Table of Contents

As filed with the Securities and Exchange Commission on December 31, 2003

Registration No. 333-                


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-11

REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
________________________________

Hartman Commercial Properties REIT

(Exact Name of Registrant as Specified in Its Governing Instruments)
_______________________________

1450 West Sam Houston Parkway North, Suite 100
Houston, Texas 77043
(713) 467-2222

(Address, Including Zip Code and Telephone Number,
Including Area Code, of Registrant’s Principal Executive Offices)
________________________________

Allen R. Hartman, President
Hartman Commercial Properties REIT
1450 West Sam Houston Parkway, North, Suite 100
Houston, Texas 77043
(713) 467-2222

(Name, Address, Including Zip Code and Telephone Number,
Including Area Code, of Agent for Service)
_______________________________

Copies to:
Rosemarie A. Thurston, Esq.
Lauren Burnham Prevost, Esq.
Morris, Manning & Martin, LLP
1600 Atlanta Financial Center
3343 Peachtree Road, N.E.
Atlanta, Georgia 30326-1044
(404) 233-7000
_______________________________

       Approximate date of commencement of proposed sale to the public: As soon as practicable following effectiveness of this Registration Statement.

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

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

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

      If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.   o    

CALCULATION OF REGISTRATION FEE

                                 

            Proposed Maximum   Proposed Maximum    
    Amount Being   Offering Price Per   Aggregate Offering   Amount of
Title of Securities Being Registered   Registered   Share   Price   Registration Fee

Common Shares of Beneficial Interest, par value $.001 per share
    10,000,000     $ 10.00     $ 100,000,000     $ 8,090.00  

Common Shares of Beneficial Interest, par value $.001 per share (1)
    1,000,000     $ 9.50     $ 9,500,000     $ 768.55  


(1)   Represents shares issuable pursuant to our dividend reinvestment plan.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant files a further amendment that specifically states that this Registration Statement will thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement becomes effective on such date as the Commission, acting pursuant to said Section  8(a) , may determine.



 


TABLE OF CONTENTS

SUITABILITY STANDARDS
QUESTIONS AND ANSWERS ABOUT THIS OFFERING
PROSPECTUS SUMMARY
Hartman Commercial Properties REIT
Our Advisor
Our Management
Terms of The Offering
Summary Risk Factors
Description of Properties, Investments and Borrowing
Estimated Use of Proceeds of This Offering
Investment Objectives
Dividend Policy
Conflicts of Interest
Prior Offering Summary
Compensation to Hartman Management and Its Affiliates
Listing
Dividend Reinvestment Plan
Share Redemption Program
Hartman REIT Operating Partnership, L.P.
ERISA Considerations
Description of Shares
RISK FACTORS
Risks Related to an Investment in Hartman Commercial Properties REIT
There is no public trading market for your shares; therefore, it will be difficult for you to sell your shares.
If we, through Hartman Management, are unable to find suitable investments, then we may not be able to achieve our investment objectives or pay dividends.
We may suffer from delays in locating suitable investments, which could adversely affect the return on your investment.
You will not have the opportunity to evaluate our investments before we make them.
If we are unable to raise substantial funds, we will be limited in the number and type of investments we may make and the value of your investment in us will fluctuate with the performance of the specific investments we make.
Because of the lack of geographic diversification of our portfolio, an economic downturn in the Houston and San Antonio, Texas metropolitan areas could adversely impact our operations and ability to pay dividends to our shareholders.
This is the first publicly offered REIT sponsored by Mr. Hartman, and the prior performance of private real estate investment programs sponsored by affiliates of Mr. Hartman may not be an indication of our future results.
If we lose or are unable to obtain key personnel, our ability to implement our investment strategies could be delayed or hindered.
Our rights, and the rights of our shareholders, to recover claims against our officers, trustees and our advisor are limited.
We may need to incur borrowings to meet REIT minimum distribution requirements.
An increase in market interest rates may have an adverse effect on our ability to sell shares in this offering.
We expect to acquire or develop several properties with the proceeds of this offering that, if unsuccessful, could adversely impact our ability to pay dividends to our shareholders.
Our use of borrowings to fund acquisitions and improvements on properties could result in foreclosures and unexpected debt service expenses upon refinancing.
We operate in a competitive business and many of our competitors have greater resources and operating flexibility than we do.
Approximately 45.0% of our gross leasable area is subject to leases that expire prior to December 31, 2005.
We depend on tenants for our revenue and on anchor tenants to attract non-anchor tenants.
The bankruptcy or insolvency of major tenants would adversely impact our operations.
We may be subject to risks as the result of joint ownership of real estate with third parties.
We may have difficulty selling our real estate investments, which may have an adverse impact on our ability to pay dividends.
You will not have the benefit of an independent due diligence review in connection with this offering.
We established the offering price on an arbitrary basis.
Provisions in our charter may discourage a takeover attempt.
You may experience immediate dilution and could suffer additional dilution as the result of the conversion of OP Units and issuances of additional shares.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities.
Complying with REIT requirements may force us to liquidate otherwise attractive investments.
Risks Related to Conflicts of Interest
Hartman Management will face conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in our favor.
Our advisor may face a conflict of interest when allocating personnel and resources between our operations and the operations of other entities it manages.
Certain of our officers and trustees face conflicts of interests relating to the positions they hold with other entities.
Allen R. Hartman controls other entities that compete with us for his time as well as tenants and acquisition opportunities.
Hartman Management will face conflicts of interest relating to joint ventures, which could result in a disproportionate benefit to a Hartman program or third party other than us.
Hartman Management will face conflicts of interest relating to the incentive fee structure under our advisory agreement, which could result in actions that are not necessarily in the long-term best interests of our shareholders.
There is no separate counsel for our affiliates and us, which could result in conflicts of interest.
Our UPREIT structure may result in potential conflicts of interest.
We have acquired a majority of our properties from entities controlled by Mr. Hartman.
Risks Related to Our Business in General
Our charter permits our board of trustees to issue capital shares with terms that may subordinate the rights of the holders of our current common shares or discourage a third party from acquiring us.
Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired.
Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act.
You are bound by the majority vote on matters on which you are entitled to vote.
Shareholders have limited control over changes in our policies and operations.
You are limited in your ability to sell your shares pursuant to our share redemption program.
If you are able to resell your shares to us pursuant to our redemption program, you will likely receive substantially less than the fair market value for your shares.
Payment of fees to Hartman Management and its affiliates will reduce cash available for investment and dividends.
There can be no assurance that we will be able to pay or maintain cash dividends or that dividends will increase over time.
Adverse economic and geopolitical conditions could negatively affect our returns and profitability.
We are uncertain of our sources for funding of future capital needs, which could adversely affect the value of our investments.
General Risks Related to Investments in Real Estate
Your investment will be directly affected by general economic and regulatory factors we cannot control or predict.
Properties that have significant vacancies could be difficult to sell, which could diminish the return on your investment.
If we set aside insufficient working capital or are unable to secure funds for future tenant improvements, we may be required to defer necessary property improvements, which could adversely impact our ability to pay cash dividends to our shareholders.
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage may adversely affect your returns.
Our operating results may be negatively affected by potential development and construction delays and resultant increased costs and risks.
Uncertain market conditions relating to the future disposition of properties could adversely affect the return on your investment.
The costs of compliance with environmental laws and other governmental laws and regulations may adversely affect our income and the cash available for any dividends.
Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.
Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.
Our costs associated with complying with the Americans with Disabilities Act may affect cash available for dividends.
If we sell properties by providing financing to purchasers, we will bear the risk of default by the purchaser.
Risks Associated with Debt Financing
We may incur mortgage indebtedness and other borrowings, which may increase our business risks.
If mortgage debt is unavailable at reasonable rates, we may not be able to finance the properties, which could reduce the number of properties we can acquire and the amount of cash dividends we can make.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to pay dividends to our shareholders.
If we enter into financing arrangements involving balloon payment obligations, it may adversely affect our ability to pay dividends.
Risks Associated with Section 1031 Exchange Transactions
We may have increased exposure to liabilities from litigation as a result of any participation by us in Section 1031 Exchange Transactions.
We will be subject to risks associated with co-tenancy arrangements that otherwise may not be present in a real estate investment.
Actions by a co-tenant might have the result of subjecting the property to liabilities in excess of those contemplated and may have the effect of reducing your returns.
Our participation in the Section 1031 Exchange Transactions may limit our ability to borrow funds in the future, which could adversely affect the value of our investments.
Federal Income Tax Risks
If we failed to qualify as a REIT, our operations and dividends to shareholders would be adversely impacted.
If Hartman OP was classified as a “publicly-traded partnership” under the Internal Revenue Code, our operations and dividends to shareholders could be adversely affected.
Dividends to tax-exempt investors may be classified as unrelated business tax income.
Investors subject to ERISA must address special consideration when determining whether to acquire common shares.
Certain fees paid to Hartman OP may affect our REIT status.
Recharacterization of the Section 1031 Exchange Transactions may result in taxation of income from a prohibited transaction, which would diminish our cash dividends to our shareholders.
You may have tax liability on dividends that you elect to reinvest in our common shares.
In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce our cash available for payment of dividends to our shareholders.
We may be subject to adverse legislative or regulatory tax changes that could adversely impact our ability to sell shares in this offering.
There are special considerations that apply to pension or profit-sharing trusts or IRAs investing in our shares.
Equity participation in mortgage loans may result in taxable income and gains from these properties, which could adversely impact our REIT status.
Forward-Looking Statements
ESTIMATED USE OF PROCEEDS
DILUTION
MANAGEMENT
General Information About Us
Committees of the Board of Trustees
Audit Committee
Compensation Committee
Conflicts Committee
Executive Officers and Trustees
Compensation of Trustees
Provisions Applicable to Our Equity Compensation Plans
Limited Liability and Indemnification of Trustees, Officers, Employees and Other Agents
The Advisor and Property Manager
The Advisory Agreement
The Property Management Agreement
The Dealer Manager
Management Decisions
MANAGEMENT COMPENSATION
OWNERSHIP OF SHARES
CONFLICTS OF INTEREST
Interests in Other Real Estate Programs
Property Acquisitions From Entities Controlled by Mr. Hartman
Certain Relationships and Related Transactions
Relationships and Related Transactions with Mr. Hartman
Private Placement
Advisory Agreement
Property Management
Partnership Management
Competition in Acquiring Properties
Affiliated Dealer Manager
Affiliated Property Manager
Lack of Separate Representation
Joint Ventures with Affiliates of Hartman Management
Receipt of Fees and Other Compensation by Hartman Management and Its Affiliates
No Arm’s-Length Agreements
Indebtedness of Management
Additional Conflicts of Interest
Certain Conflict Resolution Procedures
Conflicts Committee
Other Charter Provisions Relating to Conflicts of Interest
INVESTMENT OBJECTIVES AND CRITERIA
General
Acquisition and Investment Policies
Development and Construction of Properties
Affiliate Transaction Policy
Terms of Leases and Tenant Creditworthiness
Joint Venture Investments
Making Loans and Investments in Mortgages
Section 1031 Exchange Transactions
Borrowing Policies
Disposition Policies
Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers
Equity Capital
Other Investments
Investment Limitations
Change in Investment Objectives and Limitations
Real Property Investments
Certain Other Policies
DESCRIPTION OF REAL ESTATE AND OPERATING DATA
General Physical Attributes
General Economic Attributes
Major Tenants
Lease Expirations
Depreciation and Tax Items
Recent Developments
Competition
Insurance
Employees
Regulations
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Critical Accounting Policies
Basis of Consolidation
Real Estate
Purchase Price Allocation
Revenue Recognition
Liquidity and Capital Resources
Comparison of Quarter Ended September 30, 2003 to Quarter Ended September 30, 2002
Comparison of Nine Months Ended September 30, 2003 to Nine Months Ended September 30, 2002
Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001
Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000
Taxes
Inflation
Environmental Matters
Recent Accounting Pronouncements
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
PRIOR PERFORMANCE SUMMARY
Prior Investment Programs
Summary Information
FEDERAL INCOME TAX CONSIDERATIONS
General
Opinion of Counsel
Taxation of the Trust
Requirements for Qualification as a REIT
Failure to Qualify as a REIT
Sale-Leaseback Transactions
Taxation of United States Shareholders
Treatment of Tax-Exempt Shareholders
Special Tax Considerations for Non-United States Shareholders
Statement of Share Ownership
State and Local Taxation
Tax Aspects of Our Operating Partnership
INVESTMENT BY TAX-EXEMPT ENTITIES AND ERISA CONSIDERATIONS
General
Minimum Distribution Requirements – Plan Liquidity
Annual Valuation Requirement
Fiduciary Obligations — Prohibited Transactions
Plan Assets — Definition
Publicly Offered Securities Exemption
Real Estate Operating Company Exemption
Consequences of Holding Plan Assets
Prohibited Transactions
Prohibited Transactions – Consequences
DESCRIPTION OF SHARES
General
Common Shares
Power to Reclassify Our Shares
Power to Issue Additional Common Shares and Preferred Shares
Meetings and Special Voting Requirements
Restrictions on Transfer
Dividends
Share Redemption Program
Registrar and Transfer Agent
Restrictions on Roll-Up Transactions
Provisions of Maryland Law and of Our Charter and Bylaws
Board of Trustees
Business Combinations
Control Share Acquisitions
Subtitle 8
Advance Notice of Trustee Nominations and New Business
Anti-Takeover Effect of Certain Provisions of Maryland Law and of the Declaration of Trust and Bylaws
SUMMARY OF DIVIDEND REINVESTMENT PLAN
Eligibility
Election to Participate
Share Purchases
Account Statements
Fees and Commissions
Voting
Tax Consequences of Participation
Termination of Participation
Amendment or Termination of Plan
THE OPERATING PARTNERSHIP AGREEMENT
General
Capital Contributions
Operations
Distributions and Allocations of Profits and Losses
Rights, Obligations and Powers of the General Partner
Exchange Rights
Change in General Partner
Amendment to the Limited Partnership Agreement
PLAN OF DISTRIBUTION
The Offering
Compensation We Will Pay for the Sale of Our Shares
Subscription Procedures
Suitability Standards
Minimum Purchase Requirements
Special Notice to Pennsylvania Investors
Special Notice to New York Investors
SUPPLEMENTAL SALES MATERIAL
LEGAL MATTERS
EXPERTS
ADDITIONAL INFORMATION
INDEX TO FINANCIAL STATEMENTS
APPENDIX A PRIOR PERFORMANCE TABLES
APPENDIX B SUBSCRIPTION AGREEMENT
APPENDIX C DIVIDEND REINVESTMENT PLAN
EX-1.1 FORM OF DEALER MANAGER AGREEMENT
EX-3.1 DECLARATION OF TRUST
EX-3.2 BYLAWS
EX-4.2 SPECIMEN SHARE CERTIFICATE
EX-8.1 OPINION OF MORRIS, MANNING & MARTIN, LLP
EX-10.1 AGREEMENT OF LIMITED PARTNERSHIP
EX-10.2 FORM OF ADVISORY AGREEMENT
EX-10.3 PROPERTY MANAGEMENT AGREEMENT
EX-10.4 FORM OF ESCROW AGREEMENT
EX-23.3 CONSENT OF PANNELL KERR FOSTER OF TEXAS,PC


