feet, as of June 30, 1997; (ii) the renewal of leases
at higher rents; and (iii) the acquisition of strategic properties with Units,
borrowings under the Credit Facility and the Company's approximately $141.4
million of cash available for acquisitions and property development upon
consummation of the Offering. In the Company's second year of operations, the
Company expects sources of potential growth in cash available for distribution
through: (i) contractual increases in base rent payments from tenants;
(ii) continued leasing of available space; (iii) the acquisition of strategic
properties; and (iv) the contemplated completion of certain development
activities. Although the Company paid distributions to holders of its Common
Stock for the periods ended March 31 and June 30, 1997, there can be no
assurance that the Company will achieve any growth in cash available for
distribution, that available space will be leased, that leases scheduled to
expire will be renewed or that the Company will successfully acquire
additional properties or complete any of its planned development activities.
See "Risk Factors--Real Estate Investment Considerations--Risks of Real Estate
Acquisition and Development."

As of June 30, 1997, the Company (primarily through the Operating
Partnership and the Services Company) employed 58 persons, 43 of whom are
located at the Company's headquarters at Kilroy Airport Center in El Segundo,
California. The Company believes that relations with its employees are good.
The Company's executive officers have been with the Company for an average of
approximately 13 years. As of June 30, 1997, after giving effect to the
Offering, the Company's executive officers and directors (and certain of their
affiliates) owned in the aggregate 10.1% of the Common Stock (or interests
exchangeable therefor).

Kilroy Realty Corporation, a Maryland corporation, has executive offices at
2250 East Imperial Highway, El Segundo, California 90245 and its telephone
number is (213) 772-1193.

GROWTH STRATEGIES

The Company believes that a number of factors will enable it to achieve its
business objectives, including: (i) the opportunity to lease available space
at attractive rental rates because of increasing demand and, with respect to
the office properties, the present lack of new construction in the Southern
California submarkets in which most of the Properties are located; (ii) the
presence of inadvertent owners (through foreclosure or otherwise) of office
and industrial properties in the Company's submarkets, as well as the
Company's ability to

41
<PAGE>

acquire properties with Units (thereby permitting the seller to defer taxable
gain), both of which create enhanced acquisition opportunities; (iii) the
quality and location of the Properties; and (iv) the Company's access to
acquisition and development opportunities as a result of its significant
relationships with large Southern California corporate tenants, municipalities
and landowners and the Company's 50-year presence in the Southern California
market. Management believes that the Company is well positioned to exploit
existing opportunities because of its extensive experience in certain of its
submarkets, its seasoned management team and its proven ability to acquire,
develop, lease and efficiently manage office and industrial properties. In
addition, the Company believes that public ownership and its conservative
capital structure will provide new opportunities for growth. There can be no
assurance, however, that the Company will be able to lease available space,
complete any property acquisitions, successfully develop any land acquired or
improve the operating results of any developed properties that are acquired.
See "Business and Properties--Development, Leasing and Management Activities."

The Company believes that the strength of its leasing is demonstrated by the
Company's leasing activity since 1993. In the period from January 1, 1993 to
June 30, 1997, the Company leased or renewed leases for an aggregate of
approximately 1.2 million rentable square feet of office space and
approximately 781,000 rentable square feet of industrial space. As of June 30,
1997, the Office Properties located in the Southern California Area were
approximately 90.6% leased. As of March 31, 1997, occupancy rates for all
office properties were approximately 83.7% for the Southern California Area,
81.5% for the El Segundo submarket and approximately 86.2% for the Long Beach
submarket. In addition, as of June 30, 1997, the Industrial Properties were
approximately 96.8% leased as compared to 92.7% for all industrial properties
located in the Southern California Area as of March 31, 1997. See "Business
and Properties--General" and "--Occupancy and Rental Information."

The Company's 20 largest tenants represented approximately 56.3% of annual
base rent for the year ended December 31, 1996 (giving pro forma effect to the
Boeing Lease). Of this amount, its largest tenant, Hughes Space &
Communications, currently leases approximately 530,000 rentable square feet of
office space, representing approximately 16.9% giving pro forma effect to the
acquisition of the Acquired Properties and the Boeing Lease. The base periods
of the Hughes Space & Communications leases expire beginning in January 1999.
The Company's revenues and cash available for distribution to stockholders
would be disproportionately and materially adversely affected in the event of
bankruptcy or insolvency of, or a downturn in the business of, or the
nonrenewal of leases by, any of its significant tenants, or the renewal of
such leases on terms less favorable to the Company than their current terms.

Approximately 1.0 million aggregate rentable square feet in the Properties,
owned by the Company as of the date of its IPO, was leased by the Company from
January 1, 1992 through December 31, 1994, a period which management
characterizes as recessionary. Based on the leases the Company signed in 1996,
and the findings in an independent study of the Southern California real
estate market commissioned by the Company, management believes that the recent
trend toward increasing rental rates in Class A office and industrial
buildings in the Company's Southern California submarkets presents significant
opportunities for growth. In addition, as of June 30, 1997, approximately
58.5% of the Company's rentable square feet is subject to leases expiring in
2000 or beyond, when management expects asking rents for the respective
Properties to be higher than the rents paid pursuant to such leases. In
addition, as of June 30, 1997, approximately 32.1% of the Company's total base
rent (representing approximately 22.1% of the aggregate rentable square feet
of the Properties) was attributable

42
<PAGE>

to leases with Consumer Price Index increases and approximately 25.6% of the
Company's total base rent (representing approximately 36.6% of the aggregate
rentable square feet of the Properties) was attributable to leases with other
specified contractual increases. No assurance can be given, however, that new
leases will reflect rental rates greater than or equal to current rental rates
or that current or future economic conditions will support higher rental
rates. See "Risk Factors--Real Estate Investment Considerations."

Acquisition Strategies. The Company seeks to increase its cash available for
distribution by acquiring additional quality office and industrial properties,
including properties that: (i) may provide attractive initial yields with
significant potential for growth in cash flow from property operations; (ii)
are strategically located, of high quality and competitive in their respective
submarkets; (iii) are located in the Company's existing submarkets and/or in
other strategic submarkets where the demand for office and industrial space
exceeds available supply; or (iv) have been under-managed or are otherwise
capable of improved performance through intensive management and leasing that
will result in increased occupancy and rental revenues. The Company believes
that the Southern California market is an established and mature real estate
market in which property owners generally have a low tax basis (and,
accordingly, the potential for large taxable gains) in their properties.
Management believes that the Company's significant Southern California
relationships, extensive experience, conservative capital structure and
ability to acquire properties for Units, and thereby defer a seller's taxable
gain, if any, will enhance the ability of the Company to consummate
transactions quickly and to structure more competitive acquisitions than other
real estate companies in the market which lack its access to capital or the
ability to issue Units. See "Business and Properties--Development, Leasing and
Management Activities."

As of June 30, 1997, the Company contracted to acquire the Pending
Acquisition, one Los Angeles County industrial property encompassing
approximately 165,000 rentable square feet for an aggregate acquisition cost
of approximately $9.8 million. In addition, the Company is currently in active
negotiations to purchase 15 Pipeline Properties for an aggregate acquisition
cost of $114.4 million, including the assumption of $14.0 million of mortgage
indebtedness. There can be no assurance, however, that the Company will be
able to complete any property acquisitions, successfully develop any land
acquired or improve the operating results of any developed properties that are
acquired. See "--Recent Developments--Acquisition Activities" and "Business
and Properties--Acquired Properties."

Development Strategies. Since 1947, the Company and its predecessors have
developed millions of rentable square feet of office and industrial space,
including high technology facilities, primarily located in Southern
California, for its own portfolio and for third parties. The Company currently
owns an aggregate of approximately 36 acres of developable land and has the
exclusive right to develop an additional 24 acres of developable land which
provide it with significant growth opportunities. All of the developable land
is located in Southern California. The Company owns ten acres of developable
land in Brea, 15 acres in Foothill Ranch in Orange County, two and one-half
acres in Anaheim, three and one-half acres in Irvine and five acres in
Camarillo. The Company is the master ground lessee of, and has sole
development rights to the 24 acres of developable land entitled for office,
research and development, light industrial and other commercial projects at
Kilroy Airport Center Long Beach.

The Company presently plans to develop an aggregate of up to 1.6 million
rentable square feet of office or industrial space on the Development
Properties, subject to required entitlements. Of this amount, the Company
plans to commence development of 500,000 rentable square feet of industrial
space in 1997 at a total budgeted cost of approximately $25.0 million. No
assurance can be given that the Company will commence any development, or
that, if commenced, any such development will be completed. See "Risk
Factors--Real Estate Investment Considerations--Risks of Real Estate
Acquisition and Development" and "Business and Properties--Development,
Leasing and Management Activities--Kilroy Airport Center Long Beach."

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<PAGE>

Financing Policies. The Company's financing policies and objectives are
determined by the Board of Directors. The Company presently limits the ratio
of debt to total market capitalization (total debt of the Company as a
percentage of the market value of issued and outstanding shares of Common
Stock, including interests exchangeable therefor, plus total debt) to
approximately 50%. However, such objectives may be altered without the consent
of the Company's stockholders, and the Company's organizational documents do
not limit the amount of indebtedness that the Company may incur. The total
debt constituted, as of March 31, 1997, approximately 17.4% of the total
market capitalization of the Company and increased, as of June 30, 1997, to
approximately 30.1% of the total market capitalization of the Company. Giving
pro forma effect to the Offering and the application of the net proceeds from
the Offering, total debt, as of July 25, 1997, would have constituted
approximately 11.9% of the total market capitalization of the Company. The
Company intends to utilize one or more sources of capital for future
acquisitions, development and capital improvements, which may include
undistributed cash flow, borrowings under the Credit Facility, the Company's
approximately $141.4 million of cash available for acquisition and development
out of the net proceeds of the Offering, issuance of debt or equity securities
and other bank and/or institutional borrowings. There can be no assurance,
however, that the Company will be able to obtain capital for any such
acquisitions, developments or improvements on terms favorable to the Company.
See "--Growth Strategies," "The Company--Growth Strategies" and "Business and
Properties--Development, Leasing and Management Activities."

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<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of Common Stock in the
Offering, after the deduction of underwriting discounts and commissions and
estimated offering expenses, are expected to be approximately $246.2 million
(approximately $283.2 million if the Underwriters' over-allotment option is
exercised in full), assuming an offering price of $26.0625 per share, the last
reported sales price of the Common Stock on the NYSE on July 24, 1997. The
Company intends to contribute all of the net proceeds of the Offering to the
Operating Partnership in exchange for Units, and the Operating Partnership
will apply the net proceeds of the Offering as follows:

<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Repayment of outstanding borrowings under the Credit
Facility................................................... $ 95,000
Aggregate acquisition cost of the Pending Acquisition....... 9,800
Cash available for acquisitions, development and working
capital.................................................... 141,400
--------
Total..................................................... $246,200
========
</TABLE>

In the event that the Underwriters' over-allotment option is exercised in
full, the net proceeds thereof will be used by the Company for additional
working capital and will be available for development and for acquisitions of
properties not yet identified. Pending the application of such net proceeds,
the Company will invest the net proceeds in interest-bearing accounts and
short-term, interest-bearing securities, which are consistent with the
Company's intention to qualify for taxation as a REIT. Such investments may
include, for example, obligations of the Governmental National Mortgage
Association, other government and government agency securities, certificates
of deposit and interest-bearing bank deposits.

Substantially all of the $95.0 million of borrowings outstanding under the
Credit Facility expected to be repaid with the proceeds of this Offering were
used to finance the acquisition of the Acquired Properties (other than the
Pending Acquisition). At June 30, 1997, the amount outstanding under the
Credit Facility bore a weighted average interest rate of 7.5%. It is expected
that the Credit Facility after the application of the estimated net proceeds
of the Offering will be available for future property acquisitions,
development and working capital. In addition, the Company is currently in
active negotiations to purchase 15 Pipeline Properties for an approximate
aggregate acquisition cost of $114.4 million, including the assumption of
$14.0 million of mortgage indebtedness. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

45
<PAGE>

PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY

The Common Stock began trading on the NYSE on January 29, 1997 under the
symbol "KRC." On July 24, 1997, the last reported sales price per share of
Common Stock on the NYSE was $26.0625. As of June 30, 1997, there were
approximately 38 holders of record of the Common Stock. The following table
sets forth quarterly high and low closing sales prices per share of the Common
Stock reported on the NYSE and the distributions paid by the Company with
respect to each such period.

<TABLE>
<CAPTION>
PERIOD HIGH LOW DISTRIBUTION
- ------ ------- ------- ------------
<S> <C> <C> <C>
January 29, 1997 to March 31, 1997................ $28 1/8 $24 7/8 $0.2583(1)
April 1, 1997 to June 30, 1997.................... $26 5/8 $23 1/8 $0.3875
July 1, 1997 to July 25, 1997..................... $26 1/8 $24
</TABLE>
- --------
(1) The Company paid a distribution of $0.2583 per share of Common Stock on
May 30, 1997 for the period February 1, 1997 through March 31, 1997, which
is approximately equivalent to a quarterly distribution of $0.3875 per
share or an annual distribution of $1.55 per share of Common Stock.

Units and shares of Common Stock will receive equal distributions. Future
distributions by the Company will be at the discretion of the Board of
Directors and will depend on the actual Funds from Operations, its financial
condition, its capital requirements, the annual distribution requirements
under the REIT provisions of the Code (see "Federal Income Tax
Considerations--Taxation of the Company--Requirements for Qualification"), and
such other factors as the Board of Directors deems relevant. See "Risk
Factors--Changes in Investment and Financing Policies Without Stockholder
Vote." To obtain and maintain its qualification as a REIT, the Company must
make annual distributions to stockholders of at least 95% of its taxable
income, determined without regard to the deduction for dividends paid and by
excluding any net capital gains. Under certain circumstances, the Company may
be required to make distributions in excess of cash flow available for
distribution to meet such distribution requirements. There can be no assurance
that any such distributions will be made by the Company.

The Company anticipates that its cash available for distribution will exceed
earnings and profits due to non-cash expenses, primarily depreciation and
amortization, to be incurred by the Company. Distributions by the Company to
the extent of its current or accumulated earnings and profits for federal
income tax purposes, other than capital gain dividends, will be taxable to
stockholders as ordinary dividend income. Capital gain distributions generally
will be treated as long-term capital gains. Distributions in excess of
earnings and profits generally will be treated as a non-taxable return of
capital to the extent of each stockholder's basis in his or her Common Stock
to the extent thereof, and thereafter as taxable gain. The non-taxable
distributions will reduce each stockholder's tax basis in the Common Stock
and, therefore, the gain (or loss) recognized on the sale of such Common Stock
or upon liquidation of the Company will be increased (or decreased)
accordingly. Distributions that are treated as a reduction of the
stockholder's basis in its shares of Common Stock will have the effect of
deferring taxation until the sale of the stockholder's shares. The Company has
determined that, for federal income tax purposes, approximately 13.7% of the
distributions paid for the Company's first year of operations which commenced
on January 31, 1997 will represent return of capital to stockholders. Given
the dynamic nature of the Company's acquisition strategy and the extent to
which any future acquisitions would alter this calculation, no assurances can
be given regarding what percent of future distributions will constitute return
of capital for federal income tax purposes. If actual cash available for
distribution or taxable income vary from these amounts, the percentage of
distributions which represent a return of capital may be materially different.
For a discussion of the tax treatment of distributions to holders of Common
Stock, see "Federal Income Tax Consequences--Taxation of Taxable U.S.
Stockholders" and"--Taxation of Non-U.S. Stockholders." In order to qualify to
be taxed as a REIT, the Company must make annual distributions to stockholders
of at least 95% of its REIT taxable income (determined without regard to the
dividends received deduction and by excluding any net capital gains) which the
Company anticipates will be less than its share of adjusted Funds from
Operations. Under certain circumstances, the Company may be required to make
distributions in excess of cash available for distribution in order to meet
such distribution requirements.

46
<PAGE>

Financing activities such as repayment or refinancing of loans also may
affect the Company's assets and liabilities and the amount of cash available
for distribution for future periods. Management seeks to control the timing
and nature of investing and financing activities in order to maximize the
Company's return on invested capital.

Future distributions by the Company are subject to the requirements of the
MGCL and the discretion of the Board of Directors, and depend on the actual
cash flow of the Company, its financial condition, its capital requirements,
any decision by the Board of Directors to reinvest the Operating Partnership's
Funds from Operations rather than distribute such funds to the Company, the
annual distribution requirements under the REIT provisions of the Code (see
"Federal Income Tax Considerations--Taxation of the Company--Annual
Distribution Requirements") and such other factors as the Board of Directors
deems relevant. There can be no assurance that any distributions will be made
or that the expected level of distributions will be maintained by the Company.
See "Risk Factors--Real Estate Investment Considerations." If revenues
generated by the Company's properties in future periods decrease materially
from current levels, the Company's ability to make expected distributions
would be materially adversely affected, which could result in a decrease in
the market price of the shares of Common Stock.

The Company may in the future implement a distribution reinvestment program
under which holders of shares of Common Stock may elect automatically to
reinvest distributions in additional shares of Common Stock. The Company may,
from time to time, repurchase shares of Common Stock in the open market for
purposes of fulfilling its obligations under this distribution reinvestment
program, if adopted, or may elect to issue additional shares of Common Stock.
If the Company adopts a distribution reinvestment program, it will solicit
participation in the program after the Offering by means of a separate
prospectus, and a purchase of shares of Common Stock in the Offering does not
entitle any investor to participate in any such program. There can be no
assurance that the Company will adopt such a program, and consequently, the
probable date of adoption or number of shares of Common Stock that would be
available under such program cannot be determined at this time.

The Company provides its stockholders with annual reports containing audited
financial statements with a report thereon by the Company's independent
auditors, together with management's discussion and analysis, as required
under applicable rules and regulations of the Securities and Exchange
Commission (the "Commission").

47
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of March
31, 1997 on an historical basis, and on a pro forma basis as adjusted to give
effect to the Offering, assuming an offering price of $26.0625 per share, the
last reported sales price of the Common Stock on the NYSE on July 24, 1997,
and the application of the estimated net proceeds therefrom for the purchase
of the Acquired Properties (including the Pending Acquisition). During the
period April 1, 1997 to July 25, 1997, the Company incurred $95.0 million of
indebtedness under the Credit Facility to complete the purchase of the
Acquired Properties (other than the Pending Acquisition). The information set
forth in the following table should be read in conjunction with the Company's
Consolidated and Combined Financial Statements and notes thereto, the pro
forma financial information of the Company and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------
HISTORICAL PRO FORMA
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt
Mortgage Loans...................................... $ 95,917 $ 95,917
Borrowings under Credit Facility.................... -- --
----------- -----------
Total debt............................................ 95,917 95,917
----------- -----------
Minority interest in the Operating Partnership(1)... 31,127 46,466
Preferred Stock, $.01 par value, 30,000,000 shares
authorized, none issued or outstanding.............
Common Stock, $.01 par value, 150,000,000 shares
authorized, 14,475,000 shares issued and
outstanding, 24,475,000 shares issued and
outstanding on a pro forma basis(1)(2)............. 145 245
Capital in excess of par value...................... 167,025 401,762
Retained earnings................................... 2,652 2,652
----------- -----------
Total stockholders' equity............................ 169,822 404,659
----------- -----------
Total capitalization.................................. $296,866 $547,042
=========== ===========
</TABLE>
- --------
(1) Assumes no exchange of the Units issued to the Unitholders. If all of the
Units were exchanged, 27,292,476 shares of Common Stock would be
outstanding.
(2) Excludes 1,400,000 shares of Common Stock reserved for issuance pursuant
to the Stock Incentive Plan. See "Management--Stock Incentive Plan."

48
<PAGE>

SELECTED FINANCIAL DATA

The following table sets forth certain financial data on a historical and pro
forma basis for the Company, and on an historical basis for the Kilroy Group,
which consist of the Consolidated and Combined Financial Statements. The
financial data should be read in conjunction with the historical and pro forma
financial statements and notes thereto included in this Prospectus. The
combined historical summary financial data as of December 31, 1995 and 1996 and
for each of the three years in the period ended December 31, 1996 have been
derived from the Combined Financial Statements of the Kilroy Group audited by
Deloitte & Touche LLP, independent public accountants, whose report with
respect thereto is included elsewhere in this Prospectus. The selected combined
historical financial and operating information as of December 31, 1992, 1993
and 1994, and for the years ended December 31, 1992 and 1993, the three months
ended March 31, 1996, and the period from January 1, 1997 to January 31, 1997
have been derived from the unaudited Combined Financial Statements of the
Kilroy Group and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of operating information for the unaudited periods. The selected consolidated
historical financial and operating information as of March 31, 1997 and for the
two-month period from February 1, 1997 to March 31, 1997 have been derived from
the unaudited Consolidated Financial Statements of the Company and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the operating
information for the unaudited period. For a discussion of the adjusted three
months ended March 31, 1997 assuming the IPO and the Formation Transactions had
been consummated on January 1, 1997 (but not adjusted to reflect the Acquired
Properties) see "Management's Discussion and Analysis of Financial Conditions
and Results of Operation--Results of Operations--Adjusted Three Months Ended
March 31, 1997 Compared to Three Months Ended March 31, 1991." From March 31,
1997 through July 28, 1997, the Company incurred $95.0 million of indebtedness
under the Credit Facility to complete the purchase of the Acquired Properties
(other than the Pending Acquisition). The pro forma data assume the
consummation of the Offering and use of the aggregate net proceeds therefrom to
purchase the Acquired Properties and Pending Acquisition as of the beginning of
the periods presented for the operating data and as of the balance sheet date
for the balance sheet data. The pro forma financial data are not necessarily
indicative of what the actual financial position or results of operations of
the Company would have been as of and for the periods indicated, nor does it
purport to represent the future financial position and results of operations.

49
<PAGE>

THE COMPANY AND KILROY GROUP
(IN THOUSANDS, EXCEPT SQUARE FOOTAGE AND SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
CONSOLIDATED/COMBINED HISTORICAL COMBINED HISTORICAL
---------------------------------- -------------------------------------------
KILROY GROUP
PRO FORMA KILROY ---------------------
THREE REALTY CORP. THREE
MONTHS FEBRUARY 1, JANUARY 1, MONTHS
ENDED 1997 TO 1997 TO ENDED
MARCH 31, MARCH 31, JANUARY 31, MARCH 31, PRO FORMA
1997 1997 1997 1996 1996 1996 1995 1994 1993 1992
--------- ------------ ----------- --------- --------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Rental income....... $15,511 $7,110 $2,760 $ 8,785 $61,273 $35,022 $33,896 $32,577 $35,599 $34,274
Tenant
reimbursements..... 1,703 706 275 862 6,804 3,380 3,002 1,643 4,916 5,076
Development and
management fees.... -- -- 14 263 -- 698 1,156 919 751 882
Sale of air rights.. -- -- -- -- -- -- 4,456 -- -- --
Lease termination
fees............... -- -- -- -- -- -- 100 300 5,190 48
Interest income..... -- 971 -- -- -- -- -- -- -- --
Other income........ 192 185 4 11 667 76 298 784 188 221
------- ------ ------ ------- ------- ------- ------- ------- ------- -------
Total revenues...... 17,406 8,972 3,053 9,921 68,744 39,176 42,908 36,223 46,644 40,501
------- ------ ------ ------- ------- ------- ------- ------- ------- -------
Property expenses... 2,667 1,239 579 1,533 11,934 6,788 6,834 6,000 6,391 6,384
Real estate taxes
(refunds).......... 912 353 106 300 3,425 1,301 1,416 (448) 2,984 3,781
General and
administrative expense.. 1,419 725 78 528 5,672 2,383 2,152 2,467 1,113 1,115
Ground leases....... 277 185 64 193 1,106 768 789 913 941 854
Development
expenses........... -- -- 46 197 -- 650 737 468 581 429
Option buy-out
cost............... -- -- 3,150 3,150
Interest expense.... 2,052 1,531 1,895 5,227 8,200 21,853 24,159 25,376 25,805 26,293
Depreciation and
amortization....... 3,723 1,744 787 2,281 14,727 9,111 9,474 9,962 10,905 10,325
------- ------ ------ ------- ------- ------- ------- ------- ------- -------
Total expenses...... 11,050 5,777 3,555 10,259 48,214 46,004 45,561 44,738 48,720 49,181
------- ------ ------ ------- ------- ------- ------- ------- ------- -------
Income (loss) before
equity in loss of
subsidiary,
minority interest
and extraordinary
item............... 6,356 3,195 (502) (338) 20,530 (6,828) (2,653) (8,515) (2,076) (8,680)
Equity in income
(loss)
of subsidiary...... (87) (57) -- -- (6) -- -- -- -- --
Minority interest... (646) (486) -- -- (2,114) -- -- -- -- --
Extraordinary item--
Extinguishment of
debt............... -- -- 3,204 -- -- 20,095 15,267 1,847 -- --
------- ------ ------ ------- ------- ------- ------- ------- ------- -------
Net income (loss)... $ 5,623 $2,652 $2,702 $ (338) $18,410 $13,267 $12,614 $(6,668) $(2,076) $(8,680)
======= ====== ====== ======= ======= ======= ======= ======= ======= =======
Net income
per common
share(1)........... $ .23 $ .18 $ .75
======= ====== =======
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31,
---------------------- -----------------------------------------------------
COMBINED HISTORICAL
CONSOLIDATED -----------------------------------------------------
PRO FORMA HISTORICAL 1996 1995 1994 1993 1992
--------- ------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate assets, be-
fore accumulated de-
preciation and amorti-
zation................ $500,557 $285,402 $ 227,337 $ 224,983 $ 223,821 $ 222,056 $ 221,423
Total assets........... 560,558 310,382 128,339 132,857 143,251 148,386 161,008
Mortgages and Loans.... 95,917 95,917 223,297 233,857 250,059 248,043 250,792
Total liabilities...... 109,433 109,433 242,116 254,683 273,585 263,346 263,156
Minority interest...... 46,466 31,127 -- -- -- -- --
Stockholders' equity
(deficit)............. 404,659 169,822 (113,777) (121,826) (130,334) (114,960) (102,148)
</TABLE>

50
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------- ------------------------------------------
CONSOLIDATED/
COMBINED HISTORICAL COMBINED HISTORICAL
PRO FORMA -------------------- PRO FORMA -------------------------------
1997 1997 1996 1996 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from
Operations(2)(3)....... $ 10,107 $ 5,244 $ 1,943 $ 35,711 $ 5,433 $ 2,365 $ 1,447
Cash Flows from(3):
Operating activities... -- 227 4,354 -- 5,520 10,071 6,607
Investing activities... -- (59,606) (76) -- (2,354) (1,162) (1,765)
Financing activities... -- 175,542 (4,278) -- (3,166) (8,909) (4,842)
Office Properties:
Rentable square
footage............... 2,914,425 2,037,414 1,688,383 2,914,425 1,688,383 1,688,383 1,688,383
Occupancy.............. 87.9% 83.5% 79.4% 85.1% 76.0% 72.8% 73.3%
Industrial Properties:
Rentable square
footage............... 3,026,290 1,337,697 916,570 3,026,290 916,570 916,570 916,570
Occupancy.............. 97.6% 98.0% 98.4% 96.9% 97.6% 98.4% 79.7%
</TABLE>
- -------
(1) Pro forma net income per share equals pro forma net income divided by the
24,475,000 shares of Common Stock outstanding after the Offering.

(2) As defined by NAREIT, "Funds from Operations" represents net income (loss)
before minority interest of unit holders (computed in accordance with
GAAP), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate related depreciation and amortization (excluding
amortization of deferred financing costs) and after adjustments for
unconsolidated partnerships and joint ventures. Non-cash adjustments to
Funds from Operations were as follows: in all periods, depreciation and
amortization; in 1996, 1995 and 1994, gains on extinguishment of debt; and
in pro forma 1997 and 1996 and in the three months ended March 31, 1997,
non-cash compensation. Further, in 1996 and 1995 non-recurring items (sale
of air rights and option buy-out cost) were excluded. Management considers
Funds from Operations an appropriate measure of performance of an equity
REIT because industry analysts have accepted it as such. The Company
computes Funds from Operations in accordance with standards established by
the Board of Governors of NAREIT in its March 1995 White Paper, which may
differ from the methodology for calculating Funds from Operations utilized
by other equity REITs and, accordingly, may not be comparable to such other
REITs. Further, Funds from Operations does not represent amounts available
for management's discretionary use because of needed capital replacement or
expansion, debt service obligations, or other commitments and
uncertainties. See the notes to the historical financial statements of the
Kilroy Group. Funds from Operations should not be considered as an
alternative for net income as a measure of profitability nor is it
comparable to cash flows provided by operating activities determined in
accordance with GAAP.

(3) Funds from operations and cash flow information is comprised of Kilroy
Group for the period January 1, 1997 to January 31, 1997 and Kilroy Realty
Corporation for the period February 1, 1997 to March 31, 1997.

51
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the "Selected
Financial Data" and the Consolidated Financial Statements of the Company and
the Combined Financial Statements for the Kilroy Group and notes thereto
appearing elsewhere in this Prospectus. The Combined Financial Statements of
the Kilroy Group are comprised of the operations, assets and liabilities of
the Properties contributed to the Company by the Kilroy Group in connection
with the Formation Transactions. For accounting purposes, the financial
information of the Operating Partnership and the Company are consolidated.

RESULTS OF OPERATIONS

The Company's management believes that in order to provide meaningful
historical analysis of the financial statements, certain adjustments must be
made to the historical Kilroy Group financial statements to make accounting
periods comparable. Accordingly the results of operations for the period
January 1, 1997 to January 31, 1997 have been adjusted to reflect interest
income, general and administrative expenses, interest expense and
extraordinary items as if the IPO and Formation Transactions had been
consummated on January 1, 1997. The following sections discuss the results of
operations as adjusted.

Adjusted Three Months Ended March 31, 1997 Compared to Three Months Ended
March 31, 1996

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(IN THOUSANDS)
---------------------
1997 1996
---------------------
(AS ADJUSTED)
<S> <C> <C>
Revenues:
Rental income......................................... $ 9,870 $ 8,785
Tenant reimbursements................................. 981 862
Interest income....................................... 1,457
Development and management fees....................... 14 263
Other income.......................................... 189 11
------- -------
Total revenues........................................ 12,511 9,921
------- -------
Expenses:
Property expenses..................................... 1,818 1,533
Real estate taxes..................................... 459 300
General and administrative expense.................... 1,088 528
Ground leases......................................... 249 193
Development expenses.................................. 46 197
Interest expense...................................... 2,297 5,227
Depreciation and amortization......................... 2,531 2,281
------- -------
Total expenses........................................ 8,488 10,259
------- -------
Net income (loss)....................................... $ 4,023 $ (338)
======= =======
</TABLE>

Total revenues increased $2.6 million, or 26.1%, for the three months ended
March 31, 1997 compared to the same period for 1996. Rental income increased
$1.1 million, or 12.4% to $9.9 million for the three months ended March 31,
1997 compared to $8.8 million for the same period in 1996. Rents from office
properties increased $0.8 million during the three months ended March 31, 1997
from the comparable period in 1996. This improvement was due to an increase in
office space under lease of 398,000 rentable square feet, from 1,285,000
rentable square feet at March 31, 1996 to 1,683,000 rentable square feet at
March 31, 1997. The bulk of the rentable square footage increase reflects four
office properties acquired in connection with the IPO. Rents from industrial
properties increased $0.3 million during the three months ended March 31, 1997
compared to the same period in 1996. The increase was due to the purchase of
three industrial buildings with approximately 421,000

52
<PAGE>

rentable square feet under lease in connection with the IPO. Tenant
reimbursements increased to $1.0 million for the three months ended March 31,
1997 from $0.9 million for the same period in 1996. The $0.1 million increase
was primarily due to tenant reimbursements in connection with the office and
industrial buildings purchased in connection with the IPO. Tenant
reimbursements consist of additional rental revenue from tenants covering
operating expenses, such as utilities and property taxes, and are recorded as
revenue in accordance with the lease terms. Interest income increased $1.5
million due to interest earned on the $116.2 million of IPO net proceeds
remaining after the purchase of the properties discussed above and the
repayment of debt. Other income for the three months ended March 31, 1997
includes a $0.1 million gain on the sale of furniture and equipment.

Expenses for the three months ended March 31, 1997 decreased by $1.8
million, or 17.3%, to $8.5 million compared to $10.3 million for the same
period in 1996. Property expenses, real estate taxes and ground lease expense
increased $0.3 million, $0.2 million and $0.1 million, respectively, primarily
due to the properties purchased at the IPO. Interest expense decreased $2.9
million, or 56.1%, to $2.3 million for the three months ended March 31, 1997
from $5.2 million for the same period in 1996, primarily as a result of the
repayment of $127.4 million in debt in connection with the IPO. See "--
Liquidity and Capital Resources."

Net income was $4.0 million for the three months ended March 31, 1997
compared to a $0.3 million loss for the same period in 1996. The net change of
$4.3 million is due primarily to an increase in rental income of $1.1 million,
an increase in interest income of $1.5 million and a decrease in interest
expense of $2.9 million.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Total revenues decreased $3.7 million, or 8.7%, for the year ended December
31, 1996 compared to the same period for 1995. Rental Income increased $1.1
million, or 3.3%, to $35.0 million for the year ended December 31, 1996
compared to $33.9 million for the same period in 1995. Rents from office
properties contributed by the Kilroy Group increased $0.8 million during the
year ended December 31, 1996 from the comparable period in 1995. Such increase
was due to office space under lease increasing from 1,222,000 rentable square
feet at December 31, 1995 to 1,284,000 rentable square feet at December 31,
1996. The majority of this increase relates to leasing at Kilroy Airport
Center Long Beach. There was no significant change in rent per rentable square
foot for the year ended 1996 compared to the year ended 1995. Rents from
Industrial Properties contributed by the Kilroy Group increased $0.3 million
during the year ended December 31, 1996 compared to the same period in 1995.
The increase resulted from a lease with a CPI increase and the effect of the
2260 E. El Segundo Boulevard Building being leased for the entire twelve
months ended December 31, 1996. Tenant reimbursements increased to $3.4
million, in 1996 compared to $3.0 million for 1995. The $0.4 million increase
is primarily due to increased billable operating expenses resulting from new
leases. Revenues for 1995 include a gain on the sale of air rights of $4.5
million at Kilroy Airport Center at El Segundo. See Note 2 to the Combined
Financial Statements.

Expenses in the year ended December 31, 1996 increased by $0.4 million, or
1.0%, to $46.0 million compared to $45.6 million for the same period in 1995.
During the year ended December 31, 1996, the Company accrued the costs of an
option buy out of $3.15 million for the cancellation of an option to purchase
a 50% equity interest in Kilroy Airport Center at El Segundo. Interest expense
decreased $2.3 million, or 9.6%, to $21.9 million in calendar 1996 from $24.2
million in calendar 1995, primarily as a result of the forgiveness and
restructuring of certain debt in 1996. See Note 4 to the Combined Financial
Statements.

Net income was $13.3 million for the year ended December 31, 1996 compared
to $12.6 million for the same period in 1995. The increase of $0.7 million is
due primarily to a decrease in interest expense of $2.3 million, an increase
in extraordinary gains of $4.8 million less the nonrecurring option buy out
cost of $3.15 million for calendar 1996 and the sale of air rights of $4.5
million in calendar 1995.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

Total revenues increased $6.7 million, or 18.5%, for the year ended December
31, 1995 compared to the year ended December 31, 1994. Rental income increased
$1.3 million, or 4.0%, to $33.9 million in calendar 1995

53
<PAGE>

from $32.6 million in calendar 1994. In calendar 1995, rents from industrial
properties contributed by the Kilroy Group increased $0.8 million from the
year ended December 31, 1994, primarily due to the effect of 12-months' rental
for the Property located at 2265 E. El Segundo Boulevard compared to four-
months' rental in calendar 1994. Office square footage and average rent per
rentable square foot remained relatively unchanged for the year ended December
31, 1995 compared to the year ended December 31, 1994. Industrial square
footage under lease increased to 902,000 at December 31, 1995 as compared to
730,000 a year earlier. The 2260 E. El Segundo Boulevard building was leased
in April 1995 after being vacant during 1994. The Company also leased the
1230 S. Lewis St. property in February 1995 at a rate of $6.11 per rentable
square foot, down from the rate of $6.43 in effect for the prior year. Tenant
reimbursements increased to $3.0 million for the year ended December 31, 1995
from $1.6 million for the year ended December 31, 1994 due principally to the
1994 $1.5 million refund to tenants for property tax refunds. Parking revenues
increased to $1.6 million in 1995 from $1.4 million for the year ended
December 31, 1994 due to recognition of 12-months' parking income for Kilroy
Airport Center Long Beach in calendar 1995 compared to two months in calendar
1994, together with increased tenant parking revenues at Kilroy Airport Center
at El Segundo. Revenues for the year ended December 31, 1995 include a gain on
the sale of air rights of $4.5 million referred to above. Other income
decreased $0.5 million to $0.3 million during calendar 1995 compared to
calendar 1994, primarily as a result of nonrecurring interest income of $0.4
in 1994 million on the property tax refunds referred to below.

Expenses for the year ended December 31, 1995 increased $0.8 million, or
1.8%, to $45.6 million. Property operating expenses increased $0.8 million, or
13.9%, primarily due to increased utility costs, increases in employee wages
and benefits and a $0.3 million management fee paid to KI to cover costs of
the loan renegotiation at Kilroy Airport Center at El Segundo. Real estate
taxes increased $1.9 million, to $1.4 million in 1995 from a credit balance of
$0.4 million for the year ended December 31, 1994, primarily due to the
$2.4 million property tax refund recorded by the Company for the year ended
December 31, 1994 and the effect of a reduction in aggregate assessed property
values for the year ended December 31, 1995. General and administrative
expenses decreased $0.3 million, or 12.0%, to $2.2 million for the year ended
December 31, 1995 from $2.5 million for the year ended December 31, 1994
period, primarily due to a $0.3 million penalty for late payment of property
taxes in calendar 1994. Interest expense decreased $1.2 million to $24.2
million in 1995 from $25.4 million for the year ended December 31, 1994 due to
the September 1995 extension of the mortgage on Kilroy Airport Center at El
Segundo at a lower interest rate and the forgiveness of certain debt, offset
in part by the effect of higher interest rates on the variable rate mortgage
secured by Kilroy Airport Center Long Beach. See Note 4 to the Combined
Financial Statements. Ground lease expense decreased $0.1 million to $0.8
million for the year ended December 31, 1995, reflecting the effect of 12
months' reduction of ground rent for Phase III of Kilroy Airport Center Long
Beach compared to six months for the year ended December 31, 1994. The
$0.5 million decrease in depreciation and amortization to $9.5 million for the
year ended December 31, 1995 results from certain assets becoming fully
amortized.

Net income increased $19.3 million to $12.6 million for the year ended
December 31, 1995 compared to a net loss of $6.7 million for the year ended
December 31, 1994, primarily due to the sale of air rights discussed above and
a $13.4 million increase in gains on extinguishment of debt to $15.3 million
for the year ended December 31,1995 compared to $1.8 million for the year
ended December 31, 1994.

LIQUIDITY AND CAPITAL RESOURCES

Upon the consummation of the Offering and the use of proceeds therefrom (as
described under the caption "Use of Proceeds"), the Company will have (i)
repaid its outstanding indebtedness under the Credit Facility of $95.0 million
and (ii) cash available for acquisitions, development and working capital of
approximately $141.4 million. The Credit Facility is used primarily to finance
acquisitions of additional properties. The availability of funds under the
Credit Facility is subject to, among other things, the value of the underlying
collateral securing it. The Company has recently increased the commitment
under the Credit Facility to $200.0 million.

Subsequent to its IPO, the Company purchased approximately $198.8 million of
office and industrial properties. The purchase price for such Properties was
funded out of net proceeds of the IPO, from borrowings

54
<PAGE>

under the Credit Facility, working capital and, in the case of one Acquired
Property, in part in Units. The Company has also entered into a letter of
intent to purchase the Pending Acquisition property for an approximate
acquisition cost of $9.8 million. See "Prospectus Summary--Recent
Developments--Acquisitions," "Business and Properties--Acquired Properties" and
"--Pending Acquisition." The Company is currently in active negotiations to
purchase an additional 15 Pipeline Properties for an aggregate acquisition cost
of $114.4 million, including the assumption of $14.0 million of mortgage
indebtedness. The Company anticipates that such acquisitions, if consummated,
would be funded with net proceeds from this Offering, funds available under the
Credit Facility and working capital.

The Company presently plans to develop an aggregate of 1.6 million rentable
square feet of office or industrial space on the Development Properties,
subject to required entitlements. Of this amount, the Company plans to commence
development of 500,000 rentable square feet of industrial space in 1997 at a
total budgeted cost of $25.0 million. The Company expects to finance such
development with net proceeds from this Offering, borrowings under the Credit
Facility and working capital. The Company presently has no financial
commitments in its capacity as a developer of real estate projects.

In June 1997, the Company entered into the Boeing Lease for approximately
211,000 rentable square feet of office space at the SeaTac Office Center. In
connection with the Boeing Lease, the Company agreed to make $3.25 million of
tenant improvements which the Company presently expects to fund from working
capital or borrowings under the Credit Facility. The Company anticipates that
such tenant improvements will be completed by December 31, 1997. The Company
also expects to spend approximately $2.0 million in connection with non-
recurring capital improvements at SeaTac Office Center. In addition, the
Company expects to incur additional tenant improvement and leasing commission
costs at SeaTac in connection with the further lease-up of approximately 96,000
rentable square feet.

The Company also expects to incur $500,000 of earthquake-related improvements
to certain of the Properties in the next six months.

The Company makes quarterly distributions to stockholders from cash available
for distribution and, if necessary to satisfy distribution requirements to
maintain its status as a REIT, the Company may use borrowings under its Credit
Facility. All such distributions are at the discretion of the Board of
Directors. Amounts accumulated for distribution are invested by the Company
primarily in interest-bearing accounts and short-term, interest-bearing
securities, which are consistent with the Company's intention to qualify for
taxation as a REIT. Such investments may include, for example, obligations of
the Government National Mortgage Association, other governmental agency
securities, certificates of deposit and interest-bearing bank deposits.

In May 1997, the Company entered into its Credit Facility with MGT which has
a present commitment of $200.0 million. The Credit Facility bears interest at
LIBOR plus 1.50% and matures in May 1999, subject to a one-year option to
extend the term. The Credit Facility is secured by certain of the Properties.
In addition, in connection with the IPO, the Operating Partnership obtained
mortgage loans totaling $96.0 million (the "Mortgage Loans") from MGT. The
proceeds of the Mortgage Loans principally were used to repay existing
indebtedness on the Properties contributed by the Kilroy Group in connection
with the IPO. The Mortgage Loans consist of the $84.0 Million Loan which is
secured by certain of the Properties and the $12.0 Million Loan secured by the
SeaTac Office Center (the "SeaTac Loan"). The $84.0 Million Loan matures on
February 1, 2022 and bears interest at 8.35%. In February 2005, the interest
rate resets to the greater of 13.35% and the sum of the interest rate for U.S.
Treasury Securities maturing 15 years from the Reset Date plus 5.0%. The SeaTac
Loan matures on January 31, 1998 and bears interest at LIBOR plus 1.50%.
See "Description of Indebtedness."

The Company was adversely impacted in 1993 and 1994 by the decline in market
rental rates, higher vacancies and its higher leverage which prevented it from
meeting certain of its financial obligations. Bank notes relating to
properties, other than the SeaTac Office Center, aggregating $9.7 million and
$23.7 million were in default as of December 31, 1995 and 1994, respectively.
Past due interest relating to the notes was $2.9 million and $5.7 million as of
December 31, 1995 and 1994, respectively. In addition, property taxes of $0.1
million,

55
<PAGE>

$0.5 million and $0.6 million were past due as of December 31, 1996, 1995 and
1994, respectively. In June 1996, the Company repaid the principal of the bank
notes relating to such properties, and the applicable accrued interest, and
all but $40,000 of the property taxes, with the proceeds of a financing
secured by certain of the Industrial Properties. With respect to the SeaTac
Office Center, a high vacancy rate in 1993 resulted in insufficient cash flow
to service the underlying debt on this Property. The high vacancy rate
continued and a note payable to an insurance company having a principal
balance of $20.2 million and accrued interest of $2.4 million, as of December
31, 1996, was in default since October 1995. In October 1996, the Company
successfully negotiated a discounted payoff with the lender and the ground
lessor which provided for a payoff or purchase of the lender's note at a
discount on or before February 10, 1997 which was repaid with the net proceeds
of the IPO and borrowings under the SeaTac Loan. Bank notes relating to the
SeaTac Office Center aggregating $6.8 million were in default as of December
31, 1995 and 1994. Past due interest relating to these notes was $2.1 million
and $1.4 million as of December 31, 1995 and 1994, respectively. In June 1996,
the Company repaid the principal of the bank notes and the applicable accrued
interest relating to the SeaTac Office Center with the proceeds of a financing
secured by certain of the Industrial Properties.

The Company believes that it will have sufficient capital resources to
satisfy its obligations during its first year of operations which commenced on
January 31, 1997. The Company expects to meet certain of its long-term
liquidity requirements, including the repayment of long-term debt of $84.0
million (less scheduled principal repayments) in 2005, the repayment of debt
of $12.0 million in January 1998 and possible property acquisitions and
development, through long-term secured and unsecured borrowings, including the
Credit Facility, and the issuance of debt securities or additional equity
securities of the Company or, possibly in connection with acquisitions of land
or improved properties, the issuance of Units of the Operating Partnership.

The Phase I environmental assessments of the Properties have not revealed
any environmental liability that the Company believes would have a material
adverse effect on the Company's financial condition or results of operations
taken as a whole, nor is the Company aware of any such material environmental
liability. See "Risk Factors--Government Regulations--Environmental Matters"
and "Business and Properties--Government Regulations--Environmental Matters."

HISTORICAL CASH FLOWS

Historically, the Kilroy Group's principal sources of funding for operations
and capital expenditures were cash flow from operating activities and secured
debt financings. The Kilroy Group incurred net losses before equity in income
of subsidiaries, minority interest and extraordinary item in each of the last
five years through December 31, 1996. However, after adding back depreciation
and amortization, the Properties contributed by the Kilroy Group generated
positive net operating cash flows for each of the last four years through
December 31, 1996.

The Company's net cash from operating activities decreased $4.1 million for
the three months ended March 31, 1997 compared to the same period in 1996,
from $4.3 million in 1996 to $0.2 million in 1997. The decrease was primarily
due to the payment of accrued interest of $3.3 million and the accrued cost of
option buy out and tenant improvements of $1.4 million, and lower rents
received in advance, of $1.3 million. These increases in cash used were offset
by an increase in net income before extraordinary gains of $2.5 million, due
primarily to an increase in base rents of $1.1 million and a decrease in
interest expense of $1.8 million. The Company's net cash from operating
activities decreased $4.6 million to $5.5 million during the year ended
December 31, 1996 compared with $10.1 million in the comparable 1995 period.
The decrease was a result of the sale of air rights of $4.5 million in 1995,
the option buy-out cost of $3.15 million in 1996, offset by an increase in
total rent of $1.0 million in 1996 and a decrease in interest expense of $2.3
million in 1996. The Company's net cash from operating activities increased
$3.5 million from the year ended December 31, 1994 compared to the same period
in 1995, or from $6.6 million in 1994 to $10.1 million in 1995. The increase
was primarily due to the sale of air rights in 1995 of $4.5 million.

56
<PAGE>

Net cash used in investing activities increased $59.5 million to $59.6
million for the three months ended March 31, 1997 from $0.1 million for 1996.
The increase was due to the purchase of four office properties and three
industrial properties for an aggregate acquisition cost of $58.0 million and
additional tenant improvements of $1.6 million. Net cash used in investing
activities increased $1.2 million to $2.4 million in the year ended December
31, 1996 from $1.2 million in the 1995 period primarily due to an increase in
the number of new lease transactions and the resulting increase in the level
of tenant improvements. Net cash used in investing activities decreased $0.6
million to $1.2 million for the year ended December 31, 1995 from $1.8 million
for 1994 due to a decrease in the number of new lease transactions and the
resulting decrease in the level of tenant improvements.

Cash flows provided by financing activities totaled $175.5 million for the
three months ended March 31, 1997 compared to net cash used in financing
activities of $4.3 million in the 1996 period. The increase is primarily due
to net proceeds from the IPO of $302.8 million, a net repayment of debt of
$122.9 million and loan costs and restricted cash of $2.3 million and $4.2
million, respectively, in the 1997 period compared to net principal payments
of $0.3 million in the 1996 period. In 1997, there was a contribution from
partners of $2.2 million net of amounts owed to affiliates, compared to a net
distribution of $3.9 million in 1996. Cash flows used in financing activities
was $3.4 million for the year ended December 31, 1996 consisting of net
proceeds from issuance of debt of $2.1 million, less $5.2 million in
distributions to partners. Cash flows used in financing activities increased
$4.1 million to $8.9 million for the year ended December 31, 1995 compared to
net cash used in financing activities of $4.8 million for the same period in
1994 as result of net repayment of debt in the 1995 period compared to net
borrowings in the 1994 period and a $4.6 million decrease in deemed
distributions to partners.

FUNDS FROM OPERATIONS

Industry analysts generally consider Funds from Operations, as defined by
NAREIT, an alternative measure of performance of an equity REIT. Funds from
Operations is defined by NAREIT to mean net income (loss) determined in
accordance with GAAP, excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization (other than amortization
of deferred financing costs and depreciation of non-real estate assets), and
after adjustment for unconsolidated partnerships and joint ventures. The
Company believes that in order to facilitate a clear understanding of the
combined historical operating results of the Company, Funds from Operations
should be examined in conjunction with net income (loss) as presented in the
audited Combined Financial Statements and selected financial data included
elsewhere in this Prospectus. The Company computes Funds from Operations in
accordance with standards established by the Board of Governors of NAREIT in
its March 1995 White Paper, which may differ from the methodology for
calculating Funds from Operations utilized by other equity REITs and,
accordingly, may not be comparable to such other REITs. Funds from Operations
should not be considered as an alternative to net income (loss), as an
indication of the Company's performance or to cash flows as a measure of
liquidity or the ability to pay dividends or make distributions.

INFLATION

The Company's leases with the majority of its tenants require the tenants to
pay most operating expenses, including real estate taxes and insurance, and
increases in common area maintenance expenses, which reduce the Company's
exposure to increases in costs and operating expenses resulting from
inflation.

ADOPTION OF ACCOUNTING STANDARDS

Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, is effective for transactions entered into in fiscal years
beginning after December 15, 1995. The Company plans to continue accounting
for stock-based employee compensation plans under APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. The
Company will present pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting for stock-based
compensation had been elected, for all awards granted in the year ending
December 31, 1997 in its Annual Report on Form 10-K.

57
<PAGE>

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share. This statement
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly held common stock or potential common
stock. This statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings per Share, and makes
them comparable to international EPS standards. This statement is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods. The Company has not yet analyzed the impact of
adopting this statement.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 Reporting for Comprehensive Income and
No. 131, Disclosures about Segments of an Enterprise and Related Information.
These statements are effective for financial statements issued for periods
beginning after December 15, 1997. The Company has not yet analyzed the impact
of adopting these statements.

58
<PAGE>

BUSINESS AND PROPERTIES

GENERAL

The Company's portfolio of properties includes 33 office buildings
encompassing an aggregate of approximately 2.9 million rentable square feet
and 44 industrial buildings encompassing an aggregate of approximately 3.0
million rentable square feet. Thirty of the office buildings and 33 of the
industrial buildings are located in prime Southern California suburban
submarkets (including a complex of three Office Properties located in El
Segundo, adjacent to LAX, presently the nation's second largest air-cargo
port, and a complex of five Office Properties located adjacent to the Long
Beach Airport). The SeaTac Office Center is comprised of three Office
Properties located adjacent to the Seattle-Tacoma International Airport. The
average age of the Office Properties is approximately 14 years and the average
age of the Industrial Properties is approximately 22 years. As of June 30,
1997, the Office Properties were approximately 88.1% leased to 206 tenants,
and the Industrial Properties were approximately 96.9% leased to 170 tenants.
The Company's major tenants include, among others, Hughes Space &
Communications, a tenant since 1984, which is engaged in high-technology
commercial activities including satellite development and related applications
such as DirecTV, and other major tenants such as Sony Music Entertainment,
Boeing (giving effect to the lease dated June 20, 1997 and effective January
1, 1998), M/R Systems, McDonnell Douglas Corporation, Mattel, Inc., Northwest
Airlines, Inc. and Caltrans.

Since the completion of its IPO, the Company acquired (including the
Pending Acquisition) 19 suburban office buildings encompassing approximately
900,000 rentable square feet for an aggregate acquisition cost (including
expenses, closing costs and anticipated capital expenditures) of $108.2
million, and 32 industrial buildings encompassing approximately 1.7 million
rentable square feet for an aggregate acquisition cost (including expenses,
closing costs and anticipated capital expenditures) of approximately $100.4
million. As of the date of this Prospectus, the Company is under contract to
acquire the Pending Acquisition, an industrial property (comprised of three
buildings) encompassing approximately 165,000 rentable square feet for an
acquisition cost (including expenses, closing costs and anticipated capital
expenditures) of approximately $9.8 million. All of such properties are
located in Southern California. Of the Acquired Properties, 28 are located in
submarkets in which the Company already owned office or industrial property at
the completion of its IPO, and 23 are located in new submarkets within Los
Angeles County, North Orange County, South Orange County and Western
San Bernardino County. See "--The Company's Southern California Submarkets."
As a result of these acquisitions, the Company's aggregate rentable square
feet of office and industrial space increased by approximately 43.0% and
126.2%, respectively. In addition, the Company is currently in active
negotiations to purchase an additional 15 Pipeline Properties, all of which
are located in Southern California, for an aggregate acquisition cost
(including expenses, closing costs and anticipated capital expenditures) of
$114.4 million, including the assumption of $14.0 million of mortgage
indebtedness. No assurance can be given that the Pending Acquisition or the
acquisition of any of the Pipeline Properties will be consummated. See "Risk
Factors--Real Estate Investment Considerations--Risks of Real Estate
Acquisitions and Development" and "--Acquired Properties" and "--Pending
Acquisition."
The Company currently owns or has exclusive rights to develop approximately
60 acres of developable land in six of its existing submarkets, including (i)
ten acres in Brea, California, (ii) 15 acres in Foothill Ranch in Orange
County, California, (iii) two and one-half acres in Anaheim, California, (iv)
three and one-half acres in Irvine, (v) five acres in Camarillo and (vi) 24
acres of developable land (net of the acreage required for streets) at Kilroy
Airport Center Long Beach. The Company intends to commence development of
three projects in 1997 which comprise an aggregate of approximately 500,000
rentable square feet. See "--Development, Leasing and Management Activities."

In general, the Office Properties are leased to tenants on a full service
basis, with the landlord obligated to pay the tenant's proportionate share of
taxes, insurance and operating expenses up to the amount incurred during the
tenant's first year of occupancy ("Base Year") or a negotiated amount
approximating the tenant's pro rata

59
<PAGE>

share of real estate taxes, insurance and operating expenses ("Expense Stop").
The tenant pays its pro rata share of increases in expenses above the Base
Year or Expense Stop. Substantially all of the leases for the Industrial
Properties are written on a triple net basis, with tenants paying their
proportionate share of real estate taxes, operating costs and utility costs.

Existing Office Properties

The following table sets forth certain information (on a per rentable square
foot basis) regarding leasing activity at the Office Properties owned by the
Company upon completion of its IPO (the "Existing Office Properties") since
January 1, 1992 (based upon an average of all lease transactions during the
respective periods). As presented in the table below, for the three-month
period ended March 31, 1997, the Company entered into six office property
lease transactions for an aggregate 32,796 rentable square feet with a
weighted average initial annual base rent per square foot of $15.70. Of this
amount, over 27,000 rentable square feet was leased to one tenant at the
SeaTac Office Center at an average rent per square foot of approximately
$13.88. The remaining approximately 6,000 rentable square feet was leased at
various properties at an average rent per square foot of $24.80.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE-MONTH
------------------------------------------- PERIOD ENDED
1992 1993 1994 1995 1996 MARCH 31, 1997
------- ------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Number of lease
transactions during
period(1).............. 27 20 38 37 51 6
Rentable square feet
during period(1)....... 221,946 128,563 360,111 183,848 499,635 32,796
Base rent ($)(1)(2)..... 21.41 19.38 18.75 20.66 18.43 15.70
Tenant improvements
($)(3)................. 9.04 6.93 14.76 6.28 9.47 18.10
Leasing commissions
($)(4)................. 1.37 2.16 2.61 3.77 2.38 3.61
Other concessions
($)(5)................. -- -- -- -- -- --
Effective rent ($)(6)... 18.65 17.78 16.86 18.82 16.26 14.82
Expense Stop ($)(7)..... 6.05 6.15 6.70 6.58 5.94 3.77
Effective equivalent
triple net rent
($)(8)................. 12.43 11.62 10.16 12.24 10.32 11.05
Occupancy rate at end of
period................. 74.8% 76.1% 76.2% 76.9% 79.6% 83.5%
</TABLE>
- --------
(1) Includes only office tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.
(2) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period, divided by the terms in months
for such leases, multiplied by 12, divided by the total rentable square
feet leased under all lease transactions during the period.
(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Includes moving expenses, furniture allowances and other concessions.
(6) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the terms in months from such leases,
multiplied by 12, divided by the total rentable square feet leased under
all lease transactions during the period.
(7) Equals the amount of real estate taxes, operating costs and utility costs
which the landlord is obligated to pay on any annual basis. The tenant is
required to pay any increases above such amount.
(8) Equals effective rent minus Expense Stop.

Acquired Office Properties

During the year ended December 31, 1996, the leasing activity at the office
Acquired Properties was comprised of five leases encompassing an aggregate of
22,521 rentable square feet at an average base rent of $11.44 per rentable
square foot. As of December 31, 1996, the office Acquired Properties were
98.3% leased. For the three months ended March 31, 1997, the leasing activity
at the office Acquired Properties was comprised of two leases encompassing an
aggregate of 95,942 rentable square feet at an average bases rent of $28.23
per rentable square foot. As of March 31, 1997, the office Acquired Properties
were 98.3% leased.

60
<PAGE>

Existing Industrial Properties

The following table sets forth certain information (on a per rentable square
foot basis) regarding leasing activity at the Industrial Properties owned by
the Company upon completion of the IPO (the "Existing Industrial Properties")
since January 1, 1992 (based upon an average of all lease transactions during
the respective periods):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE-MONTH
------------------------------------------ PERIOD ENDED
1992 1993 1994 1995 1996 MARCH 31, 1997(1)
------- ------- ------ ------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Number of lease
transactions during
period(2).............. 1 3 1 6 6 --
Rentable square feet
leased during
period(2).............. 100,000 133,094 76,570 401,502 169,892 --
Base rent ($)(3)........ 6.39 7.08 7.23 4.23 5.33 --
Tenant improvements
($)(4)................. 5.87 1.33 4.49 1.20 1.42 --
Leasing commissions
($)(5)................. 1.37 2.49 3.49 1.10 1.39 --
Other concessions
($)(6)................. -- -- -- -- -- --
Effective rent ($)(7)... 5.19 6.90 6.44 3.97 4.78 --
Expense stop ($)(8)..... -- -- -- -- -- --
Effective equivalent
triple net rent
($)(9)................. 5.19 6.90 6.44 3.97 4.78 --
Occupancy rate at end of
period................. 86.0% 77.6% 70.7% 92.2% 98.3% 98.0%
</TABLE>
- --------
(1) There was no leasing activity at the Existing Industrial Properties during
the three-month period ending March 31, 1997.
(2) Includes only industrial tenants with lease terms of 12 months or longer.
(3) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period, divided by the terms in months
for such leases, multiplied by 12, divided by the total rentable square
feet leased under all lease transactions during the period.
(4) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(5) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(6) Includes moving expenses, furniture allowances and other concessions.
(7) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the terms in months from such leases,
multiplied by 12, divided by the total rentable square feet leased under
all lease transactions during the period.
(8) Leases for all Existing Industrial Properties are written on a triple net
basis, providing for each tenant to be responsible, in addition to base
rent, for its proportionate share of real estate taxes, operating costs,
utility costs and other expenses without regard to a base year.
(9) Equals effective rent minus Expense Stop.

Acquired Industrial Properties and the Pending Acquisition

During the year ended December 31, 1996, the leasing activity at the
industrial Acquired Properties was comprised of 52 leases encompassing an
aggregate of 179,759 rentable square feet at an average base rent of $7.31 per
rentable square foot. As of December 31, 1996, the industrial Acquired
Properties were 93.9% leased. For the three months ended March 31, 1997, the
leasing activity at the industrial Acquired Properties was comprised of 12
leases encompassing an aggregate of 36,090 rentable square feet at an average
base rent of $10.00 per rentable square foot. As of March 31, 1997, the office
Acquired Properties were 97.3% leased.

61
<PAGE>

THE PROPERTIES

<TABLE>
<CAPTION>
AVERAGE
PERCENTAGE PERCENTAGE BASE PERCENTAGE
LEASED AS 1996 OF 1996 RENT EFFECTIVE LEASED
RENTABLE OF 1996 BASE EFFECTIVE TOTAL BASE PER RENT PER AS OF
YEAR SQUARE 12/31/96 RENT RENT RENT SQ. FT. SQ. FT. 6/30/97
PROPERTY LOCATION BUILT FEET (%)(1) ($000)(2) ($000)(3) (%)(4) ($)(5) ($)(6) (%)(7)
- ----------------- ----- -------- ---------- --------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Existing Office
Properties:
Kilroy Airport
Center at El
Segundo
2250 E. Imperial 1983 291,187 86.5 4,561 4,293 7.8 18.12 17.05 95.7
Highway(9).....
2260 E. Imperial 1983 291,187 100.0 7,160 6,668 12.3 24.59 22.90 100.0
Highway(10)....
2240 E. Imperial
Highway 1983 118,933 100.0 1,292 1,283 2.2 10.87 10.79 100.0
El Segundo, California(11)..
Kilroy Airport
Center Long
Beach
3900 Kilroy 1987 126,840 94.0 2,412 2,223 4.1 20.23 18.64 98.9
Airport Way....
3880 Kilroy 1987 98,243 100.0 1,296 1,022 2.2 13.19 10.40 100.0
Airport Way....
3760 Kilroy 1989 165,278 72.2 3,564 2,901 6.1 29.85 24.30 97.9
Airport Way....
3780 Kilroy 1989 219,745 93.8 4,908 4,286 8.4 23.81 20.79 97.9
Airport Way....
3750 Kilroy
Airport Way 1989 10,457 100.0 75 28 0.1 7.21 2.66 100.0
Long Beach, California..
La Palma Business
Center
4175 E. La Palma
Avenue 1985 42,790 93.2 557 536 1.0 13.97 13.45 89.1
Anaheim, California..
2829 Townsgate
Road 1990 81,158 100.0 1,888 1,760 3.2 23.26 21.69 100.0
Thousand Oaks, California..
185 S. Douglas
Street 1978 60,000 100.0 1,313 898 2.3 21.89 14.96 100.0
El Segundo, California(12)..
<CAPTION>
TENANTS LEASING
10% OR MORE OF
RENTABLE SQUARE
FEET PER PROPERTY
PROPERTY LOCATION AS OF 6/30/97(8)
- ----------------- -------------------
<S> <C>
Existing Office
Properties:
Kilroy Airport
Center at El
Segundo
2250 E. Imperial Hughes Space &
Highway(9)..... Communications
(42.5%)
2260 E. Imperial Hughes Space &
Highway(10).... Communications
(100.0%)
2240 E. Imperial
Highway Hughes Space &
El Segundo, California(11)..Communications
(96.3%)
Kilroy Airport
Center Long
Beach
3900 Kilroy McDonnell Douglas
Airport Way.... Corporation
(50.9%),
Olympus America,
Inc. (18.6%)
3880 Kilroy Devry, Inc.
Airport Way.... (100.0%)
3760 Kilroy McDonnell Douglas
Airport Way.... Aircraft (25.7%)
3780 Kilroy SCAN Health Plan
Airport Way.... (23.3%),
Zelda Fay Walls
(12.7%)
3750 Kilroy
Airport Way Oasis Cafe
Long Beach, California.. (37.1%),
Keywanfar &
Baroukhim (16.1%),
SR Impressions
(15.0%)
La Palma Business
Center
4175 E. La Palma
Avenue Peryam & Kroll
Anaheim, California.. (26.2%),
DMV/VPI Insurance
Group (26.1%),
Midcom Corporation
(15.3%)
2829 Townsgate
Road Worldcom, Inc.
Thousand Oaks, California.. (34.2%),
Data Select
Systems, Inc.
(13.0%),
Pepperdine
University
(12.7%), Anheuser
Busch, Inc. (12.0%)
185 S. Douglas
Street Northwest
El Segundo, California(12)..Airlines, Inc.
(100.0%)
</TABLE>
(continued on next page)

62
<PAGE>

(continued on next page)

63
<PAGE>

(continued on next page)

64
<PAGE>

<TABLE>
<CAPTION>
AVERAGE
PERCENTAGE PERCENTAGE BASE PERCENTAGE
LEASED AS 1996 OF 1996 RENT EFFECTIVE LEASED
RENTABLE OF 1996 BASE EFFECTIVE TOTAL BASE PER RENT PER AS OF
PROPERTY YEAR SQUARE 12/31/96 RENT RENT RENT SQ. FT. SQ. FT. 6/30/97
LOCATION BUILT FEET (%)(1) ($000)(2) ($000)(3) (%)(4) ($)(5) ($)(6) (%)(7)
-------- ----- --------- ---------- --------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12400 Industry
Street 1972 64,296 100.0 321 321 0.5 4.99 4.99 100.0
Garden Grove, California..
20553 Walnut
Drive
Diamond Bar, California(18).. 1987 165,049 95.7 920 920 1.6 5.82 5.82 100.0
--------- ----- ------ ------ ----- -----
Subtotal/Weighted
Average of
Acquired
Industrial
Properties and
the Pending
Acquisition.... 1,688,593 93.9 7,685 7,685 13.2 4.77 4.77 98.2
--------- ----- ------ ------ ----- -----
Subtotal/Weighted
Average of
Acquired
Properties and
the Pending
Acquisition.... 2,564,770 94.4 18,597 18,597 31.8 7.60 7.60 98.3
--------- ----- ------ ------ ----- -----
Total/Weighted
Average All
Properties..... 5,940,715 90.9 58,402 54,104 100.0 9.83 9.11 92.6
========= ===== ====== ====== ===== =====
<CAPTION>
TENANTS LEASING
10% OR MORE OF
RENTABLE SQUARE
PROPERTY FEET PER PROPERTY
LOCATION AS OF 6/30/97(8)
-------- ------------------
<S> <C>
12400 Industry
Street Container Supply
Garden Grove, California.. Company, Inc.
(100.0%)
20553 Walnut
Drive Parnex, Inc.
Diamond Bar, California(18).. (10.1%)
Subtotal/Weighted
Average of
Acquired
Industrial
Properties and
the Pending
Acquisition....
Subtotal/Weighted
Average of
Acquired
Properties and
the Pending
Acquisition....
Total/Weighted
Average All
Properties.....
</TABLE>
- -------
(1) Based on all leases at the respective Properties in effect as of December
31, 1996.
(2) Total base rent for the year ended December 31, 1996, determined in
accordance with GAAP. All leases at the Industrial Properties are written
on a triple net basis. Unless otherwise indicated, all leases at the
Office Properties are written on a full service gross basis, with the
landlord obligated to pay the tenant's proportionate share of taxes,
insurance and operating expenses up to the amount incurred during the
Base Year or a negotiated amount approximating the Expense Stop. Each
tenant pays its pro rata share of increases in expenses above the Base
Year or Expense Stop.
(3) Aggregate base rent received over the respective lease term from all
lease transactions in effect at December 31, 1996 minus all tenant
improvements, leasing commissions and other concessions for all such
leases, paid or payable by the Company, divided by the terms in months
for such leases, multiplied by 12. Tenant improvements, leasing
commissions and other concessions are estimated using the same
methodology used to calculate effective rent for the Properties as a
whole in the charts set forth under the caption "--General."
(4) The percentage of 1996 total base rent is calculated as the base rent of
the respective Property for the year ended December 31, 1996 divided by
the combined base rent for all of the Properties (including the Acquired
Properties and the Pending Acquisition) for the year ended December 31,
1996.
(5) Base rent for the year ended December 31, 1996 divided by rentable square
feet leased at December 31, 1996.
(6) Effective rent at December 31, 1996 divided by rentable square feet
leased at December 31, 1996.
(7) Based on all leases at the respective Properties dated on or before June
30, 1997.
(8) Excludes office space leased by the Company.
(9) For this Property, leases with Hughes Space & Communications, for
approximately 96,000 rentable square feet, and with SDRC Software
Products Marketing Division, Inc., for approximately 6,800 rentable
square feet, are written on a full service gross basis except that there
is no Expense Stop.
(10) For this Property, the lease with Hughes Space & Communications is
written on a modified full service gross basis under which Hughes Space &
Communications pays for all utilities and other internal maintenance
costs with respect to the leased space and, in addition, pays its pro
rata share of real estate taxes, insurance, and certain other expenses
including common area expenses.
(11) For this Property, leases with Hughes Space & Communications for
approximately 101,000 rentable square feet are written on a full service
gross basis except that there is no Expense Stop.
(12) For this Property, the lease is written on a triple net basis.
(13) The data does not reflect the lease of 211,000 rentable square feet of
office space with Boeing at the SeaTac Office Center, entered into as of
June 20, 1997 and effective as of January 1, 1998. See "--Office
Properties--Kilroy Airport Center, Sea Tac."
(14) This Industrial Property was vacant until April 1996. The tenant began
paying rent in mid-October 1996 at an annual rate of $4.40 per rentable
square foot.
(15) The tenant subleased this Industrial Property on May 15, 1996 to RGB
Systems, Inc. (doing business as Extron Electronics), the tenant of the
Property located at 1230 S. Lewis Street, Anaheim, California, which is
adjacent to this Industrial Property. The sublease is at an amount less
than the current lease rate, and the tenant is paying the difference
between the current lease rate and the sublease rate. The lease and the
sublease terminate in April 1998. Extron Electronics has executed a lease
for this space from May 1998 through April 2005 at the current lease
rate. Extron Electronics continues to occupy the space located at 1230 S.
Lewis Street.
(16) This Industrial Property was originally designed for multi-tenant use and
currently is leased to a single tenant and utilized as an indoor multi-
vendor retail marketplace.
(17) The leases for this Industrial Property are written on a modified triple
net basis, with the tenants responsible for estimated allocated common
area expenses.
(18) As of the date of this filing, the Company has not completed the
acquisition of this Property.
(19) Brea Industrial Properties consists of 660 Puente Street, 1050 West
Central, 1150 West Central, 950 West Central, 895 Beacon Street, 955
Beacon Street and 1125 Beacon Street.
(20) Garden Grove Industrial Properties consists of 12442 Knott Avenue, 7091
Belgrave Avenue, 12311-21 Industry Street, 12241-71 Industry Street, 7261
Lampson Avenue and 12472 Edison Way.
(21) Financial information, for the year ended December 31, 1996, for 9401 and
9451 Toledo Way, Irvine, California is not available since the Property
was 100.0% owner-occupied. Concurrent with the Company's acquisition of
the Property, a lease was signed by the former owner for a continued
100.0% occupancy of the Property.
(22) Subsequent to June 30, 1997, this tenant terminated its lease and the
portion of the office space previously occupied by such tenant is now
available for lease.

65
<PAGE>

OCCUPANCY AND RENTAL INFORMATION

Existing Properties. The following table sets forth the average percentage
leased and average annual base rent per leased square foot for the Existing
Properties for the periods presented:

<TABLE>
<CAPTION>
AVERAGE
ANNUAL
BASE RENT
AVERAGE PER RENTABLE
PERCENTAGE SQUARE
YEAR LEASED (%)(1) FOOT($)(2)
---- ------------- ------------
<S> <C> <C>
Office:
Three Months Ended March 31, 1997.................. 81.6 20.02
1996............................................... 78.3 19.84
1995............................................... 77.0 19.42
1994............................................... 70.9(3) 20.35(3)
1993............................................... 76.1(3) 21.87(3)
Industrial:
Three Months Ended March 31, 1997.................. 98.2 5.79
1996............................................... 95.3 5.79
1995............................................... 81.5 6.52
1994............................................... 78.7(3) 6.71(3)
1993............................................... 81.8(3) 6.73(3)
</TABLE>
- --------
(1) Average of beginning and end-of-year aggregate percentage leased.
(2) Total base rent for the year, determined in accordance with GAAP, divided
by the average of the beginning and end-of-year aggregate rentable square
feet leased.
(3) Excludes data from the Thousands Oaks Office Property and the La Palma
Business Center which were acquired by the Company in contemplation of the
IPO and the Industrial Properties located at 12752-12822 Monarch Street,
Garden Grove, California which was acquired by KI on behalf of the Company
prior to consummation of the IPO.

Acquired Properties and the Pending Acquisition. The following table sets
forth the percentage leased and average annual base rent per leased square
foot for the Acquired Properties and the Pending Acquisition as of the end of
each of the periods presented:

<TABLE>
<CAPTION>
AVERAGE
ANNUAL
BASE RENT
END-OF-PERIOD PER RENTABLE
PERCENTAGE SQUARE
YEAR LEASED (%)(1) FOOT($)(2)
---- ------------- ------------
<S> <C> <C>
Office:
Three Months Ended March 31, 1997.................. 98.3 12.95
1996............................................... 98.3 12.67
Industrial:
Three Months Ended March 31, 1997.................. 97.3 4.89
1996............................................... 93.9 4.77
</TABLE>
- --------
(1) End-of-year aggregate percentage leased.
(2) Total base rent for the year, determined in accordance with GAAP, divided
by the average of the beginning and end-of-year aggregate rentable square
feet leased.

66
<PAGE>

LEASE EXPIRATIONS

The following table sets out a schedule of the lease expirations, as of March
31, 1997, for the Properties for each of the ten years beginning with 1997,
assuming that none of the tenants exercises renewal options or termination
rights:

<TABLE>
<CAPTION>
YEAR OF LEASE
EXPIRATION 1997(1) 1998 1999 2000 2001 2002 2003 2004 2005
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Existing Office
Properties:
Square Footage
of
Expiring Leases.. 67,387 90,033 317,313 137,478 330,578 124,228 17,574 316,527 56,307
Percentage of
Aggregate
Leased Sq.
Ft.(3)......... 4.04% 5.39% 19.01% 8.24% 19.80% 7.44% 1.05% 18.96% 3.38%
Annualized Base
Rent of
Expiring
Leases(4)...... $1,343,812 $2,001,955 $5,576,789 $2,706,745 $5,696,522 $2,230,698 $ 346,474 $7,731,107 $1,099,444
Percentage of
Total
Annualized Base
Rent........... 4.14% 6.16% 17.17% 8.33% 17.54% 6.87% 1.07% 23.80% 3.38%
Number of Leases
Expiring(2).... 16 21 33 28 27 6 3 4 4
Existing
Industrial
Properties:
Square Footage
of Expiring
Leases......... 70,000 22,888 210,464 252,241 252,966 76,570 248,476
Percentage of
Total Leased
Square
Feet(3)........ 5.34% 1.75% 16.05% 19.24% 19.30% 5.84% 18.95%
Annualized Base
Rent of
Expiring
Leases(4)...... 476,358 78,060 1,669,997 1,316,064 1,203,775 553,934 1,485,542
Percentage of
Total
Annualized Base
Rent........... 6.26% 1.03% 21.93% 17.28% 15.81% 7.27% 19.51%
Number of
Expiring
Leases(2)...... 1 1 3 5 4 1 3
ALL EXISTING
PROPERTIES--
TOTALS
Square Footage
of Expiring
Leases......... 67,387 160,033 340,201 347,942 582,819 124,228 270,540 393,097 304,783
Percentage of
Aggregate
Leased
Sq. Ft.(3)..... 2.24% 5.37% 11.42% 11.68% 19.56% 4.17% 9.08% 13.19% 10.23%
Annualized Base
Rent of
Expiring Leases(4)..$1,343,812 $2,478,313 $5,654,849 $4,376,742 $7,012,586 $2,230,698 $1,550,249 $8,285,041 $2,584,986
Percentage of
Total
Annualized Base
Rent........... 3.35% 6.18% 14.10% 10.92% 17.48% 5.56% 3.87% 20.67% 6.45%
Number of Leases
Expiring(2).... 16 22 34 31 32 6 7 5 7
Acquired Office
Properties:
Rentable Area
Subject to
Expiring Leases
(Sq. Ft.)...... 57,658 142,232 200,749 9,780 328,234 880
Percentage of
Total Leased
Square Feet
Represented by
Expiring Leases
(%)(3)......... 6.91 17.05 24.06 1.17 39.34 0.11
Annualized Base
Rent of
Expiring
Leases(4)...... $ 667,690 $1,608,695 $2,908,035 $ 91,685 $3,159,820 $ 16,170
Percentage of
Total
Annualized Base
Rent........... 5.99% 14.43% 26.08% 0.82% 28.33% 0.15%
Number of
Expiring
Leases(2)...... 8 16 10 2 6 1
<CAPTION>
YEAR OF LEASE 2006
EXPIRATION AND BEYOND SUBTOTALS
------------- ----------- ------------
<S> <C> <C>
Existing Office
Properties:
Square Footage
of
Expiring Leases.. 211,750 1,669,175
Percentage of
Aggregate
Leased Sq.
Ft.(3)......... 12.69 100.00%
Annualized Base
Rent of
Expiring
Leases(4)...... $3,746,372 $32,479,918
Percentage of
Total
Annualized Base
Rent........... 11.54% 100.00%
Number of Leases
Expiring(2).... 7 149
Existing
Industrial
Properties:
Square Footage
of Expiring
Leases......... 177,311 1,310,916
Percentage of
Total Leased
Square
Feet(3)........ 13.53% 100.00%
Annualized Base
Rent of
Expiring
Leases(4)...... 830,812 $ 7,614,542
Percentage of
Total
Annualized Base
Rent........... 10.91% 100.0%
Number of
Expiring
Leases(2)...... 3 21
ALL EXISTING
PROPERTIES--
TOTALS
Square Footage
of Expiring
Leases......... 389,061 2,980,091
Percentage of
Aggregate
Leased
Sq. Ft.(3)..... 13.06% 100.00%
Annualized Base
Rent of
Expiring Leases(4)..$4,577,184 $40,094,460
Percentage of
Total
Annualized Base
Rent........... 11.42% 100.00%
Number of Leases
Expiring(2).... 10 170
Acquired Office
Properties:
Rentable Area
Subject to
Expiring Leases
(Sq. Ft.)...... 94,844 834,377
Percentage of
Total Leased
Square Feet
Represented by
Expiring Leases
(%)(3)......... 11.36 100.00%
Annualized Base
Rent of
Expiring
Leases(4)...... $2,699,021 $11,151,116
Percentage of
Total
Annualized Base
Rent........... 24.20% 100.0%
Number of
Expiring
Leases(2)...... 1 44
</TABLE>
(footnotes on next page)

67
<PAGE>

<TABLE>
<CAPTION>
YEAR OF LEASE
EXPIRATION 1997(1) 1998 1999 2000 2001 2002 2003 2004
------------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Acquired
Industrial
Properties and
the Pending
Acquisition:
Square Footage
of
Expiring Leases.. 176,079 412,554 224,672 27,703 433,991 20,363
Percentage of
Total
Leased Sq. Ft(3)... 12.53% 29.37% 15.99% 1.97% 30.89% 1.46%
Annualized Base
Rent of
Expiring Leases(4).. $1,139,473 $1,826,358 $1,300,273 $ 168,053 $ 2,752,255 $ 237,544
Percentage of
Total Annualized
Base Rent....... 14.20% 22.75% 16.20% 2.09% 34.29% 2.96%
Number of Leases
Expiring(2)..... 45 39 34 6 11 3
ALL ACQUIRED
PROPERTIES AND
THE PENDING
ACQUISITION--
TOTALS
Square Footage
of
Expiring Leases.. 233,737 554,786 425,421 37,483 762,225 21,243
Percentage of
Total
Leased Sq. Ft(3)... 10.44% 24.78% 19.00% 1.67% 34.04% 0.95%
Annualized Base
Rent of
Expiring Leases(4).. $1,807,163 $3,435,053 $4,208,308 $ 259,738 $ 5,912,075 $ 253,714
Percentage of
Total Annualized
Base Rent....... 9.42% 17.91% 21.94% 1.35% 30.83% 1.33%
Number of Leases
Expiring(2)..... 53 55 44 8 17 4
PORTFOLIO--TOTALS
Square Footage
of
Expiring Leases.. 301,124 714,819 765,622 385,425 1,345,044 145,471 270,540 393,097
Percentage of
Total Leased
Square Feet
Represented by
Expiring Leases (%)(3).. 5.77% 13.70% 14.67% 7.38% 25.77% 2.79% 5.18% 7.53%
Annualized Base
Rent Under
Expiring
Leases(4)....... $3,150,975 $5,913,366 $9,863,157 $4,636,480 $12,924,661 $2,484,412 $1,550,249 $8,285,041
Percentage of
Total Annualized
Base Rent....... 5.31% 9.98% 16.64% 7.82% 21.81% 4.19% 2.62% 13.98%
Number of
Expiring
Leases(2)....... 69 77 78 39 49 10 7 5
<CAPTION>
YEAR OF LEASE 2006
EXPIRATION 2005 AND BEYOND SUBTOTALS
------------- ----------- ----------- ------------
<S> <C> <C> <C>
Acquired
Industrial
Properties and
the Pending
Acquisition:
Square Footage
of
Expiring Leases.. 109,449 1,404,811
Percentage of
Total
Leased Sq. Ft(3)... 7.79% 100.00%
Annualized Base
Rent of
Expiring Leases(4).. $ 602,266 $ 8,026,222
Percentage of
Total Annualized
Base Rent....... 7.51% 100.00%
Number of Leases
Expiring(2)..... 1 139
ALL ACQUIRED
PROPERTIES AND
THE PENDING
ACQUISITION--
TOTALS
Square Footage
of
Expiring Leases.. 204,293 2,239,188
Percentage of
Total
Leased Sq. Ft(3)... 9.12% 100.00%
Annualized Base
Rent of
Expiring Leases(4).. $3,301,287 $19,177,338
Percentage of
Total Annualized
Base Rent....... 17.22% 100.00%
Number of Leases
Expiring(2)..... 2 183
PORTFOLIO--TOTALS
Square Footage
of
Expiring Leases.. 304,783 593,354 5,219,279
Percentage of
Total Leased
Square Feet
Represented by
Expiring Leases (%)(3).. 5.84% 11.37% 100.00%
Annualized Base
Rent Under
Expiring
Leases(4)....... $2,584,986 $7,878,471 $59,271,798
Percentage of
Total Annualized
Base Rent....... 4.36% 13.29% 100.00%
Number of
Expiring
Leases(2)....... 7 12 353
</TABLE>
- ----
(1) Represents lease expirations from April 1, 1997 through December 31, 1997.
(2) Includes, under Existing Office Properties and Acquired Office Properties,
office tenants only. Excludes leases for amenity, retail, parking and
month-to-month office tenants. Some tenants have multiple leases.
(3) Excludes all space vacant as of March 31, 1997 unless a lease for a
replacement tenant has been dated on or before March 31, 1997.
(4) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before April 1, 1997. Certain leases became effective subsequent to
March 31, 1997.

