PILLARSTONE CAPITAL REIT - Annual Report: 2008 (Form 10-K)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

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

For the fiscal year ended December 31, 2008

PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST

(Exact name of registrant as specified in its charter)

Maryland (State or other jurisdiction of incorporation) 1240 Huron Road, Cleveland, OH (Address of principal executive offices)		39-6594066 (I.R.S. Employer Identification Number) 44115 (Zip code)

Registrant’s telephone number: 216-430-2700 Fax number: 216-430-2702

Securities registered under Section 12(b) of the Act: None

Securities registered under to Section 12(g) of the Act: Common Shares, $0.01 par value

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the Registrant is not required to file reports pursuant to section 13 or 15(d) of the exchange act. Yes o No þ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K þ.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the Registrant is a shell company (as defined in rule 12b-2 of the Exchange Act.) Yes þ No o

At March 5, 2009, the Registrant had 442,398 common shares of beneficial interest (including 38,130 shares held in treasury), $0.01 par value, 276,255 Class A Cumulative Convertible Preferred Shares, and 244,444 Class C Cumulative Convertible Preferred Shares. The aggregate market value of the voting common and preferred shares held by non-affiliates of the Registrant was approximately $5,819 based on the closing price of $0.03 per common share on the over-the-counter bulletin board on March 5, 2009. The aggregate market value of the voting preferred shares was valued as if each of the remaining 114,845 preferred shares held by non-affiliates were converted into 0.046 common shares on March 5, 2009.

DOCUMENTS INCORPORATED BY REFERENCE
None

 

 

PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
2008 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

				Page
PART I
Item 1		Business			2
Item 1A		Risk Factors			3
Item 2		Properties			4
Item 3		Legal Proceedings			4
Item 4		Submission of Matters to a Vote of Security Holders			4
PART II
Item 5		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			4
Item 6		Selected Financial Data			6
Item 7		Management’s Discussion and Analysis of Financial Condition and Results of Operations			6
Item 8		Financial Statements and Supplementary Data			11
Item 9		Changes In and Disagreements with Accountants on Accounting and Financial Disclosure			11
Item 9A(T)		Controls and Procedures			11
Item 9B		Other Information			12
PART III
Item 10		Directors, Executive Officers and Corporate Governance			13
Item 11		Executive Compensation			16
Item 12		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			18
Item 13		Certain Relationships and Related Transactions, and Director Independence			21
Item 14		Principal Accounting Fees and Services			21
PART IV
Item 15		Exhibits, Financial Statement Schedules			22
SIGNATURES					25
EX-31.1
EX-31.2
EX-32.1

PART I

Item 1. Business.

Company Overview

Paragon Real Estate Equity and Investment Trust (the “Company,” “Paragon,” “we,” “our,” or “us”)
is a real estate company with its primary focus on searching for and reviewing value-added real estate opportunities, including land development, retail, office, industrial, hotel, other real estate investment and operating companies, and joint venture investments. In addition in early 2008, the Company began to invest a portion of its available cash in publicly traded shares of other real estate companies. Presently, the Company is a corporate shell, current in its SEC filings that may be used in the future for real estate transactions or sold to another company.

The Company was formed on March 15, 1994 as a Maryland real estate investment trust (“REIT”). We operated as a traditional real estate investment trust by buying, selling, owning and operating commercial and residential properties through December 31, 1999. In 2000, the Company purchased a software technology company, resulting in the Company not meeting the Internal Revenue Code qualifications to be a REIT for federal tax purposes. In 2002, the Company discontinued the operations of the technology segment. We intend to take advantage of our tax loss carryforwards prior to electing REIT status again.

From 2003 through 2006, we pursued a value-added business plan primarily focused on acquiring well located, under-performing multi-family residential properties, including affordable housing communities, and repositioning them through renovation, leasing, improved management and branding. In 2006, we were unable to complete a $100 million public offering to fund an acquisition of a portfolio of ten apartment communities comprised of 1,478 units located in Texas and Ohio. Without completing the public offering, the Company was not able to meet the listing requirements of the American Stock Exchange (“Amex”) because its book equity was less than the $6 million minimum requirement, it had sustained consecutive years of losses from operations and net losses since its inception in 1994, and its common shares had been selling at a low share price for more than a year. In February 2006, Amex delisted Paragon’s common shares, which then commenced being quoted on the Over-The-Counter Bulletin Board (“OTC Bulletin Board”) and on the pink sheets with the new symbol “PRLE”.

Because our unrestricted cash was not sufficient to allow us to continue operations, in the third quarter of 2006, three independent trustees signed subscription agreements to purchase 125,000 Class C Convertible Preferred Shares for an aggregate contribution of $500,000 cash to maintain the Company as a corporate shell current in its SEC filings so that it may be used in the future for real estate transactions or sold to another company. There can be no assurance that we will be able to close a transaction or keep the Company currently filed with the SEC. Even if our management is successful in closing a transaction, investors may not value the transaction or the current filing status with the SEC in the same manner as we did, and investors may not value the transaction as they would value other transactions or alternatives. Failure to obtain external sources of capital and complete a transaction will materially and adversely affect the Company’s ability to continue operations. In early 2008, the Company began to invest a portion of its available cash in publicly traded shares of other real estate companies.

Real Estate

We do not own any real estate assets.

Real Estate Tenants

As we do not own any real estate, we have no tenants.

Competition

We compete for the acquisition of properties with many entities, including, among others, publicly traded REITs, life insurance companies, pension funds, partnerships and individual investors. Many competitors have substantially greater financial resources than we have. In addition, certain competitors may be willing to accept lower returns on their investments. If competitors prevent us from buying properties that may be targeted for acquisition, our capital appreciation and valuation may be impacted. Because we recently began to invest a portion of our available cash in publicly traded shares of other real estate companies, we compete with other investors for these same shares. We are subject to the fluctuations in market prices of these publicly traded securities.

Employees

The Company has two part-time employees as of March 5, 2009.

Item 1A. Risk Factors.

This annual report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based upon current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons. While it is impossible to identify all of theses factors, the following could cause actual results to differ materially from those estimated by us:

	•		worsening of national economic conditions, including continuation of lack of liquidity in the capital markets and more stringent lending requirements by financial institutions;
	•		depressed values for commercial real estate properties and companies;
	•		changes in local market conditions due to changes in general or local economic conditions and neighborhood characteristics;
	•		changes in interest rates and in the availability, cost and terms of mortgage funds;
	•		impact of present or future environmental legislation and compliance with environmental laws;
	•		ongoing need for capital improvements, particularly in older properties;
	•		more attractive lease incentives offered by competitors in similar markets;
	•		increased market demand for newer properties;
	•		changes in real estate tax rates and other operating expenses;
	•		decreases in market prices of the shares of publicly traded real estate companies;
	•		adverse changes in governmental rules and fiscal policies;
	•		adverse changes in zoning laws; and
	•		other factors which are beyond our control.

In addition, an investment in the Company involves numerous risks that potential investors should consider carefully, including, without limitation:

	•		we have no operating assets;
	•		our cash resources are limited;
	•		we have a history of losses;
	•		we have not raised funds through a public equity offering;
	•		our trustees control a significant percentage of our voting shares;
	•		shareholders could experience possible future dilution through the issuance of additional shares;
	•		we are dependent on a small number of key senior professionals who are part-time employees; and
	•		we currently do not plan to distribute dividends to the holders of our shares.

Item 2. Properties.

As of December 31, 2008, we did not own any real estate assets.

Insurance

The Company has no investments in real estate at December 31, 2008 and does not require insurance coverage.

Mortgage Loans

The Company does not have any mortgage loans outstanding at December 31, 2008.

Item 3. Legal Proceedings.

In the normal course of business, we may be involved in legal actions arising from the ownership and administration of real estate. In our opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a materially adverse effect on our consolidated financial position, operations or liquidity. We are not currently involved in any legal actions.

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

No matters were submitted to a vote of security holders during 2008.

PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

Our common shares began trading on the Amex on October 28, 1999 under the symbol “RPP”. On June 30, 2003 we changed our name to “Paragon Real Estate Equity and Investment Trust” and our new symbol on Amex for our common shares was “PRG”. Amex delisted Paragon’s common shares for failure to meet listing requirements and in February 2006, Paragon’s common shares commenced being quoted on the OTC Bulleting Board and on the pink sheets with the new symbol “PRLE”.

Our Class A Preferred Shares began trading on the Amex on October 28, 1999 under the symbol “RPP.A.” In May 2003, we offered preferred shareholders a one-time incentive to exchange their Class A preferred shares for common shares, which expired June 30, 2003. After the exchange offer was completed, the remaining Class A preferred shares held by investors not affiliated with Paragon had an aggregate market value below $1 million and therefore no longer met the minimum requirement for listing on Amex. Amex suspended trading of the Class A preferred shares and the SEC removed the Class A preferred shares from listing and registration in 2003. Preferred shareholders retain the right to convert each of their shares for 0.046 common shares. The Class A preferred shares are now quoted over-the-counter with the symbol “PRGYP”.

Our Class C Convertible Preferred Shares were issued effective September 29, 2006 to the trustees of the Company who contributed cash and or services for these shares. The Class C Convertible Preferred Shares are not traded on an exchange.

The following table shows the range of the high and low sale prices for our common shares as reported on the OTC Bulletin Board. The quotations shown represent inter-dealer prices without adjustment for retail markups, markdowns or commissions, and may not reflect actual transactions.

		High				Low
2008
4th Quarter		$	0.05			$	0.03
3rd Quarter		$	0.05			$	0.05
2nd Quarter		$	0.05			$	0.05
1st Quarter		$	0.26			$	0.05
2007
4th Quarter		$	0.45			$	0.22
3rd Quarter		$	0.51			$	0.29
2nd Quarter		$	0.51			$	0.30
1st Quarter		$	0.53			$	0.38

On March 5, 2009, the last reported sales price of our common shares on the OTC Bulletin Board was $0.03. The number of holders of record of our common shares was 230 as of March 5, 2009 and we estimate we have approximately 1,200 beneficial holders of common interests as of that same date.