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED DECEMBER 31, 2003

Hartman Commercial Properties REIT

Maximum Offering of 11,000,000 Common Shares of Beneficial Interest

Minimum Offering of 200,000 Common Shares of Beneficial Interest

      Hartman Commercial Properties REIT is a Maryland real estate investment trust. We invest in and operate retail, industrial and office properties located primarily in the Houston and San Antonio, Texas metropolitan areas. We intend to expand our investments to retail, industrial and office properties located in major metropolitan cities in the United States, principally in the Southern United States. As of December 16, 2003, we owned 33 real estate properties.

      We are offering up to 10,000,000 common shares of beneficial interest and a minimum of 200,000 common shares of beneficial interest on a best efforts basis at a price of $10.00 per share. We also are offering up to 1,000,000 common shares of beneficial interest to be issued under our dividend reinvestment plan at a purchase price of $9.50 per share. The shares will be offered to investors on a best efforts basis. This offering will terminate on or before          , 2006.

                         
    Per Share   Total Minimum   Total Maximum
   
 
 
Primary Offering
                       
Price to Public
  $ 10.00     $ 2,000,000     $ 100,000,000  
Selling Commissions*
    .35       70,000       3,500,000  
Dealer Manager Fee
    .25       50,000       2,500,000  
 
   
     
     
 
Proceeds to Us
  $ 9.40     $ 1,880,000     $ 94,000,000  
 
   
     
     
 
Dividend Reinvestment Plan
                       
Price to Public
  $ 9.50           $ 9,500,000  
Selling Commissions*
    .25             237,500  
Dealer Manager Fee
    .10             95,000  
 
   
             
 
Proceeds to Us
  $ 9.15           $ 9,167,500  
 
   
             
 

      * No selling commissions will be paid with respect to shares sold by          , our dealer manager, without the involvement of participating broker-dealers. We anticipate that approximately 50% of the shares sold pursuant to this offering will not be subject to selling commissions. A reduction in selling commissions will increase the amount of proceeds of this offering available for us to invest in real property.

       Investing in our common shares involves a high degree of risk. You should purchase common shares only if you can afford a complete loss. See “Risk Factors” beginning on page 17. The most significant risks relating to your investment include the following:

    No public market currently exists for our common shares. Our shares cannot be readily sold, and if you are able to sell your shares, you will likely have to sell them at a substantial discount. We intend to either liquidate our assets or list our shares for trading on an exchange within twelve years of the termination of this offering.

    All of our properties are located in the Houston and San Antonio metropolitan areas. Our operations may be adversely impacted by an economic downturn in Houston and/or San Antonio. If we raise substantially less than the maximum offering, we may not be able to invest in a geographically diverse portfolio of properties.

    We will rely on Hartman Management, L.P., our advisor, to select properties and other investments and conduct our operations. We are obligated to pay substantial fees to our advisor and its affiliates, some of which are payable based upon factors other than the quality of services provided to us. Our advisor and its affiliates will face conflicts of interest, such as competing demands upon their time, their involvement with other entities and the allocation of opportunities among affiliated entities and us.

    We may incur substantial debt, which could hinder our ability to pay dividends to our shareholders or could decrease the value of your investment in the event that income on, or the value of, the property securing such debt falls.

    The amount of dividends we may make is uncertain.

       Neither the Securities and Exchange Commission, the Attorney General of the State of New York nor any other state securities regulator has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

      No one is authorized to make any statement about this offering different from those that appear in this prospectus. The use of projections or forecasts in this offering is prohibited. Any representation to the contrary and any predictions, written or oral, as to the amount or certainty of any present or future cash benefit or tax consequence that may flow from an investment in this offering is not permitted.

      The dealer manager of this offering,                 , is our affiliate. The dealer manager is not required to sell any specific number of shares or dollar amount of our common shares but will use its best efforts to sell the shares offered hereby. Your subscription payments will be placed in an account held by the escrow agent,                 , and will be held in trust for your benefit, pending release to us. If we do not sell at least $2.0 million in shares by            , 2005, which is one year from the date of this prospectus, your funds in the escrow account (including interest) will be returned to you, and we will stop selling shares.

The date of this prospectus is      , 2004

 


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EXPLANATORY NOTE

       We were organized in December 2003 for the purpose of merging with Hartman Commercial Properties REIT, a Texas real estate investment trust organized in August 1998 (Hartman Texas). We will be the surviving entity after the merger.

       The sole purpose of the merger is to change our state of domicile to Maryland. Hartman Texas has filed a proxy statement with the Securities and Exchange Commission for the purpose of soliciting shareholder approval of the reorganization. We will not request effectiveness with respect to this registration statement and will not commence the public offering to which this registration relates unless the shareholders of Hartman Texas approve the reorganization. If the shareholders of Hartman Texas do not approve the reorganization, we expect to

    file a pre-effective amendment to this registration statement that would significantly alter the terms of this offering; or

    withdraw this registration statement.

       Concurrently with the merger, Hartman Texas is asking its shareholders to approve a recapitalization of the equity interests, so that the value of each common share will be $10.00. The recapitalization outstanding will not affect the economic interests of our shareholders in us.

       The information presented in this prospectus assumes that our reorganization and recapitalization have been approved by the shareholders of Hartman Texas and completed, unless otherwise indicated. The terms “we,” “us,” “our” and “the registrant” as used in this prospectus refer to Hartman Commercial Properties REIT, a Maryland real estate investment trust, as if the reorganization has been approved by the shareholders of Hartman Texas and completed, unless otherwise indicated.

 


Table of Contents

TABLE OF CONTENTS

             
        Page
       
SUITABILITY STANDARDS
    1  
QUESTIONS AND ANSWERS ABOUT THIS OFFERING
    1  
PROSPECTUS SUMMARY
    9  
 
Hartman Commercial Properties REIT
    9  
 
Our Advisor
    9  
 
Our Management
    9  
 
Terms of The Offering
    10  
 
Summary Risk Factors
    10  
 
Description of Properties, Investments and Borrowing
    11  
 
Estimated Use of Proceeds of This Offering
    11  
 
Investment Objectives
    12  
 
Dividend Policy
    12  
 
Conflicts of Interest
    12  
 
Prior Offering Summary
    14  
 
Compensation to Hartman Management and Its Affiliates
    14  
 
Listing
    15  
 
Dividend Reinvestment Plan
    15  
 
Share Redemption Program
    15  
 
Hartman REIT Operating Partnership, L.P.
    16  
 
ERISA Considerations
    16  
 
Description of Shares
    16  
RISK FACTORS
    17  
 
Risks Related to an Investment in Hartman Commercial Properties REIT
    17  
   
There is no public trading market for your shares; therefore, it will be difficult for you to sell your shares
    17  
   
If we, through Hartman Management, are unable to find suitable investments, then we may not be able to achieve our investment objectives or pay dividends
    17  
   
We may suffer from delays in locating suitable investments, which could adversely affect the return on your investment
    17  
   
You will not have the opportunity to evaluate our investments before we make them
    18  
   
If we are unable to raise substantial funds, we will be limited in the number and type of investments we may make and the value of your investment in us will fluctuate with the performance of the specific investments we make
    18  
   
Because of the lack of geographic diversification of our portfolio, an economic downturn in the Houston and San Antonio, Texas metropolitan areas could adversely impact our operations and ability to pay dividends to our shareholders
    18  
   
This is the first publicly offered REIT sponsored by Mr. Hartman, and the prior performance of private real estate investment programs sponsored by affiliates of Mr. Hartman may not be an indication of our future results
    18  
   
If we lose or are unable to obtain key personnel, our ability to implement our investment strategies could be delayed or hindered
    19  
   
Our rights, and the rights of our shareholders, to recover claims against our officers, trustees and our advisor are limited
    19  
   
We may need to incur borrowings to meet REIT minimum distribution requirements
    19  
   
An increase in market interest rates may have an adverse effect on our ability to sell shares in this offering
    20  
   
We expect to acquire or develop several properties with the proceeds of this offering that, if unsuccessful, could adversely impact our ability to pay dividends to our shareholders
    20  
   
Our use of borrowings to fund acquisitions and improvements on properties could result in foreclosures and unexpected debt service expenses upon refinancing
    21  
   
We operate in a competitive business and many of our competitors have greater resources and operating flexibility than we do
    21  
   
Approximately 45.0% of our gross leasable area is subject to leases that expire prior to December 31, 2005
    21  
   
We depend on tenants for our revenue and on anchor tenants to attract non-anchor tenants
    21  

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        Page
       
   
The bankruptcy or insolvency of major tenants would adversely impact our operations
    22  
   
We may be subject to risks as the result of joint ownership of real estate with third parties
    22  
   
We may have difficulty selling our real estate investments, which may have an adverse impact on our ability to pay dividends
    22  
   
You will not have the benefit of an independent due diligence review in connection with this offering
    22  
   
We established the offering price on an arbitrary basis
    22  
   
Provisions in our charter may discourage a takeover attempt
    23  
   
You may experience immediate dilution and could suffer additional dilution as the result of the conversion of OP Units and issuances of additional shares
    23  
   
Complying with REIT requirements may cause us to forego otherwise attractive opportunities
    24  
   
Complying with REIT requirements may force us to liquidate otherwise attractive investments
    24  
 
Risks Related to Conflicts of Interest
    24  
   
Hartman Management will face conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in our favor
    24  
   
Our advisor may face a conflict of interest when allocating personnel and resources between our operations and the operations of other entities it manages
    24  
   
Certain of our officers and trustees face conflicts of interests relating to the positions they hold with other entities
    25  
   
Allen R. Hartman controls other entities that compete with us for his time as well as tenants and acquisition opportunities
    25  
   
Hartman Management will face conflicts of interest relating to joint ventures, which could result in a disproportionate benefit to a Hartman program or third party other than us
    25  
   
Hartman Management will face conflicts of interest relating to the incentive fee structure under our advisory agreement, which could result in actions that are not necessarily in the long-term best interests of our shareholders
    26  
   
There is no separate counsel for our affiliates and us, which could result in conflicts of interest
    26  
   
Our UPREIT structure may result in potential conflicts of interest
    26  
   
We have acquired a majority of our properties from entities controlled by Mr. Hartman
    27  
 
Risks Related to Our Business in General
    27  
   
Our charter permits our board of trustees to issue capital shares with terms that may subordinate the rights of the holders of our current common shares or discourage a third party from acquiring us
    27  
   
Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired
    27  
   
Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act
    28  
   
You are bound by the majority vote on matters on which you are entitled to vote
    29  
   
Shareholders have limited control over changes in our policies and operations
    29  
   
You are limited in your ability to sell your shares pursuant to our share redemption program
    29  
   
If you are able to resell your shares to us pursuant to our redemption program, you will likely receive substantially less than the fair market value for your shares
    29  
   
Payment of fees to Hartman Management and its affiliates will reduce cash available for investment and dividends
    30  
   
There can be no assurance that we will be able to pay or maintain cash dividends or that dividends will increase over time
    30  
   
Adverse economic and geopolitical conditions could negatively affect our returns and profitability
    30  
   
We are uncertain of our sources for funding of future capital needs, which could adversely affect the value of our investments
    30  
 
General Risks Related to Investments in Real Estate
    31  
   
Your investment will be directly affected by general economic and regulatory factors we cannot control or predict
    31  

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        Page
       
   
Properties that have significant vacancies could be difficult to sell, which could diminish the return on your investment
    31  
   
If we set aside insufficient working capital or are unable to secure funds for future tenant improvements, we may be required to defer necessary property improvements, which could adversely impact our ability to pay cash dividends to our shareholders
    31  
   
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage may adversely affect your returns
    32  
   
Our operating results may be negatively affected by potential development and construction delays and resultant increased costs and risks
    32  
   
Uncertain market conditions relating to the future disposition of properties could adversely affect the return on your investment
    32  
   
The costs of compliance with environmental laws and other governmental laws and regulations may adversely affect our income and the cash available for any dividends
    33  
   
Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results
    33  
   
Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem
    33  
   
Our costs associated with complying with the Americans with Disabilities Act may affect cash available for dividends
    34  
   
If we sell properties by providing financing to purchasers, we will bear the risk of default by the purchaser
    34  
 