68
<PAGE>

The following table sets forth detailed lease expiration information for
each of the Properties for leases in place as of March 31, 1997, assuming that
none of the tenants exercise renewal options or termination rights, if any, at
or prior to the scheduled expirations:

Existing Office Properties
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------------------------------------

1997(1) 1998 1999 2000 2001 2002 2003 2004 2005
-------- -------- ---------- -------- ---------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2250 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases.......... 3,735 24,530 40,865 18,201 129,617 18,517 21,418
Percentage of
Total Leased Sq.
Ft.............. 1.45% 9.55% 15.91% 7.09% 50.46% 7.21% 8.33%
Annualized Base
Rent of Expiring
Leases.......... $ 71,325 $493,477 $ 873,957 $302,853 $1,897,433 $ 456,220 $ 485,244
Percentage of
Total Annualized
Base Rent....... 1.57% 10.77% 19.08% 6.61% 41.42% 9.96% 10.59%
Number of Leases
Expiring........ 2 7 7 2 6 1 2
2260 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases.......... 291,187
Percentage of
Total Leased Sq.
Ft.............. 100.00%
Annualized Base
Rent of Expiring
Leases.......... $7,160,207
Percentage of
Total Annualized
Base Rent....... 100.00%
Number of Leases
Expiring........ 1
2240 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases.......... 103,035 15,898
Percentage of
Total Leased Sq.
Ft.............. 86.63% 13.37%
Annualized Base
Rent of Expiring
Leases.......... $1,085,716 $ 206,670
Percentage of
Total Annualized
Base Rent....... 84.01% 15.99%
Number of Leases
Expiring........ 1 2
3900 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.......... 6,183 26,356 12,406 6,811 64,530
Percentage of
Total Leased Sq.
Ft.(2).......... 4.93% 21.02% 9.89% 5.43% 51.45%
Annualized Base
Rent of Expiring
Leases.......... $129,843 $516,551 $ 221,992 $124,105 $1,149,922
Percentage of
Total Annualized
Base Rent....... 5.38% 21.42% 9.20% 5.15% 47.68%
Number of Leases
Expiring........ 1 2 2 1 1

<CAPTION>
YEAR OF LEASE EXPIRATION
-----------------------
2006
AND BEYOND SUBTOTALS
---------- ----------
<S> <C> <C>
2250 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases.......... 256,883
Percentage of
Total Leased Sq.
Ft.............. 100.00%
Annualized Base
Rent of Expiring
Leases.......... $4,580,509
Percentage of
Total Annualized
Base Rent....... 100.00%
Number of Leases
Expiring........ 27
2260 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases.......... 291,187
Percentage of
Total Leased Sq.
Ft.............. 100.00%
Annualized Base
Rent of Expiring
Leases.......... $7,160,207
Percentage of
Total Annualized
Base Rent....... 100.00%
Number of Leases
Expiring........ 1
2240 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases.......... 118,933
Percentage of
Total Leased Sq.
Ft.............. 100.00%
Annualized Base
Rent of Expiring
Leases.......... $1,292,386
Percentage of
Total Annualized
Base Rent....... 100.00%
Number of Leases
Expiring........ 3
3900 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.......... 9,128 125,414
Percentage of
Total Leased Sq.
Ft.(2).......... 7.28% 100.00%
Annualized Base
Rent of Expiring
Leases.......... $269,532 $2,411,945
Percentage of
Total Annualized
Base Rent....... 11.17% 100.00%
Number of Leases
Expiring........ 1 8
</TABLE>
- ----
(1) Represents lease expirations from April 1, 1997 to December 31, 1997.

69
<PAGE>

<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------------------------------------------

1997(1) 1998 1999 2000 2001 2002 2003 2004 2005
---------- ---------- ---------- ---------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3880 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.........
Percentage of
Total Leased
Sq. Ft.........
Annualized Base
Rent of
Expiring Leases..
Percentage of
Total
Annualized
Base Rent......
Number of Leases
Expiring.......
3760 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases......... 8,698 23,598 89,132 8,032 27,470 4,892
Percentage of
Total Leased
Sq. Ft......... 5.38% 14.58% 55.08% 4.96% 16.98% 3.02%
Annualized Base
Rent of
Expiring Leases..$ 194,155 $ 698,706 $1,838,890 $ 171,070 $ 560,406 $ 100,330
Percentage of
Total
Annualized
Base Rent...... 5.45% 19.61% 51.60% 4.80% 15.73% 2.81%
Number of Leases
Expiring....... 1 4 10 2 3 1
3780 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases......... 22,469 3,439 4,339 63,883 28,251 9,439 3,922
Percentage of
Total Leased
Sq. Ft......... 10.45% 1.60% 2.02% 29.71% 13.14% 4.39% 1.82%
Annualized Base
Rent of
Expiring Leases..$ 532,872 $ 79,219 $ 89,709 $1,372,245 $ 638,222 $ 209,299 $ 85,656
Percentage of
Total
Annualized
Base Rent...... 11.20% 1.67% 1.89% 28.85% 13.42% 4.40% 1.80%
Number of Leases
Expiring....... 4 2 2 9 5 1 1
3750 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases......... 1,570 1,685 7,202
Percentage of
Total Leased
Sq. Ft......... 15.02% 16.11% 68.87%
Annualized Base
Rent of
Expiring Leases.. $ 37,155 $ 11,400 $ 26,839
Percentage of
Total
Annualized
Base Rent...... 49.28% 15.12% 35.60%
Number of Leases
Expiring....... 1 1 1

<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------
2006
AND BEYOND SUBTOTALS
---------- ----------
<S> <C> <C>
3880 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases......... 98,243 98,243
Percentage of
Total Leased
Sq. Ft......... 100.00% 100.00%
Annualized Base
Rent of
Expiring Leases.. $1,296,270 $1,296,270
Percentage of
Total
Annualized
Base Rent...... 100.00% 100.00%
Number of Leases
Expiring....... 1 1
3760 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases......... 161,822
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring Leases.. $3,563,557
Percentage of
Total
Annualized
Base Rent...... 100.00%
Number of Leases
Expiring....... 21
3780 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases......... 79,292 215,034
Percentage of
Total Leased
Sq. Ft......... 36.87% 100.00%
Annualized Base
Rent of
Expiring Leases.. $1,748,466 $4,755,688
Percentage of
Total
Annualized
Base Rent...... 36.77% 100.00%
Number of Leases
Expiring....... 3 27
3750 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases......... 10,457
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring Leases.. $ 75,394
Percentage of
Total
Annualized
Base Rent...... 100.00%
Number of Leases
Expiring....... 3
</TABLE>
- ------
(1) Represents lease expirations from April 1, 1997 to December 31, 1997.

70
<PAGE>

<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
--------------------------------------------------------------------------------------

1997(1) 1998 1999 2000 2001 2002 2003 2004 2005
-------- -------- -------- -------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
18000 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases......... 14,633 5,171 8,941 17,750 45,267 1,618 3,243
Percentage of
Total Leased
Sq. Ft......... 12.02% 4.25% 7.35% 14.58% 37.19% 1.33% 2.67%
Annualized Base
Rent of
Expiring
Leases......... $209,460 $ 81,505 $119,698 $225,647 $720,743 $ 25,117 $ 36,845
Percentage of
Total
Annualized Base
Rent........... 11.32% 4.40% 6.47% 12.19% 38.93% 1.36% 1.99%
Number of Leases
Expiring....... 3 4 6 7 5 2 1
17930 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases.........
Percentage of
Total Leased
Sq. Ft.........
Annualized Base
Rent of
Expiring
Leases.........
Percentage of
Total
Annualized Base
Rent...........
Number of Leases
Expiring.......
17900 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases......... 23,772 39,563 28,300
Percentage of
Total Leased
Sq. Ft......... 25.94% 43.18% 30.88%
Annualized Base
Rent of
Expiring
Leases......... $512,695 $599,439 $622,317
Percentage of
Total
Annualized Base
Rent........... 29.56% 34.56% 35.88%
Number of Leases
Expiring....... 3 2 1
4175 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 8,924 3,347 2,038 22,390
Percentage of
Total Leased
Sq. Ft......... 24.32% 9.12% 5.55% 61.01%
Annualized Base
Rent of
Expiring
Leases......... $141,093 $ 48,113 $ 19,595 $348,230
Percentage of
Total
Annualized Base
Rent........... 25.33% 8.64% 3.51% 62.52%
Number of Leases
Expiring....... 4 1 1 4

<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------
2006
AND BEYOND SUBTOTALS
---------- ----------
<S> <C> <C>
18000 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases......... 25,087 121,710
Percentage of
Total Leased
Sq. Ft......... 20.61% 100.00%
Annualized Base
Rent of
Expiring
Leases......... $432,104 $1,851,119
Percentage of
Total
Annualized Base
Rent........... 23.34% 100.00%
Number of Leases
Expiring....... 2 30
17930 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases......... --
Percentage of
Total Leased
Sq. Ft......... 0.00%
Annualized Base
Rent of
Expiring
Leases......... --
Percentage of
Total
Annualized Base
Rent........... 0.00%
Number of Leases
Expiring....... --
17900 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases......... 91,635
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $1,734,451
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 6
4175 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 36,699
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $ 557,031
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 10
</TABLE>
- ------
(1) Represents lease expirations from April 1, 1997 to December 31, 1997.

71
<PAGE>

<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
---------------------------------------------------------------------------------------------------------

1997(1) 1998 1999 2000 2001 2002 2003 2004 2005
---------- ---------- ---------- --------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2829 Townsgate
Road
Thousand Oaks, CA
Square Footage
of
Expiring Leases.. 2,745 3,592 34,823 19,193 20,805
Percentage of
Total
Leased Sq. Ft... 3.38% 4.42% 42.91% 23.65% 25.64%
Annualized Base
Rent of
Expiring
Leases......... $ 65,064 $ 84,384 $ 834,132 $ 454,075 $ 450,288
Percentage of
Total
Annualized Base
Rent........... 3.45% 4.47% 44.18% 24.05% 23.85%
Number of Leases
Expiring....... 1 1 2 5 2
185 S. Douglas
Street
El Segundo, CA
Square Footage
of
Expiring Leases.. 60,000
Percentage of
Total
Leased Sq. Ft... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $1,313,418
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 1
EXISTING OFFICE
PROPERTIES--
SUBTOTALS
Square Footage
of
Expiring Leases.. 67,387 90,033 317,313 137,478 330,578 124,228 17,574 316,527 56,307
Percentage of
Aggregate
Leased Sq.
Ft............. 4.04% 5.39% 19.01% 8.24% 19.80% 7.44% 1.05% 18.96% 3.38%
Annualized Base
Rent of
Expiring
Leases......... $1,343,812 $2,001,955 $5,576,789 2,706,745 $5,696,522 $2,230,698 $346,474 $7,731,107 $1,099,444
Percentage of
Total
Annualized Base
Rent........... 4.14% 6.16% 17.17% 8.33% 17.54% 6.87% 1.07% 23.80% 3.38%
Number of Leases
Expiring....... 16 21 33 28 27 6 3 4 4

<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------
2006
AND BEYOND SUBTOTALS
---------- ----------
<S> <C> <C>
2829 Townsgate
Road
Thousand Oaks, CA
Square Footage
of
Expiring Leases.. 81,158
Percentage of
Total
Leased Sq. Ft... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $1,887,943
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 11
185 S. Douglas
Street
El Segundo, CA
Square Footage
of
Expiring Leases.. 60,000
Percentage of
Total
Leased Sq. Ft... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $1,313,418
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 1
EXISTING OFFICE
PROPERTIES--
SUBTOTALS
Square Footage
of
Expiring Leases.. 211,750 1,669,175
Percentage of
Aggregate
Leased Sq.
Ft............. 12.69% 100.00%
Annualized Base
Rent of
Expiring
Leases......... 3,746,372 32,479,918
Percentage of
Total
Annualized Base
Rent........... 11.54% 100.00%
Number of Leases
Expiring....... 7 149
</TABLE>
- ------
(1) Represents lease expirations from April 1, 1997 to December 31, 1997.

72
<PAGE>

Existing Industrial Properties

<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------------------------------------------------------------------------------------------
2006
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 AND BEYOND TOTALS
-------- -------- -------- ---------- -------- -------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2031 E. Mariposa
Avenue
El Segundo, CA
Square Footage
of Expiring
Leases......... 192,053 192,053
Percentage of
Total Leased
Sq. Ft......... 100.00% 100.00%
Annualized Base
Rent of Expir-
ing Leases..... $1,556,321 $1,556,321
Percentage of
Total
Annualized Base
Rent........... 100.00% 100.00%
Number of Leases
Expiring....... 1 1
3340 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 62,574 90,746 153,320
Percentage of
Total Leased
Sq. Ft......... 40.81% 59.19% 100.00%
Annualized Base
Rent of Expir-
ing Leases..... $397,971 $543,180 $ 941,151
Percentage of
Total
Annualized Base
Rent........... 42.29% 57.71% 100.00%
Number of Leases
Expiring....... 1 1 2
2260 E. El
Segundo
Boulevard
El Segundo, CA
Square Footage
of Expiring
Leases......... 113,820 113,820
Percentage of
Total Leased
Sq. Ft......... 100.00% 100.00%
Annualized Base
Rent of Expir-
ing Leases..... $553,300 $ 553,300
Percentage of
Total
Annualized Base
Rent........... 100.00% 100.00%
Number of Leases
Expiring....... 1 1
2265 E. El
Segundo
Boulevard
El Segundo, CA
Square Footage
of Expiring
Leases......... 76,570 76,570
Percentage of
Total Leased
Sq. Ft......... 100.00% 100.00%
Annualized Base
Rent of Expir-
ing Leases..... $553,934 $ 553,934
Percentage of
Total
Annualized Base
Rent........... 100.00% 100.00%
Number of Leases
Expiring....... 1 1
1000 E. Ball Road
Anaheim, CA
Square Footage
of Expiring
Leases......... 100,000 100,000
Percentage of
Total Leased
Sq. Ft......... 100.00% 100.00%
Annualized Base
Rent of Expir-
ing Leases..... $639,432 $ 639,432
Percentage of
Total
Annualized Base
Rent........... 100.00% 100.00%
Number of Leases
Expiring....... 1 1
</TABLE>
- ------
(1) Represents lease expirations from April 1, 1997 to December 31, 1997.

73
<PAGE>

<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
-------------------------------------------------------------------------------------------
2006
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 AND BEYOND TOTALS
------- -------- ------- ---- -------- ---- -------- ---- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1230 S. Lewis Street
Anaheim, CA
Square Footage of Ex-
piring Leases......... 57,730 57,730
Percentage of Total
Leased Sq. Ft......... 100.00% 100.00%
Annualized Base Rent of
Expiring Leases....... $302,930 $302,930
Percentage of Total
Annualized Base Rent.. 100.00% 100.00%
Number of Leases Expir-
ing................... 1 1
12681/12691 Pala Drive
Garden Grove, CA
Square Footage of Ex-
piring Leases......... 70,000 70,000
Percentage of Total
Leased Sq. Ft......... 100.00% 100.00%
Annualized Base Rent of
Expiring Leases....... $476,358 $476,358
Percentage of Total
Annualized Base Rent.. 100.00% 100.00%
Number of Leases Expir-
ing................... 1 1
2270 E. El Segundo
Boulevard
El Segundo, CA
Square Footage of Ex-
piring Leases......... --
Percentage of Total
Leased Sq. Ft......... --
Annualized Base Rent of
Expiring Leases....... --
Percentage of Total
Annualized Base Rent.. --
Number of Leases Expir-
ing................... --
5115 N. 27th Avenue
Phoenix, AZ
Square Footage of Ex-
piring Leases......... 130,877 130,877
Percentage of Total
Leased Sq. Ft......... 100.00% 100.00%
Annualized Base Rent of
Expiring Leases....... $640,348 $640,348
Percentage of Total
Annualized Base Rent.. 100.00% 100.00%
Number of Leases Expir-
ing................... 1 1
12752-12822 Monarch
Street
Garden Grove, CA
Square Footage of Ex-
piring Leases......... 22,888 42,608 165,981 45,560 277,037
Percentage of Total
Leased Sq. Ft......... 8.26% 15.38% 59.91% 16.45% 100.00%
Annualized Base Rent of
Expiring Leases....... $78,060 $136,171 $592,548 $135,432 $942,211
Percentage of Total
Annualized Base Rent.. 8.28% 14.45% 62.89% 14.38% 100.00%
Number of Leases Expir-
ing................... 1 2 1 1 5
</TABLE>
- ------
(1) Represents lease expirations from April 1, 1997 to December 31, 1997.

74
<PAGE>

<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------------------------------------------------------------------------------------------

1997(1) 1998 1999 2000 2001 2002 2003 2004 2005
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4155 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases.......... 18,411 16,182 22,094
Percentage of
Total Leased Sq.
Ft.............. 24.67% 21.69% 29.61%
Annualized Base
Rent of
Expiring Leases.. $ 113,676 $ 141,574 $ 145,820
Percentage of
Total Annualized
Base Rent....... 20.93% 26.07% 26.84%
Number of Leases
Expiring........ 2 1 1
4125 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases.......... 64,891(2)
Percentage of
Total Leased Sq.
Ft.............. 100.00%
Annualized Base
Rent of
Expiring Leases.. $ 465,407
Percentage of
Total Annualized
Base Rent....... 100.00%
Number of Leases
Expiring........ 2
EXISTING
INDUSTRIAL
PROPERTIES--
SUBTOTALS
Square Footage
of Expiring
Leases.......... 70,000 22,888 210,464 252,241 252,966 76,570 248,476
Percentage of
Aggregate
Leased Sq. Ft. .. 5.34% 1.75% 16.05% 19.24% 19.30% 5.84% 18.95%
Annualized Base
Rent of
Expiring Leases.. $ 476,358 $ 78,060 $1,669,997 $1,316,064 $1,203,775 $ 553,934 $1,485,542
Percentage of
Total Annualized
Base Rent....... 6.26% 1.03% 21.93% 17.28% 15.81% 7.27% 19.51%
Number of Leases
Expiring........ 1 1 3 5 4 1 3
ALL EXISTING
PROPERTIES--
TOTALS
Square Footage
of Expiring
Leases.......... 67,387 160,033 340,201 347,942 582,819 124,228 270,540 393,097 304,783
Percentage of
Aggregate Leased
Sq. Ft.......... 2.24% 5.37% 11.42% 11.68% 19.56% 4.17% 9.08% 13.19% 10.23%
Annualized Base
Rent of
Expiring Leases.. $1,343,812 $2,478,313 $5,654,849 $4,376,742 $7,012,586 $2,230,698 $1,550,249 $8,285,041 $2,584,986
Percentage of
Total Annualized
Base Rent....... 3.35% 6.18% 14.10% 10.92% 17.48% 5.56% 3.87% 20.67% 6.45%
Number of Leases
Expiring........ 16 22 34 31 32 6 7 5 7

<CAPTION>
YEAR OF LEASE EXPIRATION
-------------------------
2006
AND BEYOND TOTAL
---------- -----------
<S> <C> <C>
4155 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases.......... 17,931 74,618
Percentage of
Total Leased Sq.
Ft.............. 24.03% 100.00%
Annualized Base
Rent of
Expiring Leases.. $ 142,080 $ 543,150
Percentage of
Total Annualized
Base Rent....... 26.16% 100.00%
Number of Leases
Expiring........ 1 5
4125 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases.......... 64,891
Percentage of
Total Leased Sq.
Ft.............. 100.00%
Annualized Base
Rent of
Expiring Leases.. $ 465,407
Percentage of
Total Annualized
Base Rent....... 100.00%
Number of Leases
Expiring........ 2
EXISTING
INDUSTRIAL
PROPERTIES--
SUBTOTALS
Square Footage
of Expiring
Leases.......... 177,311 1,310,916
Percentage of
Aggregate
Leased Sq. Ft. .. 13.53% 100.00%
Annualized Base
Rent of
Expiring Leases.. $ 830,812 $ 7,614,542
Percentage of
Total Annualized
Base Rent....... 10.91% 100.00%
Number of Leases
Expiring........ 3 21
ALL EXISTING
PROPERTIES--
TOTALS
Square Footage
of Expiring
Leases.......... 389,061 2,980,091
Percentage of
Aggregate Leased
Sq. Ft.......... 13.06% 100.00%
Annualized Base
Rent of
Expiring Leases.. $4,577,184 $40,094,460
Percentage of
Total Annualized
Base Rent....... 11.42% 100.00%
Number of Leases
Expiring........ 10 170
</TABLE>
- -----
(1) Represents lease expirations from April 1, 1997 to December 31, 1997.
(2) Includes 41,000 rentable square feet leased to Household Finance Corporation
which vacated the space subsequent to March 31, 1997.

75
<PAGE>

Acquired Office Properties

<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
-------------------------------------------------------------------------------------------

1997(1) 1998 1999 2000 2001 2002 2003 2004 2005
-------- -------- ---------- ------- ---------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2501 Pullman
Santa Ana,
California
Square Footage
of
Expiring Leases.. 124,921
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $1,664,169
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 1
26541 Agoura Road
Calabasas,
California
Square Footage
of Expiring
Leases......... 6,931 47,624 36,323
Percentage of
Total Leased
Sq. Ft. (1).... 7.63% 52.40% 39.97%
Annualized Base
Rent of
Expiring
Leases......... $108,170 $675,359 $ 793,294
Percentage of
Total
Annualized Base
Rent........... 6.86% 42.83% 50.31%
Number of Leases
Expiring....... 1 1 1
23600 and 23610
Telo Avenue
Torrance,
California
Square Footage
of Expiring
Leases......... 38,496 41,471
Percentage of
Total Leased
Sq. Ft......... 48.14% 51.86%
Annualized Base
Rent of
Expiring
Leases......... $392,659 $371,994
Percentage of
Total
Annualized Base
Rent........... 51.35% 48.65%
Number of Leases
Expiring....... 1 1
5151-5155 Camino
Ruiz
Camarillo,
California
Square Footage
of Expiring
Leases......... 276,216
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $2,411,824
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 1
701-741 E. Ball
Road
Anaheim,
California
Square Footage
of Expiring
Leases......... 3,380 45,536 26,265 9,780 15,165
Percentage of
Total Leased
Sq. Ft......... 3.38% 45.48% 26.23% 9.77% 15.14%
Annualized Base
Rent of
Expiring
Leases......... $ 27,682 $423,633 $ 257,464 $91,685 $ 149,666
Percentage of
Total
Annualized Base
Rent........... 2.91% 44.59% 27.10% 9.65% 15.75%
Number of Leases
Expiring....... 2 11 4 2 2

<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------
2006
AND BEYOND SUBTOTALS
---------- ---------
<S> <C> <C>
2501 Pullman
Santa Ana,
California
Square Footage
of
Expiring Leases.. 124,921
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $1,664,169
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 1
26541 Agoura Road
Calabasas,
California
Square Footage
of Expiring
Leases......... 90,878
Percentage of
Total Leased
Sq. Ft. (1).... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $1,576,823
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 3
23600 and 23610
Telo Avenue
Torrance,
California
Square Footage
of Expiring
Leases......... 79,967
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $ 764,653
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 2
5151-5155 Camino
Ruiz
Camarillo,
California
Square Footage
of Expiring
Leases......... 276,216
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $2,411,824
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 1
701-741 E. Ball
Road
Anaheim,
California
Square Footage
of Expiring
Leases......... 100,126
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $ 950,130
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 21
</TABLE>
- ------
(1) Represents lease expirations from April 1, 1997 to December 31, 1997.

76
<PAGE>

<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
-----------------------------------------------------------------------------------------------------------------
2006
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 AND BEYOND SUBTOTALS
-------- --------- --------- -------- --------- -------- -------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
111 Pacifica
Irvine,
California
Square Footage
of Expiring
Leases......... 8,851 7,601 13,240 36,853 880 67,425
Percentage of
Total Leased
Sq. Ft......... 13.13% 11.27% 19.63% 54.66% 1.31% 100.00%
Annualized Base
Rent of
Expiring
Leases......... $139,179 $ 137,709 $ 193,108 $ 598,330 $ 16,170 $ 1,084,496
Percentage of
Total
Annualized Base
Rent........... 12.83% 12.70% 17.81% 55.17% 1.49% 100.00%
Number of Leases
Expiring....... 4 3 4 3 1 15
2100 Colorado
Avenue
Santa Monica,
California
Square Footage
of Expiring
Leases......... 94,844 94,844
Percentage of
Total Leased
Sq. Ft......... 100.00% 100.00%
Annualized Base
Rent of
Expiring
Leases......... $2,699,021 $ 2,699,021
Percentage of
Total
Annualized Base
Rent........... 100.00% 100.00%
Number of Leases
Expiring....... 1 1
ACQUIRED OFFICE
PROPERTIES--
SUBTOTALS
Square Footage
of Expiring
Leases......... 57,658 142,232 200,749 9,780 328,234 880 94,844 834,377
Percentage of
Total Leased
Sq. Ft......... 6.91% 17.05% 24.06% 1.17% 39.34% 0.11% 11.36% 100.00%
Annualized Base
Rent of
Expiring
Leases......... 667,690 1,608,695 2,908,035 91,685 3,159,820 16,170 2,699,021 11,151,116
Percentage of
Total
Annualized Base
Rent........... 5.99% 14.43% 26.08% 0.82% 28.33% 0.15% 24.20% 100.00%
Number of Leases
Expiring....... 8 16 10 2 6 1 1 44
</TABLE>
- ------
(1) Represents lease expirations from April 1, 1997 to December 31, 1997.

77
<PAGE>

Acquired Industrial Properties and the Pending Acquisition

<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------------------------------------------------------------------------------
2006
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 AND BEYOND SUBTOTALS
-------- -------- -------- -------- -------- -------- ---- ---- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12400 Industry
Street
Garden Grove,
California
Square Footage
of Expiring
Leases.......... 64,296 64,296
Percentage of
Total Leased Sq.
Ft.............. 100.00% 100.00%
Annualized Base
Rent of Expiring
Leases.......... $321,000 $ 321,000
Percentage of
Total Annualized
Base Rent....... 100.00% 100.00%
Number of Leases
Expiring........ 1 1
5325 East Hunter
Avenue
Anaheim,
California
Square Footage
of Expiring
Leases.......... 109,449 109,449
Percentage of
Total Leased Sq.
Ft.............. 100.00% 100.00%
Annualized Base
Rent of Expiring
Leases.......... $602,266 $ 602,266
Percentage of
Total Annualized
Base Rent....... 100.00% 100.00%
Number of Leases
Expiring........ 1 1
821 S.
Rockefeller
Ontario,
California
Square Footage
of Expiring
Leases.......... 153,566 153,566
Percentage of
Total Leased Sq.
Ft.............. 100.00% 100.00%
Annualized Base
Rent of Expiring
Leases.......... $433,056 $ 433,056
Percentage of
Total Annualized
Base Rent....... 100.00% 100.00%
Number of Leases
Expiring........ 1 1
Brea Industrial
Properties
Brea, California
(2)
Square Footage
of Expiring
Leases.......... 14,000 28,000 110,711 6,000 105,567 264,278
Percentage of
Total Leased Sq.
Ft.............. 5.30% 10.59% 41.89% 2.27% 39.95% 100.00%
Annualized Base
Rent of Expiring
Leases.......... $ 78,167 $163,780 $585,229 $ 40,452 $569,909 $1,437,537
Percentage of
Total Annualized
Base Rent....... 5.44% 11.39% 40.71% 2.81% 39.65% 100.00%
Number of Leases
Expiring........ 2 3 4 1 3 13
Garden Grove
Industrial
Properties
Garden Grove,
California (3)
Square Footage
of Expiring
Leases.......... 88,303 112,668 70,000 5,000 275,971
Percentage of
Total Leased Sq.
Ft.............. 32.00% 40.83% 25.36% 1.81% 100.00%
Annualized Base
Rent of Expiring
Leases.......... $551,655 $493,572 $315,315 $ 33,800 $1,394,342
Percentage of
Total Annualized
Base Rent....... 39.56% 35.40% 22.61% 2.43% 100.00%
Number of Leases
Expiring........ 5 3 1 1 10
</TABLE>

- ----
(1) Represents lease expirations from April 1, 1997 to December 31, 1997.
(2) Brea Industrial Properties consists of 660 Puente Street, 1050 West
Central, 1150 West Central, 950 West Central, 895 Beacon Street, 955
Beacon Street and 1125 Beacon Street.
(3) Garden Grove Industrial Properties consists of 12442 Knott Avenue, 7091
Belgrave Avenue, 12311-21 Industry Avenue, 12241-71 Industry Avenue, 7261
Lampson Avenue and 12472 Edison Way.

78
<PAGE>

<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
-------------------------------------------------------------------------------------------

1997(1) 1998 1999 2000 2001 2002 2003 2004 2005
-------- -------- -------- -------- ---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
7421 Orangewood
Avenue
Garden Grove,
California
Square Footage
of Expiring
Leases......... 82,602
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring Leases $ 574,920
Percentage of
Total
Annualized Base
Rent 100.00%
Number of Leases
Expiring....... 1
17150 Von Karman
Irvine,
California
Square Footage
of Expiring
Leases......... 157,548
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring Leases $1,063,352
Percentage of
Total
Annualized Base
Rent 100.00%
Number of Leases
Expiring....... 1
20553 Walnut
Drive
Diamond Bar,
California
Square Footage
of Expiring
Leases......... 31,560 30,849 77,841 20,068 4,731
Percentage of
Total Leased
Sq. Ft. ....... 19.12% 18.69% 47.16% 12.16% 2.87%
Annualized Base
Rent of
Expiring
Leases......... $186,708 $216,095 $403,277 $109,719 $ 55,476
Percentage of
Total
Annualized
Base Rent...... 19.22% 22.25% 41.52% 11.30% 5.71%
Number of Leases
Expiring....... 8 12 10 3 2
184-220
Technology Drive
Irvine,
California
Square Footage
of Expiring
Leases......... 42,216 23,175 36,120 1,635 13,543 15,363
Percentage of
Total Leased
Sq. Ft......... 31.97% 17.55% 27.35% 1.24% 10.26% 11.63%
Annualized Base
Rent of
Expiring Leases..$322,943 $198,855 $311,767 $ 17,882 $ 173,283 $203,744
Percentage of
Total
Annualized
Base Rent...... 26.29% 16.19% 25.38% 1.46% 14.10% 16.58%
Number of Leases
Expiring....... 30 19 20 2 3 2

<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------
2006
AND BEYOND SUBTOTALS
---------- ----------
<S> <C> <C>
7421 Orangewood
Avenue
Garden Grove,
California
Square Footage
of Expiring
Leases......... 82,602
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring Leases $ 574,920
Percentage of
Total
Annualized Base
Rent 100.00%
Number of Leases
Expiring....... 1
17150 Von Karman
Irvine,
California
Square Footage
of Expiring
Leases......... 157,548
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring Leases $1,063,352
Percentage of
Total
Annualized Base
Rent 100.00%
Number of Leases
Expiring....... 1
20553 Walnut
Drive
Diamond Bar,
California
Square Footage
of Expiring
Leases......... 165,049
Percentage of
Total Leased
Sq. Ft. ....... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $ 971,275
Percentage of
Total
Annualized
Base Rent...... 100.00%
Number of Leases
Expiring....... 35
184-220
Technology Drive
Irvine,
California
Square Footage
of Expiring
Leases......... 132,052
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring Leases.. $1,228,474
Percentage of
Total
Annualized
Base Rent...... 100.00%
Number of Leases
Expiring....... 76
</TABLE>
- ------
(1) Represents lease expirations from April 1, 1997 to December 31, 1997.

79
<PAGE>

<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
-----------------------------------------------------------------------------------------------------------

1997(1) 1998 1999 2000 2001 2002 2003 2004 2005
---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ACQUIRED
INDUSTRIAL
PROPERTIES AND
THE PENDING
ACQUISITION--
SUBTOTALS
Square Footage
of
Expiring Leases.. 176,079 412,554 224,672 27,703 433,991 20,363
Percentage of
Total
Leased Sq. Ft... 12.53% 29.37% 15.99% 1.97% 30.89% 1.46%
Annualized Base
Rent of
Expiring Leases.. $1,139,473 $1,826,358 $1,300,273 $ 168,053 $ 2,752,255 $ 237,544
Percentage of
Total
Annualized Base
Rent........... 14.20% 22.75% 16.20% 2.09% 34.29% 2.96%
Number of Leases
Expiring....... 45 39 34 6 11 3
ALL ACQUIRED
PROPERTIES AND
THE PENDING
ACQUISITION--
TOTALS
Square Footage
of
Expiring Leases.. 233,737 554,786 425,421 37,483 762,225 21,243
Percentage of
Total
Leased Sq. Ft... 10.44% 24.78% 19.00% 1.67% 34.04% 0.95% 0.00% 0.00% 0.00%
Annualized Base
Rent of
Expiring Leases.. $1,807,163 $3,435,053 $4,208,308 $ 259,738 $ 5,912,075 $ 253,714
Percentage of
Total
Annualized Base
Rent........... 9.42% 17.91% 21.94% 1.35% 30.83% 1.33% 0.00% 0.00% 0.00%
Number of Leases
Expiring....... 53 55 44 8 17 4
PORTFOLIO--TOTALS
Square Footage
of
Expiring Leases.. 301,124 714,819 765,622 385,425 1,345,044 145,471 270,540 393,097 304,783
Percentage of
Total Leased
Square Feet
Represented by
Expiring Leases (%).. 5.77% 13.70% 14.67% 7.38% 25.77% 2.79% 5.18% 7.53% 5.84%
Annual Base Rent
Under Expiring
Leases ($000).. $3,150,975 $5,913,366 $9,863,157 $4,636,480 $12,924,661 $2,484,412 $1,550,249 $8,285,041 $2,584,986
Percentage of
Total
Annualized Base
Rent........... 5.31% 9.98% 16.64% 7.82% 21.81% 4.19% 2.62% 13.98% 4.36%
Number of
Expiring
Leases......... 69 77 78 39 49 10 7 5 7

<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------
2006
AND BEYOND SUBTOTALS
---------- -----------
<S> <C> <C>
ACQUIRED
INDUSTRIAL
PROPERTIES AND
THE PENDING
ACQUISITION--
SUBTOTALS
Square Footage
of
Expiring Leases.. 109,449 1,404,811
Percentage of
Total
Leased Sq. Ft... 7.79% 100.00%
Annualized Base
Rent of
Expiring Leases.. $ 602,266 $ 8,026,222
Percentage of
Total
Annualized Base
Rent........... 7.51% 100.00%
Number of Leases
Expiring....... 1 139
ALL ACQUIRED
PROPERTIES AND
THE PENDING
ACQUISITION--
TOTALS
Square Footage
of
Expiring Leases.. 204,293 2,239,188
Percentage of
Total
Leased Sq. Ft... 9.12% 100.00%
Annualized Base
Rent of
Expiring Leases.. $3,301,287 $19,177,338
Percentage of
Total
Annualized Base
Rent........... 17.22% 100.00%
Number of Leases
Expiring....... 2 183
PORTFOLIO--TOTALS
Square Footage
of
Expiring Leases.. 593,354 5,219,279
Percentage of
Total Leased
Square Feet
Represented by
Expiring Leases (%).. 11.37% 100.00%
Annual Base Rent
Under Expiring
Leases ($000).. $7,878,471 $59,271,798
Percentage of
Total
Annualized Base
Rent........... 13.29% 100.00%
Number of
Expiring
Leases......... 12 353
</TABLE>
- ------
(1) Represents lease expirations from April 1, 1997 to December 31, 1997.

80
<PAGE>

TENANT INFORMATION

The Company's tenants include significant corporate and other commercial
enterprises representing a range of industries including, among others,
satellite communications, manufacturing, entertainment, banking, insurance,
telecommunications, health care, computer software, finance, engineering,
technology, legal and accounting. The following table sets forth information
as to the Company's largest tenants, as of June 30, 1997 (giving effect to the
Boeing Lease), based upon rental revenues for the year ended December 31,
1996:

<TABLE>
<CAPTION>
PERCENTAGE OF
TENANT COMPANY'S
ANNUAL TOTAL
PROPERTY BASE RENTAL BASE RENTAL LEASE
TYPE(1) REVENUE($)(2) REVENUES(%)(3) EXPIRATION DATE
---------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Hughes Space &
Communications
Company(4)............... Office 10,170,792 16.9 January 1999
Sony Music Entertainment.. Office 2,699,021 4.5 August 2002
M/R Systems............... Office 2,411,824 4.0 April 2001
Boeing.................... Office 2,171,715 3.6 January 2005
McDonnell Douglas
Corporation(5)........... Office 2,041,519 3.4 January 2002
Northwest Airlines:
El Segundo............... Office 1,313,418 2.2 February 2001
Seattle.................. Office 622,317 1.0 April 2005
Caltrans.................. Office 1,664,169 2.8 April 1999
Mattel, Inc............... Industrial 1,556,321 2.5 October 2000
Devry, Inc................ Office 1,296,270 2.1 October 2009
SCAN HealthPlan(6)........ Office 1,077,090 1.8 May 2006
Packard-Hughes
Interconnect............. Industrial 1,063,352 1.8 January 2001
JARIC/Amanson............. Office 793,294 1.3 March 1999
ARCS...................... Office 675,359 1.1 December 1998
LDDS
Communications/Worldcom.. Office 674,592 1.1 December 1999
Zelda Fay Walls........... Office 672,000 1.1 August 2007
Festival Markets.......... Industrial 640,348 1.1 May 2001
Allen-Bradley/Rockwell.... Industrial 639,432 1.1 April 1998
The Clothestime, Inc...... Industrial 602,266 1.0 May 2006
Cannon Equipment.......... Industrial 592,548 1.0 July 2003
Optical Corporation of
America.................. Industrial 574,920 0.9 December 2001
----------- ----
Total.................... $33,952,567 56.3%
=========== ====
</TABLE>
- --------
(1) Table excludes the lease with Key Bank of Washington (total annual base
rent of $667,587) which expired on December 31, 1996.
(2) Determined in accordance with GAAP.
(3) Determined by dividing (i) an amount equal to the aggregate rents over the
lease term divided by the number of months in the respective lease term,
multiplied by 12, by (ii) total pro forma annual base rental revenue for
the year ended December 31, 1996 (giving effect to the Boeing Lease).
(4) Includes Hughes Space & Communications leases at Kilroy Airport Center at
El Segundo of (i) 96,133 and 11,556 rentable square feet which expire in
October 2001, (ii) 291,187 rentable square feet which expires in July
2004, (iii) 103,035 rentable square feet which expires in January 1999 and
(iv) 9,387, 7,515, 5,158 and 5,559 rentable square feet which expires on
October 2001, November 2001, October 1999 and November 1999, respectively.
Tenant annual base rental revenue for Hughes Space & Communications gives
pro forma effect to the November 1996 extension of the tenant lease with
respect to 96,133 rentable square feet of office space located on 2250 E.
Imperial Highway (along with 11,556 rentable square feet located at 2240
E. Imperial Highway) as if such lease renewal had occurred on January 1,
1996. See "--Office Properties--Kilroy LAX."
(5) Includes McDonnell Douglas Corporation leases at Kilroy Airport Center
Long Beach of 64,530 and 47,457 rentable square feet which expire January
2002 and December 1999, respectively.
(6) Tenant executed leases during 1995 representing approximately 44,825
rentable square feet effective on February 15, 1996 and an additional
6,465 rentable square feet effective on November 10, 1996. Base rental
revenue figure included on a contract basis.

81
<PAGE>

OFFICE PROPERTIES

All but four of the Office Properties are Class A office buildings. Each of
the Kilroy LAX, Kilroy Long Beach and SeaTac Office Center (each as defined)
Office Properties was designed and developed to above-standard specifications
to accommodate the long-term needs of tenants and include features such as
extra-floor loading capacity and extra-high ceilings. Each of the Kilroy LAX,
Kilroy Long Beach and SeaTac Office Properties also was designed with an
emphasis on long-term operating efficiency and tenant comfort and includes
above-standard climate controls, on-site management and security, covered
parking, heliports and retail services, all in professionally landscaped
environments. In addition, each of the Kilroy LAX and Kilroy Long Beach Office
Properties offers tenants redundant telecommunications capability and utility
leads. The Office Properties range in size up to 12 stories and are easily
accessible from major highways and all but two (Westlake Plaza and the Office
Property located at the La Palma Business Center) are easily accessible from
major airports. Management believes that the location, quality of construction
and amenities at the complexes as well as the Company's reputation for
providing a high level of tenant service have enabled the Company to attract
and retain a national tenant base.

Kilroy LAX

General. The Company developed, owns, leases and manages three Office
Properties at Kilroy Airport Center at El Segundo ("Kilroy LAX"), a Class A
high-rise, multi-tenant corporate office complex situated in what the Company
considers to be the premier location in El Segundo immediately adjacent to
LAX, the new light rail system servicing Los Angeles County and the new I-105
Freeway with a freeway off-ramp and freeway on-ramp providing immediate access
to and from the project's parking facilities. Kilroy LAX was built in 1983 to
high quality specifications to address the anticipated demands of the
submarket's aerospace and high technology tenants. The Company believes Kilroy
LAX has the premier location in the El Segundo office submarket for a number
of reasons, including: (i) unobstructed views of LAX, West Los Angeles and
downtown Los Angeles; (ii) excellent access to LAX, the new I-105 Freeway and
the new light rail system; (iii) close proximity to corporate office users
including Hughes Space & Communications and its satellite manufacturing
facility, and other related enterprises such as DirectTV; and (iv) for tenants
with their names on the Property, visibility to freeway and airline travelers.

The complex is comprised of two 12-story towers and a 13-level parking
structure with two floors of office space on top, encompassing an aggregate of
approximately 701,000 rentable square feet, of which 98.2% was leased as of
March 31, 1997. Management believes because of its premier location and other
high quality features, Kilroy LAX continues to attract long-term major
corporate tenants at rates above those offered by other facilities in the El
Segundo and neighboring submarkets. The occupancy rates for Kilroy LAX as of
the years ended December 31, 1993 through 1996, and the three-month period
ended March 31, 1997, were 90.8%, 91.6%, 92.1%, 94.4% and 98.2%, respectively.

Major tenants of the facility include Hughes Space & Communications (the
Company's largest tenant), the Federal Aviation Administration and Realtime
Associates. Hughes Space & Communications has been a tenant at Kilroy LAX
since its opening and, over the past five years, has consolidated operations
into its owned facilities in El Segundo (which includes its satellite
manufacturing facility) and into leased facilities at Kilroy LAX which also
serves as its headquarters. In addition, Hughes Space & Communications has
invested substantial amounts in tenant improvements, including approximately
$3.3 million during the year ended December 31, 1994 and $23.5 million since
1984, and repeatedly has renewed leases at the facilities, including one lease
for approximately 101,000 rentable square feet which has been renewed twice.
Hughes Space and Communications is a major employer and owner of technical
facilities in El Segundo, including facilities for the development of
satellite technology and its applications, such as DirecTV.

2240 E. Imperial Highway, El Segundo. Because the book value of the Office
Property located at 2240 E. Imperial Highway at Kilroy LAX is in excess of 10%
of the Company's total assets as of December 31, 1996, additional information
regarding this Property is presented below.

82
<PAGE>

The Office Property located at 2240 E. Imperial Highway had an occupancy
rate of 100.0% for each of the years ended December 31, 1992 through 1996 and
the three-month period ended March 31, 1997. As of March 31, 1997, Hughes
Space & Communications occupied approximately 96.3% of the Property's rentable
square feet under two leases. Under the principal lease for this space, Hughes
Space & Communications commenced occupancy of 101,000 rentable square feet on
August 11, 1986 and renewed the lease on February 1, 1989 and again on June 1,
1994. In connection with the latter renewal, Hughes made a one time payment of
$4,000,000 to the Company in consideration of a lease amendment to relieve
Hughes Space & Communications of the obligation to remove certain tenant
improvements upon termination of the lease. The current lease term under this
lease expires on January 31, 1999, subject to a five-year option to renew at
fair market value, but not less than $15.84 per annum per rentable square
foot, on a triple net basis. Hughes Space & Communications also leases 11,556
rentable square feet (along with the 96,133 rentable square feet located at
2250 E. Imperial Highway) under a second lease which expires October 31, 2001,
at an annualized triple net base rental rate of $14.04 and, for the first year
of the lease term, the tenant's allocable share of operating costs shall not
exceed $7.32 per rentable square foot. The lease also is subject to a five-
year option to renew at fair market value, adjusted bi-annually for CPI
adjusted increases in base rent. The total annual rental income per rentable
square foot for the years ended December 31, 1992 through December 31, 1996
was $24.42, $25.22, $17.15, $11.83 and $11.70, respectively. The Office
Property is 100.0% leased pursuant to three leases. One lease for 103,035
rentable square feet (representing 86.6% of the total leased rentable square
feet in the Property), expires in 1999 and has annual base rent of $1,085,716
per year, or $10.54 per rentable square foot. The other two leases, are for an
aggregate of 15,898 rentable square feet (representing 13.4% of the total
leased rentable square feet in the Property), expire in 2001 and have
aggregate annual base rent of $206,670, or $13.00 per rentable square foot.

The Company's tax basis in this Property for federal income tax purposes as
of December 31, 1996 was approximately $2.0 million (net of accumulated
depreciation and reductions in depreciable basis), and was fully depreciated.
The Property was depreciated using the modified accelerated cost recovery
system straight-line method, based on an estimated useful life ranging from 31
1/2 years to 39 years, depending upon the date of certain capitalized
improvements to the Property. For the 12-month period ending December 31,
1996, the Company was assessed property taxes on this Property at an effective
annual rate of approximately 1.0%. Property taxes on this Property for the 12-
month period ending December 31, 1996 totaled approximately $128,411.
Management does not believe that any capital improvements made during 1997, if
any, should result in an increase in annual property taxes, although the
contribution to the Operating Partnership will cause this Property to be
reassessed to its fair market value at January 31, 1997.

2250 E. Imperial Highway, El Segundo. Because the gross revenues for the
Office Property located at 2250 E. Imperial Highway at Kilroy LAX for the year
ended December 31, 1996 were in excess of 10% of the aggregate gross revenues
for all of the Properties, additional information regarding this Property is
presented below. The information presented below gives pro forma effect to the
November 1996 extension of the tenant lease with Hughes Space & Communications
with respect to this Office Property as if such lease renewal had occurred on
January 1, 1996.

The Office Property located at 2250 E. Imperial Highway had an occupancy
rate of 82.5%, 77.8%, 79.8%, 80.9%, 86.5% and 95.7% for each of the years
ended December 31, 1992 through 1996 and the three-month period ended March
31, 1997, respectively. As of March 31, 1997, Hughes Space & Communications
occupied 42.5% of the Property's rentable square feet. The Property's other
tenants include companies engaged in the communications, technology,
transportation and healthcare industries. Hughes Space & Communications
commenced occupancy of 96,133 rentable square feet on November 1, 1986 and has
entered into an agreement to renew this space (along with the 11,556 rentable
square feet located at 2240 E. Imperial Highway) through October 31, 2001, at
a triple net annual base rental rate of $14.04 per square foot and, for the
first year of the lease term, the tenant's allocable share of operating costs
shall not exceed $7.32 per rentable square foot. The lease also is subject to
a five-year option to renew at fair market value, adjusted bi-annually for CPI
increases in base rent. The total annual rental income per rentable square
foot for the years ended December 31, 1992 through December 31, 1996 was
$18.73, $19.62, $18.89, $18.86 and $18.74, respectively. The following table
sets forth

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<PAGE>

for such Property for each of the ten calendar years beginning March 31, 1997
(i) the number of tenants whose leases will expire, (ii) the total rentable
square feet covered by such leases, (iii) the percentage of total leased
rentable square feet represented by such leases, (iv) the annual base rent
represented by such leases and (v) the average annual rent per rentable square
foot represented by such leases.

<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
RENTABLE RENT PER
RENTABLE SQUARE FEET RENTABLE
YEAR OF NUMBER OF SQUARE FOOTAGE REPRESENTED ANNUAL BASE SQUARE FOOT
LEASE LEASES SUBJECT TO BY EXPIRING RENT UNDER REPRESENTED BY
EXPIRATION EXPIRING EXPIRING LEASES LEASES (%)(1) EXPIRING LEASES($)(2) EXPIRING LEASES($)
---------- --------- --------------- ------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
1997.................... 2 3,735 1.39 71,325 19.10
1998.................... 7 24,530 9.14 493,477 20.12
1999.................... 7 40,865 15.22 873,957 21.39
2000.................... 2 18,201 6.78 302,853 16.64
2001.................... 6 129,617 52.59 1,897,433 14.64
2002.................... 1 18,517 6.90 456,220 24.64
2003.................... 0 -- -- -- --
2004.................... 2 21,418 7.98 485,244 22.66
2005.................... 0 -- -- -- --
2006 and beyond......... 0 -- -- -- --
--- ------- ------ ----------
Totals................ 27 256,883 100.00% $4,580,509 $17.83
=== ======= ====== ==========
</TABLE>
- --------
(1) Excludes all space vacant as of March 31, 1997 unless a lease for a
replacement tenant has been dated on or before March 31, 1997.

(2) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before March 31, 1997. Certain leases became effective subsequent to
March 31, 1997.

84
<PAGE>

The Company's tax basis in this Property for federal income tax purposes as
of December 31, 1996 was approximately $3.3 million (net of accumulated
depreciation and reductions in depreciable basis). The Property is depreciated
using the modified accelerated using the modified accelerated cost recovery
system straight-line method, based on an estimated useful life ranging from 31
1/2 years to 39 years, depending upon the date of certain capitalized
improvements to the Property. For the year ended December 31, 1996, the
estimated average depreciation rate for this Property under the modified
accelerated cost recovery system was 4.0%. For the 12-month period ending
December 31, 1996, the Company was assessed property taxes on this Property at
an effective annual rate of approximately 1.0%. Property taxes on this
Property for the 12-month period ending December 31, 1996 totaled
approximately $237,532. Management does not believe that any capital
improvements made during 1997, if any, should result in an increase in annual
property taxes, although the contribution to the Operating Partnership will
cause this Property to be reassessed to its fair market value at January 31,
1997.

2260 E. Imperial Highway, El Segundo. Because the gross revenues for the
Office Property located at 2260 E. Imperial Highway at Kilroy LAX for the year
ended December 31, 1996 were in excess of 10% of the aggregate gross revenues
for all of the Properties, additional information regarding this Property is
presented below.

The Office Property located at 2260 E. Imperial Highway had an occupancy
rate of 100.0% for each of the years ended December 31, 1992 through 1996 and
the three-month period ended March 31, 1997. As of March 31, 1997, Hughes
Space & Communications occupied 100.0% of the Property's rentable square feet.
Hughes Space & Communications commenced occupancy of the entire building on
August 1, 1984. This lease runs through July 31, 2004 with CPI adjusted
increases in base rent every two years. The next CPI adjustment is scheduled
to occur on August 1, 1998 and provides for an increase in base rent to the
extent that such CPI adjustment exceeds a minimum floor of 1.86% compounded
annually. The remaining CPI adjustments scheduled for August 1, 2000 and
August 1, 2002, respectively, provide for similar increases to the extent that
the CPI adjustment exceeds a minimum floor of 3% compounded annually. The
total annual rental income per rentable square foot was $26.16, $26.66,
$24.59, $24.59 and $25.00 for the years ended December 31, 1992 through
December 31, 1996, respectively. The Office Property is 100.0% leased to
Hughes Space & Communications pursuant to a lease for 291,187 rentable square
feet which expires in 2004 and has annual base rent of $7,160,207 per year, or
$24.59 per rentable square foot.

The Company's tax basis in this Property for federal income tax purposes as
of December 31, 1996 was approximately $2.0 million (net of accumulated
depreciation and reductions in depreciable basis), and was fully depreciated.
For the 12-month period ending December 31, 1996, the Company was assessed
property taxes on this Property at an effective annual rate of approximately
1.0%. Property taxes on this Property for the 12-month period ending December
31, 1996, totaled approximately $273,399. Management does not believe that any
capital improvements made during 1997, if any, should result in an increase in
annual property taxes, although the contribution to the Operating Partnership
will cause this Property to be reassessed to its fair market value at January
31, 1997.

Kilroy Airport Center, Long Beach

Kilroy Airport Center in Long Beach ("Kilroy Airport Center Long Beach") was
developed in response to a desire by the City of Long Beach to promote
development in the airport area. Phase I of Kilroy Airport Center Long Beach
was developed by the Company in 1987, was sold in 1993 and was reacquired by
the Company in January 1997. This phase of the project consists of two office
buildings encompassing approximately 225,000 rentable square feet ("Kilroy
Long Beach Phase I"). As of March 31, 1997, the Office Properties at Kilroy
Long Beach Phase I were 99.48% leased to eight tenants with total annual
rental income per leased rentable square foot of $16.58 (calculated on the
basis of base rent of signed leases as of March 31, 1997, adjusted for
contractual increases in base rent in effect). Major tenants include McDonnell
Douglas Corporation, Olympus America, Inc. and Devry, Inc. The Company has
overseen and continues to oversee all leasing and management of Phase I.

85
<PAGE>

In addition, the Company developed, owns, leases and manages the three
Office Properties which comprise Phase II of Kilroy Airport Center Long Beach
("Kilroy Long Beach Phase II"), part of a planned four-phase, 53-acre Class A
corporate office headquarters, business park and retail and entertainment
center strategically located adjacent to the San Diego freeway (Interstate
405, the major coastal north-south highway in Southern California between Los
Angeles and Orange Counties) and immediately adjacent to the Long Beach
Airport. Developed by the Company in 1989/1990, Kilroy Long Beach Phase II
includes an eight-story and a six-story office building, a multi-level parking
structure with retail facilities on the ground floor, encompassing an
aggregate of approximately 395,000 rentable square feet, of which 97.9% was
leased as of March 31, 1997. The occupancy rates for Kilroy Long Beach Phase
II as of the years ended December 31, 1993 through 1996 were 64.8%, 78.7%,
76.5% and 85.0%, respectively. Major tenants include AIG Claim Services, Inc.,
Assistance in Marketing, Inc., CompuServe, Inc., Employer's Health Insurance,
Co., GTE Directories Sales Corporation, Great Northern Insured Annuities
Corp., Great Western Bank, HealthNet, Mutual of America Life Insurance
Company, North American Title Company, The Prudential Insurance Company of
America, R.L. Polk & Company, SCAN HealthPlan, Senn-Delaney Leadership
Consulting Group, Inc., 20th Century Industries, UniCare Financial
Corporation, Unihealth and Zelda Fay Walls.

Phases III and IV are planned for future development. See "--Development,
Leasing and Management Activities--Kilroy Airport Center Long Beach."

Kilroy Airport Center Long Beach is subject to three long-term ground leases
under which the Company is ground lessee. The City of Long Beach is the ground
lessor with respect to Kilroy Long Beach Phases I through III, and the Board
of Water Commissioners of the City of Long Beach, acting on behalf of the City
of Long Beach, is the ground lessor with respect to Kilroy Long Beach Phase
IV. The basic term under each of the ground leases expires on July 17, 2035.
As of June 30, 1997, primary rent under the leases for Kilroy Long Beach
Phases I, II, III and IV is approximately $338,000 per year, $295,000 per
year, $75,000 per year and $77,000 per year, respectively, with such amounts
adjusted periodically to take account of changes in the fair market rental
value of the land underlying each lease.

Because the book value of the Office Property located at 3780 Kilroy Airport
Way is in excess of 10% of the Company's total assets as of December 31, 1996,
additional information regarding this Property is presented below.

The Office Property located at 3780 Kilroy Airport Way had an occupancy rate
of 70.5%, 69.1%, 78.6%, 63.6%, 93.8% and 97.8% for each of the years ended
December 31, 1992 through 1996 and the three-month period ended March 31,
1997, respectively. As of March 31, 1997, SCAN HealthPlan, a group health
insurer, and Zelda Fay Walls, an operator of executive office suites, occupied
approximately 23.3% and 12.7%, respectively, of the Property's rentable square
feet. The Property's other tenants include companies engaged in the insurance,
healthcare, finance, high technology, law and accounting industries. Base rent
under the SCAN HealthPlan lease is $1,077,090 per year. The lease expires on
May 31, 2006, subject to two successive five-year options to renew. Base rent
under the Zelda Fay Walls lease is currently $672,000 per year, and the term
of the lease has been extended to 2007, subject to a five-year option to
renew. The total annual rental income per rentable square foot for the years
ended December 31, 1992 through 1996 was $17.53, $19.76, $20.54, $18.55 and
$21.12, respectively. The following table sets forth for such Property for
each of the ten calendar years beginning March 31, 1997 (i) the number of
tenants whose leases will expire, (ii) the total rentable square feet covered
by such leases, (iii) the percentage of total leased rentable square feet
represented by such leases, (iv) the annual base rent represented by such
leases and (v) the average annual rent per rentable square foot represented by
such leases.

86
<PAGE>

<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
RENTABLE RENT PER
RENTABLE SQUARE FEET RENTABLE
YEAR OF NUMBER OF SQUARE FOOTAGE REPRESENTED ANNUAL BASE SQUARE FOOT
LEASE LEASES SUBJECT TO BY EXPIRING RENT UNDER REPRESENTED BY
EXPIRATION EXPIRING EXPIRING LEASES LEASES(%)(1) EXPIRING LEASES($)(2) EXPIRING LEASES($)
---------- --------- --------------- ------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
1997.................... 4 22,469 10.4 532,872 23.72
1998.................... 2 3,439 1.6 79,219 23.04
1999.................... 2 4,339 2.0 89,709 20.68
2000.................... 8 63,883 29.7 1,372,245 21.48
2001.................... 5 28,251 13.1 638,222 22.59
2002.................... -- -- -- -- --
2003.................... 1 9,439 4.4 209,299 22.17
2004.................... 1 3,922 1.8 85,656 21.84
2005.................... -- -- -- -- --
2006 and beyond......... 2 79,292 36.9 1,748,466 22.05
--- ------- ----- ----------
Totals................ 25 215,034 100.0% $4,755,688 $22.12
=== ======= ===== ==========
</TABLE>
- --------
(1) Excludes all space vacant as of March 31, 1997 unless a lease for a
replacement tenant has been dated on or before March 31, 1997.
(2) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before March 31, 1997. Certain leases became effective subsequent to
March 31, 1997.

The Company's tax basis in this Property for federal income tax purposes was
$10.0 million (net of accumulated depreciation) as of December 31, 1996. The
Property is depreciated using the modified accelerated cost recovery system
straight-line method, based on an estimated useful life ranging from 31 1/2
years to 39 years, depending upon the date of certain capitalized improvements
to the Property. For the year ended December 31, 1996, the estimated average
depreciation rate for this Property under the modified accelerated cost
recovery system was 3.5%. For the 12-month period ending December 31, 1996,
the Company was assessed property taxes on this Property at an effective
annual rate of approximately 1.2%. Property taxes on this Property for the 12-
month period year ending December 31, 1996 totaled $154,202. Management does
not believe that any capital improvements made during 1997, if any, should
result in an increase in annual property taxes, although the contribution to
the Operating Partnership will cause this Property to be reassessed to its
fair market value at January 31, 1997.

Kilroy Airport Center, SeaTac

The Kilroy Group developed and the Company operates the SeaTac Office
Center, south of Seattle in SeaTac, Washington, a Class A office development
in the Southend submarket of the Puget Sound region. The SeaTac Office Center
is comprised of two 12-story towers (constructed in 1977 and 1980,
respectively) and a 4-level office and garage structure with two floors of
office space on top (constructed in 1980). The facility currently contains an
aggregate of approximately 530,000 rentable square feet of office space of
which 82.0% was leased as of June 30, 1997 (giving effect to the Boeing
Lease). Current zoning permits up to an additional 500,000 rentable square
feet of development. As of June 30, 1997, the SeaTac Office Center had
approximately 96,000 rentable square feet of available office space. Major
tenants include Boeing, First Nationwide Mortgage Corporation, Lynden, Inc.,
National Chemsearch, Northwest Airlines, Inc., Rayonier, Inc., Seattle-First
National Bank and Transamerica Financial Services, Inc.

In June 1997, Boeing signed a lease for 211,000 rentable square feet. The
lease is for a term of seven years and includes an option to cancel after five
years. Under the terms of the lease, Boeing may occupy the office space upon
completion of certain tenant improvements but in any event not later January
1, 1998. The lease has a net effective rent per square foot of $7.36.

The SeaTac Office Center is situated on an approximately 17-acre site
subject to two long-term ground leases and an airspace lease. The initial term
of the ground leases runs through December 31, 2032, and may be

87
<PAGE>

extended for an additional period of thirty years. Payments under the ground
leases are subject to adjustment for increases in the CPI every five years.
Payments under the airspace lease are made monthly. Aggregate payments under
the two ground leases and the airspace lease for the year ended December 31,
1996 totaled approximately $309,300. As of March 31, 1997, the SeaTac Office
Center properties were encumbered by a first mortgage loan having an
outstanding principal balance of $12.0 million. See "Description of
Indebtedness--The SeaTac Loan."

INDUSTRIAL PROPERTIES

Like the Office Properties, the Industrial Properties developed by the
Company were designed and developed to provide above-standard quality and meet
the long-term needs of tenants. The Company was among the first Southern
California developers to air-condition its Industrial Properties, increasing
each facility's multidimensional use while providing environments for
increased tenant operating efficiency and comfort. The Industrial Properties
developed by the Company were designed for multi-tenant operations and can be
configured for such use. The Industrial Properties, all but one of which are
located in Southern California, are primarily comprised of single-story, tilt-
up concrete buildings ranging in size up to 277,000 rentable square feet.

Substantially all of the Industrial Property leases are written on a triple
net basis with initial terms of three to eleven years and options to renew for
up to an additional five years at the then current fair market value. The
leases generally provide for rent increases based on the applicable regional
CPI or contain specific contractual increases. The leases do not contain
purchase options.

ACQUIRED PROPERTIES

The Company completed a series of transactions in which it acquired
properties comprising an aggregate of approximately 2.6 million rentable
square feet. The Acquired Properties (other than the Pending Acquisition) were
financed from the net proceeds of the IPO, borrowings under the Credit
Facility and working capital, and, in the case of one Acquired Property, in
part, with limited partnership Units.

Brea Industrial Properties. The seven buildings in this complex total
approximately 276,000 rentable square feet. The complex is centrally located
with easy access to Los Angeles, Orange and San Bernardino counties. The
buildings are of concrete tilt-up construction and include dock high and
ground level truck loading doors with drive around access. Interior
improvements include high quality office finishes, painted, insulated and
fully fire sprinklered warehouses with clearance heights up to 24 feet.

Garden Grove Industrial Properties. The Garden Grove Industrial Properties
are six buildings which encompass an aggregate of approximately 276,000
rentable square feet. The buildings are of concrete tilt-up construction and
include ground-level and dock-high truck loading doors and have interior
clearance heights of 24 feet.

Torrance Office Properties. The Torrance property consists of two, two-
story, office buildings, with surface parking. The buildings are of concrete
tilt-up construction and encompass a total of approximately 80,000 rentable
square feet.

Ontario Industrial Property. The Ontario Industrial Property is located near
the San Bernardino and Riverside County border. The building sits on a 6.7
acre lot, is of concrete tilt-up construction and encompasses 154,000 rentable
square feet.

Warren Technology Center. The Warren Technology Center was built in 1990 and
is composed of ten multi-tenant industrial buildings totaling approximately
159,000 rentable square feet. The Warren Technology Center is located in the
Irvine Spectrum in south Orange County, California. As of June 30, 1997, the
Warren Technology Center had a total of 76 tenants, none of which leased more
than 10% of the total property.

88
<PAGE>

The total annual rental income per rentable square feet for the years ended
December 31, 1995 and 1996, and the three months ending March 31, 1997 was
$4.92, $5.04 and $6.24, respectively and the occupancy rates for the same
periods were 71%, 77% and 81%.

The Company's tax basis in this Property for federal income tax purposes was
approximately $16.2 million as of June 1997. The Property is depreciated using
the modified accelerated cost recovery system straight-line method, based on
an estimated useful life of 39.5 years. The estimated average annual
depreciation rate for this Property under the modified accelerated cost
recovery system is 2.5%. Property taxes on this Property for the 12-month
period year ending December 31, 1996 totaled $116,000. Management does not
believe that any capital improvements made during 1997, if any, should result
in an increase in annual property taxes, although the purchase will cause this
Property to be reassessed to its purchase price as of the purchase date.

The following table sets forth for such Property for each of the ten
calendar years beginning March 31, 1997 (i) the number of tenants whose leases
will expire, (ii) the total rentable square feet covered by such leases, (iii)
the percentage of total leased rentable square feet represented by such
leases, (iv) the annual base rent represented by such leases and (v) the
average annual rent per rentable square foot represented by such leases.

<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
RENTABLE RENT PER
RENTABLE SQUARE FEET ANNUAL BASE RENTABLE
YEAR OF NUMBER OF SQUARE FOOT REPRESENTED RENT UNDER SQUARE FOOT
LEASE LEASES SUBJECT TO BY EXPIRING EXPIRING REPRESENTED BY
EXPIRATION EXPIRING EXPIRING LEASES LEASES(%)(1) LEASES($)(2) EXPIRING LEASES($)
---------- --------- --------------- ------------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
1997.................... 30 42,216 32.0 322,943 7.65
1998.................... 19 23,175 17.6 198,855 8.58
1999.................... 20 36,120 27.3 311,767 8.63
2000.................... 2 1,635 1.2 17,882 10.94
2001.................... 3 13,543 10.3 173,283 12.80
2002.................... 2 15,363 11.6 203,744 13.26
2003.................... -- -- -- -- --
2004.................... -- -- -- -- --
2005.................... -- -- -- -- --
2006 and beyond......... -- -- -- -- --
--- ------- ----- ----------
Totals................ 76 132,052 100.0% $1,228,474 $9.30
=== ======= ===== ==========
</TABLE>
- --------
(1) Excludes all space vacant as of March 31, 1997 unless a lease for a
replacement tenant has been dated on or before March 31, 1997.
(2) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before March 31, 1997. Certain leases became effective subsequent to
March 31, 1997.

Sony Complex. Located at 2100 Colorado Avenue, Santa Monica, California, the
Sony Complex was completed in 1992 on a build-to-suit basis for Sony Music
Entertainment, Inc. ("Sony Music"). The project consists of two, three-story
buildings and one, two-story building for an aggregate of approximately 94,844
rentable square feet. As of June 30, 1997, these Class A office buildings were
100.0% occupied by Sony Music and have been designed with a campus-like
setting and extensive build-out which is a preference for many of the
entertainment-related firms. The 1.7 acre site is located one-quarter mile
north of Interstate 10 and includes a 230-space subterranean parking
structure, an extensive water feature and a full-service cafe. Since
completion in 1992 through the date of purchase by the Company, the building
was 100.0% owner occupied. The lease for 94,844 rentable square feet with Sony
Music provides for base rent of $2.7 million per year, or $28.46 per rentable
square foot, and expires on December 31, 2008, subject to two successive five
year renewal options.

The Company's tax basis in this Property for federal income tax purposes was
approximately $32.0 million, as of June 1997. The Property is depreciated
using the modified accelerated cost recovery system straight-line method,
based on an estimated useful life of 39.5 years. The estimated average annual
depreciation rate for this Property under the modified accelerated cost
recovery system is 2.5%. Property taxes on this Property for the 12-month
period year ending December 31, 1996 totaled $290,900. Management does not
believe that capital

89
<PAGE>

improvements made during 1997, if any, should result in an increase in annual
property taxes, although the purchase will cause this Property to be
reassessed to its purchase price as of the purchase date.

Mission Oaks Technology Center. The Mission Oaks Technology Center is
located at 5151, 5153 and 5155 Camino Ruiz in the City of Camarillo in Ventura
County, California. The property is located immediately adjacent to U.S.
Highway 101 near the Los Angeles County/Ventura County border. The property's
prominent location and approximately 950 feet of freeway frontage provide
excellent visibility and regional access.

As of June 30, 1997, the site is occupied by four office and research and
development buildings containing an aggregate of approximately 276,000
rentable square feet. The four buildings are concrete tilt up structures. All
four buildings were built between 1982 and 1985. From the date of completion
of each of the buildings to the date of purchase by the Company, the buildings
were 100.0% owner-occupied. The four buildings comprise 80,000 rentable square
feet of office space, 120,544 rentable square feet of research and development
space and 75,000 rentable square feet of highly-secured space. Included on the
site is 242,245 rentable square feet (5.5 acres) of excess land, which has
been approved by the city for future development.

As of June 30, 1997, M/R Systems leased 100.0% of the Property's rentable
square feet. Base rent under the M/R Systems lease is $2.4 million per year or
$8.73 per rentable square foot. The lease for 276,216 rentable square feet
expires April 30, 2001, subject to two successive five-year options to renew.
The total annual rental income per rentable square foot for the years ended
May 31, 1992 through 1996 was $7.44, $8.04, $8.04, $8.68 and $8.68,
respectively.

The Company's tax basis in this acquired property for federal income tax
purposes was approximately $24.2 million, as of June 1997. The Property is
depreciated using the modified accelerated cost recovery system straight-line
method, based on an estimated useful life of 39.5 years. The estimated average
annual depreciation rate for this Property under the modified accelerated cost
recovery system is 2.5%. Property taxes on this Property for the 12-month
period year ending December 31, 1996 totaled $131,200. Management does not
believe that capital improvements made during 1997, if any, should result in
an increase in annual property taxes, although the purchase will cause this
Property to be reassessed to its purchase price as of the purchase date. The
Office Property is 100.0% leased to M/R Systems pursuant a lease which expires
in 2001 and has an annual base rent of $2,411,824 per year.

Caltrans Buildings. The Caltrans Buildings are located at 2501 Pullman
Avenue and 1700 Carnegie Avenue in the city of Santa Ana in Orange County,
California. The buildings are located one-half mile north of Orange County's
John Wayne International Airport and Interstate 405. On the 5.5-acre site are
concrete tilt-up buildings with a total of approximately 125,000 rentable
square feet. The buildings are connected to one another by an enclosed
pedestrian bridge at the second floor level.

As of June 30, 1997, the California State Department of Transportation
("Caltrans") leased 100.0% of the Property's 124,921 rentable square feet and
had occupied such space for eight years. Base rent under the Caltrans lease is
approximately $1.7 million per year or $13.32 per rentable square foot. The
Caltrans lease expires on April 30, 1999. The total annual rental income per
rentable square foot for the years ended May 31, 1992 through 1996 was $14.66,
$15.24, $10.50, $8.24 and $14.36. The decreases in average rent per rentable
square foot in 1994 and 1995 are attributable to contractual rent concessions
applicable to such years pursuant to the lease agreement.

The Company's tax basis in this property for federal income tax purposes was
approximately $15.5 million, as of June 1997. The Property is depreciated
using the modified accelerated cost recovery system straight-line method,
based on an estimated useful life of 39.5 years. The estimated average annual
depreciation rate for this Property under the modified accelerated cost
recovery system is 2.5%. Property taxes on this Property for the 12-month
period ending December 31, 1996 totaled $88,400. Management does not believe
that capital

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<PAGE>

PENDING ACQUISITION

Walnut Park Business Center. Walnut Park Business Center is located in the
City of Diamond Bar in southeastern Los Angeles County. The Walnut Park
Business Center is comprised of three buildings containing approximately
165,420 rentable square feet, of which 83% is industrial space and the
remaining 17% is office space. The Property was constructed in 1987 and
features concrete tilt-up construction. Clear heights range from 18 feet to 22
feet and two of the buildings provide dock-high loading doors. See "Prospectus
Summary--Recent Developments--Acquisition Activities."

OPTION PROPERTIES

General. The Company holds options to acquire (i) parcels comprising an
aggregate of approximately 18 acres located at Calabasas Park Centre, in
Calabasas, California and (ii) a three-building office complex located on
North Sepulveda Boulevard in El Segundo, California (the "Sepulveda Boulevard
Office Complex") at the respective purchase price for each of the properties
as discussed below. Each option property is currently owned by a partnership
beneficially owned and controlled by John B. Kilroy, Sr. and John B. Kilroy,
Jr. The Sepulveda Boulevard Office Complex was developed and is leased and
managed by the Kilroy Group. The option for Calabasas Park Centre is
exercisable on or before January 31, 1998. The option for the Sepulveda
Boulevard Office Complex is exercisable on or before January 31, 2004. The
acquisition cost for each of the properties is payable in cash; provided,
however, that if the option for the Sepulveda Boulevard Office Complex is
exercised after January 31, 1998, the acquisition cost will be payable in cash
or limited partnership Units at the election of the seller. The Company
intends to account for acquisitions of Option Properties, if any, using the
purchase accounting method.

In the event that the owner of one of the option properties receives an
offer from a third party for the master lease or purchase of such property,
such owner may give notice to the Company, which notice shall include the
proposed purchase price, leasing terms and/or other economic terms of the
proposed transfer or lease of such property. The Company shall then have 60
days to give notice of its election to acquire or lease such property at the
lower of the applicable option price or the proposed purchase price or lease
terms. In the event that the Company does not give such notice, the option to
acquire such property shall be suspended and the owner may proceed with the
sale or lease of such parcel pursuant to the terms of such offer, provided
that the economic terms may be up to 5% below that described in such notice;
provided, however, that with respect to any sale of the approximately 18 acres
located at Calabasas Park Centre discussed below, the Company shall have the
right to acquire at the option price the owners' rights and related monetary
obligations under the respective sales agreement. In the event the owners of
such property (i) have not entered into a letter of intent for the sale or
lease of such property within 180 days following the notice to the Company
referenced above, or (ii) have not completed the sale of the respective
property within 270 days following such notice, then the Company's option with
respect to such property shall be reinstated, up to the expiration date of the
option. The Company's options are subject to any arrangements entered into by
the Kilroy Group in connection with any financing, recapitalization or leasing
of the properties including, without limitation, any rights of the lender(s)
with respect to such properties with respect to a transfer pursuant to the
applicable option. In addition, the Sepulveda Boulevard Office Complex will be
managed by the Operating Partnership pursuant to a management agreement on
market terms.

Calabasas Park Centre. Kilroy Calabasas Associates, a limited partnership,
beneficially owned 49.0% by John B. Kilroy, Sr. and 51.0% by John B. Kilroy,
Jr., and controlled by both of them, owns Calabasas Park Centre, an
approximately 66-acre site (representing approximately 45 developable acres,
net of acreage required for streets and contractually required open areas) in
the City of Calabasas located immediately west of the San Fernando Valley,
which is presently entitled for over one million rentable square feet of
office, retail and hotel development. The property has substantially all
significant infrastructure improvements in place. Kilroy

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<PAGE>

Calabasas Associates is actively marketing for sale various parcels totaling
approximately 27 acres for neighborhood retail and hotel development, of which
approximately 1.7 acres is proposed to be dedicated to the City of Calabasas
for civic use. Kilroy Calabasas Associates has received offers with respect to
certain parcels and is pursuing such offers in the ordinary course of
business, although there is no assurance that any such transactions will be
completed in the near term. John B. Kilroy, Sr. and John B. Kilroy, Jr. each
spend an immaterial amount of time in connection with any entitlement,
marketing and sales of parcels of Calabasas Park Centre. The remaining
approximately 18 acres for which the Company has been granted an option is
entitled for over 500,000 rentable square feet for office, hotel and limited
retail use. Because of the uncertainty that such 18 acres will be used
primarily as office space, this property is not appropriate for inclusion in
the Company's portfolio at this time. In addition, both John B. Kilroy, Sr.
and John B. Kilroy, Jr. have agreed not to sell any of the parcels at
Calabasas Park Centre to a real estate investment trust with an existing
portfolio of office or industrial properties unless first offered to the
Company on the same economic terms. See "Policies with Respect to Certain
Activities--Conflicts of Interest Policies--Noncompetition Agreements."

Pursuant to the terms of the applicable option agreement, the purchase price
for the parcels located at Calabasas Park Centre will be equal to the total
accumulated costs, as of the date such option is exercised, in connection with
acquisition of rights with respect to, and the entitlement and development of
such property, including, without limitation, property taxes, predevelopment
and entitlement costs and fees, and related bond financing costs.

North Sepulveda Boulevard, El Segundo. The Kilroy Group developed and
operates the Sepulveda Boulevard Office Complex which consists of a three-
building office complex located on an over 3.5-acre parcel in El Segundo,
California, adjacent to LAX. The complex is comprised of an 11-story office
building (constructed in 1972), an eight-story office building (constructed in
1962) and a seven-level parking structure with retail space on the ground
floor (constructed in 1972), encompassing an aggregate of approximately
360,000 rentable square feet of office space and approximately 5,600 rentable
square feet of retail space. The properties have convenient access to LAX and
the I-105 Freeway. As of March 31, 1997, the office space was 100% leased to
Hughes Space & Communications (of which approximately 60% is occupied) at an
average annual triple net base rent per rentable square foot of $21.06,
subject to a lease scheduled to expire on February 28, 1998. The property is
owned by Kilroy Airport Imperial Co., a limited partnership, beneficially
owned by John B. Kilroy, Sr. and by John B. Kilroy, Jr. (who have an
approximately 65.1% interest and an 18.2% interest, respectively), and
controlled by both of them. In addition, each of Patrice Bouzaid, Susan Hahn,
Anne McCahon and Dana Pantuso, the daughters of John B. Kilroy, Sr., have an
approximately 4.2% interest in the limited partnership. Each of Messrs. Kilroy
spend an immaterial amount of time in connection with the management of the
property.

Pursuant to the terms of the applicable Option Agreement, the purchase price
for the Sepulveda Boulevard Office Complex is equal to the sum of (i) the then
outstanding mortgage indebtedness secured by the respective properties, plus
(ii) $1, plus (iii) the aggregate amount of capital contributed by the
beneficial owners of the property, net of actual cash distributions
distributed in respect of such beneficial owners, during the period beginning
on January 31, 1997 and ending on the date of exercise of the option, plus
(iv) an annualized return of 8.0% on the amount in excess of $5.0 million, if
any, as determined pursuant to clause (iii) preceding. The Company's option to
purchase the Sepulveda Boulevard Office Complex is subject to a right of first
offer held by Hughes Space & Communications.

DEVELOPMENT, LEASING AND MANAGEMENT ACTIVITIES

Since 1947, the Company and its predecessors have developed millions of
rentable square feet of office and industrial space, including high technology
facilities, primarily located in Southern California, for its own portfolio
and for third parties. Development activities include site selection, land
entitlement, project design and construction, build-to-suit activities and
tenant renovations. The Company has successfully developed numerous
sophisticated development projects for some of the nation's most prominent
corporations both in Southern California and around the country. The Company's
extensive experience has enabled it to form key alliances

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<PAGE>

with major corporate tenants, municipalities and landowners in Southern
California. The Company's relationships with tenants and users has enabled it
to act as a developer of various projects, and, in the case of Kilroy Airport
Center Long Beach, to develop the land for its own account when such
development results in a favorable risk-adjusted return on investment.

The Company or the Operating Partnership is the manager of all but eight of
the Properties and provides building management services with respect to the
Option Properties. The Company actively engages in all aspects of the
operations of the properties it manages, including negotiating all leasing
transactions. At the eight Properties where the Company does not perform
management functions, the Company hires third-party property managers to
supervise day-to-day operations while the Company actively monitors all
management activities and is actively engaged in the negotiation of all lease
transactions. The Services Company provides development services for the
Company and for the Option Properties, at market rates.

The Company currently owns an aggregate of approximately 36 acres of
developable land and has the exclusive right to develop an additional 24 acres
of developable land which provide it with significant growth opportunities.
All of the developable land is in Southern California. The Company owns ten
acres of developable land in Brea, 15 acres in Foothill Ranch in Orange
County, two and one-half acres in Anaheim, three and one-half acres in Irvine
and five acres in Camarillo. All of the developable land is located in
Southern California. The Company is the master ground lessee of, and has sole
development rights to the 24 acres of developable land entitled for office,
research and development, light industrial and other commercial projects at
Kilroy Airport Center Long Beach.

The Company presently plans to develop an aggregate of up to 1.6 million
rentable square feet of office or industrial space on the Development
Properties, subject to required entitlements. Of this amount, the Company
plans to commence development of 500,000 rentable square feet of industrial
space in 1997 at a total budgeted cost of $25.0 million. No assurance can be
given that the Company will commence such development, or that, if commenced,
such development will be completed. See "Risk Factors--Real Estate Investment
Considerations--Risks of Real Estate Acquisition and Development."

The following is a description of the Development Properties as presently
contemplated.