Dividend Policy

We have not declared or paid dividends on our common shares since the fourth quarter of 1999, and we do not anticipate paying dividends on our common shares in the foreseeable future. Declaration or payment of dividends, if any, in the future, will be at the discretion of the board of trustees and will depend on our then current financial condition, results of operations, capital requirements and other factors deemed relevant by the board of trustees.

Preferred Share Conversions

During 2008, 1,700 preferred shares were converted to 78.2 common shares .

Issuer Purchases of Equity Securities

The Company did not purchase any of its equity securities in 2008.

Item 6. Selected Financial Data.

None.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statements Regarding Forward-Looking Statements

This annual report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based upon current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:

	•		worsening of national economic conditions, including continuation of lack of liquidity in the capital markets and more stringent lending requirements by financial institutions;
	•		depressed values for commercial real estate properties and companies;
	•		changes in local market conditions due to changes in general or local economic conditions and neighborhood characteristics;
	•		changes in interest rates and in the availability, cost and terms of mortgage funds;
	•		impact of present or future environmental legislation and compliance with environmental laws;
	•		ongoing need for capital improvements, particularly in older properties;
	•		more attractive lease incentives offered by competitors in similar markets;
	•		increased market demand for newer properties;
	•		changes in real estate tax rates and other operating expenses;
	•		decreases in market prices of the shares of publicly traded real estate companies;
	•		adverse changes in governmental rules and fiscal policies;
	•		adverse changes in zoning laws; and
	•		other factors which are beyond our control.

In addition, an investment in the Company involves numerous risks that potential investors should consider carefully, including, without limitation:

	•		we have no operating assets;
	•		our cash resources are limited;
	•		we have a history of losses;
	•		we have not raised funds through a public equity offering;

	•		our trustees control a significant percentage of our voting shares;
	•		shareholders could experience possible future dilution through the issuance of additional shares;
	•		we are dependent on a small number of key senior professionals who are part-time employees; and
	•		we currently do not plan to distribute dividends to the holders of our shares.

Overview

Paragon Real Estate Equity and Investment Trust (the “Company,” “Paragon,” “we,” “our,” or “us”) is a real estate company with its primary focus on reviewing value-added real estate opportunities, including land development, retail, office, industrial, hotel, other real estate investment and operating companies, and joint venture investments. Generally, the selling prices of this asset category have been quite high and have impacted the availability and cost of financing. During the fourth quarter of 2008, capital markets became frozen and financing was not available for real estate transactions. Paragon has also been reviewing the possibility of selling the corporate entity or seeking additional investors. In addition in early 2008, the Company began to invest a portion of its available cash in publicly traded shares of other real estate companies.

As of December 31, 2008, the Company is a public shell current with its SEC filings. The board of trustees intends to keep the Company currently filed with the SEC as a corporate shell that may be used in the future for real estate deals or sold to another company. There can be no assurance that we will be able to close a transaction or keep the Company currently filed with the SEC. Even if our management is successful in closing a transaction, investors may not value the transaction or the current filing status with the SEC in the same manner as we did, and investors may not value the transaction as they would value other transactions or alternatives. Failure to obtain external sources of capital will materially and adversely affect the Company’s ability to continue operations, as well as its liquidity and financial results.

Brief History

Paragon was formed on March 15, 1994 as a Maryland real estate investment trust (“REIT”). We operated as a traditional real estate investment trust by buying, selling, owning and operating commercial and residential properties through December 31, 1999. In 2000, the Company purchased a software technology company, resulting in the Company not meeting the Internal Revenue Code qualifications to be a REIT for federal tax purposes. In 2002, the Company discontinued the operations of the technology segment. We intend to take advantage of our tax loss carryforwards prior to electing REIT status again.

Recent Developments in 2008 and Executive Overview

During 2008, the Company continued as a public shell current with its SEC filings. The board of trustees approved investing a portion of the Company’s available cash in shares of publicly traded real estate companies, and the Company began doing so in early 2008.

Results of Operations

The following is a discussion of our results of operations for the years ended December 31, 2008 and 2007 and financial condition, including:

•

Explanation of changes in the results of operations in the Consolidated Statements of Operations for the year ended December 31, 2008 compared to the year ended December 31, 2007.

	•		Our critical accounting policies and estimates that require our subjective judgment and are important to the presentation of our financial condition and results of operations.
	•		Our primary sources and uses of cash for the year ended December 31, 2008, and how we intend to generate cash for long-term capital needs.
	•		Our current income tax status.

Comparison of the years ended December 31, 2008 and 2007

Revenues from Operations

Interest and dividend income remained the same at approximately $10,000 for the years ended December 31, 2008 and December 31, 2007. Other income of approximately $12,000 for the year ended December 31, 2008 was an increase of approximately $12,000 over the year ended December 31, 2007. The increase is the result of the removal of estimates for accrued liabilities and accounts payable that were no longer considered obligations.

Expenses from Operations

Total expenses, comprised mostly of general and administrative expenses, decreased from approximately $373,000 for the year ended December 31, 2007 to approximately $271,000 for the year ended December 31, 2008, a net decrease of $102,000. The following expenses decreased in 2008: Legal fees by approximately $31,000, insurance expense by approximately $2,000, rent expense by approximately $2,000, payroll and trustee fee expenses by approximately $65,000, and other overhead expenses, such as general consulting costs and expenses of maintaining the public entity, by approximately $2,000 net. The 2008 reduction in payroll and trustee fee expenses was the result of the CEO and the trustees agreeing to extend their service for an additional year without additional compensation.

The general and administrative expenses of approximately $270,000 for 2008 included non-cash charges of approximately $187,000 for executive officer salary and trustee fees that were paid in the form of Class C Preferred Shares. The company did not pay any cash fees in 2008. Because the Company has limited unrestricted cash available, it has not replaced employees who have left and has been reducing other overhead expenses.

Loss from operations

As a result of the above, the loss from operations decreased from approximately $363,000 for the year ended December 31, 2007 to approximately $249,000 for the year ended December 31, 2008.

Gain on sale of marketable securities and impairment loss on marketable securities

The gain on sales of marketable securities of approximately $4,000 for the year ended December 31, 2008 was a result of our sale of 1,270 common shares of publicly traded real estate companies for approximately $41,000.

The impairment loss on marketable securities of approximately $33,000 for the year ended December 31, 2008 is based on the loss from the sale of marketable securities in the first quarter of 2009. We determined at December 31, 2008 not to continue to hold some of the marketable securities and recorded an impairment loss for the decrease in market value (based on market prices quoted from the stock exchanges on which the various companies are listed).

Net loss attributable to Common Shareholders

Based on the above, the net loss attributable to Common Shareholders decreased from approximately

$363,000 for the year ended December 31, 2007 to approximately $277,000 for the year ended December 31, 2008.

Liquidity and Capital Resources

Cash provided by operations, equity transactions, and borrowings from affiliates and lending institutions have generally provided the primary sources of liquidity to the Company. Historically, the Company has used these sources to fund operating expenses, satisfy its debt service obligations and fund distributions to shareholders. Presently, we are dependent on our existing cash, which was provided by three independent trustees contributing $500,000 cash in exchange for Class C Convertible Preferred Shares to maintain the Company as a corporate shell current in its SEC filings so that it may be used in the future for real estate transactions or sold to another company. We have been reviewing alternatives, including value-added real estate opportunities for land development, retail, office, industrial, hotel, other real estate investment and operating companies, and joint venture investments, as well as reverse merging with another company, selling the corporate entity, and seeking additional investors. In early 2008, the Company began to invest a portion of its available cash in publicly traded shares of other real estate companies.

Cash Flows

As of December 31, 2008, our unrestricted cash resources were approximately $182,000. We are dependent on our existing cash, contributed by three independent trustees in exchange for Class C Convertible Preferred Shares, to meet our liquidity needs because we do not have cash from operations to meet our operating requirements.

During the year ended December 31, 2008, the Company’s cash balance decreased by approximately $239,000 from approximately $421,000 at December 31, 2007 to approximately $182,000 at December 31, 2008. During 2008, we invested cash of approximately $217,000 in the purchase of marketable securities of other publicly traded real estate companies. This was offset by approximately $41,000 cash received from the sale of some of these marketable securities. Cash of approximately $63,000 was used in continuing operations.

Cash used for continuing operations included general and administrative costs, primarily for maintaining Paragon as a public shell and to keep it current with its SEC filings so that it may be used in the future for real estate deals or sold to another company.

Future Obligations

Because the Company is a corporate shell that may be used in the future for real estate transactions or sold to another company, we have no cash from operations and have reduced our day-to-day overhead expenses and material future obligations. We have reduced overhead expenses by issuing stock for our CEO’s salary and trustee fees, placed our other employee on a part-time unpaid basis, and not replaced employees who have left. We have reduced office space and rent, and reduced the use of outside consultants, negotiating discounts on prices wherever possible, and foregoing other expenses.

Long Term Liquidity and Operating Strategies

We historically have financed our long term capital needs, including acquisitions, as follows:

	•		Borrowings from new loans;
	•		Additional equity issuances of our common and preferred shares; and
	•		Proceeds from the sales of our real estate and technology segment.

Because our unrestricted cash is not sufficient to allow us to continue operations, we have been reviewing other alternatives, including selling the corporate entity and seeking additional investors. In

2006 and 2007, the Company received total payments of $500,000 from three independent trustees for payment of Class C Convertible Preferred Shares. These funds have been and continue to be used to maintain Paragon as a public shell current with its SEC filings while it searches for and reviews other value added real estate opportunities. In addition, the Company began in early 2008 to invest a portion of the available cash in shares of publicly traded real estate companies that have share prices at discounts to their net asset value.