Risks Associated with Debt Financing
    34  
   
We may incur mortgage indebtedness and other borrowings, which may increase our business risks
    34  
   
If mortgage debt is unavailable at reasonable rates, we may not be able to finance the properties, which could reduce the number of properties we can acquire and the amount of cash dividends we can make
    35  
   
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to pay dividends to our shareholders
    35  
   
If we enter into financing arrangements involving balloon payment obligations, it may adversely affect our ability to pay dividends
    35  
 
Risks Associated with Section 1031 Exchange Transactions
    35  
   
We may have increased exposure to liabilities from litigation as a result of any participation by us in Section 1031 Exchange Transactions
    35  
   
We will be subject to risks associated with co-tenancy arrangements that otherwise may not be present in a real estate investment
    35  
   
Actions by a co-tenant might have the result of subjecting the property to liabilities in excess of those contemplated and may have the effect of reducing your returns
    36  
   
Our participation in the Section 1031 Exchange Transactions may limit our ability to borrow funds in the future, which could adversely affect the value of our investments
    36  
 
Federal Income Tax Risks
    36  
   
If we failed to qualify as a REIT, our operations and dividends to shareholders would be adversely impacted
    36  
   
If Hartman OP was classified as a “publicly-traded partnership” under the Internal Revenue Code, our operations and dividends to shareholders could be adversely affected
    37  
   
Dividends to tax-exempt investors may be classified as unrelated business tax income
    37  
   
Investors subject to ERISA must address special consideration when determining whether to acquire common shares
    37  
   
Certain fees paid to Hartman OP may affect our REIT status
    38  
   
Recharacterization of the Section 1031 Exchange Transactions may result in taxation of income from a prohibited transaction, which would diminish our cash dividends to our shareholders
    38  
   
You may have tax liability on dividends that you elect to reinvest in our common shares
    38  
   
In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce our cash available for payment of dividends to our shareholders
    38  
   
We may be subject to adverse legislative or regulatory tax changes that could adversely impact our ability to sell shares in this offering
    38  

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        Page
       
   
There are special considerations that apply to pension or profit-sharing trusts or IRAs investing in our shares
    39  
   
Equity participation in mortgage loans may result in taxable income and gains from these properties, which could adversely impact our REIT status
    39  
 
Forward-Looking Statements
    39  
ESTIMATED USE OF PROCEEDS
    41  
DILUTION
    43  
MANAGEMENT
    44  
 
General Information About Us
    44  
 
Committees of the Board of Trustees
    46  
 
Audit Committee
    46  
 
Compensation Committee
    46  
 
Conflicts Committee
    46  
 
Executive Officers and Trustees
    46  
 
Compensation of Trustees
    48  
 
Provisions Applicable to Our Equity Compensation Plans
    48  
 
Limited Liability and Indemnification of Trustees, Officers, Employees and Other Agents
    49  
 
The Advisor and Property Manager
    50  
 
The Advisory Agreement
    51  
 
The Property Management Agreement
    52  
 
The Dealer Manager
    53  
 
Management Decisions
    54  
MANAGEMENT COMPENSATION
    55  
OWNERSHIP OF SHARES
    59  
CONFLICTS OF INTEREST
    60  
 
Interests in Other Real Estate Programs
    60  
 
Property Acquisitions From Entities Controlled by Mr. Hartman
    60  
 
Certain Relationships and Related Transactions
    62  
   
Relationships and Related Transactions with Mr. Hartman
    62  
   
Private Placement
    62  
   
Advisory Agreement
    63  
   
Property Management
    63  
   
Partnership Management
    63  
 
Competition in Acquiring Properties
    63  
 
Affiliated Dealer Manager
    64  
 
Affiliated Property Manager
    64  
 
Lack of Separate Representation
    64  
 
Joint Ventures with Affiliates of Hartman Management
    64  
 
Receipt of Fees and Other Compensation by Hartman Management and Its Affiliates
    64  
 
No Arm’s-Length Agreements
    65  
 
Indebtedness of Management
    65  
 
Additional Conflicts of Interest
    65  
 
Certain Conflict Resolution Procedures
    66  
   
Conflicts Committee
    66  
   
Other Charter Provisions Relating to Conflicts of Interest
    66  
INVESTMENT OBJECTIVES AND CRITERIA
    68  
 
General
    68  
 
Acquisition and Investment Policies
    68  
 
Development and Construction of Properties
    71  
 
Affiliate Transaction Policy
    71  
 
Terms of Leases and Tenant Creditworthiness
    72  
 
Joint Venture Investments
    73  
 
Making Loans and Investments in Mortgages
    73  
 
Section 1031 Exchange Transactions
    75  
 
Borrowing Policies
    76  
 
Disposition Policies
    77  
 
Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers
    78  
 
Equity Capital
    78  

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        Page
       
 
Other Investments
    78  
 
Investment Limitations
    78  
 
Change in Investment Objectives and Limitations
    79  
 
Real Property Investments
    79  
 
Certain Other Policies
    80  
DESCRIPTION OF REAL ESTATE AND OPERATING DATA
    81  
 
General Physical Attributes
    82  
 
General Economic Attributes
    83  
 
Major Tenants
    85  
 
Lease Expirations
    86  
 
Depreciation and Tax Items
    86  
 
Recent Developments
    87  
 
Competition
    87  
 
Insurance
    87  
 
Employees
    87  
 
Regulations
    87  
SELECTED FINANCIAL DATA
    88  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    89  
 
Overview
    89  
 
Critical Accounting Policies
    89  
   
Basis of Consolidation
    90  
   
Real Estate
    90  
   
Purchase Price Allocation
    90  
   
Revenue Recognition
    91  
 
Liquidity and Capital Resources
    91  
 
Comparison of Quarter Ended September 30, 2003 to Quarter Ended September 30, 2002
    96  
 
Comparison of Nine Months Ended September 30, 2003 to Nine Months Ended September 30, 2002
    97  
 
Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001
    98  
 
Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000
    99  
 
Taxes
    100  
 
Inflation
    100  
 
Environmental Matters
    101  
 
Recent Accounting Pronouncements
    101  
 
Quantitative and Qualitative Disclosures About Market Risk
    102  
 
Controls and Procedures
    102  
PRIOR PERFORMANCE SUMMARY
    103  
 
Prior Investment Programs
    103  
 
Summary Information
    103  
FEDERAL INCOME TAX CONSIDERATIONS
    106  
 
General
    106  
 
Opinion of Counsel
    106  
 
Taxation of the Trust
    107  
 
Requirements for Qualification as a REIT
    107  
 
Failure to Qualify as a REIT
    111  
 
Sale-Leaseback Transactions
    112  
 
Taxation of United States Shareholders
    112  
 
Treatment of Tax-Exempt Shareholders
    113  
 
Special Tax Considerations for Non-United States Shareholders
    114  
 
Statement of Share Ownership
    116  
 
State and Local Taxation
    116  
 
Tax Aspects of Our Operating Partnership
    116  
INVESTMENT BY TAX-EXEMPT ENTITIES AND ERISA CONSIDERATIONS
    120  
 
General
    120  
 
Minimum Distribution Requirements — Plan Liquidity
    120  
 
Annual Valuation Requirement
    121  
 
Fiduciary Obligations — Prohibited Transactions
    121  
 
Plan Assets — Definition
    121  

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        Page
       
 
Publicly Offered Securities Exemption
    122  
 
Real Estate Operating Company Exemption
    122  
 
Consequences of Holding Plan Assets
    123  
 
Prohibited Transactions
    123  
 
Prohibited Transactions – Consequences
    123  
DESCRIPTION OF SHARES
    125  
 
General
    125  
 
Common Shares
    125  
 
Power to Reclassify Our Shares
    125  
 
Power to Issue Additional Common Shares and Preferred Shares
    125  
 
Meetings and Special Voting Requirements
    126  
 
Restrictions on Transfer
    126  
 
Dividends
    128  
 
Share Redemption Program
    131  
 
Registrar and Transfer Agent
    132  
 
Restrictions on Roll-Up Transactions
    132  
 
Provisions of Maryland Law and of Our Charter and Bylaws
    133  
   
Board of Trustees
    133  
   
Business Combinations
    133  
   
Control Share Acquisitions
    134  
   
Subtitle 8
    134  
   
Advance Notice of Trustee Nominations and New Business
    135  
   
Anti-Takeover Effect of Certain Provisions of Maryland Law and of the Declaration of Trust and Bylaws
    135  
SUMMARY OF DIVIDEND REINVESTMENT PLAN
    136  
 
Eligibility
    136  
 
Election to Participate
    136  
 
Share Purchases
    136  
 
Account Statements
    136  
 
Fees and Commissions
    137  
 
Voting
    137  
 
Tax Consequences of Participation
    137  
 
Termination of Participation
    137  
 
Amendment or Termination of Plan
    137  
THE OPERATING PARTNERSHIP AGREEMENT
    138  
 
General
    138  
 
Capital Contributions
    138  
 
Operations
    138  
 
Distributions and Allocations of Profits and Losses
    138  
 
Rights, Obligations and Powers of the General Partner
    139  
 
Exchange Rights
    139  
 
Change in General Partner
    140  
 
Amendment to the Limited Partnership Agreement
    140  
PLAN OF DISTRIBUTION
    141  
 
The Offering
    141  
 
Compensation We Will Pay for the Sale of Our Shares
    141  
 
Subscription Procedures
    143  
 
Suitability Standards
    143  
 
Minimum Purchase Requirements
    144  
 
Special Notice to Pennsylvania Investors
    144  
 
Special Notice to New York Investors
    145  
SUPPLEMENTAL SALES MATERIAL
    145  
LEGAL MATTERS
    145  
EXPERTS
    145  
ADDITIONAL INFORMATION
    145  
FINANCIAL INFORMATION
    F-1  
APPENDIX A: PRIOR PERFORMANCE TABLES
    A-1  
APPENDIX B: SUBSCRIPTION AGREEMENT
    B-1  
APPENDIX C: DIVIDEND REINVESTMENT PLAN
    C-1  

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SUITABILITY STANDARDS

      An investment in our company involves significant risk and is only suitable for persons who have adequate financial means, desire a relatively long-term investment and who will not need immediate liquidity from their investment.

      In consideration of these factors, we have established suitability standards for investors in this offering and subsequent purchasers of our shares. These suitability standards require that a purchaser of shares have, excluding the value of a purchaser’s home, furnishings and automobiles, either:

    a net worth of at least $150,000; or

    a gross annual income of at least $45,000 and a net worth of at least $45,000.

      Please see the “Plan of Distribution – Suitability Standards” section of this prospectus for more detailed information about the suitability requirements of specific states.

QUESTIONS AND ANSWERS ABOUT THIS OFFERING

      Below we have provided answers to some of the more frequently asked questions relating to an offering of this type. Please see the remainder of this prospectus for more detailed information about this offering.

Q: What is a REIT?

  A:   In general, a REIT is an entity that:

    combines the capital of many investors to acquire or provide financing for real properties;

    enables individual investors to invest in a diversified real estate portfolio under professional management;

    provided certain income tax requirements are satisfied, avoids the “double taxation” treatment of income that generally results from investments in a corporation because a REIT is not generally subject to federal corporate income taxes on that portion of its income distributed to shareholders; and

    pays dividends to investors of at least 90.0% of its taxable income.

Q: What is Hartman Commercial Properties REIT?

  A:   Hartman Commercial Properties REIT is a Maryland real estate investment trust that was formed in 1998 to acquire and manage retail, industrial and office properties in the Houston and San Antonio metropolitan areas. We owned 33 commercial properties on December 16, 2003, primarily consisting of retail centers, industrial and office properties.

Q: What is the experience of your executive officers and trustees?

  A:   Allen R. Hartman has been our president, secretary and member of our board of trustees since our formation in 1998. He is also the sole limited partner of our advisor and property manager, Hartman Management, L.P. (Hartman Management), as well as the President, Secretary, sole trustee and sole shareholder of the general partner of Hartman Management. Since 1984, Mr. Hartman, as an individual general partner, has been the sponsor of 17 private limited and general partnerships that have invested in commercial real estate in Houston, Texas. Mr. Hartman has over 30 years of experience in the commercial real estate industry. From 1978 to 1983, Mr. Hartman owned and operated residential rental properties.

    Robert W. Engel has been our chief financial officer and a member of our board of trustees since 2000, and is the controller of Hartman Management. Mr. Engel is a graduate from the University of Texas with a BBA with highest honors with a major in Accounting. Mr. Engel is a CPA and holds memberships in

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    the American Institute of Certified Public Accountants, and the Texas Society of Certified Public Accountants. Mr. Engel is also a CPM, with membership in the Institute of Real Estate Management, and a CCIM as a member of the CCIM Institute. He is a licensed real estate broker in the State of Texas. From 1991 to 1999, Mr. Engel served as vice president and controller for Reignquest/Fred Rizk Construction Company.

    Chand Vyas has been a member of our board of trustees since 2002. Mr. Vyas is the Chairman and Chief Executive Officer of EPS Technology, a global information technology and business process outsourcing company that he founded in 2000. From 1982 until 1998, Mr. Vyas served as Chief Executive Officer of Ziegler Coal Holding Company, where he led a buyout of Ziegler from its parent company, Houston Natural Gas, in 1985. In subsequent years, under Mr. Vyas’ leadership, Ziegler grew many fold through acquisitions including the purchase of Old Ben Coal from British Petroleum as well as Shell Mining Company from Shell Oil. Ziegler Coal Holding Company went public in 1994 with the largest initial public offering underwritten during that year’s third quarter.