<TABLE>
<CAPTION>
TYPE OF PROPERTY POTENTIAL RENTABLE
PROPERTY ENTITLEMENT SUBMARKET ACRES SQUARE FOOTAGE
-------- ---------------- -------------- ----- ------------------
<S> <C> <C> <C> <C>
Brea.................... Industrial Orange County 10 180,000
Foothill Ranch.......... Industrial Orange County 15 300,000
Anaheim................. Industrial Orange County 2.7 42,000
Irvine.................. Industrial Orange County 3.5 100,000 to 135,000(1)
Camarillo............... Office Ventura County 5 80,000(1)
Long Beach Phase III and
Phase IV............... Office South Bay 24 900,000
</TABLE>
- --------
(1) Subject to zoning and entitlements.

Kilroy Airport Center Long Beach. In conjunction with the Company's role as
master ground lessee of Kilroy Airport Center Long Beach, the Company manages
all ongoing leasing and development activities for the four-phase,
approximately 53-acre office and retail development project, including sole
development rights to the approximately 24 remaining developable acres. To
date the Company has developed Phases I and II. See "--Office Properties--
Kilroy Airport Center, Long Beach." Current development activities are focused
on Phase III of the project ("Kilroy Long Beach Phase III") which will be
developed and owned by the Company.

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<PAGE>

Kilroy Long Beach Phase III. In addition, Kilroy Long Beach Phase III may be
developed, subject to site plan approval by the City of Long Beach, to include
an additional office building with up to 150,000 rentable square feet of
space. The Company has been in discussions with several prospective tenants
for office space presently planned to be included in Kilroy Long Beach Phase
III. Development of Kilroy Long Beach Phase III is subject to substantial
predevelopment leasing activity and, therefore, the timing for the
commencement of development is uncertain.

Kilroy Airport Center Long Beach also is planned to include Phase IV
("Kilroy Long Beach Phase IV"), which will be developed and owned by the
Company. Kilroy Long Beach Phase IV presently is contemplated to include an
aggregate of up to 550,000 rentable square feet of office and retail space
including high quality retail and specialty shops, sit-down and convenience
restaurants and, subject to site-plan approval by the City of Long Beach, a
multitheater and virtual reality entertainment center. Development of Kilroy
Long Beach Phase IV is subject to substantial predevelopment leasing activity
and, therefore, the timing for the commencement of development is uncertain.

To date the Company has invested approximately $8.8 million in
infrastructure improvements which are in place for Kilroy Long Beach Phases
III and IV and has available an additional approximately $1.4 million of
revenue bond proceeds held by the City of Long Beach which the Company
believes is sufficient to provide for further traffic mitigation improvements,
if any, which may be required by the city in connection with the future
development. Because of the over 900,000 aggregate rentable square feet
entitled at Kilroy Long Beach Phases III and IV, and the significant
infrastructure improvements already in place, the Company believes that Kilroy
Airport Center Long Beach offers substantial opportunity for tenant expansion
from a location servicing both Los Angeles and Orange Counties. See "--Office
Properties--Kilroy Airport Center, Long Beach."

Prior to the IPO in January 1997, the Kilroy Group and its affiliates
acquired construction materials at a cost of approximately $6.5 million, in
connection with the development of Kilroy Long Beach Phase III. The Company
has no obligation to purchase the materials from the Kilroy Group or to in any
way use the materials in the development and completion of the project. Any
decision on the part of the Company to purchase the materials from the Kilroy
Group in the future will be determined by a majority of the Independent
Directors.

Kilroy Airport Center Long Beach is subject to three long-term ground leases
under which the Company is ground lessee. The City of Long Beach is the ground
lessor with respect to Kilroy Long Beach Phase III, and the Board of Water
Commissioners of the City of Long Beach, acting on behalf of the City of Long
Beach, is the ground lessor with respect to Kilroy Long Beach Phase IV. The
basic term under each of the ground leases expires on July 17, 2035. As of
June 30, 1997, primary rent under the leases for Kilroy Long Beach Phases III
and IV is approximately $75,000 per year and $77,000 per year, respectively,
with such amounts adjusted periodically to take account of changes in the fair
market rental value of the land underlying each lease.

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<PAGE>

THE COMPANY'S SOUTHERN CALIFORNIA SUBMARKETS*

The Company believes that Los Angeles, Orange and Ventura Counties have been
and will continue to be excellent markets in which to own and operate Class A
office and industrial property over the long term. The Company believes that
these counties are attractive for a number of reasons:

. These counties, together with Riverside and San Bernardino Counties,
comprise the second largest Consolidated Metropolitan Statistical Area
in the United States and rank as the world's 12th largest economy;

. The continuing expansion of the service-producing sector of the economy;

. Employment sectors using Class A office and industrial properties
continue to expand with the Southern California Area's continuing growth
in foreign trade and diversification of industries;

. Since 1992, there has been virtually no increase in the Southern
California Area's inventory of office space; and

. The Southern California Area's demand for quality industrial space has
spurred new construction of industrial properties.
- --------
* The Company retained Robert Charles Lesser & Co. ("Lesser"), nationally
recognized experts in real estate consulting and urban economics, to study
the Company's Southern California submarkets, and the discussion of such
submarkets below and under the caption "Prospectus Summary--The Company's
Southern California Submarkets" is based upon Lesser's findings. While the
Company believes that these estimates of economic trends are reasonable,
there can be no assurance that these trends will in fact continue.

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<PAGE>

The Southern California Area had a 1996 total population of approximately
15.7 million people, which accounted for approximately 5.9% of the total U.S.
population. Annual population growth in the Southern California Area since
1990 has averaged approximately 190,000 persons. Of the approximately 15.7
million people in the Southern California Area, approximately 9.3 million
lived in Los Angeles County and approximately 2.6 million lived in Orange
County. Annual estimated growth in population in these counties over the next
five years is expected to be approximately 79,000 and 35,000 persons,
respectively. The following table presents the total population as a
proportion of the United States population for the Southern California Area
and California for 1980, 1990 and 1995 and the estimated population for 2000
and 2010.

POPULATION AS A PROPORTION OF THE UNITED STATES POPULATION
SOUTHERN CALIFORNIA AREA AND CALIFORNIA 1980-2010

Southern
California
California Area
---------- ----------
1980 10.4% 5.1%
1990 12.0% 5.9%
1995 12.2% 5.9%
2000 11.8% 6.1%
2010 12.8% 6.4%

Increasing Employment. The Southern California Area economy continues its
economic expansion and recovery from the recessionary conditions experienced
during the 1990-1993 period. While the Southern California Area lagged behind
the rest of the country in entering the recession, it also lagged in the
economic recovery, in part due to the cutbacks in the aerospace and defense
industries. As measured by total employment, the Southern California Area
economy "bottomed" in 1993, with 1994 showing an increase of 29,000 jobs.

Employment growth accelerated in 1995 and 1996, increasing by 112,000 and
136,000 new jobs, respectively. Of the total jobs added in 1995 and 1996,
145,000 (approximately 60% of the total) were created in Los Angeles County.
Stimulating the economic expansion were broad based gains in business and
professional management services, entertainment, health and bio-med services,
apparel manufacturing and tourism.

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<PAGE>

Employment in the Southern California Area is expected to increase during
1997 and 1998, with the rate of increase once again outpacing the nation. Job
growth estimates in these two years are 145,000 and 106,000, respectively,
which correspond to percentage gains of 2.4% in 1997 and 1.7% in 1998. The
following table shows the annual change in non-agricultural jobs for the
Southern California Area for the period from 1980 through 1995, the estimated
change for 1997 and the forecasted changes for 1997 and 1998.

ANNUAL NON-AGRICULTURAL EMPLOYMENT CHANGE
SOUTHERN CALIFORNIA AREA
1980-1998

1980 -0-
1981 67,900
1982 (127,300)
1983 42,100
1984 222,700
1985 190,800
1986 188,500
1987 194,700
1988 189,300
1989 155,700
1990 90,600
1991 (173,000)
1992 (189,000)
1993 (102,500)
1994 29,200
1995 112,800
1996 135,200
1997 145,200
1998 106,300

The unemployment rate in the Southern California Area continues to move
downward from its 1993 peak. For the U.S., the May 1996 unemployment rate was
approximately 4.8% versus approximately 6.0% in California. By comparison, the
1993 unemployment rates for the U.S. and California were approximately 6.9%
and 9.2%, respectively. While the unemployment rate in the Southern California
Area has been declining in the last couple of years, it probably will remain
higher than the unemployment rate for the nation as a whole. Within the
Southern California Area, the May 1996 unemployment rates varied from a low of
approximately 3.2% in Orange County to a high of approximately 6.7% in Los
Angeles County.

Diversification of Industries. Los Angeles and Orange Counties are widely
regarded as major centers for corporate and international business. The growth
of international trade through the Los Angeles-Long Beach port complex, which
presently ranks as the largest commercial port in the United States, is
driving the growth of business in the surrounding area. While the southern
coastal Los Angeles County market, including the El Segundo and Long Beach
submarkets, has historically been, and continues to be, associated with the
aerospace and defense industries, the downsizing of those industries has
resulted in the region becoming more diversified, with major corporations in
emerging industries such as telecommunications and healthcare. The Company
believes this diversity, which is reflected in the Company's tenant base, has
strengthened these submarkets.

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<PAGE>

Foreign Trade. The growth in the region's employment is attributable in part
to the increase in the volume of trade in the region's ports and airports,
which at the end of 1995 accounted for over 12.0% of the total trading volume
in the United States and which has grown at an average annual rate of
approximately 11.4% during the ten-year period ended in 1994 compared to an
approximately 8.0% growth rate nationally during the same period. In addition,
during 1995 the trading volume among the region's ports and airports increased
another approximately 16.0%, further securing the region's position as the
nation's leader in international trade activity. The following table shows the
growth in the Los Angeles Customs District's share of U.S. Trade for the
period from 1972 through 1995.

LOS ANGELES CUSTOMS DISTRICT SHARE OF U.S. TRADE 1972-1995

1972 6%
1973 6%
1974 7%
1975 6%
1976 7%
1977 7%
1978 7%
1979 7%
1980 8%
1981 8%
1982 8%
1983 9%
1984 9%
1985 11%
1986 12%
1987 12%
1988 12%
1989 12%
1990 12%
1991 12%
1992 12%
1993 12%
1994 13%
1995 12%

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<PAGE>

Growing Service Economy. Over the last 16 years, the composition of
employment in the Southern California Area has shifted, generally mirroring
national patterns. The goods-producing sector (mining, construction and
manufacturing) has declined from an approximately 28.7% share in 1980 to
approximately 19.9% in 1996. Within this sector, manufacturing accounted for
virtually the entire decline. Correspondingly, the services-producing sector
(transportation, communications and utilities; wholesale and retail trade;
finance, insurance and real estate services; and government) has expanded from
approximately 71.3% of total employment in 1980 to approximately 80.1% in
1996. The following table presents the total employment growth from 1980 to
1996 for various employment sectors in the Southern California Area.

TOTAL NON-AGRICULTURAL EMPLOYMENT GROWTH BY INDUSTRY
SOUTHERN CALIFORNIA AREA 1980-1996

Mining -10.2
Construction 16.9
Manufacturing -260
Transportation and Public Utilities 38.2
Wholesale and Retail Trade 238.5
F.I.R.E. 32.9
Services 697.6
Government 138.5
Goods Producing Employment -253.3
Service Producing Employment 1145.7

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In particular, the entertainment and tourism industries now account for over
400,000 jobs in the region. The following table shows the growth of tourism
and entertainment-related jobs for the period from 1983 through 1996.

GROWTH OF TOURISM AND ENTERTAINMENT-RELATED JOBS
SOUTHERN CALIFORNIA AREA 1983-1996

Total Employment (000s)
-----------------------
1983 340.4
1984 371.5
1985 384
1986 403
1987 429.6
1988 431.7
1989 457.9
1990 464.6
1991 453.7
1992 427.7
1993 445.1
1994 467.3
1995 506.2
1996 539.8

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In addition, the Southern California Area aerospace industry, which suffered
significant losses in recent years, appears to be stabilizing. The local
aerospace industry should benefit from new military aircraft production,
subcontractor involvement with Boeing's production of commercial aircraft and
increased satellite production. Growth is also taking place in the technology
sector which includes multi-media, digital information, bio-med, and advanced
transportation. The following table shows the number of jobs in the
aerospace/high technology industries in the Southern California Area for the
period from 1988 through 1998.

AEROSPACE/HIGH TECHNOLOGY EMPLOYMENT TRENDS
SOUTHERN CALIFORNIA AREA
1988-1998

Employment (000s) % Charge
----------------- --------
1988 392.7
1989 377.9 -3.8%
1990 360.2 -4.7%
1991 330 -8.4%
1992 293.7 -11.0%
1993 252.6 -14.0%
1994 224.7 -11.0%
1995 209.5 -6.8%
1996 206.7 -1.3%
1997 208.8 -1.0%
1998 211.5 1.3%

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Office Submarkets

General. Total office space in the Southern California Area amounts to
approximately 232 million rentable square feet. The Southern California Area
is the second largest office market in the country after the New York City
Metro Area (with over approximately 800 million rentable square feet). Los
Angeles County comprises two-thirds of the metro office inventory, roughly
159.4 million rentable square feet; Orange County accounts for approximately
54.2 million rentable square feet.

Vacancy rates in the office space market in the Southern California Area are
trending downward from a high in 1991 and 1992 of approximately 19.7% to a
level at the end of 1996 of approximately 16.7%. As of March 31, 1997, the
vacancy rate for Southern California office properties continued to fall,
reaching 16.3%. The following table shows the U.S. and Southern California
Area office vacancy rates for the period from 1988 through March 31, 1997.

OFFICE MARKET VACANCY TRENDS
SOUTHERN CALIFORNIA AREA VERSUS U.S.
1988-MARCH 31, 1997

Southern
California
U.S. Area
----- ----------
1988 18.2% 16.4%
1989 18.6% 17.2%
1990 19.5% 17.1%
1991 19.4% 19.8%
1992 18.7% 19.7%
1993 17.0% 19.2%
1994 15.5% 18.3%
1995 14.1% 17.8%
1996 12.8% 16.7%
1Q 1997 11.0% 16.3%

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Net absorption in the Southern California Area during the first quarter of
1997 amounted to approximately 1.1 million rentable square feet. Annualized,
this absorption pace for 1997 would reach 4.4 million rentable square feet, a
1.3 million rentable square foot increase over 1996's 3.1 million rentable
square feet. With the improving economy, absorption has increased dramatically
from 1993's recessionary low of approximately 1.7 million rentable square
feet. By comparison, absorption in the Southern California Area ranged from
approximately 11.1 million to 11.7 million rentable square feet during the
mid-to late 1980s. Annual increases in employment during the 1980s fluctuated
between approximately 160,000 and 200,000 jobs per year, as opposed to job
losses from 1991 to 1994. The following table shows the annual absorption of
office space in the Southern California Area for the period from 1986 through
March 31, 1997.

ANNUAL NET ABSORPTION OF OFFICE SPACE
SOUTHERN CALIFORNIA AREA 1986-1997

Annual
Absorption of
Office Space (000s)
-------------------
1986 11,116
1987 11,684
1988 11,687
1989 11,260
1990 7,635
1991 5,005
1992 3,301
1993 1,689
1994 2,657
1995 2,153
1996 3,140
1Q 1997 1,113

No Additional Supply of Office Space. During the last six years new
construction of office space in the Southern California Area has decreased
substantially. The following table shows the additions in square footage to
the Southern California Area office market for each of the periods presented.

ADDITIONS TO THE SOUTHERN CALIFORNIA AREA'S OFFICE MARKET*

Square Feet (000s)
------------------
1989 21,097
1990 11,033
1991 9,384
1992 3,188
1993 720
1994 0
1995 0
1996 0
1997 0
- --------
* Square feet shown in thousands. The above table represents additions to the
Southern California Area's office market net of office space removed from
service. In 1994 and 1995, the total square footage in the market decreased
by approximately 2.0 million square feet and approximately 1.3 million
square feet, respectively.

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<PAGE>

The addition in the near-term of any new speculative office space to the
market remains unlikely as effective rents for multi-tenant properties are
currently well below the level needed to make new construction economically
feasible.

El Segundo Office Submarket. In the El Segundo submarket the Company owns
and operates three Office Properties at Kilroy LAX, and one stand alone two-
story office building. The aggregate rentable square feet of the Office
Properties in the El Segundo submarket represent approximately 22% of the
approximately 3.4 million rentable square feet of all Class A office
properties located in this submarket as of December 31, 1996.

The El Segundo submarket is an approximately 5.4 square mile area in the
southwestern coastal section of Los Angeles County. The El Segundo submarket
has the advantages of proximity to LAX without the disadvantages of being
located within the City of Los Angeles, as is the case with the submarket
located on the northeast side of LAX (the "LAX/Century Boulevard submarket").
The El Segundo submarket has a highly qualified computer and technology-based
work force. El Segundo's tax structure is as much as $6.00 per square foot per
annum lower than neighboring Los Angeles, principally attributable to lower
gross receipts and utility taxes. As a result, the El Segundo submarket has
historically enjoyed higher rental occupancy and tenant retention rates than
neighboring submarkets, such as LAX/Century Boulevard, Torrance and Carson.

The El Segundo submarket tenant base has broadened from its historic
concentration of aerospace industry tenants. A number of major corporations
have a significant presence in the El Segundo submarket, including Xerox
Corporation, Mattel, Inc., Chevron USA, Inc., AT&T, TRW Corporation and Hughes
Space & Communications.

Management believes that because of the high visibility and strategic
location of the four Office Properties located in the El Segundo submarket,
the El Segundo Office Properties have higher occupancy and tenant retention
than other properties within this submarket and have achieved higher rental
rates. The vacancy rate of Class A office buildings in the El Segundo
submarket was approximately 15.9%, as of June 30, 1997, compared to
approximately 1.4% for the Company's El Segundo Office Properties as a whole,
as of June 30, 1997. The average asking annual rental rate in the El Segundo
submarket, as of June 30, 1997, was approximately $22.93 per square foot for
Class A office buildings compared to an average asking annual rental rate of
$25.20 per square foot for the Company's El Segundo Office Properties as a
whole, as of June 30, 1997.

Through June 30, 1997, net absorption of office space in the El Segundo
submarket was 32,000 rentable square feet. This gain represents a reversal of
the last several years during which the local office market recorded negative
office space absorptions. The positive absorption reflects the growth of local
tenants which are still overwhelmingly aerospace but increasingly with a high
technology orientation, such as software and satellite development businesses.

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<PAGE>

No new office buildings are under construction and, to the Company's
knowledge, no new construction is presently projected in the near future in
the El Segundo submarket. The following tables show the comparative vacancy
rates of Class A office space in the El Segundo submarket and Kilroy LAX, and
the comparative mean asking rents of Class A office space in the El Segundo
submarket and Kilroy LAX, respectively.

Class A Office Vacancy Class A Office Rents
Kilroy Versus El Segundo Kilroy Versus El Segundo
Mid-1997 Mid-1997
Vacancy Rate Mean Rent
- ------------ ---------
Kilroy........ 1.4% Kilroy........ $25.20
El Segundo.... 15.9% El Segundo.... $22.93

The local Class A office market shows evidence of increasing improvement.
Vacancy has declined from nearly 20% estimated, as September 30, 1996, to
15.9%, as of June 30, 1997. Correspondingly, overall rents have increased by
over 4% during this same time frame. The Company's asking rents have increased
over this same period by approximately 5%. Nearly two-thirds of the available
space, as of June 30, 1997, is located in one major building, 200 North
Sepulveda Boulevard. This space which had been vacated by Hughes Electronics
has undergone significant rehabilitation during much of 1996. Of the 500,000
square feet of net rentable area at 200 North Sepulveda Boulevard, 156,000
square feet has been leased as of June 30, 1997.

Management believes that rental increases should continue. Contributing
factors to this expectation include the submarket's expanding economy which is
already evidenced in declining vacancy rates, the relative availability of
large blocks of office space and lower rental rates than those offered in the
nearby West Los Angeles office submarket and no known increases in the
competitive supply of office space.

Long Beach Airport Area Office Submarket. As of June 30, 1996, the vacancy
rate of Class A office buildings in the Long Beach Airport area was
approximately 3.9% as compared to approximately 2.0% for the Company's Long
Beach Office Properties. The vacancy figures for this market reflect the
results of a market that has significantly "tightened" during the preceding
nine months. By comparison, vacancy for the Long Beach Airport area as a whole
is 15.1%, as of June 30, 1997. Of the 190,000 rentable square feet estimated
to be available in Class A buildings, as of September 30, 1996, less than
60,000 square feet remains available, as of June 30, 1997. The absorption
provides evidence of the improving regional economy and the strategic location
of Class A office space in this submarket.

Class A rents in the Long Beach Airport Area have benefited from the
improving market conditions. Asking rents have increased 6% over rents in
these same buildings, as of September 30, 1996. Asking rents at Kilroy Long
Beach Phase II have increased by 7.5% over rents as of September 30, 1996.

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The market outlook for further rental increases is favorable given the
virtual absence of available space, the improving regional economy and the
lack of new space. Available space for technology companies is particularly
difficult to find, and buildings which offer current telephone communications
capabilities and electrical support are more likely to benefit earlier.

The following tables show the comparative vacancy rates of Class A office
space in the Long Beach submarket and Kilroy Long Beach, and the comparative
mean asking rents of Class A office space in the Long Beach submarket and
Kilroy Long Beach, respectively.

Class A Office Vacancy Class A Office Rents
Kilroy Versus Long Beach Kilroy Versus Long Beach
Mid-1997 Mid-1997
Vacancy Rate Mean Rent
- ------------ ---------
Kilroy........ 2.0% Kilroy........ $25.80
Long Beach.... 3.9% Long Beach.... $23.32

Santa Monica Office Submarket. In the Santa Monica office submarket, the
Company recently purchased one 95,000 square foot office building that acts as
the headquarters for Sony Corporation's music division. The Sony Building
represents about 3.5% of the approximately 2.7 million rentable square feet of
all Class A Office Properties in this submarket as of June 30, 1997.
Entertainment is reflective of much of Santa Monica's tenant base which is
also composed of companies in the financial services, legal, real estate and
advertising industries.

Santa Monica's office market has emerged as a principal Class A office
market, with many of its office buildings ranked among the most prestigious
buildings in the Los Angeles area. The attractiveness of this market stems
from its proximity to the ocean, the breadth of local retailing and
restaurants, the generally adjacent upscale residential neighborhoods which
appeal to the enterpreneurs and executives involved in office leasing
decisions, and the entertainment industry nucleus that is now in place (Sony,
MGM and a host of post-production companies) and draws additional companies.
Another factor contributing to Santa Monica's office market success has been
the availability of large-scale office development projects featuring
generally low-rise, campus style product that is unique to the West Los
Angeles office market. With continued growth anticipated for the entertainment
industry coupled with an improving regional economy, the rental rate and
vacancy outlook for Santa Monica remains favorable.

Class A office rents are in the $30 to $42 per rentable square foot per year
range and among the highest in the Los Angeles area. By comparison, the Sony
Building average annual rents are $33 per square foot. Vacancy among Class A
buildings is 16.7% which is above the 9.3% vacancy rate as of June 30, 1997,
for the Santa Monica office market as a whole. There was no vacancy in the
Sony Building as of June 30, 1997.

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Office development economics in the form of relatively high rents have
reached a point that may encourage new construction. Two projects in the
vicinity of the Sony Building where new office development is entitled include
the Arboretum (130,000 rentable square feet) and Water Garden Phase II
(650,000 rentable square feet). No public announcements concerning these two
projects have been made at this time. The following tables show the
comparative vacancy rates of Class A office space in the Santa Monica
submarket and the Sony Complex, and the comparative mean asking rents of Class
A office space in the Santa Monica submarket and the Sony Complex,
respectively.

Class A Office Vacancy Class A Office Rents
Kilroy Versus Santa Monica Kilroy Versus Santa Monica
Mid-1997 Mid-1997
Vacancy Rate Mean Rent
- ------------ ---------
Kilroy.......... 0.0% Kilroy.......... $33.00
Santa Monica.... 16.7% Santa Monica.... $35.02

Irvine Spectrum Office Submarket. The Company recently purchased one office
property located at 111 Pacifica (the "Pacifica Building") in Irvine which
encompasses 67,425 rentable square feet, and which is part of the Irvine
"Spectrum" project. This property represents approximately 11% of the 622,000
rentable square feet of Class A office space in the Spectrum, contained no
available rental space as of June 30, 1997.

The Irvine Spectrum has become one of Southern California's most attractive
destinations for corporate headquarters and expanding high-tech industries
relocating from other parts of the Los Angeles Basin. The Spectrum is home to
over 2,200 companies employing 36,000 people. Beside being conveniently
located near the John Wayne Airport, the Spectrum enjoys great surface
accessibility due to its location at the convergence of Interstates 5 and 405.
The Spectrum also attracts tenants due to its proximity to affluent, planned
neighborhoods in Mission Viejo, Aliso Viejo, Lake Forest and Laguna Hills.
Further contributing to the success of the Spectrum is a wide variety of
office product which provides space into which Spectrum tenants can expand.

Class A office rents range from approximately $22 to $25 per rentable square
foot per year. By comparison, the mean rent at the Pacifica Building is $23.40
per rentable square foot. Vacancy among Class A buildings in the Spectrum is
7.3% as of June 30, 1997, somewhat lower than the overall surrounding
submarket vacancy rate of 8.3% as of March 31, 1997.

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Demand for the office space is expected to increase as the relocation and
success of high-tech firms attract accounting and law firms that cater to the
high-tech industry. Construction at the Spectrum will continue for the
foreseable future as The Irvine Company expects to invest approximately $1
billion in office, retail and industrial space, including a new office high-
rise, a cluster of one-story office buildings and a 250,000 rentable square
foot expansion of the existing Irvine Entertainment Center. The following
tables show the comparative vacancy rates of Class A office space in the
Irvine Spectrum submarket and the Pacifica Building, and the comparative mean
asking rents of Class A office space in the Irvine submarket and the Pacifica
Building, respectively.

Class A Office Vacancy Class A Office Rents
Kilroy Versus Irvine Spectrum Kilroy Versus Irvine Spectrum
Mid-1997 Mid-1997
Vacancy Rate Mean Rent
- ------------ ---------
Kilroy........ 0.0% Kilroy........ $23.40
Irvine........ 7.3% Irvine........ $23.50

Thousand Oaks Submarket. The Company owns a stand alone three-story Office
Property located at 2829 Townsgate Road in Thousand Oaks, California. The City
of Thousand Oaks has approximately 112,600 residents, and is located 40 miles
northwest of Los Angeles in Ventura County, which is located along the coast
immediately north of Los Angeles County. Ventura County had a 1996 population
of approximately 720,000 persons. The County is home to companies in various
industries including high technology, pharmaceuticals and finance. As of March
31, 1997, the vacancy rate of office space in the Ventura County office
submarket was approximately 15.2%. During the years ended December 31, 1996
and 1995 there was net absorption in the Ventura County office submarket of
approximately 79,000 and 157,000 rentable square feet of office space,
respectively. For the first quarter ending March 31, 1997, net absorption was
39,000. The average annual effective gross rent for office space in the
Ventura County office submarket as of March 31, 1997 was $16.68 per square
foot.

Calabasas Office Submarket. The Company recently acquired one Class A office
property located at 26541 Agoura Road in Calabasas containing approximately
91,000 rentable square feet of office space. The Calabasas office submarket
houses a wide variety of tenants from high-technology to professional service
firms.

The Calabasas office market runs along the Highway 101 and is located in the
western extreme of the larger West San Fernando Valley office submarket. The
attractiveness of the Calabasas market can be attributed to several factors,
not the least of which are a lower tax rate and reduced cost of doing business
when compared

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with office space in Los Angeles. Tenants can expect to save from 26% to 32%
over the nearby Warner Center in the City of Los Angeles. This suburban, low-
rise campus office market represents a newer stock of office space which
appeals to executives in a variety of industries who reside in nearby affluent
residential communities. Besides offering high visibility and excellent
freeway access, surface parking in Calabasas is provided free.

At June 30, 1997, the Calabasas Office Property was fully leased, as
compared to the Calabasas Class A office market and the West San Fernando
Valley office market which were at approximately 9.4% and 14.3% vacancy
levels, respectively. In 1996, Calabasas office market absorption jumped to
approximately 137,600 rentable square feet from a 1995 low of 76,709 rentable
square feet. As of June 30, 1997, rents at Class A buildings averaged $21.10
per rentable square foot per month. By comparison, the Calabasas Office
Property currently carries an average monthly rent of $19.68.

The Calabasas market is expected to benefit from the expansion of existing
tenants as well as relocations from the Warner Center in Los Angeles and from
Woodland Hills in general. Construction has just begun to anticipate this
increase in Calabasas demand as two new Class A projects of 45,000 and 61,000
square feet are currently underway. The following tables show the comparative
vacancy rates of Class A office space in the Calabasas submarket and the
Company's Calabasas Office Property, and the comparative mean asking rents of
Class A office space in the Calabasas submarket and the Company's Calabasas
Office Property, respectively.

Class A Office Vacancy Class A Office Rents
Kilroy Versus Calabasas Kilroy Versus Calabasas
Mid-1997 Mid-1997
Vacancy Rate Mean Rent
- ------------ ---------
Kilroy........ 0% Kilroy........ $19.68
Calabasas..... 9.4% Calabasas..... $21.10

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Industrial Submarkets

For the first time this decade the industrial vacancy rate in the Southern
California Area has dropped below the national average. As of March 31, 1997,
available industrial space in the Southern California Area totaled
approximately 1.2 billion rentable square feet. Vacancy rates in the
industrial space market in the Southern California Area have declined from a
high of approximately 13.8% in 1992 to approximately 7.3% at March 31, 1997.
By comparison, the national average, as of March 31, 1997, was 8.1%. As of
June 30, 1997, the vacancy rate for the Industrial Properties in the Southern
California Area was approximately 3.3%. The following table shows the U.S. and
Southern California Area industrial vacancy rates for the period from 1991
through the first quarter of 1997.

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INDUSTRIAL MARKET VACANCY TRENDS
SOUTHERN CALIFORNIA AREA VERSUS U.S.
1991-MARCH 31, 1997
1991 1992 1993 1994 1995 1996 1Q 1997
---- ---- ---- ---- ---- ---- -------
U.S. ............ 7.9% 8.7% 8.3% 7.4% 6.9% 0.077 8.1%
Southern
California Area.. 13.0% 13.8% 13.5% 12.6% 9.2% 0.076 7.3%

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Much of the existing industrial space in the Southern California Area is
considered to be functionally obsolete due to its age, services and/or
configuration. As a result, the Southern California Area inventory for
industrial space is beginning to experience a modest growth in new
construction primarily of build-to-suit. Speculative construction in the first
quarter of 1997 was approximately 9.6 million rentable square feet
(representing approximately 0.8% of the region's inventory) compared to
approximately 7.0 million in 1996.

North Orange County Industrial Submarket. The Company recently acquired
seven industrial buildings in Brea (the "Brea Industrial Properties"), part of
the North Orange County industrial submarket. The Brea Industrial Properties
encompass approximately 276,000 rentable square feet and, as of June 30, 1997,
were 98% leased. As of March 30, 1997, the North County industrial submarket
contained approximately 63.1 million rentable square feet, approximately 9.9%
of which was vacant. Vacancy rates in this submarket have dropped nearly 50%
from 1991 levels and 25% since 1995. Even in the face of speculative building,
most of which has been preleased, vacancy rates are expected to decline
further while 1997 rental rates in the North Orange County Industrial
submarket could rise by as much as 15% over year-end 1996 levels.

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Central Orange County Industrial Submarket. The Company currently owns six
industrial buildings encompassing approximately 565,000 rentable square feet
located at 3340 La Palma Avenue, 1000 East Ball Road, 1230 S. Lewis Street,
4155 E. La Palma, 4125 La Palma Avenue and 5325 East Hunter Avenue. These
buildings were 100.0% leased as of June 30, 1997. The Central Orange County
industrial submarket held approximately 31.1 million rentable square feet with
an approximate 9.9% vacancy rate, as of March 31, 1997. As is the case with
the North Orange County submarket, vacancy rates in this submarket are just
two-thirds of 1991 levels and have declined steadily since 1995. Vacancy rates
are expected to decline and rental rates increase as a shortage of developable
land keeps existing space in high demand.

West Orange County Industrial Submarket. In this submarket, the Company
currently owns five industrial buildings located at 12681/12691 Pala Drive,
12752-12822 Monarch Street, 12400 Industry Street and 7421 Orangewood Avenue.
As of June 30, 1997, the five buildings encompassed approximately 509,000
rentable square feet of which 2.6% was available for lease. As a submarket,
vacancy rates were 8.3%, as of March 31, 1997, and aggregate rentable area
totaled 36.4 million rentable square feet. By the end of 1997, rental rates
are expected to rise by up to 10% over 1996 levels.

Orange County Airport Area Industrial Submarket. The Company recently
acquired three buildings totaling approximately 561,000 rentable square feet
in Irvine and Santa Ana, part of the Orange County Airport Area industrial
submarket, located at 17150 Van Karman, 9451 Toledo Way and 184-220 Technology
Drive. As of June 30, 1997, these properties were 95.6% leased. Within the
entire submarket, vacancy rates among the 73.5 million rentable square feet
were 8.4% as of March 31, 1997. Vacancy and rental rates in this submarket
have stabilized after several years of fluctuation. By the year ended December
31, 1997, rental rates may rise up to 15% over 1996 levels as speculative
construction is expected to fall short of anticipated demand.

Ventura Coastal Plain Office and Industrial Submarkets. The Company recently
acquired four buildings consisting of 276,216 rentable square feet of office
and research and development space in Camarillo located at 5151-5155 Camino
Ruiz. Located within the Ventura Coastal Plain industrial submarket, this
property was 100% leased as of June 30, 1997. As of March 31, 1997, the
Ventura Coastal Plain industrial submarket contained approximately 155 million
rentable square feet, of which approximately 6.7% was vacant. Vacancy rates
have been slowly declining while asking rents have rebounded from a 1996 low
of $0.48 to $0.55, as of March 31, 1997. The Ventura Coastal Plain submarket
is the center of commerce for Ventura County which is actively attracting new
businesses and helping local businesses expand. Sales prices and lease rates
within the county are expected to rise through 1997 as the market tightens,
especially among warehouse and multi-tenant industrial properties.

The Ventura Coastal Plain Office Market has historically been dependent on
the expansion of local businesses and government services, and the Department
of Defense's mid-1995 announcement that the Point Mugu Naval Base would not be
closed still attracts new jobs and business to the area. Lease and vacancy
rates in this submarket, which is characterized by a large supply of small
office space, averaged $16.20 and 16.1% as of year-end 1996, respectively.
These indicators may improve if migrating Los Angeles companies interested in
the higher quality of life in Ventura County are attracted by the Ventura
Coastal Plain Office Market's varied selection of space and more reasonable
rates.

Ontario/Mira Loma Industrial Submarket. The Company recently acquired one
building containing 153,566 rentable square feet of rentable space located at
821 S. Rockefeller Drive in Ontario, part of the Ontario/Mira Loma industrial
submarket. As of June 30, 1997, this property was 100% leased. The
Ontario/Mira Loma industrial submarket contained approximately 57.3 million
rentable square feet of which approximately 5.8% was available for lease, as
of March 31, 1997. Asking rents in this submarket have increased for the first
time since 1994 and significant amounts of new construction are now underway.
Strong preleasing activity has characterized this submarket in 1997, as
international business has expanded in Southern California. The Ontario/Mira
Loma Industrial submarket is located within the two county Riverside-San
Bernardino metropolitan area which offers excellent freeway and rail access, a
solid labor base and an industrial vacancy rate of 8.0% as of the end of the
first quarter of 1997.

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Torrance/Harbor City Office and Industrial Submarket. The Company recently
acquired two office/industrial buildings located at 23600 and 23610 Telo
Avenue, within the Torrance/Harbor City industrial submarket, which encompass
approximately 80,000 rentable square feet. As of June 30, 1997, this property
was 100.0% leased. However, subsequent to June 30, 1997, one of the tenants at
this Property terminated its lease and approximately 48.1% of the rentable
square feet of the Property is presently available for lease. As of March 31,
1997, the Torrance/Harbor City industrial submarket contained approximately
29.7 million rentable square feet of which approximately 6.2% was available
for lease. Vacancy rates in this submarket have steadily declined over the
past four years. Strategic proximity to ports and the unavailability of large
blocks of developable land within the South Bay market, of which the
Torrance/Harbor City industrial submarket is a part, suggest that this trend
will continue.

The Torrance office submarket contains approximately 3.3 million rentable
square feet of office space. Vacancy rates appear to have stabilized after
having dropped to approximately 15.9%, as of March 31, 1997 (approximately 3%
lower than year-end 1996 levels), and are at their lowest level since 1991.

El Segundo/LAX Industrial Submarket. The Company currently owns four
buildings comprising approximately 390,000 rentable square feet of industrial
space located at 2031 E. Mariposa, and 2260, 2265 and 2270 E. El Segundo
Boulevard, in El Segundo, part of the El Segundo/LAX industrial submarket. As
of June 30, 1997, 1.9% of this space was vacant. As of March 31, 1997, the El
Segundo/LAX industrial submarket showed vacancy rates of 5.7%, among the
lowest of the decade, and rental rates were at approximately $7.78 per square
foot per year. Within the South Bay region, of which the El Segundo/LAX
industrial submarket is a part, much of the developable land is burdened with
environmental cleanup costs. As a result, rents should continue to rise given
constraints on developable industrial land.

Eastern San Gabriel Valley Industrial Submarket. The Company presently plans
to complete the Pending Acquisition, three buildings located at 20553 East
Walnut Drive, which contain approximately 165,000 rentable square feet of
industrial space which was fully leased as of June 30, 1997. As of March 31,
1997, vacancy rates in the Eastern San Gabriel Valley Industrial Submarket
stood at 6.4%, the result of a steady decline through the decade. Demand in
this submarket is expected to rise as tenants choose to relocate from older
industrial space into new construction. Consequently, rental and vacancy rates
should improve further, especially for better quality industrial space.

SEATTLE MARKET

The Company owns three office buildings located at the SeaTac Office Center
in the City of SeaTac, just south of Seattle, Washington. The Seattle
metropolitan area (formally the Seattle-Tacoma CMSA) reported a 1996
population of approximately 3.3 million. Seattle ranks as the 13th largest
metropolitan area in the country. Since 1990, the region has added on average
58,000 new residents. The expectation is that the region will continue to
increase, expanding annually over the next five years at approximately 53,000
new residents. Median household income in the Seattle metropolitan area is
estimated at $44,000 in 1996 and exceeds national median household income by
nearly 21%.

Employment in the Seattle metropolitan area stood at an estimated 1.3
million in 1996. During the 1990s, employment growth has averaged about 25,000
per year. Recent employment statistics for the 12-month period between May
1996 and May 1997 show that the Seattle area added nearly 66,000 jobs, the
third largest numeric increase in the country. On a percentage basis,
employment in the Seattle area expanded by 5.4% during this same 12-month
period, the fourth largest percentage increase in the country.

As of December 31, 1992, the vacancy rate for office in the Seattle
metropolitan area was approximately 15.5%. Since then, this rate has steadily
declined to a level of 12.4%, as of December 31, 1994, and 7.7%, as of June
30, 1997. Seattle's aggregate office space stands at about 53.8 million
rentable square feet. As of June 30, 1997, two new projects totaling about one
million square feet are under construction.

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INSURANCE

Management believes that the Properties are covered by adequate
comprehensive liability, rental loss, and all-risk insurance, provided by
reputable companies, with commercially reasonable deductibles, limits and
policy specifications customarily carried for similar properties. There are,
however, certain types of losses which may be either uninsurable or not
economically insurable, such as losses due to floods, riots or acts of war.
Should an uninsured loss occur, the Company could lose both its invested
capital in and anticipated profits from the property.

UNINSURED LOSSES FROM SEISMIC ACTIVITY

The Properties are located in areas that are subject to seismic activity.
Although the Company has earthquake insurance on certain of the Properties,
should any Property sustain damage as a result of an earthquake, or should
losses exceed the amount of such coverage, the Company may incur uninsured
losses or losses due to deductibles or co-payments on insured losses.

All of the Properties have been recently reviewed by an independent
engineering consultant. Each of the Office Properties located at Kilroy LAX,
Kilroy Airport Center Long Beach and the SeaTac Office Center was reviewed as
part of the respective office complex ("Office Complex") in which each is
located and the following data summarizes the findings with respect to each
Office Complex taken as a whole. The review of each of the Properties and
Office Complexes included a review of the probable loss associated with
certain seismic activity for the "as-is" building shell construction. The
estimated property damage loss associated with building shell construction and
related business interruption for the Office Complexes and each of the other
Properties was estimated based upon site-specific seismic ground motion
intensities expected to occur at least once during 50-year and 200-year time
periods. For 50-year seismic ground motion intensity, these property damage
loss evaluations indicate that none of the Office Complexes would be expected
to incur property damage losses in excess of approximately 10% of their
respective estimated replacement cost value ("RCV") and only two of the
Industrial Properties would be expected to incur property damage losses in
excess of approximately 10% of the RCV. The two Industrial Properties, located
at 12691 Pala Drive, Garden Grove, California and 1230 South Lewis Street,
Anaheim, California, are expected to incur 50-year property damage losses of
approximately 13% and approximately 14%, respectively, of their RCVs. For
seismic ground motion intensities expected to occur at least once in a 200-
year period, these property damage loss evaluations indicate that only one of
the Office Properties (including the Office Complexes) would be expected to
incur property damage losses in excess of approximately 21% of its RCV.
Specifically, the Office Property located at 185 South Douglas Street, El
Segundo, California is expected to incur a 200-year property damage loss of
approximately 40% of its estimated RCV. With respect to the Industrial
Properties, only four would be expected to incur 200-year property damage
losses in excess of 25% of their respective RCVs. Specifically, the Industrial
Properties located at 12691 Pala Drive, Garden Grove, California; 1230 South
Lewis Street, Anaheim, California; 2260 E. El Segundo Boulevard, El Segundo,
California; and 2270 E. El Segundo Boulevard, El Segundo, California, each
would be expected to experience property damage losses of approximately 40% of
its respective estimated RCV during a 200-year seismic disturbance.

The Company has insurance for loss in the event of damage to the Properties
from earthquake activity, which consists of primary loss insurance of $1.0
million and $10.0 million supplemental coverage for losses in excess of $11.0
million. Both the primary loss and supplemental coverage are subject to
deductibles equal to 25% of the insurable values for each location per
occurrence and, for the primary coverage, a minimum deductible of $250,000 (to
the extent that such amount is greater than 25% of the insurable values at
such location) for each location per occurrence. The Company's earthquake
insurance might not be sufficient for replacement.

GOVERNMENT REGULATIONS

Many laws and governmental regulations are applicable to the Properties and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.

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Costs of Compliance with Americans with Disabilities Act. Under the ADA, all
places of public accommodation are required to meet certain federal
requirements related to access and use by disabled persons. Compliance with
the ADA might require removal of structural barriers to handicapped access in
certain public areas where such removal is "readily achievable." Noncompliance
with the ADA could result in the imposition of fines or an award of damages to
private litigants. The impact of application of the ADA to the Company's
properties, including the extent and timing of required renovations, is
uncertain. If required changes involve a greater amount of expenditures than
the Company currently anticipates or if the changes must be made on a more
accelerated schedule than the Company currently anticipates, the Company's
ability to make expected distributions to stockholders could be adversely
affected.

Environmental Matters. Under various federal, state and local laws,
ordinances and regulations relating to the protection of the environment, an
owner or operator of real estate may be held liable for the costs of removal
or remediation of certain hazardous or toxic substances located on or in the
property. These laws often impose liability without regard to whether the
owner was responsible for, or even knew of, the presence of such hazardous or
toxic substances. The costs of investigation, removal or remediation of such
substances may be substantial, and the presence of such substances may
adversely affect the owner's ability to rent or sell the property or to borrow
using such property as collateral. In addition, the presence of such
substances may expose the Company to liability resulting from any release of
or exposure to such substances. Persons who arrange for the disposal or
treatment of hazardous or toxic substances at another location may also be
liable for the costs of removal or remediation of such substances at the
disposal or treatment facility, whether or not such facility is owned or
operated by such person. Certain environmental laws impose liability for
release of asbestos-containing materials into the air, and third parties may
also seek recovery from owners or operators of real properties for personal
injury associated with asbestos-containing materials and other hazardous or
toxic substances. In connection with the ownership (direct or indirect),
operation, management and development of real properties, the Company may be
considered an owner or operator of such properties or as having arranged for
the disposal or treatment of hazardous or toxic substances and, therefore,
potentially liable for removal or remediation costs, as well as certain other
related costs, including governmental penalties and injuries to persons and
property.

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Company does not believe that this site constitutes a risk of a liability that
would have a material adverse effect on the Company's financial condition or
results of operations taken as a whole. In connection with the preparation of
the Phase I environmental survey with respect to the Industrial Property
located at 12752-12822 Monarch Street, soil sampling revealed trace elements
of contamination with cleaning solvents. However, based on the level of
contamination noted in the environmental survey, management does not believe
that such contamination will have a material adverse effect on the Company's
financial condition or results of operations, taken as a whole.

Except as described in this Prospectus, there are no other laws or
regulations which have a material effect on the Company's operations, other
than typical state and local laws affecting the development and operation of
real property, such as zoning laws. See "Risk Factors--Government
Regulations," "Certain Provisions of Maryland Law and of the Articles of
Incorporation and Bylaws," "Partnership Agreement of the Operating
Partnership," "Federal Income Tax Consequences" and "ERISA Considerations."

MORTGAGE DEBT

As of July 25, 1997, the Company had an aggregate of $190.7 million of
outstanding indebtedness secured by certain of the Properties. Under the
Credit Facility, the Company had outstanding indebtedness at July 25, 1997 of
approximately $95.0 million secured by substantially all the Acquired
Properties and the five Office Properties comprising Kilroy Long Beach. The
obligations outstanding under the Credit Facility bore a weighted average
interest rate of 7.5%, and mature in May 1999, subject to a one year
extension. The Company also had outstanding mortgage indebtedness of
$84.0 million under the $84 Million Loan. Such obligation is secured by all of
the Office and Industrial Properties owned by the Company upon consummation of
the IPO, except for the

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five Office Properties at Kilroy Long Beach and the three Office Properties
comprising the SeaTac Office Center. The $84.0 Million Loan bears an interest
rate of 8.35% and matures in 2022, subject to an increase in the interest rate
on January 31, 2005 to the greater of 13.35% and the sum of the interest for
U.S. Treasury Securities maturing 15 years from such date plus 5.0%. The
Company also had outstanding $12.0 million under the SeaTac Loan which is
secured by the three Office Properties comprising the SeaTac Office Center.
The SeaTac Loan bears interest at LIBOR plus 1.5% and matures in January 1998.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources" and "Description of
Indebtedness."

MANAGEMENT AND EMPLOYEES

The Company conducts substantially all of its operations through the
Operating Partnership and substantially all of its development activities and
related operations through the Services Company. The Company generally has
full, exclusive and complete responsibility and discretion in the management
and control of the Operating Partnership, but not of the Services Company.

LEGAL PROCEEDINGS

Neither the Company nor any of the Properties is subject to any material
litigation nor, to the Company's knowledge, is any material litigation
threatened against any of them, other than routine litigation arising in the
ordinary course of business, which is expected to be covered by liability
insurance. In May 1994, KI permitted an uncontested foreclosure by the Bank of
America on a five-story office building located in El Segundo, California as
part of an overall renegotiation of KI's loans and lines of credit. In July
1993, KI sold Kilroy Long Beach Phase I to the mortgagee thereof, at a
purchase price slightly in excess of the outstanding balance of such mortgage.
KI continued to lease and manage such facility after such sale. In December
1994, the owner of Hidden River Corporate Park located in Tampa, Florida
permitted the uncontested foreclosure of the deeds of trust and certain other
property pledged as collateral to secure certain development loans related to
such property. KI developed the property, an approximately 210-acre office
park, and at the time of the foreclosure John B. Kilroy, Sr. and John B.
Kilroy, Jr. were limited partners in the company that owned the property.

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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

The Company's policies with respect to the following activities have been
determined by the Board of Directors and may be amended or revised from time
to time at the discretion of the Board of Directors, without a vote of the
stockholders of the Company, if they determine in the future that such a
change is in the best interests of the Company and its stockholders.

INVESTMENT POLICIES

Investment in Real Estate or Interests in Real Estate. The Company conducts
all its investment activities through the Operating Partnership and will
continue to do so until all Units of the Operating Partnership have been
redeemed by the Company or exchanged for shares of Common Stock and the
Operating Partnership ceases to exist. During such period, the proceeds of all
equity capital raised by the Company will be contributed to the Operating
Partnership in exchange for Units in the Operating Partnership. The investment
objectives of the Company are to achieve stable cash flow available for
distributions and, over time, to increase cash flow and portfolio value by
actively managing the Properties, by developing properties, by acquiring
additional properties that, either as acquired or after value-added activities
by the Company (such as improved management and leasing services and
renovations), will produce additional cash flows and by expanding its
management, development and leasing business with third-parties. The Company's
policy is to develop and acquire properties primarily for generation of
current income and appreciation of long-term value.

The Company pursues its investment objectives primarily through the
ownership of quality office, industrial and retail properties. The Company
currently is contemplating development of additional office buildings and
industrial buildings primarily in Southern California, although future
investments could be made outside of such area or in different property
categories if the Board of Directors determines that such acquisitions and
developments would be desirable. The Company has no limit on the amount or
percentage of its assets invested in any single property or group of related
properties. The Board of Directors may establish limitations as it deems
appropriate from time to time. No limitations have been set on the number of
properties in which the Company seeks to invest or on the concentration of
investments in any one geographic region.

The Company may develop, purchase or lease income-producing properties for
long-term investment and expand, improve or sell its properties, in whole or
in part, when circumstances warrant. The Company may also participate with
other entities in property ownership through joint ventures or other types of
co-ownership. Equity investments by the Company may be subject to existing or
future mortgage financing and other indebtedness which will have priority over
the equity interests of the Company.

As the sole general partner of the Operating Partnership, the Company also
determines the investment policies of the Operating Partnership. Under the
Partnership Agreement, all future investments must be made through the
Operating Partnership. See "Partnership Agreement of the Operating
Partnership--Management."

Investments in Real Estate Mortgages. While the Company emphasizes equity
real estate investments, the Company may, in its discretion, invest in
mortgages and other real estate interests consistent with the Company's
qualification as a REIT. The Company has not previously invested in mortgages
and does not presently intend to invest in mortgages or deeds of trust, but
may invest in participating or convertible mortgages if the Company concludes
that it may benefit from the cash flow or any appreciation in the value of the
subject property. Such mortgages are similar to equity participations.
Investments in real estate mortgages run the risk that one or more borrowers
may default under such mortgages and that the collateral securing such
mortgages may not be sufficient to enable the Company to recoup its full
investment.

Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. Subject to the percentage of ownership
limitations and gross income tests necessary for the Company to qualify and
maintain its status as a REIT, the Company may invest in securities of other
entities engaged in real estate activities or securities of other issuers See
"Federal Income Tax Considerations--Taxation of the

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Company." Except for its investment in the Services Company, the Company does
not currently intend to invest in the securities of other issuers except in
connection with acquisitions of indirect interests in properties (normally
general or limited partnership interests in special purpose partnerships
owning properties) and in connection with the acquisition of substantially all
of the economic interest in a real estate-related operating business where
such investments would be consistent with the Company's investment policies.
Investment in these securities is also subject to the Company's policy not to
be treated as an investment company under the Investment Company Act of 1940.
The risks of investing in real estate-related operating businesses include the
risk that contracts with third parties may be terminated by such third
parties, not renewed upon expiration or renewed on less favorable terms, and
the risk that fee income will decrease as a result of a decline in general
real estate market conditions.

DISPOSITIONS

The Company has no current intention to cause the disposition of any of the
Properties, although it reserves the right to do so if the Board of Directors
determines that such action would be in the best interests of the Company. The
disposition of the Office Property located at 2260 E. Imperial Highway at
Kilroy LAX in El Segundo is subject to the approval of limited partners of the
Operating Partnership. See "Partnership Agreement of the Operating
Partnership--Certain Limited Partner Approval Rights."

FINANCING

The Company has established its debt policy relative to the market
capitalization of the Company rather than to the book value of its assets, a
ratio that is frequently employed. The debt-to-total market capitalization
ratio (i.e., the total consolidated debt of the Company as a percentage of the
aggregate market value of the issued and outstanding shares of Common Stock
and Units plus total consolidated debt) of the Company, as of March 31, 1997,
was approximately 17.4% and increased, as of June 30, 1997, to approximately
30.1%. Giving pro forma effect to the Offering and the application of the net
offering proceeds therefrom as set forth under the caption "Use of Proceeds,"
the Company's debt-to-market capitalization ratio as of July 25, 1997 would
have been 11.9%. This ratio will fluctuate with changes in the price of the
Common Stock (and the issuance of additional shares of Common Stock) and
differs from the debt-to-book capitalization ratio, which is based upon book
value. As the debt-to-book capitalization ratio may not reflect the current
income potential of a company's assets and operations, the Company believes
that debt-to-total market capitalization ratio provides a more appropriate
indication of leverage for a company whose assets are primarily income-
producing real estate. The total market capitalization of the Company,
however, is more variable than book value, and does not necessarily reflect
the fair market value of the underlying assets of the Company at all times.
Although the Company considers factors other than total market capitalization
in making decisions regarding the incurrence of indebtedness (such as the
purchase price of properties to be acquired with debt financing, the estimated
market value of such properties upon refinancing and the ability of particular
properties and the Company as a whole to generate cash flow to cover expected
debt service), there can be no assurance that the ratio of indebtedness to
total market capitalization (or to any other measure of asset value) will be
consistent with the expected level of distributions to the Company's
stockholders.

The Board of Directors has adopted a policy of limiting the Company's
indebtedness to approximately 50% of its total market capitalization, but the
organizational documents of the Company do not contain any limitation on the
amount or percentage of indebtedness, funded or otherwise, that the Company
may incur. In addition, the Company may from time to time modify its debt
policy in light of then current economic conditions, relative costs of debt
and equity capital, market values of its properties, general conditions in the
market for debt and equity securities, fluctuations in the market price of its
Common Stock, growth and acquisition opportunities, the Company's continued
REIT qualification requirements and other presently unknown factors which may
arise in the future which, in the judgment of the Board of Directors, require
a revision in such policy. Accordingly, the Company may increase or decrease
its debt to market capitalization ratio beyond the limits described above. See
"Risk Factors--No Limitation on Debt."

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To the extent that the Board of Directors decides to obtain additional
capital, the Company may raise such capital through additional equity
offerings (including offerings of senior or convertible securities and
preferred stock), sales of investments, bank and other institutional
borrowings, the issuance of debt securities (which may be convertible into or
exchangeable for shares of Common Stock or be accompanied by warrants to
purchase shares of Common Stock) or retention of cash flow (subject to
provisions in the Code concerning taxability of undistributed REIT income), or
a combination of these methods. In the event that the Board of Directors
determines to raise additional equity capital, the Board has the authority,
without stockholder approval, to issue additional shares of Common Stock or
other capital stock (including securities senior to the Common Stock) of the
Company in any manner, and on such terms and for such consideration, it deems
appropriate, including in exchange for property. Existing stockholders have no
preemptive right to purchase shares issued in any offering, and any such
offering might cause a dilution of a stockholder's investment in the Company.
As long as the Operating Partnership is in existence, the net proceeds of the
sale of Common Stock by the Company will be contributed to the Operating
Partnership as a contribution to capital in exchange for a number of Units in
the Operating Partnership equal to the number of shares of Common Stock sold
by the Company. The Company presently anticipates that any additional
borrowings would be made by the Operating Partnership, although the Company
might incur indebtedness, the proceeds of which would be re-loaned to the
Operating Partnership on the same terms and conditions as are applicable to
the Company's borrowing of such funds. See "Partnership Agreement of the
Operating Partnership--Capital Contribution."

Borrowings may be unsecured or may be secured by any or all of the assets of
the Company, the Operating Partnership or any existing or new property-owning
partnership and may have full or limited recourse to all or any portion of the
assets of the Company, the Operating Partnership or any existing or new
property-owning partnership. Indebtedness incurred by the Company may be in
the form of bank borrowings, purchase money obligations to the sellers of the
properties, publicly or privately placed debt instruments or financing from
institutional investors or other lenders, any of which may be recourse to all
or any part of the property of the Company or may be limited to the particular
property for which the indebtedness relates. The Company does not have a
policy limiting the number or amount of mortgages or interests which may be
placed on any particular property. In addition, the proceeds from any
borrowings by the Company may be used for working capital, to refinance
existing indebtedness, to finance the acquisition, expansion or development of
properties and for the payment of distributions.

The Board of Directors also has the authority to cause the Operating
Partnership to issue additional Units in any manner (and on such terms and for
such consideration) as it deems appropriate, including in exchange for
property. See "Partnership Agreement of the Operating Partnership--Issuance of
Additional Units."

In the future, the Company may seek to extend, expand, reduce or renew the
Mortgage Loans, the Credit Facility, or obtain new credit facilities or lines
of credit, subject to its general policy of debt capitalization. Future
mortgage loans, credit facilities and lines of credit may be used for the
purpose of making acquisitions or capital improvements, providing working
capital or meeting the taxable income distribution requirements for REITs
under the Code if the Company has taxable income without receipt of cash
sufficient to enable the Company to meet such distribution requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

WORKING CAPITAL RESERVES

The Company will maintain working capital reserves (and when not sufficient,
access to borrowings) in amounts that the Board of Directors determines from
time to time to be adequate to meet normal contingencies in connection with
the operation of the Company's business and investments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."

CONFLICT OF INTEREST POLICIES

Directors and officers of the Company may be subject to certain conflicts of
interest in fulfilling their responsibilities to the Company. The Company has
adopted certain policies designed to minimize potential conflicts of interest.

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Terms of Transfers. The terms of the transfers of certain of the Properties
to the Operating Partnership by the Unitholders who are members of the Kilroy
Group and the terms of each of the option agreements relating to the Option
Properties, were not determined through arm's length negotiations. Partners
and affiliates of the Kilroy Group who are directors and officers of the
Company had a substantial economic interest in the entities transferring the
Properties and granting the options. Consequently, such directors and officers
may be subject to a conflict of interest with respect to their obligations as
management of the Company to enforce the terms of the agreements relating to
such transfers, including the indemnification provisions thereof. However, a
majority of the Independent Directors must approve any transactions between
the Company and members of the Kilroy Group, including the enforcement of the
terms of the transfers. See "Risk Factors--Conflicts of Interest" and
"Management."

Sale or Refinancing of Certain of the Properties. The sale of certain of the
Properties may cause adverse tax consequences to members of the Kilroy Group,
as compared to the effects on the Company. In addition, a significant
reduction in debt encumbering such Properties could cause adverse tax
consequences to the members of the Kilroy Group, as compared to the effects on
the holders of Units or shares of Common Stock. As a result, certain officers
and directors who are members of the Kilroy Group might not favor such a sale
of such Properties or a significant reduction in debt even though such sale or
debt reduction could be beneficial to the Company. The decision as to whether
to proceed with any such sale or debt reduction would be made by the Board of
Directors, subject to the obligation of the Operating Partnership to use its
commercially reasonable efforts to cooperate with the limited partners to
minimize any taxes payable in connection with any repayment, refinancing,
replacement or restructuring of indebtedness, or any sale, exchange or any
other disposition of assets, of the Operating Partnership. In addition, the
Partnership Agreement provides that if the limited partners own at least 5% of
the outstanding Units (including Units held by the Company), the Company shall
not, without the prior consent of a majority of the limited partners, prior to
January 31, 2004, sell the Office Property located at 2260 E. Imperial
Highway, at Kilroy LAX, other than incident to a merger or sale of
substantially all of the Company's assets. See "Partnership Agreement of the
Operating Partnership--Transferability of Interests" and "--Certain Limited
Partner Approval Rights."

Noncompetition Agreements. John B. Kilroy, Sr. has agreed, during the term
of his service as a member of the Board of Directors, not to conduct property
development, acquisition or management activities with respect to office and
industrial property in greater Southern California or in any other market in
which the Company owns, develops or manages property. John B. Kilroy, Sr. is
not restricted, however, from continuing to own, manage and lease certain
other existing real estate investments owned by him including, without
limitation, certain properties described under "Business and Properties--
Option Properties."

John B. Kilroy, Jr. has agreed, during the term of his employment agreement
and for one year thereafter (unless terminated by the Company without "cause"
or by John B. Kilroy, Jr. for "good reason" or following a "change of
control," as such terms are defined in his employment agreement), and for so
long as he is a member of the Board of Directors, not to conduct property
development, acquisition, sale or management activities in any market.
Notwithstanding the foregoing, John B. Kilroy, Jr. is not restricted from
continuing to own, manage, lease, transfer and exchange certain existing real
estate investments owned by him described under the caption "Business and
Properties--Option Properties" or owning interests in real property not
competitive with the Company. See "Management--Employment Agreements."

In addition, with respect to the property located at Calabasas Park Centre,
each of John B. Kilroy, Sr. and John B. Kilroy, Jr. has agreed to be limited
solely to activities related to the marketing, entitlement and sale of such
properties. Such properties are being actively marketed for sale and are
expected to be sold in the ordinary course of business. John B. Kilroy, Sr.
and John B. Kilroy, Jr. each spend an immaterial amount of time in connection
with the sale of such properties. In addition, each has agreed not to sell
such properties located at Calabasas Park Centre to a real estate investment
trust with an existing portfolio of office or industrial properties unless
first offered to the Company on the same economic terms.

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License Agreement. The Unitholders who are members of the Kilroy family have
entered into a license agreement (the "License Agreement") pursuant to which
such Unitholders have granted to the Company the nonexclusive right to use the
Kilroy name in connection with the acquisition, development, leasing and
management of commercial properties. Pursuant to the terms of the License
Agreement, each of the Unitholders retains the right to use the Kilroy name
for commercial endeavors, including in connection with real estate
transactions. Such activities are subject to the limitations set forth in the
agreements described above in the subsection "--Noncompetition Agreements."

Policies Applicable to All Directors. Under the Articles of Incorporation
and Maryland law, a contract or transaction between the Company and any of its
directors or between the Company and any other corporation, firm or other
entity in which any of its directors is a director, officer, stockholder,
member or partner or has a material financial interest is not void or voidable
solely because of such interest if (i) the contract or transaction is
approved, after disclosure of the interest, by the affirmative vote of a
majority of the disinterested directors, or by the affirmative vote of a
majority of the votes cast by disinterested stockholders, or (ii) the contract
or transaction is established to have been fair and reasonable to the Company.

The Articles of Incorporation and Bylaws provide that a majority of the
Board of Directors must be Independent Directors. See "Certain Provisions of
Maryland Law and of the Articles of Incorporation and Bylaws--The Board of
Directors."

OTHER POLICIES

The Company operates in a manner that does not subject it to regulation
under the Investment Company Act of 1940. The Company does not intend (i) to
invest in the securities of other issuers (other than the Operating
Partnership and the Services Company) for the purpose of exercising control
over such issuer, (ii) to underwrite securities of other issuers or (iii) to
trade actively in loans or other investments.

The Board of Directors has the authority, without stockholder approval, to
issue additional shares of Common Stock or other securities and to repurchase
or otherwise reacquire shares of Common Stock or any other securities in the
open market or otherwise and may engage in such activities in the future. The
Company may, under certain circumstances, purchase shares of Common Stock in
the open market, if such purchases are approved by the Board of Directors. The
Board of Directors has no present intention of causing the Company to
repurchase any of the shares of Common Stock, and any such action would be
taken only in conformity with applicable federal and state laws and the
requirements for qualifying as a REIT under the Code and the Treasury
Regulations. To date, the Operating Partnership has issued 165,102 additional
limited partnership Units exchangeable into shares of Common Stock in exchange
for certain real property interests and the Operating Partnership may issue
additional Units, and the Company may issue additional shares of Common Stock,
in the future. The Company expects to issue shares of Common Stock to
Unitholders upon exercise of their exchange rights in the Partnership
Agreement. The Company has not made loans to other entities or persons,
including its officers and directors. The Company may in the future make loans
to joint ventures in which it participates in order to meet working capital
needs. The Company has not engaged in trading, underwriting or agency
distribution or sale of securities of other issuers other than the Operating
Partnership, nor has the Company invested in the securities of other issuers
other than the Operating Partnership and the Services Company for the purposes
of exercising control, and does not intend to do so.

At all times, the Company intends to make investments in such a manner as to
be consistent with the requirements of the Code for the Company to qualify as
a REIT unless, because of changing circumstances or changes in the Code (or in
Treasury Regulations), the Board of Directors determines that it is no longer
in the best interests of the Company to qualify as a REIT and such
determination is approved by the affirmative vote of holders owning at least
two-thirds of the shares of the Company's capital stock outstanding and
entitled to vote thereon.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The Board of Directors consists of five members, including a majority of
directors who are Independent Directors. Directors of the Company are divided
into three classes serving staggered three-year terms (except initial terms
expiring in 1998 and 1999) with directors serving until the election and
qualification of their successors. The first annual meeting of stockholders of
the Company after the IPO will be held in 1998. See "Certain Provisions of
Maryland Law and of the Articles of Incorporation and Bylaws--The Board of
Directors." Subject to rights pursuant to any employment agreements, officers
of the Company serve at the pleasure of the Board of Directors.

The following table sets forth certain information with respect to the
directors and executive officers of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION TERMEXPIRES
- ---- --- -------- -----------
<S> <C> <C> <C>
John B. Kilroy, Sr...... 75 Chairman of the Board of Directors 1999
John B. Kilroy, Jr...... 48 President, Chief Executive Officer and 2000
Director
Jeffrey C. Hawken....... 38 Executive Vice President and Chief
Operating Officer
Richard E. Moran Jr..... 45 Executive Vice President, Chief Financial
Officer and Secretary
Campbell Hugh Greenup... 43 General Counsel
Alan S. Pekarcik........ 46 Senior Vice President, Acquisitions
Tyler H. Rose........... 36 Senior Vice President and Treasurer
Ann Marie Whitney....... 30 Vice President and Controller
John T. Fucci........... 37 Vice President, Asset Management
William P. Dickey....... 54 Director 1998
Matthew J. Hart......... 45 Director 1999
Dale F. Kinsella........ 48 Director 2000
</TABLE>

The biographical summary of the experience of the directors and executive
officers of the Company named above is as follows:

JOHN B. KILROY, SR., age 75, has served as the Company's Chairman of the
Board of Directors since its incorporation in September 1996, and served in
the same capacity for KI since 1954. In 1947, Mr. Kilroy founded the
businesses which were incorporated in 1952 as the entity today known as KI.
Mr. Kilroy has served as KI's President from its incorporation until 1981.
Mr. Kilroy is a nationally recognized member of the real estate community,
providing the Company with strategic leadership and a broadly-based network
of relationships. Mr. Kilroy is a trustee of the Independent Colleges of
Southern California, serves on the board of directors of Pepperdine
University, and is a past trustee of Harvey Mudd College.

JOHN B. KILROY, JR., age 48, has served as the Company's President, Chief
Executive Officer and Director since its incorporation in September 1996.
Prior to joining the Company, Mr. Kilroy served in the same capacity for KI
and was responsible for the overall management of all facets of KI and its
various affiliates since 1981. Mr. Kilroy has been involved in all aspects
of commercial and industrial real estate acquisition, sales, development,
construction, leasing, financing, and entitlement since 1967 and worked for
KI for over twenty-five years. Mr. Kilroy became President of KI in 1981
and was elected Chief Executive Officer in 1991. Prior to that time, he
held positions as Executive Vice President and Vice President--Leasing &
Marketing. He is a member of the National Realty Committee and the Urban
Land Institute, and is a trustee of the El Segundo Employers Association,
and a past trustee of Viewpoint School, the Jefferson Center For Character
Education and the National Fitness Foundation.

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JEFFREY C. HAWKEN, age 38, has served as the Company's Executive Vice
President and Chief Operating Officer since it commenced operations in
January 1997. Prior to that time, Mr. Hawken served in the same capacity
for KI and was responsible for the management and operations of KI's real
estate portfolio. Mr. Hawken's activities have included leasing, asset and
facility management, with an emphasis on quality of service, operational
cost reduction and code compliance. He has also served on KI's acquisitions
and executive committees. Mr. Hawken joined KI in 1980, as a Senior
Financial Analyst, and has been involved in property and asset management
with the Company since May 1983. Since that time, he attained the
designation of Real Property Administrator (RPA) through the Building
Owner's and Manager's Association (BOMA).

RICHARD E. MORAN JR., age 45, has served as the Company's Executive Vice
President and Chief Financial Officer since December 1996. Prior to that
time, Mr. Moran was Executive Vice President, Chief Financial Officer and
Secretary of the Irvine Apartment Communities, Inc. from 1993 to 1996. Mr.
Moran was affiliated with The Irvine Company from 1977 to 1993. He served
as Treasurer of The Irvine Company from 1983 to 1993, was named Vice
President in 1984, Senior Vice President in 1990, and Executive Vice
President Corporate Finance in 1992. Previously, he was a certified public
accountant with Coopers & Lybrand. He is a member of the Urban Land
Institute. Mr. Moran received his Master of Business Administration degree
from the Harvard University Graduate School of Business Administration and
his undergraduate degree from Boston College.

CAMPBELL HUGH GREENUP, age 43, has served as the Company's General
Counsel since it commenced operations in January 1997. Prior to that time,
Mr. Greenup was employed at KI since 1986 as Assistant General Counsel and
had responsibility for a significant portion of the Company's legal
affairs, including transaction negotiation and documentation. In addition,
he was responsible for all of KI's development activities, including land
acquisition and entitlement, project development, leasing and disposition.
In this role, he was also President of Kilroy Technologies Company, LLC,
the Kilroy Group services entity, and directed all of KI's fee development
activities. Mr. Greenup is a member of the American Bar Association, the
Urban Land Institute-IOPC Gold Committee, the National Association of
Corporate Real Estate Executives and the Los Angeles County Beach Advisory
Commission.

ALAN S. PEKARCIK, age 46, was appointed Senior Vice President,
Acquisitions in March 1997. Prior to joining the Company, Mr. Pekarcik was
a broker specializing in Southern California industrial investment
transactions from October 1988 to March 1997 at Voit Commercial Brokerage.
From 1979 to 1988, Mr. Pekarcik was employed at Daum/Johnstown American and
Business Properties. Mr. Pekarcik holds a Bachelor of Science degree in
Business Administration from the University of Southern California.

TYLER H. ROSE, age 36, was appointed Senior Vice President and Treasurer
in March 1997. Mr. Rose was Senior Vice President, Corporate Finance of
Irvine Apartment Communities, Inc. from March 1995 to March 1997, and was
appointed Treasurer in 1996. Prior to that, Mr. Rose was Vice President,
Corporate Finance of The Irvine Company from January 1994 to March 1995.
From 1986 to 1994, Mr. Rose was employed at J.P. Morgan & Co., serving in
its Real Estate Corporate Finance Group until 1992 and as Vice President of
its Australia Mergers and Acquisitions Group from 1992 to 1994. Mr. Rose
also served for two years as a financial analyst for General Electric
Company. Mr. Rose holds a degree of Master of Business Administration from
The University of Chicago Graduate School of Business and a Bachelor of
Arts degree in Economics from the University of California at Berkeley.

ANN MARIE WHITNEY, age 30, was appointed Vice President and Controller in
May 1997. From August 1989 to May 1997, Ms. Whitney was with the accounting
firm of Deloitte & Touche LLP, most recently as a manager specializing in
real estate. Ms. Whitney is a Certified Public Accountant and received her
Bachelor of Science degree in Business Management from Boston College.

JOHN T. FUCCI, age 37, was appointed Vice President, Asset Management in
July 1997. From February 1990 to June 1997, Mr. Fucci was employed at
Catellus Development Corporation, serving as Director of Asset Management
until 1995 and as a Project Director in the Development Group from 1995 to
1997, where he was responsible for the management of nine million rentable
square feet of industrial, office and

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retail properties and the development of over 400 acres of land in Southern
California. From June 1985 to January 1990, Mr. Fucci was employed at Meyer
Asset Management Company, most recently as Associate Vice President. Mr.
Fucci received his Bachelor of Science degree in Business Administration
from California State Polytechnic University, Pomona. He also received the
designation of Certified Property Manager in June 1997 and is a licensed
California Real Estate Salesperson as of July 1984.

WILLIAM P. DICKEY, age 54, has been the president of The Dermot Company,
Inc., a real estate investment and management company since 1990. From 1986
to 1990, Mr. Dickey was a managing director of real estate for CS First
Boston Corporation. Prior to 1986, Mr. Dickey was a partner at the New York
law firm of Cravath, Swaine & Moore, where he started as an associate
beginning in 1974. Mr. Dickey is a member of the board of directors of
Horizon Group, Inc., a REIT which invests primarily in factory outlet
centers, Price Enterprises, Inc., a REIT which invests primarily in
shopping centers, and Mezzanine Capital Property Investors, Inc., a REIT
which invests primarily in the East Coast office/mixed use space, and is a
member of the board of trustees of Retail Property Trust, a REIT which
invests primarily in regional malls. Mr. Dickey received his undergraduate
degree from the United States Air Force Academy, his Masters Degree from
Georgetown University and his Juris Doctor degree from Columbia Law School.

MATTHEW J. HART, age 45, joined Hilton Hotels Corporation in 1996 and is
its Executive Vice President and Chief Financial Officer. Mr. Hart is
primarily responsible for Hilton's corporate finance and development
activities. Prior to joining Hilton, Mr. Hart was Senior Vice President and
Treasurer of The Walt Disney Company from 1995 to 1996. From 1981 to 1995,
Mr. Hart was employed by Host Marriott Corporation (formerly known as
Marriott Corporation), most recently as its Executive Vice President and
Chief Financial Officer. He was responsible for the company's corporate and
project financing activities, as well as the corporate control and the
corporate tax functions. Before joining Marriott Corporation, Mr. Hart had
been a lending officer with Bankers Trust Company in New York. Mr. Hart is
a member of the board of directors of First Washington Realty Trust, Inc.,
a REIT which invests primarily in retail properties. Mr. Hart received his
undergraduate degree from Vanderbilt University and a Masters of Business
Administration from Columbia University.

DALE F. KINSELLA, age 48, has been a partner with the Los Angeles law
firm of Kinsella, Boesch, Fujikawa & Towle for the past eight years. Mr.
Kinsella received his undergraduate degree from the University of Santa
Barbara and his Juris Doctor degree from the University of California at
Los Angeles.

COMMITTEES OF THE BOARD OF DIRECTORS

Audit Committee. The Board of Directors established an audit committee (the
"Audit Committee") to make recommendations concerning the engagement of
independent public accountants, review with the independent public accountants
the scope and results of the audit engagement, approve professional services
provided by the independent public accountants, review the independence of the
independent public accountants, consider the range of audit and non-audit fees
and review the adequacy of the Company's internal accounting controls. The
Audit Committee consists of two Independent Directors, Messrs. Matthew J.
Hart, the Chairman, and William P. Dickey.

Independent Committee. The Board of Directors established an independent
committee (the "Independent Committee") which consists solely of the
Independent Directors, Messrs. Dale F. Kinsella, the chairman, Matthew J. Hart
and William P. Dickey. The Independent Committee is established to approve
transactions between the Company and John B. Kilroy, Sr. or John B. Kilroy,
Jr. and their respective affiliates.

Executive Committee. The Board of Directors established an executive
committee (the "Executive Committee"). Subject to the Company's conflict of
interest policies, the Executive Committee is granted the authority to acquire
and dispose of real property and the authority to execute, on behalf of the
Board of Directors, certain contracts and agreements, including those related
to the borrowing of money by the Company (and, consistent with the Partnership
Agreement, to cause the Operating Partnership to take such actions). The
Executive Committee consists of John B. Kilroy, Sr., the chairman, John B.
Kilroy, Jr. and one Independent Director, Dale F. Kinsella.

126
<PAGE>

Executive Compensation Committee. The Board of Directors formed an executive
compensation committee (the "Executive Compensation Committee") to establish
remuneration levels for executive officers of the Company and implementation
of the Stock Incentive Plan (as defined) and any other incentive programs. The
Executive Compensation Committee consists of two Independent Directors,
Messrs. William P. Dickey, the chairman, and Matthew J. Hart.

The Board of Directors may from time to time establish certain other
committees to facilitate the management of the Company.

COMPENSATION OF DIRECTORS

The Company currently pays its Independent Directors (as defined) annual
compensation of $12,000 for their services. In addition, Independent Directors
receive $1,000 for each committee meeting chaired by such director.
Independent Directors also are reimbursed for reasonable expenses incurred to
attend director and committee meetings. An "Independent Director" is a
director who is not an employee, officer or affiliate of the Company or a
subsidiary or a division thereof, or a relative of a principal executive
officer, or who is not an individual member of an organization acting as an
advisor, consultant or legal counsel, receiving compensation on a continuing
basis from the Company in addition to director's fees. Officers of the Company
who are directors will not be paid any director's fees. Each Independent
Director receives, upon initial election to the Board of Directors, an option
to purchase 10,000 shares of Common Stock which vests pro rata in annual
installments over a three-year period. Each Independent Director receives an
option to purchase 1,000 shares of Common Stock on each anniversary of his
election to the Board of Directors, which options also vests pro rata in
annual installments over a three-year period. In addition, on January 31,
1997, John B. Kilroy, Sr., who is not an Independent Director, received an
option to purchase 15,000 shares of Common Stock which vests over a three-year
period. All stock options will be issued pursuant to the Stock Incentive Plan
at an exercise price equal to or greater than the fair market value of the
Common Stock at the date of grant.

EXECUTIVE COMPENSATION

Since the Company has no operating history prior to 1997, meaningful
individual compensation information for executive officers is not available
for prior periods. The compensation table below sets forth the annual base
salary rates and other compensation to be paid in 1997 to the Chief Executive
Officer and the Company's other executive officers who are expected to have a
total annual salary and bonus in excess of $100,000. The Company has entered
into employment agreements with each of its executive officers as described
below. See "--Employment Agreements."

<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
-------------- -----------------------------
RESTRICTED SECURITIES
STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS AWARD(S) OPTIONS/SARS(2)
- --------------------------- ------- -------- ----- ---------- ---------------
<S> <C> <C> <C> <C> <C>
John B. Kilroy, Jr........ 1997 $200,000 (3) -- 250,000
Director, President and
Chief Executive Officer
Jeffrey C. Hawken......... 1997 175,000 (3) -- 150,000
Executive Vice President
and Chief Operating
Officer
Richard E. Moran Jr....... 1997 200,000 (3) $2,299,000(4) 150,000
Executive Vice President,
Chief Financial Officer
and Secretary
Campbell Hugh Greenup..... 1997 165,000 (3) -- 100,000
General Counsel
Tyler H. Rose............. 1997 160,000 (3) -- 150,000
Senior Vice President and
Treasurer
</TABLE>
- --------

127
<PAGE>

(1) Amounts given are annualized projections for the year ending December 31,
1997.
(2) Options to purchase an aggregate of 1,185,000 shares of Common Stock have
been granted to directors, executive officers and other employees of the
Company as of July 28, 1997. Such options vest pro rata in annual
installments over a three-year-period. An additional 215,000 shares of
Common Stock have been reserved for issuance under the Stock Incentive
Plan. See "--Stock Incentive Plan."
(3) Under the terms of each executive officer's respective employment
agreement, each executive officer is entitled to receive an annual bonus
in an amount up to 100% of such executive officer's base salary. The
amount of any such bonus will be determined by the Executive Compensation
Committee of the Board of Directors. In addition, Mr. Moran was paid a
bonus of $200,000 upon consummation of the IPO on January 31, 1997. Mr.
Moran's bonus was an obligation of, and was paid by, the principals of KI.
See "--Employment Agreements."
(4) Pursuant to Mr. Moran's employment agreement, concurrent with the
consummation of the IPO, he received 100,000 restricted shares of Common
Stock under the Stock Incentive Plan with an aggregate value at January
31, 1997, the date of issuance, of $2.3 million against the payment of
$1,000 therefor. The restricted stock vest in equal annual installments
pro rata over a five-year period, subject to certain acceleration
provisions. See "--Employment Agreements." Mr. Moran is entitled to
receive distributions in respect of such restricted stock.

EMPLOYMENT AGREEMENTS

Each of John B. Kilroy, Jr., Jeffrey C. Hawken, Richard E. Moran Jr.,
Campbell Hugh Greenup and Tyler H. Rose entered into an employment agreement
with the Company which became effective on January 31, 1997 or, in the case of
Mr. Rose, the commencement of his employment. The employment agreements will
have an initial term of three years and are subject to automatic one-year
extensions following the expiration of the initial term. The employment
agreements provide for annual base compensation in the amounts set forth in
the Executive Compensation table with the amount of any bonus to be determined
by the Executive Compensation Committee, up to 100% of the applicable annual
base compensation. Under the terms of his employment agreement, Mr. Moran was
paid a bonus of $200,000 on January 31, 1997. Mr. Moran's bonus was an
obligation of, and was paid by, the principals of KI.