Current Tax Status

At December 31, 2008, we have net operating losses of approximately $2.2 million. While these losses created a deferred tax asset, a valuation allowance was applied against the asset because of the uncertainty of whether we will be able to use these loss carryforwards, which will expire in varying amounts through the year 2028.

We, and certain of our subsidiaries, are also subject to certain state and local income, excise and franchise taxes. The provision for state and local taxes has been reflected in general and administrative expense in the consolidated statements of operations and has not been separately stated due to its insignificance.

Interest Rates and Inflation

Interest rates fell during 2008 as the Federal Reserve Bank lowered the discount rate. While interest rates are at record lows, debt financing is only available to the top-tier of creditworthy companies. Financial institutions are tightening financial covenant tests and charging higher fees for loans, which will likely lead to a slow down in real estate transactions.

We were not significantly affected by inflation during the periods presented in this report due primarily to the relative low nationwide inflation rates and the Company being a corporate shell with minimal expenses.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have, or are likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Application of Critical Accounting Estimates

Our Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles, which require us to make certain estimates and assumptions. The following section is a summary of certain estimates that both require our most subjective judgment and are most important to the presentation of our financial condition and results of operations. It is possible that the use of different estimates or assumptions in making these judgments could result in materially different amounts being reported in our Consolidated Financial Statements.

Valuation Allowance of Deferred Tax Asset

We account for income taxes using the liability method under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to affect taxable income. At December 31, 2008, we had net operating losses totaling approximately $2.2 million. While these losses created a deferred tax asset of approximately $865,000, a valuation allowance of $865,000 was applied against this asset because of the uncertainty of whether we will be able to use these loss carryforwards, which will expire in varying amounts through the year 2028. Pursuant to Internal Revenue Code regulations, we will be limited to using approximately $1.5 million of the prior

net operating losses of $13.3 million, and these same regulations also limit the amount of loss used in any one year.

Fair Value of Financial Instruments

We have irrevocably chosen to measure and record our investment in marketable securities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. We also present and disclose other information designed to facilitate comparison between entities that choose different measurement attributes for similar types of assets and liabilities.

The fair value hierarchy has three levels of inputs, both observable and unobservable. Level 1 inputs include quoted market prices in an active market for identical assets or liabilities. Level 2 inputs are market data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data. Level 3 inputs are unobservable and corroborated by little or no market data.

Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value, we have elected not to record any other assets or liabilities at fair value. No events occurred during 2008 which would require adjustment to the recognized balances of assets or liabilities which are recorded at fair value on a nonrecurring basis.

As of December 31, 2008, our marketable securities had a fair value of approximately $111,000, including marketable securities at market values of approximately $65,000 (based on market prices quoted from the stock exchanges on which the various companies are listed) and a money market account of approximately $46,000. We recorded an unrealized loss on marketable securities during 2008 of approximately $37,000, which is shown in shareholders’ equity as unrealized loss on marketable securities. Additionally, at December 31, 2008, we determined not to continue to hold some of these marketable securities and to sell them during the first quarter of 2009. Accordingly, we recognized an impairment loss of approximately $33,000 for the decrease in market value (based on market prices quoted from the stock exchanges on which the various companies are listed).

Item 8. Financial Statements and Supplementary Data

The required audited consolidated financial statements of the Company are included herein commencing on page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A(T). Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of December 31, 2008, the date of this report, James C. Mastandrea, our Chief Executive Officer and President, and John J. Dee, our Chief Financial Officer and Senior Vice President, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and

reported, within the time periods specified in the SEC’s rules and forms. Based upon this evaluation, Messrs. Mastandrea and Dee concluded that, as of December 31, 2008, our disclosure controls and procedures are effective.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our evaluation of internal control over financial reporting includes using the COSO (Committee Of Sponsoring Organizations) framework of the Treadway Commission to identify the risks and control objectives within our Company. We have established policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2008. Further, there was no change in the fourth fiscal quarter of 2008 in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, these controls.

Attestation Report of Independent Registered Public Accounting Firm

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The names, ages and positions of our trustees and executive officers are as follows:

								Expiration
Name		Age				Position		of Term(1)
James C. Mastandrea			65			President, Chief Executive Officer and Chairman of Board of Trustees		2006 (1)
John J. Dee			57			Senior Vice President, Chief Financial Officer and Trustee		2007 (1)
Daryl J. Carter			53			Trustee		2008 (1)
Daniel G. DeVos			51			Trustee		2006 (1)
Paul T. Lambert			56			Trustee		2007 (1)
Michael T. Oliver			65			Trustee		2008 (1)

Board of Trustees and Executive Officers

The business experience, principal occupations and employment, as well as the periods of service, of each of our trustees and executive officers during at least the last five years are set forth below.

James C. Mastandrea has served as President and Chairman of the Board of Trustees since March 4, 2003 and as Chief Executive Officer since April 7, 2003. Since October 2, 2006, he has also been Chairman and Chief Executive Officer of Whitestone REIT, a public though non-traded REIT. Mr. Mastandrea is Chairman and Chief Executive Officer of MDC Realty Corporation, Chicago, Illinois, which he founded in 1978 and has used for the development of over $500 million of real estate projects until 1993. From July 1993 to December 1993, Mr. Mastandrea was President of First Union Real Estate Investments, a NYSE listed real estate investment trust headquartered in Cleveland, Ohio. From January 1994 until his departure in May 1998, he was Chairman of the Board of Trustees and Chief Executive Officer of First Union. During his tenure at First Union, Mr. Mastandrea and his management team substantially grew the assets of the company from $495 million at the beginning of 1994 to $1 billion, along with commensurate growth in net operating income and funds from operations, at the end of his tenure in mid-1998. Mr. Mastandrea is a director of Cleveland State University Foundation Board and a member of the Strategic Planning Committee, a director and a member of the real estate committee of University Circle Inc., Cleveland, Ohio, and a director of the Calvin Business Alliance Board at Calvin College, Grand Rapids, Michigan. He is also a member of Pension Real Estate Association (PREA).

John J. Dee has served as a trustee and Senior Vice President since March 4, 2003, and as Chief Financial Officer since April 7, 2003. Since October 3, 2006, Mr. Dee has also been Chief Operating Officer, Executive Vice President, and Director of Finance at Whitestone REIT, a public though non-traded REIT. Prior to Mr. Dee’s joining Paragon, from 2002 to 2003, he was Senior Vice President and Chief Financial Officer of MDC Realty Corporation, Cleveland, Ohio, an affiliate of MDC Realty Corporation, Chicago, Illinois. From 2000 to 2002, Mr. Dee was Director of Finance and Administration for Frantz Ward, LLP, Cleveland, Ohio, a Cleveland-based law firm with approximately 100 employees. From 1978 to 2000, Mr. Dee held various management positions with First Union Real Estate Investments (NYSE), most recently as Senior Vice President and Chief Accounting Officer from 1996 to 2000. Mr. Dee is licensed as a CPA (non-practicing) in the State of Ohio.

Daryl J. Carter has served as a trustee since June 30, 2003. Mr. Carter is the Founder, Chairman and CEO of Avanath Capital Partners, LLC, an investment firm focused on urban-themed real estate and mortgage investments. Mr. Carter directs the strategy, investments, and overall operations of the firm. Previously, Mr. Carter was an Executive Managing Director of Centerline Capital Group (“Centerline”) a subsidiary of Centerline Holding Company (NYSE), and head of the Commercial Real Estate Group. Mr. Carter was responsible for overseeing the Commercial Real Estate Group’s national origination platform, investment strategy and new business development. He was also the President of American Mortgage Acceptance Corporation, a publicly-held, commercial mortgage lender (AMEX) that was externally managed by Centerline. Mr. Carter became part of Centerline when his company, Capri Capital Finance (“CCF”), was acquired by Centerline in 2005. Mr. Carter co-founded and served as Co-Chairman of both CCF and Capri Capital Advisors in 1992. He was instrumental in building Capri to a diversified real estate firm with $8 billion in real estate equity and debt investments under management. Prior to Capri, Mr. Carter was Regional Vice President at Westinghouse Credit Corporation in Irvine and a Second Vice President at Continental Bank in Chicago. Mr. Carter is a Trustee of the Urban Land Institute, Executive Committee Member of the National Multifamily Housing Association, Vice Chairman of the Commercial Board of Governors of the Mortgage Bankers Association, and a Trustee of Whitestone REIT, a non-traded publicly filing REIT headquartered in Houston, Texas. Mr. Carter also serves on the Dean’s Advisory Council of the M.I.T. Sloan School of Management.

Daniel G. DeVos has served as a trustee since March 4, 2003. Mr. DeVos is Chairman of the Board and Chief Executive Officer of DP Fox Ventures, LLC, a diversified management enterprise with investments in real estate, transportation, and sports teams. In addition, Mr. DeVos is the majority owner of the Grand Rapids Rampage (AFL), Grand Rapids Griffins (AHL) and has ownership interests in the Orlando Magic (NBA). Mr. DeVos is a director of Alticor, Inc., the parent of Amway Corporation, located in Ada, Michigan, and the Orlando Magic (NBA), as well as a Trustee of Whitestone REIT, a non-traded publicly filing REIT headquartered in Houston, Texas.. From 1994 to 1998, Mr. DeVos served as a trustee of First Union Real Estate Investments (NYSE).

Paul T. Lambert has served as a trustee since November 1998. Mr. Lambert serves as the Chief Executive Officer of Lambert Capital Corporation. He served on the Board of Directors and was the Chief Operating Officer of First Industrial Realty Trust, Inc. (NYSE) from its initial public offering in October 1994 to the end of 1995. Mr. Lambert was one of the largest contributors to the formation of First Industrial and one of its founding shareholders. Prior to forming First Industrial, Mr. Lambert was managing partner for The Shidler Group, a national private real estate investment company. Prior to joining Shidler, Mr. Lambert was a commercial real estate developer with Dillingham Corporation and, prior to that, was a consultant with The Boston Consulting Group.