    Jack L. Mahaffey has been a member of our board of trustees since 2000. Mr. Mahaffey served as the President of Shell Mining Co. from 1984 until 1991. Since his retirement in 1991, Mr. Mahaffey has managed his personal investments. Mr. Mahaffey graduated from Ohio State University with a B.S. and M.S. in Petroleum Engineering and served in the United States Air Force. He is a former board member of the National Coal Association and the National Coal Council.

    Samuel C. Hathorn has been a member of our board of trustees since 2000. Mr. Hathorn has been in the home building and land development business for over thirty years. He has held both divisional and senior management positions with three different large publicly held home builders/developers during his real estate career. For the last twenty-one years, Mr. Hathorn has been a senior executive with Weyerhaeuser Real Estate Company (WRECO), a wholly owned subsidiary of Weyerhaeuser Company (NYSE). Since 1984, Mr. Hathorn has been President and Chief Executive Officer of Trendmaker Homes, the Houston, Texas based home building and land development subsidiary of WRECO. Mr. Hathorn is a licensed CPA in the State of California and holds a Bachelor of Science degree in accounting. He currently serves as a director of National Beverage Corp. (AMEX).

    Chris A. Minton has been a member of our board of trustees since 2000. Mr. Minton was employed by Lockheed Martin for 35 years and was a Vice-President of Lockheed’s Technology Services Group from 1993 until 1995. While employed at Lockheed, he supervised the business operations of six operating companies that employed over 30,000 people. Since his retirement from Lockheed in 1995, Mr. Minton has managed his personal investments and served as a consultant to a privately held aircraft mechanics school and to a Lockheed Martin subsidiary company. Mr. Minton graduated from Villanova University with a Bachelors Degree, and he is a licensed C.P.A. (retired status) in the State of Texas. He has been awarded the Gold Knight of Management award for achievements as a professional manager by the National Management Association.

Q: Who is Hartman Management, L.P.?

  A:   Hartman Management is our advisor and property manager. Hartman Management was organized as a Texas corporation in 1990 and reorganized as a Texas limited partnership in 2001. Hartman Management manages our day-to-day operations and our portfolio of properties. As of November 30, 2003, Hartman Management had sponsored or advised private real estate programs that had raised approximately $120 million from approximately 1,100 investors, including investors in us, and that owned and operated more than 4.5 million square feet of commercial real estate properties.

Q: In what types of real property will you invest?

  A:   We generally will seek to use the offering proceeds available for investment after the payment of fees and expenses to acquire commercial retail, office and industrial properties that we intend to hold for a period of seven to ten years from the date of acquisition. We will seek to invest in commercial properties in major metropolitan cities in the United States, principally in the Southern United States. We may invest in other property types or geographic areas in order to reduce overall portfolio risk or enhance overall portfolio returns if our advisor determines that it would be advantageous to do so.

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Q: May you invest in anything other than real property?

  A:   Yes. We anticipate there will be opportunities to acquire some or all of the ownership interests of unaffiliated enterprises having real property investments consistent with those we intend to acquire directly. In addition, if our advisor determines that, due to the state of the real estate market or in order to diversify our investment portfolio, it would be advantageous to us, we may also provide mortgage loans to owners of commercial retail, office or industrial properties or purchase such mortgage loans or participations in mortgage loans from other mortgage lenders. Because there are significant limitations on the amount of non-real estate assets that a REIT may own without losing its status as a REIT, we will be significantly limited as to ownership of non-real estate investments. These limitations may limit our ability to maximize profits.

Q: How are you different from your competitors who offer unlisted REIT shares to the public?

  A:   We plan to list our shares within twelve years of the completion of this offering, in order to provide liquidity for our shareholders. We have a track record of acquiring properties for prices that provide us the ability to add value. The REIT has experienced growth and intends to continue that trend. One very important difference is that we use Hartman Management, our advisor, to lease and manage our properties. Hartman Management only manages properties in various Hartman programs. Other third-party managers work for multiple, unrelated owners. We believe Hartman Management is able to provide us more individualized service.

Q: Who will choose the investments you make?

  A:   Hartman Management is our advisor and makes recommendations on all investments to our board of trustees. Hartman Management is wholly owned by Allen R. Hartman, who is our President and a member of our board of trustees. Mr. Hartman has extensive experience investing in commercial real estate. In addition, various other officers and key employees of Hartman Management have extensive experience in the areas of commercial property management, leasing, development or investment. The officers, trustees and key employees of Hartman Management are Terry L. Henderson, Robert W. Engel, John Crossin and Valarie L. King, and they will assist Mr. Hartman in making property acquisition recommendations on behalf of Hartman Management to our board of trustees. Our board of trustees, including a majority of our independent trustees, must approve all of our investments.

Q: How will Hartman Management select potential properties for acquisition?

  A:   Hartman Management will generally seek to acquire good quality retail, office and industrial buildings located in major metropolitan cities in the United States, principally in the Southern United States, and leased to creditworthy companies. Current tenants of our existing properties include Kroger Food Stores, National Oilwell, 99 Cents Only Stores Texas, Bally Total Fitness, Sears Homestore, Circuit City, Michael’s, PETsMART and Carrier. Some of the properties may be acquired from affiliated entities, such as the private real estate programs sponsored or advised by Hartman Management.

    To find properties that best meet our selection criteria for investment, Hartman Management’s property acquisition team will study regional demographics and market conditions and interview local brokers to gain practical knowledge of the regional economic and market dynamics. An experienced commercial construction engineer will inspect the structural soundness and the operating systems of each building, and an environmental firm will investigate all environmental issues to help ensure that each property meets our quality specifications.

Q: How many properties do you currently own?

  A:   As of December 16, 2003, we owned 33 commercial properties. These properties are retail, industrial and office properties located in the Houston and San Antonio metropolitan areas. We expect to use substantially all of the net proceeds from this offering to acquire and operate retail, office and industrial properties located in major metropolitan cities in the United States, principally in the Southern United States. We will seek to invest in good quality income-producing retail, office and industrial properties leased to creditworthy tenants. We may also invest in entities that make similar investments. Because

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    we have not identified any specific properties to acquire with the proceeds from this offering, we are considered to be a partial blind pool.

Q: Do you intend to acquire some of your properties in joint ventures?

  A:   We may want to acquire properties in joint ventures if we determine it necessary in order to diversify our portfolio of properties in terms of geographic region, property type or tenant industry group. Also, a joint venture may enable us to invest net proceeds from this offering sooner than would be possible otherwise, since the amount of gross proceeds raised in the early stages of this offering may be insufficient to acquire title to all of a real property targeted for investment. Such joint ventures may be with our affiliates or with third parties. We may also make or invest in mortgage loans secured by properties owned by such joint ventures.

Q: What steps do you take to make sure you invest in environmentally compliant property?

  A:   We will obtain a Phase I environmental assessment of each property purchased. In addition, we expect that in most cases we will obtain a representation from the seller that, to its knowledge, the property is not contaminated with hazardous materials.

Q: What will be the terms of your leases?

  A:   We will seek to secure leases with creditworthy tenants before or at the time we acquire a property. We expect that our leases generally will be economically net leases, which means that the tenant would be responsible for the cost of repairs, maintenance, property taxes, utilities, insurance and other operating costs. In most of these leases, we will probably be responsible for the replacement of specific structural components of a property, such as the roof of the building or the parking lot. We expect that our leases generally will have terms of three to five or more years, some of which may have renewal options.

Q: How will you own your real estate properties?

  A:   As an “UPREIT,” we expect to own substantially all of our real estate properties through Hartman REIT Operating Partnership, L.P., which we refer to as Hartman OP. We organized Hartman OP to own, operate and manage real properties on our behalf. We are the sole general partner and own 53.37% of the outstanding units of partnership interest of Hartman OP. We may, however, own investments directly or through other entities.

Q: What is an “UPREIT”?

  A:   UPREIT stands for Umbrella Partnership Real Estate Investment Trust. We use this structure because a sale of property directly to the REIT is generally a taxable transaction to the selling property owner. In an UPREIT structure, a seller of a property who desires to defer taxable gain on the sale of his property may transfer the property to the UPREIT in exchange for limited partnership units in the UPREIT and defer taxation of gain until the seller later exchanges his UPREIT units on a one-for-one basis for REIT shares. If the REIT shares are publicly traded, the former property owner will achieve liquidity for his investment. Using an UPREIT structure gives us an advantage in acquiring desired properties from persons who may not otherwise sell their properties because of unfavorable tax results.

Q: What commissions and fees will you pay in connection with this offering?

  A:   If our dealer manager places any shares sold to the public without the participation of any other broker-dealer, we will not pay any sales commissions in connection with such sales. Therefore, with respect to these types of sales, amounts we would otherwise be required to pay to unaffiliated broker-dealers will be available to us for investment in real properties or for working capital purposes. We will also use unaffiliated broker-dealers to sell our shares to the public. With respect to sales of shares through such broker-dealers, we will pay our dealer manager a 7.0% commission that it will reallow in its entirety to the broker-dealers selling such shares to the public. We expect the selling commissions will be reduced or waived from time-to-time in connection with certain categories of sales, such as sales through investment advisers or banks acting as trustees or fiduciaries and volume purchases, and such sales will

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    be made at a reduced purchase price reflecting a discount for the reduction or waiver of the selling commissions. Our dealer manager also will be paid a fee of 2.5% of gross offering proceeds, all or a portion of which may be reallowed to the broker-dealers for reimbursable marketing and due diligence expenses. We will also pay our dealer manager a fee of 2.5% of gross proceeds to cover organization and offering expenses. The expenses will not be required to be accounted for. Our advisor will be paid a fee of 2.0% of gross proceeds of the offering for acquisition of the properties.

    We will also pay our advisor a quarterly asset management fee of one-fourth of 0.25% of the gross asset value of our real estate portfolio. In connection with the sale of properties, we may pay our advisor a fee of 1.0% of the contract sales price of the properties. This fee, when combined with other real estate commissions paid to our advisor, its affiliates and unaffiliated third parties, may not exceed 6.0% of the contract sales price. Hartman Management may also receive a subordinated 15.0% share of the net sales proceeds from the sale of our portfolio if our shareholders have received a 7.0% cumulative non-compounded return for a similar success-based fee if our shares trade at prices reflecting such a return (taking prior dividends into account) upon their listing on a national securities exchange or the Nasdaq Stock Market. See “Management Compensation” and “Plan of Distribution” for a more detailed description of the fees and expenses payable to our advisor, our dealer manager and their affiliates.

Q: If I buy shares, will I receive dividends and how often?

  A:   Provided we have sufficient cash flow to pay dividends, we intend to declare dividends to our shareholders on a quarterly basis and to pay the dividends on a monthly basis during the following quarter. We have paid cash dividends ever since our operations commenced in 1999. Our board of trustees will make the determination of whether to declare a dividend and the amount thereof consistent with its fiduciary duties. We will not pay a dividend when we are unable to pay our debts as they become due in the usual course of business. However, in order to maintain our qualification as a REIT, we must make aggregate annual distributions equal to at least 90.0% of our taxable income (which does not necessarily equal net income as calculated in accordance with accounting principles generally accepted in the United States (GAAP)).

Q: How do you calculate the payment of dividends to shareholders?

  A:   We intend to calculate our dividends on a monthly basis to shareholders of record. As a result, any dividend payments will begin to accrue immediately upon our monthly admission of new shareholders. Such dividends will be paid to new shareholders beginning with the dividend payment made on the third month following their acquisition of our common shares.

Q: May I reinvest my dividends in shares of Hartman Commercial Properties REIT?

  A:   Yes. You may participate in our dividend reinvestment plan by checking the appropriate box on the subscription agreement or by filling out an enrollment form, which we will provide to you at your request. The purchase price for shares purchased under the dividend reinvestment plan will be $9.50.

Q: Will the dividends I receive be taxable as ordinary income?

  A:   Generally, dividends that you receive, including dividends that are reinvested pursuant to our dividend reinvestment plan, will be taxed as ordinary income to the extent they are from current or accumulated earnings and profits. We expect that some portion of your dividends may not be subject to tax in the year in which they are received because depreciation expense reduces the amount of taxable income but does not reduce cash available for distribution to our shareholders. The portion of your dividend that is not subject to tax immediately is considered a return of capital for tax purposes and will reduce the tax basis of your investment. This, in effect, can defer a portion of your tax until your investment is sold or we are liquidated, at which time you will be taxed at capital gains rates. Any dividend or distribution that we properly designate as a capital gain distribution generally will be treated as long-term capital gain without regard to the period for which you have held your shares. However, because each investor’s tax considerations are different, we suggest that you consult with your tax advisor. You should also review the section of this prospectus entitled “Federal Income Tax Considerations.”

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Q: What will you do with the money raised in this offering?

  A:   We intend to use substantially all of the net proceeds from this offering to acquire and operate commercial real estate primarily consisting of retail, office and industrial properties leased to creditworthy companies. Assuming that approximately one-half of the shares we sell in this offering are sold by our dealer manager without the payment of commissions, we estimate that approximately $8.95 of per share proceeds will be available for the purchase of real estate, with the remaining proceeds to pay fees and expenses of this offering and an acquisition fee to our advisor.

    Until we invest the proceeds of this offering in real estate, we may invest in short-term, highly liquid or other authorized investments. Such short-term investments will not earn as high of a return as we expect to earn on our real estate investments, and we may not be able to invest the proceeds in real estate promptly.

    Holders of interests in Hartman OP have the right to exchange those interests for our shares. We expect few, if any, of the holders of interests in Hartman OP will elect to exchange such interests during this offering and that the loss of cash proceeds from any such exchange will be immaterial. See “The Operating Partnership Agreement — Exchange Rights” for a summary of these rights.

Q: What kind of offering is this?

  A:   We are offering to the public up to 10,000,000 common shares of beneficial interest on a “best efforts” basis. We are also offering up to 1,000,000 common shares of beneficial interest to be issued pursuant to our dividend reinvestment plan.