The employment agreements entitle the executives to participate in the Stock
Incentive Plan (each executive was initially allocated the number of stock
options and/or restricted stock set forth in the Executive Compensation table)
and to receive certain other insurance benefits. The employment agreements
also provide that in the event of death, the executive's estate will receive
monthly payments of the executive's annual salary, plus one-twelfth of any
bonus to be received, for a period equal to the lesser of the term remaining
under the employment agreement or one year. In addition, in the event of a
termination by the Company without "cause," a termination of employment
resulting from "disability," a termination by the executive for "good reason,"
or, in the case of Mr. Kilroy and Mr. Moran, a termination pursuant to a
"change of control" of the Company (as such terms are defined in the
respective employment agreements), the terminated executive will be entitled
to (i) severance (the "Severance Amount") and (ii) continued receipt of
certain benefits including medical insurance, life and disability insurance
and the receipt of other customary benefits established by the Company for its
executive employees for two years following the date of termination
(collectively, the "Severance Benefits"). The Severance Amount is equal to the
sum of two times the executive's average annual base compensation and two
times the highest annual bonus received during the preceding 36-month period.
"Disability" means a physical or mental disability or infirmity which, in the
opinion of a physician selected by the Board of Directors, renders the
executive unable to perform his duties for six consecutive months or for
shorter periods aggregating 180 business days in any 12-month period (but only
to the extent that such definition does not violate the Americans with
Disabilities Act). "Cause," as defined under the terms of the respective
employment agreements, means (a) the executive's conviction for commission of
a felony or a crime involving moral turpitude, (b) the executive's willful
commission of any act of theft, embezzlement or misappropriation against the
Company, or (c) the executive's willful and continued failure to substantially
perform the executive's duties (other than such failure resulting from the
executive's incapacity due to physical or mental illness), which is not
remedied within a reasonable time. "Good reason" means (a) the Company's
material breach of any of its

128
<PAGE>

obligations under the employment agreement (subject to certain notice and cure
provisions) or (b) any removal of the executive from one or more of the
appointed offices or any material alteration or diminution in the executive's
authority, duties or responsibilities, without "cause" and without the
executive's prior written consent. "Change of Control" means (a) the event by
which the individuals constituting the Board of Directors as of the date of
the IPO cease for any reason to constitute at least a majority of the Board of
Directors; provided, however, that if the election, or nomination for election
by the Company's stockholders of any new director was approved by a vote of at
least a majority of the members of the original Board of Directors, such new
director shall be considered a member of the original Board of Directors, (b)
an acquisition of any voting securities of the Company by any "person" (as the
term"person" is used for purposes of Section 13(d) or Section 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) immediately
after which such person has "beneficial ownership" (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 20% or more of the combined
voting power of the Company's then outstanding voting securities unless such
acquisition was approved by a vote of at least one more than a majority of the
original Board of Directors, or (c) approval by the stockholders of the
Company of (i) a merger, consolidation, share exchange or reorganization
involving the Company, unless the stockholders of the Company, immediately
before such merger, consolidation, share exchange or reorganization, own,
directly or indirectly immediately following such merger, consolidation, share
exchange or reorganization, at least 80% of the combined voting power of the
outstanding voting securities of the corporation that is the successor in such
merger, consolidation, share exchange or reorganization in substantially the
same proportion as their ownership of the voting securities immediately before
such merger, consolidation, share exchange or reorganization; (ii) a complete
liquidation or dissolution of the Company; or (iii) an agreement for the sale
or other disposition of all or substantially all of the assets of the Company.

STOCK INCENTIVE PLAN

The Company established the Stock Option and Incentive Plan (the "Stock
Incentive Plan") to enable executive officers, key employees and directors of
the Company, the Operating Partnership and the Services Company to participate
in the ownership of the Company. The Stock Incentive Plan is designed to
attract and retain executive officers, other key employees and directors of
the Company, the Operating Partnership and the Services Company and to provide
incentives to such persons to maximize the Company's cash flow available for
distribution. The Stock Incentive Plan provides for the award to such
executive officers and employees of the Company, the Operating Partnership and
the Services Company (subject to the Ownership Limit, or such other limit as
provided in the Articles of Incorporation or as otherwise permitted by the
Board of Directors) of a broad variety of stock-based compensation
alternatives such as nonqualified stock options, incentive stock options,
restricted stock and stock appreciation rights, and provides for the grant to
Independent Directors and directors of the Services Company (subject to the
Ownership Limit, or such other limit as provided in the Articles of
Incorporation or as otherwise permitted by the Board of Directors) of
nonqualified stock options.

129
<PAGE>

Stock Options. As of March 31, 1997, the Company issued to certain officers,
directors and key employees of the Company, the Operating Partnership and the
Services Company options to purchase, subject to the Ownership Limit, or such
other limit as provided in the Articles of Incorporation or as otherwise
permitted by the Board of Directors, 1,185,000 shares of Common Stock pursuant
to the Stock Incentive Plan. The term of each of such option is ten years from
the date of grant. Each such option vests 33 1/3% per year over three years
beginning on the first anniversary date of the grant and is exercisable at a
price per share equal to the fair market value per share of Common Stock on
the date of the grant. The following table below sets forth the allocation of
the options to such persons that had been issued as of July 28, 1997.

<TABLE>
<CAPTION>
NAME OPTIONS
---- -------
<S> <C>
John B. Kilroy, Sr............................................... 15,000
John B. Kilroy, Jr............................................... 250,000
Jeffrey C. Hawken................................................ 150,000
Richard E. Moran Jr.............................................. 150,000
Campbell Hugh Greenup............................................ 100,000
Tyler H. Rose.................................................... 150,000
Ann Marie Whitney................................................ 50,000
Independent Directors (as a group)............................... 30,000
Other employees (as a group)..................................... 290,000
</TABLE>

An additional 215,000 shares of Common Stock have been reserved for issuance
under the Stock Incentive Plan. There is no limit on the number of awards that
may be granted to any one individual so long as the (i) aggregate fair market
value (determined at the time of grant) of shares with respect to which an
incentive stock option is first exercisable by an optionee during any calendar
year cannot exceed $100,000, (ii) the grant does not violate the Ownership
Limit or cause the Company to fail to qualify as a REIT for federal income tax
purposes and (iii) the maximum number of shares of Common Stock for which
stock options and stock appreciation rights may be issued during any fiscal
year to any participant in the Stock Incentive Plan shall not exceed 300,000.
See"Description of Capital Stock--Restrictions on Ownership and Transfer." To
the extent permitted by the foregoing, the option grants shown in the above
table will include incentive stock options.

Restricted Stock. Restricted stock may be sold to participants at various
prices (but not below par value) and are subject to such restrictions as may
be determined by the Executive Compensation Committee. Restricted stock,
typically, may be repurchased by the Company at the original purchase price if
the conditions or restrictions are not met. In general, restricted stock may
not be sold, or otherwise transferred or hypothecated, until restrictions are
removed or expire. Purchasers of restricted stock have voting rights and
receive distributions prior to the time when the restrictions lapse. The
Company issued 100,000 restricted shares of Common Stock reserved for issuance
under the Stock Incentive Plan, to Richard E. Moran Jr. on January 31, 1997.

Administration of the Stock Incentive Plan. The Stock Incentive Plan is
administered by the Board of Directors and/or the Executive Compensation
Committee. No person is eligible to serve on the Executive Compensation
Committee unless such person is then an Independent Director. The Committee
has complete discretion to determine (subject to (a) the Ownership Limit
contained in the Articles of Incorporation of the Company and (b) a limit
against granting options or stock appreciation rights for more than 300,000
shares to any person in any fiscal year) which eligible individuals are to
receive option or other stock grants, the number of shares subject to each
such grant, the status of any granted option as either an incentive option or
a non-qualified stock option under the federal tax laws, the exercise schedule
to be in effect for the grant, the maximum term for which any granted option
is to remain outstanding and subject to the specific terms of the Stock
Incentive Plan, any other terms of the grant.

Eligibility. All employees of the Company may, at the discretion of the
Executive Compensation Committee, be granted incentive and non-qualified stock
options to purchase shares of Common Stock at any exercise price not less than
100% of the fair market value of such shares on the grant date. Directors of
the Company, employees of the Operating Partnership, employees and directors
of the Services Company,

130
<PAGE>

consultants and other persons who are not regular salaried employees of the
Company are not eligible to receive incentive stock options, but are eligible
to receive non-qualified stock options. In addition, all employees and
consultants of the Company, the Operating Partnership and the Services Company
are eligible for awards of restricted stock and grants of stock appreciation
rights.

Number of Shares Subject to Stock Incentive Plan. The Company has reserved
up to 1,500,000 shares of Common Stock for issuance pursuant to the Stock
Incentive Plan, 100,000 of which was issued, and options covering 1,185,000 of
which were granted, under the Stock Incentive Plan.

Purchase Price of Shares Subject to Options. The price of the shares of
Common Stock subject to each option shall be set by the Executive Compensation
Committee; provided, however, that the price per share of an option shall be
not less than 100% of the fair market value of such shares on the date such
option is granted; provided, further, that, in the case of an incentive stock
option, the price per share shall not be less than 110% of the fair market
value of such shares on the date such option is granted in the case of an
individual then owning (within the meaning of Section 424(d) of the Code) more
than ten percent of the total combined voting power of all classes of stock of
the Company, any subsidiary or any parent corporation ("greater than 10%
stockholders").

Non-Assignability. Options may be transferred only by will or by the laws of
descent and distribution. During a participant's lifetime, options are
exercisable only by the participant.

Terms and Exercisability of Options. Unless otherwise determined by the
Board of Directors or the Executive Compensation Committee, all options
granted under the Stock Incentive Plan are subject to the following
conditions: (i) options will be exercisable in installments, on a cumulative
basis, at the rate of thirty-three and one-third percent (33 1/3%) each year
beginning on the first anniversary of the date of the grant of the option,
until the options expire or are terminated, and (ii) following an optionee's
termination of employment, the optionee shall have the right to exercise any
outstanding vested options for a specified period.

Options are not assignable or transferable by the optionee except by will or
the laws of inheritance following the optionee's death. The optionee has no
stockholder rights with respect to the shares subject to his or her
outstanding options until such options are exercised and the purchase price is
paid for the shares.

To the extent that the aggregate fair market value of stock with respect to
which "incentive stock options" (within the meaning of Section 422 of the
Code, but without regard to Section 422(d) of the Code) are exercisable for
the first time by an optionee during any calendar year (under the Stock
Incentive Plan and all other incentive stock option plans of the Company, any
subsidiary and any parent corporation) exceeds $100,000, such options shall be
taxed as non-qualified stock options. The rule set forth in the preceding
sentence shall be applied by taking options into account in the order in which
they were granted. For this purpose, the fair market value of stock shall be
determined as of the time that the option with respect to such stock is
granted.

Options are exercisable in whole or in part by written notice to the
Company, specifying the number of shares being purchased and accompanied by
payment of the purchase price for such shares. The option price may be paid:
(i) in cash or by certified or cashier's check payable to the order of the
Company, (ii) by delivery of shares of Common Stock already owned by, and in
the possession of, the optionee or (iii) if authorized by the Board of
Directors or the Executive Compensation Committee or if specified in the
option agreement for the option being exercised, by a recourse promissory note
made by the optionee in favor of the Company or through installment payments
to the Company.

On the date the option price is to be paid, the optionee (or his or her
successor) must make full payment to the Company of all amounts that must be
withheld by the Company for federal, state or local tax purposes.

Termination of Employment; Death or Permanent Disability. If a holder of an
option ceases to be employed by the Company for any reason other than the
optionee's death or permanent disability, such optionee's stock option shall
expire three months after the date of such cessation of employment unless by
its terms it expires sooner; provided, however, that during such period after
cessation of employment, such stock

131
<PAGE>

option may be exercised only to the extent it was exercisable according to
such option's terms on the date of cessation of employment. If an optionee
dies or becomes permanently disabled while the optionee is employed by the
Company, such optionee's option shall expire twelve months after the date of
such optionee's death or permanent disability unless by its terms it expires
sooner. During such period after death, such stock option may, to the extent
it remains unexercised upon the date of such death, be exercised by the person
or persons to whom the optionee's rights under such stock option are
transferred under the laws of descent and distribution.

Acceleration of Exercisability. In the event that the Company is acquired by
merger, consolidation or asset sale, each outstanding option which is not to
be assumed by the successor corporation or replaced with a comparable option
to purchase shares of the capital stock of the successor corporation will, at
the election of the Board of Directors (or if so provided in an option or
other agreement with an optionee), automatically accelerate in full.

Adjustments. In the event any change is made to the Common Stock issuable
under the Stock Incentive Plan by reason of any recapitalization, stock
dividend, stock split, combination of shares, exchange of shares or other
change in corporate structure effected without the Company's receipt of
consideration, appropriate adjustment will be made to (i) the maximum number
and class of shares issuable under the Stock Incentive Plan and (ii) the
number and/or class of shares and price per share in effect under each
outstanding option.

Amendments to the Stock Incentive Plan. The Board of Directors may at any
time suspend or terminate the Stock Incentive Plan. The Board of Directors or
Executive Compensation Committee may also at any time amend or revise the
terms of the Stock Incentive Plan; provided that no such amendment or revision
shall, unless appropriate stockholder approval of such amendment or revision
is obtained, (i) increase the maximum number of shares which may be acquired
pursuant to options granted under the Stock Incentive Plan (except for
adjustments as described in the foregoing paragraph) or (ii) change the
minimum purchase price required under the Stock Incentive Plan.

Termination. The Stock Incentive Plan will terminate on January 31, 2007,
unless sooner terminated by the Board of Directors.

Registration Statement on Form S-8. The Company plans to file with the
Securities and Exchange Commission a Registration Statement on Form S-8
covering the restricted shares of Common Stock and the shares of Common Stock
underlying options granted under the Stock Incentive Plan.

SECTION 401(K) PLAN

The Company plans to establish the Company's Section 401(k)
Savings/Retirement Plan (the "Section 401(k) Plan") to cover eligible
employees of the Company and any designated affiliate.

The Section 401(k) Plan permits eligible employees of the Company to defer
up to 15% of their annual compensation, subject to certain limitations imposed
by the Code. The employees' elective deferrals are immediately vested and non-
forfeitable upon contribution to the Section 401(k) Plan. The Company
currently reserves the right to make matching contributions to the Section
401(k) Plan or discretionary profit sharing contributions in the future.

INDEMNIFICATION

For a description of the limitation of liability and indemnification rights
of the Company's officers and directors, see "Certain Provisions of Maryland
Law and of the Articles of Incorporation and Bylaws--Limitation of Directors'
and Officers' Liability" and "--Indemnification Agreements."

132
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain directors and executive officers of the Company, including John B.
Kilroy, Sr. and John B. Kilroy, Jr., the Chairman of the Board of Directors
and its President and Chief Executive Officer, respectively, (or members of
their immediate families) and persons who will hold more than 5% of the
outstanding shares of Common Stock (or interests exchangeable therefor) have
direct or indirect interests in transactions with by the Company, the
Operating Partnership or the Services Company, including the transfer of
certain Properties to the Operating Partnership by the Unitholders, the grant
of options with respect to the Option Properties and, if exercised, the
purchase by the Company of one or more of the Option Properties from the
respective Unitholders, the repayment of certain indebtedness encumbering the
Properties and the performance of management and leasing activities by the
Operating Partnership and certain development and other activities by the
Services Company at the Option Properties. See "Formation and Structure of the
Company--Formation Transactions." In addition, John B. Kilroy, Sr. contributed
$1,000 to the Company in exchange for an aggregate of 50 shares of Common
Stock which were subsequently repurchased by the Company, and on January 31,
1997, John B. Kilroy, Jr. and John B. Kilroy, Sr. each contributed cash to the
Services Company, which represents a 5.0% economic interest in the Services
Company. See the Combined Financial Statements and the notes thereto contained
elsewhere in this Prospectus.

PARTNERSHIP AGREEMENT

On January 31, 1997, the Company entered into the Partnership Agreement of
the Operating Partnership with the various limited partners of the Operating
Partnership. See "Partnership Agreement of the Operating Partnership." John B.
Kilroy, Sr. and John B. Kilroy, Jr., who are limited partners of the Operating
Partnership, are directors and/or officers of the Company.

ASSIGNMENT OF LEASE; VARIOUS SERVICES PROVIDED BY THE SERVICES COMPANY TO THE
KILROY GROUP

On January 31, 1997, KI assigned to the Operating Partnership all of its
interest as a tenant in a lease with a partnership affiliated with certain
Unitholders covering the space that was serving as the headquarters of KI at
Kilroy LAX in El Segundo, California. The Company, the Operating Partnership
and the Services Company occupy such space, with the Company and the Services
Company subleasing some of such space from the Operating Partnership and
paying rent to the Operating Partnership therefor, at rates which the Company
believes are equal to the fair rental value of the space.

Pursuant to management agreements, the Operating Partnership is providing
management and leasing services, and the Services Company is providing
development services, with respect to the Option Properties, each of which is
beneficially owned and controlled by John B. Kilroy, Sr. and John B. Kilroy,
Jr., for fees equivalent to the fair market value of such services. See
"Business and Properties--Option Properties."

OPTIONS TO PURCHASE CERTAIN PROPERTIES

In connection with the formation of the Company, the Company entered into
certain option agreements with partnerships controlled by John B. Kilroy, Sr.
and John B. Kilroy, Jr., the Chairman of the Board of Directors, and
President, Chief Executive Officer and Director, respectively, granting to the
Operating Partnership options to acquire (i) parcels comprising an aggregate
of approximately 18 acres located at Calabasas Park Centre, in Calabasas,
California and (ii) a three-building office complex located on North Sepulveda
Boulevard in El Segundo, California at the respective purchase price for each
of the properties as discussed below. The option for Calabasas Park Centre is
exercisable on or before January 31, 1998. The option for the office complex
located on North Sepulveda Boulevard in El Segundo is exercisable on or before
January 31, 2004. The purchase price for each of the properties is payable in
cash; provided, however, that if the option for the office complex in El
Segundo is exercised after January 31, 1998, the purchase price will be
payable in cash or Units at the election of the seller.

133
<PAGE>

Pursuant to the terms of the applicable option agreement, the purchase price
for the parcels located at Calabasas Park Centre will be equal to the lower of
(i) a third-party offer or (ii) the total accumulated costs, as of the date
such option is exercised, in connection with the acquisition of rights with
respect to, and the entitlement and development of such property, including,
without limitation, property taxes, predevelopment and entitlement costs and
fees, and related bond financing costs.

In addition, in connection with the Formation Transactions, the Company
incurred certain expenses on behalf of KI, including the payment of $700,000
of interest in connection with the repayment of an outstanding loan. All
amounts payable to the Company from KI have been paid in full. The highest
amount of such receivables outstanding during the period beginning February 1,
1997 was approximately $1.3 million.

134
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth the beneficial ownership of shares of Common
Stock as of June 30, 1997 and as adjusted to give effect to the Offering for
(i) each person known to the Company to be the beneficial owner of 5% or more
of the outstanding Common Stock, (ii) directors and executive officers of the
Company, and (iii) directors and executive officers of the Company as a group.
Except for the restricted shares of Common Stock owned by Mr. Moran, the
shares owned by Mr. Dickey and Mr. Hart, 1,000 shares of Common Stock owned by
Mr. Rose and 600 shares of Common Stock owned by Mr. Kilroy, Jr., none of the
persons or entities listed below currently owns any shares of Common Stock,
but rather owns Units exchangeable for shares of Common Stock. See
"Partnership Agreement of the Operating Partnership--Redemption/Exchange
Rights." Each person named in the table has sole voting and investment power
with respect to all of the shares of Common Stock shown as beneficially owned
by such person, except as otherwise set forth in the notes to the table. This
table reflects the ownership interests each of the following persons would
have if each person exchanged all of his Units for shares of Common Stock at a
current exchange ratio of one Unit for each share of Common Stock (without
regard to the Ownership Limit and the prohibition on redemption or exchange of
Units until January 31, 1999). See "Partnership Agreement of the Operating
Partnership--Redemption/Exchange Rights." Unless otherwise indicated, the
address of each named person is c/o Kilroy Realty Corporation, 2250 East
Imperial Highway, Suite 1200, El Segundo, California 90245.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES
OF COMMON STOCK
BENEFICIALLY OWNED (1)(2)
-----------------------------
NUMBER OF SHARES
OF COMMON STOCK
BENEFICIALLY OWNED JUNE 30,
NAME OF BENEFICIAL OWNER AS OF JUNE 30, 1997 (1) 1996 AS ADJUSTED
- ------------------------ ----------------------- ------------- ------------
<S> <C> <C> <C>
John B. Kilroy, Sr. .... 1,253,926(4) 7.3% 4.6%
John B. Kilroy, Jr. .... 1,253,926(4) 7.3% 4.6%
Jeffrey C. Hawken....... -- -- --
Richard E. Moran Jr. ... 100,000(5) * *
Campbell Hugh Greenup... -- -- --
Tyler H. Rose........... 1,000(6) * *
Ann Marie Whitney....... -- -- --
William P. Dickey....... 2,000(7) * *
Matthew J. Hart......... 5,000(7) * *
Dale F. Kinsella........ -- -- --
Cohen & Steers Capital
Management, Inc. (3)... 1,282,000 7.4% 4.7%
All directors and
executive officers as a
group (10 persons)..... 2,615,852 15.1% 9.6%
</TABLE>
- --------
(1) Includes the Units beneficially owned by KI which are allocated to John B.
Kilroy, Sr. and John B. Kilroy, Jr., the only stockholders of KI, in
accordance with their respective percentage ownership of KI. Excludes
options to purchase 895,000 shares of Common Stock granted to executive
officers and directors on January 31, 1997.
(2) Assuming exchange of the 2,817,476 Units outstanding as of June 30, 1997.
(3) According to a Schedule 13G filed with the SEC, this person has sole
voting power with respect to 1,139,200 of such shares and sole dispositive
power with respect to 1,282,000 of such shares as of February 4, 1997. The
principal business office of Cohen & Steers Capital Management, Inc. is
757 Third Avenue, New York, New York 10017.
(4) One-half of these Units have been pledged to secure certain
indemnification obligations to the Company arising in connection with the
Formation Transactions. See "Certain Relationships and Related
Transactions."
(5) Represents 100,000 restricted shares of Common Stock granted under the
Stock Incentive Plan to Richard E. Moran Jr. pursuant to the terms of his
employment agreement, which shares vest in five equal annual installments
over a five-year period. See "Management--Employment Agreements."
(6) Represents 1,000 shares of Common Stock purchased by Tyler H. Rose in the
public stock market at $24 1/4 per share of Common Stock on May 19, 1997.
(7) Represents shares purchased by the director at the IPO price of $23.00 per
share of Common Stock on January 31, 1997.
* Represents less than 1.0% of outstanding shares of Common Stock.

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FORMATION AND STRUCTURE OF THE COMPANY

Kilroy Realty Corporation was formed in September 1996 and the Operating
Partnership was formed in October 1996. The Services Company was formed in
January 1997.

FORMATION TRANSACTIONS

As of the consummation of the IPO, the Company and certain of the
Unitholders engaged in the Formation Transactions designed to enable the
Company to continue and expand the real estate operations of the Kilroy Group,
to facilitate the IPO, to enable the Company to qualify as a REIT for federal
income tax purposes commencing with its taxable year ending December 31, 1997
and to preserve certain tax advantages for certain Unitholders of the
Properties. The Formation Transactions were as follows:

. Pursuant to the Omnibus Agreement, the Operating Partnership required
the contribution to the Operating Partnership of all of the Kilroy
Group's interests in the Properties owned by them immediately prior to
the IPO, the assets used to conduct the leasing, management and
development activities (principally office equipment) and the assignment
of contract rights in connection with development opportunities at
Kilroy Airport Center Long Beach. Pursuant to the terms of the Omnibus
Agreement, the Operating Partnership acquired the Existing Properties
and the other assets from the Kilroy Group in exchange for limited
Partnership Units. Upon completion of the IPO, the limited Partnership
Units received by the Kilroy Group constituted in the aggregate an
approximately 15.5% limited partnership interest in the Operating
Partnership.

. John B. Kilroy, Sr. and John B. Kilroy, Jr. acquired all of the voting
common stock of the Services Company for the aggregate purchase price of
$5,275 in cash (representing 5.0% of its economic value), and the
Operating Partnership acquired all of the non-voting preferred stock of
the Services Company (representing 95.0% of its economic value).

. The Company contributed the net proceeds from the IPO and the issuance
of 100,000 restricted shares of Common Stock (approximately $302.8
million in the aggregate) to the Operating Partnership in exchange for
an 84.5% general partner interest in the Operating Partnership.

. The Company, through the Operating Partnership, borrowed approximately
$84.0 million principal amount of long-term financing and $12.0 million
principal amount of short-term debt pursuant to the Mortgage Loans.

. The Operating Partnership applied the IPO net proceeds and the Mortgage
Loans toward the repayment of existing mortgage indebtedness on certain
of the Properties, the purchase of certain properties and payment of its
expenses arising in connection with the IPO and the Mortgage Loans.

. Certain employees of KI became employees of the Company, the Operating
Partnership and/or the Services Company, including John B. Kilroy, Jr.,
the President and Chief Executive Officer of KI, three other executive
officers (Mr. Jeffrey Hawken, Executive Vice President and Chief
Operating Officer, Mr. Richard E. Moran Jr., Executive Vice President,
Chief Financial Officer and Secretary, and Mr. Campbell Hugh Greenup,
General Counsel) who are not Unitholders and 43 other operating and
administrative employees.

. On January 31, 1997, the Company entered into Option Agreements with
partnerships controlled by John B. Kilroy, Sr. and John B. Kilroy, Jr.
granting to the Operating Partnership the right to acquire (i) the
approximately 18 undeveloped acres located at Calabasas Park Centre for
cash and (ii) the office property located at North Sepulveda Boulevard,
El Segundo for cash (or for Units after January 31, 1998 at the election
of the seller), and in each case pursuant to the other terms of the
respective option agreement. See "Business and Properties--Option
Properties--Calabasas Park Centre" and"--North Sepulveda Boulevard, El
Segundo" for a discussion of the purchase price and other material terms
of each Option Agreement.

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. The Operating Partnership or the Services Company entered into
Management Agreements with respect to each of the Option Properties.
Pursuant to the terms of each of the Management Agreements, the
Operating Partnership or the Services Company, as applicable, has
exclusive control and authority (subject to an operating budget approved
by the owners of each property) over each of the Option Properties for a
term of 24 months. If any of the Option Properties are sold during the
term of the Management Agreements, then either party may terminate the
respective Management Agreement with respect to the property being sold
upon 30 days' prior written notice. In consideration of the services
provided under the Management Agreements, the Company receives a monthly
property management fee as well as any applicable leasing commissions.
See "Business and Properties--Option Properties."

As a result of the Formation Transactions, the Company owned 14,428,367
Units, which represented an approximately 84.5% economic interest in the
Operating Partnership, and the Kilroy Group owned 2,652,374 Units, which
represented the remaining approximately 15.5% economic interest in the
Operating Partnership. The Company is the sole general partner and retains
management control over the Operating Partnership.

The Unitholders have the opportunity after January 31, 1999 to have their
Units redeemed by the Operating Partnership at the request of the Unitholder
for cash (based on the fair market value of an equivalent number of shares of
Common Stock at the time of such redemption) or, at the Company's option, it
may exchange Units for shares of Common Stock on a one-for-one basis, subject
to certain anti-dilution adjustments and the obligation of certain of the
Unitholders to indemnify the Company in connection with the Formation
Transactions; provided, however, that if the Company does not elect to
exchange such Units for shares of Common Stock, a Unitholder that is a
corporation or limited liability company may require the Company to issue
shares of Common Stock in lieu of cash, subject to the Ownership Limit or such
other limit as provided in the Articles of Incorporation, as applicable. Under
certain circumstances, 50% of the Units received by John B. Kilroy, Sr., John
B. Kilroy, Jr. and KI may be redeemed prior to January 31, 1999 in connection
with the obligation of such Unitholders to indemnify the Company in connection
with the Formation Transactions.

ADVANTAGES AND DISADVANTAGES OF THE FORMATION TRANSACTIONS TO UNAFFILIATED
STOCKHOLDERS

The advantages of the Formation Transactions to unaffiliated stockholders of
the Company included their ability to participate in the cash flow of the
Properties through their ownership in the Company and in all future office and
industrial property acquisitions and development by the Company. The
disadvantages of such transactions to unaffiliated stockholders of the Company
included the impact of shares available for future sale and immediate and
substantial dilution in the tangible book value per share, and the lack of
arm's length negotiations to determine the terms of the transfers of the
Existing Properties to the Company and the Operating Partnership and the terms
of the option agreements relating to the Option Properties.

BENEFITS OF THE FORMATION TRANSACTIONS TO THE KILROY GROUP

The Kilroy Group realized certain benefits as a result of the IPO and the
Formation Transactions, including the following:

. improved liquidity of their interests in the Properties owned by the
Kilroy Group immediately prior to the IPO and increased diversification
of their investment;

. repayment of indebtedness in the aggregate net amount of approximately
$229.5 million resulting from the refinancing of mortgage indebtedness,
of which approximately $37.2 million was guaranteed by John B. Kilroy,
Sr., including $8.7 million which also was guaranteed by John B. Kilroy,
Jr., and the repayment of approximately $3.4 million of personal
indebtedness of John B. Kilroy, Sr.;

. an employment agreement between the Company and John B. Kilroy, Jr.
providing annual salary, incentive compensation (including Common Stock
options) and other benefits for his services as an officer of the
Company (see "Management--Employment Agreements"), and a grant of
options to purchase Common Stock to John B. Kilroy, Sr. (see
"Management--Stock Incentive Plan"); and

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. the deferral of certain tax consequences of taxable dispositions of
assets through the creation of the Operating Partnership and the direct
contribution of their interests in the Properties to the Operating
Partnership in exchange for Units.

FORMATION OF KILROY SERVICES, INC.

In January 1997, the Services Company was formed under the laws of the State
of Maryland to succeed to the development activities of the Kilroy Group. John
B. Kilroy, Sr. and John B. Kilroy, Jr. together own 100.0% of the voting
common stock of the Services Company, representing 5.0% of its economic value.
The Operating Partnership owns 100.0% of the nonvoting preferred stock of the
Services Company, representing 95.0% of its economic value. The ownership
structure of the Services Company is necessary to permit the Company to share
in the income of the activities of the Services Company and also maintain its
status as a REIT. Although the Company receives substantially all of the
economic benefit of the businesses carried on by the Services Company through
the Company's right to receive dividends through the Operating Partnership's
investment in the Services Company's nonvoting preferred stock, the Company is
not able to elect the Services Company's officer or directors and,
consequently, may not have the ability to influence the operations of the
Services Company or require the declaration of dividends. See "Risk Factors--
Risks of Development Business and Related Activities Being Conducted by the
Services Company--Adverse Consequences of Lack of Control Over the Businesses
of the Services Company."

The Services Company currently has three directors, including Campbell Hugh
Greenup, who also serves as the General Counsel of the Company; Jeffrey C.
Hawken, who also serves as the Executive Vice President and Chief Operating
Officer of the Company; and one independent director. See "Management."
Campbell Hugh Greenup serves as the Services Company's President and
Secretary, David Armanetti serves as its Vice President of Development
Services and Treasurer and Jeffrey C. Hawken serves as its Vice President and
Assistant Secretary.

FORMATION OF KILROY REALTY FINANCE, INC. AND KILROY REALTY FINANCE
PARTNERSHIP, L.P.

In January 1997, Kilroy Realty Corporation formed the Finance Company to act
as the general partner of the Finance Partnership. The Finance Partnership, a
single-purpose limited partnership, was formed in January 1997 to facilitate
borrowings under the Mortgage Loans. Kilroy Realty Corporation owns 100.0% of
the common stock of the Finance Company which owns a 1.0% general partner
interest in the Finance Partnership. The Operating Partnership owns a 99.0%
limited partner interest in the Finance Partnership. The Finance Partnership
owns legal title to the Properties secured by the Mortgage Loans.

The Finance Company currently has five directors, including John B. Kilroy,
Jr., who also serves as the President and Chief Executive Officer of the
Company; Jeffrey C. Hawken, who also serves as the Executive Vice President
and Chief Operating Officer of the Company; Richard E. Moran Jr., who also
serves as the Executive Vice President, Chief Financial Officer and Secretary
of the Company; A. Christian Krogh, who also serves as the Vice President of
Asset Management of the Company; and one independent director. See
"Management." Jeffrey C. Hawken serves as the Finance Company's President and
Secretary, A. Christian Krogh serves as its Vice President, Treasurer and
Assistant Secretary and John B. Kilroy, Jr. serves as its Vice President.

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DESCRIPTION OF CAPITAL STOCK

The following summary of the terms of the Company's capital stock does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Articles of Incorporation and Bylaws, copies of which are
filed as exhibits to the Registration Statement of which this Prospectus is a
part. See "Additional Information."

GENERAL

Under the Articles of Incorporation, the authorized capital stock of the
Company consists of 150,000,000 shares of Common Stock, par value $.01 per
share, and 30,000,000 shares of preferred stock, par value $.01 per share
("Preferred Stock"). Upon completion of the Offering, 24,475,000 shares of
Common Stock will be issued and outstanding excluding the 1,500,000 shares of
Common Stock which are subject to the Underwriters' over-allotment option and
2,817,476 shares of Common Stock which may be issued upon the exchange of
outstanding limited partnership Units. Upon completion of the Offering, no
shares of Preferred Stock will be issued and outstanding.

COMMON STOCK

Each outstanding share of Common Stock entitles the holder to one vote on
all matters presented to stockholders for a vote, including the election of
directors, and, except as otherwise required by law and except as provided in
any resolution adopted by the Board of Directors with respect to any other
class or series of stock establishing the designation, powers, preferences and
relative, participating, optional or other special rights and powers of such
series, the holders of such shares possess the exclusive voting power, subject
to the provisions of the Articles of Incorporation regarding the ownership of
shares of Common Stock in excess of the Ownership Limit, or such other limit
as provided in the Articles of Incorporation or as otherwise permitted by the
Board of Directors as described below. Holders of shares of Common Stock have
no conversion, exchange, sinking fund, redemption or appraisal rights and have
no preemptive rights to subscribe for any securities of the Company or
cumulative voting rights in the election of directors. All shares of Common
Stock issued and outstanding are duly authorized, fully paid and non-
assessable. Subject to the preferential rights of any other shares or series
of stock and to the provisions of the Articles of Incorporation regarding
ownership of shares of Common Stock in excess of the Ownership Limit, or such
other limit as provided in the Articles of Incorporation or as otherwise
permitted by the Board of Directors as described below, distributions are paid
to the holders of shares of Common Stock if and when authorized and declared
by the Board of Directors out of funds legally available therefor. The Company
currently makes quarterly distributions. See "Price Range of Common Stock and
Distribution History."

Under Maryland law, stockholders are generally not liable for the Company's
debts or obligations. If the Company is liquidated, subject to the right of
any holders of Preferred Stock to receive preferential distributions, each
outstanding share of Common Stock will be entitled to participate pro rata in
the assets remaining after payment of, or adequate provision for, all known
debts and liabilities of the Company, including debts and liabilities arising
out of its status as general partner of the Operating Partnership.

Subject to the provisions of the Articles of Incorporation regarding the
ownership of shares of Common Stock in excess of the Ownership Limit, or such
other limit as provided in the Articles of Incorporation or as otherwise
permitted by the Board of Directors described below, all shares of Common
Stock have equal distribution, liquidation and voting rights, and have no
preference or exchange rights. See "--Restrictions on Ownership and Transfer."

Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary

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course of business unless approved by the affirmative vote of stockholders
holding at least two-thirds of the shares entitled to vote on the matter
unless a lesser percentage (but not less than a majority of all of the votes
entitled to be cast on the matter) is set forth in the corporation's charter.
Under the MGCL, the term "substantially all of the Company's assets" is not
defined and is, therefore, subject to Maryland common law and to judicial
interpretation and review in the context of the unique facts and circumstances
of any particular transaction. The Articles of Incorporation do not provide
for a lesser percentage in any such situation.

The Articles of Incorporation authorize the Board of Directors to reclassify
any unissued shares of Common Stock into other classes or series of classes of
stock and to establish the number of shares in each class or series and to set
the preferences, conversion and other rights, voting powers, restrictions,
limitations and restrictions on ownership, limitations as to dividends or
other distributions, qualifications and terms or conditions of redemption for
each such class or series.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services.

PREFERRED STOCK

Preferred Stock may be issued from time to time, in one or more series, as
authorized by the Board of Directors. No Preferred Stock is currently issued
or outstanding. Prior to the issuance of shares of each series, the Board of
Directors is required by the MGCL and the Articles of Incorporation to fix for
each series the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions, qualifications and terms or
conditions of redemption, as permitted by Maryland law. Because the Board of
Directors has the power to establish the preferences, powers and rights of
each series of Preferred Stock, it may afford the holders of any series of
Preferred Stock preferences, powers and rights, voting or otherwise, senior to
the rights of holders of shares of Common Stock. The issuance of Preferred
Stock could have the effect of delaying or preventing a change of control of
the Company that might involve a premium price for holders of Common Stock or
otherwise be in their best interest. The Board of Directors has no present
plans to issue any Preferred Stock.

RESTRICTIONS ON OWNERSHIP AND TRANSFER

Ownership Limits. In order for the Company to qualify as a REIT under the
Code, no more than 50% in value of its outstanding shares of stock may be
owned, actually or constructively, by five or fewer individuals (as defined in
the Code to include certain entities) during the last half of a taxable year
(other than the first year for which an election to be treated as a REIT has
been made). In addition, if the Company, or an owner of 10% or more of the
Company, actually or constructively owns 10% or more of a tenant of the
Company (or a tenant of any partnership in which the Company is a partner),
the rent received by the Company (either directly or through any such
partnership) from such tenant will not be qualifying income for purposes of
the REIT gross income tests of the Code. A REIT's stock must also be
beneficially owned by 100 or more persons during at least 335 days of a
taxable year of twelve months or during a proportionate part of a shorter
taxable year (other than the first year for which an election to be treated as
a REIT has been made).

Because the Company will elect to qualify as a REIT, the Articles of
Incorporation contain restrictions on the ownership and transfer of Common
Stock which are intended to assist the Company in complying with these
requirements. The Ownership Limit set forth in the Articles of Incorporation
provides that, subject to certain specified exceptions, no person or entity
may own, or be deemed to own by virtue of the applicable constructive
ownership provisions of the Code, more than 7.0% (by number or value,
whichever is more restrictive) of the outstanding shares of Common Stock. The
constructive ownership rules are complex, and may cause shares of Common Stock
owned actually or constructively by a group of related individuals and/or
entities to be constructively owned by one individual or entity. As a result,
the acquisition of less than 7.0% of the shares of Common Stock (or the
acquisition of an interest in an entity that owns, actually or constructively,
Common

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Stock) by an individual or entity, could, nevertheless cause that individual
or entity, or another individual or entity, to own constructively in excess of
7.0% of the outstanding Common Stock and thus violate the Ownership Limit, or
such other limit as provided in the Articles of Incorporation or as otherwise
permitted by the Board of Directors. The Board of Directors may, but in no
event will be required to, waive the Ownership Limit with respect to a
particular stockholder if it determines that such ownership will not
jeopardize the Company's status as a REIT and the Board of Directors otherwise
decides such action would be in the best interest of the Company. As a
condition of such waiver, the Board of Directors may require an opinion of
counsel satisfactory to it and/or undertakings or representations from the
applicant with respect to preserving the REIT status of the Company. The Board
of Directors has obtained such undertakings and representations from John B.
Kilroy, Sr. and John B. Kilroy, Jr. and has waived the Ownership Limit with
respect to the actual and constructive ownership (and to any constructive
ownership of securities therefrom) of Common Stock by John B. Kilroy, Sr. and
John B. Kilroy, Jr. Consequently, John B. Kilroy, Sr., John B. Kilroy, Jr.,
members of their families and entities (including the Operating Partnership)
which are deemed to own Messrs. Kilroys' Common Stock under the constructive
ownership rules of the Code will be permitted to own, in the aggregate,
actually or constructively, up to 19.6% (by number of shares or value,
whichever is more restrictive) of the outstanding Common Stock.

The Articles of Incorporation further prohibits (i) any person from actually
or constructively owning shares of stock of the Company that would result in
the Company being "closely held" under Section 856(h) of the Code or otherwise
cause the Company to fail to qualify as a REIT, and (ii) any person from
transferring shares of stock of the Company if such transfer would result in
shares of stock of the Company being owned by fewer than 100 persons.

Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of stock of the Company that will or may
violate any of the foregoing restrictions on transferability and ownership is
required to give notice immediately to the Company and provide the Company
with such other information as the Company may request in order to determine
the effect of such transfer on the Company's status as a REIT. The foregoing
restrictions on transferability and ownership will not apply if the Board of
Directors determines that it is no longer in the best interest of the Company
to attempt to qualify, or to continue to qualify, as a REIT. Except as
otherwise described above, any change in the Ownership Limit would require an
amendment to the Articles of Incorporation. Amendments to the Articles of
Incorporation require the affirmative vote of holders owning at least two-
thirds of the shares of the Company's capital stock outstanding and entitled
to vote thereon.

Pursuant to the Articles of Incorporation, if any purported transfer of
Common Stock or any other event would otherwise result in any person violating
the Ownership Limit or such other limit as provided in the Articles of
Incorporation or as otherwise permitted by the Board of Directors, then any
such purported transfer will be void and of no force or effect with respect to
the purported transferee (the "Prohibited Transferee") as to that number of
shares in excess of the Ownership Limit or such other limit, and the
Prohibited Transferee shall acquire no right or interest (or, in the case of
any event other than a purported transfer, the person or entity holding record
title to any such excess shares (the "Prohibited Owner") shall cease to own
any right or interest) in such excess shares. Any such excess shares described
above will be transferred automatically, by operation of law, to a trust, the
beneficiary of which will be a qualified charitable organization selected by
the Company (the "Beneficiary"). Such automatic transfer shall be deemed to be
effective as of the close of business on the business day prior to the date of
such violative transfer. Within 20 days of receiving notice from the Company
of the transfer of shares to the trust, the trustee of the trust (who shall be
designated by the Company and be unaffiliated with the Company and any
Prohibited Transferee or Prohibited Owner) will be required to sell such
excess shares to a person or entity who could own such shares without
violating the Ownership Limit, or such other limit as provided in the Articles
of Incorporation or as otherwise permitted by the Board of Directors, and
distribute to the Prohibited Transferee or Prohibited Owner an amount equal to
the lesser of the price paid by the Prohibited Transferee or Prohibited Owner
for such excess shares or the sales proceeds received by the trust for such
excess shares. In the case of any excess shares resulting from any event other
than a transfer, or from a transfer for no consideration (such as a gift), the
trustee will be required to sell such excess shares to a qualified person or
entity and distribute to the Prohibited Owner an amount equal to the lesser of
the Market Price (as defined in the Articles of Incorporation) of such excess
shares as of the date of such event or the sales proceeds

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received by the trust for such excess shares. In either case, any proceeds in
excess of the amount distributable to the Prohibited Transferee or Prohibited
Owner, as applicable, will be distributed to the Beneficiary. Prior to a sale
of any such excess shares by the trust, the trustee will be entitled to
receive, in trust for the Beneficiary, all dividends and other distributions
paid by the Company with respect to such excess shares, and also will be
entitled to exercise all voting rights with respect to such excess shares.
Subject to Maryland law, effective as of the date that such shares have been
transferred to the trust, the trustee shall have the authority (at the
trustee's sole discretion) (i) to rescind as void any vote cast by a
Prohibited Transferee or Prohibited Owner, as applicable, prior to the
discovery by the Company that such shares have been transferred to the trust
and (ii) to recast such vote in accordance with the desires of the trustee
acting for the benefit of the Beneficiary. However, if the Company has already
taken irreversible corporate action, then the trustee shall not have the
authority to rescind and recast such vote. Any dividend or other distribution
paid to the Prohibited Transferee or Prohibited Owner (prior to the discovery
by the Company that such shares had been automatically transferred to a trust
as described above) will be required to be repaid to the trustee upon demand
for distribution to the Beneficiary. In the event that the transfer to the
trust as described above is not automatically effective (for any reason) to
prevent violation of the Ownership Limit or such other limit as provided in
the Articles of Incorporation or as otherwise permitted by the Board of
Directors, then the Articles of Incorporation provide that the transfer of the
excess shares will be void.

In addition, shares of stock of the Company held in the trust shall be
deemed to have been offered for sale to the Company, or its designee, at a
price per share equal to the lesser of (i) the price per share in the
transaction that resulted in such transfer to the trust (or, in the case of a
devise or gift, the Market Price at the time of such devise or gift) and (ii)
the Market Price on the date the Company, or its designee, accepts such offer.
The Company shall have the right to accept such offer until the trustee has
sold the shares of stock held in the trust. Upon such a sale to the Company,
the interest of the Beneficiary in the shares sold shall terminate and the
trustee shall distribute the net proceeds of the sale to the Prohibited
Transferee or Prohibited Owner.

If any purported transfer of shares of Common Stock would cause the Company
to be beneficially owned by fewer than 100 persons, such transfer will be null
and void in its entirety and the intended transferee will acquire no rights to
the stock.

All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above. The foregoing ownership
limitations could delay, defer or prevent a transaction or a change in control
of the Company that might involve a premium price for the Common Stock or
otherwise be in the best interest of stockholders.

Under the Articles of Incorporation, every owner of a specified percentage
(or more) of the outstanding shares of Common Stock must file a completed
questionnaire with the Company containing information regarding their
ownership of such shares, as set forth in the Treasury Regulations. Under
current Treasury Regulations, the percentage will be set between 0.5% and
5.0%, depending upon the number of record holders of the Company's shares of
Common Stock. In addition, each stockholder shall upon demand be required to
disclose to the Company in writing such information as the Company may request
in order to determine the effect, if any, of such stockholder's actual and
constructive ownership of Common Stock on the Company's status as a REIT and
to ensure compliance with the Ownership Limit, or such other limit as provided
in the Articles of Incorporation or as otherwise permitted by the Board of
Directors.

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CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE ARTICLES OF INCORPORATION AND BYLAWS

The following paragraphs summarize certain provisions of the MGCL and the
Articles of Incorporation and Bylaws. The summary does not purport to be
complete and is subject to and qualified in its entirety by reference to the
MGCL and the Articles of Incorporation and Bylaws, copies of which are
exhibits to the Registration Statement of which this Prospectus is a part.

THE BOARD OF DIRECTORS

The Articles of Incorporation provide that the number of directors of the
Company shall be established by the Bylaws but shall not be less than the
minimum number required by the MGCL, which in the case of the Company is
three. The Bylaws currently provide that the Board of Directors will consist
of not fewer than five nor more than 13 members. Any vacancy (except for a
vacancy caused by removal) will be filled, at any regular meeting or at any
special meeting called for that purpose, by a majority of the remaining
directors or, in the case of a vacancy resulting from an increase in the
number of directors, by a majority of the entire Board of Directors. A vacancy
resulting from removal will be filled by the stockholders at the next annual
meeting of stockholders or at a special meeting of the stockholders called for
that purpose. The Articles of Incorporation and Bylaws provide that a majority
of the Board must be "Independent Directors." An "Independent Director" is a
director who is not an employee, officer or affiliate of the Company or a
subsidiary or division thereof, or a relative of a principal executive
officer, or who is not an individual member of an organization acting as
advisor, consultant or legal counsel, receiving compensation on a continuing
basis from the Company in addition to director's fees.

Pursuant to the Articles of Incorporation, the directors are divided into
three classes as nearly equal in size as practicable. One class holds office
initially for a term expiring at the annual meeting of stockholders to be held
in 1998, another class holds office initially for a term expiring at the
annual meeting of stockholders to be held in 1999 and another class holds
office initially for a term expiring at the annual meeting of stockholders to
be held in 2000. As the term of each class expires, directors in that class
will be elected for a term of three years and until their successors are duly
elected and qualified and the directors in the other two classes will continue
in office. The Company believes that classification of the Board of Directors
helps to assure the continuity and stability of the Company's business
strategies and policies as determined by the Board of Directors.

The classified director provision could have the effect of making the
removal of incumbent directors more time consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in
a majority of the Board of Directors. Thus, the classified board provision
could increase the likelihood that incumbent directors will retain their
positions. Holders of shares of Common Stock will have no right to cumulative
voting for the election of directors. Consequently, at each annual meeting of
stockholders, the holders of a majority of the shares of Common Stock will be
able to elect all of the successors of the class of directors whose term
expires at that meeting.

REMOVAL OF DIRECTORS

While the Articles of Incorporation and the MGCL empower the stockholders to
fill vacancies in the Board of Directors that are caused by the removal of a
director, the Articles of Incorporation preclude stockholders from removing
incumbent directors except upon a substantial affirmative vote. Specifically,
the Articles of Incorporation provide that a director may be removed only for
cause and only by the affirmative vote of at least two-thirds of the votes
entitled to be cast in the election of directors. Under the MGCL, the term
"cause" is not defined and is, therefore, subject to Maryland common law and
to judicial interpretation and review in the context of the unique facts and
circumstances of any particular situation. This provision, when coupled with
the provision in the Bylaws authorizing the Board of Directors to fill vacant
directorships, precludes stockholders from removing incumbent directors except
upon a substantial affirmative vote and filling the vacancies created by such
removal with their own nominees.

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BUSINESS COMBINATIONS

Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between the Company and
any person who beneficially owns, directly or indirectly, 10% or more of the
voting power of the Company's shares, or an affiliate of the Company who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the Company's then
outstanding shares (an "Interested Stockholder") or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. Thereafter, any such business
combination must be recommended by the Board of Directors and approved by the
affirmative vote of at least (i) 80% of the votes entitled to be cast by
holders of outstanding shares of the Company's voting stock and (ii) two-
thirds of the votes entitled to be cast by holders of outstanding shares of
the Company's voting stock other than shares held by the Interested
Stockholder with whom the business combination is to be effected, unless,
among other things, the Company's stockholders receive a minimum price (as
defined in the MGCL) for their shares of stock and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of the MGCL do not apply,
however, to business combinations that are approved or exempted by the Board
of Directors prior to the time that the Interested Stockholder becomes an
Interested Stockholder. The Board of Directors has resolved to opt out of the
business combinations provisions of the MGCL, and such resolutions also
require that any decision to opt back in be subject to the approval of holders
of a majority of the shares of Common Stock. As a result of the Company's
decision to opt out of the business combinations provisions of the MGCL, an
Interested Stockholder would be able to effect a "business combination"
without complying with the requirements set forth above. The decision to opt
out of the provisions may have the effect of making it easier for stockholders
who become Interested Stockholders to consummate a business combination
involving the Company. However, no assurance can be given that any such
business combination would be consummated or, if consummated, would result in
a purchase of shares of Common Stock from any stockholder at a premium.

CONTROL SHARE ACQUISITIONS

The MGCL provides that "control shares" of the Company acquired in a
"control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares owned by the acquiror or by officers or directors who
are employees of the Company. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired
by the acquiror, or in respect of which the acquiror is able to exercise or
direct the exercise of voting power (except solely by revocable proxy), would
entitle the acquiror to exercise voting power in electing directors within one
of the following ranges of voting power: (i) one-fifth or more but less than
one-third; (ii) one-third or more but less than a majority; or (iii) a
majority of all voting power. "Control shares" do not include shares of stock
the acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.

A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of stockholders to
be held within 50 days of demand to consider voting rights for the shares. If
no request for a meeting is made, the Company may itself present the question
at any stockholders' meeting.

If voting rights are not approved at the stockholders' meeting or if the
acquiring person does not deliver an acquiring person statement as required by
the MGCL, then, subject to certain conditions and limitations, the Company may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders'
meeting and the acquiror becomes entitled to vote a majority of the shares of
stock entitled to vote,

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all other stockholders may exercise appraisal rights. The fair value of the
shares of stock as determined for purposes of such appraisal rights may not be
less than the highest price per share paid by the acquiror in the control
share acquisition, and certain limitations and restrictions otherwise
applicable to the exercise of dissenters' rights do not apply in the context
of a control share acquisition.

The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the Company is a party to the
transaction, or to acquisitions approved or exempted by the Articles of
Incorporation or Bylaws. The Bylaws contain a provision exempting from the
control share acquisition statute any and all acquisitions by any person of
the Company's shares of stock. Although there can be no assurance that such
provision will not be amended or eliminated at any time in the future, the
Board of Directors has resolved that the provision may not be amended or
eliminated without the approval of the holders of at least a majority of the
shares of Common Stock. As a result of the Company's decision to opt out of
the "control share acquisition" provisions of the MGCL, stockholders who
acquire a substantial block of Common Stock are not precluded from exercising
full voting rights with respect to their shares on all matters without first
obtaining the approval of other stockholders entitled to vote. This may have
the effect of making it easier for any such control share stockholder to
effect a business combination with the Company. However, no assurance can be
given that any such business combination would be consummated or, if
consummated, would result in a purchase of shares of Common Stock from any
stockholder at a premium.

AMENDMENT TO THE ARTICLES OF INCORPORATION AND BYLAWS

The Articles of Incorporation may not be amended without the affirmative
vote of at least two-thirds of the shares of capital stock outstanding and
entitled to vote thereon voting together as a single class. Other than
provisions of the Bylaws (i) opting out of the control share acquisition
statute, (ii) requiring approval by the Independent Directors for selection of
operators of the Properties or of transactions involving John B. Kilroy, Sr.
and John B. Kilroy, Jr. and their affiliates and (iii) those governing
amendment of the Bylaws, each of which may be amended only with the approval
of a majority of the shares of capital stock entitled to vote, the Bylaws may
be amended by the vote of a majority of the Board of Directors or the shares
of the Company's capital stock entitled to vote thereon.

MEETINGS OF STOCKHOLDERS

The Bylaws provide for annual meetings of stockholders, commencing with the
year 1998, to elect the Board of Directors and transact such other business as
may properly be brought before the meeting. Special meetings of stockholders
may be called by the President, the Board of Directors or the Chairman of the
Board and shall be called at the request in writing of the holders of 50% or
more of the outstanding stock of the Company entitled to vote.

The MGCL provides that any action required or permitted to be taken at a
meeting of stockholders may be taken without a meeting by unanimous written
consent, if such consent sets forth such action and is signed by each
stockholder entitled to vote on the matter and a written waiver of any right
to dissent is signed by each stockholder entitled to notice of the meeting but
not entitled to vote at it.

ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS

The Bylaws provide that (i) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(a) pursuant to the Company's notice of the meeting, (b) by or at the
direction of the Board of Directors or (c) by a stockholder who is entitled to
vote at the meeting and has complied with the advance notice procedures set
forth in the Bylaws, and (ii) with respect to special meetings of
stockholders, only the business specified in the Company's notice of meeting
may be brought before the meeting of stockholders.

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The provisions in the Articles of Incorporation on classification of the
Board of Directors and amendments to the Articles of Incorporation and the
advance notice provisions of the Bylaws could have the effect of discouraging
a takeover or other transaction in which holders of some, or a majority, of
the shares of Common Stock might receive a premium for their shares of Common
Stock over the then prevailing market price or which such holders might
believe to be otherwise in their best interests.

DISSOLUTION OF THE COMPANY

Under the MGCL, the Company may be dissolved by (i) the affirmative vote of
a majority of the entire Board of Directors declaring such dissolution to be
advisable and directing that the proposed dissolution be submitted for
consideration at any annual or special meeting of stockholders, and (ii) upon
proper notice, stockholder approval by the affirmative vote of the holders of
two-thirds of the total number of shares of capital stock outstanding and
entitled to vote thereon voting as a single class.

LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY

The Company's officers and directors are and will be indemnified under
Maryland law, the Articles of Incorporation and the Partnership Agreement
against certain liabilities. The Articles of Incorporation and Bylaws require
the Company to indemnify its directors and officers to the fullest extent
permitted from time to time by the laws of Maryland.

The MGCL permits a corporation to indemnify its directors and officers and
certain other parties against judgments, penalties, fines, settlements, and
reasonable expenses actually incurred by them in connection with any
proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (i) the act or
omission of the director or officer was material to the matter giving rise to
the proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty, (ii) the director or officer actually received an
improper personal benefit in money, property or services, or (iii) in the case
of any criminal proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. Indemnification may be made
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by the director or officer in connection with the
proceeding; provided, however, that if the proceeding is one by or in the
right of the corporation, indemnification may not be made with respect to any
proceeding in which the director or officer has been adjudged to be liable to
the corporation. In addition, a director or officer may not be indemnified
with respect to any proceeding charging improper personal benefit to the
director or officer in which the director or officer was adjudged to be liable
on the basis that personal benefit was received. The termination of any
proceeding by conviction, or upon a plea of nolo contendere or its equivalent,
or an entry of any order of probation prior to judgment, creates a rebuttable
presumption that the director or officer did not meet the requisite standard
of conduct required for indemnification to be permitted.

The MGCL permits the articles of incorporation of a Maryland corporation to
include a provision limiting the liability of its directors and officers to
the corporation and its stockholders for money damages, subject to specified
restrictions, and the Articles of Incorporation contain this provision. The
law does not, however, permit the liability of directors and officers to the
corporation or its stockholders to be limited to the extent that (i) it is
proved that the person actually received an improper personal benefit in
money, property or services, (ii) a judgment or other final adjudication is
entered in a proceeding based on a finding that the person's action, or
failure to act, was committed in bad faith or was the result of active and
deliberate dishonesty and was material to the cause of action adjudicated in
the proceeding or (iii) in the case of any criminal proceeding, the director
had reasonable cause to believe that the act or failure to act was unlawful.
This provision does not limit the ability of the Company or its stockholders
to obtain other relief, such as an injunction or rescission.

The Partnership Agreement also provides for indemnification of the Company,
as general partner, and its officers and directors to the same extent
indemnification is provided to officers and directors of the Company in its
Articles of Incorporation, and limits the liability of the Company and its
officers and directors to the Operating Partnership and the partners of the
Operating Partnership to the same extent liability of officers and directors
of

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the Company to the Company and its stockholders is limited under the Articles
of Incorporation. See "Partnership Agreement of the Operating Partnership--
Indemnification."

Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.

INDEMNIFICATION AGREEMENTS

The Company has entered into indemnification agreements with each of its
executive officers and directors. The indemnification agreements require,
among other matters, that the Company indemnify its executive officers and
directors to the fullest extent permitted by law and advance to the executive
officers and directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. Under the
agreements, the Company must also indemnify and advance all expenses incurred
by executive officers and directors seeking to enforce their rights under the
indemnification agreements and may cover executive officers and directors
under the Company's directors' and officers' liability insurance. Although the
form of indemnification agreement offers substantially the same scope of
coverage afforded by law, it provides greater assurance to directors and
executive officers that indemnification will be available, because, as a
contract, it cannot be modified unilaterally in the future by the Board of
Directors or the stockholders to eliminate the rights it provides.

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PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP

The following summary of the Amended and Restated Agreement of Limited
Partnership of the Operating Partnership (the"Partnership Agreement") and the
descriptions of certain provisions set forth elsewhere in this Prospectus, are
qualified in their entirety by reference to the Partnership Agreement, which
is filed as an exhibit to the Registration Statement of which this Prospectus
is a part. See"Additional Information."

MANAGEMENT

The Operating Partnership is organized as a Delaware limited partnership
pursuant to the terms of the Partnership Agreement. The Company is the sole
general partner of the Operating Partnership and presently holds an 83.7%
economic interest in the Operating Partnership (89.7% after giving effect to
the Offering and the application of the net offering proceeds therefrom as set
forth under the caption "Use of Proceeds.") of the economic interests in, the
Operating Partnership. The Company conducts substantially all of its business
through the Operating Partnership, except for development and certain other
services (which are conducted through the Services Company) in order to
preserve the Company's REIT status. The Operating Partnership owns a 95.0%
economic interest in the Services Company. Generally, pursuant to the
Partnership Agreement, the Company, as the sole general partner of the
Operating Partnership, has full, exclusive and complete responsibility and
discretion in the management and control of the Operating Partnership,
including the ability to cause the Operating Partnership to enter into certain
major transactions including acquisitions, dispositions and refinancings and
to cause changes in the Operating Partnership's line of business and
distribution policies.

The Unitholders, as limited partners of the Operating Partnership, have no
authority to transact business for, or participate in the management
activities or decisions of, the Operating Partnership, except as provided in
the Partnership Agreement and as required by applicable law.

INDEMNIFICATION

To the extent permitted by law, the Partnership Agreement provides for
indemnification of the Company, as general partner, its officers and directors
and such other persons as the Company may designate to the same extent
indemnification is provided to officers and directors of the Company in its
Articles of Incorporation, and limits the liability of the Company and its
officers and directors to the Operating Partnership to the same extent
liability of officers and directors of the Company is limited under the
Articles of Incorporation.

TRANSFERABILITY OF INTERESTS

Except for a transaction described in the following two paragraphs, the
Partnership Agreement provides that the Company may not voluntarily withdraw
from the Operating Partnership, or transfer or assign its interest in the
Operating Partnership, without the consent of the holders of at least 60% of
the partner interests (including the interests of the Company, which will
represent approximately 89.7% of the total partner interests upon consummation
of the Offering and the application of the net offering proceeds therefrom as
set forth under the caption "Use of Proceeds"). Pursuant to the Partnership
Agreement, the limited partners have agreed not to transfer, assign, sell,
encumber or otherwise dispose of, without the consent of the Company, their
interest in the Operating Partnership, other than to family members or
accredited investors who agree to assume the obligations of the transferor
under the Partnership Agreement subject to a right of first refusal for the
benefit of the Company. The Unitholders are subject to additional restrictions
on their ability to transfer shares of Common Stock. See"Underwriting."

The Company may not engage in any merger, consolidation or other combination
with or into another person, sale of all or substantially all of its assets or
any reclassification, recapitalization or change of its outstanding equity
interests (each a"Termination Transaction") unless the Termination Transaction
has been approved by holders of at least 60% of the Units (including Units
held by the Company, which will represent approximately 89.7% of all Units
outstanding upon consummation of the Offering and the application of the net
offering proceeds therefrom as set forth under the caption "Use of Proceeds")
and in connection with which

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all limited partners either will receive, or will have the right to elect to
receive, for each Unit an amount of cash, securities or other property equal
to the product of the number of shares of Common Stock into which each Unit is
then exchangeable and the greatest amount of cash, securities or other
property paid to the holder of one share of Common Stock in consideration of
one share of Common Stock pursuant to the Termination Transaction. If, in
connection with the Termination Transaction, a purchase, tender or exchange
offer shall have been made to and accepted by the holders of the outstanding
shares of Common Stock, each holder of Units will receive, or will have the
right to elect to receive, the greatest amount of cash, securities or other
property which such holder would have received had it exercised its right to
redemption and received shares of Common Stock in exchange for its Units
immediately prior to the expiration of such purchase, tender or exchange offer
and had thereupon accepted such purchase, tender or exchange offer.

The Company may also merge or otherwise combine its assets with another
entity if the following conditions are met: (i) substantially all of the
assets directly or indirectly owned by the surviving entity are held directly
or indirectly by the Operating Partnership or another limited partnership or
limited liability company which is the survivor of a merger, consolidation or
combination of assets with the Operating Partnership (in each case,
the"Surviving Partnership"); (ii) the limited partners own a percentage
interest of the Surviving Partnership based on the relative fair market value
of the net assets of the Operating Partnership and the other net assets of the
Surviving Partnership immediately prior to the consummation of such
transaction; (iii) the rights, preferences and privileges of the limited
partners in the Surviving Partnership are at least as favorable as those in
effect immediately prior to the consummation of such transaction and as those
applicable to any other limited partners or non-managing members of the
Surviving Partnership; and (iv) such rights of the limited partners include
the right to exchange their interests in the Surviving Partnership for at
least one of the following: (a) the consideration available to such persons
pursuant to the preceding paragraph, or (b) if the ultimate controlling person
of the Surviving Partnership has publicly traded common equity securities,
such common equity securities, with an exchange ratio based on the relative
fair market value of such securities and the Common Stock. For purposes of
this paragraph, the determination of relative fair market values and rights,
preferences and privileges of the limited partners shall be reasonably
determined by the Board of Directors as of the time of the Termination
Transaction and, to the extent applicable, the values shall be no less
favorable to the limited partners than the relative values reflected in the
terms of the Termination Transaction.

In respect of any transaction described in the preceding two paragraphs, the
Company is required to use its commercially reasonable efforts to structure
such transaction to avoid causing the limited partners to recognize gain for
federal income tax purposes by virtue of the occurrence of or their
participation in such transaction. The Operating Partnership will also use
commercially reasonable efforts to cooperate with the limited partners to
minimize any taxes payable in connection with any repayment, refinancing,
replacement or restructuring of indebtedness, or any sale, exchange or any
other disposition of assets, of the Operating Partnership.

ISSUANCE OF ADDITIONAL UNITS

As sole general partner of the Operating Partnership, the Company has the
ability to cause the Operating Partnership to issue additional Units
representing general and limited partnership interests in the Operating
Partnership, including preferred Units of limited partnership interests.

CAPITAL CONTRIBUTION

The Partnership Agreement provides that if the Operating Partnership
requires additional funds at any time or from time to time in excess of funds
available to the Operating Partnership from borrowings or capital
contributions, the Company may borrow such funds from a financial institution
or other lender or through public or private debt offerings and lend such
funds to the Operating Partnership on the same terms and conditions as are
applicable to the Company's borrowing of such funds. As an alternative to
borrowing funds required by the Operating Partnership, the Company may
contribute the amount of such required funds as an additional capital
contribution to the Operating Partnership. If the Company so contributes
additional capital to the Operating Partnership, the Company's partnership
interest in the Operating Partnership will be increased on a proportionate
basis. Conversely, the partnership interests of the limited partners will be
decreased on a proportionate basis in the event of additional capital
contributions by the Company. See"Policies With Respect to Certain
Activities--Financing."

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AWARDS UNDER STOCK INCENTIVE PLAN

If options granted in connection with the Stock Incentive Plan are exercised
at any time or from time to time, or restricted shares of Common Stock are
issued under the Stock Incentive Plan, the Partnership Agreement requires the
Company to contribute to the Operating Partnership as an additional
contribution the exercise price received by the Company in connection with the
issuance of shares of Common Stock to such exercising participant or the
proceeds received by the Company upon issuance of the shares. Upon such
contribution the Company will be issued a number of Units in the Operating
Partnership equal to the number of shares of Common Stock so issued.

REDEMPTION/EXCHANGE RIGHTS

Limited partners have rights to require the Operating Partnership to redeem
part or all of their Units for cash (based upon the fair market value of an
equivalent number of shares of Common Stock at the time of such redemption) or
the Company may elect to exchange such Units for shares of Common Stock (on a
one-for-one basis, subject to adjustment in the event of stock splits, stock
dividends, issuance of certain rights, certain extraordinary distributions and
similar events); provided, however, that if the Company does not elect to
exchange such Units for shares of Common Stock, a holder of Units that is a
corporation or a limited liability company may require the Company to issue
Common Stock in lieu thereof, subject to the Ownership Limit or such other
limit as provided in the Articles of Incorporation or as otherwise permitted
by the Board of Directors, as applicable. The Company presently anticipates
that it will elect to issue Common Stock in exchange for Units in connection
with each such redemption request, rather than having the Operating
Partnership pay cash. With each such redemption or exchange, the Company's
percentage ownership interest in the Operating Partnership will increase. This
redemption/exchange right may be exercised by limited partners from time to
time, in whole or in part, subject to the limitations that such right may not
be exercised (i) prior to January 31, 1999 or (ii) at any time to the extent
such exercise would result in any person actually or constructively owning
Common Stock in excess of the Ownership Limit or such other amount as provided
in the Articles of Incorporation or as otherwise permitted by the Board of
Directors, as applicable, assuming Common Stock was issued in such exchange.
See"Description of Capital Stock--Restrictions on Ownership and Transfer." In
addition, under certain circumstances 50% of the Units received by John B.
Kilroy, Sr., John B. Kilroy, Jr. and KI may be redeemed prior to January 31,
1999 in connection with the obligation of such Unitholders to indemnify the
Company in connection with the Formation Transactions. See"Formation and
Structure of the Company--Formation Transactions."

REGISTRATION RIGHTS

For a description of certain registration rights held by the Unitholders,
see"Shares Eligible for Future Sale--Redemption/Exchange Rights and
Registration Rights."

TAX MATTERS

Pursuant to the Partnership Agreement, the Company is the tax matters
partner of the Operating Partnership and, as such, has authority to make tax
elections under the Code on behalf of the Operating Partnership.

The net income or net loss of the Operating Partnership will generally be
allocated to the Company and the limited partners in accordance with their
respective percentage interests in the Operating Partnership, subject to
compliance with the provisions of Sections 704(b) and 704(c) of the Code and
the Treasury Regulations promulgated thereunder. See"Federal Income Tax
Consequences--Tax Aspects of the Partnerships."

OPERATIONS

The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT and to avoid any federal income tax liability.
The Partnership Agreement provides that the net operating cash revenues of the
Operating Partnership,

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as well as net sales and refinancing proceeds, will be distributed from time
to time as determined by the Company (but not less frequently than quarterly)
pro rata in accordance with the partners' respective percentage interests.
Pursuant to the Partnership Agreement, the Operating Partnership assumes and
pays when due, or reimburses the Company for payment of, all expenses it
incurs relating to the ownership and operation of, or for the benefit of, the
Operating Partnership and all costs and expenses relating to the operations of
the Company.

DUTIES AND CONFLICTS

Except as otherwise set forth in "Policies with Respect to Certain
Activities--Conflicts of Interest Policies" and "Management--Employment
Agreements," any limited partner of the Operating Partnership may engage in
other business activities outside the Operating Partnership, including
business activities that directly compete with the Operating Partnership.

CERTAIN LIMITED PARTNER APPROVAL RIGHTS

The Partnership Agreement provides that if the limited partners own at least
5% of the outstanding Units (including Units held by the Company), the Company
shall not, on behalf of the Operating Partnership, take any of the following
actions without the prior consent of the holders of more than 50% (excluding
Units held by the Company) of the Units representing limited partner
interests: (i) dissolve the Operating Partnership, other than incident to a
merger or sale of substantially all of the Company's assets; or (ii) prior to
January 31, 2004, sell the Office Property located at 2260 E. Imperial
Highway, at Kilroy LAX, other than incident to a merger or sale of
substantially all of the Company's assets.

TERM

The Operating Partnership will continue in full force and effect for 99
years or until sooner dissolved pursuant to the terms of the Partnership
Agreement.

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DESCRIPTION OF INDEBTEDNESS

The following paragraphs summarize certain provisions of the Credit
Facility, the $84 Million Loan and the SeaTac Loan. The summary does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Revolving Credit Agreement, dated as of May 21, 1997 between
Kilroy Realty, L.P. and the banks listed therein, the Credit Agreement between
Kilroy Finance and the banks named therein, and the Variable Interest Rate
Indenture, Mortgage, Deed of Trust, Security Agreement, Financing Statement,
Fixture Filing and Assignment of Leases and Rents, respectively, and the
related documents and agreements referenced therein, each of which is an
exhibit to the Registration Statement of which this Prospectus is a part.

CREDIT FACILITY

On May 21, 1997, the Company, on behalf of the Operating Partnership,
obtained from MGT the two-year, $150.0 million revolving Credit Facility.
There is a one-year option to extend the term of the Credit Facility. On July
28, 1997, the Company received a commitment to increase the Credit Facility to
$200.0 million. The Credit Facility is used primarily to finance acquisitions
of additional properties. Payment of principal and interest is secured by
substantially all of the Properties other than Properties securing the
Mortgage Loans. In addition, borrowing under the Credit Facility are recourse
obligations to the Operating Partnership.

Availability under the Credit Facility is subject to the value of the
underlying collateral securing it. As of July 25, 1997, approximately
$95.0 million is outstanding. The Operating Partnership's ability to borrow
under the Credit Facility is subject to its compliance with the following
covenants on an ongoing basis: a ratio of Net Operating Cash Flow (as defined
below) to Debt Service (as defined below) of 1.75-to-1; a loan to collateral
value ratio of not more than 60.0%; a ratio of debt to tangible fair market
value of real property assets owned by the Operating Partnership of not more
than 50%; a ratio of annual earnings before income taxes, depreciation and
amortization to Debt Service of at least 2-to-1; limitations on distributions
to 95% of funds from operations; consolidated tangible net worth of the
Operating Partnership of not less than 90.0% of the Operating Partnership's
consolidated tangible net worth as of January 28, 1997; maintenance of the
Company's status as a REIT for federal income tax purposes and compliance with
all applicable regulations in connection with such status; maintenance of
collateral; a limit of $5.0 million of recourse debt; limitations on the
incurrence of additional indebtedness; and other customary covenants. "Debt
Service" means, measured as of the last day of each calendar quarter, an
amount equal to the interest actually payable by the Operating Partnership on
the loans for the previous four consecutive quarters including the quarter
then ended. "Net Operating Cash Flow" means, as of any date of determination,
with respect to all mortgaged properties, property income for the previous
four consecutive quarters including the quarter then ended, but less (a)
property expenses with respect to all such mortgaged properties for the
previous four consecutive quarters including the quarter then ended, and (b)
the greater of (i) capital expenditures which are not related to new
construction for the previous four consecutive quarters including the quarter
then ended, and (ii) appropriate reserves for replacements of not less than
$0.20 per square foot of space subject to leases per annum for each mortgaged
property which is an office property, and $0.15 per square foot of space
subject to leases per annum for each mortgaged property which is an industrial
property. Based on the interest rate selected, each advance under the Credit
Facility bears interest at a rate equal to either (a) 0.25% plus a rate (the
"Prime Rate") equal to the higher of (i) MGT's prime rate then in effect or
(ii) the federal funds rate plus 0.50%, or (b) 1.5% plus the LIBOR rate
applicable to the selected interest period, which period may be one, two,
three or six months. The Company and the Operating Partnership anticipate that
the Credit Facility will be either extended, renewed or refinanced through the
issuance of debt or equity securities at its maturity.

$84.0 MILLION LOAN

In connection with the IPO, the Company obtained the $84.0 million mortgage
loan from MGT (the "84.0 Million Loan"). The proceeds of the loan were used to
repay indebtedness on certain of the Properties that were owned by the Company
upon completion of the IPO. The $84.0 Million Loan is secured by the

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Properties owned by the Company upon completion of the IPO other than the five
Office Properties comprising Kilroy Long Beach and the three Office Properties
comprising the SeaTac Office Center.

The $84.0 Million Loan requires monthly payments of $667,921. This loan
matures on February 1, 2022, and until January 31, 2005 (the "Reset Date"), it
bears interest at 8.35%. On the Reset Date the interest rate for the $84.0
Million Loan will increase to a rate equal to the greater of 13.35% and the sum
of the interest rate for U.S. Treasury Securities maturing 15 years from the
Reset Date plus 5.0%. The $84.0 Million Loan is secured by cross-collateralized
and cross-defaulted mortgages on certain of the Properties. The $84.0 Million
Loan may not be prepaid during the first four years of the loan term commencing
on January 31, 1997. Thereafter the loan may be repaid in whole or in part,
subject to a prepayment premium. The $84.0 Million Loan requires reserves for
current taxes and insurance, capital expenditures and tenant improvements and
leasing commissions. An improvements and repairs reserve of approximately $1.2
million has been established, which reserve will be released upon completion of
the improvements; a replacement reserve is funded monthly at an annual rate of
approximately $.20 per rentable square foot of the collateral; and a reserve of
approximately $908,000 has been established to make certain earthquake-related
structural modifications. A tenant improvement and leasing commission reserve
will commence in January 1998; the Company presently anticipates that the
average balance of this reserve will be approximately $1.0 million in each of
the first four years of the reserve. In addition, the $84.0 Million Loan
includes customary representations and warranties and requires the borrower to
comply with the following affirmative and negative covenants: limitations on
the incurrence of additional indebtedness; limitations on advances to and
investments in others (including the guaranty of any obligations of another
person); limitations on the transfer or sale of assets including the
collateral; limitations on merger and acquisition transactions; maintenance of
minimum levels of insurance; maintenance of collateral; and other customary
covenants. The $84.0 Million Loan was incurred by the Finance Partnership which
is wholly-owned by the Company and the Operating Partnership and which is
structured to be a "bankruptcy remote" financing vehicle. The Properties used
as collateral for the $84.0 Million Loan have been transferred to that limited
partnership. Subject to certain limited exceptions, the $84.0 Million Loan is
non-recourse to the Company.

SEATAC LOAN

Also in connection with the IPO, the Company obtained the $12.0 million
SeaTac Loan from MGT. The proceeds of the SeaTac Loan were used to repay
indebtedness on, and the SeaTac Loan is secured by, the three Office Properties
comprising the SeaTac Office Center.

The SeaTac Loan bears interest at a variable rate equal to the 30-day LIBOR
plus 1.5% and matures on January 31, 1998. The SeaTac Loan requires monthly
payments of interest. The SeaTac Loan is secured by the ground leasehold
interest in the SeaTac Office Center. Principal and interest under the SeaTac
Loan is full recourse to the Company.

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SHARES ELIGIBLE FOR FUTURE SALE

GENERAL

Upon the consummation of the Offering, the Company will have issued and
outstanding 24,475,000 shares of Common Stock in the public market (excluding
the 1,500,000 shares which are subject to the Underwriters' over-allotment
option), of which 24,375,000 (or 25,875,000 if the Underwriters' over-
allotment option is exercised in full) will be freely tradable in the public
market by persons other than "affiliates" of the Company without restriction
or registration under the Securities Act.

In connection with the IPO, each of the Unitholders has agreed not to,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose (or announce any
offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) of any Units or shares of Common Stock
or other capital stock of the Company, or any securities convertible or
exercisable or exchangeable for any Units or shares of Common Stock or other
capital stock until January 28, 1999. The Company, in connection with this
Offering, has agreed not to offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose (or announce
any offer, sale, offer of sale, contract of sale, pledge, grant of any option
to purchase or other sale or disposition) of any (other than pursuant to the
Stock Incentive Plan) shares of Common Stock or other capital stock of the
Company, or any securities convertible or exercisable or exchangeable for any
Units or shares of Common Stock or other capital stock of the Company, for a
period of 180 days from the date of this Prospectus, in each case without the
prior written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, subject to certain limited exceptions. Prudential Securities
Incorporated may, at any time and without notice, release all or any portion
of the shares of Common Stock subject to such lock-up agreements.
Notwithstanding the foregoing, 50% of the Units received by John B. Kilroy,
Sr., John B. Kilroy, Jr. and Kilroy Industries in connection with consummation
of the IPO have been pledged to secure their indemnification obligations
pursuant to an agreement with the Company. See "Formation and Structure of the
Company."

The shares of Common Stock owned by "affiliates" of the Company, the 100,000
restricted shares of Common Stock issued to an officer of the Company who is
not a Unitholder and the shares of Common Stock issuable upon exchange of
Units (other than those issued pursuant to registration rights, as described
below), are subject to Rule 144 and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including exemptions contained in Rule 144.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated with them in accordance with Rule 144) who has
beneficially owned "restricted shares" (defined generally as shares acquired
from the issuer or an affiliate in a non-public transaction) for at least one
year, as well as any person who purchased unrestricted shares on the open
market who may be deemed an affiliate of the Company, would be entitled to
sell, subject to certain manner of sale, public information and notice
requirements, within any three-month period, a number of shares of Common
Stock that does not exceed the greater of 1% of the then-outstanding number of
shares of Common Stock or 1% of the average weekly trading volume of those
shares during the four calendar weeks preceding each such sale. After
restricted shares are held for two years, a person who is not then deemed an
affiliate of the Company is entitled to sell such shares under Rule 144(k)
without regard to these volume limitations. Sales of shares of Common Stock by
affiliates of the Company will continue to be subject to the volume
limitations, unless resold under an effective registration statement under the
Securities Act. In addition, the Commission has recently proposed further
revisions to the holding and volume limitations contained in Rule 144. The
adoption of amendments effecting such proposed revisions may result in resales
of restricted securities sooner than would be the case under Rule 144 and Rule
144(k) as currently in effect. However, there can be no assurance of when, if
ever, such amendments will be proposed or adopted.

The Company has established the Stock Incentive Plan for the purpose of
attracting and retaining executive officers, directors and other key
employees. See "Management--Stock Incentive Plan." As of March 31, 1997, the
Company has issued in the aggregate options to purchase 1,185,000 shares of
Common Stock to executive officers, directors and certain key employees and
has reserved 215,000 additional shares of Common Stock for future issuance
under the Stock Incentive Plan.

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The Common Stock began trading on the NYSE on January 28, 1997, under the
symbol "KRC," and, therefore, no sales prices for the Common Stock are
available for periods prior to that date. On July 24, 1997, the reported
closing sales price on the NYSE was $26.0625 per share. As of June 30, 1997,
there were approximately 38 holders of record of Common Stock. No prediction
can be made as to the effect, if any, that future sales of shares of Common
Stock (including sales pursuant to Rule 144) or the availability of shares of
Common Stock for future sale will have on the market price prevailing from
time to time. Sales of substantial amounts of shares of Common Stock
(including shares of Common Stock issued upon the exercise of options or the
exchange of Units), or the perception that such sales could occur, could
adversely affect prevailing market prices of the shares of Common Stock and
impair the Company's ability to obtain additional capital through the sale of
equity securities. See "Risk Factors--Shares Eligible for Future Sale." For a
description of certain restrictions on transfers of Common Stock held by
certain stockholders of the Company, see "Underwriting" and "Description of
Capital Stock--Restrictions on Ownership and Transfer."

REDEMPTION/EXCHANGE RIGHTS AND REGISTRATION RIGHTS

Each limited partner of the Operating Partnership has the right to require
the Operating Partnership to redeem part or all of their Units for cash (based
on the fair market value of an equivalent number of shares of Common Stock at
the time of such redemption) or, at the election of the Company, to exchange
such Units for shares of Common Stock, at any time after January 28, 1999
subject to the obligation of John B. Kilroy, Sr., John B. Kilroy, Jr. and
Kilroy Industries, with respect to 50% of their limited partnership Units, to
indemnify the Company in connection with the Formation Transactions. See
"Formation and Structure of the Company--Formation Transactions." If the
Company does not elect to exchange such Units for shares of Common Stock, a
Unitholder that is a corporation or a limited liability company may require
the Company to issue shares of Common Stock in lieu of cash, subject to the
Ownership Limit or such other amount as provided in the Articles of
Incorporation, or as permitted by the Board of Directors as applicable. As of
June 30, 1997, an aggregate of approximately 2,817,476 Units are held by
limited partners of the Operating Partnership. If the Company elects to
exchange Units for Common Stock, each Unit will be exchangeable for one share
of Common Stock, subject to adjustment in the event of stock splits,
distribution of rights, extraordinary dividends and similar events.

In order to protect the Company's status as a REIT, a holder of Units is
prohibited from exchanging such Units for shares of Common Stock, to the
extent that as a result of such exchange any person would own or would be
deemed to own, actually or constructively, more than 7.0% of the Common Stock,
except to the extent such holder has been granted an exception to the
Ownership Limit. See "Description of Capital Stock--Restrictions on Ownership
and Transfer."