Michael T. Oliver has served as a trustee since March 4, 2003. Mr. Oliver is Director of New Business Development at Concierge Asset Management. Mr. Oliver was the State Investment Officer of Real Estate and Private Equity Investments of the Alaska State Pension Board of the Alaska State Pension Fund, Juneau, Alaska, a position he held from August 2000 through September 2005. Mr. Oliver was a consultant from March 1998 to July 2000 to MPAC Capital Markets, Seattle, Washington, and a

consultant to several Asian governments concerning laws governing real estate investment trusts. From April 1996 to March 1998, Mr. Oliver was Chairman of RERC Capital Markets, LLC, Chicago, Illinois. From March 1987 to February 1996, he was Chairman of Heitman/PRA Securities Advisors, Inc. and President of its Real Estate Fund. Prior to March 1987 and since 1967, Mr. Oliver held positions at real estate companies raising capital and making direct investments in real estate, and at investment banking firms analyzing real estate companies and raising capital.

The board of trustees has determined that each of Messrs. Carter, DeVos, Lambert, and Oliver do not have a material relationship with Paragon that would interfere with the exercise of independent judgment and are independent as defined by the applicable rules of the SEC. Mr. Oliver is the chairman of Paragon’s audit committee and serves as the committee’s financial expert. Mr. Carter is the chairman of the management, organization and compensation committee. All four independent trustees are on the audit committee and the management, organization and compensation committee.

Code of Ethics

On January 14, 2004, our Board of Trustees adopted a code of conduct and ethics that applies to all officers, trustees and employees of Paragon, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Conduct and Ethics is filed as exhibit 14 to our annual report for the year ended December 31, 2003. Upon written request to the Company, we will provide a copy of our Code of Conduct and Ethics without charge.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers, trustees and persons who own more than 10% of our common shares to file reports of ownership and changes in ownership with the SEC. Officers, trustees and greater than 10% shareholders are required by regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on review of the copies of Form 4s filed by trustees reporting grants of restricted shares and options furnished to us, or written representations that no Annual Statements of Beneficial Ownership of Securities on Form 5 were required to be filed, we believe that for the fiscal year ended December 31, 2008, all Section 16(a) filing requirements applicable to our officers, trustees and greater than 10% shareholders were complied with.

Item 11. Executive Compensation.

James C. Mastandrea did not receive any compensation for serving as our CEO, president and chairman during the years ended December 31, 2008 and December 31, 2007.

Outstanding Equity Awards at Fiscal Year End

The following table sets forth the status of equity awards as of December 31, 2008

Option Awards

Stock Awards

Equity Incentive

Plan Awards:

Market

Number of

Number of

Number of

Number of

Value of

Unearned

Securities

Securities

Shares or

Shares or

Shares, Units

Underlying

Underlying

Units of

Units of

or Other

Unexercised

Unexercised

Option

Option

Stock That

Stock That

Rights That

Options

Options

Exercise

Expiration

Have Not

Have Not

Have Not

Name

Exercisable

Unexercisable

Price

Date

Vested

Vested

Vested

James C. Mastandrea Chief Executive Officer, President and Chairman

2,000 (1)

—

$

20.25

1/2/09

4,000 (2)

$

120.00

(3

)

Employment Agreements

On April 3, 2006, the Board of Trustees of Paragon authorized modifications to the employment agreement of James C. Mastandrea, President and Chief Executive Officer. The modification agreement allows Mr. Mastandrea to devote time to other business and personal investments while performing his duties for Paragon. The original employment agreement with Mr. Mastandrea provides for an annual salary of $60,000 effective as of March 4, 2003. The initial term of Mr. Mastandrea’s employment is for two years and may be extended for terms of one year through his 70th birthday. Mr. Mastandrea’s base annual salary may be adjusted from time to time, except that the adjustment may not be lower than the preceding year’s base salary. The employment agreement provides that Mr. Mastandrea will be entitled to base salary and bonus at the rate in effect before any termination for a period of three years in the event that his employment is terminated without cause by us or for good reason by Mr. Mastandrea. Effective September 29, 2006, in lieu of an annual salary of $100,000, Mr.

Mastandrea received 44,444 Class C Convertible Preferred Shares for his services as an officer of Paragon through September 29, 2008. On September 25, 2008 this agreement was amended to change the service period ending date to September 29, 2009 and the vesting period date restriction on the sale of shares was changed to September 29, 2009.

Effective June 30, 2003, we issued 696,078 preferred shares valued at approximately $2.4 million to Messrs. Mastandrea and Dee pursuant to separate restricted share agreements. On June 30, 2003, 534,668 preferred shares were converted at a factor of 0.305 into 163,116 common shares. Under the restricted share agreement for each of Mr. Mastandrea and Mr. Dee, the restricted shares vest upon the later of the following dates:

	•		the date our gross assets exceed $50.0 million, or
	•		50% of the restricted shares on March 4, 2004; 25% of the shares on March 4, 2005, and the remaining 25% of the shares on March 4, 2006.

The number of common shares and the conversion factor have been revised to reflect the 1-for-75 reverse split of the common shares that occurred in July 2006.

Compensation of Trustees

During the year ended December 31, 2008, trustees were not paid any compensation.

In lieu of cash payments for trustee fees, effective September 29, 2006, each trustee of the Company received 12,500 restricted Class C Convertible Preferred Shares for service as a trustee until September 29, 2008. The shares are restricted until the latest to occur of: (a) a public offering by the Company sufficient to liquidate the shares, (b) an exchange of the Company’s existing shares for new shares, and (c) September 29, 2008. On September 25, 2008 these agreements were amended to change the service period ending dates to September 29, 2009 and the vesting period date restrictions on the sale of shares was changed to September 29, 2009.

On June 30, 2003, our shareholders approved the issuance of additional common shares to Paragon Real Estate Development, LLC for James C. Mastandrea, our Chief Executive Officer and President, and John J. Dee, our Chief Financial Officer and Senior Vice President, to encourage them to substantially grow the asset base, net operating income, funds from operations, net value, and share value of Paragon. On September 29, 2006, Paragon amended this agreement to add each of the trustees to the agreement so that if a trustee brings a new deal to Paragon, he would receive additional common shares of Paragon in accordance with a formula in the agreement. We will issue restricted common shares if they locate and close on our behalf future acquisition, development or re-development transactions. Any of these transactions would be subject to approval by the members of our board of trustees who are not receiving the additional common shares. The maximum number of common shares they may receive under the additional contribution agreement is limited to a total value of $26 million based on the average closing price of the common shares for 30 calendar days preceding the closing of any acquisition. The common shares will be restricted until we achieve the five-year pro forma income target for the acquisition, as approved by the board of trustees, and an increase of 5% in Paragon’s net operating income and funds from operations. The restricted shares would vest immediately upon any “shift in ownership,” as defined in the agreement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table includes certain information with respect to the beneficial ownership of our shares by: (i) each person known by us to own more than 5% in interest of the outstanding shares; (ii) each of the trustees; (iii) each of our executive officers; and (iv) all of the trustees and executive officers as a group. Except as otherwise noted, the person or entity named has sole voting and investment power over the shares indicated.

The table shows ownership as of March 5, 2009.

																										Total Common Shares
		Common Shares (2)								Preferred A Shares (3)								Preferred C Shares (4)								and Preferred Shares (5)
Name and Address (1)		Number				Percent (6)				Number				Percent (6)				Number				Percent (6)				Number				Percent (6)
James C. Mastandrea			174,163	(7)			43.1	%			161,410	(15)			58.4	%			56,944				23.3	%			792,846	(17)			77.5	%
Paragon Real Estate Development, LLC			163,117	(8)			40.3	%			161,410	(15)			58.4	%			—				—				212,359	(18)			46.8	%
Paul T. Lambert			34,448	(9)			8.5	%			—				—				62,500				25.6	%			659,448	(19)			64.0	%
John J. Dee			4,000	(10)			1.0	%			—	(16)			—				12,500				5.1	%			129,000	(20)			24.4	%
Daryl J. Carter			3,000	(11)			*				—				—				37,500				15.3	%			378,000	(21)			48.4	%
Daniel G. DeVos			3,000	(11)			*				—				—				62,500				25.6	%			628,000	(22)			61.0	%
Michael T. Oliver			1,667	(12)			*				—				—				12,500				5.1	%			126,667	(23)			23.9	%
All trustees and current executive officers as a group (13)			220,278	(14)			53.9	%			161,410				58.4	%			244,444				100.0	%			2,713,961	(24)			93.5	%

Equity Compensation Plan Information

										Number of securities
		Number of				Weighted-				remaining available
		securities to be				average exercise				for future issuance
		issued upon				price of				under equity
		exercise of				outstanding				compensation plans
		outstanding				options,				(excluding securities
Equity Compensation Plans		options, warrants				warrants and				reflected in column
Approved/ Not Approved by Security		and rights				rights				(a))
Holders		(a)				(b)				(c)
Equity compensation plans approved by security holders
2004 Share Option Plan
Restricted common shares			17,333			$	—
Options for common shares			8,667			$	18.00
			26,000			$	6.00				20,666
Equity compensation plans not approved by security holders
Common shares			6,667			$	—
Warrants for common shares			11,667			$	7.50
			18,334			$	4.77				—
Total all plans — Common shares			44,334			$	5.49				20,666

In addition to the above plans, we entered into an agreement dated March 4, 2003 and approved by the shareholders on June 30, 2003 with Mr. Mastandrea, Mr. Dee and Paragon Real Estate Development, LLC of which Mr. Mastandrea is the managing member, and Mr. Dee is a member. Pursuant to this agreement, we may issue up to $26.0 million in our common shares to Paragon Real Estate Development, LLC in exchange for it and its members procuring future acquisition, development and re-development real estate transactions for Paragon’s benefit. On September 29, 2006, Paragon amended this agreement to add each of the trustees to the agreement so that if a trustee brings a new transaction to Paragon, he would receive additional common shares of Paragon in accordance with the formula in the agreement. This agreement is intended to serve as incentive for the trustees and officers of Paragon to increase our assets and net operating income in the future. The exact number of common shares that would be issued will be calculated in accordance with a formula based on the type of transaction that they present to us. The formula for a particular real estate transaction would be calculated by dividing (i) estimated net operating income to be generated from the real estate transaction for the first year following its consummation by (ii) the capitalization rate used in the real estate transaction, less the “applicable basis point factor.” The “applicable basis point factor” is defined as: 75 basis points for the acquisition of an existing operating property, 87.5 basis points for the acquisition of a re-development property, and 100 basis points for the acquisition of a development property. We would issue our common shares only upon the closing of the real estate transaction. For any transaction brought to Paragon by Messrs. Mastandrea and Dee, Mr. Mastandrea would be allocated half of the common shares and Mr. Dee would be allocated the other half, and all of their common shares would be held by Paragon Real Estate Development, LLC for the benefit of its owners.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Relationships and Related Transactions

None.