Q: How does a “best efforts” offering work?

  A:   When shares are offered on a “best efforts” basis, the broker-dealers participating in the offering are only required to use their best efforts to sell the shares and have no firm commitment or obligation to purchase any of the shares. Therefore, we may not sell all or any of the shares that we are offering.

Q: How long will this offering last?

  A:   The offering will not last beyond               , 2006.

Q: Who can buy shares?

  A:   An investment in our company is only suitable for persons who have adequate financial means and who will not need immediate liquidity from their investment. Residents of most states can buy shares in this offering provided that they have either (1) a net worth of at least $45,000 and an annual gross income of at least $45,000, or (2) a net worth of at least $150,000. For this purpose, net worth does not include your home, home furnishings and automobiles. These minimum levels may be higher in certain states, so you should carefully read the more detailed description in the “Plan of Distribution – Suitability Standards” section of this prospectus.

Q: May I make an investment through my IRA, SEP or other tax-deferred account?

  A:   Yes. You may make an investment through your individual retirement account (IRA), a simplified employee pension (SEP) plan or other tax-deferred account. In making these investment decisions, decision makers should, at a minimum, consider (1) whether the investment is in accordance with the documents and instruments governing such IRA, plan or other account, (2) whether the investment satisfies the fiduciary requirements associated with such IRA, plan or other account, (3) whether the investment will generate unrelated business taxable income (UBTI) to such IRA, plan or other account, (4) whether there is sufficient liquidity for such investment under such IRA, plan or other account, (5) the need to value the assets of such IRA, plan or other account annually or more frequently, and (6) whether such investment would constitute a prohibited transaction under applicable law.

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Q: Have you arranged for a custodian for investments made through IRA, SEP or other tax-deferred accounts?

  A:   Yes. Resources Trust Company has agreed to serve as custodian for investments made through IRA, SEP and certain other tax-deferred accounts. We will pay the fees related to the establishment of investor accounts with Resources Trust Company, and we will also pay the fees related to the maintenance of any such account for the first year following its establishment. Thereafter, Resources Trust Company has agreed to provide this service to our shareholders with annual maintenance fees charged at their standard rate. Resources Trust Company is a member of the Fiserv, Inc. family of financial services companies. Fiserv, Inc. is a publicly traded financial services company based in Brookfield, Wisconsin.

Q: Is there any minimum investment required?

  A:   Yes. Generally, you must invest at least $1,000. Thereafter, you may purchase additional shares in $250 increments. Investors who already own our shares can make purchases for less than the minimum investment. These minimum investment levels may be higher in certain states, so you should carefully read the more detailed description of the minimum investment requirements appearing in the “Plan of Distribution – Suitability Standards” section of this prospectus.

Q: How do I subscribe for shares?

  A:   If you choose to purchase shares in this offering, you will need to complete and sign a subscription agreement, like the one contained in this prospectus as Appendix B, for a specific number of shares and pay for the shares at the time you subscribe. Your payment will be placed into an escrow account with             , where your funds will be held, along with those of other subscribers, until we sell at least 200,000 shares and, for sales thereafter, until we admit new investors, which we expect to do monthly. Separate escrow accounts will be established for subscriptions of residents of New York and Pennsylvania. See the section of this prospectus captioned “Plan of Distribution – Subscription Procedures” for a detailed discussion of how to subscribe for shares.

Q: What happens if you don’t sell at least 200,000 shares?

  A:   If we do not sell at least 200,000 shares, or $2.0 million, before             , 2005, we will terminate the offering and stop selling shares. In such event, within ten days after termination of the offering, the escrow agent will return all invested funds, including interest. Different escrow procedures apply to Pennsylvania and New York investors. See “Plan of Distribution – Special Notice to Pennsylvania Investors” and “Plan of Distribution – Special Notice to New York Investors.”

Q: If I buy shares in this offering, how may I later sell them?

  A:   At the time you purchase the shares, they will not be listed for trading on any securities exchange or over-the-counter market. In fact, we cannot be sure that any public market will ever develop for the shares. As a result, you may find it difficult to find a buyer for your shares. If you are able to find a buyer for your shares, you may sell your shares to that buyer only if the buyer satisfies the suitability standards applicable to him or her, or unless such sale would cause the buyer to own more than 9.8% of the outstanding common shares. See the “Suitability Standards,” “Plan of Distribution – Suitability Standards” and “Description of Shares – Restrictions on Transfer” sections of this prospectus.

    In addition, after you have held your shares for at least one year, you may be able to have your shares repurchased by us pursuant to our share redemption program. Subject to the limitations described in this prospectus, we will also redeem shares upon the request of the estate, heir or beneficiary of a deceased shareholder. Redemption of shares, when requested, will be made quarterly on a first-come, first-served basis with a priority given to redemptions upon death of a shareholder. See the “Description of Shares – Share Redemption Program” section of this prospectus.

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Q: What are your exit strategies?

  A:   We will seek to return your investment to you by listing our shares on a national exchange within twelve years from the termination of this offering or, if we do not obtain such a listing, by making an orderly disposition of our properties and distributing the net proceeds from such sales to you.

Q: Who is the transfer agent?

  A:   American Stock Transfer and Trust Co.
59 Maiden Lane
New York, New York 10038
(212) 936-5100

    To ensure that any account changes are made promptly and accurately, all account changes, including your address, ownership type and distribution mailing address, should be directed to us.

Q: Will I be notified of how my investment is doing?

  A:   Yes. We will provide you with periodic updates on the performance of your investment with us, including:

    monthly newsletters or dividend reports;

    three quarterly financial reports, which are filed with the Securities and Exchange Commission and will be distributed to you upon request;

    an annual report; and

    an annual IRS Form 1099-DIV, if required; and

    supplements to this prospectus.

    We will provide this information to you via one or more of the following methods, in our discretion and with your consent, if necessary:

    United States mail or other courier;

    facsimile;

    electronic delivery; and

    posting on our affiliated website, at www.hartmanmgmt.com.

Q: When will I receive my detailed tax information?

  A:   Your Form 1099 tax information will be placed in the mail by January 31 of each year.

Q: Who can help answer my questions?

  A:   If you have more questions about the offering or if you would like additional copies of this prospectus, you should contact your registered representative or contact:

1450 West Sam Houston Parkway North, Suite 100
Houston, Texas 77043
(713) 467-2222

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PROSPECTUS SUMMARY

       This prospectus summary highlights selected information contained elsewhere in this prospectus. Because it is a summary, this section does not contain all of the information that is important to your decision whether to invest in our common shares. To understand this offering fully, you should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements.

Hartman Commercial Properties REIT

      Hartman Commercial Properties REIT is a Maryland real estate investment trust. We invest in and operate retail, industrial and office properties located primarily in the Houston and San Antonio metropolitan areas. We intend to expand our investments to retail, office and industrial properties located in major metropolitan cities in the United States, principally in the Southern United States. We conduct substantially all of our operations and activities through Hartman REIT Operating Partnership, L.P., which we refer to elsewhere in this prospectus as Hartman OP. We are the sole general partner of Hartman OP and, as of December 16, 2003, we owned 4,654,065.51 OP Units in Hartman OP, which represented 53.37% of all outstanding OP Units on such date. The term “OP Units” refers to the units of partnership interest of Hartman OP. We owned 33 commercial properties as of December 16, 2003, primarily consisting of retail centers, industrial and office properties. Our properties are typically leased to a variety of tenants under long-term leases. Some tenants are national companies; others are local businesses. Our business and properties are more fully described in the “Description of Real Estate and Operating Data” section of this prospectus.

      We have made an election to be taxed as a REIT. Consequently, we generally are not subject to federal income tax on income that we distribute to our shareholders. Under the Internal Revenue Code of 1986, as amended, REITs are subject to numerous organizational and operational requirements, including a requirement that they distribute at least 90% of their taxable income for all future years beginning with 2001. We refer to the Internal Revenue Code of 1986, as amended, as the “Internal Revenue Code” in this prospectus. If we fail to qualify for taxation as a REIT in any year, our income will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify. Even if we continue to qualify as a REIT for federal income tax purposes, we may still be subject to state and local taxes on our income and property and to federal income and excise taxes on our undistributed income. We encourage you to read the section of this prospectus titled “Federal Income Tax Considerations” for more information about how we are taxed.

      Our office is located at 1450 West Sam Houston Parkway North, Suite 100, Houston, Texas 77043. Our telephone number is (713) 467-2222.

Our Advisor

      Our advisor is Hartman Management, a Texas limited partnership. Hartman Management manages our day-to-day operations and identifies acquisitions and investments on our behalf. Hartman Management also manages our portfolio of properties. We sometimes refer to Hartman Management as our property manager in this prospectus.

Our Management

      We operate under the direction of our board of trustees, the members of which are accountable to our shareholders and us as fiduciaries. Our board of trustees, including a majority of our independent trustees, must approve certain matters set forth in our First Amended and Restated Declaration of Trust (sometimes referred to herein as the “charter” or the “Declaration of Trust”). We have six members on our board of trustees. Four of the trustees are independent of Hartman Management and have responsibility for reviewing its performance. Our trustees are elected annually by our shareholders. Although we have executive officers who will manage our operation, we do not have any paid employees. Hartman Management has employees whom it compensates out of the fees we pay to it. Except with respect to share purchase rights and options to purchase common shares that may be granted to our executive officers, only our non-employee trustees are compensated for their services to us.

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Terms of The Offering

      We are offering up to 10,000,000 common shares of beneficial interest to the public at $10.00 per share. We are also offering up to 1,000,000 shares pursuant to our dividend reinvestment plan at $9.50 per share. We plan to offer common shares of beneficial interest until the earlier of                     , 2006 or the date we sell all 11,000,000 shares in this offering. However, we may terminate this offering at any time prior to such termination date. This offering must be registered, or exempt from registration, in every state in which we offer or sell shares. Generally, such registrations are for a period of one year. Therefore, we may have to stop selling shares in any state in which the registration is not renewed annually. If 200,000 shares are not sold by                     , 2005, this offering will be terminated and subscribers’ funds, plus interest, will be returned promptly. Funds in escrow will be invested in short-term, highly liquid or other authorized investments that can be readily sold or otherwise disposed of for cash without any dissipation of the offering proceeds invested. After the initial 200,000 shares are sold, subscription proceeds will continue to be held in escrow until investors are admitted as shareholders, except that subscribers residing in Pennsylvania may not be admitted until subscriptions have been received and accepted for $5,475,000 and subscribers residing in New York may not be admitted until subscriptions have been received for $2,500,000. We intend to admit new shareholders monthly. Each time new investors are admitted, we will hold such investment proceeds in our account until we withdraw funds for the acquisition of investments, or the payment of fees and expenses.

Summary Risk Factors

      An investment in our common shares is subject to significant risks that are described in more detail in the “Risk Factors” and “Conflicts of Interest” sections of this prospectus, which begin on pages 17 and 60, respectively. If we are unable to effectively manage the impact of these risks, we may not meet our investment objectives and, therefore, you may lose some or all of your investment. The following is a summary of the risks that we believe are most relevant to an investment in our common shares:

    There is no public trading market for the shares, and we cannot assure you that one will ever develop. Until the shares are publicly traded, you will have difficulty selling your shares, and even if you are able to sell your shares, you will likely have to sell them at a substantial discount.

    All of our properties are located in the Houston and San Antonio metropolitan areas. Because of the lack of geographic diversification of our portfolio, an economic downturn in the Houston and San Antonio metropolitan areas could adversely impact our operations and ability to pay dividends to our shareholders.

    We have not identified any investments that we will make with the proceeds of this offering. You will not have the opportunity to evaluate our investments prior to our making them. You must rely totally upon Hartman Management’s ability to select our investments.

    The number of properties that we will acquire and the diversification of our investments will be reduced to the extent that we sell less than all of the 11,000,000 shares being offered. If we do not sell substantially more than the minimum offering of 200,000 shares, we may buy only one property with the proceeds of this offering and the value of your investment may fluctuate more widely with the performance of the specific investment. There is a greater risk that you will lose money in your investment if we cannot diversify our portfolio of investments by geographic location and property type.

    Our ability to achieve our investment objectives and to pay dividends depends on the performance of Hartman Management, our advisor, for the day-to-day management of our business and the selection of our real estate properties, mortgage loans and other investments.

    We will pay significant fees to Hartman Management and its affiliates, some of which are payable based upon factors other than the quality of services provided to us.

    We may incur substantial debt. Loans we obtain will be secured by some of our properties, which will put those properties at risk of forfeiture if we are unable to pay our debts and could hinder our ability to pay dividends to our shareholders in the event that income on such properties, or their value, falls.

    We may not remain qualified as a REIT for federal income tax purposes, which would subject us to the payment of tax on our income at corporate rates and reduce the amount of funds available for payment of dividends to our shareholders.

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    We depend on tenants for our revenue and on anchor tenants to attract non-anchor tenants. We cannot predict what the occupancy level will be in a particular building or that any tenant will remain solvent. We also cannot predict the future value of our properties. Accordingly, we cannot guarantee that you will receive cash dividends or appreciation of your investment.

    To ensure that we continue to qualify as a REIT, our charter prohibits any shareholder from owning more than 9.8% of our outstanding common shares.

    You will not have preemptive rights as a shareholder, so any shares that we issue in the future may dilute your interest in our company.

    Approximately 45.0% of our gross leasable area is subject to leases that expire prior to December 31, 2005.

    If we do not obtain listing of our common shares on a national exchange by the twelfth anniversary of the termination of the offering, our charter provides that we must liquidate our assets unless a majority of our board of trustees, including a majority of our independent trustees, shall approve otherwise.

    The vote of shareholders owning a majority of our shares will bind all of the shareholders as to certain matters such as the election of trustees and any amendment to our charter.