The Company has granted the Unitholders certain registration rights
(collectively, the "Registration Rights") with respect to the shares of Common
Stock acquired upon exchange of limited partnership Units or otherwise (the
"Registrable Shares"). The Company has agreed to file and generally keep
continuously effective beginning on January 31, 1999 a registration statement
covering the issuance of shares of Common Stock upon exchange of Units and the
resale thereof. In addition, the Company has granted the Unitholders piggyback
registration rights with respect to shares of Common Stock acquired by them by
any means. The Company also has agreed to provide the Registration Rights to
any other person who may become an owner of Units, provided such person
provides the Company with satisfactory undertakings. The Company will bear
expenses incident to its registration obligations upon the exercise of the
Registration Rights, including the payment of federal securities law and state
Blue Sky registration fees, except that it will not bear any underwriting
discounts or commissions or transfer taxes relating to registration of
Registrable Shares.

REINVESTMENT AND SHARE PURCHASE PLAN

The Company is considering the adoption of a Distribution Reinvestment and
Share Purchase Plan that would allow stockholders to automatically reinvest
cash distributions on their outstanding shares of Common Stock and/or Units to
purchase additional shares of Common Stock at a discounted price and without
the payment of any brokerage commission or service charge. Stockholders would
also have the option of investing limited additional amounts by making cash
payments. No decision has been made yet by the Company whether or not to adopt
such a plan and there can be no assurance that such a plan will ever be
adopted by the Company.

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FEDERAL INCOME TAX CONSEQUENCES

The following summary of material federal income tax considerations
regarding the Company and the Offering is based on current law, is for general
information only and is not tax advice. The information set forth below, to
the extent that it constitutes matters of law, summaries of legal matters or
legal conclusions, is the opinion of Latham & Watkins, tax counsel to the
Company, as to the material federal income tax considerations relevant to
purchasers of the Common Stock. This discussion does not purport to deal with
all aspects of taxation that may be relevant to particular stockholders in
light of their personal investment or tax circumstances, or to certain types
of stockholders subject to special treatment under the federal income tax
laws, including, without limitation, certain financial institutions, life
insurance companies, dealers in securities or currencies, stockholders holding
Common Stock as part of a conversion transaction, as part of a hedge or
hedging transaction, or as a position in a straddle for tax purposes, tax-
exempt organizations (except to the extent discussed under the heading "--
Taxation of Tax-Exempt Stockholders") or foreign corporations, foreign
partnerships and persons who are not citizens or residents of the United
States (except to the extent discussed under the heading "Taxation of Non-U.S.
Stockholders"). In addition, the summary below does not consider the effect of
any foreign, state, local or other tax laws that may be applicable to
prospective stockholders.

EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP AND SALE OF THE COMMON STOCK, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.

TAXATION OF THE COMPANY

General. The Company intends to make an election to be taxed as a REIT under
Sections 856 through 860 of the Code commencing with its taxable year ending
December 31, 1997. The Company believes that, commencing with its taxable year
ending December 31, 1997, it has been organized and has operated in such a
manner as to qualify for taxation as a REIT under the Code commencing with
such taxable year, and the Company intends to continue to operate in such a
manner, but no assurance can be given that it has operated or will continue to
operate in such a manner so as to qualify or remain qualified.

These sections of the Code and the corresponding Treasury Regulations are
highly technical and complex. The following sets forth the material aspects of
the sections that govern the federal income tax treatment of a REIT and its
stockholders. This summary is qualified in its entirety by the applicable Code
provisions, rules and regulations promulgated thereunder, and administrative
and judicial interpretations thereof.

Latham & Watkins has acted as tax counsel to the Company in connection with
the IPO, the Offering and the Company's election to be taxed as a REIT. In the
opinion of Latham & Watkins, commencing with the Company's taxable year ending
December 31, 1997, the Company has been organized in conformity with the
requirements for qualification as a REIT, and its method of operation has
enabled, and its proposed method of operation will enable, it to meet the
requirements for qualification and taxation as a REIT under the Code. It must
be emphasized that this opinion is based on various factual assumptions
relating to the organization and operation of the Company (including the
Finance Company, the Operating Partnership, the Finance Partnership, and the
Services Company), and is conditioned upon certain representations made by the
Company as to factual matters. In addition, this opinion is based upon the
factual representations of the Company concerning its business and properties
as set forth in this Prospectus. Moreover, such qualification and taxation as
a REIT depends upon the Company's ability to meet (through actual annual
operating results, distribution levels and diversity of stock ownership) the
various qualification tests imposed under the Code discussed below, the
results of which have not been and will not be reviewed by Latham & Watkins.
Accordingly, no assurance can be given that the actual results of the
Company's operation for any particular taxable year will satisfy such
requirements. Further, the anticipated income tax treatment described in this
Prospectus may be changed, perhaps retroactively, by legislative,
administrative or judicial action at any time. See "--Failure to Qualify."

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If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates
the"double taxation" (at the corporate and stockholder levels) that generally
results from investment in a regular corporation. However, the Company will be
subject to federal income tax as follows. First, the Company will be taxed at
regular corporate rates on any undistributed "REIT taxable income," including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" (defined generally as property acquired
by the Company through foreclosure or otherwise after a default on a loan
secured by the property or a lease of the property) which is held primarily
for sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at
the highest corporate rate on such income. Fourth, if the Company has net
income from prohibited transactions (which are, in general, certain sales or
other dispositions of property held primarily for sale to customers in the
ordinary course of business other than foreclosure property), such income will
be subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), but has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on an amount
equal to (a) the gross income attributable to the greater of the amount by
which the Company fails the 75% or 95% test multiplied by (b) a fraction
intended to reflect the Company's profitability. Sixth, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of
its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, with
respect to any asset (a "Built-In Gain Asset") acquired by the Company from a
corporation which is or has been a C corporation (i.e., generally a
corporation subject to full corporate-level tax) in a transaction in which the
basis of the Built-In Gain Asset in the hands of the Company is determined by
reference to the basis of the asset in the hands of the C corporation, if the
Company recognizes gain on the disposition of such asset during the ten-year
period (the "Recognition Period") beginning on the date on which such asset
was acquired by the Company, then, to the extent of the Built-In Gain (i.e.,
the excess of (a) the fair market value of such asset over (b) the Company's
adjusted basis in such asset, determined as of the beginning of the
Recognition Period), such gain will be subject to tax at the highest regular
corporate rate pursuant to Treasury Regulations that have not yet been
promulgated. The results described above with respect to the recognition of
Built-In Gain assume that the Company will make an election pursuant to IRS
Notice 88-19.

Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (i) which is managed by one or more trustees or
directors; (ii) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest; (iii) which
would be taxable as a domestic corporation, but for Sections 856 through 859
of the Code; (iv) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) during the last half
of each taxable year not more than 50% in value of the outstanding stock of
which is owned, actually or constructively, by five or fewer individuals (as
defined in the Code to include certain entities); and (vii) which meets
certain other tests, described below, regarding the nature of its income and
assets. The Code provides that conditions (i) to (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of twelve months, or during a proportionate
part of a taxable year of less than twelve months. Conditions (v) and (vi)
will not apply until after the first taxable year for which an election is
made to be taxed as a REIT. For purposes of conditions (v) and (vi), pension
funds and certain other tax-exempt entities are treated as individuals,
subject to a "look-through" exception in the case of condition (vi).

The Company believes that the conditions set forth in (i) through (iv) above
have been satisfied. The Company also believes that it has issued sufficient
shares of Common Stock with sufficient diversity of ownership pursuant to the
Offering to allow it to satisfy conditions (v) and (vi). In addition, the
Articles of Incorporation provide for restrictions regarding the transfer and
ownership of shares, which restrictions are intended to assist the Company in
continuing to satisfy the share ownership requirements described in (v) and
(vi) above. Such ownership and transfer restrictions are described in
"Description of Capital Stock--Restrictions

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on Ownership and Transfer." These restrictions, however, may not ensure that
the Company will, in all cases, be able to satisfy the share ownership
requirements described above. If the Company fails to satisfy such share
ownership requirements, the Company's status as a REIT will terminate. See "--
Failure to Qualify." In addition, a corporation may not elect to become a REIT
unless its taxable year is the calendar year. The Company will have a calendar
taxable year.

Ownership of a Partnership Interest. In the case of a REIT which is a
partner in a partnership, Treasury Regulations provide that the REIT will be
deemed to own its proportionate share of the assets of the partnership and
will be deemed to be entitled to the income of the partnership attributable to
such share. In addition, the character of the assets and gross income of the
partnership shall retain the same character in the hands of the REIT for
purposes of Section 856 of the Code, including satisfying the gross income
tests and the asset tests. Thus, the Company's proportionate share of the
assets and items of income of the Operating Partnership (including the
Operating Partnership's share of such items of any subsidiary partnerships)
will be treated as assets and items of income of the Company for purposes of
applying the requirements described herein. A summary of the rules governing
the federal income taxation of partnerships and their partners is provided
below in "--Tax Aspects of the Partnerships." The Company has direct control
of the Operating Partnership and operates it consistent with the requirements
for qualification as a REIT.

Ownership of Qualified REIT Subsidiaries. A corporation will qualify as a
"qualified REIT subsidiary" if 100% of its stock is held by the Company at all
times during the period which such corporation is in existence. The Company's
ownership of the stock of the Finance Company has satisfied this test and,
accordingly, the Finance Company will qualify as a qualified REIT subsidiary.
A qualified REIT subsidiary will not be treated as a separate corporation, and
all assets, liabilities, and items of income, deduction, and credit of a
qualified REIT subsidiary will be treated as assets, liabilities and such
items (as the case may be) of the Company for all purposes of the Code
including the REIT qualification tests. For this reason, references under
"Federal Income Tax Considerations" to the income and assets of the Company
include the income and assets of the Finance Company. A qualified REIT
subsidiary will not be subject to federal income tax and the Company's
ownership of the voting stock of such a subsidiary will not violate the
restrictions against ownership of securities of any one issuer which
constitute more than 10% of such issuer's voting securities or more than 5% of
the value of the Company's total assets, described below under "--Asset
Tests."

Income Tests. In order to maintain its qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly
from investments relating to real property or mortgages on real property
(including "rents from real property" and, in certain circumstances, interest)
or from certain types of temporary investments. Second, at least 95% of the
Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived from such real property investments,
dividends, interest and gain from the sale or disposition of stock or
securities (or from any combination of the foregoing). Third, subject to
certain exceptions in the year in which the Company is liquidated, short-term
gain from the sale or other disposition of stock or securities, gain from
prohibited transactions and gain on the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) must represent less than 30% of the Company's
gross income (including gross income from prohibited transactions) for each
taxable year. For purposes of applying the 30% gross income test, the holding
period of Properties acquired by the Operating Partnership in the Formation
Transactions will be deemed to have commenced on the date of acquisition.
Legislation has been proposed, however, which would repeal the 30% gross
income test.

Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents
received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the REIT, or an actual or constructive
owner of 10% or more of the REIT, actually or constructively owns 10% or more
of such tenant (a "Related Party

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Tenant"). Third, if rent attributable to personal property, leased in
connection with a lease of real property, is greater than 15% of the total
rent received under the lease, then the portion of rent attributable to such
personal property will not qualify as "rents from real property." Finally, for
rents received to qualify as "rents from real property," the REIT generally
must not operate or manage the property or furnish or render services to the
tenants of such property, other than through an independent contractor from
whom the REIT derives no revenue. The REIT may, however, directly perform
certain services that are "usually or customarily rendered" in connection with
the rental of space for occupancy only and are not otherwise considered
"rendered to the occupant" of the property. The Company does not and will not;
(i) charge rent for any property that is based in whole or in part on the
income or profits of any person (except by reason of being based on a
percentage of receipts or sales, as described above); (ii) rent any property
to a Related Party Tenant; (iii) derive rental income attributable to personal
property (other than personal property leased in connection with the lease of
real property, the amount of which is less than 15% of the total rent received
under the lease); or (iv) perform services considered to be rendered to the
occupant of the property, other than through an independent contractor from
whom the Company derives no revenue. Notwithstanding the foregoing, the
Company may take certain of the actions set forth in (i) through (iv) above to
the extent such actions will not, based on the advice of tax counsel to the
Company, jeopardize the Company's tax status as a REIT.

The Services Company receives fees in exchange for the performance of
certain development activities. Such fees do not accrue to the Company, but
the Company derives its allocable share of dividends from the Services Company
through its interest in the Operating Partnership, which qualify under the 95%
gross income test, but not the 75% gross income test.

The Operating Partnership receives fees in exchange for the performance of
certain management activities for third parties with respect to properties in
which the Operating Partnership does not own an interest, including certain of
the Option Properties. Such fees will result in nonqualifying income to the
Company under the 95% and 75% gross income tests. The Company believes that
the aggregate amount of nonqualifying income, including such fees, in any
taxable year will not exceed the limit on nonqualifying income under the gross
income tests.

The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends
in whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of
receipts or sales.

If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions will be generally available if the Company's failure to meet
such tests was due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its federal income
tax return, and any incorrect information on the schedule was not due to fraud
with intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. For example, if the Company fails to satisfy the gross income
tests because nonqualifying income that the Company intentionally incurs
exceeds the limits on such income, the IRS could conclude that the Company's
failure to satisfy the tests was not due to reasonable cause. If these relief
provisions are inapplicable to a particular set of circumstances involving the
Company, the Company would not qualify as a REIT. As discussed above in "--
Taxation of the Company--General," even if these relief provisions apply, a
100% tax would be imposed on an amount equal to (a) the gross income
attributable to the greater of the amount by which the Company failed the 75%
or 95% test multiplied by (b) a fraction intended to reflect the Company's
profitability. No similar mitigation provision provides relief if the Company
fails the 30% gross income test. In such case, the Company would cease to
qualify as a REIT.

Any gain realized by the Company on the sale of any property held as
inventory or other property held primarily for sale to customers in the
ordinary course of business (including the Company's share of any such

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gain realized by the Operating Partnership or the Finance Partnership) will be
treated as income from a prohibited transaction that is subject to a 100%
penalty tax. Such prohibited transaction income may also have an adverse
effect upon the Company's ability to satisfy the income tests for
qualification as a REIT. Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of a trade
or business is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. The Operating
Partnership and the Finance Partnership hold the Properties for investment
with a view to long-term appreciation, engage in the business of acquiring,
developing, owning, and operating the Properties (and other properties) and
make such occasional sales of the Properties as are consistent with the
Operating Partnership's and the Finance Partnership's investment objectives.
There can be no assurance, however, that the IRS; might not contend that one
or more of such sales is subject to the 100% penalty tax.

Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets (including its allocable
share of the assets held by partnerships in which it has a direct or indirect
interest, including the Operating Partnership and the Finance Partnership)
must be represented by real estate assets, stock or debt instruments held for
not more than one year purchased with the proceeds of a stock offering or
long-term (at least five years) public debt offering of the Company, cash,
cash items and government securities. Second, not more than 25% of the
Company's total assets may be represented by securities other than those in
the 75% asset class. Third, of the investments included in the 25% asset
class, the value of any one issuer's securities owned by the Company may not
exceed 5% of the value of the Company's total assets and the Company may not
own more than 10% of any one issuer's outstanding voting securities.

As described above, the Operating Partnership owns 100% of the non-voting
preferred stock of the Services Company, and by virtue of its ownership of
interests in the Operating Partnership, the Company is considered to own its
pro rata share of such stock. See "Structure and Formation of the Company."
The Operating Partnership does not and will not own any of the voting
securities of the Services Company, and therefore the Company will not be
considered to own more than 10% of the voting securities of the Services
Company. In addition, the Company believes (and has represented to tax counsel
to the Company for purposes of its opinion, as described above) that the value
of its pro rata share of the securities of the Services Company held by the
Operating Partnership does not exceed 5% of the total value of the Company's
assets, and will not exceed such amount in the future. Latham & Watkins, in
rendering its opinion as to the qualification of the Company as a REIT, is
relying on the representation of the Company to such effect. No independent
appraisals have been obtained to support this conclusion. There can be no
assurance that the IRS will not contend that the value of the securities of
the Services Company held by the Company (through the Operating Partnership)
exceeds the 5% value limitation.

The 5% value test must be satisfied not only on the date that the Company
(directly or through the Operating Partnership) acquires securities in the
Services Company, but also each time the Company increases its ownership of
securities of the Services Company (including as a result of increasing its
interest in the Operating Partnership as a result of Company capital
contributions to the Operating Partnership or as limited partners exercise
their redemption/exchange rights). Although the Company plans to take steps to
ensure that it satisfies the 5% value test for any quarter with respect to
which retesting is to occur, there can be no assurance that such steps will
always be successful, or will not require a reduction in the Operating
Partnership's overall interest in the Services Company.

After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter (including as a result of the
Company increasing its interest in the Operating Partnership), the failure can
be cured by the disposition of sufficient nonqualifying assets within 30 days
after the close of that quarter. The Company intends to maintain adequate
records of the value of its assets to ensure compliance with the asset tests
and to take such other actions within 30 days after the close of any quarter
as may be required to cure any noncompliance. If the Company fails to cure
noncompliance with the asset tests within such time period, the Company would
cease to qualify as a REIT.

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Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends)
to its stockholders in an amount at least equal to (i) the sum of (a) 95% of
the Company's "REIT taxable income" (computed without regard to the dividends
paid deduction and by excluding the Company's net capital gain) and (b) 95% of
the excess of the net income, if any, from foreclosure property over the tax
imposed on such income, minus (ii) the excess of the sum of certain items of
noncash income (i.e., income attributable to leveled stepped rents, original
issue discount or purchase money debt, or a like-kind exchange that is later
determined to be taxable) over 5% of "REIT Taxable Income" as described in
clause (i)(a) above. In addition, if the Company disposes of any Built-In Gain
Asset during its Recognition Period, the Company will be required, pursuant to
Treasury Regulations which have not yet been promulgated, to distribute at
least 95% of the Built-in Gain (after tax), if any, recognized on the
disposition of such asset. Such distributions must be paid in the taxable year
to which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before the
first regular dividend payment after such declaration. Such distributions are
taxable to holders of Common Stock (other than tax-exempt entities, as
discussed below) in the year in which paid, even though such distributions
relate to the prior year for purposes of the Company's 95% distribution
requirement. The amount distributed must not be preferential--i.e., each
holder of shares of Common Stock must receive the same distribution per share.
A REIT may have more than one class of capital stock, as long as distributions
within each class are pro rata and non-preferential. To the extent that the
Company does not distribute all of its net capital gain or distributes at
least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it
will be subject to tax thereon at regular ordinary and capital gain corporate
tax rates. The Company currently makes timely distributions sufficient to
satisfy these annual distribution requirements. In this regard, the
Partnership Agreement authorizes the Company, as general partner, to take such
steps as may be necessary to cause the Operating Partnership to distribute to
its partners an amount sufficient to permit the Company to meet these
distribution requirements.

It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, the Company anticipates that it
will generally have sufficient cash or liquid assets to enable it to satisfy
the distribution requirements described above. It is possible, however, that
the Company, from time to time, may not have sufficient cash or other liquid
assets to meet these distribution requirements due to timing differences
between (i) the actual receipt of income and actual payment of deductible
expenses and (ii) the inclusion of such income and deduction of such expenses
in arriving at taxable income of the Company. In the event that such timing
differences occur, in order to meet the distribution requirements, the Company
may find it necessary to arrange for short-term, or possibly long-term,
borrowings, to pay dividends in the form of taxable stock dividends.

If the Company fails to meet the 95% distribution test due to certain
adjustments (e.g., an increase in the Company's income or a decrease in its
deduction for dividends paid) by reason of a judicial decision or by agreement
with the IRS, the Company may pay a "deficiency dividend" to holders of shares
of Common Stock in the taxable year of the adjustment, which dividend would
relate back to the year being adjusted. In such case, the Company would also
be required to pay interest to the IRS and would be subject to any applicable
penalty provisions.

Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject
to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed.

FAILURE TO QUALIFY

If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will
they be required to be made. As a result, the Company's failure

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to qualify as a REIT would reduce the cash available for distribution by the
Company to its stockholders. In addition, if the Company fails to qualify as a
REIT, all distributions to stockholders will be taxable as ordinary income, to
the extent of the Company's current and accumulated earnings and profits, and,
subject to certain limitations of the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, the Company will also be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.

TAXATION OF TAXABLE U.S. STOCKHOLDERS GENERALLY

As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership,
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, (iii) is an estate the income of
which is subject to United States federal income taxation regardless of its
source; or (iv) is a trust, if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust.

As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Stockholders as ordinary income. Such distributions will not be
eligible for the dividends received deduction otherwise available with respect
to dividends received by U.S. Stockholders that are corporations.
Distributions made by the Company that are properly designated by the Company
as capital gain dividends will be taxable to taxable U.S. Stockholders as
long-term capital gains (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which a U.S. Stockholder has held his shares of Common Stock. U.S.
Stockholders that are corporations may, however, be required to treat up to
20% of certain capital gain dividends as ordinary income. To the extent that
the Company makes distributions (not designated as capital gain dividends) in
excess of its current and accumulated earnings and profits, such distributions
will be treated first as a tax-free return of capital to each U.S.
Stockholder, reducing the adjusted basis which such U.S. Stockholder has in
his shares of Common Stock for tax purposes by the amount of such distribution
(but not below zero), with distributions in excess of a U.S. Stockholder's
adjusted basis in his shares taxable as long-term capital gains (or short-term
capital gain if the shares have been held for one year or less), provided that
the shares have been held as a capital asset. Dividends declared by the
Company in October, November, or December of any year and payable to a
stockholder of record on a specified date in any such month shall be treated
as both paid by the Company and received by the stockholder on December 31st
of such year; provided that the dividend is actually paid by the Company on or
before January 31st of the following calendar year. Stockholders may not
include in their own income tax returns any net operating losses or capital
losses of the Company.

Distributions made by the Company and gain arising from the sale or exchange
by a U.S. Stockholder of shares of Common Stock will not be treated as passive
activity income, and, as a result, U.S. Stockholders generally will not be
able to apply any "passive losses" against such income or gain. Distributions
made by the Company (to the extent they do not constitute a return of capital)
generally will be treated as investment income for purposes of computing the
investment income limitation. Gain arising from the sale or other disposition
of Common Stock, however, will not be treated as investment income unless the
U.S. Stockholder elects to reduce the amount of such U.S. Stockholder's total
net capital gain eligible for the 28% maximum capital gains rate by the amount
of such gain with respect to such Common Stock.

Upon any sale or other disposition of Common Stock, a U.S. Stockholder will
recognize gain or loss for federal income tax purposes in an amount equal to
the difference between (i) the amount of cash and the fair market value of any
property received on such sale or other disposition and (ii) the holder's
adjusted basis in such shares of Common Stock for tax purposes. Such gain or
loss will be capital gain or loss if the shares have been held by the U.S.
Stockholder as a capital asset, and will be long-term gain or loss if such
shares have been

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held for more than one year. In general, any loss recognized by a U.S.
Stockholder upon the sale or other disposition of shares of Common Stock that
have been held for six months or less (after applying certain holding period
rules) will be treated as a long-term capital loss, to the extent of capital
gain dividends received by such U.S. Stockholder from the Company which were
required to be treated as long-term capital gains.

BACKUP WITHHOLDING

The Company reports to its U.S. Stockholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to
backup withholding at the rate of 31% with respect to dividends paid unless
such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with applicable requirements of the
backup withholding rules. A U.S. Stockholder that does not provide the Company
with his correct taxpayer identification number may also be subject to
penalties imposed by the IRS. Backup withholding is not an additional tax. Any
amount paid as backup withholding will be creditable against the stockholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions to any stockholders who fail to certify
their non-foreign status to the Company. See "--Taxation of Non-U.S.
Stockholders."

TAXATION OF TAX-EXEMPT STOCKHOLDERS

The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income ("UBTI") when received by
a tax-exempt entity. Based on that ruling, provided that a tax-exempt
shareholder (except certain tax-exempt shareholders described below) has not
held its shares of Common Stock as "debt financed property" within the meaning
of the Code and such shares are not otherwise used in a trade or business, the
dividend income from the Company will not be UBTI to a tax-exempt shareholder.
Similarly, income from the sale of Common Stock will not constitute UBTI
unless such tax-exempt shareholder has held such shares as "debt financed
property" within the meaning of the Code or has used the shares in a trade or
business.

For tax-exempt shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their own tax advisors concerning these
"set aside" and reserve requirements.

Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" shall be treated as UBTI as to any trust which (i) is
described in Section 401(a) of the Code, (ii) is tax-exempt under Section
501(a) of the Code, and (iii) holds more than 10% (by value) of the interests
in the REIT. Tax-exempt pension funds that are described in Section 401(a) of
the Code are referred to below as "qualified trusts." A REIT is a "pension
held REIT" if (i) it would not have qualified as a REIT but for the fact that
Section 856(h)(3) of the Code provides that stock owned by qualified trusts
shall be treated, for purposes of the "not closely held" requirement, as owned
by the beneficiaries of the trust (rather than by the trust itself), and (ii)
either (a) at least one such qualified trust holds more than 25% (by value) of
the interests in the REIT, or (b) one or more such qualified trusts, each of
which owns more than 10% (by value) of the interests in the REIT, hold in the
aggregate more than 50% (by value) of the interests in the REIT. The
percentage of any REIT dividend treated as UBTI is equal to the ratio of (i)
the UBTI earned by the REIT (treating the REIT as if it were a qualified trust
and therefore subject to tax on UBTI) to (ii) the total gross income of the
REIT. A de minimis exception applies where the percentage is less than 5% for
any year. The provisions requiring qualified trusts to treat a portion of REIT
distributions as UBTI will not apply if the REIT is able to satisfy the "not
closely held" requirement without relying upon the "look-through" exception
with respect to qualified trusts. As a result of certain limitations on
transfer and ownership of Common Stock contained in the Articles of
Incorporation, the Company does not expect to be classified as a "pension held
REIT."

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TAXATION OF NON-U.S. STOCKHOLDERS

The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts (collectively, "Non-U.S. Stockholders") are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of United
States federal income tax and does not address state, local or foreign tax
consequences that may be relevant to a Non-U.S. Stockholder in light of its
particular circumstances, including, for example, if the investment in the
Company is connected to the conduct by a Non-U.S. Stockholder of a U.S. trade
or business. In addition, this discussion is based on current law, which is
subject to change, and assumes that the Company qualifies for taxation as a
REIT. Prospective Non-U.S. Stockholders should consult with their own tax
advisers to determine the impact of federal, state, local and foreign income
tax laws with regard to an investment in Common Stock, including any reporting
requirements.

Distributions. Distributions by the Company to a Non-U.S. Stockholder that
are neither attributable to gain from sales or exchanges by the Company of
United States real property interests nor designated by the Company as capital
gains dividends will be treated as dividends of ordinary income to the extent
that they are made out of current or accumulated earnings and profits of the
Company. Such distributions ordinarily will be subject to withholding of
United States federal income tax on a gross basis (that is, without allowance
of deductions) at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty, unless the dividends are treated as effectively
connected with the conduct by the Non-U.S. Stockholder of a United States
trade or business. Dividends that are effectively connected with such a trade
or business will be subject to tax on a net basis (that is, after allowance of
deductions) at graduated rates, in the same manner as domestic stockholders
are taxed with respect to such dividends and are generally not subject to
withholding. Any such dividends received by a Non-U.S. Stockholder that is a
corporation may also be subject to an additional branch profits tax at a 30%
rate or such lower rate as may be specified by an applicable income tax
treaty.

Pursuant to current Treasury Regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury Regulations, not currently in effect, however, a Non-U.S.
Stockholder who wished to claim the benefit of an applicable treaty rate would
be required to satisfy certain certification and other requirements. Under
certain treaties, lower withholding rates generally applicable to dividends do
not apply to dividends from a REIT, such as the Company. Certain certification
and disclosure requirements must be satisfied to be exempt from withholding
under the effectively connected income exemption discussed above.

Distributions in excess of current or accumulated earnings and profits of
the Company will not be taxable to a Non-U.S. Stockholder to the extent that
they do not exceed the adjusted basis of the stockholder's Common Stock, but
rather will reduce the adjusted basis of such stock. For FIRPTA withholding
purposes (discussed below), such distributions (i.e., distributions that are
not made out of earnings and profits) will be treated as consideration for the
sale or exchange of shares of Common Stock. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Stockholder's Common
Stock, they will give rise to gain from the sale or exchange of his stock, the
tax treatment of which is described below. If it cannot be determined at the
time a distribution is made whether or not such distribution will be in excess
of current or accumulated earnings and profits, the distribution will
generally be treated as a dividend for withholding purposes. However, amounts
thus withheld are generally refundable if it is subsequently determined that
such distribution was, in fact, in excess of current or accumulated earnings
and profits of the Company.

Distributions to a Non-U.S. Stockholder that are designated by the Company
at the time of distribution as capital gains dividends (other than those
arising from the disposition of a United States real property interest)
generally will not be subject to United States federal income taxation, unless
(i) investment in the Common Stock is effectively connected with the Non-U.S.
Stockholder's United States trade or business, in which case the Non-U.S.
Stockholder will be subject to the same treatment as domestic stockholders
with respect to such gain (except

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that a stockholder that is a foreign corporation may also be subject to the
30% branch profits tax, as discussed above), or (ii) the Non-U.S. Stockholder
is a nonresident alien individual who is present in the United States for 183
days or more during the taxable year and has a"tax home" in the United States,
in which case the nonresident alien individual will be subject to a 30% tax on
the individual's capital gains.

Distributions to a Non-U.S. Stockholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests
will cause the Non-U.S. Stockholder to be treated as recognizing such gain as
income effectively connected with a United States trade or business. Non-U.S.
Stockholders would thus generally be entitled to offset its gross income by
allowable deductions and would pay tax on the resulting taxable income at the
same rates applicable to domestic stockholders (subject to a special
alternative minimum tax in the case of nonresident alien individuals). Also,
such gain may be subject to a 30% branch profits tax in the hands of a Non-
U.S. Stockholder that is a corporation and is not entitled to treaty relief or
exemption, as discussed above. The Company is required to withhold 35% of any
such distribution. That amount is creditable against the Non-U.S.
Stockholder's United States federal income tax liability. To the extent that
such withholding exceeds the actual tax owed by the Non-U.S. Stockholder, the
Non-U.S. Stockholder may claim a refund from the IRS.

The Company or any nominee (e.g., a broker holding shares in street name)
may rely on a certificate of non-foreign status on Form W-8 or Form W-9 to
determine whether withholding is required on gains realized from the
disposition of United States real property interests. A domestic person who
holds shares of Common Stock on behalf of a Non-U.S. Stockholder will bear the
burden of withholding, provided that the Company has properly designated the
appropriate portion of a distribution as a capital gain dividend.

Sale of Common Stock. Gain recognized by a Non-U.S. Stockholder upon the
sale or exchange of shares of Common Stock generally will not be subject to
United States taxation unless such shares constitute a"United States real
property interest" within the meaning of the Foreign Investment in Real
Property Tax Act of 1980 ("FIRPTA"). The Common Stock will not constitute
a"United States real property interest" so long as the Company is
a"domestically controlled REIT." A"domestically controlled REIT" is a REIT in
which at all times during a specified testing period less than 50% in value of
its stock is held directly or indirectly by Non-U.S. Stockholders. The Company
believes that is a"domestically controlled REIT," and therefore that the sale
of shares of Common Stock are not subject to taxation under FIRPTA. However,
because the shares of Common Stock are publicly traded, no assurance can be
given that the Company will continue to be a"domestically-controlled REIT."
Notwithstanding the foregoing, gain from the sale or exchange of shares of
Common Stock not otherwise subject to FIRPTA will be taxable to a Non-U.S.
Stockholder if the Non-U.S. Stockholder is a nonresident alien individual who
is present in the United States for 183 days or more during the taxable year
and has a"tax home" in the United States. In such case, the nonresident alien
individual will be subject to a 30% United States withholding tax on the
amount of such individual's gain.

If the Company does not qualify as or ceases to be a"domestically-controlled
REIT," gain arising from the sale or exchange by a Non-U.S. Stockholder of
shares of Common Stock would be subject to United States taxation under FIRPTA
as a sale of a"United States real property interest" unless the shares
are"regularly traded" (as defined by applicable Treasury Regulations) on an
established securities market (e.g., the New York Stock Exchange) and the
selling Non-U.S. Stockholder held no more than 5% (after applying certain
constructive ownership rules) of the shares of Common Stock during the shorter
of (i) the period during which the taxpayer held such shares, or (ii) the 5-
year period ending on the date of the disposition of such shares. If gain on
the sale or exchange of shares of Common Stock were subject to taxation under
FIRPTA, the Non-U.S. Stockholder would be subject to regular United States
income tax with respect to such gain in the same manner as a U.S. Stockholder
(subject to any applicable alternative minimum tax, a special alternative
minimum tax in the case of nonresident alien individuals and the possible
application of the 30% branch profits tax in the case of foreign
corporations), and the purchaser of the stock would be required to withhold
and remit to the IRS 10% of the purchase price.

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Backup Withholding Tax and Information Reporting. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to Non-U.S. Stockholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends or
(iii) distributions attributable to gain from the sale or exchange by the
Company of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common Stock by or through a foreign office of a foreign
broker. Information reporting (but not backup withholding) will apply,
however, to a payment of the proceeds of a sale of Common Stock by a foreign
office of a broker that (a) is a United States person, (b) derives 50% or more
of its gross income for certain periods from the conduct of a trade or
business in the United States or (c) is a "controlled foreign corporation"
(generally, a foreign corporation controlled by United States stockholders)
for United States tax purposes, unless the broker has documentary evidence in
its records that the holder is a Non-U.S. Stockholder and certain other
conditions are met, or the stockholder otherwise establishes an exemption.
Payment to or through a United States office of a broker of the proceeds of a
sale of Common Stock is subject to both backup withholding and information
reporting unless the stockholder certifies under penalty of perjury that the
stockholder is a Non-U.S. Stockholder, or otherwise establishes an exemption.
Backup withholding is not additional tax. A Non-U.S. Stockholder may obtain a
refund of any amounts withheld under the backup withholding rules by filing
the appropriate claim for refund with the IRS.

New Proposed Regulations. The United States Treasury has recently issued
proposed Treasury Regulations regarding the withholding and information
reporting rules discussed above. In general, the proposed Treasury Regulations
create new withholding and information reporting requirements and
certification procedures and forms and clarify and modify reliance standards.
If finalized in their current form, the proposed Treasury Regulations would
generally be effective for payments made after December 31, 1997, subject to
certain transition rules.

TAX ASPECTS OF THE PARTNERSHIPS

General. Substantially all of the Company's investments are held indirectly
through the Operating Partnership and the Finance Partnership. In general,
partnerships are "pass-through" entities which are not subject to federal
income tax. Rather, partners are allocated their proportionate shares of the
items of income, gain, loss, deduction and credit of a partnership, and are
potentially subject to tax thereon, without regard to whether the partners
receive a distribution from the partnership. The Company includes in its
income its proportionate share of the foregoing partnership items for purposes
of the various REIT income tests and in the computation of its REIT taxable
income. Moreover, for purposes of the REIT asset tests, the Company includes
its proportionate share of assets held by the Operating Partnership. See "--
Taxation of the Company."

Entity Classification. The Company's interests in the Operating Partnership
and the Finance Partnership involve special tax considerations, including the
possibility of a challenge by the IRS of the status of the Operating
Partnership or the Finance Partnership as a partnership (as opposed to an
association taxable as a corporation) for federal income tax purposes. If the
Operating Partnership or the Finance Partnership were treated as an
association, it would be taxable as a corporation and therefore be subject to
an entity-level tax on its income. In such a situation, the character of the
Company's assets and items of gross income would change and preclude the
Company from satisfying the asset tests and possibly the income tests (see "--
Taxation of the Company--Asset Tests" and "--Income Tests"), and in turn would
prevent the Company from qualifying as a REIT. See "--Taxation of the
Company--Failure to Qualify" above for a discussion of the effect of the
Company's failure to meet such tests for a taxable year. In addition, a change
in the Operating Partnership's or Finance Partnership's status for tax
purposes might be treated as a taxable event in which case the Company might
incur a tax liability without any related cash distributions.

The IRS recently finalized and published certain Treasury Regulations (the
"Final Regulations") which provide that a domestic business entity not
otherwise classified as a corporation and which has at least two members (an
"Eligible Entity") may elect to be taxed as a partnership for federal income
tax purposes. The Final

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Regulations apply for tax periods beginning on or after January 1, 1997 (the
"Effective Date"). Unless it elects otherwise, an Eligible Entity in existence
prior to the Effective Date will have the same classification for federal
income tax purposes that it claimed under the entity classification Treasury
Regulations in effect prior to the Effective Date. In addition, an Eligible
Entity which did not exist, or did not claim a classification, prior to the
Effective Date, will be classified as a partnership for federal income tax
purposes unless it elects otherwise. Each of the Operating Partnership and
Finance Partnership intends to claim classification as a partnership under the
Final Regulations.

Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and loss among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic
arrangement of the partners.

If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The Operating Partnership's allocations of
taxable income and loss are intended to comply with the requirements of
Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder.

The Partnership Agreement provides that net income or net loss of the
Operating Partnership will generally be allocated to the Company and the
limited partners in accordance with their respective percentage interests in
the Operating Partnership. Notwithstanding the foregoing, such agreement
provides that certain interest deductions and income from the discharge of
certain indebtedness of the Operating Partnership, attributable to loans
transferred to the Operating Partnership by certain Unitholders, will be
allocated disproportionately to such Unitholders. In addition, allocations of
net income or net loss are subject to compliance with the provisions of
Sections 704(b) and 704(c) of the Code and the Treasury Regulations
promulgated thereunder.

Tax Allocations with Respect to the Properties. Pursuant to Section 704(c)
of the Code, income, gain, loss and deduction attributable to appreciated or
depreciated property (such as the Properties) that is contributed to a
partnership in exchange for an interest in the partnership, must be allocated
in a manner such that the contributing partner is charged with, or benefits
from, respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain
or unrealized loss is generally equal to the difference between the fair
market value of contributed property at the time of contribution and the
adjusted tax basis of such property at such time (a "Book-Tax Difference").
Such allocations are solely for federal income tax purposes and do not affect
the book capital accounts or other economic or legal arrangements among the
partners. The Operating Partnership was formed by way of contributions of
appreciated property (including certain Properties). Consequently, the
Partnership Agreement requires that such allocations be made in a manner
consistent with Section 704(c) of the Code.

In general, the principals of KI and possibly other Unitholders who are
limited partners of the Operating Partnership will be allocated depreciation
deductions for tax purposes which are lower than such deductions would be if
determined on a pro rata basis. In addition, in the event of the disposition
of any of the contributed assets which have a Book-Tax Difference, all income
attributable to such Book-Tax Difference will generally be allocated to such
limited partners, and the Company will generally be allocated only its share
of capital gains attributable to appreciation, if any, occurring after the
date the Operating Partnership acquired such assets. This will tend to
eliminate the Book-Tax Difference over the life of the Operating Partnership.
However, the special allocation rules of Section 704(c) do not always entirely
eliminate the Book-Tax Difference on an annual basis or with respect to a
specific taxable transaction such as a sale. Thus, the carryover basis of the
contributed assets in the hands the Operating Partnership may cause the
Company to be allocated lower depreciation and other deductions, and possibly
an amount of taxable income in the event of a sale of such contributed assets
in excess of the economic or book income allocated to it as a result of such
sale. This may cause the Company to recognize taxable income in excess of cash
proceeds, which might adversely affect the Company's ability to comply with
the REIT distribution requirements. See "--Taxation of the Company--Annual
Distribution Requirements."

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Treasury Regulations under Section 704(c) of the Code provide partnerships
with a choice of several methods of accounting for Book-Tax Differences,
including retention of the "traditional method" or the election of certain
methods which would permit any distortions caused by a Book-Tax Difference to
be entirely rectified on an annual basis or with respect to a specific taxable
transaction such as a sale. The Operating Partnership Agreement provides that
it will use the traditional method with respect to the assets it acquired at
the time of the IPO. The selection of this method will cause the Company to be
allocated depreciation deductions for tax purposes which are lower than such
deductions would be if the Company directly had acquired its pro rata share of
the Operating Partnership property in exchange for cash or if other methods
were chosen to eliminate Book-Tax Differences. The Operating Partnership and
the Company have not yet decided which method will be used to account for
Book-Tax Differences with respect to properties acquired or to be acquired by
the Operating Partnership after the IPO.

With respect to any property purchased by the Operating Partnership in a
taxable transaction (e.g., properties acquired in exchange for cash)
subsequent to the admission of the Company to the Operating Partnership, such
property will initially have a tax basis equal to its fair market value, and
Section 704(c) of the Code will not apply.

SERVICES COMPANY

A portion of the cash to be used by the Operating Partnership to fund
distributions to partners, and in turn to fund distributions by the Company to
its stockholders, is expected to come from the Services Company, through
dividends on nonvoting preferred stock to be held by the Operating
Partnership. The Services Company will not qualify as a REIT and will pay
federal, state and local income taxes on its taxable income at normal
corporate rates. The federal, state and local income taxes that the Services
Company is required to pay will reduce the cash available for distribution by
the Company to its stockholders.

As described above, the value of the Company's indirect interest in the
securities of the Services Company held by the Operating Partnership cannot
exceed 5% of the value of the Company's total assets at the end of any
calendar quarter in which the Company acquires such securities or increases
its interest in such securities (including as a result of the Company
increasing its interest in the Operating Partnership). See "--Taxation of the
Company--Asset Tests." This limitation may restrict the ability of the
Services Company to increase the size of its business, or may cause the
Operating Partnership to sell all or a portion of its stock in the Services
Company, unless the value of the assets of the Company or the Operating
Partnership is increasing at a commensurate rate.

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OTHER TAX CONSEQUENCES

The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their
own tax advisors regarding the effect of state and local tax laws on an
investment in the Company.

ERISA CONSIDERATIONS

The following is a summary of material considerations arising under ERISA
and the prohibited transaction provisions of Section 4975 of the Code that may
be relevant to a prospective purchaser (including, with respect to the
discussion contained in "--Status of the Company, the Operating Partnership
and the Services Company under ERISA," to a prospective purchaser that is not
an employee benefit plan, another tax-qualified retirement plan or an
individual retirement account ("IRA")). This discussion does not propose to
deal with all aspects of ERISA or Section 4975 of the Code or, to the extent
not preempted, state law that may be relevant to particular employee benefit
plan shareholders (including plans subject to Title I of ERISA, other employee
benefit plans and IRAs subject to the prohibited transaction provisions of
Section 4975 of the Code, and governmental plans and church plans that are
exempt from ERISA and Section 4975 of the Code but that may be subject to
state law requirements) in light of their particular circumstances.

A FIDUCIARY MAKING THE DECISION TO INVEST IN SHARES OF COMMON STOCK ON
BEHALF OF A PROSPECTIVE PURCHASER WHICH IS AN ERISA PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, AN IRA OR OTHER EMPLOYEE BENEFIT PLAN IS ADVISED TO CONSULT
ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER
ERISA, SECTION 4975 OF THE CODE, AND (TO THE EXTENT NOT PRE-EMPTED) STATE LAW
WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF SHARES OF COMMON STOCK BY
SUCH PLAN OR IRA. Plans should also consider the entire discussion under the
heading "Federal Income Tax Considerations," as material contained therein is
relevant to any decision by an employee benefit plan, tax-qualified retirement
plan or IRA to purchase the Common Stock.

EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS

Each fiduciary of an employee benefit plan subject to Title I of ERISA (an
"ERISA Plan") should carefully consider whether an investment in shares of
Common Stock is consistent with its fiduciary responsibilities under ERISA. In
particular, the fiduciary requirements of Part 4 of Title I of ERISA require
(i) an ERISA Plan's investments to be prudent and in the best interests of the
ERISA Plan, its participants and beneficiaries, (ii) an ERISA Plan's
investments to be diversified in order to reduce the risk of large losses,
unless it is clearly prudent not to do so, (iii) an ERISA Plan's investments
to be authorized under ERISA and the terms of the governing documents of the
ERISA Plan and (iv) that the fiduciary not cause the ERISA Plan to enter into
transactions prohibited under Section 406 of ERISA. In determining whether an
investment in shares of Common Stock is prudent for purposes of ERISA, the
appropriate fiduciary of an ERISA Plan should consider all of the facts and
circumstances, including whether the investment is reasonably designed, as a
part of the ERISA Plan's portfolio for which the fiduciary has investment
responsibility, to meet the objectives of the ERISA Plan, taking into
consideration the risk of loss and opportunity for gain (or other return) from
the investment, the diversification, cash flow and funding requirements of the
ERISA Plan, and the liquidity and current return of the ERISA Plan's
portfolio. A fiduciary should also take into account the nature of the
Company's business, the length of the Company's operating history and other
matters described under "Risk Factors."

The fiduciary of an IRA or of an employee benefit plan not subject to Title
I of ERISA because it is a governmental or church plan or because it does not
cover common law employees (a "Non-ERISA Plan") should

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consider that such an IRA or Non-ERISA Plan may only make investments that are
authorized by the appropriate governing documents, not prohibited under
Section 4975 of the Code and permitted under applicable state law.

STATUS OF THE COMPANY, THE OPERATING PARTNERSHIP AND THE SERVICES COMPANY
UNDER ERISA

A prohibited transaction may occur if the assets of the Company are deemed
to be assets of the investing Plans and disqualified persons deal with such
assets. In certain circumstances where a Plan holds an interest in an entity,
the assets of the entity are deemed to be Plan assets (the "look-through
rule"). Under such circumstances, any person that exercises authority or
control with respect to the management or disposition of such assets is a Plan
fiduciary. Plan assets are not defined in ERISA or the Code, but the United
States Department of Labor has issued regulations, effective March 13, 1987
(the "Regulations"), that outline the circumstances under which a Plan's
interest in an entity will be subject to the look-through rule.

The Regulations apply only to the purchase by a Plan of an "equity interest"
in an entity, such as common stock of a REIT. However, the Regulations provide
an exception to the look-through rule for equity interests that are "publicly-
offered securities."

Under the Regulations, a "publicly-offered security" is a security that is
(i) freely transferable, (ii) part of a class of securities that is widely-
held and (iii) either (a) part of a class of securities that is registered
under section 12(b) or 12(g) of the Exchange Act or (b) sold to a Plan as part
of an offering of securities to the public pursuant to an effective
registration statement under the Securities Act and the class of securities of
which such security is a part is registered under the Exchange Act within 120
days (or such longer period allowed by the Securities and Exchange Commission)
after the end of the fiscal year of the issuer during which the offering of
such securities to the public occurred. Whether a security is considered
"freely transferable" depends on the facts and circumstances of each case.
Generally, if the security is part of an offering in which the minimum
investment is $10,000 or less, any restriction on or prohibition against any
transfer or assignment of such security for the purposes of preventing a
termination or reclassification of the entity for federal or state tax
purposes will not of itself prevent the security from being considered freely
transferable. A class of securities is considered "widely-held" if it is a
class of securities that is owned by 100 or more investors independent of the
issuer and of one another.

The Common Stock of the Company meets the criteria of the publicly-offered
securities exception to the look-through rule. First, the Common Stock is
considered to be freely transferable, as the minimum investment will be less
than $10,000 and the only restrictions upon its transfer are those required
under federal tax laws to maintain the Company's status as a REIT. Second, the
Common Stock is held by 100 or more investors and that at least 100 or more of
these investors are independent of the Company and of one another. Third, the
Common Stock is part of an offering of securities to the public pursuant to an
effective registration statement under the Securities Act and is registered
under the Exchange Act within 120 days after the end of the fiscal year of the
Company during which the offering of such securities to the public occurs.
Accordingly, the Company believes that if a Plan purchases the Common Stock,
the Company's assets should not be deemed to be Plan assets and, therefore,
that any person who exercises authority or control with respect to the
Company's assets should not be a Plan fiduciary.

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UNDERWRITING

The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated ("Prudential Securities"), Donaldson, Lufkin &
Jenrette Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, J.P. Morgan Securities Inc. and Smith Barney Inc. are acting as
representatives ("Representatives"), have severally agreed, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase from
the Company the number of shares of Common Stock set forth below opposite
their respective names:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ----------
<S> <C>
Prudential Securities Incorporated................................
Donaldson, Lufkin & Jenrette Securities Corporation...............
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
J.P. Morgan Securities Inc........................................
Smith Barney Inc. ................................................
----------
Total........................................................... 10,000,000
==========
</TABLE>

The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby if any are
purchased.

The Underwriters, through their Representatives, have advised the Company
that they propose to offer the shares of Common Stock to the public initially
at the public offering price set forth on the cover page of this Prospectus;
that the Underwriters may allow to selected dealers a concession of $ per
share, and that such dealers may re-allow a concession of $ per share to
certain other dealers. After the Offering, the Offering Price and the
concessions may be changed by the Representatives.

The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 1,500,000 additional
shares of Common Stock at the initial public offering price, less the
underwriting discounts and commissions, as set forth on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose
of covering over-allotments incurred in the sale of shares of Common Stock
offered hereby. To the extent such option to purchase is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
the number set forth next to such Underwriter's name in the preceding table
bears to 10,000,000.

The Company has agreed to indemnify the several Underwriters against or to
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act. The Company has been advised that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. Nevertheless, the
Underwriters may seek to enforce such indemnification and rights to
contribution which are expressly provided under the Act.

The Company has agreed not to, directly or indirectly, offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or otherwise
dispose or transfer (or announce any offer, sale, offer of sale, contract of
sale, pledge, grant of any option to purchase or other disposition or
transfer) of any (other than pursuant to the Stock Incentive Plan) shares of
Common Stock or other capital stock of the Company, or any securities
convertible or exercisable or exchangeable for any Units or shares of Common
Stock or other capital stock of the Company, or any securities substantially
similar thereto, for a period of [180] days from the date of the Prospectus,
without the prior written consent of Prudential Securities, on behalf of the
Underwriters, subject to certain limited exceptions.

In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions
that stabilize, maintain or otherwise affect the market price of

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the Common Stock. Such transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M promulgated by the
Commission, pursuant to which such persons may bid for or purchase Common
Stock for the purpose of stabilizing its market price. The Underwriters also
may create a short position for the account of the Underwriters by selling
more Common Stock in connection with the Offering than they are committed to
purchase from the Company, and in such case may purchase Common Stock in the
open market following the closing of the Offering to cover all or a portion of
such short position. The Underwriters may also cover all or a portion of such
short position, up to 1,500,000 shares of Common Stock, by exercising the
Underwriters' over-allotment option referred to above. In addition, Prudential
Securities, on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or selling group member participating in the Offering) for the
account of the other Underwriters, the selling concession with respect to
Common Stock that is distributed in the Offering but subsequently purchased
for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.

An affiliate of J.P. Morgan Securities Inc. provided the Mortgage Loans and
the Credit Facility. In connection with such transactions, the Company paid
(i) a debt placement fee to an affiliate of J.P. Morgan Securities Inc. for
(a) the $84.0 Million Loan equal to 0.5% of the principal amount thereof and
(b) the SeaTac Loan equal to 1.5% of the principal amount thereof, and (ii) an
origination fee to an affiliate of J.P. Morgan Securities Inc. for the Credit
Facility equal to 1.0% of the maximum amount available thereunder.

The Prudential Insurance Company of America, an affiliate of Prudential
Securities, is a tenant in one of the Office Properties located in Kilroy Long
Beach, leasing approximately 2,189 rentable square feet of space.

In connection with the IPO, certain of the Underwriters received advisory
fees and underwriting discounts and commissions from the Company. In the
ordinary course of their business, certain of the Underwriters or their
affiliates have engaged in transactions with and performed services for the
Company and its subsidiaries for which they have received customary fees.

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LEGAL MATTERS

Certain legal matters in connection with the Offering will be passed upon
for the Company by Latham & Watkins, Los Angeles, California. Legal matters
relating to Maryland law, including the validity of the issuance of the shares
of Common Stock offered hereby, will be passed upon for the Company by Ballard
Spahr Andrews & Ingersoll, Baltimore, Maryland. Certain legal matters will be
passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP,
Los Angeles, California. In addition, the description of federal income tax
consequences contained in this Prospectus under "Federal Income Tax
Consequences" is, to the extent that it constitutes matters of law, summaries
of legal matters or legal conclusions, the opinion of Latham & Watkins,
special tax counsel to the Company as to the material federal income tax
consequences of the Offering.

EXPERTS

The financial statements of the Kilroy Group as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996 and
the Acquisition Properties for the year ended December 31, 1996 and the
Acquired Properties and Pending Acquisition for the year ended December 31,
1996 included in this Prospectus and the related financial statement schedule
included elsewhere in the Registration Statement have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports appearing
herein and elsewhere in the Registration Statement, and are included in
reliance on the reports of such firm, given upon their authority as experts in
auditing and accounting.

In addition, certain statistical information provided under the captions
"Prospectus Summary--The Company's Southern California Submarkets" and
"Business and Properties--The Company's Southern California Submarkets" has
been prepared by Robert Charles Lesser & Co., and is included herein in
reliance upon the authority of such firm as an expert in, among other things,
real estate consulting and urban economics.

ADDITIONAL INFORMATION

The Company has filed with the Commission, 450 Fifth Street N.W.,
Washington, D.C. 20599, a Registration Statement (of which this Prospectus is
a part) on Form S-11 under the Securities Act and the rules and regulations
promulgated thereunder with respect to the Common Stock offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and financial statements thereto, certain portions
of which have been omitted as permitted by the rules and regulations of the
Commission. Statements contained in this Prospectus as to the content of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference and the exhibits and schedules hereto. For
further information regarding the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement and such exhibits and
schedules, copies of which may be examined without charge at, or copies
obtained upon payment of prescribed fees from, the Public Reference Section of
the Commission at Room 1204, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511, or by way of the Commission's Internet address, http://www.sec.gov. In
addition, the Common Stock is listed on the NYSE, and such materials can be
inspected and copied at the NYSE, 20 Broad Street, New York, NY 10005.
Statements contained in this Prospectus as to the contents of any contract or
other document that is filed as an exhibit to the Registration Statement are
not necessarily complete, and each such statement is qualified in its entirety
by reference to the full text of such contract or document.

The Company is required to file reports, proxy statements and other
information with the Commission pursuant to the Exchange Act. Such reports,
proxy statements, and other information can be inspected and copied at the
locations described above. Copies of such materials can be obtained by mail
from the Public Reference

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Section of the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates. In addition to applicable legal or NYSE
requirements, if any, the Company intends to furnish its stockholders with
annual reports containing consolidated audited financial statements with a
report thereon by the Company's independent certified public accountants and
with quarterly reports containing unaudited condensed consolidated financial
statements for each of the first three quarters of each fiscal year.

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GLOSSARY

"ADA" means the Americans with Disabilities Act, enacted on July 26, 1990.

"Audit Committee" means the audit committee of the Board of Directors.

"Base Rent" means gross rent excluding payments by tenants on account of
real estate taxes, operating expenses and utility expenses.

"Class A Office Buildings" means office buildings that have excellent
location and access, attract major corporate tenants, have high quality
finishes, are well maintained, professionally managed and are either new
buildings or buildings that are competitive with new buildings.

"Code" means the Internal Revenue Code of 1986, as amended.

"Commission" means the Securities and Exchange Commission.

"Common Stock" means common stock, par value $.01 per share, of the Company.

"Company" means Kilroy Realty Corporation and its consolidated subsidiaries
and the Services Company.

"Credit Facility" means the $150.0 million revolving credit facility by and
between the Operating Partnership and Morgan Guaranty Trust Company of New
York, dated as of May 21, 1997.

"$84.0 Million Loan" means the $84.0 million mortgage loan secured by
certain of the Properties.

"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Executive Committee" means the executive committee of the Board of
Directors.

"Formation Transactions" means those transactions relating to the
organization of the Company and its subsidiaries, including the transfer of
the Properties and other assets to the Company, as described under "Formation
and Structure of the Company--Formation Transactions."

"Funds from Operations" means, in accordance with the resolution adopted by
the Board of Governors of NAREIT in its March 1995 White Paper, net income
(loss) computed in accordance with GAAP, excluding gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation and
amortization (excluding amortization of deferred financing costs), and after
adjustments for unconsolidated partnerships and joint ventures.

"Independent Director" means a director of the Company who is not an
employee, officer or affiliate of the Company or a subsidiary or division
thereof, or a relative of a principal executive officer, and who is not an
individual member of an organization acting as advisor, consultant or legal
counsel, receiving compensation on a continuing basis from the Company in
addition to director's fees.

"Industrial Properties" means the 44 industrial buildings in which the
Company has an ownership interest.

"IPO" means the initial public offering of shares of Common Stock of Kilroy
Realty Corporation which was consummated on January 31, 1997 (including the
exercise of the underwriters over-allotment option in connection therewith).

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"IRAs" means individual retirement accounts.

"IRS" means the Internal Revenue Service.

"KI" means Kilroy Industries, a California corporation, that operated the
Company's business prior to the consummation of the IPO and the Formation
Transactions.

"Kilroy Group" means KI and the partnerships and trusts affiliated with KI
that prior to the IPO owned the Properties and other assets transferred to the
Company in the Formation Transactions. See "Note 1. Organization and Basis of
Presentation" of the historical financial statements of the Kilroy Group.

"Kilroy Realty Corporation" means Kilroy Realty Corporation, a Maryland
corporation with its principal office at 2250 East Imperial Highway, Suite
1200, El Segundo, California 90245.

"LAX" means Los Angeles International Airport.

"Look-Through Rule" means the ERISA rule providing that in certain
circumstances where a Plan holds an interest in an entity, the assets of the
entity are deemed to be the Plan's assets.

"MGCL" means the Maryland General Corporation Law.

"Mortgage Loans" means the $96.0 million mortgage loans obtained by the
Company from Morgan Guaranty Trust Company of New York.

"NAREIT" means the National Association of Real Estate Investment Trusts.

"Net Absorption" means, with respect to a specified market area, the net
increase in occupied rentable space.

"NYSE" means the New York Stock Exchange, Inc.

"Offering" means the public offering of shares of Common Stock of Kilroy
Realty Corporation pursuant to and as described in this Prospectus.

"Office Properties" means the 33 office buildings in which the Company has
an ownership interest.

"Omnibus Agreement" means the agreement by and among each of the Unitholders
and the Company pursuant to which the Unitholders contributed their interests
in the Properties and certain other assets, in exchange for Units representing
limited partnership interests in the Operating Partnership.

"Operating Partnership" means Kilroy Realty, L.P., a Delaware limited
partnership with its office at 2250 East Imperial Highway, Suite 1200, El
Segundo, California 90245, organized in the Formation Transactions and through
which all of the Company's interests in the Properties will be held and real
estate activities will be conducted.

"Ownership Limit" means the restriction contained in the Articles of
Incorporation providing that, subject to certain exceptions, no holder may
own, or be deemed to own by virtue of the constructive ownership provisions of
the Code, more than 7.0% (by number or value, whichever is more restrictive)
of the outstanding shares of Common Stock.

"Partnership Agreement" means the Amended and Restated Agreement of Limited
Partnership of the Operating Partnership, as amended from time to time.

"Partnerships" means those corporations, general and limited partnerships
and trusts affiliated with Kilroy Industries whose Properties were acquired by
the Operating Partnership.

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"Plans" means employee benefit plans and IRAs.

"Preferred Stock" means shares of preferred stock, par value $.01 per share,
of the Company.

"Properties" means the real property and related assets owned by the
Partnerships and contributed to the Company, including, but not limited to,
the Properties.

"Prospectus" means this prospectus relating to the sale of up to 10,000,000
shares of Common Stock of the Company in the Offering, plus the 1,500,000
shares of Common Stock subject to the Underwriters' over-allotment option.

"Regulations" means regulations issued by the United States Department of
Labor defining "plan assets."

"REIT" means a real estate investment trust as defined in Section 856 of the
Code which meets the requirements for qualification as a REIT described in
Sections 856 through 860 of the Code.

"Related Party Tenant" means a tenant of a REIT in which the REIT, or an
owner of 10% or more of the REIT, actually or constructively owns a 10% or
greater ownership interest.

"rentable square feet" means a building's usable area plus common areas and
penetrations, expressed collectively in square feet which are allocated pro
rata to tenants.

"Representatives" means Prudential Securities Incorporated, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation, J.P. Morgan Securities Inc. and Smith Barney Inc., as
representatives of the Underwriters.

"Rule 144" means Rule 144 promulgated under the Securities Act.

"SeaTac Loan" means the $12.0 million mortgage loan secured by the SeaTac
Office Center.

"Securities Act" means the Securities Act of 1933, as amended.

"Services Company" means Kilroy Services, Inc., a Maryland corporation with
its principal office at 2250 East Imperial Highway, El Segundo, California
90245, which performs the Company's development activities and third party
development services, and the economic value of which is owned 95.0% by the
Operating Partnership and 5.0% collectively by John B. Kilroy, Sr. and John B.
Kilroy, Jr.

"Southern California Area" means the counties of Los Angeles, Orange,
Riverside, San Bernardino and Ventura.

"Stock Incentive Plan" means the Company's stock incentive plan, as further
described in this Prospectus under the caption entitled "Management--Stock
Incentive Plan."

"Thousand Oaks Office Property" means the office building and related realty
located at 2829 Townsgate Road, Thousand Oaks, California.

"Treasury Regulations" means regulations of the U.S. Department of Treasury
under the Code.

"triple net basis lease" means a lease pursuant to which a tenant is
responsible for the base rent in addition to the costs and expenses in
connection with and related to property taxes, insurance and repairs and
maintenance applicable to the leased space.

"Underwriters" means each of the Underwriters named in the section of this
Prospectus entitled "Underwriting."

177
<PAGE>

"Underwriting Agreement" means the Underwriting Agreement between the
Company and the Representatives relating to the purchase of the Common Stock
offered hereby.

"Units" means limited and general partnership interests representing an
ownership interest in the Operating Partnership.

"Unitholders" shall mean the persons and entities who received Units in
connection with the Formation Transactions and with the acquisition of a
certain Property. See "Note 1. Organization and Basis of Presentation" to the
Combined Financial Statements of the Kilroy Group.

178
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Kilroy Realty Corporation Pro Forma (Unaudited):
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1997..... F-2
Notes to Pro Forma Condensed Consolidated Balance Sheet................. F-3
Pro Forma Condensed Consolidated Statements of Operations for the three
months ended March 31, 1997 and the year ended December 31, 1996....... F-5
Notes to Pro Forma Condensed Consolidated Statements of Operations...... F-7
Kilroy Realty Corporation and Kilroy Group:
Independent Auditors' Report............................................ F-8
Consolidated Balance Sheet as of March 31, 1997 (Unaudited) and Combined
Balance Sheets as of December 31, 1996 and 1995........................ F-9
Consolidated Statement of Operations for the period February 1, 1997 to
March 31, 1997 (Unaudited) and Combined Statements of Operations for
the period January 1, 1997 to January 31, 1997 (Unaudited) for the
three months ended March 31, 1996 (Unaudited) and the three years ended
December 31, 1996, 1995 and 1994....................................... F-10
Consolidated Statement of Stockholders' Equity for the three months
ended March 31, 1997 (Unaudited) and Combined Statements of
Stockholders' Equity for the three years ended December 31, 1996, 1995
and 1994 .............................................................. F-11
Consolidated Statement of Cash Flows for the three months ended March
31, 1997 (Unaudited) and Combined Statements of Cash Flows for the
three months ended March 31, 1996 (Unaudited) and the three years ended
December 31, 1996, 1995 and 1994 ...................................... F-12
Notes to Consolidated and Combined Financial Statements................. F-13
Acquisition Properties:
Independent Auditors' Report............................................ F-25
Combined Historical Summary of Certain Revenues and Certain Expenses for
the year ended December 31, 1996....................................... F-26
Notes to Combined Historical Summary of Certain Revenues and Certain
Expenses............................................................... F-27
Acquired Properties and Pending Acquisition:
Independent Auditors' Report............................................ F-29
Combined Historical Summaries of Certain Revenues and Certain Expenses
for the three months ended March 31, 1997 (Unaudited) and the year
ended December 31, 1996................................................ F-30
Notes to Combined Historical Summaries of Certain Revenues and Certain
Expenses............................................................... F-31
Additional Combining Information of Certain Revenues and Certain
Expenses for the three months ended March 31, 1997 (Unaudited) and the
year ended December 31, 1996........................................... F-33
</TABLE>

F-1
<PAGE>

KILROY REALTY CORPORATION

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

MARCH 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)

This unaudited pro forma condensed consolidated balance sheet is presented
as if the Offering and use of proceeds to purchase the Acquisition Properties
and Pending Acquisition had each occurred on March 31, 1997. Such pro forma
information is based upon the balance sheet of the Company at March 31, 1997.
The Acquisition Properties and Pending Acquisition will be accounted for as
purchase transactions. Future acquisitions will also be accounted as purchase
transactions. This pro forma condensed balance sheet should be read in
conjunction with the pro forma condensed statement of operations of the
Company, the consolidated financial statements and notes thereto of the
Company and the historical combined summaries of certain revenues and certain
expenses of the Acquired Properties and Pending Acquisition included elsewhere
in this Prospectus. See "The Company" and "Use of Proceeds."

The unaudited pro forma consolidated balance sheet is not necessarily
indicative of what the actual financial position of the Company would have
been assuming the consummation of the Offering and use of proceeds to purchase
the Acquired Properties and Pending Acquisition at March 31, 1997, nor does it
purport to represent the future financial position of the Company.

<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------------------
ACQUIRED KILROY REALTY
KILROY REALTY PROPERTIES CORPORATION
CORPORATION AND PENDING PRO FORMA PRO FORMA
HISTORICAL ACQUISITION ADJUSTMENTS CONSOLIDATED
------------- ----------- ----------- -------------
(A)
ASSETS
<S> <C> <C> <C> <C> <C>
Rental properties, net
of accumulated
depreciation and
amortization........... $173,612 $ 215,155 (B) $ $388,767
Cash and cash
equivalents............ 116,163 (211,176)(C) 246,197 (C) 151,184
Restricted cash......... 4,244 4,244
Tenant receivables,
net.................... 3,537 3,537
Due from affiliates..... 1,261 1,261
Deferred charges and
other assets, net of
accumulated
amortization........... 11,565 11,565
-------- --------- -------- --------
Total................ $310,382 $ 3,979 $246,197 $560,558
======== ========= ======== ========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C>
Liabilities:
Debt................... $ 95,917 $ $ $ 95,917
Accounts payable and
accrued expenses...... 4,292 4,292
Accrued interest
payable............... 670 670
Rent received in
advance and tenant
security deposits..... 8,554 8,554
-------- --------- -------- --------
Total liabilities.... 109,433 109,433
-------- --------- -------- --------
Minority interest....... 31,127 3,979 11,360 (D) 46,466
-------- --------- -------- --------
Stockholders' equity:
Common stock........... 145 100 (E) 245
Additional paid-in
capital............... 167,025 246,097 (E) 401,762
(11,360)(D)
Retained Earnings...... 2,652 2,652
-------- --------- -------- --------
Total stockholders'
equity.............. 169,822 234,837 404,659
-------- --------- -------- --------
Total................ $310,382 $ -- $246,197 $560,558
======== ========= ======== ========
</TABLE>

F-2
<PAGE>

KILROY REALTY CORPORATION

NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

PRO FORMA ADJUSTMENTS

These pro forma adjustments are to reflect the Offering and use of proceeds
thereof to purchase the Acquired Properties and Pending Acquisition.

(A) Reflects Kilroy Realty Corporation unaudited balance sheet as of March 31,
1997.

(B) Reflects the purchase price and actual and estimated additional closing
costs of the Acquired Properties and Pending Acquisition (including
165,102 units of the Operating Partnership issued in connection with one
of the acquisitions based on the closing price of the Company's common
stock on the date of the acquisition). The Acquired Properties and Pending
Acquisition, all of which will be acquired from unaffiliated third
parties, are as follows:

<TABLE>
<CAPTION>
PURCHASE
PROPERTY PRICE SELLER
-------- -------- ------
<S> <C> <C>
Industrial and Office
Portfolio*.............. $ 44,480 Mission Land Company
Pacifica & Warren
Technology Center....... 24,899 Shidler West Acquisition Company, L.L.C.
Sony Arboretum........... 31,619 Santa Monica Number Seven Assoc., L.P.
2501 Pullman Avenue...... 15,497 Pullman Carnegie Associates
12400 Industry Street.... 3,002 Container Supply Company, Inc.
7421 Orangewood Avenue... 4,500 The Perkin-Elmer Corporation
Walnut Park Business
Center.................. 9,750 Walnut Park Business Centers, Ltd.
701-741 East Ball Road... 7,953 Stanley Hanson
26541 Agoura Road........ 11,587 Pennino Broadcasting Corporation
5325 Hunter Avenue....... 5,256 DeAngelo's Partnership #8
17150 Von Karman......... 12,126 Limar Realty Corporation
9401 & 9451 Toledo Way .. 17,077 Mazda Motor of America, Inc.
Foothill Ranch........... 3,247 Boorego Partners
Mission Oaks Technology
Center.................. 24,162 Camarillo Partners
--------
Total................ $215,155
========
</TABLE>
- --------
* The Industrial and Office Portfolio is comprised of one industrial building
in Ontario, California, seven industrial buildings in Brea, California, six
industrial buildings in Garden Grove, California, one office building in
Torrance, California and ten acres of land in Brea, California.

The Acquired Properties and Pending Acquisition will be accounted for as
purchase transactions. The operations of the Sellers were not acquired and the
land and buildings were the only assets purchased. The cost of the properties
is estimated to be allocated as follows:

<TABLE>
<S> <C>
Land........................................................ $ 63,112
Buildings................................................... 152,043
--------
$215,155
========
</TABLE>

<TABLE>
<S> <C>
. Net proceeds from the Offering after underwriting discount and
estimated issuance costs of $14,433............................. $246,197
. Purchase of Acquired Properties and Pending Acquisition (net of
165,102 units issued in connection with one of the
acquisitions)................................................... (211,176)
--------
Net increase in cash and cash equivalents......................... $ 35,021
========
</TABLE>

F-3
<PAGE>

KILROY REALTY CORPORATION

NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

PRO FORMA ADJUSTMENTS

(D) Reflects the estimated minority interest of the Continuing Investors in the
Operating Partnership computed as follows:

<TABLE>
<S> <C>
Pro forma total assets............................................. $560,558
Pro forma total liabilities........................................ (109,433)
--------
Pro forma net book value of Operating Partnership.................. $451,125
========
Minority interest at 10.3%......................................... $ 46,466
========
</TABLE>

(E) Reflects the issuance of 10,000,000 shares of Common Stock, par value $.01
per share, at an assumed Offering price of $26.0625 per share. The
following table sets forth the adjustments to additional paid-in capital:

<TABLE>
<S> <C>
. Net proceeds from the Offering of Common Stock after
underwriting discounts and commissions and estimated issuance
costs of $14,433................................................ $246,197
Less: par value of Common Stock of 10,000,000 shares at $.01 per
share........................................................... (100)
--------
Net adjustment to additional paid-in capital...................... $246,097
========
</TABLE>

F-4
<PAGE>

KILROY REALTY CORPORATION

PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 1997 AND YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

The unaudited pro forma condensed consolidated statements of operations are
presented as if (i) the Offering and use of proceeds to purchase the Acquired
Properties and Pending Acquisition and (ii) the transfer of the Properties and
business and operations of the Kilroy Group pursuant to the Formation
Transactions and (iii) the IPO and the Mortgage Loans, and the use of proceeds
thereof to repay indebtedness and purchase the IPO Acquisition Properties,
each had occurred on January 1, 1996. Such pro forma information is based upon
the historical results of operations of Kilroy Realty Corporation and the
Kilroy Group for the three months ended March 31, 1997, and the year ended
December 31, 1996 respectively. This pro forma condensed consolidated
statement of operations should be read in conjunction with the pro forma
condensed consolidated balance sheet of the Company and the historical
combined financial statements and notes thereto of the Kilroy Group and the
historical combined summaries of certain revenues and certain expenses of the
IPO Acquisition Properties and the Acquired Properties and Pending Acquisition
and notes thereto included elsewhere in this Prospectus. Reference is also
made to "The Company" and "Use of Proceeds."

The unaudited pro forma condensed consolidated statement of operations is
not necessarily indicative of what the actual results of operations of the
Company would have been assuming the Company had been formed and (i) the
Offering and use of proceeds to purchase the Acquired Properties and Pending
Acquisition and (ii) the transfer of the Properties and business and
operations of the Kilroy Group pursuant to the Formation Transactions and
(iii) the IPO and the Mortgage Loans, and the use of proceeds thereof to repay
indebtedness and purchase the IPO Acquisition Properties, each had occurred on
January 1, 1996 nor does it purport to represent the results of operations of
future periods of the Company.

F-5
<PAGE>

KILROY REALTY CORPORATION

PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
--------------------------------------------------------------------------------
KILROY KILROY
GROUP REALTY
JANUARY 1, CORPORATION
1997 TO FEBRUARY 1, PRE-ACQUISITION ACQUIRED
JANUARY 1997 TO PERIOD FOR THE PROPERTIES AND COMPANY PRO
31, 1997 MARCH 31, IPO PENDING PRO FORMA FORMA
HISTORICAL 1997 ACQUISITIONS(J) ACQUISITION(K) ADJUSTMENTS CONSOLIDATED
---------- ----------- --------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental income... $2,760 $7,110 $721 $4,920 $ 15,511
Tenant
reimbursements.. 275 706 76 646 1,703
Development and
management
fees............ 14 $ (14)(B)
Interest
income.......... 971 (971)
Other income.... 4 185 3 192
------ ------ ---- ------ ------- ----------
Total revenues.. 3,053 8,972 797 5,569 (985) 17,406
------ ------ ---- ------ ------- ----------
EXPENSES:
Property
expenses........ 579 1,239 50 759 40 (C) 2,667
Real estate
taxes........... 106 353 45 304 104 (D) 912
General and
administrative.. 78 725 6 34 576 (E) 1,419
Ground lease.... 64 185 28 277
Development and
management
expenses........ 46 (46)(B)
Option buy-out..
Interest
expense......... 1,895 1,531 (1,374)(F) 2,052
Depreciation and
amortization.... 787 1,744 1,192 (G) 3,723
------ ------ ---- ------ ------- ----------
Total expenses.. 3,555 5,777 129 1,097 492 11,050
------ ------ ---- ------ ------- ----------
(Loss) income
from operations
before equity in
loss of
subsidiary and
minority
interest........ (502) 3,195 668 4,472 (1,477) 6,356
Equity in loss
of subsidiary... (57) (30)(B) (87)
Minority
interest........ (486) (160)(H) (646)
------ ------ ---- ------ ------- ----------
Net (loss)
income.......... $ (502) $2,652 $668 $4,472 $(1,667) $ 5,623
====== ====== ==== ====== ======= ==========
Average number
of shares
outstanding..... 24,475,000
==========
Pro forma net
income per
common share
(I)............. $ 0.23
==========
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------
ACQUIRED
KILROY IPO PROPERTIES AND COMPANY PRO
GROUP ACQUISITION PENDING PRO FORMA FORMA
HISTORICAL PROPERTIES ACQUISITION(K) ADJUSTMENTS CONSOLIDATED
---------- ----------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental income... $35,022 $7,709 $19,066 $ (524)(A) $ 61,273
Tenant
reimbursements.. 3,380 924 2,524 6,804
Development and
management
fees............ 698 (698)(B)
Interest
income..........
Other income.... 76 473 94 667
---------- ----------- -------------- ------------- ------------
Total revenues.. 39,176 9,106 21,684 (1,222) 68,744
---------- ----------- -------------- ------------- ------------
EXPENSES:
Property
expenses........ 6,788 1,700 3,329 117 (C) 11,934
Real estate
taxes........... 1,301 524 1,114 486 (D) 3,425
General and
administrative.. 2,383 257 89 2,943 (E) 5,672
Ground lease.... 768 338 1,106
Development and
management
expenses........ 650 (650)(B)
Option buy-out.. 3,150 3,150
Interest
expense......... 21,853 (13,653)(F) 8,200
Depreciation and
amortization.... 9,111 5,616 (G) 14,727
---------- ----------- -------------- ------------- ------------
Total expenses.. 46,004 2,819 4,532 (5,141) 48,214
---------- ----------- -------------- ------------- ------------
(Loss) income
from operations
before equity in
loss of
subsidiary and
minority
interest........ (6,828) 6,287 17,152 3,919 20,530
Equity in loss
of subsidiary... (6)(B) (6)
Minority
interest........ (2,114)(H) (2,114)
---------- ----------- -------------- ------------- ------------
Net (loss)
income.......... $(6,828) $6,287 $17,152 $ 1,799 $ 18,410
========== =========== ============== ============= ============
Average number
of shares
outstanding..... 24,475,000
------------
Pro forma net
income per
common share
(I)............. $ 0.75
============
</TABLE>

F-6
<PAGE>

KILROY REALTY CORPORATION

NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (DOLLARS IN THOUSANDS)

(A) Represents the elimination of rental income received from Kilroy
Industries.

(B) Represents the elimination of the Services Company's gross revenues and
expenses and the recording of the equity in income of the Services Company
net of income taxes.

<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
1997 1996
--------------- ------------
<S> <C> <C>
Development and management fees............... $ 14 $ 698
Development and management expenses........... (46) (650)
Elimination of nonrecurring Services Company
expenses..................................... 132
---- -----
180
Elimination of management fees earned on one
of the IPO Acquisition Properties............ (186)
---- -----
Estimated service company net loss............ (32) (6)
---- -----
At 95% economic interest...................... $(30) $ (6)
==== =====
</TABLE>

(C) Represents the elimination of management fees charged to the Kilroy Group
by Kilroy Industries and the reclassification of expenses which previously
had not been allocated to individual properties.

(D) Represents incremental property taxes on the IPO Acquisition Properties
and the office properties of the Recently Acquired and Pending Acquisition
Properties due to change of ownership.

(E) Represents the estimated incremental increases in other general and
administrative expenses, including, without limitation, the incremental
general and administrative expenses to be incurred as a public company,
increases in other G&A expenses, less the effect of the reclassification
of property expenses which previously had not been allocated to individual
properties.

(F) Reflects reduction of interest expenses associated with the mortgage debts
assumed to be repaid using net proceeds from the IPO and the Offering:

<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
1997 1996
--------------- ------------
<S> <C> <C>
. Interest expense on the Mortgage Loans
(fixed interest rate of 8.35% on $84,000
with 25-year amortization; variable
interest rate of LIBOR plus 1.5% on
$12,000)................................... $ 435 $ 7,866
. Amortization of the issuance costs on the
Mortgage Loans............................. 86 334
. Interest expense on debt assumed to be
retired.................................... (1,895) (21,853)
------- --------
Net interest expense reduction............. $(1,374) $(13,653)
======= ========
</TABLE>

(G) Represents depreciation expense calculated based on the cost of the IPO
Acquisition Properties' and the Acquired Properties' and Pending
Acquisition's buildings depreciated on the straight-line method over a
35 year life.

(H) Represents the income allocated to the 10.3% minority interest in the
Operating Partnership owned by the holders of units in the Operating
Partnership.

(I) Pro forma net income per share of Common Stock is based upon 24,375,000
shares of Common Stock assumed to be outstanding in connection with the
IPO and the Offering and 100,000 restricted shares of Common Stock granted
to an officer of the Company.

(J) Reflects January 1997 operating activities of the four IPO acquisition
properties.

(K) Excludes operating activity of 9401 and 9451 Toledo Way as the property
was tenant occupied prior to acquisition.

F-7
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Partners of Kilroy Group:

We have audited the accompanying combined balance sheets of Kilroy Group
(described in Note 1) as of December 31, 1996 and 1995, and the related
combined statements of operations, accumulated deficit, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements and the financial statement schedule are the responsibility of the
management of Kilroy Group. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Kilroy Group as of December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.

Deloitte & Touche LLP
Los Angeles, California

March 21, 1997 (July 11, 1997 as to Note 12)

F-8
<PAGE>

KILROY REALTY CORPORATION (THE "COMPANY") AND
KILROY GROUP (PREDECESSOR TO THE COMPANY)

CONSOLIDATED BALANCE SHEET OF THE COMPANY AND
COMBINED BALANCE SHEETS OF THE KILROY GROUP
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
KILROY
REALTY KILROY GROUP
CORPORATION DECEMBER 31,
MARCH 31, --------------------
1997 1996 1995
----------- --------- ---------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
RENTAL PROPERTIES (Notes 1, 2, 4, 5, 7 and
11):
Land....................................... $ 26,069 $ 12,490 $ 12,490
Buildings and improvements................. 259,333 214,847 212,493
--------- --------- ---------
Total rental properties.................. 285,402 227,337 224,983
Accumulated depreciation and amortization.. (111,791) (109,668) (101,774)
--------- --------- ---------
Rental properties, net................... 173,612 117,669 123,209
CASH AND CASH EQUIVALENTS.................... 116,163
RESTRICTED CASH.............................. 4,244
TENANT RECEIVABLES, NET (Note 2)............. 3,537 3,042 3,973
DUE FROM AFFILIATES.......................... 1,261
DEFERRED CHARGES AND OTHER ASSETS, NET
(Notes 2, 3 and 8).......................... 11,565 7,628 5,675
--------- --------- ---------
TOTAL........................................ $ 310,382 $ 128,339 $ 132,857
========= ========= =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
LIABILITIES:
Debt (Notes 4, 9 and 11)................... $ 95,917 $ 223,297 $ 233,857
Accounts payable and accrued expenses (Note
2)........................................ 4,292 3,685 4,863
Accrued interest payable (Note 4).......... 670 3,929 7,251
Accrued cost of option buy-out and tenant
improvement (Note 5)...................... 1,390
Rents received in advance and tenant
security deposits (Note 2)................ 8,554 9,815 8,712
--------- --------- ---------
Total liabilities........................ 109,433 242,116 254,683
COMMITMENTS AND CONTINGENCIES (Note 7).......
MINORITY INTEREST............................ 31,127
STOCKHOLDERS' EQUITY (Note 6)................
Preferred stock, $.01 par value, 30,000,000
shares authorized; none issued and
outstanding...............................
Common stock, $.01 par value, 150,000,000
shares authorized:
14,475,000 shares issued and
outstanding............................. 145
Additional paid-in capital................. 167,025
Retained earnings (deficit) (Note 1)....... 2,652 (113,777) (121,826)
--------- --------- ---------
Total Stockholders' Equity............... 169,822 (113,777) (121,826)
--------- --------- ---------
TOTAL........................................ $ 310,382 $ 128,339 $ 132,857
========= ========= =========
</TABLE>

See notes to consolidated and combined financial statements.