Trustee Independence

Our Board has affirmatively determined that four of our six trustees are “independent” under the NASDAQ listing standards, applicable SEC rules and the standards prescribed by our declaration of trust. These trustees are Daryl J. Carter, Daniel G. DeVos, Paul T. Lambert, and Michael T. Oliver. Messrs. Mastandrea and Dee, our other two trustees, are also executive officers of the Company, and therefore are not considered to be “independent” according to these standards.

Item 14. Principal Accounting Fees and Services.

The aggregate fees billed by the principal independent registered public accountants (Boulay, Heutmaker, Zibell & Co., P.L.L.P.) to the Company for the fiscal years ended December 31, 2008
and 2007 are as follows:

										% Approved
										by Audit
Category		Year				Fees				Committee
Audit Fees (1)			2008			$	35,300				100	%
			2007			$	33,700				100	%
Audit-Related Fees			2008			$	—
			2007			$	—
Tax Fees (2)			2008			$	2,765				100	%
			2007			$	3,600				100	%
All Other Fees			2008			$	—
			2007			$	—

Policy for Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

Before the independent auditors are engaged by the Company to render audit or non-audit services,
the Audit Committee approves the engagement.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

Exhibit
Number		Exhibit Description
2.1		Asset Contribution Agreement among Hampton Court Associates, L.P., Paragon Real Estate, L.P., and the Company (filed as Exhibit 2.1 with the Company’s Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)
2.2		Additional Contribution Agreement between the Company and Paragon Real Estate Development, LLC (filed as Exhibit 2.7 with the Company’s Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)
2.3		Amendment to Additional Contribution Agreement between the Company, the Board of Trustees and each Trustee individually dated September 29, 2006. (filed as Exhibit 2.1 with the Company’s Current Report on Form 8-K filed on October 3, 2006 and incorporated herein by reference)
2.4		Modification Agreement between the Company and Paragon Real Estate Development, LLC (filed as Exhibit 2.8 with the Company’s Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)
2.5		Amendment No. 1 to the Agreement of Limited Partnership of Wellington Properties Investments, L.P. among the Company and the Limited Partners named therein (filed as Exhibit 2.9 with the Company’s Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)
2.6		Closing Agreement dated June 27, 2003 among the Company, Hampton Court Associates, L.P., Hoyt Properties, Inc. and WLPT Funding LLC (filed as Exhibit 2.5 with the Company’s Current Report on Form 8-K filed on July 15, 2003 and incorporated herein by reference)
3.1		Articles of Amendment and Restatement of the Declaration of Trust of the Company (filed as Exhibit 3.1 with the Company’s Registration Statement on Form SB-2/A filed on October 14, 1999 and incorporated herein by reference)
3.2		Articles of Amendment of Declaration of Trust of the Company (filed as Exhibit 2.3 with the Company’s Current Report on Form 8-K filed on July 15, 2003 and incorporated herein by reference)
3.3		Articles Supplementary to the Declaration of Trust of the Company (filed as Exhibit 3.1 with the Company’s Current Report on Form 8-K filed on July 23, 2004 and incorporated herein by reference)
3.4		Articles of Amendment of Declaration of Trust of the Company (filed as Exhibit 3.1 with the Company’s Current Report on Form 8-K filed on July 17, 2006 and incorporated herein by reference)
3.5		Articles Supplementary to the Declaration of Trust of the Company (filed as Exhibit 3.1 with the Company’s Current Report on Form 8-K filed on October 3, 2006 and incorporated herein by reference)

Exhibit
Number		Exhibit Description
3.6		Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 with the Company’s Registration Statement on Form SB-2/A filed on October 14, 1999 and incorporated herein by reference)
3.7		Amendment No. 1 to the Amended and Restated Bylaws of the Company (filed as Exhibit 3.4 with the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2003 and incorporated herein by reference)
3.8		Amendment No. 2 to the Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 with the Company’s Current Report on Form 8-K filed on October 19, 2005 and incorporated herein by reference)
4.1		Voting and Stock Restriction Agreement among the Company, Steven B. Hoyt, Duane H. Lund, Paul T. Lambert, John J. Dee, James C. Mastandrea, and Paragon Real Estate Development, LLC (filed as Exhibit 2.2 with the Company’s Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)
10.1		Employment Agreement of James C. Mastandrea (filed as Exhibit 2.3 with the Company’s Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference) (1)
10.2		Employment Agreement of John J. Dee (filed as Exhibit 2.4 with the Company’s Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference) (1)
10.3		Restricted Share Agreement of James C. Mastandrea (filed as Exhibit 2.5 with the Company’s Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference) (1)
10.4		Restricted Share Agreement of John J. Dee (filed as Exhibit 2.6 with the Company’s Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference) (1)
10.5		Form of Restricted Share Agreement for Trustees dated September 26, 2006 (filed as Exhibit 10.3 with the Company’s Current Report on Form 8-K filed on October 3, 2006 and incorporated herein by reference) (1)
10.6		Agreement of Limited Partnership of Paragon Real Estate, L.P. (filed as Exhibit 2.2 with the Company’s Current Report on Form 8-K filed on July 15, 2003 and incorporated herein by reference)
10.7		2004 Share Option Plan of the Company (filed as Exhibit 4.1 with the Company’s Registration Statement on Form S-8 filed on July 23, 2004 and incorporated herein by reference)
10.8		Stock Subscription Agreement between James C. Mastandrea and the Company dated as of September 29, 2006 (filed as Exhibit 10.2 with the Company’s Current Report on Form 8-K filed on October 3, 2006 and incorporated herein by reference)
10.9		Form of Stock Subscription Agreement between Investors and the Company dated as of September 29, 2006 (filed as Exhibit 10.1 with the Company’s Current Report on Form 8-K filed on October 3, 2006 and incorporated herein by reference)

Exhibit
Number		Exhibit Description
10.10		Modification Agreement between the Company and John J. Dee dated April 3, 2006 (filed as Exhibit 10.2 with the Company’s Current Report on Form 8-K filed on April 6, 2006 and incorporated herein by reference)
10.11		Modification Agreement between the Company and James C. Mastandrea dated April 3, 2006 (filed as Exhibit 10.1 with the Company’s Current Report on Form 8-K filed on April 6, 2006 and incorporated herein by reference)
10.12		Form of First Amendment to Restricted Share Agreement for Trustees dated September 25, 2008 (filed as Exhibit 10.1 with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 and incorporated herein by reference)
10.13		First Amendment to Stock Subscription Agreement between James C. Mastandrea and the Company dated September 25, 2008 (filed as Exhibit 10.2 with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 and incorporated herein by reference)
14		Code of Conduct and Ethics (filed as Exhibit 14 with the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003 and incorporated herein by reference)
31.1		Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002 — Chief Executive Officer (2)
31.2		Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002 — Chief Financial Officer (2)
32.1		CEO/CFO Certification under Section 906 of Sarbanes-Oxley Act of 2002 (2)

SIGNATURES

In accordance with the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John J. Dee, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

In accordance with Section 13 or 15(d) of the Securities Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST

Signature		Title		Date
/s/ James C. Mastandrea   James C. Mastandrea		Trustee, Chief Executive Officer and President		March 5, 2009
/s/ John J. Dee   John J. Dee		Trustee, Senior Vice President and Chief Financial Officer		March 5, 2009
/s/ Daryl J. Carter   Daryl J. Carter		Trustee		March 5, 2009
/s/ Daniel G. DeVos   Daniel G. DeVos		Trustee		March 5, 2009
/s/ Paul T. Lambert   Paul T. Lambert		Trustee		March 5, 2009
/s/ Michael T. Oliver   Michael T. Oliver		Trustee		March 5, 2009

PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheets as of December 31, 2008 and December 31, 2007			F-3
Consolidated Statements of Operations — Years ended December 31, 2008 and December 31, 2007			F-4
Consolidated Statements of Shareholders’ Equity — Years ended December 31, 2008 and December 31, 2007			F-5
Consolidated Statements of Cash Flows — Years ended December 31, 2008 and December 31, 2007			F-6
Notes to Consolidated Financial Statements			F-7

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Trustees and Shareholders of
Paragon Real Estate Equity and Investment Trust and Subsidiaries:

We have audited the accompanying consolidated balance sheet of Paragon Real Estate Equity and Investment Trust and Subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2008. Paragon Real Estate Equity and Investment Trust and Subsidiaries’ management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Paragon Real Estate Equity and Investment Trust and Subsidiaries as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2008, in conformity with principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the lack of a revenue generating asset, the Company’s net losses, negative cash flow from operations and accumulated deficit raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P.
Certified Public Accountants