    Potential liability as the result of environmental matters could adversely affect our operations.

    Allen R. Hartman controls other entities that compete with us for his time as well as for tenants and acquisition opportunities. Accordingly, Mr. Hartman will face conflicts of interest resulting from his duties to these other entities.

    We have acquired a majority of our properties from entities owned, in whole or in part, by Allen R. Hartman.

Description of Properties, Investments and Borrowing

      As of December 16, 2003, we owned 33 commercial properties. We have not contracted to acquire any investments with the proceeds of this offering, nor has our advisor identified any assets in which there is a reasonable probability that we will invest. Although all of our properties are retail, industrial or office properties located in the Houston and San Antonio, Texas metropolitan areas, we will seek to invest in retail, office and industrial properties located in major metropolitan cities throughout the United States, principally in the Southern United States. All acquisitions of properties will be evaluated for tenant creditworthiness and the reliability and stability of the properties’ future income and capital appreciation within a seven to ten-year holding period. In addition, we may acquire interests in other entities with similar real property investments. Our properties may be acquired, developed and operated by us alone or jointly with another party. We may enter into one or more joint ventures for the acquisition of properties with certain of our affiliates, other third parties, including the present and future real estate limited partnerships sponsored by our advisor. We may also serve as mortgage lender to these joint ventures or other Hartman real estate programs.

      Our charter permits us to incur indebtedness of up to 300.0% of our net asset value as of the date of any borrowing. However, our board of trustees has adopted a policy that we will generally limit our aggregate borrowing to 50.0% of the aggregate value of our assets as of the date of any borrowing, unless substantial justification exists that borrowing a greater amount is in our best interests. Our policy limitation does not apply to individual properties. As a result, it can be expected that, with respect to the acquisition of one or more of our properties, we may incur indebtedness of more than 50.0% of the asset value of the property acquired. We expect to borrow up to 50.0% of our aggregate asset value if interest rates and loan terms are favorable. Our board of trustees must review our aggregate borrowing at least quarterly. Our charter further provides that we may borrow in excess of 300.0% of our aggregate asset value only if approved by our independent trustees, in which event we must disclose the justification for such excess borrowing in our next quarterly report to shareholders.

Estimated Use of Proceeds of This Offering

      We estimate that we will use at least 89.5% of the proceeds of this offering to invest in properties and for general working capital purposes, but our estimate is based on the number of shares we sell in this offering through our dealer manager without the involvement of participating broker-dealers since the commissions that would

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otherwise be payable for such sales will be retained and used to invest in properties. If actual sales are a lower proportion of total shares sold, then the percentage of the proceeds that will be so available will be lower. On the date of this prospectus, we had not identified any particular properties that we intend to acquire with the proceeds of this offering. We will use the remainder of the offering proceeds to pay selling commissions, fees and expenses related to this offering and fees and expenses related to the selection and acquisition of properties. You should read the “Estimated Use of Proceeds” section of this prospectus for further detail regarding the use of the proceeds of this offering.

Investment Objectives

      Our investment objectives are:

    to maximize cash dividends paid to you;

    to obtain and preserve long-term capital appreciation in the value of our properties to be realized upon our ultimate sale of such properties; and

    to provide you with a return of your investment by listing the shares on a national exchange within twelve years of the termination of this offering or, if we do not obtain listing of the shares within twelve years of the termination of this offering, by making an orderly disposition of our properties and distributing the cash to you.

      To achieve these objectives, we intend to increase net income from our operations through selective acquisitions and sophisticated and professional management of our properties. We intend to hold our properties until we determine that they should be sold, which we expect to be generally seven to ten years from the date of acquisition. To the extent that any of our properties are sold, we may reinvest the net proceeds of such sale in additional properties or distribute such net proceeds to equity holders. See the “Investment Objectives and Criteria” section of this prospectus for a more complete description of our business and objectives.

Dividend Policy

      We have paid regular dividends to our shareholders since our inception, and we intend to continue to pay regular dividends. Dividends will be determined by our board of trustees and will be dependent upon a number of factors. To maintain our qualification to be taxed as a REIT, we are required to distribute at least 90% of our taxable income. We expect to continue to pay dividends on a monthly basis, and to pay such dividends to investors in this offering after we have sold the minimum offering amount and have admitted our initial investors. Please see the “Description of Shares — Dividends” section of this prospectus for a description of our dividend policy and a table showing all dividends we made prior to December 31, 2003.

Conflicts of Interest

      We have no paid employees. Hartman Management directs, supervises and manages our day-to-day activities in accordance with an advisory agreement. Hartman Management also supervises our property acquisitions. Allen R. Hartman is the president and sole owner of Hartman Management. Mr. Hartman is also our president and is a member of our board of trustees.

      Hartman Management, as our advisor, will experience conflicts of interest in connection with the management of our business affairs, including the following:

    Our board of trustees oversees our operations. We have six members on our board of trustees. Four of our trustees are independent of Hartman Management and have responsibility for reviewing its performance.

    We pay Hartman Management significant compensation for services it performs, the majority of which is not dependent on the quality of the service provided to us. We also reimburse Hartman Management for expenses it pays on our behalf.

    Hartman Management will experience conflicts of interest in connection with the management of our business and properties, such as:

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  -   Mr. Hartman and other employees of Hartman Management will need to allocate their time between our operations and the operations of other companies managed by Hartman Management that are affiliated with Mr. Hartman.

  -   We compete for tenants with other companies affiliated with Mr. Hartman also managed by Hartman Management.

  -   We may acquire properties from entities affiliated with Mr. Hartman but otherwise not affiliated with us.

  -   Hartman Management must determine which properties we should acquire and which properties should be acquired by another Hartman program.

  -   Hartman Management will receive fees in connection with transactions involving the purchase, management and sale of our properties regardless of the quality of the property acquired or service provided to us.

      See the “Conflicts of Interest” section of this prospectus for a detailed discussion of the various conflicts of interest relating to your investment, as well as the procedures that we have established to resolve a number of these potential conflicts.

      The following chart shows the ownership structure of the various Hartman entities that are affiliated with Hartman Management:

(OWNERSHIP STRUCTURE CHART)


(1)   Allen R. Hartman owns 3.37% of the issued and outstanding common shares of Hartman Commercial Properties REIT. Units of Hartman REIT Operating Partnership, L.P. may be converted into common shares of Hartman Commercial Properties REIT. Assuming Mr. Hartman makes such a conversion, and assuming that he is deemed the beneficial owner of Houston R. E. Income Properties XIV, Mr. Hartman will own 19.66% of the issued and outstanding common shares of Hartman Commercial Properties REIT.

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(2)   Hartman Commercial Properties REIT is the 53% owner and the general partner of Hartman REIT Operating Partnership, L.P.

(3)   Hartman REIT Operating Partnership II, L.P. is a wholly owned subsidiary of Hartman REIT Operating Partnership, L.P. and was formed in order to secure a loan from GMAC.

Prior Offering Summary

      Our founder, Allen R. Hartman, has previously sponsored 17 privately offered real estate limited partnerships over the last 20 years. As of November 30, 2003, Mr. Hartman had raised approximately $120 million from approximately 1,100 investors in these real estate programs. Neither Mr. Hartman, nor any of our other affiliates, have previously sponsored or organized a publicly offered REIT. The “Prior Performance Summary” section of this prospectus contains a discussion of the programs sponsored by Mr. Hartman from January 1, 1995 to date. Certain statistical data relating to such programs with investment objectives similar to ours is also provided in the “Prior Performance Tables” included as Appendix A to this prospectus. Our prior performance, and the prior performance of the other programs previously sponsored by Mr. Hartman, are not necessarily indicative of the results that we will achieve. Therefore, you should not assume that you will experience returns, if any, comparable to those experienced by our shareholders in the past or by investors in other prior Hartman real estate programs.

Compensation to Hartman Management and Its Affiliates

      Hartman Management and its affiliates will receive compensation and fees for services relating to this offering and the investment and management of our assets. The most significant items of compensation are summarized in the following table:

         
        Estimated $$ Amount
        for Maximum
        Offering
        (11,000,000 shares
Type of Compensation   Form of Compensation   - $109,500,000)

    Offering Stage    

Sales Commissions   Blended average of 3.5% of gross offering proceeds (no selling commissions on sales through our dealer manager without participating broker-dealers; 7.0% of gross offering proceeds for sales through participating broker-dealers); 5.0% of gross proceeds from sales under dividend reinvestment plan where sales of underlying shares were made through participating broker-dealers   $3,737,500

Dealer Manager Fee   2.5% of gross offering proceeds; 1.0% of dividend reinvestment plan purchases   $2,595,000

Organization and Offering Expenses   2.5% of gross offering proceeds   $2,737,500

    Acquisition and Development Stage    

Acquisition Fees   2.0% of gross offering proceeds   $2,190,000

    Operational Stage    

Property Management and Leasing Fees   Based upon the customary property management and leasing fees applicable to the geographic location and type of property ( i.e. , generally 2.0% to 4.0% of gross revenues for management of commercial office buildings and 5.0% of gross revenues for management of retail and industrial properties)   N/A

Asset Management Fee   Quarterly fee of one-fourth of 0.25% of our gross assets value   N/A

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        Estimated $$ Amount
        for Maximum
        Offering
        (11,000,000 shares
Type of Compensation   Form of Compensation   - $109,500,000)

Real Estate Commissions   1.0% of contract price for properties sold for substantial assistance in connection with sale   N/A

Subordinated Participation in Net Sale Proceeds (payable only if our shares are not listed on an exchange)   15.0% of remaining amounts of net sale proceeds after return of capital plus payment to investors of a 7.0% annual, cumulative, noncompounded return on capital   N/A

Subordinated Incentive Listing Fee (payable only if our shares are listed on an exchange)   15.0% of the amount by which our adjusted market value exceeds the aggregate capital contributions contributed by investors plus payment to investors of a 7.0% annual, cumulative, noncompounded return on capital   N/A

      There are many additional conditions and restrictions on the amount of compensation that Hartman Management and its affiliates may receive. There are also some smaller items of compensation and expense reimbursements that Hartman Management may receive. For a more detailed explanation of these fees and expenses payable to Hartman Management and its affiliates, see the “Estimated Use of Proceeds” section of this prospectus and the “Management – Management Compensation” section of this prospectus.

Listing

      We anticipate listing our shares on a national securities exchange within twelve years of the termination of this offering. In the event we do not obtain listing within twelve years of the termination of this offering, our charter requires us to begin the sale of our properties and liquidation of our assets unless a majority of our board of trustees, including a majority of our independent trustees, shall approve otherwise.

Dividend Reinvestment Plan

      You may participate in our dividend reinvestment plan, pursuant to which you may have the dividends you receive from us reinvested in our common shares. The purchase price per share under our dividend reinvestment plan will be $9.50. If you participate in our dividend reinvestment plan, you will be taxed on income attributable to the reinvested dividends. Your participation in our dividend reinvestment plan would mean that you would have to rely solely on sources other than our dividends from which to pay such taxes. As a result, you may have a tax liability without receiving cash dividends to pay such liability. We may terminate the dividend reinvestment plan in our discretion at any time upon ten days notice to plan participants.

Share Redemption Program

      After you have held your shares for a minimum of one year, our share redemption program may provide an opportunity for you to redeem your shares. We will limit the number of shares redeemed pursuant to our share redemption program as follows: (1) during any calendar year, we will not redeem in excess of 5.0% of the weighted average number of shares outstanding during the prior calendar year; and (2) funding for the redemption of shares will be dependent upon whether we have sufficient excess cash to repurchase shares. Funds available for redemptions generally will be limited to 1.0% of our operating cash flow from the previous fiscal year, plus any proceeds from our dividend reinvestment plan. The funds we may set aside for our share redemption program may not be sufficient to accommodate all requests made in any year. For three years after we complete this offering, the redemption price for purchases under our share redemption program will be $9.50 per share. Thereafter, the redemption price will equal 95.0% of our per share value as estimated by Hartman Management or another financial advisor evaluation firm we choose for this purpose. The share redemption program has different rules if shares are being redeemed in connection with the death of a shareholder. See “Description of Shares – Share Redemption Program” for more information about our share redemption program. Our board of trustees may amend or terminate the share redemption program at any time.

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Hartman REIT Operating Partnership, L.P.

      We own our existing investments, and generally intend to own our additional investments, through Hartman REIT Operating Partnership, L.P. (Hartman OP) or subsidiaries thereof, or other operating partnerships. This structure is sometimes referred to as an Umbrella Partnership Real Estate Investment Trust, or UPREIT. We may, however, own investments directly or through other entities. We are the sole general partner of Hartman OP. As of November 30, 2003, Hartman OP had 416 limited partners. The UPREIT structure enables us to acquire real estate properties in exchange for limited partnership units in Hartman OP. This structure also enables sellers of properties to transfer their properties to Hartman OP in exchange for units of Hartman OP and defer gain recognition for tax purposes with respect to such transfers. At present, we have no plans to acquire any specific properties in exchange for units of Hartman OP. The holders of units in Hartman OP may have their units exchanged for cash or our common shares under certain circumstances described in the section of this prospectus captioned “The Operating Partnership Agreement.”

ERISA Considerations

      The section of this prospectus entitled “Investment by Tax-Exempt Entities and ERISA Considerations” describes the effect the purchase of shares will have on individual retirement accounts (IRAs) and retirement plans subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), and/or the Internal Revenue Code. ERISA is a federal law that regulates the operation of certain tax-advantaged retirement plans. Any retirement plan trustee or individual considering purchasing shares for a retirement plan or an IRA should read carefully the section of this prospectus captioned “Investment by Tax-Exempt Entities and ERISA Considerations.”