F-9
<PAGE>

KILROY REALTY CORPORATION (THE "COMPANY") AND
KILROY GROUP (PREDECESSOR TO THE COMPANY)

CONSOLIDATED STATEMENT OF OPERATIONS FOR THE COMPANY AND
COMBINED STATEMENTS OF OPERATIONS FOR THE KILROY GROUP
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
KILROY KILROY KILROY
REALTY CORP GROUP GROUP
FEBRUARY 1, JANUARY 1, JANUARY 1, KILROY GROUP
1997 TO 1997 TO 1996 TO YEAR ENDED DECEMBER 31,
MARCH 31, JANUARY 31, MARCH 31, -------------------------
1997 1997 1996 1996 1995 1994
----------- ----------- ---------- ------- ------- -------
(UNAUDITED)
-----------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES (Notes 2 and
5):
Rental income (Note
8)................... $ 7,110 $2,760 $ 8,785 $35,022 $33,896 $32,577
Tenant reimbursements
(Note 3)............. 706 275 862 3,380 3,002 1,643
Development and
management services.. 14 263 698 1,156 919
Sale of air rights
(Note 2)............. 4,456
Interest Income....... 971
Other income (Note
3)................... 185 4 11 76 398 1,084
----------- ------ ------- ------- ------- -------
Total revenues...... 8,972 3,053 9,921 39,176 42,908 36,223
----------- ------ ------- ------- ------- -------
EXPENSES:
Property expenses
(Notes 2 and 8)...... 1,239 579 1,533 6,788 6,834 6,000
Real estate taxes
(Note 2)............. 353 106 300 1,301 1,416 (448)
General and
administrative....... 725 78 528 2,383 2,152 2,467
Ground lease (Note
7)................... 185 64 193 768 789 913
Development expenses.. 46 197 650 737 468
Option buy-out cost
(Note 5)............. 3,150
Interest expense...... 1,531 1,895 5,227 21,853 24,159 25,376
Depreciation and
amortization......... 1,744 787 2,281 9,111 9,474 9,962
----------- ------ ------- ------- ------- -------
Total expenses...... 5,777 3,555 10,259 46,004 45,561 44,738
----------- ------ ------- ------- ------- -------
INCOME (LOSS) BEFORE
EQUITY IN LOSS OF
SUBSIDIARY, MINORITY
INTEREST AND
EXTRAORDINARY GAINS.... 3,195 (502) (338) (6,828) (2,653) (8,515)
EQUITY IN LOSS OF
UNCONSOLIDATED
SUBSIDIARY............. (57)
MINORITY INTEREST....... (486)
----------- ------ ------- ------- ------- -------
INCOME (LOSS) BEFORE
EXTRAORDINARY GAINS
(Note 4)............... 2,652 (502) (338) (6,828) (2,653) (8,515)
EXTRAORDINARY GAINS
(Note 4)............... 3,204 20,095 15,267 1,847
----------- ------ ------- ------- ------- -------
NET INCOME (LOSS)....... $ 2,652 $2,702 $ (338) $13,267 $12,614 $(6,668)
=========== ====== ======= ======= ======= =======
NET INCOME PER COMMON
SHARE.................. $ .18
===========
Weighted average shares
outstanding............ 14,475,000
===========
</TABLE>

See notes to consolidated and combined financial statements.

F-10
<PAGE>

KILROY REALTY CORPORATION (THE COMPANY) AND
KILROY GROUP (PREDECESSOR TO THE COMPANY)

STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK
TOTAL
(ACCUMULATED
ADDITIONAL RETAINED DEFICIT)/
PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNTS CAPITAL (DEFICIT) EQUITY
---------- ------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1994................... $(114,960) $(114,960)
Deemed and actual
distributions to
partners, net of
contributions........ (8,706) (8,706)
Net loss.............. (6,668) (6,668)
---------- ---- -------- --------- ---------
BALANCE, DECEMBER 31,
1994................... (130,334) (130,334)
Deemed and actual
distributions to
partners, net of
contributions........ (4,106) (4,106)
Net income............ 12,614 12,614
---------- ---- -------- --------- ---------
BALANCE, DECEMBER 31,
1995................... (121,826) (121,826)
Deemed and actual
distributions to
partners, net of
contributions........ (5,218) (5,218)
Net income............ 13,267 13,267
---------- ---- -------- --------- ---------
BALANCE, DECEMBER 31,
1996................... (113,777) (113,777)
Deemed and actual
contributions from
partners, net of
distributions
(unaudited).......... 3,483 3,483
Sale of common stock
net of offering costs
(unaudited).......... 14,375,000 $144 $167,025 107,592 274,761
Issuance of restricted
shares (unaudited)... 100,000 1 1
Net income
(unaudited).......... 5,354 5,354
---------- ---- -------- --------- ---------
BALANCE, MARCH 31, 1997
(unaudited)............ 14,475,000 $145 $167,025 $ 2,652 $ 169,822
========== ==== ======== ========= =========
</TABLE>

See notes to consolidated and combined financial statements.

F-11
<PAGE>

KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS KILROY GROUP
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------ ---------------------------
1997 1996 1996 1995 1994
--------- ------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)........... $ 5,354 $ (338) $ 13,267 $ 12,614 $(6,668)
Adjustment to reconcile net
income (loss) to net cash
provided
by operating activities:
Depreciation and
amortization.............. 2,531 2,281 9,111 9,474 9,962
Provision for bad debts.... 150 10 1,266 1,000 909
Extraordinary gain......... (3,204) (20,095) (15,267) (1,847)
Minority interest in
earnings.................. 486
Equity in loss of
unconsolidated
subsidiary................ 57
Changes in assets and
liabilities:
Tenant receivables....... (645) 215 (335) (1,012) (760)
Other assets............. 801 (385) (1,349) 2,095 (3,212)
Accounts payable and
accrued expenses........ 607 2,032 (1,178) (182) (137)
Accrued interest
payable................. (3,259) 239 2,340 3,061 1,846
Accrued cost of option
buy-out and tenant
improvements............ (1,390) 1,390
Rents received in
advance and tenant
security deposits....... (1,261) 300 1,103 (212) 5,014
Property tax refund
payable................. (1,500) 1,500
--------- ------- -------- -------- -------
Net cash provided by
operating activities.. 227 4,354 5,520 10,071 6,607
--------- ------- -------- -------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Expenditures for rental
properties................. (59,555) (76) (2,354) (1,162) (1,765)
Investment in unconsolidated
subsidiary................. (51)
--------- ------- -------- -------- -------
Net cash used in
investing activities.. (59,606) (76) (2,354) (1,162) (1,765)
--------- ------- -------- -------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from issuance
of stock................... 302,780
Proceeds received from
debt....................... 96,000 873 21,143 625 11,127
Principal payments on debt.. (218,893) (1,210) (19,091) (5,428) (7,263)
Cash paid for loan costs.... (2,323)
Restricted cash............. (4,244)
Due from affiliates......... (1,261)
Deemed and actual
contributions from
(distributions to)
partners, net.............. 3,483 (3,941) (5,218) (4,106) (8,706)
--------- ------- -------- -------- -------
Net cash provided by
(used in) financing
activities............ 175,542 (4,278) (3,166) (8,909) (4,842)
--------- ------- -------- -------- -------
NET INCREASE IN CASH AND CASH
EQUIVALENTS.................. 116,163
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD..........
--------- ------- -------- -------- -------
CASH AND CASH EQUIVALENTS, END
OF PERIOD.................... $ 116,163 $ -- $ -- $ -- $ --
========= ======= ======== ======== =======
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest...... $ 3,872 $ 4,988 $ 25,175 $ 21,098 $23,530
========= ======= ======== ======== =======
</TABLE>

See notes to consolidated and combined financial statements.

F-12
<PAGE>

KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

1. ORGANIZATION AND FORMATION TRANSACTIONS

Kilroy Realty Corporation (the "Company") was incorporated in Maryland in
September 1996 and is the successor to the operations of the Kilroy Group
("KG"). KG consists of the combination of Kilroy Industries ("KI") and various
entities, the properties of which were under common control of KI and/or its
stockholders, including John B. Kilroy, Sr. and John B. Kilroy, Jr. The
Company's Chairman of the Board of Directors, and President and Chief
Executive Officer are John B. Kilroy, Sr. and John B. Kilroy, Jr.,
respectively. KI has historically provided acquisition, development,
financing, construction and leasing services with respect to the properties
held by KG. KI has also provided development services to the third-party
owners of properties for a fee. The accompanying combined financial statements
of KG have been presented on a combined basis because of common ownership and
management and because the entities were the subject of a business combination
in 1997 with the Company.

On January 31, 1997, the Company completed an initial public offering of
12,500,000 shares of $.01 par value common stock (the "Offering"). The
Offering price was $23.00 per share resulting in gross proceeds of
$287,500,000. On February 7, 1997, the underwriters exercised their over-
allotment option and, accordingly, the Company issued an additional 1,875,000
shares of common stock and received gross proceeds of $43,125,000. The
aggregate proceeds to the Company, net of underwriters' discount, advisory fee
and offering costs were approximately $302,800,000.

The following transactions occurred simultaneously with the completion of
the Offering (collectively, the "Formation Transactions):

. The Company consummated various purchase agreements to acquire four
properties for approximately $58,000,000 in cash. The four properties
had aggregate operating revenues of approximately $9,100,000 and net
operating income (before depreciation, amortization and interest of
approximately $6,300,000 during the year ended December 31, 1996).

. The Company became the sole general partner of Kilroy Realty L.P. (the
"Operating Partnership"). Upon completion of the Offering, the Company
contributed substantially all of the net proceeds of the Offering in
exchange for an approximate 84.5% interest in the Operating Partnership.
The Company also contributed cash to purchase 100% of Kilroy Realty
Finance, Inc. ("Finance Inc."), which was formed to serve as the general
partner of Kilroy Realty Finance Partnership, L.P. (the "Finance
Partnership"). The Operating Partnership executed various option and
purchase agreements whereby it issued 2,652,374 units of the Operating
Partnership ("Units"), representing a 15.5% partnership interest, to the
continuing investors in exchange for interest in the properties listed
below. The continuing investors included John B. Kilroy Sr., John B.
Kilroy Jr., certain family members and certain entities owned by them.
The Operating Partnership contributed certain properties to the Finance
Partnership in exchange for a limited partnership interest therein. All
properties acquired by the Company are held by or through the Operating
Partnership or the Finance Partnership. Unless otherwise indicated, all
references to the Company include the Operating Partnership, the Finance
Partnership and Finance Inc.

. The Finance Partnership and the Operating Partnership borrowed
$84,000,000 and $12,000,000, respectively, under two mortgage loans.

. The Operating Partnership used a portion of the Offering proceeds and
the proceeds of new mortgage borrowings to repay approximately
$219,000,000 of indebtedness.

F-13
<PAGE>

KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

. The Operating Partnership contributed certain assets valued at
approximately $100,000 to Kilroy Services Inc. for a 5% ownership
interest and a 95% economic interest in Kilroy Services Inc. The
remaining ownership interest is held by John B. Kilroy Sr. and John B.
Kilroy Jr.

The Company is engaged in the acquisition, development, ownership and
operation of office and industrial properties located in California,
Washington and Arizona. As of March 31, 1997, the Company owned and operated
14 office properties encompassing approximately 2.0 million rentable square
feet and 12 industrial properties encompassing approximately 1.3 million
rentable square feet located in Southern California, Washington and Arizona.

The entities which directly owned the properties contributed to the
Operating Partnership are as follows:

<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP OF
PROPERTY BY
KI,
JOHN B.
KILROY, SR.,
AND/OR
JOHN B KILROY,
ENTITY NAME JR. PROPERTY LOCATION
----------- -------------- -------- --------
<C> <C> <S> <C>
OFFICE:
Kilroy Airport 100% Kilroy Airport Center at El El Segundo,
Associates Segundo: California
2240 E. Imperial Highway El Segundo,
2250 E. Imperial Highway California
2260 E. Imperial Highway El Segundo,
California
Kilroy Long Beach 99%(1) Kilroy Airport Center Long Long Beach,
Partner II Beach: 3750 Kilroy Airport Way California
3760 Kilroy Airport Way Long Beach,
3780 Kilroy Airport Way California
Long Beach,
California
Kilroy Freehold
Industrial Development
Organization ("K- El Segundo,
FIDO") 83%(2) 185/181 S. Douglas Street California
Sea Tac Properties, Ltd. 99%(1) SeaTac Office Center:
17900 Pacific Highway Seattle, Washington
17930 Pacific Highway Seattle, Washington
18000 Pacific Highway Seattle, Washington
INDUSTRIAL:
Kilroy Industries 100% El Segundo,
2031 E. Mariposa Avenue California
Kilroy Building 73 100%
Partnership 3332 E. La Palma Avenue Anaheim, California
K-FIDO 83%(2) El Segundo,
2260 E. El Segundo Boulevard California
K-FIDO 83%(2) El Segundo,
2265 E. El Segundo Boulevard California
K-FIDO 83%(2) El Segundo,
2270 E. El Segundo Boulevard California
A-102 Trust 20%(2) 5115 N. 27th Avenue Phoenix, Arizona
KI 1979 Trust 85%(2) 1000 E. Ball Road Anaheim, California
KI 1979 Trust 85%(2) 1230 S. Lewis Street Anaheim, California
Kilroy Garden Grove Garden Grove,
Assoc. 100% 12681/12691 Pala Drive California
</TABLE>

F-14
<PAGE>

KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

- --------
(1) The balance of the ownership interest are held by Marshall L. McDaniel
(representing an aggregate interest of approximately 1%).
(2) The balance of the ownership interest are held by the four adult daughters
of John B. Kilroy, Sr.

The development services of KG relating to non-owned properties have been
conducted by KI and Kilroy Technologies Company, LLC, both wholly-owned by
John B. Kilroy, Sr. and John B. Kilroy, Jr.

Certain of the named entities are owned by other entities. The properties
are ultimately owned beneficially in the proportions identified above.

Certain other properties and operations affiliated with KI have been
excluded as they are not compatible with the investment purposes of the
Company. Deemed and actual cash distributions to partners, net of
contributions, included in the combined statements of accumulated deficit
generally represent distributions of the cash flows generated by KG, and
advances to partners and KI, as well as related-party transactions (see Note
8).

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the consolidated financial
position of the Company, Finance Inc., the Finance Partnership and the
Operating Partnership at March 31, 1997 and the results of their operations
for the period from February 1, 1997 to March 31, 1997. Subsequent to the
Offering, the operating results of the service business conducted by Kilroy
Services Inc. are reflected in the accompanying financial statements on the
equity method of accounting. All significant intercompany balances and
transactions have been eliminated in the consolidated financial statements.

The accompanying unaudited interim financial statements have been prepared
by the Company's management in accordance with generally accepted accounting
principles and in conjunction with the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, the interim financial
statements presented herein, reflect all adjustments of a normal and recurring
nature which are necessary to fairly state the interim financial statements.
The results of operations for the interim period ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the eleven
months ended December 31, 1997.

The Company intends to qualify as a real estate investment trust ("REIT")
under Section 856 through 860 of the Internal Revenue Code of 1986, as amended
(the "Code")commencing the year ended December 31, 1997. As a REIT, the
Company will not generally be subject to corporate Federal income taxes as
long as it satisfies certain technical requirements of the Code relating to
composition of its income and assets and requirements relating to
distributions of taxable income to shareholders. Prior to formation of the
Company, no provision for Federal income taxes was made in the financial
statements as the income or loss of KG was included in the taxable income of
the individual partners.

Significant Accounting Policies:

Rental Properties--Rental properties are stated at historical cost less
accumulated depreciation, which, in the opinion of the Company's management
does not require a provision for impairment. Net realizable value does not
purport to represent fair market value. Costs incurred for the acquisition,
renovation and betterment of the properties are capitalized. Maintenance and
repairs are charged to expense as incurred.

F-15
<PAGE>

KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

During 1995, KG adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of." Under this standard, if impairment conditions
exist, the Company makes an assessment of the recoverability of the carrying
amounts of individual properties by estimating the future undiscounted cash
flows, excluding interest charges, on a property-by-property basis. If the
carrying amount exceeds the aggregate future cash flows, the Company would
recognize an impairment loss to the extent the carrying amount exceeds the
fair value of the property. Any long-lived assets to be disposed of are to be
valued at estimated fair value less costs to sell. Based on such periodic
assessments, no impairments have been determined and, therefore, no real
estate carrying amounts have been adjusted.

Depreciation and Amortization--The cost of buildings and improvements are
depreciated on the straight-line method over estimated useful lives, as
follows:

Buildings--25 to 40 years.

Tenant improvements--The shorter of lease term or useful lives range
from 5 to 20 years.

Restricted Cash--Restricted cash consists of cash held as collateral to
provide credit enhancement for the mortgage loans payable and cash reserves
for capital expenditures and tenant improvements.

Due from Affiliates--Due from affiliates represents amounts paid by the
Company for certain tenant improvements and leasing commissions which will be
reimbursed by the principals of KI. The total amount due was received by the
Company in June 1997.

Accrued Cost of Option Buy-out and Tenant Improvements--In September 1996,
KG amended the terms of certain of their lease agreements. Such amendments
included a $500,000 allowance for tenant improvements. In addition, KG agreed
to pay $3,150,000 in consideration for the cancellation of an option to
purchase a 50% equity interest in Kilroy Airport Center at El Segundo which
has been reflected in the statement of operations as of December 31, 1996. In
November 1996, $2,260,000 of the total liability of $3,650,000 was paid by KI
and its stockholders. In January 1997, $100,000 of the amount was paid by KG
and the remaining balance was paid with the proceeds of the Offering.

Deferred Charges--Deferred charges include deferred leasing costs and loan
fees. Leasing costs include leasing commissions that are amortized on the
straight-line basis over the initial lives of the leases, which range from 5
to 10 years. Deferred loan fees are amortized on a straight-line basis over
the terms of the respective loans, which approximates the effective interest
method.

Accrued Property Taxes--As of December 31, 1996 and 1995 $147,000, and
$696,000 of accrued property taxes of the Company and Kilroy Group
respectively, were delinquent. Accrued property taxes are included in accounts
payable and accrued expenses. As of March 31, 1997, all property taxes were
current.

Revenue Recognition and Tenant Receivables--Leases with tenants are
accounted for as operating leases. Minimum annual rentals are recognized on a
straight-line basis over the lease term. Unbilled deferred rent represents the
amount that expected straight-line rental income exceeds rents currently due
under the lease agreement. Total tenant receivables consists of the following
amounts:

<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------
1997 1996 1995
--------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tenant rent and reimbursements receivable........ $ 3,202 $ 2,577 $ 3,171
Allowance for uncollectible rent................. (1,763) (1,628) (1,837)
Unbilled deferred rent........................... 2,098 2,093 2,639
------- ------- -------
Tenants receivables, net......................... $ 3,537 $ 3,042 $ 3,973
======= ======= =======
</TABLE>

F-16
<PAGE>

KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

Included in tenant rent and reimbursements receivable are additional rentals
based on common area maintenance expenses and certain other expenses that are
accrued in the period in which the related expenses are incurred.

Rents Received in Advance and Tenant Security Deposits--The balances as of
December 31, 1996 and 1995 include a $4,000,000 payment received from a tenant
in connection with the tenant's obligation to remove tenant improvements upon
termination of the lease. Such payment is nonrefundable and will be recognized
as income, net of the costs of removal of improvements, upon termination of
the lease. The related lease expires in 1999, subject to a five-year option to
renew.

Parking--The Kilroy Airport Center at El Segundo includes parking
facilities. KG records as rental income the gross parking receipts. KG
contracts with parking management companies to operate the parking facilities,
and such contract costs are included in property expenses.

Development Services--Development services revenues represent fees earned by
KG for supervision services provided for building development of nonowned
properties. Fees are typically a percentage of total development costs plus
reimbursement for certain expenses. Unreimbursed expenses are recorded as
development expenses and include items such as wages, equipment rental,
supplies, etc.

Sale of Air Rights--In 1995, based on an agreement between KG and the
California Transportation Commission, KG received $4,456,000, net of related
expenses, for granting temporary construction and permanent air right
easements over a portion of its Property for the construction of a freeway on-
ramp. In connection with this transaction, KG accrued $874,000 for the costs
of restoration of the property after construction of the on-ramp.

Property Tax Refunds--Property tax refunds of $2,379,000 were collected in
1995 and relate to appeals filed by KG in 1994 for refunds of property taxes
paid in 1990 through 1994. During the year ended December 31, 1994, such
amount was recorded as a reduction of property taxes, as well as related
interest income of $441,000, which was recorded as other income. Of these
property tax recoveries, approximately $1,500,000 was refunded to tenants of
the related properties and has been recorded as a reduction to tenant
reimbursements income during the year ended December 31, 1994.

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

F-17
<PAGE>

KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

3. DEFERRED CHARGES AND OTHER ASSETS

Deferred charges and other assets are summarized as follows for the Company
at March 31, 1997 and the Kilroy Group at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------
1997 1996 1995
--------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred assets:
Deferred financing costs..................... $ 2,323 $ 2,968 $ 3,436
Deferred leasing costs (Note 8).............. 12,567 11,563 11,327
------- ------- --------
Total deferred assets...................... 14,890 14,531 14,763
Accumulated amortization....................... (5,110) (7,728) (10,142)
------- ------- --------
Deferred assets, net........................... 9,780 6,803 4,621
Prepaid expenses............................... 1,785 825 1,054
------- ------- --------
Total deferred charges and other assets.... $11,565 $ 7,628 $ 5,675
======= ======= ========
</TABLE>

4. DEBT

At March 31, 1997, debt consists of an $83,917,000 mortgage loan ( the
"Permanent Loan") secured by certain of the properties and a $12,000,000
mortgage loan (the "SeaTac Loan") secured by an office complex in Seattle,
Washington. The Permanent Loan requires monthly principal and interest
payments based on an interest rate of 8.35%, amortizes over a 25-year period,
but is subject to increases in the effective interest rate beginning in 2005.
The SeaTac Loan requires monthly payments of interest based on a variable rate
of LIBOR plus 3% (8.77% at March 31, 1997) and matures in July 1997 with two
options to extend for six months each. In July 1997, the Company exercised one
of the options to extend the maturity for six months. The interest rate during
the remainder of the term is LIBOR plus 1.5%. As of March 31, 1997 the loans
have a weighted average interest rate of 8.40%.

The fixed rate Permanent Loan of $83,917,000 at March 31, 1997 approximates
its fair value based on terms currently offered to the Company. The carrying
values of the variable rate SeaTac Loan at March 31, 1997, also approximates
its fair value.

Scheduled principal payments for the above mortgage loans at March 31, 1997
are as follows (in thousands):

<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
-------------------------
<S> <C>
1997........................................................... $ 777
1998........................................................... 13,115
1999........................................................... 1,212
2000........................................................... 1,317
2001........................................................... 1,431
Thereafter..................................................... 78,065
--------
$95,917
========
</TABLE>
On July 23, 1997 the Company received a commitment to increase its secured
revolving line of credit to $200,000,000 from $150,000,000. The facility has a
two year term, with an option to extend for one year, and bears interest at
the Eurodollar rate plus 1.5%. Availability under the facility is subject to,
among other things, the value of the underlying collateral securing it.

F-18
<PAGE>

KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

Debt consists of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Bank notes payable, due in December 1994, bearing interest at
prime (8.5% at December 31, 1995)(a)(b)..................... $ 16,536
Bank notes payable, due in January 1999, bearing interest at
LIBOR + 1.15% (6.81% at December 31, 1996 and 6.9% at
December 31, 1995).......................................... $ 56,254 54,811
Notes payable to finance company and related pension funds,
maturing in 1997 and 1998, bearing interest at rates from
8.5% to 12.7%(b)............................................ 28,447 33,447
Note payable to insurance company, maturing April 2001,
bearing interest at 9.75%(c)................................ 20,162 20,162
Notes payable to insurance company, maturing March 2006,
bearing interest at 9.5%(b)................................. 1,957 10,722
Note payable to insurance company, due April 2002, bearing
interest at 9.25%........................................... 94,095 97,283
Notes payable to underwriter, due in June 1997, bearing
interest at LIBOR + 3% (8.66% at December 31, 1996)(b)...... 21,525
Bank notes payable, due in July 2008, bearing interest at
10%......................................................... 857 896
-------- --------
$223,297 $233,857
======== ========
</TABLE>

All of the debt was repaid on January 31, 1997 from the proceeds of the
Offering and new mortgage financing described in Note 1.

(a) In September 1995, a note payable to a bank of $14,000,000 due in
December 1994 and accrued interest payable of $3,867,000 was retired by a cash
payment of $2,600,000. KG recorded an extraordinary gain of $15,267,000 as a
result of this transaction. The remaining notes payable of $16,536,000 were in
default as of December 31, 1995. Past due interest on the remaining notes,
approximately $5,003,000 at December 31, 1995, is included in accrued
interest. See discussion below under (b) regarding settlement of this loan and
accrued interest.

(b) On June 20, 1996, KG obtained a mortgage loan of $21,525,000 from one of
the underwriters of the Offering referred to in Note 1. Such loan bears
interest at 3% above LIBOR. Fees of $2,616,500 were incurred in connection
with obtaining this loan. The proceeds were used to pay: $2,100,000 as
settlement of bank notes with an aggregate principal balance of $16,536,000
and $5,659,000 of unpaid interest, a note payable to an insurance company with
a principal balance of $8,549,000 and a note payable to a finance company with
a principal balance of $4,600,000. The forgiveness of $20,095,000 has been
recorded as an extraordinary gain.

(c) KG was not, as of December 31, 1996, making the required monthly
principal installments of $239,000 on this note and accrued interest of
$2,385,000 was unpaid as of December 31, 1996. The SeaTac Office Center was
pledged as collateral for the note payable. On October 25, 1996, KG and the
insurance company entered into a forbearance agreement which provided KG with
the exclusive right to purchase the note payable for $16,100,000 on or before
January 31, 1997. A portion of the proceeds from the Offering referred to in
Note 1 were used to purchase this note resulting in an extraordinary gain of
$3,204,000 including the write-off of deferred financing fees of $1,283,000 in
1997.

In 1994, two notes payable to insurance companies, with an aggregate unpaid
balance of $6,782,000 were paid after forgiveness of $1,847,000 of principal
by the lenders, which has been recorded as an extraordinary gain.

F-19
<PAGE>

KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

The notes payable were secured by deeds of trust on all KG's properties and
the assignment of certain rents and leases associated with the related
Properties. The notes were generally due in monthly installments of principal
and interest or interest only. As of December 31, 1996, approximately $37.2
million of notes payable were guaranteed by certain members of KG.

5. FUTURE MINIMUM RENT

The Company has operating leases with tenants that expire at various dates
through 2006 and are either subject to scheduled fixed increases or
adjustments based on the Consumer Price Index. Generally, the leases grant
tenants renewal options. Leases also provide for additional rents based on
certain operating expenses as well as sales volume of certain retail space
within the office buildings. Future minimum rent under operating leases,
excluding tenant reimbursements of certain costs, as of March 31, 1997 and
December 31, 1996, are summarized as follows (in thousands):

<TABLE>
<CAPTION>
MARCH DECEMBER 31,
31, 1997 1996
-------- ------------
<S> <C> <C>
Period Ending December 31,
1997................................................. $ 30,255 $ 32,676
1998................................................. 39,204 31,085
1999................................................. 34,783 27,513
2000................................................. 30,231 23,818
2001................................................. 17,745 17,745
Thereafter........................................... 66,953 41,185
-------- --------
Total.............................................. $219,171 $174,022
======== ========
</TABLE>

The majority of KG's properties are located in Southern California. The
ability of the tenants to honor the terms of their respective leases is
dependent upon the economic, regulatory and social factors affecting the
communities and industries in which the tenants operate.

Rental income from one tenant, Hughes Electronics Corporation's Space &
Communications Company ("Hughes"), was $1,743,000, $10,783,000, $10,817,000
and $11,395,000 for the three months ended March 31, 1997 and the years ended
December 31, 1996, 1995 and 1994, respectively. Future minimum rents from this
tenant are $74,098,000 at December 31, 1996.

In September 1996, KG and Hughes amended the terms of certain of their lease
agreements. Such amendments included the extension of one lease through
October 31, 2001 and a $500,000 allowance for tenant improvements. In
addition, KG agreed to pay Hughes $3,150,000 in consideration for the
cancellation of an option to purchase a 50% equity interest in Kilroy Airport
Center at El Segundo which has been reflected in the statement of operations
as of December 31, 1996. In November 1996, $2,260,000 of the total liability
of $3,650,000 was paid by KI and its stockholders. The remaining balance is
payable in monthly installments of $100,000 commencing in January 1997.

6. STOCK OPTIONS

The Company has established a stock option and incentive plan for the
purpose of attracting and retaining qualified executives and to reward them
for superior performance in achieving the Company's business goals and
enhancing stockholder value. In conjunction with the Offering and as of March
31, 1997, 945,000 of the Company's authorized shares have been granted to
directors, officers and employees and an additional 455,000

F-20
<PAGE>

KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

have been reserved for issuance under such plan. The term of each option is
ten years from the date of grant. Each option vests 33 1/3% per year over
three years beginning on the first anniversary date of the grant and is
exercisable at a price per share equal to the fair market value on the date of
grant.

7. COMMITMENTS AND CONTINGENCIES

Operating Leases--KG has a noncancelable ground lease obligation on Kilroy
Airport Center Long Beach with an initial lease period expiring on July 31,
2035, classified as an operating lease. Further, KG has noncancelable ground
lease obligations on the SeaTac Office Center expiring on December 31, 2032
with an option to extend the leases for an additional 30 years and on one of
the properties purchased in connection with the Offering which expires in
2035. Rentals are subject to adjustments every five years based on changes in
the Consumer Price Index. The minimum commitment under these leases as of
March 31, 1997 and December 31, 1996 are as follows (in thousands):

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Period Ending December 31,
1997................................................ $ 1,081 $ 743
1998................................................ 1,099 761
1999................................................ 1,261 923
2000................................................ 1,394 1,056
2001................................................ 1,394 1,056
Thereafter.......................................... 46,004 34,681
------- -------
Total............................................. $52,233 $39,220
======= =======
</TABLE>

Litigation--KG is subject to various legal proceedings and claims that arise
in the ordinary course of business. These matters are generally covered by
insurance. While the resolution of these matters cannot be predicted with
certainty, management believes that the final outcome of such matters will not
have a material adverse effect on the financial statements of KG.

8. RELATED-PARTY TRANSACTIONS

KI provides management, legal, accounting and general administrative
services pursuant to agreements that provide for management fees based upon a
percentage of gross revenues from the Properties and reimbursement of other
costs incurred by KI in connection with providing the aforementioned services.
Kilroy Company ("KC"), an affiliated entity, provides marketing and leasing
services. Charges by KC include leasing commissions paid to employees and
outside leasing brokers as well as fees to cover its general administrative
costs. Management fees are expensed as incurred and are included in property
expenses. Leasing fees are capitalized and amortized over the life of the
related leases. In the opinion of KG management, the fees paid to KI and KC
for management and leasing services are comparable to the rates which KG would
have paid an independent company to provide similar services. In addition, KI
is a tenant at the Kilroy Airport Center at El Segundo and Kilroy Airport
Center Long Beach, under month-to-month basis leases. Charges for services
provided by KI and KC and rental income from KI are summarized as follows:

<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Management fees......................................... $1,220 $1,343 $1,026
Leasing fees............................................ 1,878 804 1,456
Rental income........................................... 524 528 528
</TABLE>

F-21
<PAGE>

KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

Management fees in 1995 include a fourth quarter charge of $321,000 relating
to management time incurred for the renegotiation of loans.

9. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS

The following disclosure of estimated fair value was determined by KG using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessary to interpret market data and develop the
related estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized upon
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts. Receivables, accounts payable and other
liabilities are carried at amounts that reasonably approximate their fair
value.

The fixed rate mortgage notes payable totaling $145,518,000 and $162,510,000
as of December 31, 1996 and 1995 have fair values of $151,472,000 and
$165,300,000, respectively (excluding prepayment penalties), as estimated
based upon interest rates available for the issuance of debt with similar
terms and remaining maturities. The carrying values of floating rate mortgages
totaling $77,779 and $71,347,000 at December 31, 1996 and 1995, respectively,
reasonably approximate their fair values.

The fair value estimates presented herein are based on information available
to KG management as of December 31, 1996 and 1995. Although KG management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since that date, and current estimates
of fair value may differ significantly from the amounts presented herein.

10. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The accompanying unaudited pro forma information for the three months ended
March 31, 1997 and 1996 are presented as if the Formation Transactions
described in Note 1 to the financial statements had occurred on January 1,
1996. Such pro forma information is based upon the historical consolidated
financial statements of the Company and the KG and should be read in
conjunction with the consolidated and combined financial statements and the
notes thereto.

This unaudited pro forma condensed consolidated information does not purport
to represent what the actual results of operations of the Company would have
been assuming such Formation Transactions had been completed as set forth
above, nor do they purport to predict the results of operations for future
periods.

F-22
<PAGE>

KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

11. SCHEDULE OF RENTAL PROPERTY
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------------------------------------------
COSTS GROSS AMOUNTS AT WHICH
INITIAL COST CAPITALIZED CARRIED AT CLOSE OF PERIOD
--------------------- SUBSEQUENT TO ----------------------------- DATE OF
BUILDINGS AND ACQUISITION/ BUILDING AND ACCUMULATED ACQUIS.(A)/
PROPERTY ENCUMBRANCE LAND IMPROVEMENTS IMPROVEMENT LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTR.(C)
-------- ----------- ------- ------------- ------------- ------- ------------ -------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Kilroy Airport
Center
El Segundo,
California......... $ 94,095 $ 6,141 $ 69,195 $19,701 $ 6,141 $ 88,897 $ 95,038 $ 45,546 1983(C)
Kilroy Airport
Center
Long Beach,
California......... 56,254 47,387 12,531 59,918 59,918 18,034 1989(C)
185/181 S. Douglas
Street
El Segundo,
California(1)...... 21,525 525 4,687 1,845 628 6,429 7,057 3,676 1978(C)
SeaTac Office
Center
Seattle,
Washington......... 20,162 25,993 7,284 33,276 33,276 23,378 1977(C)
2270 E. El Segundo
Boulevard
El Segundo,
California(1)...... 361 100 77 419 119 538 74 1977(C)
2260 E. El Segundo
Boulevard,
El Segundo,
California(1)...... 1,423 4,194 1,236 1,703 5,150 6,853 3,082 1979(C)
2031 E. Mariposa
Avenue,
El Segundo,
California......... 12,000 132 867 2,669 132 3,535 3,667 2,587 1954(C)
3332 E. La Palma
Avenue,
Anaheim,
California......... 7,557 67 1,521 2,869 67 4,390 4,457 3,297 1966(C)
2265 E. El Segundo
Boulevard,
El Segundo,
California(1)...... 1,352 2,028 645 1,571 2,454 4,025 1,610 1978(C)
5115 N. 27th
Avenue,
Phoenix, Arizona... 3,000 125 1,206 (38) 125 1,168 1,293 1,163 1962(C)
1000 E. Ball Road,
Anaheim,
California(2) ..... 5,447 838 1,984 719 838 2,703 3,541 1,737 1979(A)(3)
1956(C)
1230 S. Lewis
Street,
Anaheim,
California(2)...... 395 1,489 1,994 395 3,483 3,878 2,521 1982(C)
12681/12691 Pala
Drive,
Garden Grove,
California......... 3,257 471 2,115 1,210 471 3,325 3,796 2,963 1980(A)
1970(C)
-------- ------- -------- ------- ------- -------- -------- --------
Total........... $223,297 $11,830 $162,766 $52,742 $12,490 $214,847 $227,337 $109,668
======== ======= ======== ======= ======= ======== ======== ========
</TABLE>
- ----
(1) A note payable of $21,525 is secured by the buildings located at 185/181
S. Douglas Street, El Segundo, California, and 2260 and 2270 E. El Segundo
Boulevard, El Segundo, California.

(2) A note payable of $5,447,000 is secured by the buildings located at 1000
E. Ball Road, Anaheim, California and 1230 S. Lewis, Anaheim, California.

(3) The property located at 1000 E. Ball Road, Anaheim, California, was
developed for a third party by the Company in 1956, and acquired by the
Company in 1979.

F-23
<PAGE>

KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate gross cost of property included above for federal income tax
purposes, approximated $227,337,436 as of December 31, 1996.

The following table reconciles the historical cost of the Properties from
January 1, 1994 to December 31, 1996:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year....................... $224,983 $223,821 $222,056
Additions during period--Acquisition,
improvements, etc............................. 2,354 1,162 1,765
-------- -------- --------
Balance, end of year............................. $227,337 $224,983 $223,821
======== ======== ========

The following table reconciles the accumulated depreciation from January 1,
1994 to December 31, 1996:

<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year....................... $101,774 $ 93,475 $ 84,759
Additions during period--Depreciation and
amortization for the year..................... 7,894 8,299 8,716
-------- -------- --------
Balance, end of year............................. $109,668 $101,774 $ 93,475
======== ======== ========
</TABLE>

12. COMMERCIAL REAL ESTATE INVESTMENTS

Subsequent to March 31, 1997, the Company acquired the following properties:

<TABLE>
<CAPTION>
PURCHASE
ACREAGE/SQUARE LOCATION OF PRICE
DESCRIPTION FOOTAGE PROPERTY (MILLIONS)
----------- -------------- ----------- ---------
<S> <C> <C> <C>
Undeveloped land 15 (acres) Foothill Ranch, CA $ 3.2
Undeveloped land 10 (acres) Brea, CA 3.3
Office building 91,000 sq. ft. Calabasas, CA 11.6
Office buildings 115,000 sq. ft. Anaheim, CA 8.0
Office buildings 276,000 sq. ft. Camarillo, CA 24.1
Office buildings 80,000 sq. ft. Torrance, CA 5.7
Office building 67,000 sq. ft. Irvine, CA 8.7
Office building 27,200 sq. ft. Irvine, CA 3.0
Office buildings 125,000 sq. ft. Santa Ana, CA 15.5
Office building 95,000 sq. ft. Santa Monica, CA 31.6
Industrial building 109,000 sq. ft. Anaheim, CA 5.3
Industrial building 158,000 sq. ft. Irvine, CA 12.1
Industrial building 245,000 sq. ft. Irvine, CA 14.1
Industrial buildings 160,000 sq. ft. Irvine, CA 16.2
Industrial buildings 276,000 sq. ft. Brea, CA 16.4
Industrial buildings 276,000 sq. ft. Garden Grove, CA 14.1
Industrial building 64,000 sq. ft. Garden Grove, CA 3.0
Industrial building 83,000 sq. ft. Garden Grove, CA 4.5
Industrial buildings 165,000 sq. ft. Diamond Bar, CA 9.8
Industrial building 154,000 sq. ft. Ontario, CA 4.9
</TABLE>

The acquisitions were funded out of working capital and funds available from
the secured revolving credit facility.

Each of the proposed acquisitions remains subject to the completion of due
diligence procedures and no assurance can be given that the Company will
consummate any of the proposed acquisitions.

F-24
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Kilroy Realty Corporation:

We have audited the accompanying combined historical summary of certain
revenues and certain expenses (defined as operating revenues less direct
operating expenses) of the Acquisition Properties for the year ended
December 31, 1996. This historical summary is the responsibility of the
Acquisition Properties' management. Our responsibility is to express an
opinion on this combined historical summary based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined historical summary of
certain revenues and certain expenses is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the combined historical summary of certain revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the combined historical summary of certain revenues and
certain expenses. We believe our audit provides a reasonable basis for our
opinion.

The accompanying combined historical summary of certain revenues and certain
expenses was prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
Form S-11 Registration Statement of Kilroy Realty Corporation. Material
amounts, described in Note 1 to the historical summary of certain revenues and
certain expenses, that would not be comparable to those resulting from the
proposed future operation of the Acquisition Properties are excluded, and the
summary is not intended to be a complete presentation of the revenues and
expenses of these properties.

In our opinion, such historical summary of certain revenues and certain
expenses presents fairly, in all material respects, the combined summary of
certain revenues and certain expenses, as defined in Note 1, of the
Acquisition Properties for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.

Deloitte & Touche LLP
Los Angeles, California
July 11, 1997

F-25
<PAGE>

ACQUISITION PROPERTIES

COMBINED HISTORICAL SUMMARY OF CERTAIN REVENUES AND CERTAIN EXPENSES

YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)

<TABLE>
<S> <C>
CERTAIN REVENUES:
Rental income (Note 2)................................................ $7,709
Tenant reimbursements................................................. 924
Other income.......................................................... 473
------
Total certain revenues.............................................. 9,106
------
CERTAIN EXPENSES:
Property expenses (Note 3)............................................ 1,700
Real estate taxes..................................................... 524
Ground rent (Note 4).................................................. 338
General and administrative............................................ 257
------
Total certain expenses.............................................. 2,819
------
CERTAIN REVENUES IN EXCESS OF CERTAIN EXPENSES.......................... $6,287
======
</TABLE>

See notes to combined historical summary of certain revenues and certain
expenses.

F-26
<PAGE>

ACQUISITION PROPERTIES

NOTES TO COMBINED HISTORICAL SUMMARY OF CERTAIN REVENUES
AND CERTAIN EXPENSES

YEAR ENDED DECEMBER 31, 1996

1. BASIS OF PRESENTATION

The combined historical summary of certain revenues and certain expenses
relates to the operations of Westlake Plaza Centre, Long Beach Phase I, La
Palma Business Center and the Monarch Building (collectively, the "Acquisition
Properties"), which were acquired by Kilroy Realty Corporation (the "Company")
from unaffiliated third parties as follows:

<TABLE>
<CAPTION>
DATE OF
PROPERTY LOCATION ACQUISITION
-------- -------- -----------
<S> <C> <C>
Westlake Plaza Centre.................. Thousand Oaks, California 1/31/97
Long Beach Phase I..................... Long Beach, California 1/31/97
La Palma Business Center............... Anaheim, California 1/31/97
Monarch Building....................... Garden Grove, California 12/19/96
</TABLE>

Operating revenues and operating expenses are presented on the accrual basis
of accounting. The accompanying historical summary of certain revenues and
certain expenses is not representative of the actual operations for the period
presented, as certain revenues and certain expenses that may not be comparable
to the revenues and expenses expected to be incurred by the Company in the
proposed future operation of the Acquisition Properties have been excluded.
Revenues excluded consist of termination fees and interest income. Expenses
excluded consist of interest, depreciation, professional fees and other costs
not directly related to the future operations of the Acquisition Properties.

2. OPERATING LEASES

Rental income is recognized on the accrual method as earned, which
approximates recognition on a straight-line basis.

The Acquisition Properties are leased to tenants under operating leases with
expiration dates extending to the year 2009. Future minimum rents under the
Acquisition Property's office leases, excluding tenant reimbursements as of
December 31, 1996, are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997.............................................................. $ 8,244
1998.............................................................. 8,119
1999.............................................................. 7,270
2000.............................................................. 6,413
2001.............................................................. 6,157
Thereafter........................................................ 19,611
-------
Total........................................................... $55,814
=======
</TABLE>

3. RELATED-PARTY TRANSACTIONS

Property expenses include $181,000 of management fees for the year ended
December 31, 1996 related to Long Beach Phase I, which was paid to an
affiliate of the Company.

F-27
<PAGE>

ACQUISITION PROPERTIES

NOTES TO COMBINED HISTORICAL SUMMARY OF CERTAIN REVENUES
AND CERTAIN EXPENSES--(CONTINUED)

4. COMMITMENTS

Long Beach Phase I is located on land that is under a noncancelable ground
lease which expires in 2035 and is classified as an operating lease. Minimum
annual lease payments as of December 31, 1996 are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997.............................................................. $ 338
1998.............................................................. 338
1999.............................................................. 338
2000.............................................................. 338
2001.............................................................. 338
Thereafter........................................................ 11,323
-------
Total........................................................... $13,013
=======
</TABLE>

F-28
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Kilroy Realty Corporation:

We have audited the accompanying combined historical summary of certain
revenues and certain expenses (defined as operating revenues less direct
operating expenses) of the Acquired Properties and Pending Acquisition (as
described in Note 1) (the "Properties") for the year ended December 31, 1996.
This combined historical summary is the responsibility of the respective
Properties' management. Our responsibility is to express an opinion on this
combined historical summary of certain revenue and certain expenses based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to
obtain reasonable assurance about whether the combined historical summary of
certain revenues and certain expenses is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the combined historical summary of certain revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the combined historical summary of certain revenues and
certain expenses. We believe that our audit provides a reasonable basis for
our opinion.

The accompanying combined historical summary of certain revenues and certain
expenses was prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
Registration Statement on Form S-11 of Kilroy Realty Corporation. Material
amounts, described in Note 1 to the combined historical summary of certain
revenues and certain expenses, that would not be comparable to those resulting
from the proposed future operation of the Properties are excluded, and the
historical summary is not intended to be a complete presentation of the
revenues and expenses of these properties.

In our opinion, such combined historical summary of certain revenues and
certain expenses presents fairly, in all material respects, the combined
certain revenues and certain expenses, as defined above, of the Properties for
the year ended December 31, 1996 in conformity with generally accepted
accounting principles.

Our audit was conducted for the purpose of forming an opinion on the basic
combined historical summary of certain revenues and certain expenses taken as
a whole. The additional combining information is presented for the purpose of
additional analysis of the basic combined historical summary of certain
revenues and certain expenses rather than to present the results of operations
of the individual properties and is not a required part of the basic combined
historical summary of certain revenues and certain expenses. This additional
combining information is the responsibility of the respective Properties'
management. Such information has been subjected to auditing procedures applied
in our audit of the basic combined historical summary of certain revenues and
certain expenses for the year ended December 31, 1996 and, in our opinion, is
fairly stated in all material aspects when considered in relation to the basic
combined historical summary of certain revenues and expenses taken as a whole.

Deloitte & Touche LLP
Los Angeles, California
July 11, 1997

F-29
<PAGE>

ACQUIRED PROPERTIES AND PENDING ACQUISITION

COMBINED HISTORICAL SUMMARIES OF CERTAIN REVENUES AND CERTAIN EXPENSES

THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) AND THE
YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED DECEMBER
MARCH 31, 31,
1997 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
CERTAIN REVENUES:
Rental revenues (Note 2)............................ $4,920,578 $19,066,073
Tenant reimbursements............................... 645,932 2,523,650
Other income........................................ 2,962 94,257
---------- -----------
Total revenues.................................... 5,569,473 21,683,980
---------- -----------
CERTAIN EXPENSES:
Property expenses................................... 759,221 3,329,460
Real estate taxes................................... 303,972 1,114,079
General and administrative.......................... 34,121 88,534
---------- -----------
Total expenses.................................... 1,097,314 4,532,073
---------- -----------
CERTAIN REVENUES IN EXCESS OF CERTAIN EXPENSES........ $4,472,158 $17,151,907
========== ===========
</TABLE>

See notes to combined statements of revenues and certain expenses.

F-30
<PAGE>

ACQUIRED PROPERTIES AND PENDING ACQUISITION

NOTES TO COMBINED HISTORICAL SUMMARIES OF CERTAIN REVENUES
AND CERTAIN EXPENSES

THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) AND THE
YEAR ENDED DECEMBER 31, 1996

1. BASIS OF PRESENTATION

The combined historical summaries of certain revenues and certain expenses
relate to the operations of the following properties which have been, or are
expected to be, acquired by Kilroy Realty Corporation (the Company) from
unaffiliated parties.

<TABLE>
<CAPTION>
DATE OF
PROPERTY LOCATION ACQUISITION
-------- -------- -----------
<S> <C> <C>
701-704 East Ball Road.................. Anaheim, California 4/30/97
26541 Agoura Road....................... Calabasas, California 4/30/97
5325 Hunter Avenue...................... Anaheim, California 5/1/97
17150 Von Karman........................ Irvine, California 5/5/97
Mission Oaks Technology Center.......... Camarillo, California 5/22/97
Industrial and Office Portfolio*........ Garden Grove, California 6/3/97
Pacifica & Warren Center................ Irvine, California 6/18/97
Sony Arboretum.......................... Santa Monica, California 6/30/97
2501 Pullman Avenue..................... Santa Ana, California 7/1/97
12400 Industry Street................... Garden Grove 7/10/97
7421 Orangewood Avenue.................. Garden Grove, California 7/16/97
Walnut Park Business Center............. Walnut, California **
</TABLE>
- --------
* The Industrial and Office Portfolio is comprised of one industrial building
in Ontario, California, seven industrial buildings in Brea, California, six
industrial buildings in Garden Grove, California, one office building in
Torrance, California, and ten acres of land in Brea, California.
** The Company has entered into a contract to acquire this property and
anticipates consummation of this acquisition prior to August 31, 1997.

In addition to the properties identified above, the Company acquired
buildings at 9401 and 9451 Toledo Way, Irvine, on July 2, 1997. As these
buildings were owner occupied as of the date of acquisition the Combined
Historical Summaries of Certain Revenues and Certain Expenses do not reflect
the operations of these buildings. Commensurate with the acquisition of these
buildings a lease was executed between the Company and the former owner. The
future minimum rents due under such lease have been included in the table in
Note 2.

Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying historical summaries of certain
revenues and certain expenses are not representative of the actual operations
for the periods presented as certain revenues and expenses which may not be
comparable to the revenues and expenses expected to be incurred by the Company
in the proposed future operations of the properties have been excluded.
Revenues and expenses excluded consist of certain other income, interest,
depreciation and amortization and professional fees not directly related to
the future operations of the properties.

F-31
<PAGE>

ACQUIRED PROPERTIES AND PENDING ACQUISITIONS

NOTES TO COMBINED HISTORICAL SUMMARIES OF CERTAIN REVENUES
AND CERTAIN EXPENSES--(CONTINUED)

2. OPERATING LEASES

The properties are leased to tenants under operating leases with expiration
dates extending to the year 2008. Future minimum rentals under noncancelable
operating leases, excluding tenant reimbursements of operating expenses as of
December 31, 1996 are approximately as follows:

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31:
------------
<S> <C>
1997........................................................ $ 18,309,766
1998........................................................ 17,336,432
1999........................................................ 14,376,022
2000........................................................ 12,496,153
2001........................................................ 7,138,991
Thereafter.................................................. 35,109,765
------------
Total..................................................... $104,767,128
============
</TABLE>

Rental revenues from two tenants, Sony Music Entertainment and M/R Systems
Corporation, were $2,595,482 and $2,397,000, respectively, for the year ended
December 31, 1996. Future minimum rents from these tenants are $32,387,329 and
$11,371,344, respectively, at December 31, 1996.

F-32
<PAGE>

ACQUIRED PROPERTIES AND PENDING ACQUISITIONS

ADDITIONAL COMBINING INFORMATION OF CERTAIN REVENUES AND CERTAIN EXPENSES

THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)

<TABLE>
<CAPTION>
MISSION PACIFICA
701-704 26541 5325 17150 OAKS INDUSTRIAL & 2501 12400 7421
EAST BALL AGOURA HUNTER VON TECHNOLOGY AND OFFICE WARREN SONY PULLMAN INDUSTRY ORANGEWOOD
ROAD ROAD AVENUE KARMAN CENTER PORTFOLIO TECH ARBORETUM AVENUE STREET AVENUE
--------- -------- -------- -------- ---------- ---------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CERTAIN REVENUES:
Rental
revenues........ $237,105 $490,210 $109,012 $285,786 $599,400 $1,010,235 $552,186 $ 770,736 $400,266 $80,250 $143,730
Tenant
reimbursements.. 5,996 136,482 13,905 81,306 39,962 296,213
Other income.... 105 578 1,903 20,209
-------- -------- -------- -------- -------- ---------- -------- ---------- -------- ------- --------
Total certain
revenues........ 243,206 627,271 109,012 299,691 599,400 1,091,541 594,051 1,066,949 420,475 80,250 143,730
-------- -------- -------- -------- -------- ---------- -------- ---------- -------- ------- --------
CERTAIN EXPENSES:
Property
expenses........ 61,981 96,435 2,676 5,301 107,298 169,468 218,258 55,337
Real estate
taxes........... 15,626 46,112 84,270 50,146 63,051 22,044
General and
administrative.. 8,988 16,488 3,304
-------- -------- -------- -------- -------- ---------- -------- ---------- -------- ------- --------
Total expenses.. 77,607 142,547 11,664 5,301 191,568 219,614 297,797 80,685
-------- -------- -------- -------- -------- ---------- -------- ---------- -------- ------- --------
CERTAIN REVENUES
IN EXCESS OF
CERTAIN
EXPENSES......... $165,599 $484,723 $ 97,348 $294,390 $599,400 $ 899,973 $374,437 $ 769,152 $339,790 $80,250 $143,730
======== ======== ======== ======== ======== ========== ======== ========== ======== ======= ========
<CAPTION>
WALNUT
PARK
BUSINESS
CENTER TOTAL
-------- ----------
<S> <C> <C>
CERTAIN REVENUES:
Rental
revenues........ $241,662 $4,920,578
Tenant
reimbursements.. 51,859 645,932
Other income.... 376 2,962
-------- ----------
Total certain
revenues........ 293,897 5,569,473
-------- ----------
CERTAIN EXPENSES:
Property
expenses........ 42,467 759,221
Real estate
taxes........... 22,723 303,972
General and
administrative.. 5,341 34,121
-------- ----------
Total expenses.. 70,531 1,097,314
-------- ----------
CERTAIN REVENUES
IN EXCESS OF
CERTAIN
EXPENSES......... $223,366 $4,472,158
======== ==========
</TABLE>

See notes to combined historical summaries of certain revenues and certain
expenses.

F-33
<PAGE>

ACQUIRED PROPERTIES AND PENDING ACQUISITIONS

ADDITIONAL COMBINING INFORMATION OF CERTAIN REVENUES AND CERTAIN EXPENSES

YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
MISSION
701-704 26541 5325 OAKS INDUSTRIAL PACIFICA & 2501 12400
EAST BALL AGOURA HUNTER 17150 TECHNOLOGY AND OFFICE WARREN SONY PULLMAN INDUSTRY
ROAD ROAD AVENUE VON KARMAN CENTER PORTFOLIO TECH ARBORETUM AVENUE STREET
--------- ---------- -------- ---------- ---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CERTAIN REVENUES:
Rental
revenues........ $ 998,870 $1,576,823 $602,266 $1,063,352 $2,397,600 $4,078,464 $2,079,145 $2,852,366 $1,601,065 $321,000
Tenant
reimbursements.. 44,507 521,023 52,479 207,094 209,986 1,201,293 77,581
Other income.... 4,712 68,396 5,146 878 14,839
--------- ---------- -------- ---------- ---------- ---------- ---------- ---------- ---------- --------
Total certain
revenues........ 1,048,089 2,166,242 607,412 1,115,831 2,397,600 4,286,436 2,303,970 4,053,659 1,678,646 321,000
--------- ---------- -------- ---------- ---------- ---------- ---------- ---------- ---------- --------
CERTAIN EXPENSES:
Property
expenses........ 157,453 863,137 13,815 21,419 296,930 510,156 909,698 360,534
Real estate
taxes........... 62,503 84,421 327,808 200,558 290,907 88,442
General and
administrative.. 10,925 8,886 4,040 8,291 40,186 7,014
--------- ---------- -------- ---------- ---------- ---------- ---------- ---------- ---------- --------
Total expenses.. 219,956 958,483 22,701 25,459 624,738 719,005 1,240,791 455,990
--------- ---------- -------- ---------- ---------- ---------- ---------- ---------- ---------- --------
CERTAIN REVENUES
IN EXCESS OF
CERTAIN
EXPENSES......... $ 828,133 $1,207,759 $584,711 $1,090,372 $2,397,600 $3,661,698 $1,584,965 $2,812,868 $1,222,656 $321,000
========= ========== ======== ========== ========== ========== ========== ========== ========== ========
<CAPTION>
WALNUT
7421 PARK
ORANGEWOOD BUSINESS
AVENUE CENTER TOTAL
---------- --------- -----------
<S> <C> <C> <C>
CERTAIN REVENUES:
Rental
revenues........ $574,920 $ 920,202 $19,066,073
Tenant
reimbursements.. 209,687 2,523,650
Other income.... 286 94,257
---------- --------- -----------
Total certain
revenues........ 574,920 1,130,175 21,683,980
---------- --------- -----------
CERTAIN EXPENSES:
Property
expenses........ 196,318 3,329,460
Real estate
taxes........... 59,440 1,114,079
General and
administrative.. 9,192 88,534
---------- --------- -----------
Total expenses.. 264,950 4,532,073
---------- --------- -----------
CERTAIN REVENUES
IN EXCESS OF
CERTAIN
EXPENSES......... $574,920 $ 865,225 $17,151,907
========== ========= ===========
</TABLE>

See notes to combined historical summaries of certain revenues and certain
expenses.

F-34
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS,
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY
THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT ANY INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.

---------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 23
The Company.............................................................. 39
Use of Proceeds.......................................................... 45
Price Range of Common Stock and Distribution History..................... 46
Capitalization........................................................... 48
Selected Financial Data.................................................. 49
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 52
Business and Properties.................................................. 59
Policies with Respect to Certain Activities.............................. 119
Management............................................................... 124
Certain Relationships and Related Transactions........................... 133
Principal Stockholders................................................... 135
Formation and Structure of the Company................................... 136
Description of Capital Stock............................................. 139
Certain Provisions of Maryland Law and of the Articles of Incorporation
and Bylaws.............................................................. 143
Partnership Agreement of the Operating Partnership....................... 148
Description of Indebtedness.............................................. 152
Shares Eligible for Future Sale.......................................... 154
Federal Income Tax Consequences.......................................... 156
Other Tax Consequences................................................... 169
ERISA Considerations..................................................... 169
Underwriting............................................................. 171
Legal Matters............................................................ 173
Experts.................................................................. 173
Additional Information................................................... 173
Glossary................................................................. 175
Index to Financial Statements............................................ F-1
</TABLE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10,000,000 Shares

[LOGO OF KILROY REALTY CORPORATION]

KILROY REALTY CORPORATION

Common Stock

--------------
PROSPECTUS
--------------

PRUDENTIAL SECURITIES INCORPORATED

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

MERRILL LYNCH & CO.

J.P. MORGAN & CO.

SMITH BARNEY INC.

, 1997

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee, NYSE filing fee, the National Association of
Securities Dealers, Inc. ("NASD") filing fee, all amounts are estimates.

<TABLE>
<S> <C>
SEC Registration Fee................................................. $89,735
NYSE Filing Fee...................................................... 65,000
Printing............................................................. 250,000
Legal Fees and Expenses..............................................
Accounting Fees and Expenses.........................................
Registrar and Transfer Agent Fees and Expenses....................... 5,000
Blue Sky Fees and Expenses........................................... 5,000
NASD Filing Fee...................................................... 30,113
Miscellaneous Expenses............................................... 50,000
-------
Total..............................................................
=======
</TABLE>

All of the costs identified above will be paid by the Company.

ITEM 32. SALES TO SPECIAL PARTIES.

See Item 33.

ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.

In consideration of the transfer of the Properties and certain other assets
to the Company on January 31, 1997, an aggregate of 2,652,374 Units were
issued to KI, Kilroy Technologies Company, LLC, a California limited liability
company, John B. Kilroy, Sr., John B. Kilroy, Jr., Patrice Bouzaid, Susan
Hahn, Anne McCahon and Dana Pantuso, the daughters of John B. Kilroy, Sr., and
Marshall L. McDaniel, a long-time employee of KI, each of which transferred
interests in the Properties and certain other assets to the Company. The book
value to the Unitholders of the assets contributed to the Operating
Partnership was a negative $113.2 million and the value of the Units
representing limited partnership interests in the Operating Partnership
received by the Unitholders is $61.0 million, which assumes a Unit value equal
to the IPO price of $23.00 per share. No independent valuations or appraisals
of the Properties were obtained in connection with the Formation Transactions.
All of such persons irrevocably committed to the exchange of Units for the
contribution of their respective interests in the Properties on November 3,
1996, prior to the filing of the registration statement on Form S-11 in
connection with the IPO, and are "accredited investors" as defined under
Regulation D. The issuance of such Units was effected in reliance upon an
exemption from registration under Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering. See "Formation and
Structure of the Company."

In September 1996, 50 shares of Common Stock were issued to John B. Kilroy,
Sr. for an aggregate purchase price of $1,000. The issuance of such shares was
effected in reliance upon an exemption from registration under Section 4(2) of
the Securities Act as a transaction by an issuer not involving a public
offering. In addition, on January 31, 1997, 100,000 restricted shares of
Common Stock were issued to Richard E. Moran Jr. against the payment of $1,000
in cash therefor pursuant to the terms of his employment agreement. The
issuance of such shares was effected in reliance upon an exemption from
registration under Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering.

In connection with the purchase and sale of 111 Pacifica and 184-220
Technology Drive, in Irvine, California, pursuant to the Purchase and Sale
Agreement, Contribution Agreement and Joint Escrow Instructions, dated May 12,
1997, by and between Shidler West Acquisition Company, LLC and Kilroy Realty,
L.P., as

II-1
<PAGE>

amended by the First Amendment to the Purchase Agreement, dated June 6, 1997,
and the Second Amendment to the Purchase Agreement, dated June 12, 1997 (such
purchase agreement, as so amended, the "Purchase Agreement"), the Company
issued an aggregate of 165,102 Units to four accredited investors in partial
consideration for the purchase price therefor. The Units were issued upon
reliance on the exemption from registration provided by Regulation D under the
Securities Act as a transaction by an issuer not involving a public offering.

ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 2-418 of the MGCL permits a corporation to indemnify its directors
and officers and certain other parties against judgments, penalties, fines,
settlements, and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities unless it is established that (i) the act
or omission of the director or officer was material to the matter giving rise
to the proceeding and (a) was committed in bad faith or (b) was the result of
active and deliberate dishonesty; (ii) the director or officer actually
received an improper personal benefit in money, property or services; or (iii)
in the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. Indemnification may be
made against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by the director or officer in connection with the proceeding;
provided, however, that if the proceeding is one by or in the right of the
corporation, indemnification may not be made with respect to any proceeding in
which the director or officer has been adjudged to be liable to the
corporation. In addition, a director or officer may not be indemnified with
respect to any proceeding charging improper personal benefit to the director or
officer, whether or not involving action in the director's or officer's
official capacity, in which the director or officer was adjudged to be liable
on the basis that personal benefit was received. The termination of any
proceeding by conviction, or upon a plea of nolo contendere or its equivalent,
or an entry of any order of probation prior to judgment, creates a rebuttable
presumption that the director or officer did not meet the requisite standard of
conduct required for indemnification to be permitted.

In addition, Section 2-418 of the MGCL requires that, unless prohibited by
its charter, a corporation indemnify any director or officer who is made a
party to any proceeding by reason of service in that capacity against
reasonable expenses incurred by the director or officer in connection with the
proceeding, in the event that the director or officer is successful, on the
merits or otherwise, in the defense of the proceeding.

The Company's Charter and Bylaws provide in effect for the indemnification by
the Company of the directors and officers of the Company to the fullest extent
permitted by applicable law. The Company has purchased directors' and officers'
liability insurance for the benefit of its directors and officers.

ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.

Not applicable.

ITEM 36. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.

(a)(1) Financial Statements

KILROY REALTY CORPORATION PRO FORMA (UNAUDITED):
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1997
Notes to Pro Forma Condensed Consolidated Balance Sheet
Pro Forma Condensed Consolidated Statements of Operations for the three
months ended March 31, 1997 and the year ended December 31, 1996
Notes to Pro Forma Condensed Consolidated Statements of Operations

KILROY REALTY CORPORATION AND KILROY GROUP
Independent Auditors' Report
Consolidated Balance Sheet as of March 31, 1997 (Unaudited) and Combined
Balance Sheets as of December 31, 1996 and 1995

II-2
<PAGE>

Consolidated Statement of Operations for the period February 1, 1997 to
March 31, 1997 (Unaudited) and Combined Statements of Operations for the
period January 1, 1997 to January 31, 1997 (Unaudited), for the three
months ended March 31, 1996 (Unaudited) and the three years ended December
31, 1996, 1995 and 1994
Consolidated Statement of Stockholders' Equity for the three months ended
March 31, 1997 (Unaudited) and Combined Statements of Stockholders' Equity
for the three years ended December 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the three months ended March 31,
1997 (Unaudited) and Combined Statements of Cash Flows, for the three
months ended March 31, 1996 (Unaudited) for the three years ended December
31, 1996, 1995 and 1994
Notes to Consolidated and Combined Financial Statements

ACQUISITION PROPERTIES
Independent Auditors' Report
Combined Historical Summary of Certain Revenues and Certain Expenses for
the year ended December 31, 1996
Notes to Combined Historical Summary of Certain Revenues and Certain
Expenses

ACQUIRED PROPERTIES AND PENDING ACQUISITION
Independent Auditors' Report
Combined Historical Summaries of Certain Revenues and Certain Expenses for
the three months ended March 31, 1997 (Unaudited) and the year ended
December 31, 1996
Notes to Combined Historical Summaries of Certain Revenues and Certain
Expenses
Additional Combining Information of Certain Revenues and Certain Expenses
for the three months ended March 31, 1997 (Unaudited) and the year ended
December 31, 1996

(a)(2) Financial Statement Schedule

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED
DECEMBER 31, 1996

(b) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
**1.1 Form of Underwriting Agreement.
3.1 Articles of Amendment and Restatement of the Registrant.(1)
3.2 Amended and Restated Bylaws of the Registrant.(1)
3.3 Form of Certificate for Common Stock of the Registrant.(1)
**5.1 Opinion of Ballard Spahr Andrews & Ingersoll regarding the validity of
the Common Stock being registered.
**8.1 Opinion of Latham & Watkins regarding certain federal income tax
matters.
10.1 Amended and Restated Agreement of Limited Partnership of Kilroy
Realty, L.P.(1)
10.2 Form of Registration Rights Agreement among the Registrant and the
persons named therein.(1)
10.3 Omnibus Agreement, dated as of October 30, 1996, by and among Kilroy
Realty, L.P. and the parties named therein.(1)
10.4 Supplemental Representations, Warranties and Indemnity Agreement by
and among Kilroy Realty, L.P. and the parties named therein.(1)
10.5 Pledge Agreement by and among Kilroy Realty, L.P., John B. Kilroy,
Sr., John B. Kilroy, Jr. and Kilroy Industries.(1)
10.6 1997 Stock Option and Incentive Plan of the Registrant and Kilroy
Realty, L.P.(1)
10.7 Form of Indemnity Agreement of the Registrant and Kilroy Realty, L.P.
with certain officers and directors.(1)
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.8 Lease Agreement, dated January 24, 1989, by and between Kilroy Long
Beach Associates and the City of Long Beach for Kilroy Long Beach
Phase I.(1)
10.9 First Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase I.(1)
10.10 Lease Agreement, dated July 17, 1985, by and between Kilroy Long Beach
Associates and the City of Long Beach for Kilroy Long Beach Phase
III.(1)
10.11 Lease Agreement, dated April 21, 1988, by and between Kilroy Long
Beach Associates and the Board of Water Commissioners of the City of
Long Beach, acting for and on behalf of the City of Long Beach, for
Long Beach Phase IV.(1)
10.12 Lease Agreement, dated December 30, 1988, by and between Kilroy Long
Beach Associates and the City of Long Beach for Kilroy Long Beach
Phase II.(1)
10.13 First Amendment to Lease, dated January 24, 1989, by and between
Kilroy Long Beach Associates and the City of Long Beach for Kilroy
Long Beach Phase III.(1)
10.14 Second Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase III.(1)
10.15 First Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase II.(1)
10.16 Third Amendment to Lease Agreement, dated October 10, 1994, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase III.(1)
10.17 Development Agreement by and between Kilroy Long Beach Associates and
the City of Long Beach.(1)
10.18 Amendment No. 1 to Development Agreement by and between Kilroy Long
Beach Associates and the City of Long Beach.(1)
10.19 Ground Lease by and between Frederick Boysen and Ted Boysen and Kilroy
Industries, dated May 15, 1969, for SeaTac Office Center.(1)
10.20 Amendment No. 1 to Ground Lease and Grant of Easement, dated April 27,
1973, among Frederick Boysen and Dorothy Boysen, Ted Boysen and Rose
Boysen and Sea/Tac Properties.(1)
10.21 Amendment No. 2 to Ground Lease and Grant of Easement, dated May 17,
1977, among Frederick Boysen and Dorothy Boysen, Ted Boysen and Rose
Boysen and Sea/Tac Properties.(1)
10.22 Airspace Lease, dated July 10, 1980, by and among the Washington State
Department of Transportation, as lessor, and Sea Tac Properties, Ltd.
and Kilroy Industries, as lessee.(1)
10.23 Lease, dated April 1, 1980, by and among Bow Lake, Inc., as lessor,
and Kilroy Industries and SeaTac Properties, Ltd., as lessees for
Sea/Tac Office Center.(1)
10.24 Amendment No. 1 to Ground Lease, dated September 17, 1990, between Bow
Lake, Inc., as lessor, and Kilroy Industries and Sea/Tac Properties,
Ltd., as lessee.(1)
10.25 Amendment No. 2 to Ground Lease, dated March 21, 1991, between Bow
Lake, Inc., as lessor, and Kilroy Industries and Sea/Tac Properties,
Ltd., as lessee.(1)
10.26 Property Management Agreement between Kilroy Realty Finance
Partnership, L.P. and Kilroy Realty, L.P.(1)
10.27 Form of Environmental Indemnity Agreement.(1)
10.28 Option Agreement by and between Kilroy Realty, L.P. and Kilroy Airport
Imperial Co.(1)
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.29 Option Agreement by and between Kilroy Realty, L.P. and Kilroy
Calabasas Associates.(1)
10.30 Employment Agreement between the Registrant and John B. Kilroy, Jr.(1)
10.31 Employment Agreement between the Registrant and Richard E. Moran
Jr.(1)
10.32 Employment Agreement between the Registrant and Jeffrey C. Hawken.(1)
10.33 Employment Agreement between the Registrant and C. Hugh Greenup.(1)
10.34 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Sr.(1)
10.35 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Jr.(1)
10.36 License Agreement by and among the Registrant and the other persons
named therein.(1)
10.37 Form of Indenture of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of Leases, Rents
and Security Deposits.(1)
10.38 Form of Mortgage Note.(1)
10.39 Form of Indemnity Agreement.(1)
10.40 Form of Assignment of Leases, Rents and Security Deposits.(1)
10.41 Form of Credit Agreement.(1)
10.42 Form of Variable Interest Rate Indenture of Mortgage, Deed of Trust,
Security Agreement, Financing Statement, Fixture Filing and Assignment
of Leases and Rents.(1)
10.43 Form of Environmental Indemnity Agreement.(1)
10.44 Form of Assignment, Rents and Security Deposits.(1)
*10.45 Revolving Credit Agreement, dated as of May 21, 1997, among Kilroy
Realty, L.P., Morgan Guaranty Trust Company of New York and the Banks
listed herein.
10.46 Form of Mortgage, Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment of Leases and Rents.(1)
10.47 Assignment of Leases, Rents and Security Deposits.(1)
10.48 Purchase and Sale Agreement and Joint Escrow Instructions, dated April
30, 1997, by and between Mission Land Company, Mission-Vacaville, L.P.
and Kilroy Realty, L.P.(2)
10.49 Agreement of Purchase and Sale and Joint Escrow Instructions, dated
April 30, 1997, by and between Camarillo Partners and Kilroy Realty,
L.P.(2)
10.50 Purchase and Sale Agreement and Escrow Instructions, dated May 5,
1997, by and between Kilroy Realty, L.P. and Pullman Carnegie
Associates.(4)
10.51 Amendment to Purchase and Sale Agreement and Escrow Instructions,
dated June 27, 1997, by and between Pullman Carnegie Associates and
Kilroy Realty, L.P.(4)
10.52 Purchase and Sale Agreement, Contribution Agreement and Joint Escrow
Instructions, dated May 12, 1997, by and between Shidler West
Acquisition Company, LLC and Kilroy Realty, L.P.(3)
10.53 First Amendment to Purchase and Sale Agreement, Contribution Agreement
and Joint Escrow Instructions, dated June 6, 1997, between Kilroy
Realty, L.P. and Shidler West Acquisition Company, L.L.C.(3)
10.54 Second Amendment to Purchase and Sale Agreement, Contribution
Agreement and Joint Escrow Instructions, dated June 12, 1997, by and
between Shidler West Acquisition Company, LLC and Kilroy Realty,
L.P.(3)
10.55 Agreement of Purchase and Sale and Joint Escrow Instructions, dated
June 12, 1997, by and between Mazda Motor of America, Inc. and Kilroy
Realty, L.P.(4)
</TABLE>

II-5
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.56 Amendment to Agreement of Purchase and Sale and Joint Escrow
Instructions, dated June 30, 1997, by and between Mazda Motor of
America, Inc. and Kilroy Realty, L.P.(4)
10.57 Agreement for Purchase and Sale of 2100 Colorado Avenue, Santa Monica,
California, dated June 16, 1997, by and between Santa Monica Number
Seven Associates L.P. and Kilroy Realty L.P.(4)
**23.1 Consent of Latham & Watkins (filed with Exhibit 8.1).
**23.2 Consent of Ballard Spahr Andrews & Ingersoll (filed with Exhibit 5.1).
*23.3 Consent of Deloitte & Touche LLP.
*23.4 Consent of Robert Charles Lesser & Co.
*24.1 Power of Attorney (included on the signature page to the Registration
Statement).
</TABLE>
- --------
* Filed herewith.
** To be filed by amendment.
(1) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-15553) as declared effective on January 28, 1997 and incorporated
herein by reference.
(2) Previously filed as Exhibit 10.11 and 10.12, respectively, to the Current
Report on Form 8-K (No. 1-12675) as filed on June 5, 1997 and incorporated
herein by reference.
(3) Previously filed as Exhibit 10.57, 10.58 and 10.59, respectively, to the
Current Report on Form 8-K (No. 1-12675) as filed on July 3, 1997 and
incorporated herein by reference.
(4) Previously filed as Exhibit 10.54, 10.59, 10.60, 10.61 and 10.62,
respectively, to the Current Report on Form 8-K (No. 1-12675) as filed on
July 15, 1997 and incorporated herein by reference.

ITEM 37. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the provisions described under Item 33
above, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the successful defense of
any action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

The Registrant hereby undertakes:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and contained in the form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-6
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY
AUTHORIZED IN THE CITY OF EL SEGUNDO, STATE OF CALIFORNIA, ON THE 28TH DAY OF
JULY, 1997.

Kilroy Reality Corporation

/s/ Richard E. Moran Jr.
By: _________________________________
RICHARD E. MORAN JR.
Executive Vice President, Chief
Financial
Officer and Secretary

Date: July 28, 1997

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS JOHN B. KILROY, JR., RICHARD E. MORAN JR.,
JEFFREY C. HAWKEN, TYLER H. ROSE AND ANN MARIE WHITNEY, AND EACH OF THEM, HIS
TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF SUBSTITUTION
AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL
CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE
AMENDMENTS) TO THIS REGISTRATION STATEMENT, AS WELL AS ANY REGISTRATION
STATEMENT (OR AMENDMENT THERETO) RELATED TO THIS REGISTRATION STATEMENT THAT IS
TO BE EFFECTIVE UPON FILING PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT,
AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND ALL DOCUMENTS IN
CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING
UNTO SAID ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND
AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE OR NECESSARY
TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS
HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID
ATTORNEYS-IN-FACT AND AGENTS, OR ANY OF THEM, OR THEIR OR HIS SUBSTITUTE OR
SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF
OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

SIGNATURE TITLE DATE

/s/ John B. Kilroy, Sr. Chairman of the July 28, 1997
- ------------------------------------- Board and Director
JOHN B. KILROY, SR.

/s/ John B. Kilroy, Jr. President, Chief July 28, 1997
- ------------------------------------- Executive Officer
JOHN B. KILROY, JR. and Director
(Principal
Executive Officer)

II-7
<PAGE>

SIGNATURE TITLE DATE

/s/ Richard E. Moran Jr. Executive Vice July 28, 1997
- ------------------------------------- President, Chief
RICHARD E. MORAN, JR. Financial Officer
and Secretary
(Principal
Financial Officer)

/s/ Ann Marie Whitney Vice President and July 28, 1997
- ------------------------------------- Controller
ANN MARIE WHITNEY (Principal
Accounting Officer)

/s/ William P. Dickey Director July 28, 1997
- -------------------------------------
WILLIAM P. DICKEY

/s/ Matthew J. Hart Director July 28, 1997
- -------------------------------------
MATTHEW J. HART

/s/ Dale F. Kinsella Director July 28, 1997
- -------------------------------------
DALE F. KINSELLA

II-8
<PAGE>

KILROY GROUP

SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS

EACH OF THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
CHARGED TO
BALANCE AT COSTS AND BALANCE
BEGINNING EXPENSES OR AT END
OF PERIOD RENTAL REVENUE DEDUCTIONS OF PERIOD
---------- -------------- ---------- ---------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Allowance for uncollectible
rent......................... $1,837 $1,266 $(1,475) $1,628
====== ====== ======= ======
Year Ended December 31, 1995
Allowance for uncollectible
rent......................... $ 837 $1,000 $ -- $1,837
====== ====== ======= ======
Year Ended December 31, 1994
Allowance for uncollectible
rent......................... $ 428 $ 909 $ (500) $ 837
====== ====== ======= ======
</TABLE>

S-1
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
<C> <S>
**1.1 Form of Underwriting Agreement.
3.1 Articles of Amendment and Restatement of the Registrant.(1)
3.2 Amended and Restated Bylaws of the Registrant.(1)
3.3 Form of Certificate for Common Stock of the Registrant.(1)
**5.1 Opinion of Ballard Spahr Andrews & Ingersoll regarding the validity of
the Common Stock being registered.
**8.1 Opinion of Latham & Watkins regarding certain federal income tax
matters.
10.1 Amended and Restated Agreement of Limited Partnership of Kilroy
Realty, L.P.(1)
10.2 Form of Registration Rights Agreement among the Registrant and the
persons named therein.(1)
10.3 Omnibus Agreement, dated as of October 30, 1996, by and among Kilroy
Realty, L.P. and the parties named therein.(1)
10.4 Supplemental Representations, Warranties and Indemnity Agreement by
and among Kilroy Realty, L.P. and the parties named therein.(1)
10.5 Pledge Agreement by and among Kilroy Realty, L.P., John B. Kilroy,
Sr., John B. Kilroy, Jr. and Kilroy Industries.(1)
10.6 1997 Stock Option and Incentive Plan of the Registrant and Kilroy
Realty, L.P.(1)
10.7 Form of Indemnity Agreement of the Registrant and Kilroy Realty, L.P.
with certain officers and directors.(1)
10.8 Lease Agreement, dated January 24, 1989, by and between Kilroy Long
Beach Associates and the City of Long Beach for Kilroy Long Beach
Phase I.(1)
10.9 First Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase I.(1)
10.10 Lease Agreement, dated July 17, 1985, by and between Kilroy Long Beach
Associates and the City of Long Beach for Kilroy Long Beach Phase
III.(1)
10.11 Lease Agreement, dated April 21, 1988, by and between Kilroy Long
Beach Associates and the Board of Water Commissioners of the City of
Long Beach, acting for and on behalf of the City of Long Beach, for
Long Beach Phase IV.(1)
10.12 Lease Agreement, dated December 30, 1988, by and between Kilroy Long
Beach Associates and the City of Long Beach for Kilroy Long Beach
Phase II.(1)
10.13 First Amendment to Lease, dated January 24, 1989, by and between
Kilroy Long Beach Associates and the City of Long Beach for Kilroy
Long Beach Phase III.(1)
10.14 Second Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase III.(1)
10.15 First Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase II.(1)
10.16 Third Amendment to Lease Agreement, dated October 10, 1994, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase III.(1)
10.17 Development Agreement by and between Kilroy Long Beach Associates and
the City of Long Beach.(1)
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
<C> <S>
10.18 Amendment No. 1 to Development Agreement by and between Kilroy Long
Beach Associates and the City of Long Beach.(1)
10.19 Ground Lease by and between Frederick Boysen and Ted Boysen and Kilroy
Industries, dated May 15, 1969, for SeaTac Office Center.(1)
10.20 Amendment No. 1 to Ground Lease and Grant of Easement, dated April 27,
1973, among Frederick Boysen and Dorothy Boysen, Ted Boysen and Rose
Boysen and Sea/Tac Properties.(1)
10.21 Amendment No. 2 to Ground Lease and Grant of Easement, dated May 17,
1977, among Frederick Boysen and Dorothy Boysen, Ted Boysen and Rose
Boysen and Sea/Tac Properties.(1)
10.22 Airspace Lease, dated July 10, 1980, by and among the Washington State
Department of Transportation, as lessor, and Sea Tac Properties, Ltd.
and Kilroy Industries, as lessee.(1)
10.23 Lease, dated April 1, 1980, by and among Bow Lake, Inc., as lessor,
and Kilroy Industries and SeaTac Properties, Ltd., as lessees for
Sea/Tac Office Center.(1)
10.24 Amendment No. 1 to Ground Lease, dated September 17, 1990, between Bow
Lake, Inc., as lessor, and Kilroy Industries and Sea/Tac Properties,
Ltd., as lessee.(1)
10.25 Amendment No. 2 to Ground Lease, dated March 21, 1991, between Bow
Lake, Inc., as lessor, and Kilroy Industries and Sea/Tac Properties,
Ltd., as lessee.(1)
10.26 Property Management Agreement between Kilroy Realty Finance
Partnership, L.P. and Kilroy Realty, L.P.(1)
10.27 Form of Environmental Indemnity Agreement.(1)
10.28 Option Agreement by and between Kilroy Realty, L.P. and Kilroy Airport
Imperial Co.(1)
10.29 Option Agreement by and between Kilroy Realty, L.P. and Kilroy
Calabasas Associates.(1)
10.30 Employment Agreement between the Registrant and John B. Kilroy, Jr.(1)
10.31 Employment Agreement between the Registrant and Richard E. Moran
Jr.(1)
10.32 Employment Agreement between the Registrant and Jeffrey C. Hawken.(1)
10.33 Employment Agreement between the Registrant and C. Hugh Greenup.(1)
10.34 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Sr.(1)
10.35 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Jr.(1)
10.36 License Agreement by and among the Registrant and the other persons
named therein.(1)
10.37 Form of Indenture of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of Leases, Rents
and Security Deposits.(1)
10.38 Form of Mortgage Note.(1)
10.39 Form of Indemnity Agreement.(1)
10.40 Form of Assignment of Leases, Rents and Security Deposits.(1)
10.41 Form of Credit Agreement.(1)
10.42 Form of Variable Interest Rate Indenture of Mortgage, Deed of Trust,
Security Agreement, Financing Statement, Fixture Filing and Assignment
of Leases and Rents.(1)
10.43 Form of Environmental Indemnity Agreement.(1)
10.44 Form of Assignment, Rents and Security Deposits.(1)
*10.45 Revolving Credit Agreement, dated as of May 21, 1997, among Kilroy
Realty, L.P., Morgan Guaranty Trust Company of New York and the Banks
listed herein.
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
<C> <S>
10.46 Form of Mortgage, Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment of Leases and Rents.(1)
10.47 Assignment of Leases, Rents and Security Deposits.(1)
10.48 Purchase and Sale Agreement and Joint Escrow Instructions, dated April
30, 1997, by and between Mission Land Company, Mission-Vacaville, L.P.
and Kilroy Realty, L.P.(2)
10.49 Agreement of Purchase and Sale and Joint Escrow Instructions, dated
April 30, 1997, by and between Camarillo Partners and Kilroy Realty,
L.P.(2)
10.50 Purchase and Sale Agreement and Escrow Instructions, dated May 5,
1997, by and between Kilroy Realty, L.P. and Pullman Carnegie
Associates.(4)
10.51 Amendment to Purchase and Sale Agreement and Escrow Instructions,
dated June 27, 1997, by and between Pullman Carnegie Associates and
Kilroy Realty, L.P.(4)
10.52 Purchase and Sale Agreement, Contribution Agreement and Joint Escrow
Instructions, dated May 12, 1997, by and between Shidler West
Acquisition Company, LLC and Kilroy Realty, L.P.(3)
10.53 First Amendment to Purchase and Sale Agreement, Contribution Agreement
and Joint Escrow Instructions, dated June 6, 1997, between Kilroy
Realty, L.P. and Shidler West Acquisition Company, L.L.C.(3)
10.54 Second Amendment to Purchase and Sale Agreement, Contribution
Agreement and Joint Escrow Instructions, dated June 12, 1997, by and
between Shidler West Acquisition Company, LLC and Kilroy Realty,
L.P.(3)
10.55 Agreement of Purchase and Sale and Joint Escrow Instructions, dated
June 12, 1997, by and between Mazda Motor of America, Inc. and Kilroy
Realty, L.P.(4)
10.56 Amendment to Agreement of Purchase and Sale and Joint Escrow
Instructions, dated June 30, 1997, by and between Mazda Motor of
America, Inc. and Kilroy Realty, L.P.(4)
10.57 Agreement for Purchase and Sale of 2100 Colorado Avenue, Santa Monica,
California, dated June 16, 1997, by and between Santa Monica Number
Seven Associates L.P. and Kilroy Realty L.P.(4)
**23.1 Consent of Latham & Watkins (filed with Exhibit 8.1).
**23.2 Consent of Ballard Spahr Andrews & Ingersoll (filed with Exhibit 5.1).
*23.3 Consent of Deloitte & Touche LLP.
*23.4 Consent of Robert Charles Lesser & Co.
*24.1 Power of Attorney (included on the signature page to the Registration
Statement).
</TABLE>
- --------
* Filed herewith.
**To be filed by amendment.
(1) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-15553) as declared effective on January 28, 1997 and incorporated
herein by reference.
(2) Previously filed as Exhibit 10.11 and 10.12, respectively, to the Current
Report on Form 8-K (No. 1-12675) as filed on June 5, 1997 and incorporated
herein by reference.
(3) Previously filed as Exhibit 10.57, 10.58 and 10.59, respectively, to the
Current Report on Form 8-K (No. 1-12675) as filed on July 3, 1997 and
incorporated herein by reference.
(4) Previously filed as Exhibit 10.54, 10.59, 10.60, 10.61 and 10.62,
respectively, to the Current Report on Form 8-K (No. 1-12675) as filed on
July 15, 1997 and incorporated herein by reference.