Minneapolis, Minnesota
March 13, 2009

Paragon Real Estate Equity and Investment Trust and Subsidiary
Consolidated Balance Sheets
December 31, 2008 and December 31, 2007

		December 31,				December 31,
		2008				2007
Assets
Investments in equipment:
Furniture, fixtures and equipment		$	5,370			$	5,370
Accumulated depreciation			(4,257	)			(3,183	)
Net investments in equipment			1,113				2,187
Cash			182,373				421,196
Marketable securities			111,191				—
Accounts receivable			—				551
Other assets			9,343				13,080
Total Assets		$	304,020			$	437,014
Liabilities and Shareholders’ Equity
Liabilities:
Accounts payable and accrued expenses			6,959				14,025
Total liabilities			6,959				14,025
Commitments and Contingencies
Shareholders’ equity:
Preferred A Shares — $0.01 par value, 10,000,000 authorized: 276,255 and 277,955 Class A cumulative convertible shares issued and outstanding at December 31, 2008 and December 31, 2007, respectively, $10.00 per share liquidation preference			2,763				2,780
Preferred C Shares — $0.01 par value, 300,000 authorized: 244,444 Class C cumulative convertible shares issued and outstanding, $10.00 per share liquidation preference			2,444				2,444
Common Shares — $0.01 par value, 100,000,000 authorized: 442,398 and 442,320 shares issued and outstanding at December 31, 2008 and December 31, 2007, respectively			4,424				4,424
Additional paid-in capital			28,146,404				27,958,838
Accumulated deficit			(27,021,670	)			(26,744,762	)
Accumulated other comprehensive income, net unrealized loss on marketable securities			(36,569	)			—
Treasury stock, at cost, 38,130 shares			(800,735	)			(800,735	)
Total shareholders’ equity			297,061				422,989
Total Liabilities and Shareholders’ Equity		$	304,020			$	437,014

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

Paragon Real Estate Equity and Investment Trust and Subsidiary
Consolidated Statements of Operations

		For the year ended December 31,
		2008				2007
Revenues
Interest/dividend income		$	10,080			$	10,252
Other income			12,016				—
Total revenues			22,096				10,252
Expenses
Depreciation and amortization			1,074				1,074
General and administrative			269,568				372,170
Total expenses			270,642				373,244
Loss from operations			(248,546	)			(362,992	)
Gain on sale of marketable securities			4,253				—
Impairment loss on marketable securities			(32,615	)			—
Net loss attributable to Common Shareholders			(276,908	)			(362,992	)
Net loss attributable to Common Shareholders per Common Share: Basic and Diluted		$	(.63	)		$	(.82	)
Weighted average number of Common Shares outstanding: Basic and Diluted			442,359				442,482
Comprehensive loss:
Net loss		$	(276,908	)		$	(362,992	)
Other comprehensive loss:
Unrealized loss on marketable securities			(36,569	)			—
Comprehensive loss		$	(313,477	)		$	(362,992	)

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

Paragon Real Estate Equity and Investment Trust
Consolidated Statements of Shareholders’ Equity
For the years ended December 31, 2008 and 2007

																						Accumulated
																						other
																						comprehensive
																						income, net
														Subscriptions								unrealized gain
		Class A				Class C								Receivable Class								(loss) on
		Preferred				Preferred				Common				C Preferred				Additional Paid-				marketable				Accumulated				Cost of Shares
		Shares				Shares				Shares				Shares				in Capital				securities				Deficit				held in Treasury				Total
Balance at December 31, 2006		$	2,780			$	2,444			$	4,426				($300,000	)		$	27,676,829			$	—				($26,381,645	)			($800,735	)		$	204,099
Cash paid in lieu of fractional shares											(2	)																							(2	)
Stock based compensation																			31,500																31,500
Amortization of unearned compensation and trustee fees, net of market price reduction																			250,384																250,384
Cash receipts for subscriptions receivable on issuance of Preferred C shares															300,000																				300,000
Reclassify discontinued operations																			125								(125	)							—
Net loss																											(362,992	)							(362,992	)
Balance at December 31, 2007		$	2,780			$	2,444			$	4,424			$	—			$	27,958,838			$	—				($26,744,762	)			($800,735	)		$	422,989
Unrealized loss on Marketable Securities																							(36,569	)											(36,569	)
Conversion of Preferred Shares			(17	)															17																—
Amortization of unearned compensation and trustee fees, net of market price reduction																			187,549																187,549
Net loss																											(276,908	)							(276,908	)
Balance at December 31, 2008		$	2,763			$	2,444			$	4,424			$	—			$	28,146,404				($36,569	)			($27,021,670	)			($800,735	)		$	297,061

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

Paragon Real Estate Equity and Investment Trust and Subsidiary
Consolidated Statements of Cash Flows

		For the year ended December 31,
		2008				2007
Cash flows from operating activities:
Net loss		$	(276,908	)		$	(362,992	)
Adjustments to reconcile net loss to net cash used in continuing operations:
Compensation costs paid through amortization of restricted common shares			50				385
Compensation costs and trustee fees incurred through the issuance of shares			187,499				250,000
Stock based compensation			—				31,500
Depreciation and amortization			1,074				1,074
Removal of non cash estimated liabilities			(12,016	)			—
Gain on sale of marketable securities			(4,253	)			—
Impairment loss on marketable securities			32,615				—
Net change in assets and liabilities:
Other assets			4,288				2,217
Accounts payable and accrued expenses			4,950				(13,692	)
Net cash used in continuing operations			(62,701	)			(91,508	)
Cash flows from investing activities:
Cash used for the purchase of marketable securities			(217,175	)			—
Proceeds from the sale of marketable securities			41,053
Net cash used for investing activities			(176,122	)			—
Cash flows from financing activities:
Cash proceeds from issuance of Preferred C shares			—				300,000
Fractional shares purchased for cash			—				(2	)
Net cash from financing activities			—				299,998
Net increase (decrease) in cash			(238,823	)			208,490
Cash
Beginning of period			421,196				212,706
End of period		$	182,373			$	421,196

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

Paragon Real Estate Equity and Investment Trust and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2008

Note 1 — Organization

Paragon Real Estate Equity and Investment Trust (the “Company,” “Paragon,” “we,” “our,” or “us”)
is a real estate company with its primary focus on searching for and reviewing value-added real estate opportunities, including land development, retail, office, industrial, hotel, other real estate investment and operating companies, and joint venture investments. In addition in early 2008, the Company began to invest a portion of its available cash in publicly traded shares of other real estate companies. Presently, the Company is a corporate shell, current in its SEC filings that may be used in the future for real estate transactions or sold to another company.

Note 2 — Basis of Presentation

Going Concern

The financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the continued operations as a public company and paying liabilities in the normal course of business. The Company has received $500,000 from three trustees for payment of Class C Convertible Preferred Shares, which is to be used to maintain Paragon as a public shell current in its SEC filings. No other amounts are due from the trustees for these Convertible Preferred Shares. The Company has continued to incur net losses and at December 31, 2008 had unrestricted cash of approximately $182,000. The net decrease in cash during the year ended December 31, 2008 was approximately $239,000, of which $176,000 was the net cash used to invest in marketable securities and $63,000 was used to maintain the Company as a corporate shell reporting with the SEC. Our ability to continue as a going concern will be dependent upon acquiring assets to generate cash flow because we have no revenue generating assets other than marketable securities.

Paragon continues to seek value-added real estate opportunities, including land development, retail, office, industrial, hotel, other real estate investment and operating companies, and joint venture investments. In addition, because our unrestricted cash is not sufficient to allow us to continue operations, we have reviewed other alternatives, including selling the corporate entity and seeking additional investors. There can be no assurance that we will be able to close a transaction or keep the Company currently filed with the SEC. Even if our management is successful in closing a transaction, investors may not value the transaction or the current filing status with the SEC in the same manner as we did, and investors may not value the transaction as they would value other transactions or alternatives. Failure to obtain external sources of capital and complete a transaction will materially and adversely affect the Company’s ability to continue operations. Three independent trustees contributed an aggregate of $500,000 cash to maintain the Company as a corporate shell current in its SEC filings so that it may be used in the future for real estate transactions or sold to another company.

Note 3 — Summary of Significant Accounting Policies

Use of Estimates in the Preparation of Financial Statements

In order to conform with generally accepted accounting principles, management, in preparation of our consolidated financial statements, is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of December 31, 2008 and December 31, 2007, and the reported amounts of revenues and expenses for the years ended December 31, 2008 and 2007. Actual results could differ from those estimates. Significant estimates include deferred taxes, a related valuation allowance for deferred taxes, and the valuation of share-based compensation, and these significant estimates, as well as other estimates and assumptions, may change in the near term.

Investments in Equipment

Our investments in equipment assets are reported at cost.

Depreciation expense is computed using the straight-line method based on the following useful lives:

		Years
Furniture, fixtures and equipment		3-7

Cash

We maintain our cash in bank accounts in amounts that may exceed federally insured limits at times.

Other Assets

As of December 31, 2008 and December 31, 2007, other assets of approximately $9,000 and $13,000, respectively, are prepaid expenses for director and officer liability insurance.

Revenue Recognition

Revenues include interest and dividends earned on cash balances and marketable securities. In addition in 2008, we recorded other income of approximately $12,000 from the removal of estimates of accrued liabilities and accounts payable that were no longer considered obligations.

Stock-Based Compensation

On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) (“SFAS No. 123R”), Share-Based Payment, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. In January 2005, the SEC issued SAB No. 107, which provides supplemental implementation guidance for SFAS No. 123R. SFAS No. 123R eliminates the ability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and instead generally requires that such transactions be accounted for using a fair-value-based method. In accordance with the modified-prospective transition method, the Company’s financial statements for prior periods have not been restated to reflect the impact of SFAS No. 123R. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards.