Description of Shares

    General

      Generally, your investment will be recorded on our books only, and we will issue a certificate evidencing ownership of our common shares only to shareholders who make a written request to us. If you wish to transfer your shares, you will be required to send an executed transfer form to us, along with a fee to cover reasonable transfer costs, in an amount as determined by our board of trustees. We will provide the required form to you upon request.

    Shareholder Voting Rights and Limitations

      We will hold annual meetings of our shareholders for the purpose of electing our trustees and conducting other business matters that may be presented at such meetings. We may also call a special meeting of shareholders from time to time for the purpose of conducting certain matters. You are entitled to one vote for each common share you own at any of these meetings.

    Restriction on Share Ownership

      Our charter contains a restriction on ownership of the shares that prevents any one person from owning more than 9.8% of our outstanding common shares. These restrictions are designed to enable us to comply with share accumulation restrictions imposed on REITs by the Internal Revenue Code. For a more complete description of the shares, including restrictions on the ownership of shares, please see the “Description of Shares” section of this prospectus.

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RISK FACTORS

       Your purchase of shares involves a number of risks. You should specifically consider the following before making your investment decision.

Risks Related to an Investment in Hartman Commercial Properties REIT

There is no public trading market for your shares; therefore, it will be difficult for you to sell your shares.

      There is no current public market for the shares. Therefore, you should purchase the shares only as a long-term investment. The suitability standards described in this prospectus also apply to potential subsequent purchasers of our shares. If you are able to find a buyer for your shares, you may not sell your shares to such buyer unless the buyer meets the suitability standards applicable to him or her. Our charter also imposes restrictions on the ownership of common shares that will apply to potential transferees that may inhibit your ability to sell your shares. Moreover, except for requests for redemptions by the estate, heir or beneficiary of a deceased shareholder, our board of trustees may reject any request for redemption of shares or amend, suspend or terminate our share redemption program at any time. Therefore, it will be difficult for you to sell your shares promptly or at all. You may not be able to sell your shares in the event of an emergency, and, if you are able to sell your shares, you may have to sell them at a substantial discount. It is also likely that your shares would not be accepted as the primary collateral for a loan. See “Plan of Distribution – Suitability Standards,” “Description of Shares – Restrictions on Transfer” and “– Share Redemption Program” elsewhere herein for a more complete discussion on the restrictions on your ability to transfer your shares.

If we, through Hartman Management, are unable to find suitable investments, then we may not be able to achieve our investment objectives or pay dividends.

      Our ability to achieve our investment objectives and to pay dividends is dependent upon the performance of Hartman Management, our advisor, in the acquisition of our investments, the selection of tenants and the determination of any financing arrangements. You must rely entirely on the management ability of Hartman Management and the oversight of our board of trustees. We cannot be sure that Hartman Management will be successful in obtaining suitable investments on financially attractive terms or that, if it makes investments on our behalf, our objectives will be achieved. If we, through Hartman Management, are unable to find suitable investments, we will hold the proceeds of this offering in an interest-bearing account, invest the proceeds in short-term, investment-grade investments or, ultimately, liquidate. In such an event, our ability to pay dividends to our shareholders would be adversely affected.

We may suffer from delays in locating suitable investments, which could adversely affect the return on your investment.

      We could suffer from delays in locating suitable investments, particularly as a result of our reliance on our advisor at times when management of our advisor is simultaneously seeking to locate suitable investments for other Hartman programs. Delays we encounter in the selection, acquisition and development of properties could adversely affect your returns. In addition, where we acquire properties prior to the start of construction or during the early stages of construction, it will typically take several months to complete construction and rent available space. Therefore, you could suffer delays in the distribution of cash dividends attributable to those particular properties. In addition, if we are unable to invest our offering proceeds in income-producing real properties in a timely manner, our ability to pay dividends to our shareholders would be adversely affected. As of the date of this prospectus, we have not identified specific properties that we will purchase with the proceeds of this offering. Because we are conducting this offering on a “best efforts” basis over several months, our ability to commit to purchase specific properties will be partially dependent on our ability to raise sufficient funds for such acquisitions. We may be delayed in making investments due to delays in the sale of our shares, delays in negotiating or obtaining the necessary purchase documentation, delays in locating suitable investments and other factors. We will invest all proceeds we receive from this offering in short-term, highly-liquid investments until we use such funds for acquisitions. We expect that the income we earn on these temporary investments will be lower than the rate of return associated with our historical dividends. Therefore, the temporary investment of proceeds from this offering for an extended time may result in a lower rate of return for shareholders.

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You will not have the opportunity to evaluate our investments before we make them.

      Because we have not identified any investments that we may make with the proceeds of this offering, we are not able to provide you with information to evaluate our investments prior to acquisition. We will seek to invest substantially all of the offering proceeds available for investment, after the payment of fees and expenses, in the acquisition of properties. In addition, we will make or invest in mortgage loans or participations therein if our advisor determines, due to the state of the real estate market or in order to diversify our investment portfolio or otherwise, that such investments are advantageous to us. Our management intends to limit such mortgage investments to 15.0% of our total investment portfolio unless our management determines that prevailing economic or portfolio circumstances require otherwise. However, we are not limited to such investments. We have established policies relating to the creditworthiness of tenants, managers and borrowers, but our board of trustees will have wide discretion in implementing these policies, and you will not have the opportunity to evaluate potential tenants, managers or borrowers. For a more detailed discussion of our investment policies, see “Investment Objectives and Criteria – Acquisition and Investment Policies.”

If we are unable to raise substantial funds, we will be limited in the number and type of investments we may make and the value of your investment in us will fluctuate with the performance of the specific investments we make.

      If we are unable to raise substantially more than the minimum offering amount, we will make fewer investments resulting in less diversification in terms of the number of investments owned, the geographic regions in which our investments are located and the types of investments that we make. In such event, the likelihood of our profitability being affected by the performance of any one of our investments will increase. For example, in the event we only raise the minimum amount of $2.0 million, we may be able to invest in only one additional property. If we only are able to one invest in one additional property, we would not achieve significant diversification of our assets. Additionally, we are not limited in the number or size of our investments or the percentage of net proceeds we may dedicate to a single investment. Your investment in our shares will be subject to greater risk to the extent that we lack a diversified portfolio of investments. In addition, if we are unable to raise substantial funds, our fixed operating expenses, as a percentage of gross income, would be higher, and our financial condition and ability to pay dividends could be adversely affected. This offering is being made on a “best efforts” basis, whereby the brokers participating in the offering are only required to use their best efforts to sell our shares and have no firm commitment or obligation to purchase any of the shares. As a result, we cannot assure you as to the amount of proceeds that will be raised in this offering or that we will achieve sales of the minimum offering amount.

Because of the lack of geographic diversification of our portfolio, an economic downturn in the Houston and San Antonio, Texas metropolitan areas could adversely impact our operations and ability to pay dividends to our shareholders.

      All of our assets and revenues are currently derived from properties located in the Houston and San Antonio, Texas metropolitan areas. Our results of operation are directly contingent on our ability to attract financially sound commercial tenants. If Houston or San Antonio experiences a significant economic downturn, our ability to locate and/or retain financially sound tenants may decrease. Likewise, we may be required to lower our rental rates to attract desirable tenants in such an environment. Consequently, because of the lack of geographic diversity among our current assets, if Houston or San Antonio experiences an economic downturn, our operations and ability to pay dividends to our shareholders could be adversely impacted.

This is the first publicly offered REIT sponsored by Mr. Hartman, and the prior performance of private real estate investment programs sponsored by affiliates of Mr. Hartman may not be an indication of our future results.

      Although Mr. Hartman and other members of our advisor’s management have significant experience in the acquisition, finance, management and development of commercial real estate, this is the first publicly offered REIT sponsored by Mr. Hartman. Accordingly, the prior performance of real estate investment programs sponsored by affiliates of Mr. Hartman and our advisor may not be indicative of our future results. Presently, our advisor is funded by Mr. Hartman. If our capital resources, or those of our advisor, are insufficient to support our operations, we will not be successful.

      To be successful in this market, we must, among other things:

    identify and acquire investments that further our investment strategies;

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    increase awareness of the Hartman name within the investment products market outside of the Houston and San Antonio, Texas metropolitan areas;

    establish and maintain our network of licensed securities brokers and other agents;

    attract, integrate, motivate and retain qualified personnel to manage our day-to-day operations;

    respond to competition for our targeted real estate properties and other investments as well as for potential investors in us; and

    continue to build and expand our operations structure to support our business.

      We cannot guarantee that we will succeed in achieving these goals, and our failure to do so could cause you to lose all or a portion of your investment.

If we lose or are unable to obtain key personnel, our ability to implement our investment strategies could be delayed or hindered.

      Our success depends to a significant degree upon the continued contributions of certain executive officers and other key personnel, including Allen R. Hartman. We do not have an employment agreement with Mr. Hartman, and we cannot guarantee that he will remain affiliated with us. If Mr. Hartman or any of the key personnel of Hartman Management were to cease their affiliation with us, our operating results could suffer. We have not purchased “key person” life insurance on the life of Mr. Hartman. We believe that our future success depends, in large part, upon our advisor’s ability to retain and hire highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure you that our advisor will be successful in attracting and retaining such skilled personnel. If we lose or are unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered.

Our rights, and the rights of our shareholders, to recover claims against our officers, trustees and our advisor are limited.

      Maryland law provides that a trustee has no liability in that capacity if he performs his duties in good faith, in a manner he reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter, in the case of our trustees, officers, employees and agents, and the advisory agreement, in the case of our advisor, require us to indemnify our trustees, officers, employees and agents and our advisor and its affiliates for actions taken by them in good faith and without negligence or misconduct. Additionally, our charter limits the liability of our trustees and officers for monetary damages to the maximum extent permitted under Maryland law. As a result, our shareholders and we may have more limited rights against our trustees, officers, employees and agents, and our advisor and its affiliates, than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our trustees, officers, employees and agents or our advisor in some cases. See the section captioned “Management – Limited Liability and Indemnification of Trustees, Officers, Employees and Other Agents” elsewhere herein.

We may need to incur borrowings to meet REIT minimum distribution requirements.

      In order to maintain our qualification as a REIT, we are required to distribute to our shareholders at least 90% of our annual net taxable income (excluding any net capital gain). In addition, the Internal Revenue Code will subject us to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by us with respect to any calendar year are less than the sum of (i) 85% of our ordinary income for that year, (ii) 95% of our capital gain net income for that year and (iii) 100% of our undistributed taxable income from prior years. Although we intend to pay dividends to our shareholders in a manner that allows us to meet the foregoing distribution requirement and avoid this 4% excise tax, we cannot assure you that we will always be able to do so.

      Our income consists almost solely of our share of Hartman OP’s income, and the cash available for distribution by us to our shareholders consists of our share of cash distributions made by Hartman OP. Because we are the sole general partner of Hartman OP, our trustees will determine the amount of any distributions made by it. The trustees may consider a number of factors in making such distributions, including:

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    the amount of the cash available for distribution;

    our UPREIT’s financial condition;

    our UPREIT’s capital expenditure requirements; and

    our annual distribution requirements necessary to maintain our qualification as a REIT.

      Differences in timing between the actual receipt of income and actual payment of deductible expenses and the inclusion of such income and deduction of such expenses when determining our taxable income, as well as the effect of nondeductible capital expenditures and the creation of reserves or required debt amortization payments, could require us to borrow funds on a short-term or long-term basis to meet the REIT distribution requirements and to avoid the 4% excise tax described above. In such circumstances, we might need to borrow funds to avoid adverse tax consequences even if our management believes that the then prevailing market conditions generally are not favorable for such borrowings or that such borrowings would not be advisable in the absence of such tax consideration.

An increase in market interest rates may have an adverse effect on our ability to sell shares in this offering.

      One of the factors that investors may consider in deciding whether to buy our shares is our dividend rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher dividend on our shares or seek securities paying higher dividends or interest. The value of an investment in our shares to prospective investors likely will be based primarily on the income and return that we derive from our properties and our related distributions to shareholders, and not from the market value or underlying appraised value of the properties themselves. If interest rates rise without an increase in our dividend rate, potential investors may require a higher dividend yield on our shares as market rates on interest-bearing securities, such as bonds, rise. Rising interest rates may make an investment in our shares less attractive and may have an adverse effect on our ability to sell shares in this offering.

We expect to acquire or develop several properties with the proceeds of this offering that, if unsuccessful, could adversely impact our ability to pay dividends to our shareholders.

      We expect to acquire or develop several properties with the proceeds of this offering. The acquisition of additional properties will subject us to risks associated with managing the properties, including tenant retention and tenant defaults of lease obligations. A larger portfolio of properties will also generate additional operating expenses. Specific examples of risks that could relate to acquisitions include:

    risks that investments will fail to perform in accordance with expectations;

    risks that judgments with respect to the costs of necessary improvements will prove inaccurate; and

    general investment risks associated with any real estate investment.

      To the extent that we acquire a property that needs substantial renovation or repositioning, it will bear certain risks including:

    the risks of construction delays or cost overruns that may increase project costs and could make such project uneconomical;

    the risk that occupancy or rental rates at the completed project will not be sufficient to enable us to pay operating expenses or earn the targeted rate of return on our investment; and

    the risk of incurrence of redevelopment costs in connection with projects that are not completed.

      In the case of an unsuccessful acquisition or redevelopment project, our loss could exceed our investment in such project, which could adversely impact our ability to pay dividends to our shareholders.

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Our use of borrowings to fund acquisitions and improvements on properties could result in foreclosures and unexpected debt service expenses upon refinancing.

      We have relied on borrowings to fund acquisitions and we expect to continue to rely on borrowings and other external sources of financing to fund the costs of property acquisitions, capital expenditures and other items. As of December 16, 2003, we had aggregate debt of $47.0 million secured by our assets. Accordingly, we are subject to the risk that our cash flow will not sufficiently cover required debt service payments.