<PAGE>

EXHIBIT 10.45

_________________________________________________________
_________________________________________________________

REVOLVING CREDIT AGREEMENT

dated as of May 21, 1997

among

KILROY REALTY, L.P.

MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Bank and as Lead Agent for the Banks,

and

THE BANKS LISTED HEREIN

_________________________________________________________
_________________________________________________________
<PAGE>

TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>

ARTICLE I

DEFINITIONS............................................. 1

SECTION 1.1. Definitions.................................................... 1
SECTION 1.2. Accounting Terms and Determinations............................ 21
SECTION 1.3. Types of Borrowings............................................ 22

ARTICLE II

THE CREDITS............................................. 22

SECTION 2.1. Commitments to Lend............................................ 22
SECTION 2.2. Notice of Borrowing............................................ 23
SECTION 2.3. Notice to Banks; Funding of Loans.............................. 23
SECTION 2.4. Notes.......................................................... 24
SECTION 2.5. Maturity of Loans.............................................. 25
SECTION 2.6. Interest Rates................................................. 25
SECTION 2.7. Fees........................................................... 27
SECTION 2.8. Mandatory Termination.......................................... 28
SECTION 2.9. Mandatory Prepayment........................................... 28
SECTION 2.10. Optional Prepayments........................................... 29
SECTION 2.11. General Provisions as to Payments.............................. 30
SECTION 2.12. Funding Losses................................................. 31
SECTION 2.13. Computation of Interest and Fees............................... 32
SECTION 2.14. Method of Electing Interest Rates.............................. 32

ARTICLE III

CONDITIONS............................................. 34

SECTION 3.1. Closing........................................................ 34
SECTION 3.2. Borrowings..................................................... 38
SECTION 3.3. Conditions Precedent to Additional Real Property Assets........ 39
SECTION 3.4. Mortgaged Properties........................................... 40

ARTICLE IV

REPRESENTATIONS AND WARRANTIES.................................... 42

SECTION 4.1. Existence and Power............................................ 42
SECTION 4.2. Power and Authority............................................ 43
SECTION 4.3. No Violation................................................... 43
SECTION 4.4. Financial Information.......................................... 44
SECTION 4.5. Litigation..................................................... 44
SECTION 4.6. Compliance with ERISA.......................................... 44
SECTION 4.7 Environmental Compliance....................................... 45
SECTION 4.8. Taxes.......................................................... 47
SECTION 4.9. Full Disclosure................................................ 47
SECTION 4.10. Solvency....................................................... 47
SECTION 4.11. Use of Proceeds; Margin Regulations............................ 47
SECTION 4.12. Governmental Approvals......................................... 48
</TABLE>

i
<PAGE>

SECTION 4.13. Investment Company Act; Public Utility Holding Company Act...... 48
SECTION 4.14. Closing Date Transactions....................................... 48
SECTION 4.15. Representations and Warranties in Loan Documents................ 48
SECTION 4.16. Patents, Trademarks, etc........................................ 49
SECTION 4.17. No Default...................................................... 49
SECTION 4.18. Licenses, etc................................................... 49
SECTION 4.19. Compliance With Law............................................. 49
SECTION 4.20. No Burdensome Restrictions...................................... 50
SECTION 4.21. Brokers' Fees................................................... 50
SECTION 4.22. Labor Matters................................................... 50
SECTION 4.23. Organizational Documents........................................ 50
SECTION 4.24. Principal Offices............................................... 50
SECTION 4.25. REIT Status..................................................... 51
SECTION 4.26. Ownership of Property........................................... 51
SECTION 4.27. Security Interests and Liens.................................... 51
SECTION 4.28. Structural Defects and Violation of Law......................... 51

ARTICLE V

AFFIRMATIVE AND NEGATIVE COVENANTS........................ 52

SECTION 5.1. Information..................................................... 52
SECTION 5.2. Payment of Obligations.......................................... 55
SECTION 5.3. Maintenance of Property; Insurance.............................. 56
SECTION 5.4. Conduct of Business............................................. 56
SECTION 5.5. Compliance with Laws............................................ 56
SECTION 5.6. Inspection of Property, Books and Records....................... 57
SECTION 5.7. Existence....................................................... 57
SECTION 5.8. Financial Covenants............................................. 57
SECTION 5.9. Restriction on Fundamental Changes; Operation and Control....... 59
SECTION 5.10. Changes in Business............................................. 59
SECTION 5.11. Sale of the Property............................................ 59
SECTION 5.12. Fiscal Year; Fiscal Quarter..................................... 59
SECTION 5.13. Margin Stock.................................................... 59
SECTION 5.14. Development Activities.......................................... 59
SECTION 5.15. Use of Proceeds................................................. 60
SECTION 5.16. Borrower Status................................................. 60

ARTICLE VI

DEFAULTS.................................................. 60

SECTION 6.1. Events of Default............................................... 60
SECTION 6.2. Rights and Remedies............................................. 64
SECTION 6.3. Notice of Default............................................... 65

ARTICLE VII

THE LEAD AGENT............................................. 66

SECTION 7.1. Appointment and Authorization................................... 66
</TABLE>

ii
<PAGE>

SECTION 7.2. Lead Agent and Affiliates....................................... 66
SECTION 7.3. Action by Lead Agent............................................ 66
SECTION 7.4. Consultation with Experts....................................... 66
SECTION 7.5. Liability of Lead Agent......................................... 66
SECTION 7.6. Indemnification................................................. 67
SECTION 7.7. Credit Decision................................................. 67
SECTION 7.8. Successor Lead Agent............................................ 67
SECTION 7.9. Lead Agent's Fee................................................ 68
SECTION 7.10. Copies of Notices............................................... 68

ARTICLE VIII

CHANGE IN CIRCUMSTANCES.................................... 68

SECTION 8.1. Basis for Determining Interest Rate Inad equate or Unfair....... 68
SECTION 8.2. Illegality...................................................... 69
SECTION 8.3. Increased Cost and Reduced Return............................... 70
SECTION 8.4. Taxes........................................................... 71
SECTION 8.5. Base Rate Loans Substituted for Affected Euro-Dollar Loans...... 74

ARTICLE IX

MISCELLANEOUS.................................. 75

SECTION 9.1. Notices......................................................... 75
SECTION 9.2. No Waivers...................................................... 75
SECTION 9.3. Expenses; Indemnification....................................... 76
SECTION 9.4. Sharing of Set-Offs............................................. 77
SECTION 9.5. Amendments and Waivers.......................................... 78
SECTION 9.6. Successors and Assigns.......................................... 79
SECTION 9.7. Governing Law; Submission to Jurisdic tion...................... 81
SECTION 9.8. Marshaling; Recapture........................................... 82
SECTION 9.9. Counterparts; Integration; Effectiveness........................ 82
SECTION 9.10. WAIVER OF JURY TRIAL............................................ 82
SECTION 9.11. Survival........................................................ 82
SECTION 9.12. Domicile of Loans............................................... 83
SECTION 9.13. Limitation of Liability......................................... 83

Exhibit A - Form of Note
Exhibit B - Mortgaged Properties
Exhibit C - Assignment and Assumption Agreement
Exhibit D - Allocated Mortgaged Property Loan Amounts
</TABLE>

iii
<PAGE>

EXHIBIT A

REVOLVING CREDIT AGREEMENT

REVOLVING CREDIT AGREEMENT, dated as of May 21, 1997, among KILROY
REALTY, L.P.(the "Borrower"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Bank
--------
and as Lead Agent for the Banks and the BANKS listed on the signature pages
hereof (the "Banks").
-----

The parties hereby agree as follows:

ARTICLE I

DEFINITIONS

SECTION 1.1. Definitions. The following terms, as used herein, have
-----------
the following meanings:

"Adjusted London Interbank Offered Rate" has the meaning set forth in
--------------------------------------
Section 2.6(b).

"Administrative Questionnaire" means, with respect to each Bank, an
----------------------------
administrative questionnaire in the form prepared by the Lead Agent and
submitted to the Lead Agent (with a copy to the Borrower) duly completed by such
Bank.

"Agreement" means this Revolving Credit Agree Agreement as the same
---------
may from time to time hereafter be modified, supplemented or amended.

"Allocated Mortgaged Property Loan Amount" means (x) as to the
----------------------------------------
Mortgaged Properties as of the date hereof, sixty percent (60%) of the Appraised
Value there of, and (y) as to properties that become Mortgaged Properties after
the date hereof, an amount equal to the lesser of sixty percent (60%) of (x) the
purchase price thereof and (y) the Appraised Value thereof. The Allocated
Mortgaged Property Loan Amounts for the Mortgaged Properties as of the date
hereof are set forth on Exhibit D attached hereto and made a part hereof.
---------

"Annual EBITDA" means, measured as of the last day of each calendar
-------------
quarter, an amount derived from (i) total revenues relating to all Real Property
Assets of the Borrower and its Consolidated Subsidiaries or to the
<PAGE>

Borrower's interest in Minority Holdings for the previous four consecutive
calendar quarters including the quarter then ended, on an accrual basis with
adjustments for the straight-lining of rents, plus (ii) interest and other
----
income of the Borrower and its Consolidated Subsidiaries, including, without
limitation, real estate service revenues, for such period, less (iii) total
----
operating expenses and other expenses relating to such Real Property Assets and
to the Borrower's interest in Minority Holdings for such period (other than
interest, taxes, depreciation, amortization, and other non-cash items), less
----
(iv) total corporate operating expenses (including general overhead expenses)
and other expenses of the Borrower, its Consolidated Subsidiaries and the
Borrower's interest in Minority Holdings (other than interest, taxes,
depreciation, amortization and other non-cash items), for such period.

"Applicable Interest Rate" means the lesser of (x) the rate at which
------------------------
the interest rate applicable to any floating rate Debt could be fixed, at the
time of calculation, by the Borrower entering into an unsecured interest rate
swap agreement (or, if such rate is incapable of being fixed by entering into an
unsecured interest rate swap agreement at the time of calculation, a reasonably
determined fixed rate equivalent), and (y) the rate at which the interest rate
applicable to such floating rate Debt is actually capped, at the time of
calculation, if the Borrower has entered into an interest rate cap agreement
with respect thereto or if the documentation for such Debt contains a cap.

"Applicable Lending Office" means, with respect to any Bank, (i) in
-------------------------
the case of its Base Rate Loans, its Domestic Lending Office and (ii) in the
case of its Euro-Dollar Loans, its Euro-Dollar Lending Office.

"Appraisals" means, with respect to each Mortgaged Property, the
----------
independent appraisals, prepared and delivered to the Lead Agent at the
Borrower's sole cost and expense and conforming to the regulations promulgated
pursuant to FIRREA, initially completed by Koeppel Tener Real Estate Services,
Inc. in the case of Appraisals for the Mortgaged Properties as of the date of
this Agreement.

2
<PAGE>

"Appraised Value" means the value of any Mortgaged Property as
---------------
indicated on the most recent Appraisal thereof.

"Assignee" has the meaning set forth in Section 9.6(c).
--------

"Assignments" means, the Assignment(s) of Leases, Rents and Security
-----------
Deposits, each executed by the Borrower on or prior to the date hereof or as of
the date of acquisition of a Mortgaged Property, securing all or a portion of
the Loans.

"Bank" means each bank listed on the signature pages hereof, each
----
Assignee which becomes a Bank pursuant to Section 9.6(c), and their respective
successors.

"Bankruptcy Code" means Title 11 of the United States Code, entitled
---------------
"Bankruptcy", as amended from time to time, and any successor statute or
statutes.

"Base Rate" means, for any day, a rate per annum equal to the higher
---------
of (i) the Prime Rate for such day and (ii) the sum of the Federal Funds Rate
plus .50%.

"Base Rate Borrowing" means a Borrowing comprised of Base Rate Loans.
-------------------

"Base Rate Loan" means a Loan to be made by a Bank as a Base Rate Loan
--------------
in accordance with the applicable Notice of Borrowing or pursuant to Article
VIII.

"Benefit Arrangement" means at any time an employee benefit plan
-------------------
within the meaning of Section 3(3) of ERISA which is not a Plan or a
Multiemployer Plan and which is maintained or otherwise contributed to by any
member of the ERISA Group.

"Borrower" means Kilroy Realty, L.P. and its successors.
--------

"Borrowing" means a borrowing hereunder consisting of Loans made to
---------
the Borrower at the same time by the Banks pursuant to Article II. A Borrowing
is a "Domestic Borrowing" if such Loans are Base Rate Loans or a "Euro-Dollar
------------------ -----------
Borrowing" if such Loans are Euro-Dollar Loans.
- ---------

3
<PAGE>

"Capital Expenditures" means, for any period, the sum of all
--------------------
expenditures (whether paid in cash or accrued as a liability) by the Borrower
which are capitalized on the consolidated balance sheet of the Borrower in
conformity with GAAP, but less (i) all expenditures made with respect to the
acquisition by the Borrower and its Consolidated Subsidiaries of any interest in
real property within nine months after the date such interest in real property
is acquired and (ii) capital expenditures made from the proceeds of insurance or
condemnation awards (or payments in lieu thereof) or indemnity payments
received during such period by Borrower or any of its Consolidated Subsidiaries
from third parties.

"Capital Leases" means, with respect to any Person, any lease of any
--------------
property by such Person as lessee that, in conformity with GAAP, is required to
be accounted for as a capital lease.

"Cash or Cash Equivalents" means (i) cash, (ii) direct obligations of
------------------------
the United States Government, including, without limitation, treasury bills,
notes and bonds, (iii) interest bearing or discounted obligations of Federal
agencies and Government sponsored entities or pools of such instruments offered
by banks rated AA or better by S&P or Aa2 by Moody's and dealers, including,
without limitation, Federal Home Loan Mortgage Corporation participation sale
certificates, Government National Mortgage Association modified pass-through
certificates, Federal National Mortgage Association bonds and notes, Federal
Farm Credit System securities, (iv) time deposits, domestic and Eurodollar
certificates of deposit, bankers acceptances, commercial paper rated at least A-
1 by S&P and P-1 by Moody's, and/or guaranteed by an Aa rating by Moody's, an AA
rating by S&P, or better rated credit, floating rate notes, other money market
instru ments and letters of credit each issued by banks which have a long-term
debt rating of at least AA by S&P or Aa2 by Moody's, (v) obligations of domestic
corporations, including, without limitation, commercial paper, bonds,
debentures, and loan participations, each of which is rated at least AA by S&P,
and/or Aa2 by Moody's, and/or unconditionally guaranteed by an AA rating by S&P,
an Aa2 rating by Moody's, or better rated credit, (vi) obligations issued by
states and local governments or their agencies, rated at least MIG-1 by Moody's
and/or SP-1 by

4
<PAGE>

S&P and/or guaranteed by an irrevocable letter of credit of a bank with a long-
term debt rating of at least AA by S&P or Aa2 by Moody's, (vii) repurchase
agreements with major banks and primary government securities dealers fully
secured by U.S. Government or agency collateral equal to or exceeding the
principal amount on a daily basis and held in safekeeping, (viii) real estate
loan pool participations, guaranteed by an entity with an AA rating given by S&P
or an Aa2 rating given by Moody's, or better rated credit, and (ix) shares of
any mutual fund that has its assets primarily invested in the types of
investments referred to in clauses (i) through (v).

"Closing Date" means the date on which the Lead Agent shall have
------------
received the documents specified in or pursuant to Section 3.1.

"Collateral" means all property and interests in property now owned or
----------
hereafter acquired in or upon which a Lien has been or is purported or intended
to have been granted to the Lead Agent on behalf of the Banks under each of the
Mortgages.

"Combined Asset Value" shall mean the book value of the assets of the
--------------------
Borrower (including Minority Holdings) and its Consolidated Subsidiaries,
calculated on a consolidated basis, in accordance with GAAP, but without
deduction for depreciation and net of monetary obligations which are not for
borrowed money (such as accounts payable and working capital liabilities).

"Commitment" means, with respect to each Bank, the amount committed by
----------
such Bank pursuant to this Agreement with respect to any Loans, as such amount
may be reduced from time to time pursuant to Sections 2.8 and 2.9.

"Consolidated Subsidiary" means at any date any Subsidiary or other
-----------------------
entity which is consolidated with the Borrower in accordance with GAAP.

"Consolidated Tangible Net Worth" means at any date the consolidated
-------------------------------
stockholders' equity of the Borrower (determined on a book basis), less its
consolidated Intangible Assets, all determined as of such date. For purposes of
this definition "Intangible Assets" means with respect to any such intangible
-----------------
assets, the amount (to the extent reflected in determining such consolidated
stockholders' equity) of (i) all write-ups subsequent to December 31, 1996 in
the book value of any asset owned by the Borrower or a Consolidated Subsidiary
and (ii) good will, patents, trademarks, service marks, trade names, anticipated
future benefit of tax loss carry forwards,

5
<PAGE>

copyrights, organization or developmental expenses and other intangible assets.

"Contingent Obligation" as to any Person means, without duplication,
---------------------
(i) any contingent obligation of such Person required to be shown on such
Person's balance sheet in accordance with GAAP, and (ii) any obligation required
to be disclosed in the footnotes to such Person's financial statements,
guaranteeing partially or in whole any non-recourse Debt, lease, dividend or
other obligation, exclusive of contractual indemnities (including, without
limitation, any indemnity or price-adjustment provision relating to the
purchase or sale of securities or other assets) and guarantees of non-monetary
obligations (other than guarantees of completion) which have not yet been called
on or quantified, of such Person or of any other Person. The amount of any
Contingent Obligation described in clause (ii) shall be deemed to be (a) with
respect to a guaranty of interest or interest and principal, or operating income
guaranty, the sum of all payments required to be made thereunder (which in the
case of an operating income guaranty shall be deemed to be equal to the debt
service for the note secured there by), calculated at the Applicable Interest
Rate, through (i) in the case of an interest or interest and principal guaranty,
the stated date of maturity of the obligation (and commencing on the date
interest could first be payable thereunder), or (ii) in the case of an operating
income guaranty, the date through which such guaranty will remain in effect, and
(b) with respect to all guarantees not covered by the preceding clause (a), an
amount equal to the stated or determinable amount of the primary obligation in
respect of which such guaranty is made or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof (assuming such
Person is required to perform thereunder) as recorded on the balance sheet and
on the footnotes to the most recent financial statements of the applicable
Borrower required to be delivered pursuant to Section 4.6 hereof.
Notwithstanding anything contained herein to the contrary, guarantees of
completion shall not be deemed to be Contingent Obligations unless and until a
claim for payment or performance has been made thereunder, at which time any
such guaranty of completion shall be deemed to be a Contingent Obligation in an
amount equal to any such claim. Subject to the preceding sentence, (i) in the
case of a joint and several guaranty given by such Person

6
<PAGE>

and another Person (but only to the extent such guaranty is recourse, directly
or indirectly to the applicable Borrower), the amount of the guaranty shall be
deemed to be 100% thereof unless and only to the extent that such other Person
has delivered Cash or Cash Equivalents to secure all or any part of such
Person's guaranteed obligations, (ii) in the case of joint and several
guarantees given by a Person in whom the applicable Borrower owns an interest
(which guarantees are non-recourse to the applicable Borrower), to the extent
the guarantees, in the aggregate, exceed 15% of total real estate investments,
the amount in excess of 15% shall be deemed to be a Contingent Obligation of the
applicable Borrower, and (iii) in the case of a guaranty (whether or not joint
and several) of an obligation otherwise constituting Debt of such Person, the
amount of such guaranty shall be deemed to be only that amount in excess of the
amount of the obligation constituting Debt of such Person. Notwithstanding
anything contained herein to the contrary, "Contingent Obligations" shall not be
deemed to include guarantees of Unused Commitments or of construction loans to
the extent the same have not been drawn.

"Debt" of any Person means, without duplication, (A) as shown on such
----
Person's consolidated balance sheet (i) all indebtedness of such Person for
borrowed money or for the deferred purchase price of property and, (ii) all
indebtedness of such Person evidenced by a note, bond, debenture or similar
instrument (whether or not disbursed in full in the case of a construction
loan), (B) the face amount of all letters of credit issued for the account of
such Person and, without duplication, all unreimbursed amounts drawn thereunder,
(C) all Contingent Obligations of such Person, (D) all payment obligations of
such Person under any interest rate protection agree ment (including, without
limitation, any interest rate swaps, caps, floors, collars and similar
agreements) and currency swaps and similar agreements which were not entered
into specifically in connection with Debt set forth in clauses (A), (B) or (C)
hereof. For purposes of this Agreement, Debt (other than Contingent
Obligations) of the Borrower shall be deemed to include only the Borrower's pro
rata share (such share being based upon the Borrower's percentage ownership
interest as shown on the Borrower's annual audited financial statements) of the
Debt of any Person in which the applicable Borrower, directly or indirectly,
owns an interest, provided that

7
<PAGE>

such Debt is nonrecourse, both directly and indirectly, to the applicable
Borrower.

"Debt Service" shall mean, measured as of the last day of each
------------
calendar quarter, an amount equal to the greater of (i) interest actually
payable by the Borrower on the Loans for the previous four consecutive quarters
including the quarter then ended and (ii) the sum of the Pro-Forma Debt Service
for the previous four consecutive quarters including the quarter then ended.

"Default" means any condition or event which constitutes an Event of
-------
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.

"Domestic Business Day" means any day except a Saturday, Sunday or
---------------------
other day on which commercial banks in New York City are authorized by law to
close.

"Domestic Lending Office" means, as to each Bank, its office located
-----------------------
within the United States at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its Domestic
Lending Office) or such other office within the United States as such Bank may
hereafter designate as its Domestic Lending Office by notice to the Borrower and
the Lead Agent; provided that no Bank shall be permitted to change its Domestic
Lending Office if as a result of such change either (i) pursuant to the
provisions of Section 8.1 or Section 8.2, Borrower would be unable to maintain
any Loans as Euro-Dollar Loans; or (ii) Borrower would be required to make any
payment to such Bank pursuant to the provisions of Section 8.3 or Section 8.4.

"Due Diligence Package" has the meaning provided in Section 3.3.
---------------------

"Environmental Affiliate" means any partnership, or joint venture,
-----------------------
trust or corporation in which an equity interest is owned by the Borrower,
either directly or indirectly.

"Environmental Approvals" means any permit, license, approval,
-----------------------
ruling, variance, exemption or other authorization required under applicable
Environmental Laws.

8
<PAGE>

"Environmental Claim" means, with respect to any Person, any notice,
-------------------
claim, demand or similar communication (written or oral) by any other Person
alleging potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damage, property damage, personal
injuries, fines or penalties arising out of, based on or resulting from (i) the
presence, or release into the environment, of any Material of Environmental
Concern at any location, whether or not owned by such Person or (ii)
circumstances forming the basis of any violation, or alleged violation, of any
Environmental Law, in each case as to which could reasonably be expected to have
a Material Adverse Effect.

"Environmental Indemnity" means the Environmental Indemnity executed
-----------------------
by the Borrower on or prior to the date hereof or as of the date of the addition
of a Real Property Asset to the Mortgaged Properties.

"Environmental Laws" means any and all federal, state, local and
------------------
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating to
the environment, the effect of the environment on human health or to emissions,
discharges or releases of pollutants, contaminants, Material of Environmental
Concern or hazardous wastes into the environment including, without limitation,
ambient air, surface water, ground water, or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, Material of Environmental
Concern or hazardous wastes or the clean-up or other remediation thereof.

"Environmental Report" has the meaning set forth in Section 4.7.
--------------------

"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended, or any successor stat ute.

"ERISA Group" means the Borrower, any Subsidiary and all members of a
-----------
controlled group of corporations and all trades or businesses (whether or not
incor porated) under common control which, together with the

9
<PAGE>

Borrower or any Subsidiary, are treated as a single employer under Section 414
of the Internal Revenue Code.

"Euro-Dollar Borrowing" has the meaning set forth in Section 1.3.
---------------------

"Euro-Dollar Business Day" means any Domestic Business Day on which
------------------------
commercial banks are open for international business (including dealings in
dollar deposits) in London.

"Euro-Dollar Lending Office" means, as to each Bank, its office,
--------------------------
branch or affiliate located at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its Euro-
Dollar Lending Office) or such other office, branch or affiliate of such Bank as
it may hereafter designate as its Euro-Dollar Lending Office by notice to the
Borrower and the Lead Agent; provided that no Bank shall be permitted to change
its Euro-Dollar Lending Office if as a result of such change either (i) pursuant
to the provisions of Section 8.1 or Section 8.2, Borrower would be unable to
maintain any Loans as Euro-Dollar Loans; or (ii) Borrower would be required make
any payment to such Bank pursuant to the provisions of Sections 8.3 or Section
8.4.

"Euro-Dollar Loan" means a Loan to be made by a Bank as a Euro-Dollar
----------------
Loan in accordance with the applicable Notice of Borrowing or Notice of
Interest Rate Election.

"Euro-Dollar Reserve Percentage" has the meaning set forth in Section
------------------------------
2.6(b).

"Event of Default" has the meaning set forth in Section 6.1.
----------------

"Federal Funds Rate" means, for any day, the rate per annum (rounded
------------------
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day; provided that (i) if such day is not a Domestic
--------
Business Day, the Federal Funds Rate

10
<PAGE>

for such day shall be such rate on such transactions on the next preceding
Domestic Business Day as so published on the next succeeding Domestic Business
Day, and (ii) if no such rate is so published on such next succeeding Domestic
Business Day, the Federal Funds Rate for such day shall be the average rate
quoted to Morgan on such day on such transactions as determined by the Lead
Agent.

"Federal Reserve Board" means the Board of Governors of the Federal
---------------------
Reserve System as constituted from time to time.

"FFO" means "funds from operations," defined to mean net income (or
---
loss) (computed in accordance with GAAP), excluding gains (or losses) from debt
restructurings and sales of properties, plus depreciation and amortization,
after adjustments for Minority Holdings. Adjustments for Minority Holdings
will be calculated to reflect FFO on the same basis.

"Financing Statements" means those Uniform Commercial Code Financing
--------------------
Statements executed by the Borrower on or prior to the date hereof or as of the
date of an addition of a Real Property Asset to the Mortgaged Properties for the
purpose of perfecting the security interest in any personal property, both
tangible and intangible, serving as collateral for the Loans pursuant to any
Loan Document.

"FIRREA" means the Financial Institutions Reform, Recovery and
------
Enforcement Act of 1989, as amended.

"FMV Cap Rate" means 9.50%.
------------

"GAAP" means generally accepted accounting principles recognized as
----
such in the opinions and pronouncements of the Accounting Principles Board and
the American Institute of Certified Public Accountants and Board or in such
other statements by such other entity as may be approved by a significant
segment of the accounting profession, which are applicable to the circumstances
as of the date of determination.

"Governmental Authority" means any Federal, state or local government
----------------------
or any other political subdivision thereof or agency exercising executive,
legislative,

11
<PAGE>

judicial, regulatory or administrative functions having jurisdiction over the
Borrower or any Mortgaged Property.

"Group of Loans" means, at any time, a group of Loans consisting of
--------------
(i) all Loans which are Base Rate Loans at such time, or (ii) all Loans which
are Euro-Dollar Loans having the same Interest Period at such time; provided
--------
that, if a Loan of any particular Bank is converted to or made as a Base Rate
Loan pursuant to Section 8.2 or 8.4, such Loan shall be included in the same
Group or Groups of Loans from time to time as it would have been in if it had
not been so converted or made.

"Improvements" has the meaning ascribed to it in each of the
------------
Mortgages.

"Indemnitee" has the meaning set forth in Section 9.3(b).
----------

"Interest Period" means: (1) with respect to each Euro-Dollar
---------------
Borrowing, the period commencing on the date of such Borrowing or of any Notice
of Interest Election with respect to such Borrowing and ending one, two, three
or six months thereafter, as the Borrower may elect in the applicable Notice of
Borrowing or Notice of Interest Election; provided that:
--------

(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest Period shall end on the
next preceding Euro-Dollar Business Day;

(b) any Interest Period which begins on the last Euro-Dollar Business
Day of a calendar month (or on a day for which there is no numerically cor-
responding day in the calendar month at the end of such Interest Period)
shall, subject to clause (c) below, end on the last Euro-Dollar Business
Day of a calendar month; and

(c) if any Interest Period includes a date on which a payment of
principal of the Loans is required to be made under Section 2.9 but does
not end

12
<PAGE>

on such date, then (i) the principal amount (if any) of each Euro-Dollar
Loan required to be repaid on such date shall have an Interest Period
ending on such date and (ii) the remainder (if any) of each such Euro-
Dollar Loan shall have an Interest Period determined as set forth above.

(2) with respect to each Base Rate Borrowing, the period commencing on the date
of such Borrowing or Notice of Interest Rate Election and ending 30 days
thereafter; provided that:
--------

(a) any Interest Period (other than an Interest Period determined
pursuant to clause (c)(i) above) which would otherwise end on a day which
is not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day; and

(b) if any Interest Period includes a date on which a payment of
principal of the Loans is required to be made under Section 2.9 but does
not end on such date, then (i) the principal amount (if any) of each Base
Rate Loan required to be repaid on such date shall have an Interest Period
ending on such date and (ii) the remainder (if any) of each such Base Rate
Loan shall have an Interest Period determined as set forth above.

"Internal Revenue Code" means the Internal Revenue Code of 1986, as
---------------------
amended, or any successor statute.

"Lead Agent" means Morgan Guaranty Trust Company of New York in its
----------
capacity as Lead Agent for the Banks hereunder, and its successors in such
capacity.

"Lien" means, with respect to any asset, any mortgage, lien, pledge,
----
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset. For the purposes of this Agreement, each of
the Borrower and any Subsidiary shall be deemed to own subject to a Lien any
asset which it has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such asset.

13
<PAGE>

"Loan" means a Base Rate Loan or a Euro-Dollar Loan and "Loans" means
---- -----
Base Rate Loans or Euro-Dollar Loans or any combination of the foregoing.

"Loan Amount" has the meaning set forth in Section 2.1(a).
-----------

"Loan Documents" means this Agreement, the Notes, the Mortgages, the
--------------
Assignments, the Environmental Indemnity, the Financing Statements and any
related documents.

"London Interbank Offered Rate" has the meaning set forth in Section
-----------------------------
2.6(b).

"LTV Ratio" means, as of any date of determination, the ratio,
---------
expressed as a percentage, of the aggregate amount of the Loans outstanding as
of such date of determination to the Mortgaged Properties Value as of the date
of determination.

"Margin Stock" shall have the meaning provided such term in Regulation
------------
U and Regulation G of the Federal Reserve Board.

"Material Adverse Effect" means a material adverse effect upon (i) the
-----------------------
business, operations, properties or assets of the Borrower or (ii) the ability
of the Borrower to perform its obligations hereunder in all material respects,
including to pay interest and principal.

"Material Plan" means at any time a Plan having aggregate Unfunded
-------------
Liabilities in excess of $5,000,000.

"Material of Environmental Concern" means and includes pollutants,
---------------------------------
contaminants, hazardous wastes, and toxic, radioactive, caustic or otherwise
hazardous substances, including petroleum, its derivatives, by-products and
other hydrocarbons, or any substance having any constituent elements displaying
any of the foregoing characteristics.

"Maturity Date" has the meaning set forth in Section 2.8.
-------------

14
<PAGE>

"Maximum Total Debt Ratio" means the ratio as of the date of
------------------------
determination of (i) the sum of (x) the aggregate Debt of the Borrower and its
Consolidated Subsidiaries and (y) the Borrower's pro rata share of the Debt of
any Subsidiaries of the Borrower which are not Consolidated Subsidiaries, at the
time of determination to (ii) the Tangible FMV of the Borrower and its
Consolidated Subsidiaries.

"Minimum Debt Service Coverage" means as of the last day of each
-----------------------------
calendar quarter, Net Operating Cash Flow equal to or greater than 175% of Debt
Service.

"Minority Holdings" means partnerships, limited liability companies
-----------------
and corporations held or owned by the Borrower which are not consolidated with
the Borrower on its financial statements.

"Moody's" means Moody's Investors Service, Inc. or any successor
-------
thereto.

"Morgan" means Morgan Guaranty Trust Company of New York, in its
------
individual capacity.

"Mortgaged Properties" means, as of any date, the Real Property Assets
--------------------
listed in Exhibit B attached hereto and made a part hereof, each of which is
---------
100% owned in fee (or leasehold in the case of assets listed as such on Exhibit
-------
B) by the Borrower, together with all Real Property Assets which have become
- -
part of the Mortgaged Properties on or prior to such date in accordance with
Section 3.3 and excluding any Mortgaged Properties which have been released from
this Agreement, the Mortgage and the other Loan Documents as of such date in
accordance with Sections 3.4(c) and 5.11 and all other terms of this Agreement.

"Mortgaged Properties Value" means the aggregate of the Appraised
--------------------------
Value of each of the Mortgaged Properties.

"Mortgages" shall mean the mortgage(s), deed(s) to secure debt, and/or
---------
deed(s) of trust executed by the Borrower on or prior to the date hereof or as
of the date of the addition of a Real Property Asset to the Mortgaged
Properties, securing all or a portion of the Loans, each of which Mortgages
shall be a first mortgage lien with

15
<PAGE>

respect to each Real Property Asset which is the subject thereof.

"Multiemployer Plan" means at any time an employee pension benefit
------------------
plan within the meaning of Section 4001(a)(3) of ERISA to which any member of
the ERISA Group is then making or accruing an obligation to make contributions
or has within the preceding five plan years made contributions, including for
these purposes any Person which ceased to be a member of the ERISA Group during
such five year period.

"Net Operating Cash Flow" means, as of any date of determination, with
-----------------------
respect to all Mortgaged Properties, Property Income for the previous four
consecutive quarters including the quarter then ended, but less (x) Property
Expenses with respect to all such Mortgaged Properties for the previous four
consecutive quarters including the quarter then ended, and (y) the greater of
(i) Capital Expenditures which are not related to new construction for the
previous four consecutive quarters including the quarter then ended, and (ii)
appropriate reserves for replacements of not less than $.20 per square foot of
space subject to leases per annum for each Mortgaged Property which is an office
property, and $.15 per square foot of space subject to leases per annum for each
Mortgaged Property which is an industrial property.

"Non-Recourse Debt" means Debt of the Borrower on a consolidated basis
-----------------
for which the right of recovery of the obligee thereof is limited to recourse
against the Real Property Assets securing such Debt (subject to such limited
exceptions to the non-recourse nature of such Debt such as fraud,
misappropriation, misapplication and environmental indemnities, as are usual and
customary in like transactions at the time of the incurrence of such Debt).

"Notes" means, collectively, the promissory notes of the Borrower,
-----
each substantially in the form of Exhibit A hereto, evidencing the obligation of
---------
the Borrower to repay the Loans, and "Note" means any one of such promissory
----
notes issued hereunder.

"Notice of Borrowing" has the meaning set forth in Section 2.2.
-------------------

16
<PAGE>

"Notice of Interest Election" has the meaning set forth in Section
---------------------------
2.14(a).

"Obligations" means all obligations, liabilities and indebtedness of
-----------
every nature of the Borrower from time to time owing to any Bank under or in
connection with this Agreement or any other Loan Document.

"Outstanding Balance" means the aggregate outstanding and unpaid
-------------------
principal balance of all Loans.

"Parent" means, with respect to any Bank, any Person controlling such
------
Bank.

"Participant" has the meaning set forth in Section 9.6(b).
-----------

"PBGC" means the Pension Benefit Guaranty Corporation or any entity
----
succeeding to any or all of its functions under ERISA.

"Permitted LTV Ratio" means 60%.
-------------------

"Person" means an individual, a corporation, a partnership, a limited
------
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.

"Plan" means at any time an employee pension benefit plan (other than
----
a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person which
was at such time a member of the ERISA Group for employees of any Person which
was at such time a member of the ERISA Group.

"Prime Rate" means the rate of interest publicly announced by Morgan
----------
in New York City from time to time as its Prime Rate.

17
<PAGE>

"Pro-Forma Debt Service" means, for any calendar quarter, the amount
----------------------
of debt service payments determined by applying a 25-year mortgage style
amortization schedule to the Loans outstanding as of the last day of such
calendar quarter, using an interest rate equal to the Treasury Rate plus 1.75%.

"Property Expenses" means, when used with respect to any Mortgaged
-----------------
Property, the costs of maintaining such Real Property Asset which are the
responsibility of the owner thereof and that are not paid directly by the
tenant thereof, including, without limitation, taxes, insurance, repairs and
maintenance, but provided that if such tenant is more than 60 days in arrears in
the payment of base or fixed rent, then such costs will also constitute
"Property Expenses", but excluding depreciation, amortization and interest
costs.

"Property Income" means, when used with respect to any Mortgaged
---------------
Property, cash rents and other cash revenues received in the ordinary course
therefrom, including, without limitation, revenues from any parking leases and
lease termination fees amortized over the remaining term of the lease for which
such termination fee was received (other than the paid rents and revenues and
security deposits except to the extent applied in satisfaction of tenants'
obligations for rent).

"Property Release" has the meaning set forth in Section 3.4(c).
----------------

"Real Property Assets" means as of any time, the real property assets
--------------------
owned directly or indirectly by the Borrower at such time.

"Recourse Debt" shall mean Debt of the Borrower or any Consolidated
-------------
Subsidiary that is not Non-Recourse Debt.

"Reference Bank" means the principal London offices of Morgan.
--------------

"Regulation U" means Regulation U of the Board of Governors of the
------------
Federal Reserve System, as in effect from time to time.

18
<PAGE>

"Release" means any release, spill, emission, leaking, pumping,
-------
pouring, dumping, emptying, deposit, discharge, leaching or migration.

"Release Date" has the meaning set forth in Section 3.4(c).
------------

"Request to Extend" has the meaning set forth in Section 2.8(b).
-----------------

"Required Banks" means, at any time, Banks having at least 51% of the
--------------
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding Notes evidencing at least 51% of the aggregate unpaid
principal amount of the Loans.

"Requirements" means all present and future laws, statutes, codes,
------------
ordinances, orders, judgments, decrees, injunctions, rules, regulations and
requirements of every Governmental Authority having jurisdiction over any
Mortgaged Property and all restrictive covenants applicable to any Mortgaged
Property.

"S&P" means Standard & Poor's Ratings Services, a Division of The
---
McGraw-Hill Companies, Inc., or any successor thereto.

"Solvent" means, with respect to any Person, that the fair saleable
-------
value of such Person's assets exceeds the Debts of such Person.

"Subsidiary" means any corporation or other entity of which securities
----------
or other ownership interests representing either (i) ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions or (ii) a majority of the economic interest therein, are at the time
directly or indirectly owned by the Borrower.

"Survey" means a survey (prepared in accordance with the ALTA
------
appropriate specifications) for each Mortgaged Property, prepared or re-
certified on a date not earlier than six (6) months prior to the date of the
applicable Mortgage, by a land surveyor duly licensed in the state in which such
Mortgaged Property is located.

19
<PAGE>

"Tangible FMV" means the sum of (x) (i) with respect to Real Property
------------
Assets owned by the Borrower or its Consolidated Subsidiaries for a period of at
least one year, the quotient of Net Operating Income with respect to such Real
Property Assets determined for the four fiscal quarter period ending as of the
last day of the previous calendar quarter, as divided by the FMV Cap Rate, (ii)
with respect to Real Property Assets owned the Borrower or its Consolidated
Subsidiaries for a period of less than six months, the purchase price of such
Real Property Assets and (iii) with respect to Real Property Assets owned by the
Borrower or its Consolidated Subsidiaries for a period of at least six months
but less than one year, the lesser of (A) the purchase price of such Real
Property Assets or (B) the quotient of Property Income attributable to such Real
Property Assets for the period during which the Borrower or its Consolidated Sub
sidiaries owned such Real Property Assets, but less Property Expenses
attributable to such Real Property Assets for the period during which the
Borrower or its Consolidated Subsidiaries owned such Real Property Assets, on
an annualized basis, as divided by the FMV Cap Rate and (y) Cash or Cash
Equivalents of the Borrower and its Consolidated Subsidiaries as of the date of
determination.

"Term" has the meaning set forth in Section 2.8.
----

"Title Company" means, with respect to each Mortgaged Property, a
-------------
title insurance company of recognized national standing.

"Title Commitment" means, for each Mortgaged Property, an ALTA fee or
----------------
leasehold title commitment or title policy issued by the Title Company.

"Total Debt Service" shall mean, as of the last day of each calendar
------------------
quarter, an amount equal to the sum of (i) interest (whether accrued, paid or
capitalized) actually payable by Borrower on its Debt for the previous four
consecutive quarters including the quarter then ended, plus (ii) scheduled
payments of principal on such Debt, whether or not paid by the Borrower
(excluding balloon payments) for the previous four consecutive quarters
including the quarter then ended.

20
<PAGE>

"Treasury Rate" means, as of any date, a rate equal to the annual
-------------
yield to maturity on the U.S. Treasury Constant Maturity Series with a ten-year
maturity, as such yield is reported in Federal Reserve Statistical Release H.15
- -- Selected Interest Rates, published most recently prior to the date the
applicable Treasury Rate is being determined. Such yield shall be determined by
straight line linear interpolation between the yields reported in Release H.15,
if necessary. In the event Release H.15 is no longer published, the Lead Agent
shall select, in its reasonable discretion, an alternate basis for the
determination of Treasury yield for U.S. Treasury Constant Maturity Series with
ten-year maturities.

"Unfunded Liabilities" means, with respect to any Plan at any time,
--------------------
the amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed
by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market
value of all Plan assets allocable to such liabilities under Title IV of ERISA
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the ERISA Group to the
PBGC or any other Person under Title IV of ERISA.

"United States" means the United States of America, including the
-------------
States and the District of Columbia, but excluding its territories and
possessions.

"Unused Commitments" means an amount equal to all unadvanced funds
------------------
(other than unadvanced funds in connection with any construction loan) which any
third party is obligated to advance to the Borrower or otherwise, pursuant to
any Loan Document, written instrument or otherwise.

SECTION 1.2. Accounting Terms and Determinations. Unless otherwise
------------------------------------
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with GAAP,
applied on a basis consistent (except for changes concurred in by the Borrower's
independent public accountants) with the most

21
<PAGE>

recent audited consolidated financial statements of the Borrower delivered to
the Lead Agent and the Banks; provided that, if the Borrower notifies the Lead
--------
Agent and the Banks that the Borrower wishes to amend any covenant in Article V
to eliminate the effect of any change in GAAP on the operation of such covenant
(or if the Lead Agent notifies the Borrower that the Required Banks wish to
amend Article V for such purpose), then the Borrower's compliance with such
covenant shall be determined on the basis of GAAP in effect immediately before
the relevant change in GAAP became effective, until either such notice is
withdrawn or such covenant is amended in a manner satisfactory to the Borrower
and the Required Banks.

SECTION 1.3. Types of Borrowings. The term "Borrowing" denotes the
------------------- ---------
aggregation of Loans of one or more Banks to be made to the Borrower pursuant to
Article II on a single date and for a single Interest Period. Borrowings are
classified for purposes of this Agreement by reference to the pricing of Loans
comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing
----
comprised of Euro-Dollar Loans).

ARTICLE II

THE CREDITS

SECTION 2.1. Commitments to Lend.
-------------------

(a) Each Bank severally agrees, on the terms and conditions set forth
in this Agreement, to make the Loans to the Borrower pursuant to this Section
from time to time during the Term in amounts such that the aggregate principal
amount of the Loans by such Bank at any one time outstanding shall not exceed
the amount of its Commitment. The aggregate amount of Loans to be made
hereunder shall not exceed One Hundred Fifty Million Dollars ($150,000,000)
(the Loan Amount"). Each Borrowing under this subsection (a) shall be in an
-----------
aggregate principal amount of at least $2,500,000, or an integral multiple of
$500,000 in excess thereof and shall be made from the several Banks ratably in
proportion to their respective Commitments. Subject to the limitations set
forth herein, any amounts repaid may be reborrowed. Notwithstanding anything
to the contrary, the number of new

22
<PAGE>

Borrowings shall be limited to five (5) Borrowings per month.

(b) Notwithstanding anything in the preceding subparagraph (a) to the
contrary, the Loan Amount shall in no event exceed (and no Bank shall be deemed
to have committed to fund its pro rata share of an amount which exceeds) (A) the
--- ----
Mortgaged Properties Value or (B) an amount which would result in the violation
of any provision of Section 5.8.

SECTION 2.2. Notice of Borrowing. The Borrower shall give the Lead
-------------------
Agent notice (a "Notice of Borrowing") not later than 11:30 a.m. (New York City
-------------------
time) (x) one Domestic Business Day before each Base Rate Borrowing or (y) the
third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying:

(i) the date of such Borrowing, which shall be a Domestic
Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day
in the case of a Euro-Dollar Borrowing,

(ii) the aggregate amount of such Borrowing,

(iii) whether the Loans comprising such Borrowing are to be Base
Rate Loans or Euro-Dollar Loans,

(iv) in the case of a Euro-Dollar Borrowing, the duration of the
Interest Period applicable thereto, subject to the provisions of the definition
of Interest Period, and

(v) the intended use for the proceeds of such Borrowing.

SECTION 2.3. Notice to Banks; Funding of Loans.
---------------------------------

(a) Upon receipt of a Notice of Borrowing, the Lead Agent shall
notify each Bank on the same day as it receives the Notice of Borrowing of the
contents thereof and of such Bank's share of such Borrowing and such Notice of
Borrowing shall not thereafter be revocable by the Borrower.

23
<PAGE>

(b) Not later than 2:00 P.M. (New York City time) on the date of each
Borrowing, each Bank shall make available its share of such Borrowing, in
Federal or other funds immediately available in New York City, to the Lead Agent
at its address referred to in Section 9.1. The Lead Agent will make the funds
so received from the Banks available to the Borrower at the Lead Agent's
aforesaid address. Upon any change in any of the Commitments in accordance
herewith, there shall be an automatic adjustment to such participations to
reflect such changed shares.

(c) Unless the Lead Agent shall have received notice from a Bank
prior to the date of any Borrowing that such Bank will not make available to the
Lead Agent such Bank's share of such Borrowing, the Lead Agent may assume that
such Bank has made such share available to the Lead Agent on the date of such
Borrowing in accordance with subsection (b) of this Section 2.3 and the Lead
Agent may, in reliance upon such assumption, make available to the Borrower on
such date a corresponding amount. If and to the extent that such Bank shall not
have so made such share available to the Lead Agent, such Bank and the Borrower
severally agree to repay to the Lead Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the date
such amount is made available to the Borrower until the date such amount is
repaid to the Lead Agent, at (i) in the case of the Borrower, a rate per annum
equal to the higher of the Federal Funds Rate and the interest rate applicable
thereto pursuant to Section 2.6 and (ii) in the case of such Bank, the Federal
Funds Rate. If such Bank shall repay to the Lead Agent such corresponding
amount, such amount so repaid shall constitute such Bank's Loan included in such
Borrowing for purposes of this Agreement.

SECTION 2.4. Notes.
-----

(a) The Loans shall be evidenced by the Notes, each of which shall be
payable to the order of each Bank for the account of its Applicable Lending
Office in an amount equal to each such Bank's Commitment.

(b) Each Bank may, by notice to the Borrower and the Lead Agent,
request that its Loans of a particular type be evidenced by a separate Note in
an amount

24
<PAGE>

equal to the aggregate unpaid principal amount of such Loans. Each such Note
shall be in substantially the form of Exhibit A hereto, with appropriate
---------
modifications to reflect the fact that it evidences solely Loans of the relevant
type. Each reference in this Agreement to the "Note" of such Bank shall be
----
deemed to refer to and include any or all of such Notes, as the context may
require.

(c) Upon receipt of each Bank's Note pursuant to Section 3.1(a), the
Lead Agent shall forward such Note to such Bank. Each Bank shall record the
date, amount, type and maturity of each Loan made by it and the date and amount
of each payment of principal made by the Borrower with respect thereto, and may,
if such Bank so elects in connection with any transfer or enforcement of its
Note, endorse on the schedule forming a part thereof appropriate notations to
evidence the foregoing information with respect to each such Loan then
outstanding; provided that the failure of any Bank to make any such recordation
--------
or endorsement shall not affect the obligations of the Borrower hereunder or
under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so
to endorse its Note and to attach to and make a part of its Note a continuation
of any such schedule as and when required.

(d) There shall be no more than seven (7) Euro-Dollar Borrowings
outstanding at any one time pursuant to this Agreement.

SECTION 2.5. Maturity of Loans. The Loans shall mature, and the
-----------------
principal amount thereof shall be due and payable, on the Maturity Date.

SECTION 2.6. Interest Rates.
--------------

(a) Each Base Rate Loan shall bear interest on the outstanding
principal amount thereof, for each day from the date such Loan is made until it
becomes due, at a rate per annum equal to the sum of twenty-five (25) basis
points plus the Base Rate for such day. Such interest shall be payable for each
Interest Period on the last day thereof.

(b) Euro-Dollar Loan shall bear interest on the outstanding principal
amount thereof, for each day

25
<PAGE>

during the Interest Period applicable thereto, at a rate per annum equal to the
sum of 1.50% plus the Adjusted London Interbank Offered Rate applicable to such
Interest Period. Such interest shall be payable for each Interest Period on the
last day thereof and, if such Interest Period is longer than three months, at
intervals of three months after the first day thereof.

"Adjusted London Interbank Offered Rate" applicable to any Interest
--------------------------------------
Period means a rate per annum equal to the quotient obtained (rounded upward, if
necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London
Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve Percentage.

"Euro-Dollar Reserve Percentage" means for any day that percentage
------------------------------
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of "Eurocurrency liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar Loans is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of any Bank to United
States residents). The Adjusted London Interbank Offered Rate shall be adjusted
automatically on and as of the effective date of any change in the Euro-Dollar
Reserve Percentage.

"London Interbank Offered Rate" applicable to any Interest Period
-----------------------------
means the average (rounded upward, if necessary, to the next higher 1/16 of 1%)
of the respective rates per annum at which deposits in dollars are offered to
the Reference Bank in the London interbank market at approximately 11:00 a.m.
(London time) two Euro-Dollar Business Days before the first day of such
Interest Period in an amount approximately equal to the principal amount of the
Euro-Dollar Loan of such Reference Bank to which such Interest Period is to
apply and for a period of time comparable to such Interest Period.

(c) In the event that, and for so long as, any Event of Default shall
have occurred and be continuing, the outstanding principal amount of the Loans,
and, to

26
<PAGE>

the extent permitted by law, overdue interest in respect of all Loans, shall
bear interest at the annual rate of the sum of the Prime Rate and four percent
(4%).

(d) The Lead Agent shall determine each interest rate applicable to
the Loans hereunder. The Lead Agent shall give prompt notice to the Borrower
and the Banks of each rate of interest so determined, and its determination
thereof shall be conclusive in the absence of manifest error.

(e) The Reference Bank agrees to use its best efforts to furnish
quotations to the Lead Agent as contemplated by this Section. If the Reference
Bank does not furnish a timely quotation, the provisions of Section 8.1 shall
apply.

SECTION 2.7. Fees.
----

(a) Commitment Fee. During the Term, the Borrower shall pay Lead
--------------
Agent for the account of the Banks ratably in proportion to their respective
Commitments, a commitment fee at an annual rate of .25% on the daily average
undrawn Commitments in any given quarter, payable quarterly, in arrears.

(b) Reserved.
--------

(c) Extension Fee. Within one week of the notification by the Lead
-------------
Agent to the Borrower that a Request to Extend has been accepted pursuant to
Section 2.08(b), the Borrower shall pay to the Lead Agent for the account of the
Banks ratably in proportion to their Commitments an extension fee of 1/4 of 1%
of the Commitments then outstanding.

(d) Fees Non-Refundable. All fees set forth in this Section 2.7 shall
-------------------
be deemed to have been earned on the date payment is due in accordance with the
provisions hereof and shall be non-refundable. The obligation of the Borrower
to pay such fees in accordance with the provisions hereof shall be binding upon
the Borrower and shall inure to the benefit of the Lead Agent and the Banks
regardless of whether any Loans are actually made.

27
<PAGE>

SECTION 2.8. Mandatory Termination. (a) The term (the "Term") of
--------------------- ----
the Commitments shall terminate and expire on May 30, 1999 (the "Maturity
--------
Date").

(b) The Borrower may request a one-year extension of the Maturity
Date by delivering a written request therefor to the Lead Agent not more than
eight months or less than six months prior to the Maturity Date (a "Request to
----------
Extend"). The Lead Agent shall notify the Banks of the receipt of such request
- ------
and each Bank shall give notice in writing to the Lead Agent not less than five
months prior to the Maturity Date of such Bank's acceptance or rejection of
such request. If all the Banks shall have notified the Lead Agent on or prior to
the date which is five months prior to the Maturity Date that they accept such
request, the Maturity Date shall be extended for one year. If any Bank shall
not have notified the Lead Agent on or prior to the date which is five months
prior to the Maturity Date that it accepts such request, the Maturity Date shall
not be extended. The Lead Agent shall notify the Borrower whether the Request to
Extend has been accepted or rejected as well as which Bank or Banks rejected the
Borrower's Request to Extend.

SECTION 2.9. Mandatory Prepayment.
--------------------

(a) If as of the last day of any calendar quarter the LTV Ratio
exceeds the Permitted LTV Ratio, provided that no Event of Default has occurred
and is continuing, either (i) the Borrower shall add additional Real Property
Assets to the Mortgaged Properties within thirty (30) days of the date of
delivery of the financial statements (or the date on which such statements
should have been delivered) of Borrower with respect to such calendar quarter
the LTV Ratio exceeded the Permitted LTV Ratio, in accordance with the
provisions of Section 3.3, or (ii) the Borrower shall pay to the Lead Agent, for
the account of the Banks, within thirty (30) days of the date of delivery of the
financial statements (or the date on which such statements should have been
delivered) of Borrower with respect to such calendar quarter the LTV Ratio
exceeded the Permitted LTV Ratio, an amount such that the Loans outstanding
subsequent to such payment do not cause the LTV Ratio to exceed the Permitted
LTV Ratio.

(b) In the event that a Mortgaged Property is sold in accordance with
Section 3.4(c) hereof, the Bor-

28
<PAGE>

rower shall simultaneously with such sale, prepay to the Lead Agent, for the
account of the Banks, an amount equal to 125% of the Allocated Mortgaged
Property Loan Amount for such Mortgaged Property. Sale of a Mortgaged Property
in violation of this Section 2.9 shall constitute an Event of Default.

(c) In the event that the Minimum Debt Service Coverage is not
maintained as of the last day of a calendar quarter, either (i) the Borrower
will add a Real Property Asset to the Mortgaged Properties in accordance with
this Agreement which, on a pro forma basis (i.e. the Minimum Debt Service
--------- ----
Coverage shall be recalculated to include such Real Property Asset as though the
same had been a Mortgaged Property for the entire applicable period) would
result in compliance with the Minimum Debt Service Coverage or (ii) the
Borrower shall prepay to the Lead Agent, for the account of the Banks, an amount
necessary to cause the Minimum Debt Service Coverage to be in compliance within
ninety (90) days of the date on which the Minimum Debt Service Coverage failed
to be maintained. Failure by the Borrower to comply with the Minimum Debt
Service Coverage within ninety (90) days of the date of such non-compliance
shall be an Event of Default.

SECTION 2.10. Optional Prepayments.
--------------------

(a) The Borrower may, upon at least one Domestic Business Day's
notice to the Lead Agent, prepay to the Lead Agent, for the account of the
Banks, any Base Rate Borrowing in whole at any time, or from time to time in
part in amounts aggregating One Million Dollars ($1,000,000), or an integral
multiple of One Million Dollars ($1,000,000) in excess thereof or, if less, the
outstanding principal balance, by paying the principal amount to be prepaid
together with accrued interest thereon to the date of prepayment. Each such
optional prepayment shall be applied to prepay ratably the Loans of the several
Banks included in such Borrowing.

(b) Except as provided in Section 8.2, the Borrower may not prepay all
or any portion of the principal amount of any Euro-Dollar Loan prior to the
maturity thereof unless the Borrower shall also pay any applicable expenses
pursuant to Section 2.12. Any such prepayment shall be upon at least three (3)
Euro-Dollar Business

29
<PAGE>

Days' notice to the Lead Agent. Any notice of prepayment delivered pursuant to
this Section 2.10(b) shall set forth the amount of such prepayment which is
applicable to any Loan made for working capital purposes. Each such optional
prepayment shall be in the amounts set forth in Section 2.10(a) above and shall
be applied to prepay ratably the Loans of the Banks included.

(c) A Borrower may at any time and from time to time cancel all or any
part of the Commitments in amounts aggregating One Million Dollars ($1,000,000),
or an integral multiple of One Million Dollars ($1,000,000) in excess thereof,
by the delivery to the Lead Agent and the Banks of a notice of cancellation upon
at least three (3) Domestic Business Days' notice to Lead Agent and the Banks,
whereupon, all or such portion of the Commitments shall terminate as to the
Banks, pro rata on the date set forth in such notice of cancellation, and, if
--------
there are any Loans then outstanding in an aggregate amount which exceeds the
aggregate Commitments (after giving effect to any such reduction), the Borrower
shall prepay to the Lead Agent, for the account of the Banks, all or such
portion of Loans outstanding on such date in accordance with the requirements of
Sections 2.10(a) and (b). The Borrower shall be permitted to designate in its
notice of cancellation which Loans, if any, are to be prepaid.

(d) Upon receipt of a notice of prepayment or cancellation pursuant to
this Section, the Lead Agent shall promptly, and in any event within one (1)
Domestic Business Day, notify each Bank of the contents thereof and of such
Bank's ratable share (if any) of such prepayment or cancellation and such
notice shall not thereafter be revocable by the Borrower.

(e) Any amounts so prepaid pursuant to this Section 2.10 may be
reborrowed subject to the other terms of this Agreement. In the event that the
Borrower elects to cancel all or any portion of the Commitments pursuant to
Section 2.10(c) hereof, such amounts may not be reborrowed.

SECTION 2.11. General Provisions as to Payments.
----------------------------------

(a) The Borrower shall make each payment of principal of, and interest
on, the Loans and of fees

30
<PAGE>

hereunder, not later than 12:00 Noon (New York City time) on the date when due,
in Federal or other funds immediately available in New York City, to the Lead
Agent at its address referred to in Section 9.1. The Lead Agent will distribute
to each Bank its ratable share of each such payment received by the Lead Agent
for the account of the Banks on the same day as received by the Lead Agent if
received by the Lead Agent by 3:00 p.m. (New York City time), or, if received by
the Lead Agent after 3:00 p.m. (New York City time), on the immediately
following Domestic Business Day. Whenever any payment of principal of, or
interest on, the Base Rate Loans or of fees shall be due on a day which is not a
Domestic Business Day, the date for payment thereof shall be extended to the
next succeeding Domestic Business Day. Whenever any payment of principal of, or
interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-
Dollar Business Day, the date for payment thereof shall be extended to the next
succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls
in another calendar month, in which case the date for payment thereof shall be
the next preceding Euro-Dollar Business Day. If the date for any payment of
principal is extended by operation of law or otherwise, interest thereon shall
be payable for such extended time.

(b) Unless the Lead Agent shall have received notice from the Borrower
prior to the date on which any payment is due to the Banks hereunder that the
Borrower will not make such payment in full, the Lead Agent may assume that the
Borrower has made such payment in full to the Lead Agent on such date and the
Lead Agent may, in reliance upon such assumption, cause to be distributed to
each Bank on such due date an amount equal to the amount then due such Bank. If
and to the extent that the Borrower shall not have so made such payment, each
Bank shall repay to the Lead Agent forthwith on demand such amount distributed
to such Bank together with interest thereon, for each day from the date such
amount is distributed to such Bank until the date such Bank repays such amount
to the Lead Agent, at the Federal Funds Rate.

SECTION 2.12. Funding Losses. If the Borrower makes any payment of
--------------
principal with respect to any Euro-Dollar Loan (pursuant to Article II, VI or
VIII or otherwise) on any day other than the last day of the Interest Period
applicable thereto, or if the Borrower fails to

31
<PAGE>

borrow any Euro-Dollar Loans, after notice has been given to any Bank in
accordance with Section 2.3(a), the Borrower shall reimburse each Bank within
15 days after demand for any resulting loss or expense incurred by it (or by an
existing Participant in the related Loan; provided that no Participant shall be
entitled to receive more than the Bank with respect to which such Participant is
a Participant would be entitled to receive under this Section 2.12), including
(without limitation) any loss incurred in obtaining, liquidating or employing
deposits from third parties, but excluding loss of margin for the period after
any such payment or failure to borrow, provided that such Bank shall have
--------
delivered to the Borrower a certificate as to the amount of such loss or expense
and the calculation thereof, which certificate shall be conclusive in the
absence of manifest error.

SECTION 2.13. Computation of Interest and Fees. Interest based on
--------------------------------
the Prime Rate hereunder shall be computed on the basis of a year of 365 days
(or 366 days in a leap year) and paid for the actual number of days elapsed
(including the first day but excluding the last day). All other interest and
fees shall be computed on the basis of a year of 360 days and paid for the
actual number of days elapsed (including the first day but excluding the last
day).

SECTION 2.14. Method of Electing Interest Rates.
---------------------------------
(a) The Loans included in each Borrowing shall bear interest initially
at the type of rate specified by the Borrower in the applicable Notice of
Borrowing. Thereafter, the Borrower may from time to time elect to change or
continue the type of interest rate borne by each Group of Loans (subject in each
case to the provisions of Article VIII), as follows:

(i) if such Loans are Base Rate Loans, the Borrower may elect to
convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day;

(ii) if such Loans are Euro-Dollar Loans, the Borrower may elect to
convert such Loans to Base Rate Loans or elect to continue such Loans as Euro-
Dollar Loans for an additional Interest Period, in each case effective on the
last day of the then current Interest Period applicable to such Loans.

32
<PAGE>

Each such election shall be made by delivering a notice (a "Notice of Interest
------------------
Rate Election") to the Lead Agent at least three (3) Euro-Dollar Business Days
- -------------
before the conversion or continuation selected in such notice is to be effective
(unless the relevant Loans are to be continued as Base Rate Loans, in which
case such notice shall be delivered to the Lead Agent no later than 12:00 Noon
(New York City time) at least one (1) Domestic Business Day before such
continuation is to be effective). A Notice of Interest Rate Election may, if it
so specifies, apply to only a portion of the aggregate principal amount of the
relevant Group of Loans; provided that (i) such portion is allocated ratably
--------
among the Loans comprising such Group, (ii) the portion to which such notice
applies, and the remaining portion to which it does not apply, are each
$1,000,000 or any larger multiple of $1,000,000, (iii) there shall be no more
than seven (7) Borrowings comprised of Euro-Dollar Loans outstanding at any time
under this Agreement, (iv) no Loan may be continued as, or converted into, a
Euro-Dollar Loan when any Event of Default has occurred and is continuing, and
(v) no Interest Period shall extend beyond the Maturity Date.

(b) Each Notice of Interest Rate Election shall specify:

(i) the Group of Loans (or portion thereof) to which such notice
applies;

(ii) the date on which the conversion or continuation selected in
such notice is to be effective, which shall comply with the applicable clause of
subsection (a) above;

(iii) if the Loans comprising such Group are to be converted, the new
type of Loans and, if such new Loans are Euro-Dollar Loans, the duration of the
initial Interest Period applicable thereto; and

(iv) if such Loans are to be continued as Euro-Dollar Loans for an
additional Interest Period, the duration of such additional Interest Period.

Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.

33
<PAGE>

(c) Upon receipt of a Notice of Interest Rate Election from the
Borrower pursuant to subsection (a) above, the Lead Agent shall notify each Bank
on the same day as it receives such Notice of Interest Rate Election of the
contents thereof and such notice shall not thereafter be revocable by the
Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate
Election to the Lead Agent for any Group of Euro-Dollar Loans, such Loans shall
be converted into Base Rate Loans on the last day of the then current Interest
Period applicable thereto.

ARTICLE III

CONDITIONS

SECTION 3.1. Closing. The closing hereunder shall occur on the date (the
-------
"Closing Date") when each of the following conditions is satisfied (or waived by
------------
the Lead Agent, such waiver to be evidenced by the funding of the Loans made on
the Closing Date), each document to be dated the Closing Date unless otherwise
indicated:

(a) the Borrower shall have executed and delivered to the Lead Agent a
Note for the account of each Bank dated on or before the Closing Date complying
with the provisions of Section 2.4;

(b) the Borrower shall have executed and delivered to the Lead Agent a
duly executed original of this Agreement;

(c) the Lead Agent shall have received an opinion of Latham & Watkins
counsel for the Borrower, together with opinions of local counsel, in each case
acceptable to the Lead Agent, the Banks and their counsel;

(d) the Lead Agent shall have received all documents the Lead Agent
may reasonably request relating to the existence of the Borrower, the authority
for and the validity of this Agreement and the other Loan Documents, and any
other matters relevant hereto, all in form and substance reasonably satisfactory
to the Lead Agent. Such documentation shall include, without limitation, the
articles of incorporation and by-laws or the partnership agreement and limited
partnership certificate, as appli-

34
<PAGE>

cable, of the Borrower, as amended, modified or supplemented to the Closing
Date, each certified to be true, correct and complete by a senior officer of the
Borrower as of a date not more than forty-five (45) days prior to the Closing
Date, together with a good standing certificate from the Secretary of State (or
the equivalent thereof) of the State of Delaware with respect to the Borrower
and a good standing certificate from the Secretary of State (or the equivalent
thereof) of each other State in which the Borrower is required to be qualified
to transact business, each to be dated not more than forty-five (45) days prior
to the Closing Date;

(e) the Lead Agent shall have received all certificates, agreements
and other documents and papers referred to in this Section 3.1 and Section 3.2,
unless otherwise specified, in sufficient counterparts, satisfactory in form
and substance to the Lead Agent in its sole discretion;

(f) the Borrower shall have taken all actions required to authorize
the execution and delivery of this Agreement and the other Loan Documents and
the performance thereof by the Borrower;

(g) the Lead Agent shall be satisfied that the Borrower is not subject
to any present or contingent environmental liability which could reasonably be
expected to have a Material Adverse Effect;

(h) the Lead Agent shall have received an unaudited consolidated
balance sheet and income statement of the Borrower for the fiscal quarter ended
March 31, 1997;

(i) the Lead Agent shall have received wire transfer instructions in
connection with the Loans to be made on the Closing Date;

(j) the Lead Agent shall have received, for its and any other Bank's
account, all fees due and payable pursuant to Section 2.7 hereof on or before
the Closing Date, and the reasonable fees and expenses accrued through the
Closing Date of Skadden, Arps, Slate, Meagher & Flom LLP;

35
<PAGE>

(k) the Lead Agent shall have received copies of all consents,
licenses and approvals, if any, required in connection with the execution,
delivery and performance by the Borrower, and the validity and enforceability
against the Borrower, of the Loan Documents, or in connection with any of the
transactions contemplated thereby to occur on or prior to the Closing Date, and
such consents, licenses and approvals shall be in full force and effect;

(l) the Lead Agent shall have received satisfactory reports of
Uniform Commercial Code filing searches conducted by a search firm acceptable
to the Lead Agent with respect to the Mortgaged Properties and the Borrower,
such searches to be conducted in each of the locations specified by the Lead
Agent;

(m) the representations and warranties of the Borrower contained in
this Agreement shall be true and correct in all material respects on and as of
the Closing Date both before and after giving effect to the making of any Loans;

(n) the Lead Agent shall have received certificates of insurance with
respect to each Mortgaged Property demonstrating the coverages required under
this Agreement;

(o) the Lead Agent shall have received with respect to each Mortgaged
Property, a satisfactory Title Commitment to be issued and delivered by each
Title Company in an amount equal to that set forth on Exhibit D annexed hereto;
---------

(p) the Lead Agent shall have received with respect to each Mortgaged
Property, a satisfactory environmental report indicating that (A) the Mortgaged
Property complies with all Environmental Laws in all material respects, (B) is
free of all Material of Environmental Concern in all material respects and (C)
is not subject to any Environmental Claim;

(q) the Lead Agent shall have received with respect to each Mortgaged
Property, a satisfactory engineer's inspection report;

36
<PAGE>

(r) the Lead Agent shall have received with respect to each Mortgaged
Property, evidence of compliance with zoning and other local laws, together
with copies of the certificates of occupancy for each thereof (or evidence
satisfactory to the Lead Agent as to why no certificate of occupancy is
required);

(s) the Lead Agent shall have received with respect to each Mortgaged
Property, (i) a description of the Mortgaged Property, (ii) two years of
historical cash flow operating statements, if available, (iii) five years of
cash flow projections (including capital expenditures), (iv) the credit history
of each existing tenant which occupies more than 15% of such Mortgaged Property,
(v) a map and site plan, including an existing Survey of the property dated not
more than six (6) months prior to such submission, (vi) copies of all lease
agreements with each existing tenant which occupies more than 15% of such
Mortgaged Property and lease abstracts thereof, (vii) an estoppel certificate
from each tenant which occupies 15% or more of such Mortgaged Property and
(viii) any investment memorandum prepared by the Borrower; and

(t) receipt by the Lead Agent and the Banks of a certificate of the
chief financial officer or the chief accounting officer of the Borrower
certifying that the Borrower is in compliance with all covenants of the Borrower
contained in this Agreement, including, without limitation, the requirements of
Section 5.8, as of the Closing Date;

(u) the Lead Agent shall have received the Financing Statements
executed by the Borrower, as debtor, naming the Lead Agent, as secured party, to
be filed in the appropriate jurisdictions as is necessary to create perfected
security interests with respect to such portion of the Mortgaged Properties and
the personal property located thereon, with respect to which security interests
are governed by the Uniform Commercial Code;

(v) the Lead Agent shall have received the Mortgages, covering each
Mortgaged Property, duly executed by the Borrower to be recorded in the
appropriate jurisdictions as is necessary to create perfected mortgage liens
with respect to the Mortgaged Properties;

37
<PAGE>

(w) the Lead Agent shall have received the Assignments, covering each
Mortgaged Property, duly executed by the Borrower to be recorded in the
appropriate jurisdictions as is necessary to create effective assignments as
contemplated thereby with respect to the Mortgaged Properties;

(x) the Lead Agent shall have received the Environmental Indemnity,
duly executed by the appropriate party acceptable to the Lead Agent in
accordance with the terms of this Agreement;

(y) the Lead Agent shall have received the Appraisals; and

(z) the general partner of the Borrower shall have qualified and
shall intend to continue to qualify as a real estate investment trust under the
Internal Revenue Code.

The Lead Agent shall promptly notify the Borrower and the Banks of the Closing
Date, and such notice shall be conclusive and binding on all parties hereto.

SECTION 3.2. Borrowings. The obligation of any Bank to make a Loan on the
----------
occasion of any Borrowing is subject to the satisfaction of the following
conditions:

(a) the Closing Date shall have occurred on or prior to May 23, 1997;

(b) receipt by the Lead Agent of a Notice of Borrowing as required by
Section 2.2;

(c) immediately after such Borrowing, the Outstanding Balance will
not exceed the aggregate amount of the Commitments and with respect to each
Bank, such Bank's pro rata portion of the Loans on the amount permitted
--------
pursuant to Section 2.1(b);

(d) immediately before and after such Borrowing, no Default or Event
of Default shall have occurred and be continuing both before and after giving
effect to the making of such Loans;

(e) the representations and warranties of the Borrower contained in
this Agreement (other than repre-

38
<PAGE>

sentations and warranties which speak as of a specific date) shall be true and
correct in all material respects on and as of the date of such Borrowing both
before and after giving effect to the making of such Loans;

(f) no law or regulation shall have been adopted, no order, judgment
or decree of any governmental authority shall have been issued, and no
litigation shall be pending or threatened, which does or, with respect to any
threatened litigation, seeks to enjoin, prohibit or restrain, the making or
repayment of the Loans or any participations therein or the consummation of the
transactions contemplated hereby; and

(g) no event, act or condition shall have occurred after the Closing
Date which, in the reasonable judgment of the Lead Agent or the Required Banks,
as the case may be, has had or is likely to have a Material Adverse Effect.

Each Borrowing hereunder shall be deemed to be a representation and warranty by
the Borrower on the date of such Borrowing as to the facts specified in clauses
(c) through (g) of this Section (except that with respect to clause (f), such
representation and warranty shall be deemed to be limited to laws, regulations,
orders, judgments, decrees and litigation affecting the Borrower and not solely
the Banks).

SECTION 3.3. Conditions Precedent to Additional Real Property Assets.
-------------------------------------------------------

(a) All Real Property Assets to be added to the Mortgaged Properties
shall be approved by all of the Banks.

(b) The Borrower shall submit to the Lead Agent and the Banks as
provided in subsection (c) below the materials set forth below (the "Due
---
Diligence Package") relating to each Real Property Asset to be added to the
- -----------------
Mortgaged Properties. The Due Diligence Package shall include (i) a description
of the Real Property Asset, (ii) two years of historical cash flow operating
statements, if available, (iii) five years of cash flow projections (including
capital expenditures), (iv) the credit history of each existing tenant which
occupies more than 15% of such Real Property Asset, (v) a map and

39
<PAGE>

site plan, including an existing Survey of the property dated not more than
twelve (12) months prior to such submission, (vi) copies of all lease agreements
and abstracts thereof with each existing tenant which occupies more than 15% of
such Real Property Asset, (vii) an environmental report in compliance with
Section 3.1(p), (viii) an engineer's inspection report satisfactory to the Lead
Agent, (ix) an estoppel certificate from each tenant which occupies 15% or more
of the Real Property Asset, (x) evidence of compliance with zoning and other
local laws, (xi) a Title Commitment satisfactory to the Lead Agent, (xii) a
final investment memorandum prepared by the Borrower in connection with the Real
Property Asset, (xiii) a property inspection report satisfactory to the Lead
Agent, and (xiv) an Appraisal. The Borrower shall permit the Lead Agent at all
reasonable times and upon reasonable prior notice to make an inspection of such
Real Property Asset.

(c) The Borrower shall distribute a copy of each item constituting the
Due Diligence Package by overnight mail to each of the Banks for their review
and approval. Failure to respond to the Lead Agent in writing by any Bank
within twenty (20) Domestic Business Days after receipt of the Due Diligence
Package, shall be deemed to be an approval by such Bank of such potential Real
Property Asset.

SECTION 3.4. Mortgaged Properties. (a) On the Closing Date, and on
--------------------
the date of the addition of any Real Property Asset to the Mortgaged Properties,
as applicable, or as soon thereafter as is practicable, the Lead Agent shall
cause all of the Mortgages, the Assignments, the Environmental Indemnities and
the Financing Statements (collectively, the "Security Documents") (which are to
------------------
be recorded and/or filed) to be recorded and/or filed in the appropriate
offices, as security for the Loans, at the Borrower's sole cost and expense.
Upon such addition, the Borrower shall cause to be delivered to the Lead Agent,
at the Borrower's sole cost and expense, the Title Policies, and the Borrower
will cooperate with the Lead Agent and execute such further instruments and
documents and perform such further acts as the Lead Agent or the Title Company
shall reasonably request to carry out the creation and perfection of the liens
and security interests contemplated by the Security Documents.

40
<PAGE>

(b) The Lead Agent shall have the annual (based on the date of the
most recent applicable Appraisal) right with respect to each Real Property
Asset which is or becomes a Mortgaged Property, prior to the Maturity Date, to
commission, at the Borrower's sole cost and expense, an updated Appraisal, and
shall deliver copies of each such Appraisal to each Bank and to the Borrower
promptly after receipt thereof by the Lead Agent.

(c) The Borrower shall be entitled to have one (1) or more of the
Mortgaged Properties released from the Lien of the applicable Mortgage, in
connection with a sale of such Mortgaged Property to an unaffiliated third
party; provided that all of the conditions set forth below have been satisfied.
--------
The release of any of the Mortgaged Properties shall be subject to the
satisfaction of the following conditions:

(i) Lead Agent shall have received from the Borrower at least 10
days' prior written notice of the date proposed for such
release (the "Release Date").
------------

(ii) no Event of Default shall have occurred and be continuing
as of the date of such notice and the Release Date.

(iii) on or prior to the Release Date, the Borrower shall pay to
the Lead Agent for the account of the Banks, the amounts
required to be paid pursuant to Section 2.9(b).

(iv) the Borrower shall have delivered to the Lead Agent an
officer's certificate, dated the Release Date, confirming
the matters referred to in clause (ii) above, certifying
that the provisions of clause (iii) above have been complied
with and certifying that all conditions precedent for such
release contained in this Agreement have been complied
with;

41
<PAGE>

Upon or concurrently with payment of all amounts required to be paid
pursuant to Section 2.9(b) and the satisfaction of all other conditions provided
for herein, the Lead Agent shall effectuate the following (hereinafter referred
to as a "Property Release"): the security interest of the Banks in the Mortgage
----------------
and other Loan Documents relating to the released Mortgaged Property shall be
released from the Lien of the Mortgage and the Lead Agent will execute and
deliver any agreements reasonably requested by the Borrower to release and
terminate or reassign, at the Borrower's option, the Mortgage as to the released
Mortgaged Property; provided, that such release and termination or reassignment
--------
shall be without recourse to the Lead Agent (except as contemplated hereby) and
without any representation or warranty except that the Lead Agent shall be
deemed to have represented that such release and termination or reassignment
has been duly authorized and that it has not assigned or encumbered the Mortgage
or the other Loan Documents relating to the released Mortgaged Property (except
as contemplated hereby) and the Lead Agent shall return the originals of any
Loan Documents that relate solely to the released Mortgaged Property to the
Borrower; provided, further, that upon the release and termination or
-------- -------
reassignment of the Lead Agent's security interest in the Mortgage relating to
the released Mortgaged Property all references herein to the Mortgage relating
to the released Mortgaged Property shall be deemed deleted, except as otherwise
provided herein with respect to indemnities .