Income Taxes

Because we have not elected to be taxed as a Real Estate Investment Trust (“REIT”) for federal income tax purposes, we account for income taxes using the liability method under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We intend to take advantage of our tax loss carryforwards prior to electing REIT status again.

The Company evaluates potential uncertain tax positions on an annual basis in conjunction with the Board of Trustees and its tax accountants. Authoritative literature provides a two-step approach to recognize and measure tax benefits when realization of the benefits is uncertain. The first step is to determine whether the benefit meets the more-likely-than-not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%. The adoption of FIN 48 on November 1, 2008, had no material effect on the Company’s financial condition or results of operations.

At December 31, 2008, we have net operating losses totaling approximately $2.2 million. While these losses created a deferred tax asset, a valuation allowance was applied against the asset because of the uncertainty of

whether we will be able to use these loss carryforwards, which will expire in varying amounts through the year 2028. Pursuant to Internal Revenue Code regulations, Paragon will be limited to using approximately $1.5 million of the prior net operating losses of $13.3 million. These same regulations also limit the amount of loss used in any one year.

We are also subject to certain state and local income, excise and franchise taxes. The provision for state and local taxes has been reflected in general and administrative expense in the consolidated statements of operations and has not been separately stated due to its insignificance.

Fair Value of Financial Instruments

Effective January 1, 2008, we adopted Statement of Financial Accounting Standard No. 157, Fair Value Measurements (“SFAS 157”), as it applies to our financial instruments, and Statement of Financial Accounting Standard No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 157 defines fair value, outlines a framework for measuring fair value, and details the required disclosures about fair value measurements. SFAS 159 permits companies to irrevocably choose to measure certain financial instruments and other items at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparison between entities that choose different measurement attributes for similar types of assets and liabilities.

Under SFAS 157, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. SFAS 157 establishes a hierarchy in determining the fair value of an asset or liability. The fair value hierarchy has three levels of inputs, both observable and unobservable. SFAS 157 requires the utilization of the lowest possible level of input to determine fair value. Level 1 inputs include quoted market prices in an active market for identical assets or liabilities. Level 2 inputs are market data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data. Level 3 inputs are unobservable and corroborated by little or no market data.

Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our Consolidated Balance Sheets, we have elected not to record any other assets or liabilities at fair value, as permitted by SFAS 159. No events occurred during 2008 which would require adjustment to the recognized balances of assets or liabilities which are recorded at fair value on a nonrecurring basis.

The following table provides information on those assets and liabilities measured at fair value on a recurring basis.

		Carrying Amount
		in Consolidated
		Balance Sheet				Fair Value				Fair Value Measurement Using
		December 31, 2008				December 31, 2008				Level 1				Level 2				Level 3
Marketable Securities		$	111,191			$	111,191			$	111,191			$	—			$	—

The fair value of the marketable securities is based on quoted market prices in an active market.

Recent Accounting Pronouncements

Management has reviewed recently issued accounting pronouncements and does not expect the implementation of these pronouncements to have a significant effect on the Company’s financial statements.

Reclassifications

We have reclassified certain prior year amounts in the accompanying consolidated balance sheets to be consistent

with the current year presentation. The reclassification was limited to the shareholders’ equity section for the combining of “unearned compensation and trustees’ fees” with “additional paid-in capital,” which had no effect on “total shareholders’ equity.”

Note 4 — Marketable Securities

Our investments in marketable securities are classified as available-for-sale, as of December 31, 2008, and represent common shares of publicly traded real estate investment trusts.

As of December 31, 2008, our marketable securities had a fair market value of approximately $111,000, including marketable securities at market value of approximately $65,000 (based on market prices quoted from the stock exchanges on which the various companies are listed) and a money market account of approximately $46,000. We recorded an unrealized loss on marketable securities during 2008 of approximately $37,000, which is shown in shareholders’ equity as net unrealized loss on marketable securities. Additionally, at December 31, 2008, we determined not to continue to hold some of these marketable securities and to sell them during the first quarter of 2009. Accordingly, we recognized an impairment loss of approximately $33,000 for the decrease in market value (based on market prices quoted from the stock exchanges on which the various companies are listed).

We recognize gain or loss on the sale of marketable securities based upon the first-in-first-out method. During the year ended December 31, 2008, we sold marketable securities for approximately $41,000, having a cost of approximately $37,000, and recognized a gain of approximately $4,000.

Note 5 — Shareholders’ Equity

Preferred Shares

The Company has outstanding 114,845 Class A Cumulative Convertible Preferred Shares (“Class A Preferred Shares”) that were issued to the public. The Class A Preferred Shares bear a liquidation value of $10.00 per share. The Class A Preferred Shares are convertible into 0.046 common shares subject to certain formulas. We have the right to redeem the Class A Preferred Shares.

Effective June 30, 2003, we issued 696,078 Class A Preferred Shares valued at approximately $2.4 million to Messrs. Mastandrea and Dee pursuant to separate restricted share agreements. Under each restricted share agreement, the restricted shares vest upon the later of the following dates:

	•		the date our gross assets exceed $50.0 million, or
	•		50% of the restricted shares on March 4, 2004; 25% of the shares on March 4, 2005 and the remaining 25% of the shares on March 4, 2006.

In conjunction with a one-time incentive exchange offer for Class A preferred shareholders, Messrs. Mastandrea and Dee exchanged 534,668 of these restricted Class A Preferred Shares into 163,116 restricted common shares. The restrictions described above are also applicable to their common shares. The remaining 161,410 restricted Class A preferred shares held by Messrs Mastandrea and Dee can each be converted into 0.305 restricted common shares.

During 2008, 1,700 Class A Preferred Shares were converted to 78 common shares, at a conversion rate of 0.046 common shares for each preferred share.

Effective September 29, 2006, Paragon filed articles supplementary to its declaration of trust, as amended, restated and supplemented with the State Department of Assessment and Taxation of Maryland designating 300,000 Class C Convertible Preferred Shares (“Class C Preferred Shares”). Dividends for the holders of the Class C Preferred Shares are at the discretion of the trustees. The Class C Preferred Shares have voting rights equal to the number of common shares into which they are convertible. Each Class C Preferred Share is

convertible into common shares by dividing by the sum of $10.00 and any accrued but unpaid dividends on the Class C Preferred Shares by the conversion price of $1.00. The Class C Preferred Shares have a liquidation preference of $10.00 per share, plus any accrued but unpaid dividends, and can be redeemed by the board of trustees at any time, with notice, at the same price per share.

Effective September 29, 2006, three independent trustees of Paragon signed subscription agreements to purchase 125,000 Class C Preferred Shares for an aggregate contribution of $500,000 cash to maintain Paragon as a corporate shell current in its SEC filings. The trustees paid installments of $200,000 during 2006 and the remaining $300,000 in 2007.

In addition, on September 29, 2006, James C. Mastandrea, President, Chief Executive Officer, and Chairman of the Board of Trustees of Paragon, signed a subscription agreement to purchase 44,444 restricted shares of Class C Convertible Preferred Shares. The consideration for the purchase was Mr. Mastandrea’s services as an officer of Paragon for the period beginning September 29, 2006 and ending September 29, 2008. The Class C Convertible Preferred Shares are subject to forfeiture and are restricted from being sold by Mr. Mastandrea until the latest to occur of a public offering by Paragon sufficient to liquidate the Class C Convertible Preferred Shares, an exchange of Paragon’s existing shares for new shares, or September 29, 2008. On September 25, 2008 this agreement was amended to change the service period ending date to September 29, 2009 and the vesting period date restriction on the sale of shares was changed to September 29, 2009.

Each of the trustees of Paragon, namely Daryl J. Carter, John J. Dee, Daniel G. DeVos, Paul T. Lambert, James C. Mastandrea and Michael T. Oliver, signed a restricted share agreement with Paragon, dated September 29, 2006, to receive a total of 12,500 restricted Class C Convertible Preferred Shares in lieu of receiving fees in cash for service as a trustee for the two years ending September 29, 2008. The restrictions on the Class C Convertible Preferred Shares were to be removed upon the latest to occur of a public offering by Paragon sufficient to liquidate the Class C Convertible Preferred Shares, an exchange of Paragon’s existing shares for new shares, or September 29, 2008. On September 25, 2008, these agreements were amended to change the service period ending dates to September 29, 2009 and the vesting period date restrictions on the sale of shares was changed to September 29, 2009.

Common Shares

Effective July 27, 2006, the board of trustees approved a reverse share split of 1-for-75 for the outstanding common shares. Shareholders approved a proposal at the June 3, 2005 annual meeting authorizing the Board, at its discretion, to determine the timing of the reverse share split and declare the split at one of four ratios. Information related to the number of common shares and the earnings per share have been restated in the accompanying financial statements and related footnotes to reflect this reverse split. During 2008,
1,700 Class A Preferred Shares were converted into 78 common shares.

Shares Held in Treasury

On October 1, 2003 we completed the sale of our 92.9% general partnership interest in our four commercial properties. A portion of the proceeds from the sale was paid in 38,130 of our common shares at an average closing price for the 30 calendar days prior to June 27, 2003 of $21.00 or approximately $801,000. These shares are recorded at cost in the accompanying consolidated balance sheet under treasury shares.

Restricted Common Shares

The following table summarizes the activity of our unvested restricted common shares for the years ended December 31, 2008 and 2007:

		Unvested Restricted Common Shares
						Weighted-Average
		Number of				Grant-Date
		Shares				Fair Value
Unvested at January 1, 2007			172,450			$	11.55
Vested			(4,000	)		$	16.50
Unvested at December 31, 2007			168,450			$	11.44
Vested			(667	)		$	9.75
Unvested at December 31, 2008			167,783			$	11.44

As of December 31, 2008 and 2007 there was approximately $1,920,000 and $1,926,000, respectively, of unrecognized compensation cost related to unvested restricted shares, net of forecasted forfeitures and expirations. This amount is expected to be recognized over a weighted average period of four years. To the extent the actual forfeiture rate is different than we have anticipated, the number of restricted common shares vesting would be different from our expectations.

On June 30, 2003, our shareholders approved the issuance of additional common shares to Paragon Real Estate Development, LLC for James C. Mastandrea, our Chief Executive Officer and President, and John J. Dee, our Chief Financial Officer and Senior Vice President, to encourage them to substantially grow the asset base, net operating income, funds from operations, net value, and share value of Paragon. On September 29, 2006, Paragon amended this agreement to add each of the trustees to the agreement so that if a trustee brings a new transaction to Paragon, he would receive additional common shares of Paragon in accordance with a formula in the agreement. We will issue restricted common shares if they locate and close on our behalf future acquisition, development or re-development transactions. Any of these transactions would be subject to approval by the members of our board of trustees who are not receiving the additional common shares. The maximum number of common shares they may receive under the additional contribution agreement is limited to a total value of $26 million based on the average closing price of the common shares for 30 calendar days preceding the closing of any acquisition. The common shares will be restricted until we achieve the five-year pro forma income target for the acquisition, as approved by the board of trustees, and an increase of 5% in Paragon’s net operating income and funds from operations. The restricted shares would vest immediately upon any “shift in ownership,” as defined in the agreement.

Options

On November 16, 1998, we adopted the 1998 Share Option Plan. In 2004 the board of trustees unanimously recommended and the shareholders approved amendments to our 1998 Share Option Plan to increase the number of shares available for grant from 42,222 to 46,666 and to conform with current tax regulations (“2004 Plan”). The 2004 Plan provides for the grant of “incentive stock options,” as defined under
Section 422(b) of the tax code, options that are not qualified under the tax code (referred to in this annual report as “non-statutory options”), share appreciation rights (“SARs”) and restricted share grants and performance share awards and dividend equivalents. The 2004 Plan is administered by our management, organization and compensation committee of the board. The committee has the authority, subject to approval by our board, to determine the terms of each award, to interpret the provisions of the 2004 plan and to make all other determinations for the administration of the 2004 Plan.

The 2004 Plan provides for the granting of share options to officers, trustees and employees at a price determined by a formula in the 2004 Plan agreement. The options are to be exercisable over a period of time determined by the 2004 Plan committee, but no longer than ten years after the grant date. Compensation resulting from the share options is initially measured at the grant date based on fair market value of the shares.
The assumptions made in estimating the fair value of the options on the grant date based upon the Black-Scholes option-pricing model. There were no option grants during 2007 and 2008.

The following table summarizes the activity for outstanding stock options:

		Options Outstanding
										Weighted-
										Average
						Weighted-				Remaining
						Average				Contractual				Aggregate
		Number of				Exercise				Term				Intrinsic Value
		Shares				Price				(in years)				(1)
Balance at January 1, 2007			9,391			$	48.00				4.3
Granted			—				—
Exercised			—				—
Canceled/forfeited/expired			—				—
Balance at December 31, 2007			9,391			$	48.00				3.3
Granted			—				—
Exercised			—				—
Canceled/forfeited/expired			725			$	402.75
Balance at December 31, 2008			8,666			$	18.17				2.7			$	0.00
Vested and exercisable as of December 31, 2008			8,666			$	18.17				2.7			$	0.00
Vested and expected to vest as of December 31, 2008			8,666			$	18.17				2.7			$	0.00

The Company recognized stock-based compensation expense of approximately $0 and $31,500 during the years ending December 31, 2008 and 2007, respectively. As of December 31, 2008 and December 31, 2007, there was no remaining unrecognized cost related to stock options. To the extent the forfeiture rate is different than we have anticipated, stock-based compensation related to these awards will be different from our expectations.

Warrants

On March 5, 1998, we issued a warrant to Credit Suisse First Boston Mortgage LLC in connection with the refinancing of debt. The warrant provides for the right to purchase 633 common shares at a price of $402.75 per common share and was exercisable at any time through March 5, 2008. This warrant expired on March 5, 2008.

Effective September 23, 2005, we issued to our legal counsel 11,667 warrants for our common shares at an exercise price of $7.50 per warrant representing the average closing price of our common shares for the preceding ten days. Each warrant is exercisable for one common share, can be exercised after a two year holding period, and expires five years from the date issued.

Note 6 — Loss Per Share

The Company has adopted the SFAS No. 128, “Earnings Per Share” (“EPS”) for all periods presented herein.
Net loss per weighted average common share outstanding — basic and diluted — are computed based on the weighted average number of common shares outstanding for the period. The weighted average number of common shares outstanding for the years ended December 31, 2008 and 2007 was 442,359 and 442,482, respectively. Common

share equivalents of approximately 2,519,000 as of December 31, 2008 and approximately 2,521,000 as of December 31, 2007 include outstanding convertible preferred shares, warrants, stock options and limited partnership units, and are not included in net loss per weighted average common share outstanding—diluted as they would be anti-dilutive.

		For the year ended December 31,
		2008				2007
Numerator
Net loss attributable to Common Shareholders		$	(276,908	)		$	(362,992	)
Denominator
Weighted average Common Shares outstanding at December 31, 2008 and December 31, 2007 — Basic and Diluted			442,359				442,482
Basic and Diluted EPS
Net loss attributable to Common Shareholders — Basic and Diluted		$	(0.63	)		$	(0.82	)

Note 7 — Dividends/Distributions

No cash distributions were declared during 2008 and 2007 with respect to the common or preferred shares.

Note 8 — Income taxes

There was no income tax provision for the years ended December 31, 2008 and 2007.

		For the year ended December 31,
		2008				2007
Current		$	—			$	—
Deferred			—				—
Total tax provision		$	—			$	—

The tax provision differs from the expense that would result from applying Federal statutory rates as follows:

		For the year ended December 31,
		2008				2007
Tax / (Benefit) at Federal statutory rate		$	(83,000	)		$	(102,000	)
State income tax / (benefit), net of Federal tax effect			(15,000	)			(18,000	)
Adjustment to net operating and capital loss carryforwards			(21,000	)			—
Change in valuation allowance			119,000				120,000
Other							—
Tax provision		$	—			$	—

Deferred tax assets and liabilities consist of the following:

		At December 31,
		2008				2007
Deferred tax assets:
Net operating loss carryforwards		$	865,000			$	746,000
Capital loss carryforward			—				—
Provision for loss on marketable securities			—				—
Accrual and other temporary variances			—				—
Valuation allowance			(865,000	)			(746,000	)
Deferred tax liabilities			—				—
Net deferred tax assets		$	—			$	—

Realization of deferred tax assets is dependent upon generation of sufficient future taxable income and the effects of other loss utilization provisions. Management has determined that sufficient uncertainty exists regarding the realizability of a significant portion of the net deferred tax assets and has provided a valuation allowance of $865,000 and $746,000, against the net deferred tax assets of the Company as of December 31, 2008 and 2007, respectively. A valuation allowance is considered to be a significant estimate that may change in the near term.

At December 31, 2008, the Company had net operating loss carryforwards of approximately $2.2 million available to be carried to future periods. Net operating loss carryforwards of $713,000 are available for Paragon to use without any limitation or restriction imposed by tax regulations. Changes in the ownership of Paragon’s shares that occurred in 2001, 2003 and 2006 have limited the amount of net operating losses to be used to approximately $72,500 per year for another 20 years, or a total of approximately $1,450,000. Prior net loss carryforwards of approximately $11,231,000 cannot be used due to the limitations imposed by Section 382 of the Internal Revenue Code related to the 2001, 2003 and 2006 changes of share ownership. The loss carryforwards expire as follows:

Year Expiring		Net Operating Loss
2026		$	1,553,000
2027			365,000
2028			245,000
Total loss carryforwards		$	2,163,000

Note 9 — Commitments and Contingencies

Employment Agreements

On April 3, 2006, the Board of Trustees of Paragon authorized modifications to the employment agreement of James C. Mastandrea, President and Chief Executive Officer. The modification agreement allows Mr. Mastandrea to devote time to other business and personal investments while performing his duties for Paragon. The original employment agreement with Mr. Mastandrea provides for an annual salary of $60,000 effective as of March 4, 2003. The initial term of Mr. Mastandrea’s employment is for two years and may be extended for terms of one year through his 70th birthday. Mr. Mastandrea’s base annual salary may be adjusted from time to time, except that the adjustment may not be lower than the preceding year’s base salary. The employment agreement provides that Mr. Mastandrea will be entitled to base salary and bonus at the rate in effect before any termination for a period of three years in the event that his employment is terminated without cause by us or for good reason by Mr. Mastandrea. Effective September 29, 2006, in lieu of an annual salary of $100,000, Mr. Mastandrea received 44,444 Class C Convertible Preferred Shares for his services as an officer of Paragon through September 29, 2008. On September 25, 2008 this agreement was amended to change the service period

ending date to September 29, 2009 and the vesting period date restriction on the sale of shares was changed to September 29, 2009.

The employment agreement with John J. Dee was also modified on April 3, 2006 in a similar way to Mr. Mastandrea’s employment agreement as explained above. His compensation is based on a rate of $125 per hour to a maximum of $5,000 per month. Mr. Dee’s base annual salaries may be adjusted from time to time, except that the adjustment may not be lower than the preceding year’s base salary. The employment agreement provides that Mr. Dee will be entitled to base salary and bonus at the rate in effect before any termination for a period of three years in the event that his employment is terminated without cause by us or for good reason by Mr. Dee. To conserve cash, Mr. Dee received no cash compensation in 2007 or 2008.

Note 10 — Related Party Transactions

None.