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

In order to induce the Lead Agent and each of the other Banks which
may become a party to this Agreement to make the Loans, the Borrower makes the
following representations and warranties as of the date hereof. Such
representations and warranties shall survive the effectiveness of this
Agreement, the execution and delivery of the other Loan Documents and the
making of the Loans.

SECTION 4.1. Existence and Power. The Borrower is duly organized,
-------------------
validly existing and in good standing as a limited partnership under the laws of
the State of Delaware and has all powers and all material

42
<PAGE>

governmental licenses, authorizations, consents and approvals required to own
its property and assets and carry on its business as now conducted or as it
presently proposes to conduct and has been duly qualified and is in good
standing in every jurisdiction in which the failure to be so qualified and/or in
good standing is likely to have a Material Adverse Effect.

SECTION 4.2. Power and Authority. The Borrower has the corporate
-------------------
power and authority to execute, deliver and carry out the terms and provisions
of each of the Loan Documents to which it is a party and has taken all necessary
action to authorize the execution and delivery on behalf of the Borrower and the
performance by the Borrower of such Loan Documents. The Borrower has duly
executed and delivered each Loan Document to which it is a party, and each such
Loan Document constitutes the legal, valid and binding obligation of the
Borrower, enforceable in accordance with its terms, except as enforceability
may be limited by applicable insolvency, bankruptcy or other laws affecting
creditors rights generally, or general principles of equity, whether such
enforceability is considered in a proceeding in equity or at law.

SECTION 4.3. No Violation. Neither the execution, delivery or
------------
performance by or on behalf of the Borrower of the Loan Documents, nor
compliance by the Borrower with the terms and provisions thereof nor the
consummation of the transactions contemplated by the Loan Documents, (i) will
contravene any applicable provision of any law, statute, rule, regulation,
order, writ, injunction or decree of any court or governmental instrumentality
applicable to Borrower or (ii) will conflict with or result in any breach of,
any of the terms, covenants, conditions or provisions of, or constitute a
default under, or result in the creation or imposition of (or the obligation to
create or impose) any Lien upon any of the property or assets of the Borrower
pursuant to the terms of any material indenture, mortgage, deed of trust, or
other agreement or other instrument to which the Borrower (or of any partnership
of which the Borrower is a partner) is a party or by which it or any of its
property or assets is bound or to which it is subject or (iii) will cause a
default by the Borrower under any organizational document of any Subsidiary, or
cause a de-

43
<PAGE>

fault under the Borrower's general partner's articles of incorporation or by-
laws.

SECTION 4.4. Financial Information.
---------------------

(a) The unaudited consolidated balance sheet of the Borrower as of
March 31, 1997, when delivered to Lead Agent shall fairly present, in conformity
with GAAP, the consolidated financial position of the Borrower as of such date
and its consolidated results of operations for such fiscal year.

(b) Since March 31, 1997, (i) there has been no material adverse
change in the business, financial position or results of operations of the
Borrower and (ii) except as previously disclosed to the Lead Agent, the Borrower
has not incurred any material indebtedness or guaranty.

SECTION 4.5. Litigation.
----------

(a) There is no action, suit or proceeding pending against, or to the
knowledge of the Borrower, threatened against or affecting, (i) the Borrower or
any of its Subsidiaries, (ii) the Loan Documents or any of the transactions
contemplated by the Loan Documents or (iii) any of their assets, in any case
before any court or arbitrator or any governmental body, agency or official
which could reasonably be expected to have a Material Adverse Effect or which
in any manner draws into question the validity of this Agreement or the other
Loan Documents.

(b) There are no final nonappealable judgments or decrees in an
aggregate amount of One Million Dollars ($1,000,000) or more entered by a court
or courts of competent jurisdiction against the Borrower (other than any
judgment as to which, and only to the extent, a reputable insurance company has
acknowledged coverage of such claim in writing).

SECTION 4.6. Compliance with ERISA.
---------------------

(a) Except as previously disclosed to the Lead Agent in writing, each
member of the ERISA Group has fulfilled its obligations under the minimum
funding standards of ERISA and the Internal Revenue Code with respect

44
<PAGE>

to each Plan and is in compliance in all material respects with the presently
applicable provisions of ERISA and the Internal Revenue Code with respect to
each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum
funding standard under Section 412 of the Internal Revenue Code in respect of
any Plan, (ii) failed to make any contribution or payment to any Plan or
Multiemployer Plan or in respect of any Benefit Arrangement, or made any
amendment to any Plan or Benefit Arrangement, which has resulted or could
result in the imposition of a Lien or the posting of a bond or other security
under ERISA or the Internal Revenue Code or (iii) incurred any liability under
Title IV of ERISA other than a liability to the PBGC for premiums under Section
4007 of ERISA.

(b) Except for each "employee benefit plan" (as such term is defined
in Section 3(3) of ERISA) that is maintained, or contributed to, by one or more
members of the ERISA Group, no member of the ERISA Group is a "party in
interest" (as such term is defined in Section 3(14) of ERISA or a "disqualified
person" (as such term is defined in Section 4975(e)(2) of the Code) with
respect to any funded employee benefit plan and none of the assets of any such
plans have been invested in a manner that would cause the transactions
contemplated by the Loan Documents to constitute a nonexempt prohibited
transaction (as such term is defined in Section 4975 of the Code or Section 406
of ERISA).

SECTION 4.7 Environmental Compliance. To the best of Borrower's
------------------------
knowledge, except as set forth in the Phase I environmental report(s) delivered
to and accepted by the Lead Agent with respect to each of the Mortgaged
Properties (as supplemented or amended, the "Environmental Reports"), (i) there
----------------------
are in effect all Environmental Approvals which are required to be obtained
under all Environmental Laws with respect to the Property, except for such
Environmental Approvals the absence of which would not have a Material Adverse
Effect, (ii) the Borrower is in compliance in all material respects with the
terms and conditions of all such Environmental Approvals, and is also in
compliance in all material respects with all other Environmental Laws or any
plan, order, decree, judgment, injunction, notice or demand letter issued,
entered or approved thereunder, except to the extent

45
<PAGE>

failure to comply would not have a Material Adverse Effect.

Except as set forth in the Environmental Reports or otherwise
disclosed to the Lead Agent as of the Closing Date, to Borrower's actual
knowledge:

(i) There are no Environmental Claims or investigations pending
or threatened by any Governmental Authority with respect to any alleged
failure by the Borrower to have any Environmental Approval required in
connection with the conduct of the business of the Borrower on any of the
Mortgaged Properties, or with respect to any generation, treatment,
storage, recycling, transportation, Release or disposal of any Material of
Environmental Concern generated by the Borrower or any lessee on any of the
Mortgaged Properties;

(ii) No Material of Environmental Concern has been Released at
the Property to an extent that it may reasonably be expected to have a
Material Adverse Effect;

(iii) No PCB (in amounts or concentrations which exceed those
set by applicable Environmental Laws) is present at any of the Mortgaged
Properties;

(iv) No friable asbestos is present at any of the Mortgaged
Properties;

(v) There are no underground storage tanks for Material of
Environmental Concern, active or abandoned, at any of the Mortgaged
Properties;

(vi) No Environmental Claims have been filed with a Governmental
Authority with respect to any of the Mortgaged Properties, and none of the
Mortgaged Properties is listed or proposed for listing on the National
Priority List promulgated pursuant to CERCLA, on CERCLIS or on any similar
state list of sites requiring investigation or clean-up;

(vii) There are no Liens arising under or pursuant to any
Environmental Laws on any of the Mortgaged Properties, and no government
actions have

46
<PAGE>

been taken or are in process which could subject any of the Mortgaged
Properties to such Liens; and

(viii) There have been no environmental investigations, studies,
audits, tests, reviews or other analyses conducted by, or which are in the
possession of, the Borrower in relation to any of the Mortgaged Properties
which have not been made available to the Lead Agent.

SECTION 4.8. Taxes. The initial tax year of the Borrower for federal
-----
income tax purposes was 1996. The federal income tax returns of the Borrower
and its Consolidated Subsidiaries for the fiscal year ended December 31, 1996
have been filed. The Borrower and its Subsidiaries have filed all United States
Federal income tax returns and all other material tax returns which are required
to be filed by them and have paid all taxes due pursuant to such returns or
pursuant to any assessment received by the Borrower or any Subsidiary except
those being contested in good faith. The charges, accruals and reserves on the
books of the Borrower and its Subsidiaries in respect of taxes or other
governmental charges are, in the opinion of the Borrower, adequate.

SECTION 4.9. Full Disclosure. All information heretofore furnished
---------------
by the Borrower to the Lead Agent or any Bank for purposes of or in connection
with this Agreement or any transaction contemplated hereby is true and accurate
in all material respects on the date as of which such information is stated or
certified. The Borrower has disclosed to the Banks in writing any and all facts
known to the Borrower which materially and adversely affect or are likely to
materially and adversely affect (to the extent the Borrower can now reasonably
foresee), the business, operations or financial condition of the Borrower
considered as one enterprise or the ability of the Borrower to perform its
obligations under this Agreement or the other Loan Documents.

SECTION 4.10. Solvency. On the Closing Date and after giving effect
--------
to the transactions contemplated by the Loan Documents occurring on the Closing
Date, the Borrower is Solvent.

SECTION 4.11. Use of Proceeds; Margin Regulations. All proceeds of
------------------------------------
the Loans will be used by the

47
<PAGE>

Borrower only in accordance with the provisions hereof. No part of the proceeds
of any Loan will be used by the Borrower to purchase or carry any Margin Stock
or to extend credit to others for the purpose of purchasing or carrying any
Margin Stock. Neither the making of any Loan nor the use of the proceeds
thereof will violate or be inconsistent with the provisions of Regulations G, T,
U or X of the Federal Reserve Board.

SECTION 4.12. Governmental Approvals. No order, consent, approval,
----------------------
license, authorization, or validation of, or filing, recording or registration
with, or exemption by, any governmental or public body or authority, or any
subdivision thereof, is required to authorize, or is required in connection with
the execution, delivery and performance of any Loan Document or the
consummation of any of the transactions contemplated thereby other than those
that have already been duly made or obtained and remain in full force and
effect.

SECTION 4.13. Investment Company Act; Public Utility Holding Company
------------------------------------------------------
Act. The Borrower is not (x) an "investment company" or a company "controlled"
- --- ------------------ ----------
by an "investment company", within the meaning of the Investment Company Act of
------------------
1940, as amended, (y) a "holding company" or a "subsidiary company" of a
--------------- ------------------
"holding company" or an "affiliate" of either a "holding company" or a
--------------- --------- ---------------
"subsidiary company" within the meaning of the Public Utility Holding Company
- -------------------
Act of 1935, as amended, or (z) subject to any other federal or state law or
regulation which purports to restrict or regulate its ability to borrow money.

SECTION 4.14. Closing Date Transactions. On the Closing Date and
-------------------------
immediately prior to or concurrently with the making of the Loans, the
transactions (other than the making of the Loans) intended to be consummated on
the Closing Date will have been consummated in accordance with all applicable
laws. On or prior to the Closing Date, all consents and approvals of, and
filings and registrations with, and all other actions by, any Person required in
order to make or consummate such transactions have been obtained, given, filed
or taken and are in full force and effect.

SECTION 4.15. Representations and Warranties in Loan Documents. All
------------------------------------------------
representations and warranties

48
<PAGE>

made by the Borrower in the Loan Documents are true and correct in all material
respects.

SECTION 4.16. Patents, Trademarks, etc. The Borrower has obtained
-------------------------
and holds in full force and effect all patents, trademarks, service marks, trade
names, copyrights and other such rights, free from burdensome restrictions,
which are necessary for the operation of its business as presently conducted,
the impairment of which is likely to have a Material Adverse Effect. To the
Borrower's knowledge, no material product, process, method, substance, part or
other material presently sold by or employed by the Borrower in connection with
such business infringes any patent, trademark, service mark, trade name,
copyright, license or other such right owned by any other Person. There is not
pending or, to the Borrower's knowledge, threatened any claim or litigation
against or affecting the Borrower contesting its right to sell or use any such
product, process, method, substance, part or other material.

SECTION 4.17. No Default. No Default or Event of Default exists
----------
under or with respect to any Loan Document. The Borrower is not in default in
any material respect beyond any applicable grace period under or with respect
to any other material agreement, instrument or undertaking to which it is a
party or by which it or any of its property is bound in any respect, the
existence of which default is likely (to the extent that the Borrower can now
reasonably foresee) to result in a Material Adverse Effect.

SECTION 4.18. Licenses, etc. The Borrower has obtained and holds in
--------------
full force and effect, all franchises, licenses, permits, certificates,
authorizations, qualifications, accreditations, easements, rights of way and
other consents and approvals which are necessary for the operation of its
businesses as presently conducted, the absence of which is likely (to the extent
that the Borrower can now reasonably foresee) to have a Material Adverse Effect.

SECTION 4.19. Compliance With Law. The Borrower is in compliance
-------------------
with all laws, rules, regulations, orders, judgments, writs and decrees,
including, without limitation, all building and zoning ordinances and codes, the
failure to comply with which is likely (to the extent

49
<PAGE>

that the Borrower can now reasonably foresee) to have a Material Adverse Effect.

SECTION 4.20. No Burdensome Restrictions. The Borrower is not a
--------------------------
party to any agreement or instrument or subject to any other obligation or any
charter or corporate or partnership restriction, as the case may be, which,
individually or in the aggregate, is likely (to the extent that the Borrower can
now reasonably foresee) to have a Material Adverse Effect.

SECTION 4.21. Brokers' Fees. The Borrower has not dealt with any
-------------
broker or finder with respect to the transactions contemplated by the Loan
Documents (except with respect to the acquisition or disposition of Real
Property Assets) or otherwise in connection with this Agreement, and the
Borrower has not done any acts, had any negotiations or conversation, or made
any agreements or promises which will in any way create or give rise to any
obligation or liability for the payment by the Borrower of any brokerage fee,
charge, commission or other compensation to any party with respect to the
transactions contemplated by the Loan Documents (except with respect to the
acquisition or disposition of Real Property Assets), other than the fees payable
hereunder.

SECTION 4.22. Labor Matters. Except as set forth on Schedule 4.22
------------- -------------
attached hereto and made a part hereof, there are no collective bargaining
agreements or Multiemployer Plans covering the employees of the Borrower and
the Borrower has not suffered any strikes, walkouts, work stoppages or other
material labor difficulty within the last five (5) years.

SECTION 4.23. Organizational Documents. The documents delivered
------------------------
pursuant to Section 3.1(d) constitute, as of the Closing Date, all of the
organizational documents (together with all amendments and modifications
thereof) of the Borrower. The Borrower represents that it has delivered to the
Lead Agent true, correct and complete copies of each of the documents set forth
in this Section 4.23.

SECTION 4.24. Principal Offices. The principal office, chief
-----------------
executive office and principal place of business of the Borrower is 2250 East
Imperial Highway, Suite 1200, El Segundo, California 90245.

50
<PAGE>

SECTION 4.25. REIT Status. For the fiscal year ended December 31,
-----------
1997, the general partner of the Borrower will qualify, and the general partner
of the Borrower intends to continue to qualify as a real estate investment trust
under the Code.

SECTION 4.26. Ownership of Property. The Borrower owns fee simple
---------------------
title to or a ground leasehold interest in each of the Mortgaged Properties.

SECTION 4.27 Security Interests and Liens. The Mortgages create, as
----------------------------
security for the Obligations, valid and enforceable security interests in and
Liens on all of the Collateral in favor of the Lead Agent as agent for the
ratable benefit of the Banks, and subject to no other Liens (except as may be
permitted under any Mortgage with respect to the Mortgaged Property subject
thereto), except as enforceability may be limited by applicable insolvency,
bankruptcy or other laws affecting creditors' rights generally, or general
principles of equity, whether such enforceability is considered in a proceeding
in equity or at law. Such security interests in and Liens on the Collateral
shall be superior to and prior to the rights of all third parties in the
Collateral (except as may be permitted under any Mortgage with respect to the
Mortgaged Property subject thereto), and, other than in connection with any
future change in Borrower's name or the location of Borrower's chief executive
office, no further recordings or filings are or will be required in connection
with the creation, perfection or enforcement of such security interests and
Liens, other than the filing of continuation statements in accordance with
applicable law.

SECTION 4.28 Structural Defects and Violation of Law. To the best of
---------------------------------------
Borrower's knowledge and except as set forth in the structural and engineering
report delivered to and accepted by the Lead Agent with respect to the
Mortgaged Properties (as supplemented or amended, the "Engineering Report"),
------------------
there are no structural defects any of the Improvements, none of the
Improvements is in material violation of any Requirements, and the Borrower's
anticipated use of the Improvements will comply in all material respects with
applicable zoning ordinances, regulations, and restrictive covenants affecting
the applicable Mortgaged Property.

51
<PAGE>

ARTICLE V

AFFIRMATIVE AND NEGATIVE COVENANTS

The Borrower covenants and agrees that, so long as any Bank has any
Commitment hereunder or any Obligations remain unpaid:

SECTION 5.1. Information. The Borrower will deliver to the Lead
-----------
Agent and to each of the Banks:

(a) as soon as available and in any event within 105 days after the
end of each fiscal year of the Borrower, an audited consolidated balance sheet
of the Borrower as of the end of such fiscal year and the related consolidated
statements of cash flow and operations for such fiscal year, setting forth in
each case in comparative form the figures for the previous fiscal year, audited
by Delloite & Touche or other independent public accountants of similar
standing;

(b) as soon as available and in any event within sixty (60) days after
the end of each quarter of each fiscal year (other than the last quarter in any
fiscal year) of the Borrower, a statement of the Borrower, prepared in
accordance with GAAP, setting forth the operating income and operating expenses
of the Borrower, in sufficient detail so as to calculate net operating cash flow
of the Borrower for the immediately preceding quarter;

(c) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate of the chief
financial officer or the chief accounting officer of the Borrower (i) setting
forth in reasonable detail the calculations required to establish whether the
Borrower was in compliance with the requirements of Section 5.8 on the date of
such financial statements;(ii) stating whether any Default exists on the date
of such certificate and, if any Default then exists, setting forth the details
thereof and the action which the Borrower is taking or proposes to take with
respect thereto; and (iii) certifying (x) that such financial statements fairly
present the financial condition and the results of operations of the Borrower
as of the dates and for the periods indicated, in accordance with GAAP, subject,
in the case of interim

52
<PAGE>

financial statements, to normal year-end adjustments, and (y) that such officer
has reviewed the terms of the Loan Documents and has made, or caused to be made
under his or her supervision, a review in reasonable detail of the business and
condition of the Borrower during the period beginning on the date through which
the last such review was made pursuant to this Section 5.1(c) (or, in the case
of the first certification pursuant to this Section 5.1(c), the Closing Date)
and ending on a date not more than ten (10) Domestic Business Days prior to the
date of such delivery and that on the basis of such review of the Loan Documents
and the business and condition of the Borrower, to the best knowledge of such
officer, no Default or Event of Default under any other provision of Section 6.1
occurred or, if any such Default or Event of Default has occurred, specifying
the nature and extent thereof and, if continuing, the action the Borrower
proposes to take in respect thereof;

(d) simultaneously with the delivery of each set of financial
statements referred to in clause (a) above, a statement of a firm of independent
public accountants confirming the calculations set forth in the officer's
certificate delivered simultaneously therewith pursuant to clause (c) above;

(e) (i) within five (5) days after the president, chief financial
officer, treasurer, controller or other executive officer of the Borrower
obtains knowledge of any Default, if such Default is then continuing, a
certificate of the chief financial officer or the president of the Borrower
setting forth the details thereof and the action which the Borrower is taking or
proposes to take with respect thereto; (ii) promptly and in any event within ten
(10) days after the Borrower obtains knowledge thereof, notice of (x) any
litigation or governmental proceeding pending or threatened against the
Borrower which is likely to individually or in the aggregate, result in a
Material Adverse Effect, and (y) any other event, act or condition which is
likely to result in a Material Adverse Effect;

(f) if and when any member of the ERISA Group (i) gives or is required
to give notice to the PBGC of any "reportable event" (as defined in Section 4043
of ERISA) with respect to any Plan which might constitute grounds for a
termination of such Plan under Title IV of

53
<PAGE>

ERISA, or knows that the plan administrator of any Plan has given or is required
to give notice of any such reportable event, a copy of the notice of such
reportable event given or required to be given to the PBGC; (ii) receives notice
of complete or partial withdrawal liability under Title IV of ERISA or notice
that any Multiemployer Plan is in reorganization, is insolvent or has been
terminated, a copy of such notice; (iii) receives notice from the PBGC under
Title IV of ERISA of an intent to terminate, impose liability (other than for
premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to
administer any Plan, a copy of such notice; (iv) applies for a waiver of the
minimum funding standard under Section 412 of the Internal Revenue Code, a copy
of such application; (v) gives notice of intent to terminate any Plan under
Section 4041(c) of ERISA, a copy of such notice and other information filed with
the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063
of ERISA, a copy of such notice; or (vii) fails to make any payment or
contribution to any Plan or Multiemployer Plan or in respect of any Benefit
Arrangement or makes any amendment to any Plan or Benefit Arrangement which
has resulted or could result in the imposition of a Lien or the posting of a
bond or other security, a certificate of the chief financial officer or the
chief accounting officer of the Borrower setting forth details as to such
occurrence and action, if any, which the Borrower or applicable member of the
ERISA Group is required or proposes to take;

(g) promptly and in any event within five (5) Domestic Business Days
after the Borrower obtains actual knowledge of any of the following events, a
certificate of the Borrower executed by an officer of the Borrower specifying
the nature of such condition and the Borrower's, if the Borrower has actual
knowledge thereof, the Environmental Affiliate's proposed initial response
thereto: (i) the receipt by the Borrower, or, if the Borrower has actual
knowledge thereof, any of the Environmental Affiliates, of any communication
(written or oral), whether from a governmental authority, citizens group,
employee or otherwise, that alleges that the Borrower, or, if the Borrower has
actual knowledge thereof, any of the Environmental Affiliates, is not in
compliance with applicable Environmental Laws, and such noncompliance is likely
to have a Material Adverse Effect, (ii) the Borrower shall obtain actual
knowledge

54
<PAGE>

that there exists any Environmental Claim which is likely to have a Material
Adverse Effect pending or threatened against the Borrower or any Environmental
Affiliate or (iii) the Borrower obtains actual knowledge of any release,
emission, discharge or disposal of any Material of Environmental Concern that is
likely to form the basis of any Environmental Claim against the Borrower or any
Environmental Affiliate;

(h) promptly and in any event within five (5) Domestic Business Days
after receipt of any material notices or correspondence from any company or
agent for any company providing insurance coverage to the Borrower relating to
any material loss or loss of the Borrower with respect to any of the Mortgaged
Properties, copies of such notices and correspondence; and

(i) promptly upon the mailing thereof to the shareholders or partners
of the Borrower, copies of all financial statements, reports and proxy statement
so mailed;

(j) promptly upon the filing thereof, copies of all registration
statements (other than the exhibits thereto and any registration statements on
Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their
equivalents) which the Borrower shall have filed with the Securities and
Exchange Commission;

(k) simultaneously with delivery of the information required by
Sections 5.1(a) and (b), a statement of Net Operating Cash Flow with respect to
each Mortgaged Property and a list of all Mortgaged Properties; and

(l) from time to time such additional information regarding the
financial position or business of the Borrower as the Lead Agent, at the request
of any Bank, may reasonably request.

SECTION 5.2. Payment of Obligations. The Borrower will pay and
----------------------
discharge, at or before maturity, all its material obligations and liabilities
including, without limitation, any obligation pursuant to any agreement by which
it or any of its properties is bound and any tax liabilities, in any case, where
failure to do so will likely result in a Material Adverse Effect except (i) such
tax liabilities may be contested in good faith

55
<PAGE>

by appropriate proceedings, and will maintain in accordance with GAAP,
appropriate reserves for the accrual of any of the same; or (ii) such obligation
or liability as may be contested in good faith by appropriate proceedings.

SECTION 5.3. Maintenance of Property; Insurance.
----------------------------------

(a) The Borrower will keep each of the Mortgaged Properties in good
repair, working order and condition, subject to ordinary wear and tear and in
accordance with the provisions of the applicable Mortgage.

(b) The Borrower shall (a) maintain insurance as specified in Section
5 of the Mortgage with insurers meeting the qualifications described therein,
which insurance shall in any event not provide for materially less coverage than
the insurance in effect on the Closing Date, and (b) furnish to each Bank from
time to time, upon written request, copies of the policies under which such
insurance is issued, certificates of insurance and such other information
relating to such insurance as such Bank may reasonably request. The Borrower
will deliver to the Banks (i) upon request of any Bank through the Lead Agent
from time to time, full information as to the insurance carried, (ii) within
five (5) days of receipt of notice from any insurer, a copy of any notice of
cancellation or material change in coverage from that existing on the date of
this Agreement and (iii) forthwith, notice of any cancellation or nonrenewal of
coverage by the Borrower.

SECTION 5.4. Conduct of Business. The Borrower will continue to
-------------------
engage in business of the same general type as now conducted by it.

SECTION 5.5. Compliance with Laws. The Borrower will comply in all
--------------------
material respects with all applicable laws, ordinances, rules, regulations, and
requirements of governmental authorities (including, without limitation,
Environmental Laws, all zoning and building codes and ERISA and the rules and
regulations thereunder) except where the necessity of compliance therewith is
contested in good faith by appropriate proceedings.

56
<PAGE>

SECTION 5.6. Inspection of Property, Books and Records. The Borrower
-----------------------------------------
will keep proper books of record and account in which full, true and correct
entries shall be made of all dealings and transactions in relation to its
business and activities; and will permit representatives of any Bank at such
Bank's expense to visit and inspect any of its properties to examine and make
abstracts from any of its books and records and to discuss its affairs, finances
and accounts with its officers and employees, all at such reasonable times, upon
reasonable notice, and as often as may reasonably be desired.

SECTION 5.7. Existence.
---------

(a) The Borrower shall do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate existence or its
partnership existence, as applicable.

(b) The Borrower shall do or cause to be done all things necessary to
preserve and keep in full force and effect its patents, trademarks,
servicemarks, tradenames, copyrights, franchises, licenses, permits,
certificates, authorizations, qualifications, accreditations, easements, rights
of way and other rights, consents and approvals the nonexistence of which is
likely to have a Material Adverse Effect.

SECTION 5.8. Financial Covenants.
-------------------

(a) Debt Service Coverage. Measured as of the last day of each
---------------------
calendar quarter, the ratio of (i) Net Operating Cash Flow to (ii) Debt Service
will not be less than 1.75:1.

(b) LTV Ratio. As of the last day of each calendar quarter and as of
---------
the date of any addition of a Mortgaged Property, the LTV Ratio shall not exceed
60%, subject, however, to the Borrower's rights to cure pursuant to Section
2.9(a). Failure to restore compliance with this Section 5.8(b) in accordance
with Section 2.9(a) shall be an immediate Event of Default.

(c) Maximum Total Debt to Tangible FMV. As of the last day of each
----------------------------------
calendar quarter, the Maximum Total Debt Ratio will not be greater than 50%
during the then current calendar year.

57
<PAGE>

(d) EBITDA Coverage. As of the last day of each calendar quarter, the
---------------
ratio of Annual EBITDA to Total Debt Service will not be less than 2.0:1.

(e) Dividends. The Borrower will not, as determined on an aggregate
---------
annual basis, pay any dividends in excess of the greater of (i) 95% of its
consolidated FFO for such year, and (ii) an amount which results in
distributions to the general partner of the Borrower in an amount sufficient to
permit such general partner to make distributions to its shareholders which it
reasonably believes are necessary for it to (A) maintain its qualification as a
real estate investment trust for federal and state income tax purposes, and (B)
avoid the payment of federal or state income or excise tax. During the
continuance of an Event of Default under Section 6.1(a), the Borrower shall pay
only those dividends necessary to make distributions to the general partner of
the Borrower to make distributions to its shareholders which it reasonably
believes are necessary to maintain its status as a real estate investment trust
for federal and state income tax purposes.

(f) Minimum Consolidated Tangible Net Worth. The Consolidated
---------------------------------------
Tangible Net Worth will at no time be less than 90% of the Consolidated Tangible
Net Worth on January 28, 1997.

(g) Negative Pledge. The Borrower will not create, assume or suffer
---------------
to exist any Lien on any Mortgaged Property now owned or hereafter acquired by
it, except for any encumbrances created or permitted by the Loan Documents.

(h) Project Indebtedness. The Borrower shall not, at any time,
--------------------
create, incur, assume, guaranty, suffer to exist or otherwise become or remain
directly or indirectly liable with respect to any Debt other than Non-Recourse
Debt. Notwithstanding the provisions of the sentence immediately foregoing, the
Borrower shall have the right to incur Recourse Debt up to an aggregate maximum
of $5,000,000 which is either (i) unsecured or (ii) incurred with respect to
assets which are not Mortgaged Properties and is subject to a purchase money
security interest or security interest under a conditional sale agreement.

58
<PAGE>

SECTION 5.9. Restriction on Fundamental Changes; Operation and
-------------------------------------------------
Control. (a) The Borrower shall not enter into any merger or consolidation,
- -------
unless the Borrower is the surviving entity, or liquidate, wind-up or dissolve
(or suffer any liquidation or dissolution), discontinue its business or convey,
lease, sell, transfer or otherwise dispose of, in one transaction or series of
transactions, any substantial part of its business or property, whether now or
hereafter acquired, hold an interest in any subsidiary which is not controlled
by the Borrower or enter into other business lines, without the prior written
consent of the Lead Agent.

(b) The Borrower shall not amend its articles of incorporation, by-
laws or agreement of limited partnership, as applicable, in any material
respect, without the Lead Agent's consent, which shall not be unreasonably
withheld or delayed.

SECTION 5.10. Changes in Business. The Borrower shall not enter
-------------------
into any business which is substantially different from that conducted by the
Borrower on the Closing Date after giving effect to the transactions
contemplated by the Loan Documents.

SECTION 5.11 Sale of the Property. Except as provided in Section
--------------------
3.4(c) and in the Loan Documents, the Borrower shall not sell or otherwise
transfer its interest in all or any part of the Mortgaged Properties; provided,
--------
however, that nothing in this Section 5.11 shall be deemed to prohibit the
- -------
leasing of portions of the Mortgaged Properties in the ordinary course of
business for occupancy by the tenants thereunder.

SECTION 5.12. Fiscal Year; Fiscal Quarter. The Borrower shall not
---------------------------
change its fiscal year or any of its fiscal quarters without the Lead Agent's
consent, which shall not be unreasonably withheld or delayed.

SECTION 5.13. Margin Stock. None of the proceeds of the Loan will be
------------
used, directly or indirectly, for the purpose, whether immediate, incidental or
ultimate, of buying or carrying any Margin Stock.

SECTION 5.14. Development Activities. The Borrower shall not engage
----------------------
in any development activities except for development in connection with the
expansion

59
<PAGE>

and/or repositioning or restoration following a casualty or condemnation of
existing improvements on Real Property Assets. Notwithstanding the foregoing,
the Borrower may engage in all other development activities where there is
construction completion risk provided that in no event shall the value
(determined in accordance with the definition of Combined Asset Value) of the
Real Property Assets under such other type of development exceed twenty percent
(20%) of the Borrower's Combined Asset Value.

SECTION 5.15. Use of Proceeds. The Borrower shall use the proceeds
---------------
of the Loans solely to refinance the Mortgaged Properties as of the date hereof,
to finance the acquisition of additional Mortgaged Properties which are
industrial or office properties and for its general business purposes.

SECTION 5.16 Borrower Status. The general partner of the Borrower
---------------
shall at all times (i) maintain its status as a self-directed and self-
administered real estate investment trust under the Code, and (ii) remain a
publicly traded company listed on the New York Stock Exchange.

ARTICLE VI

DEFAULTS

SECTION 6.1. Events of Default. If one or more of the following
-----------------
events ("Events of Default") shall have occurred and be continuing:
-----------------

(a) the Borrower shall fail to pay when due any principal of any Loan,
or the Borrower shall fail to pay when due any interest on any Loan; provided,
--------
however, that the Borrower shall be entitled to a three (3) Domestic Business
- -------
Day grace period with respect thereto but only as to two (2) payments of
interest during the Term, or the Borrower shall fail to pay within three (3)
Domestic Business Days after the same is due any fees or other amounts payable
hereunder;

(b) the Borrower shall fail to observe or perform any covenant
contained in Sections 5.8(a)-(g) and

60
<PAGE>

Sections 5.8 to 5.16, inclusive, subject to any applicable grace periods set
forth therein;

(c) the Borrower shall fail to observe or perform any covenant or
agreement contained in this Agreement (other than those covered by clause (a)
or (b) above) for 30 days after written notice thereof has been given to the
Borrower by the Lead Agent;

(d) any representation, warranty, certification or statement made by
the Borrower in this Agreement or in any certificate, financial statement or
other document delivered pursuant to this Agreement shall prove to have been
incorrect in any material respect when made (or deemed made);

(e) the Borrower shall default in the payment when due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise) of
any amount owing in respect of any Recourse Debt or Debt guaranteed by the
Borrower (other than the Obligations) and such default shall continue beyond the
giving of any required notice and the expiration of any applicable grace period
(as the same may be extended by the applicable lender) and such default shall
not be waived by the applicable lender (which waiver shall serve to reinstate
the applicable loan), or the Borrower shall default in the performance or
observance of any obligation or condition with respect to any such Debt or any
other event shall occur or condition exist beyond the giving of any required
notice and the expiration of any applicable grace period (as the same may be
extended by the applicable lender), if in any such case as a result of such
default, event or condition, the lender thereof shall accelerate the maturity of
any such Debt or to permit (without any further requirement of notice or lapse
of time) the holder or holders thereof, or any trustee or agent for such
holders, to accelerate the maturity of any such Debt and such default shall not
be waived by the applicable lender (which waiver shall serve to reinstate the
applicable loan), or any such Debt shall become or be declared to be due and
payable prior to its stated maturity other than as a result of a regularly
scheduled payment;

(f) the Borrower shall commence a voluntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to itself or
its

61
<PAGE>

debts under any bankruptcy, insolvency or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator, custodian
or other similar official of it or any substantial part of its property, or
shall consent to any such relief or to the appointment of or taking possession
by any such official in an involuntary case or other proceeding commenced
against it, or shall make a general assignment for the benefit of creditors, or
shall fail generally to pay its debts as they become due, or shall take any
corporate action to authorize any of the foregoing;

(g) an involuntary case or other proceeding shall be commenced against
the Borrower seeking liquidation, reorganization or other relief with respect
to it or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of 60 days; or an order for relief shall
be entered against the Borrower under the federal bankruptcy laws as now or
hereafter in effect;

(h) the Borrower shall default in its obligations under any Loan
Document other than this Agreement beyond any applicable notice and grace
periods;

(i) any member of the ERISA Group shall fail to pay when due an amount
or amounts aggregating in excess of $1,000,000 which it shall have become liable
to pay under Title IV of ERISA, or notice of intent to terminate a Material Plan
shall be filed under Title IV of ERISA by any member of the ERISA Group, any
plan administrator or any combination of the foregoing, or the PBGC shall
institute proceedings under Title IV of ERISA to terminate, to impose liability
(other than for premiums under Section 4007 of ERISA) in respect of, or to
cause a trustee to be appointed to administer any Material Plan, or a condition
shall exist by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any Material Plan must be terminated, or there shall occur a
complete or partial withdrawal from, or a default, within the meaning of Section
4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which
could cause one or more members of the ERISA Group

62
<PAGE>

to incur a current payment obligation in excess of $1,000,000;

(j) one or more final nonappealable judgments or decrees in an
aggregate amount of $10,000,000 as of such date shall be entered by a court or
courts of competent jurisdiction against the Borrower (other than any judgment
as to which, and only to the extent, a reputable insurance company has
acknowledged coverage of such claim in writing) and (i) any such judgments or
decrees shall not be stayed, discharged, paid, bonded or vacated within thirty
(30) days (or bonded, vacated or satisfied within thirty (30) after any stay is
lifted) or (ii) enforcement proceedings shall be commenced by any creditor on
any such judgments or decrees;

(k) (i) any Environmental Claim shall have been asserted against the
Borrower or any Environmental Affiliate, (ii) any release, emission, discharge
or disposal of any Material of Environmental Concern shall have occurred, and
such event is reasonably likely to form the basis of an Environmental Claim
against the Borrower or any Environmental Affiliate, or (iii) the Borrower or
the Environmental Affiliates shall have failed to obtain any Environmental
Approval necessary for the ownership, or operation of its business, property or
assets or any such Environmental Approval shall be revoked, terminated, or
otherwise cease to be in full force and effect, in the case of clauses (i), (ii)
or (iii) above, if the existence of such condition has had or is reasonably
likely to have a Material Adverse Effect;

(l) during any consecutive two year period commencing on or after the
date hereof, individuals who at the beginning of such period constituted the
Board of Directors of the Borrower (together with any new directors whose
election by the Board of Directors or whose nomination for election by the
Borrower stockholders was approved by a vote of at least a majority of the
members of the Board of Directors then in the office who either were members of
the Board of Directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the members of the Board of Directors then in office;

63
<PAGE>

(m) the general partner of the Borrower shall cease at any time to
qualify as a real estate investment trust under the Internal Revenue Code;

(n) at any time, for any reason the Borrower seeks to repudiate its
obligations under any Loan Document;

(o) any Mortgage or any Lien granted thereunder shall (except in
accordance with the terms hereof or thereof), in whole or in part, terminate,
cease to be effective or cease to be a legally valid, binding and enforceable
obligation of the Borrower, or any Lien securing the Loans shall, in whole or in
part, cease to be a perfected first priority Lien, subject to the Permitted
Exceptions (as defined in the Mortgages).

SECTION 6.2. Rights and Remedies. (a) Upon the occurrence of any
-------------------
Event of Default described in Sections 6.1(f) or (g), the unpaid principal
amount of, and any and all accrued interest on, the Loans and any and all
accrued fees and other Obligations hereunder shall automatically become
immediately due and payable, with all additional interest from time to time
accrued thereon and without presentation, demand, or protest or other
requirements of any kind (including, without limitation, valuation and
appraisement, diligence, presentment, notice of intent to demand or accelerate
and notice of acceleration), all of which are hereby expressly waived by the
Borrower; and upon the occurrence and during the continuance of any other Event
of Default, the Lead Agent may exercise any of its rights and remedies hereunder
and by written notice to the Borrower, declare the unpaid principal amount of
and any and all accrued and unpaid interest on the Loans and any and all accrued
fees and other Obligations hereunder to be, and the same shall thereupon be,
immediately due and payable with all additional interest from time to time
accrued thereon and without presentation, demand, or protest or other
requirements of any kind other than as provided in the Loan Documents
(including, without limitation, valuation and appraisement, diligence,
presentment, and notice of intent to demand or accelerate), all of which are
hereby expressly waived by the Borrower.

(b) Notwithstanding the foregoing, upon the occurrence and during the
continuance of any Event of De-

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<PAGE>

fault other than any Event of Default described in Sections 6.1(f) or (g), the
Lead Agent shall not exercise any of its rights and remedies hereunder nor
declare the unpaid principal amount of and any and all accrued and unpaid
interest on the Loans and any and all accrued fees and other Obligations
hereunder to be immediately due and payable, until such time as the Lead Agent
shall have delivered a notice to the Banks specifying the Event of Default which
has occurred and whether Lead Agent recommends the acceleration of the
Obligations due hereunder or the exercise of other remedies hereunder. The
Banks shall notify the Lead Agent if they approve or disapprove of the
acceleration of the Obligations due hereunder or the exercise of such other
remedy recommended by Lead Agent within five (5) Domestic Business Days after
receipt of such notice. If any Bank shall not respond within such five (5)
Domestic Business Day period, then such Bank shall be deemed to have accepted
Lead Agent's recommendation for acceleration of the Obligations due hereunder or
the exercise of such other remedy. If the Required Banks shall approve the
acceleration of the Obligations due hereunder or the exercise of such other
remedy, then Lead Agent shall declare the unpaid principal amount of and any
and all accrued and unpaid interest on the Loans and any and all accrued fees
and other Obligations hereunder to be immediately due and payable or exercise
such other remedy approved by the Required Banks. If the Required Banks shall
neither approve nor disapprove the acceleration of the Obligations due
hereunder or such other remedy recommended by Lead Agent, then Lead Agent may
accelerate the Obligations due hereunder or exercise any of its rights and
remedies hereunder in its sole discretion. If the Required Banks shall
disapprove the acceleration of the Obligations due hereunder or the exercise of
such other remedy recommended by Lead Agent, but approve of another remedy, then
to the extent permitted hereunder, Lead Agent shall exercise such remedy.

SECTION 6.3. Notice of Default. If the Lead Agent shall not already
-----------------
have given any notice to the Borrower under Section 6.1, the Lead Agent shall
give notice to the Borrower under Section 6.1 promptly upon being requested to
do so by the Required Banks and shall thereupon notify all the Banks thereof.

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<PAGE>

ARTICLE VII

THE LEAD AGENT

SECTION 7.1. Appointment and Authorization. Each Bank irrevocably
-----------------------------
appoints and authorizes the Lead Agent to take such action as agent on its
behalf and to exercise such powers under this Agreement and the other Loan
Documents as are delegated to the Lead Agent by the terms hereof or thereof,
together with all such powers as are reasonably incidental thereto.

SECTION 7.2. Lead Agent and Affiliates. Morgan shall have the same
-------------------------
rights and powers under this Agreement as any other Bank and may exercise or
refrain from exercising the same as though it were not the Lead Agent, and
Morgan and its affiliates may accept deposits from, lend money to, and generally
engage in any kind of business with the Borrower or any subsidiary or affiliate
of the Borrower as if it were not the Lead Agent hereunder, and the term "Bank"
and "Banks" shall include Morgan in its individual capacity.

SECTION 7.3. Action by Lead Agent. The obligations of the Lead
--------------------
Agent hereunder are only those expressly set forth herein. Without limiting
the generality of the foregoing, the Lead Agent shall not be required to take
any action with respect to any Default, except as expressly provided in Article
VI.

SECTION 7.4. Consultation with Experts. The Lead Agent may consult
-------------------------
with legal counsel (who may be counsel for the Borrower), independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
advice of such counsel, accountants or experts.

SECTION 7.5. Liability of Lead Agent. Neither the Lead Agent nor any
-----------------------
of its affiliates nor any of their respective directors, officers, agents or
employees shall be liable for any action taken or not taken by it in connection
herewith (i) with the consent or at the request of the Required Banks or, where
required by the terms of this Agreement, all of the Banks, or (ii) in the
absence of its own gross negligence or willful misconduct. Neither the Lead
Agent nor any of its directors,

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<PAGE>

officers, agents or employees shall be responsible for or have any duty to
ascertain, inquire into or verify (i) any statement, warranty or representation
made in connection with this Agreement or any borrowing hereunder; (ii) the
performance or observance of any of the covenants or agreements of the Borrower;
(iii) the satisfaction of any condition specified in Article III, except receipt
of items required to be delivered to the Lead Agent; or (iv) the validity,
effectiveness or genuineness of this Agreement, the other Loan Documents or any
other instrument or writing furnished in connection herewith. The Lead Agent
shall not incur any liability by acting in reliance upon any notice, consent,
certificate, statement, or other writing (which may be a bank wire, telex or
similar writing) believed by it in good faith to be genuine or to be signed by
the proper party or parties.

SECTION 7.6. Indemnification. Each Bank shall, ratably in accordance
---------------
with its Commitment, indemnify the Lead Agent, its affiliates and their
respective directors, officers, agents and employees (to the extent not
reimbursed by the Borrower) against any cost, expense (including counsel fees
and disbursements), claim, demand, action, loss or liability (except such as
result from such indemnitees' gross negligence or willful misconduct) that such
indemnitees may suffer or incur in connection with this Agreement, the other
Loan Documents or any action taken or omitted by such indemnitees hereunder.

SECTION 7.7. Credit Decision. Each Bank acknowledges that it has,
---------------
independently and without reliance upon the Lead Agent or any other Bank, and
based on such documents and information as it has deemed appropriate, made its
own credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance upon the Lead
Agent or any other Bank, and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit decisions in
taking or not taking any action under this Agreement.

SECTION 7.8. Successor Lead Agent. The Lead Agent may resign at any
--------------------
time by giving notice thereof to the Banks and the Borrower. Upon any such
resignation or the removal of the Lead Agent in accordance with Section 7.11,
the Required Banks shall have the right to appoint

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<PAGE>

a successor Lead Agent with the consent of the Borrower provided that no Event
of Default shall have occurred and be continuing. If no successor Lead Agent
shall have been so appointed by the Required Banks, and shall have accepted such
appointment, within 30 days after the retiring Lead Agent gives notice of
resignation, then the retiring Lead Agent may, on behalf of the Banks, appoint a
successor Lead Agent, which shall be a commercial bank organized or licensed
under the laws of the United States of America or of any State thereof and
having a combined capital and surplus of at least $50,000,000. Upon the
acceptance of its appointment as the Lead Agent hereunder by a successor Lead
Agent, such successor Lead Agent shall thereupon succeed to and become vested
with all the rights and duties of the retiring Lead Agent, and the retiring Lead
Agent shall be discharged from its duties and obligations hereunder first
accruing or arising after the effective date of such retirement. After any
retiring Lead Agent's resignation hereunder as Lead Agent, the provisions of
this Article shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was the Lead Agent.

SECTION 7.9. Lead Agent's Fee. The Borrower shall pay to the Lead
----------------
Agent for its own account fees in the amounts and at the times previously agreed
upon between the Borrower and the Lead Agent.

SECTION 7.10. Copies of Notices. Lead Agent shall deliver to each
-----------------
Bank a copy of any notice sent to the Borrower by Lead Agent in connection with
the performance of its duties as Lead Agent hereunder.

ARTICLE VIII

CHANGE IN CIRCUMSTANCES

SECTION 8.1. Basis for Determining Interest Rate Inadequate or
-------------------------------------------------
Unfair. If on or prior to the first day of any Interest Period for any Euro-
- ------
Dollar Borrowing:

(a) the Lead Agent is advised by the Reference Bank that deposits in
dollars (in the applicable amounts) are not being offered to the Reference Bank
in the relevant market for such Interest Period, or

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<PAGE>

(b) Banks having 50% or more of the aggregate amount of the
Commitments advise the Lead Agent that the Adjusted London Interbank Offered
Rate as determined by the Lead Agent will not adequately and fairly reflect the
cost to such Banks of funding their Euro-Dollar Loans for such Interest Period,
the Lead Agent shall forthwith give notice thereof to the Borrower and the
Banks, whereupon until the Lead Agent notifies the Borrower that the
circumstances giving rise to such suspension no longer exist, the obligations of
the Banks to make Euro-Dollar Loans shall be suspended. Unless the Borrower
notifies the Lead Agent at least two Domestic Business Days before the date of
any Euro-Dollar Borrowing for which a Notice of Borrowing has previously been
given that it elects not to borrow on such date, such Borrowing shall instead be
made as a Base Rate Borrowing.

SECTION 8.2. Illegality. If, after the date of this Agreement, the
----------
adoption of any applicable law, rule or regulation, or any change in any
existing applicable law, rule or regulation, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency shall make it unlawful or
impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or
fund its Euro-Dollar Loans, and such Bank shall so notify the Lead Agent, the
Lead Agent shall forthwith give notice thereof to the other Banks and the
Borrower, whereupon until such Bank notifies the Borrower and the Lead Agent
that the circumstances giving rise to such suspension no longer exist, the
obligation of such Bank to make Euro-Dollar Loans shall be suspended. Before
giving any notice to the Lead Agent pursuant to this Section, such Bank shall
designate a different Euro-Dollar Lending Office if such designation will avoid
the need for giving such notice and will not, in the judgment of such Bank, be
otherwise disadvantageous to such Bank. If such Bank shall determine that it
may not lawfully continue to maintain and fund any of its outstanding Euro-
Dollar Loans to maturity and shall so specify in such notice, the Borrower shall
immediately prepay in full the then outstanding principal amount of each such
Euro-Dollar Loan, together with accrued inter-

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<PAGE>

est thereon. Concurrently with prepaying each such Euro-Dollar Loan, the
Borrower shall borrow a Base Rate Loan in an equal principal amount from such
Bank (on which interest and principal shall be payable contemporaneously with
the related Euro-Dollar Loans of the other Banks), and such Bank shall make such
a Base Rate Loan.

SECTION 8.3. Increased Cost and Reduced Return.
---------------------------------

(a) If, after the date hereof, the adoption of any applicable law,
rule or regulation, or any change in any applicable law, rule or regulation, or
any change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Bank (or its Applicable Lending
Office) with any request or directive (whether or not having the force of law)
of any such authority, central bank or comparable agency shall impose, modify or
deem applicable any reserve (including, without limitation, any such requirement
imposed by the Board of Governors of the Federal Reserve System (but excluding
with respect to any Euro-Dollar Loan any such requirement reflected in an
applicable Euro-Dollar Reserve Percentage)), special deposit, insurance
assessment or similar requirement against assets of, deposits with or for the
account of, or credit extended by, any Bank (or its Applicable Lending Office)
or shall impose on any Bank (or its Applicable Lending Office) or on the London
interbank market any other condition affecting its Euro-Dollar Loans, its Note,
or its obligation to make Euro-Dollar Loans, and the result of any of the
foregoing is to increase the cost to such Bank (or its Applicable Lending
Office) of making or maintaining any Euro-Dollar Loan, or to reduce the amount
of any sum received or receivable by such Bank (or its Applicable Lending
Office) under this Agreement or under its Note with respect thereto, by an
amount deemed by such Bank to be material, then, within 15 days after demand by
such Bank (with a copy to the Lead Agent), which demand shall be accompanied by
a certificate showing, in reasonable detail, the calculation of such amount or
amounts, the Borrower shall pay to such Bank such additional amount or amounts
as will compensate such Bank for such increased cost or reduction.

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<PAGE>

(b) If any Bank shall have determined that, after the date hereof, the
adoption of any applicable law, rule or regulation regarding capital adequacy,
or any change in any such law, rule or regulation, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or any request or directive regarding capital adequacy (whether or not
having the force of law) of any such authority, central bank or comparable
agency, has or would have the effect of reducing the rate of return on capital
of such Bank (or its Parent) as a consequence of such Bank's obligations
hereunder to a level below that which such Bank (or its Parent) could have
achieved but for such adoption, change, request or directive (taking into
consideration its policies with respect to capital adequacy) by an amount deemed
by such Bank to be material, then from time to time, within 15 days after
demand by such Bank (with a copy to the Lead Agent), which demand shall be
accompanied by a certificate showing, in reasonable detail, the calculation of
such amount or amounts, the Borrower shall pay to such Bank such additional
amount or amounts as will compensate such Bank (or its Parent) for such
reduction.

(c) Each Bank will promptly notify the Borrower and the Lead Agent of
any event of which it has knowledge, occurring after the date hereof, which
will entitle such Bank to compensation pursuant to this Section and will
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in the
judgment of such Bank, be otherwise disadvantageous to such Bank. A
certificate of any Bank claiming compensation under this Section and setting
forth the additional amount or amounts to be paid to it hereunder shall be
conclusive in the absence of manifest error. In determining such amount, such
Bank may use any reasonable averaging and attribution methods.

SECTION 8.4. Taxes.
-----

(a) Any and all payments by the Borrower to or for the account of any
Bank or the Lead Agent hereunder or under any other Loan Document shall be made
free and clear of and without deduction for any and all present or future taxes,
duties, levies, imposts, deductions, charg-

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<PAGE>

es or withholdings, and all liabilities with respect thereto, excluding, in the
---------
case of each Bank and the Lead Agent, taxes imposed on its income, and franchise
taxes imposed on it, by the jurisdiction under the laws of which such Bank or
the Lead Agent (as the case may be) is organized or any political subdivision
thereof and, in the case of each Bank, taxes imposed on its income, and
franchise or similar taxes imposed on it, by the jurisdiction of such Bank's
Applicable Lending Office or any political subdivision thereof (and, if
different from the jurisdiction of such Bank's Applicable Lending Office, the
jurisdiction of the domicile of its Loans either established by the Bank
pursuant to Section 9.12 or determined by the applicable taxing authorities)(all
such non-excluded taxes, duties, levies, imposts, deductions, charges,
withholdings and liabilities being hereinafter referred to as "Taxes"). If the
-----
Borrower shall be required by law to deduct any Taxes from or in respect of any
sum payable hereunder or under any Note or participation therein to any Bank or
the Lead Agent, (i) the sum payable shall be increased as necessary so that
after making all required deductions (including deductions applicable to
additional sums payable under this Section 8.4) such Bank or the Lead Agent (as
the case may be) receives an amount equal to the sum it would have received had
no such deductions been made, (ii) the Borrower shall make such deductions,
(iii) the Borrower shall pay the full amount deducted to the relevant taxation
authority or other authority in accordance with applicable law and (iv) the
Borrower shall furnish to the Lead Agent, at its address referred to in Section
9.1, the original or a certified copy of a receipt evidencing payment thereof.

(b) In addition, the Borrower agrees to pay any present or future
stamp or documentary taxes and any other excise or property taxes, or charges or
similar levies which arise from any payment made hereunder or under any Note or
participation therein or from the execution or delivery of, or otherwise with
respect to, this Agreement or any Note or participation therein (hereinafter
referred to as "Other Taxes").
-----------

(c) The Borrower agrees to indemnify each Bank and the Lead Agent for
the full amount of Taxes or Other Taxes (including, without limitation, any
Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable
under this Section 8.4) paid by such Bank or the

72
<PAGE>

Lead Agent (as the case may be) and any liability (including penalties,
interest and expenses) arising therefrom or with respect thereto. Any payment
required under this indemnification shall be made within 15 days from the date
such Bank or the Lead Agent (as the case may be) makes demand therefor.

(d) Each Bank organized under the laws of a jurisdiction outside the
United States, on or prior to the date of its execution and delivery of this
Agreement in the case of each Bank listed on the signature pages hereof and on
or prior to the date on which it becomes a Bank in the case of each other Bank,
and from time to time thereafter if requested in writing by the Borrower (but
only so long as such Bank remains lawfully able to do so), shall provide the
Borrower with Internal Revenue Service form 1001 or 4224, as appropriate, or any
successor form prescribed by the Internal Revenue Service, certifying that such
Bank is entitled to benefits under an income tax treaty to which the United
States is a party which reduces the rate of withholding tax on payments of
interest or certifying that the income receivable pursuant to this Agreement is
effectively connected with the conduct of a trade or business in the United
States. If the form provided by a Bank at the time such Bank first became a
party to this Agreement or at any time thereafter (other than solely by reason
of a change in United States law or a change in the terms of any treaty to which
the United States is a party after the date hereof) indicates a United States
interest withholding tax rate in excess of zero (or would have indicated such a
withholding tax rate if such form had been submitted and completed accurately
and completely and either was not submitted or was not completed accurately and
completely), or if a Bank otherwise is subject to United States interest
withholding tax at a rate in excess of zero at any time for any reason (other
than solely by reason of a change in United States law or regulation or a change
in any treaty to which the United States is a party after the date hereof),
withholding tax at such rate shall be considered excluded from "Taxes" as
defined in Section 8.4(a). In addition, any amount that otherwise would be
considered "Taxes" or "Other Taxes" for purposes of this Section 8.4 shall be
excluded therefrom if the Bank either has transferred the domicile of its Loans
pursuant to Section 9.12 or changed the Applicable Lending Office with respect
to such Loans and such amount

73
<PAGE>

would not have been incurred had such transfer or change not been made.

(e) For any period with respect to which a Bank has failed to provide
the Borrower with the appropriate form pursuant to Section 8.4(d) (unless such
failure is due to a change in treaty, law or regulation occurring subsequent to
the date on which a form originally was required to be provided), such Bank
shall not be entitled to indemnification under Section 8.4(a) with respect to
Taxes imposed by the United States; provided, however, that should a Bank, which
-------- -------
is otherwise exempt from or subject to a reduced rate of withholding tax, become
subject to Taxes because of its failure to deliver a form required hereunder,
the Borrower shall take such steps as such Bank shall reasonably request to
assist such Bank to recover such Taxes.

(f) If the Borrower is required to pay additional amounts to or for
the account of any Bank pursuant to this Section 8.4, then such Bank will change
the jurisdiction of its Applicable Lending Office so as to eliminate or reduce
any such additional payment which may thereafter accrue if such change, in the
judgment of such Bank, is not otherwise disadvantageous to such Bank.

SECTION 8.5. Base Rate Loans Substituted for Affected Euro-Dollar
----------------------------------------------------
Loans. If (i) the obligation of any Bank to make Euro-Dollar Loans has been
- -----
suspended pursuant to Sections 8.1 or 8.2 or (ii) any Bank has demanded
compensation under Section 8.3 or 8.4 with respect to its Euro-Dollar Loans and
the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to
such Bank through the Lead Agent, have elected that the provisions of this
Section shall apply to such Bank, then, unless and until such Bank notifies the
Borrower that the circumstances giving rise to such suspension or demand for
compensation no longer exist:

(a) all Loans which would otherwise be made by such Bank as Euro-
Dollar Loans shall be made instead as Base Rate Loans (on which interest and
principal shall be payable contemporaneously with the related Euro-Dollar Loans
of the other Banks), and

(b) after each of its Euro-Dollar Loans has been repaid, all payments
of principal which would other-

74
<PAGE>

wise be applied to repay such Euro-Dollar Loans shall be applied to repay its
Base Rate Loans instead.

ARTICLE IX

MISCELLANEOUS

SECTION 9.1. Notices. All notices, requests and other communications
-------
to any party hereunder shall be in writing (including bank wire, telex,
facsimile transmission or similar writing) and shall be given to such party:
(x) in the case of the Borrower or the Lead Agent, at its address or telecopy
number set forth on the signature pages hereof, together with copies thereof, in
the case of the Borrower, to Latham & Watkins, 633 West Fifth Street, Suite
4000, Los Angeles, CA 90071, Attention: Glen B. Collyer, Esq., Telephone: (213)
485-1234, Telecopy: (213) 891-8763, and in the case of the Lead Agent, to
Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York
10022, Attention: Martha Feltenstein, Esq., Telephone: (212) 735-2272, Telecopy:
(212) 735-2000, (y) in the case of any Bank, at its address or telecopy number
set forth on the signature pages hereof or in its Administrative Questionnaire
or (z) in the case of any party, such other address or telecopy number as such
party may hereafter specify for the purpose by notice to the Lead Agent, the
Banks and the Borrower. Each such notice, request or other communication shall
be effective (i) if given by telecopy, when such telecopy is transmitted to the
telecopy number specified in this Section, (ii) if given by mail, 72 hours after
such communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid or (iii) if given by any other means, when delivered at
the address specified in this Section; provided that notices to the Lead Agent
--------
under Article II or Article VIII shall not be effective until received.

SECTION 9.2. No Waivers. No failure or delay by the Lead Agent or
----------
any Bank in exercising any right, power or privilege hereunder or under any Note
shall operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein provided shall
be cumulative and not exclusive of any rights or remedies provided by law.

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<PAGE>

SECTION 9.3. Expenses; Indemnification.
-------------------------

(a) The Borrower shall pay (i) all reasonable out-of-pocket expenses
of the Lead Agent (including, without limitation, reasonable fees and
disbursements of special counsel Skadden, Arps, Slate, Meagher & Flom LLP, local
counsel for the Lead Agent, and travel, site visits, third party reports
(including Appraisals), mortgage recording taxes, environmental and engineering
expenses), in connection with the preparation and administration of this
Agreement, the Loan Documents and the documents and instruments referred to
therein, the syndication of the Loans, any waiver or consent hereunder or any
amendment or modification hereof or any Default or alleged Default hereunder and
(ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the
Lead Agent and each Bank, including, without limitation, reasonable fees and
disbursements of counsel for the Lead Agent, in connection with the enforcement
of the Loan Documents and the instruments referred to therein and such Event of
Default and collection, bankruptcy, insolvency and other enforcement
proceedings resulting therefrom.

(b) The Borrower agrees to indemnify the Lead Agent and each Bank,
their respective affiliates and the respective directors, officers, agents and
employees of the foregoing (each an "Indemnitee") and hold each Indemnitee
----------
harmless from and against any and all liabilities, losses, damages, costs and
expenses of any kind, including, without limitation, the reasonable fees and
disbursements of counsel and settlements and settlement costs, which may be
incurred by such Indemnitee in connection with any investigative,
administrative or judicial proceeding (whether or not such Indemnitee shall be
designated a party thereto) that may at any time (including, without
limitation, at any time following the payment of the Obligations) be imposed
on, asserted against or incurred by any Indemnitee as a result of, or arising
out of, or in any way related to or by reason of, (i) any of the transactions
contemplated by the Loan Documents or the execution, delivery or performance of
any Loan Document (including, without limitation, the Borrower's actual or
proposed use of proceeds of the Loans, whether or not in compliance with the
provisions hereof), (ii) any violation by the Borrower or the Environmental
Affiliates of any applicable Environmental Law, (iii) any Environmental Claim
arising out of the management, use,

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<PAGE>

control, ownership or operation of property or assets by the Borrower or any of
the Environmental Affiliates, including, without limitation, all on-site and
off-site activities involving Material of Environmental Concern, (iv) the breach
of any environmental representation or warranty set forth herein, (v) the grant
to the Lead Agent and the Banks of any Lien in any property or assets of the
Borrower or any stock or other equity interest in the Borrower, and (vi) the
exercise by the Lead Agent and the Banks of their rights and remedies
(including, without limitation, foreclosure) under any agreements creating any
such Lien (but excluding, as to any Indemnitee, any such losses, liabilities,
claims, damages, expenses, obligations, penalties, actions, judgments, suits,
costs or disbursements incurred solely by reason of (i) the gross negligence or
willful misconduct of such Indemnitee as finally determined by a court of
competent jurisdiction or (ii) any investigative, administrative or judicial
proceeding imposed or asserted against any Indemnitee by any bank regulatory
agency or by any equity holder of such Indemnitee). The Borrower's obligations
under this Section shall survive the termination of this Agreement and the
payment of the Obligations.

(c) The Borrower shall pay, and hold the Lead Agent and each of the
Banks harmless from and against, any and all present and future U.S. stamp,
recording, transfer and other similar foreclosure related taxes with respect to
the foregoing matters and hold the Lead Agent and each Bank harmless from and
against any and all liabilities with respect to or resulting from any delay or
omission (other than to the extent attributable to such Bank) to pay such taxes.

SECTION 9.4. Sharing of Set-Offs. In addition to any rights now or
-------------------
hereafter granted under applicable law or otherwise, and not by way of
limitation of any such rights, upon the occurrence and during the continuance
of any Event of Default, each Bank is hereby authorized at any time or from
time to time, without presentment, demand, protest or other notice of any kind
to the Borrower or to any other Person, any such notice being hereby expressly
waived, to set off and to appropriate and apply any and all deposits (general or
special, time or demand, provisional or final), other than deposits held for the
benefit of third parties, and any other indebtedness at any time held or owing
by such Bank (in-

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<PAGE>

cluding, without limitation, by branches and agencies of such Bank wherever
located) to or for the credit or the account of the Borrower against and on
account of the Obligations of the Borrower then due and payable to such Bank
under this Agreement or under any of the other Loan Documents, including,
without limitation, all interests in Obligations purchased by such Bank. Each
Bank agrees that if it shall, by exercising any right of set-off or counterclaim
or otherwise, receive payment of a proportion of the aggregate amount of
principal and interest due with respect to any Note held by it which is greater
than the proportion received by any other Bank in respect of the aggregate
amount of principal and interest due with respect to any Note held by such other
Bank, the Bank receiving such proportionately greater payment shall purchase
such participations in the Notes held by the other Banks, and such other
adjustments shall be made, as may be required so that all such payments of
principal and interest with respect to the Notes held by the Banks shall be
shared by the Banks pro rata; provided that nothing in this Section shall impair
--------
the right of any Bank to exercise any right of set-off or counterclaim it may
have and to apply the amount subject to such exercise to the payment of
indebtedness of the Borrower other than its indebtedness under the Notes. The
Borrower agrees, to the fullest extent that it may effectively do so under
applicable law, that any holder of a participation in a Note, whether or not
acquired pursuant to the foregoing arrangements, may exercise rights of set-off
or counter-claim and other rights with respect to such participation as fully as
if such holder of a participation were a direct creditor of the Borrower in the
amount of such participation.

SECTION 9.5. Amendments and Waivers. Any provision of this
----------------------
Agreement, the Notes or other Loan Documents may be amended or waived if, but
only if, such amendment or waiver is in writing and is signed by the Borrower
and the Required Banks (and, if the rights or duties of the Lead Agent are
affected thereby, by the Lead Agent); provided that no such amendment or waiver
--------
shall, unless signed by all the Banks, (i) increase or decrease the Commitment
of any Bank (except for a ratable decrease in the Commitments of all Banks) or
subject any Bank to any additional obligation, (ii) reduce the principal of or
rate of interest on any Loan or any fees specified herein, (iii) postpone the
date fixed for any

78
<PAGE>

payment of principal of or interest on any Loan or any fees hereunder or for any
reduction or termination of any Commitment, (iv) release the Lien of any
Mortgage or otherwise release any other collateral, or (v) change the percentage
of the Commitments or of the aggregate unpaid principal amount of the Notes, or
the number of Banks, which shall be required for the Banks or any of them to
take any action under this Section or any other provision of this Agreement.

SECTION 9.6. Successors and Assigns.
----------------------

(a) The provisions of this Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, except that the Borrower may not assign or otherwise transfer any of
their rights under this Agreement or the other Loan Documents without the prior
written consent of all Banks.

(b) Any Bank may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in its Commitment or
-----------
any or all of its Loans. In the event of any such grant by a Bank of a
participating interest to a Participant, whether or not upon notice to the
Borrower and the Lead Agent, such Bank shall remain responsible for the
performance of its obligations hereunder, and the Borrower and the Lead Agent
shall continue to deal solely and directly with such Bank in connection with
such Bank's rights and obligations under this Agreement. Any agreement pursuant
to which any Bank may grant such a participating interest shall provide that
such Bank shall retain the sole right and responsibility to enforce the
obligations of the Borrower hereunder including, without limitation, the right
to approve any amendment, modification or waiver of any provision of this
Agreement; provided that such participation agreement may provide that such Bank
--------
will not agree to any modification, amendment or waiver of this Agreement
described in clause (i), (ii), (iii) or (iv) of Section 9.5 without the consent
of the Participant. The Borrower agrees that each Participant shall, to the
extent provided in its participation agreement, be entitled to the benefits of
Article VIII with respect to its participating interest. An assignment or other
transfer which is not permitted by subsection (c) or (d) below shall be given
effect for purposes of this Agree-

79
<PAGE>

ment only to the extent of a participating interest granted in accordance with
this subsection (b).

(c) Any Bank may at any time assign to one or more banks or other
institutions (each an "Assignee") all, or a proportionate part of all, of its
--------
rights and obligations under this Agreement, the Notes and the other Loan
Documents, and such Assignee shall assume such rights and obligations, pursuant
to an Assignment and Assumption Agreement in substantially the form of Exhibit C
---------
attached hereto executed by such Assignee and such transferor Bank, with (and
subject to) the subscribed consent of the Lead Agent and, provided no Event of
Default shall have occurred and be continuing, the Borrower, which consent
shall not be unreasonably withheld or delayed. Upon execution and delivery of
such instrument and payment by such Assignee to such transferor Bank of an
amount equal to the purchase price agreed between such transferor Bank and such
Assignee, such Assignee shall be a Bank party to this Agreement and shall have
all the rights and obligations of a Bank with a Commitment as set forth in such
instrument of assumption, and the transferor Bank shall be released from its
obligations hereunder to a corresponding extent, and no further consent or
action by any party shall be required. Upon the consummation of any assignment
pursuant to this subsection (c), the transferor Bank, the Lead Agent and the
Borrower shall make appropriate arrangements so that, if required, a new Note or
Notes are issued to the Assignee. In connection with any such assignment, the
transferor Bank shall pay to the Lead Agent an administrative fee for
processing such assignment in the amount of $2,500. If the Assignee is not
incorporated under the laws of the United States of America or a state thereof,
it shall deliver to the Borrower and the Lead Agent certification as to
exemption from deduction or withholding of any United States federal income
taxes in accordance with Section 8.4.

(d) Any Bank may at any time assign all or any portion of its rights
under this Agreement and its Note to a Federal Reserve Bank. No such assignment
shall release the transferor Bank from its obligations hereunder.

(e) No Assignee, Participant or other transferee of any Bank's rights
shall be entitled to receive

80
<PAGE>

any greater payment under Section 8.3 or 8.4 than such Bank would have been
entitled to receive with respect to the rights transferred, unless such transfer
is made with the Borrower's prior written consent or by reason of the provisions
of Section 8.2, 8.3 or 8.4 requiring such Bank to designate a different
Applicable Lending Office under certain circumstances or at a time when the
circumstances giving rise to such greater payment did not exist.

SECTION 9.7. Governing Law; Submission to Jurisdiction.
-----------------------------------------

(a) THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN
ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT
GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW).

(b) Any legal action or proceeding with respect to this Agreement or
any other Loan Document and any action for enforcement of any judgment in
respect thereof may be brought in the courts of the State of New York or of the
United States of America for the Southern District of New York, and, by
execution and delivery of this Agreement, the Borrower hereby accepts for itself
and in respect of its property, generally and unconditionally, the non-
exclusive jurisdiction of the aforesaid courts and appellate courts from any
thereof. The Borrower irrevocably consents to the service of process out of
any of the aforementioned courts in any such action or proceeding by the hand
delivery, or mailing of copies thereof by registered or certified mail, postage
prepaid, to the Borrower at its address set forth below. The Borrower hereby
irrevocably waives any objection which it may now or hereafter have to the
laying of venue of any of the aforesaid actions or proceedings arising out of or
in connection with this Agreement or any other Loan Document brought in the
courts referred to above and hereby further irrevocably waives and agrees not to
plead or claim in any such court that any such action or proceeding brought in
any such court has been brought in an inconvenient forum. Nothing herein shall
affect the right of the Lead Agent, any Bank or any holder of a Note to serve
process in any other manner permitted by law or to commence legal proceedings or
otherwise proceed against the Borrower in any other jurisdiction.

81
<PAGE>

SECTION 9.8. Marshaling; Recapture. Neither the Lead Agent nor any
---------------------
Bank shall be under any obligation to marshal any assets in favor of the
Borrower or any other party or against or in payment of any or all of the
Obligations. To the extent any Bank receives any payment by or on behalf of the
Borrower, which payment or any part thereof is subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid to
the Borrower or its estate, trustee, receiver, custodian or any other party
under any bankruptcy law, state or federal law, common law or equitable cause,
then to the extent of such payment or repayment, the Obligation or part thereof
which has been paid, reduced or satisfied by the amount so repaid shall be
reinstated by the amount so repaid and shall be included within the liabilities
of the Borrower to such Bank as of the date such initial payment, reduction or
satisfaction occurred.

SECTION 9.9. Counterparts; Integration; Effectiveness. This
-----------------------------------------
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Agreement constitutes the entire agreement and
understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Agreement shall become effective upon receipt by the Lead Agent of
counterparts hereof signed by each of the parties hereto (or, in the case of any
party as to which an executed counterpart shall not have been received, receipt
by the Lead Agent in form satisfactory to it of telegraphic, telex or other
written confirmation from such party of execution of a counterpart hereof by
such party).

SECTION 9.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE LEAD
--------------------
AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY
JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.

SECTION 9.11. Survival. All indemnities set forth herein shall
--------
survive the execution and delivery of this Agreement and the other Loan
Documents and the making and repayment of the Loans hereunder.

82
<PAGE>

SECTION 9.12. Domicile of Loans. Subject to the provisions of
-----------------
Article VIII, each Bank may transfer and carry its Loans at, to or for the
account of any domestic or foreign branch office, subsidiary or affiliate of
such Bank.

SECTION 9.13. Limitation of Liability. No claim may be made by the
-----------------------
Borrower or any other Person against the Lead Agent or any Bank or the
affiliates, directors, officers, employees, attorneys or agent of any of them
for any consequential or punitive damages in respect of any claim for breach of
contract or any other theory of liability arising out of or related to the
transactions contemplated by this Agreement or by the other Loan Documents, or
any act, omission or event occurring in connection therewith; and the Borrower
hereby waives, releases and agrees not to sue upon any claim for any such
damages, whether or not accrued and whether or not known or suspected to exist
in its favor.

83
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.

KILROY REALTY, L.P., a Delaware
limited partnership

By: Kilroy Realty Corporation,
a Maryland Corporation

By:_________________________
Name:
Title:
Commitments

$150,000,000.00 MORGAN GUARANTY TRUST COMPANY
OF NEW YORK

By:_____________________________
Name:
Title:

Total Commitments
- -----------------

$150,000,000.00

MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Lead Agent

By:__________________________
Name:
Title:

60 Wall Street
New York, New York 10260-0060
Attention: Michael Erichetti
Telephone number: (212) 648-8127
Telecopy number: (212) 648-5336

Domestic and Euro-Currency
Lending Office:
Nassau, Bahamas Office
c/o J.P. Morgan Services Inc.
500 Stanton Christiana Road
Newark, Delaware 19173-2107
Attention: Nancy K. Dunbar
Telecopy number: (302) 634-4222

84
<PAGE>

EXHIBIT A
---------

NOTE

$150,000,000.00 New York, New York

May __, 1997

For value received, KILROY REALTY, L.P. a Delaware limited partnership
(the "Borrower") promises to pay to the order of Morgan Guaranty Trust Company
--------
of New York (the "Bank"), for the account of its Applicable Lending Office, the
----
unpaid principal amount of each Loan made by the Bank to the Borrower pursuant
to the Credit Agreement referred to below on the Maturity Date. The Borrower
promises to pay interest on the unpaid principal amount of each such Loan on the
dates and at the rate or rates provided for in the Credit Agreement. All such
payments of principal and interest shall be made in lawful money of the United
States in Federal or other immediately available funds at the office of Lead
Agent under the Credit Agreement (as defined below).

All Loans made by the Bank, the respective types and maturities
thereof and all repayments of the principal thereof shall be recorded by the
Bank and, if the Bank so elects in connection with any transfer or enforcement
hereof, appropriate notations to evidence the foregoing information with respect
to each such Loan then outstanding may be endorsed by the Bank on the schedule
attached hereto, or on a continuation of such schedule attached to and made a
part hereof; provided that the failure of the Bank to make any such recordation
--------
or endorsement shall not affect the obligations of the Borrower hereunder or
under the Credit Agreement.

This Note is one of the Notes referred to in the Revolving Credit
Agreement, dated as of May __, 1997, among the Borrower, the Banks parties
thereto, and Morgan Guaranty Trust Company of New York, as Lead Agent (as the
same may be amended from time to time, the "Credit Agreement"). Terms defined
----------------
in the Credit Agreement are used herein with the same meanings. Reference is
made to the Credit Agreement for provisions for the prepayment hereof and the
acceleration of the maturity hereof.

KILROY REALTY, L.P., a Delaware
limited partnership

By: Kilroy Realty Corporation,
a Maryland Corporation

By:______________________________
Name:
Title:

A-1
<PAGE>

Note (cont'd)

LOANS AND PAYMENTS OF PRINCIPAL

_______________________________________________________________

Amount of
Amount of Type of Principal Maturity Notation
Date Loan Loan Repaid Date Made By
_______________________________________________________________

_______________________________________________________________

______________________________________________________________

_______________________________________________________________

A-2
<PAGE>

EXHIBIT B
---------

MORTGAGED PROPERTIES

1) City of Long Beach Airport Phase I (Parcels 1 & 2), Los Angeles County,
California ("Phase I")
-------

2) City of Long Beach Airport Phase II (Parcels 5 & 6), Los Angeles County,
California ("Phase II")
--------

B-1
<PAGE>

EXHIBIT C
---------

FORM OF ASSIGNMENT AND ASSUMPTION

ASSIGNMENT AND ASSUMPTION AGREEMENT
-----------------------------------

AGREEMENT dated as of __________, 199_ among [ASSIGNOR] (the
"Assignor"), [ASSIGNEE] (the "Assignee"), KILROY REALTY, L.P. (the "Borrower")
and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Lead Agent (the "Agent").

W I T N E S S E T H
-------------------

WHEREAS, this Assignment and Assumption Agreement (the "Assignment")
relates to the Revolving Credit Agreement dated as of ________ ___, 199_ (the
"Loan Agreement") among the Borrower, the Assignor and the other Banks party
thereto, as Banks, and the Agent;

WHEREAS, as provided under the Loan Agreement, the Assignor has a
Commitment to make Loans to the Borrower in an aggregate principal amount at any
time outstanding not to exceed $__________;

WHEREAS, Loans made to the Borrower by the Assignor under the Loan
Agreement in the aggregate principal amount of $____________ are outstanding at
the date hereof; and

WHEREAS, the Assignor proposes to assign to the Assignee all of the
rights of the Assignor under the Loan Agreement in respect of a portion of its
Commitment thereunder in an amount equal to $__________ (the "Assigned Amount"),
together with a corresponding portion of its outstanding Loans, and the Assignee
proposes to accept assignment of such rights and assume the corresponding
obligations from the Assignor on such terms;

NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, the parties hereto agree as follows:

SECTION 1. Definitions. All capitalized terms not otherwise defined
-----------
herein shall have the respective meanings set forth in the Loan Agreement.

SECTION 2. Assignment. The Assignor hereby assigns and sells to the
----------
Assignee all of the rights of the Assignor under the Loan Agreement to the
extent of the Assigned Amount, and the Assignee hereby accepts such assignment
from the Assignor and assumes all of the obligations of the Assignor under the
Loan Agreement to the extent of the Assigned Amount, including the purchase from
the Assignor of the corresponding portion of the principal amount of the Loans
made by the Assignor outstanding at the date hereof. Upon the execution and
delivery hereof by the Assignor, the Assignee, the Borrower and the Agent and
the payment of the amounts specified in Section 3 required to be paid on the
date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights
and be obligated to perform the obligations of a Bank

C-1
<PAGE>

under the Loan Agreement with a Commitment in an amount equal to the Assigned
Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be
reduced by a like amount and the Assignor released from its obligations under
the Loan Agreement to the extent such obligations have been assumed by the
Assignee. The assignment provided for herein shall be without recourse to the
Assignor.

SECTION 3. Payments. As consideration for the assignment and sale
--------
contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the
date hereof in Federal funds the amount heretofore agreed between them./1/ It
is understood that Commitment Fees accrued to the date hereof are for the
account of the Assignor and such fees accruing from and including the date
hereof are for the account of the Assignee. Each of the Assignor and the
Assignee hereby agrees that if it receives any amount under the Loan Agreement
which is for the account of the other party hereto, it shall receive the same
for the account of such other party to the extent of such other party's interest
therein and shall promptly pay the same to such other party.

SECTION 4. Consent of the Borrower and the Agent. This Agreement is
-------------------------------------
conditioned upon the written consent of the Borrower and the consent of the
Agent pursuant to section 9.6(c) of the Loan Agreement. The execution of this
Agreement by the Borrower and the Agent is evidence of the required consents.
Pursuant to Section 9.6(c) the Borrower agrees to execute and deliver a Note
payable to the order of the Assignee to evidence the assignment and assumption
provided for herein.

SECTION 5. Non-Reliance on Assignor. The Assignor makes no
------------------------
representation or warranty in connection with, and shall have no responsibility
with respect to, the solvency, financial condition, or statements of the
Borrower, or the validity and enforceability of the obligations of the Borrower
in respect of the Loan Agreement or any Note. The Assignee acknowledges that it
has, independently and without reliance on the Assignor, and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement and will continue to be
responsible for making its own independent appraisal of the business, affairs
and financial condition of the Borrower.

SECTION 6. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the external laws of the State of New York.

- ---------------------
/1/ The amount should combine principal together with accrued interest and
breakage compensation, if any, to be paid by the Assignee, net of any
portion of any upfront fee to be paid by the Assignor to the Assignee. It
may be preferable in an appropriate case to specify these amounts
generically or by formula rather than as a fixed sum.

C-2
<PAGE>

SECTION 7. Counterparts. This Agreement may be signed in any number
------------
of counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.

IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their duly authorized officers as of the date first
above written.

[ASSIGNOR]

By:_______________________
Name:
Title:

[ASSIGNEE]

By:________________________
Name:
Title:

MORGAN GUARANTY TRUST COMPANY OF NEW YORK

By:________________________
Name:
Title:

CONSENTED TO:

KILROY REALTY, L.P.

By: Kilroy Realty Corporation

By: _____________________
Name:
Title:

C-3
<PAGE>

EXHIBIT D
---------

ALLOCATED MORTGAGED PROPERTY LOAN AMOUNTS

Phase I $ 14,400,000.00

Phase II $ 29,400,000.00

D-1
<PAGE>

SCHEDULE 4.22
-------------

LABOR MATTERS

Agreement between Building Owners and Managers Association of Greater Los
Angeles, Inc., and International Union of Operating Engineers, Local No. 501,
AFL-CIO (November 1, 1996-October 31, 2001)

4.22-1

<PAGE>

EXHIBIT 23.3

INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES

To the Partners of Kilroy Group:

We consent to the use in this Registration Statement of Kilroy Realty
Corporation on Form S-11 of our reports on the Combined Financial Statements
of Kilroy Group dated March 21, 1997 (July 11, 1997 as to Note 12), the
Acquired Properties and Pending Acquisition, dated July 11, 1997, and
Acquisition Properties dated July 11, 1997, appearing in the Prospectus, which
is a part of this Registration Statement, and to the references to us under
the headings "Selected Financial Data" and "Experts" in such Prospectus.

Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Kilroy Group, listed
in the Item 36. This financial statement schedule is the responsibility of the
management of Kilroy Group. Our responsibility is to express an opinion based
on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.

Deloitte & Touche LLP
Los Angeles, California
July 28, 1997

<PAGE>

EXHIBIT 23.4

CONSENT OF ROBERT CHARLES LESSER & CO.

To Kilroy Realty Corporation:

As experts in real estate consulting and urban economics, we hereby consent
to the use of our Regional Economic Overview and Market Analysis dated July 28,
1997 and to all references to our firm included in or made a part of this
Registration Statement.

/s/ Robert Charles Lesser & Co.
-------------------------------------
Robert Charles Lesser & Co.

Los Angeles, California
July 28, 1997