      If we cannot meet our required mortgage payment obligations, the property or properties subject to such mortgage indebtedness could be foreclosed upon by or otherwise transferred to our lender, with a consequent loss of income and asset value to us. The interest rates attributable to the debt are adjustable and could rise substantially over the term of the mortgages. Additionally, we may be required to refinance our debt subject to “lump sum” or “balloon” payment maturities or on other terms less favorable than the original loan or at a time we would otherwise prefer to not refinance such debt. A refinancing on such terms or at such times could increase our debt service payments, which could adversely impact the cash we would have available for distribution to our shareholders.

      Our organizational documents permit us to borrow up to 300% of our net asset value as of the date of any borrowing. Our board of trustees has adopted a policy that we will generally limit our aggregate borrowing to 50.0% of the aggregate value of our assets as of the date of any borrowing, unless substantial justification exists that borrowing a greater amount is in our best interests. If we increase our use of financing, we would become subject to an increased risk of default and an increase in debt service requirements. These risks could also adversely affect our financial condition and results of our operations and, consequently, our ability to pay dividends to our shareholders.

We operate in a competitive business and many of our competitors have greater resources and operating flexibility than we do.

      Numerous real estate companies that operate in the Houston and San Antonio, Texas metropolitan areas compete with us in developing and acquiring office, retail and industrial properties and seeking tenants to occupy such properties. Moreover, as we seek to expand our investments and operations into other geographic locations and other asset types, we will encounter significantly more competition from entities that have more financial and other resources, and more operating experience, than us or our advisor. Such competition could adversely affect our business. In addition, the number of entities and the amount of funds competing for suitable investments may increase. Any such increase would result in increased demand for these assets and therefore increased prices paid for them. If we pay higher prices for properties and other investments, our profitability will be reduced and you may experience a lower return on your investment.

Approximately 45.0% of our gross leasable area is subject to leases that expire prior to December 31, 2005.

      As of December 31, 2003, 45.0% of the aggregate gross leasable area of our properties is subject to leases that expire prior to December 31, 2005. We are subject to the risk that:

    tenants will not renew such leases;

    we will not be able to re-lease the space subject to such leases; and

    the terms of any renewal or re-lease will not be as favorable as current leases.

      If any of these risks materialize, our cash flow and ability to pay dividends could be adversely affected.

We depend on tenants for our revenue and on anchor tenants to attract non-anchor tenants.

      As rental income from real property comprises substantially all of our income, the inability of a single major tenant or a number of smaller tenants to meet their obligations would adversely affect our income. Tenants may have the right to terminate their leases upon the occurrence of certain customary events of default or, in some cases, if the lease held by an anchor tenant or other principal tenant of the property expires, is terminated or the property subject to the lease is vacated, even if rent continues to be paid under the lease. The weakening of a significant tenant’s financial condition or the loss of an anchor tenant may adversely affect our cash flow and amounts available for distribution to our shareholders.

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The bankruptcy or insolvency of major tenants would adversely impact our operations.

      As of November 30, 2003, the five largest tenants of our properties generated approximately 7.0% of the combined rent of our properties. The bankruptcy or insolvency of a major tenant or a number of small tenants would have an adverse impact on our income and dividends. Generally, under bankruptcy law, a tenant has the option of continuing or terminating any unexpired lease. If the tenant continues its current lease, the tenant must cure all defaults under the lease and provide adequate assurance of its future performance under the lease. If the tenant terminates the lease, our claim for breach of the lease (absent collateral securing the claim) will be treated as a general unsecured claim. General unsecured claims are the last claims paid in a bankruptcy, and funds may not be available to pay such claims. As of November 30, 2003, none of our major tenants were in bankruptcy or had materially defaulted on their lease. However, any of our tenants could become insolvent or declare bankruptcy in the future.

We may be subject to risks as the result of joint ownership of real estate with third parties.

      We may invest in properties and assets jointly with other persons or entities. Joint ownership of properties, under certain circumstances, may involve risks not otherwise present, including:

    the possibility that our partners or co-investors might become insolvent or bankrupt;

    that such partners or co-investors might have economic or other business interests or goals that are inconsistent with our business interests or goals;

    the possibility that we may incur liabilities as the result of the action taken by our partner or co-investor; or

    that such partners or co-investors may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, including our policy with respect to maintaining our qualification as a REIT.

We may have difficulty selling our real estate investments, which may have an adverse impact on our ability to pay dividends.

      Equity real estate investments are relatively illiquid. We have a limited ability to vary our portfolio in response to changes in economic or other conditions. The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. We are especially vulnerable to these risks because all but one of our current properties are located in one geographical location. In addition, mortgage payments and, to the extent a property is not occupied entirely by tenants subject to triple net leases, certain significant expenditures such as real estate taxes and maintenance costs generally are not reduced when circumstances cause a reduction in income from the investment. The occurrence of such events would adversely affect our income and ability to pay dividends to our shareholders.

You will not have the benefit of an independent due diligence review in connection with this offering.

      Because the dealer manager is an affiliate of Mr. Hartman, you will not have the benefit of an independent due diligence review and investigation of the type normally performed by unaffiliated, independent underwriters in connection with securities offerings. Further, the due diligence investigation of us by the dealer manager cannot be considered to be an independent review and, therefore, may not be as meaningful as a review conducted by an unaffiliated broker-dealer or investment banker.

We established the offering price on an arbitrary basis.

      Our board of trustees determined the selling price of the common shares, and such price bears no relationship to any established criteria for valuing issued or outstanding shares.

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Provisions in our charter may discourage a takeover attempt.

      To maintain our qualification as a REIT, no less than six individuals, as defined in the Internal Revenue Code to include certain entities, can own, actually or constructively, more than 50% in value of our issued and outstanding shares at any time during the last half of a taxable year. Attribution rules in the Internal Revenue Code determine if any individual or entity actually or constructively owns our shares under this requirement. Additionally, at least 100 persons must beneficially own our shares during at least 335 days of a taxable year. Also, rent from “related party tenants” is not qualifying income for purposes of the gross income tests of the Internal Revenue Code. To help insure that we meet these tests, our charter restricts the acquisition and ownership of our shares.

      Our charter, with certain exceptions, authorizes our trustees to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of trustees, no person may own more than 9.8% in value or number (whichever is more restrictive) of our outstanding common shares. Our board of trustees may not grant such an exemption to any proposed transferee whose ownership of in excess of 9.8% of the value of our outstanding shares would result in the termination of our status as a REIT. See “Description of Securities — Restrictions on Transfer.” These restrictions on transferability and ownership will not apply if our board of trustees determines that it is no longer in our best interests to continue to qualify as a REIT. These ownership limits could delay, defer or prevent a transaction or a change in control that might involve a premium price for our common shares or otherwise be in the best interest of our shareholders. See “Description of Securities — Restrictions on Transfer.”

      Our charter authorizes us to issue additional authorized but unissued common shares or preferred shares. In addition, our board of trustees, without any action by our shareholders, may amend our charter to increase or decrease the aggregate number of shares or the number of shares of any class or series that we have authority to issue, and our board of trustees may classify or reclassify any unissued common shares or preferred shares and may set the preferences, rights and other terms of the classified or reclassified shares. See “Description of Securities — Common Shares” and “— Power to Issue Additional Common Shares and Preferred Shares.” Although our board of trustees has no intention to do so at the present time, it could establish a series of preferred shares that could delay, defer or prevent a transaction or a change in control that might involve a premium price for our common shares or otherwise be in the best interest of our shareholders.

      Our Declaration of Trust and bylaws also contain other provisions that may delay, defer or prevent a transaction or a change in control that might involve a premium price for our common shares or otherwise be in the best interest of our shareholders. See “Description of Shares — Provisions of Maryland Law and of Our Charter and Bylaws — Board of Trustees,” “— Control Share Acquisitions” and “— Advance Notice of Trustee Nominations and New Business.”

You may experience immediate dilution and could suffer additional dilution as the result of the conversion of OP Units and issuances of additional shares.

      Purchasers of our common shares in this offering may experience immediate dilution in the net tangible book value of the common shares from the offering price. The public offering price of $10.00 per common share exceeds our pro forma net tangible book value of $            per share after this offering. As of the date of this prospectus, and on a pro forma basis assuming this offering had been completed on December 31, 2003, you would have incurred immediate dilution of $            per common share. See the “Dilution” section of this prospectus. As of December 31, 2003, Hartman OP had 8,719,905.55 OP Units outstanding, 4,065,840.04 of which are not owned by us. These OP Units are convertible, on a one-to-one basis, into our common shares. Shareholders could also experience dilution upon the future conversion of OP Units into common shares.

      In addition, existing shareholders and potential investors in this offering do not have preemptive rights to any shares issued by us in the future. Our charter currently has authorized 450,000,000 shares of beneficial interest, of which 400,000,000 shares are designated as common shares and 50,000,000 shares are designated as preferred shares. Subject to any limitations set forth under Maryland law, our board of trustees may increase the number of authorized shares of beneficial interest, increase or decrease the number of designated shares, or reclassify any unissued shares without the necessity of obtaining shareholder approval. All of such shares may be issued in the discretion of our board of trustees. Therefore, in the event that we (1) sell shares in this offering or sell additional shares in the future, including those issued pursuant to the dividend reinvestment plan, (2) sell securities that are convertible into our common shares, (3) issue our common shares in a private offering of securities to institutional investors, (4) issue our common shares upon the exercise of the options granted to our independent trustees or employees of Hartman Management or its affiliates, or (5) issue common shares to sellers of properties

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acquired by us in connection with an exchange of units of partnership interest in Hartman OP, existing shareholders and investors purchasing shares in this offering will likely experience dilution of their equity investment in us. Because the units of partnership interest in Hartman OP may be exchanged for our common shares, any merger, exchange or conversion between Hartman OP and another entity ultimately could result in the issuance of a substantial number of shares of our common shares, thereby diluting the percentage ownership interest of other shareholders. Because of these and other reasons described in this “Risk Factors” section, you should not expect to be able to own a significant percentage of our shares.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

      To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our shareholders and the ownership of our shares. We may be required to pay dividends to our shareholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Complying with REIT requirements may force us to liquidate otherwise attractive investments.

      To qualify as a REIT, we must also ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 20% of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments.

Risks Related to Conflicts of Interest

      We will be subject to conflicts of interest arising out of our relationships with our advisor and its affiliates, including the material conflicts discussed below. The “Conflicts of Interest” section of this prospectus provides a more detailed discussion of the conflicts of interest between us and our advisor and its affiliates, and our policies to reduce or eliminate potential conflicts.

Hartman Management will face conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in our favor.

      We may be buying properties at the same time as one or more of the other Hartman programs managed by officers and employees of Hartman Management are buying properties. There is a risk that Hartman Management will choose a property that provides lower returns to us than a property purchased by another Hartman program. We cannot be sure that officers and employees acting on behalf of Hartman Management and on behalf of managers of other Hartman programs will act in our best interests when deciding whether to allocate any particular property to us. In addition, we may acquire properties in geographic areas where other Hartman programs own properties. If one of the other Hartman programs attracts a tenant that we are competing for, we could suffer a loss of revenue due to delays in locating another suitable tenant. You will not have the opportunity to evaluate the manner in which these conflicts of interest are resolved before or after making your investment. Similar conflicts of interest may apply if our advisors determine to make or purchase mortgage loans or participations in mortgage loans on our behalf, since other Hartman programs may be competing with us for such investments.

Our advisor may face a conflict of interest when allocating personnel and resources between our operations and the operations of other entities it manages.

      Mr. Hartman strategically directs our day-to-day operations through our advisor, which he owns and controls, pursuant to the terms of an advisory agreement. Mr. Hartman also controls other entities that own properties managed by our advisor. Our advisor’s personnel will not devote their efforts full-time to the property management of our portfolio of

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properties, but will devote a material amount of their time to the management of the business of these other property-owning entities controlled by Mr. Hartman but otherwise unaffiliated with us. From time to time, our advisor may have a conflict of interest in allocating its personnel between our operations and the operations of other entities controlled by Mr. Hartman. The failure of our advisor to adequately perform services for, or allocate resources to, us because of its obligations to these other entities could adversely affect our business and the returns we receive from our investments.

Certain of our officers and trustees face conflicts of interests relating to the positions they hold with other entities.

      Certain of our officers and trustees are also officers and trustees of Hartman Management and other entities controlled by Mr. Hartman. These individuals owe fiduciary duties to these other entities and their security holders and these duties may from time to time conflict with the fiduciary duties such individuals owe to our shareholders and us.

Allen R. Hartman controls other entities that compete with us for his time as well as tenants and acquisition opportunities.

      Mr. Hartman is not restricted from acquiring, operating, managing or developing real estate through entities other than us. We expect that Mr. Hartman will continue to develop, own or operate real estate that he feels does not conform to our investment strategy in or through other entities. Mr. Hartman currently controls and/or operates four other entities that collectively own twelve properties in the Houston and San Antonio metropolitan areas. Mr. Hartman spends a material amount of time managing these properties and other assets unrelated to our business. To varying degrees, we compete with these entities for tenants. Mr. Hartman may have conflicts of interest when seeking to allocate tenant and acquisition opportunities between us and other entities he controls. We encourage you to read the “Conflicts of Interest — Certain Relationships and Related Transactions” section of this prospectus for a further discussion of these topics.

Hartman Management will face conflicts of interest relating to joint ventures, which could result in a disproportionate benefit to a Hartman program or third party other than us.

      We are likely to enter into joint ventures with other Hartman programs, as well as third parties for the acquisition, development or improvement of properties. We may also purchase and develop properties in joint ventures or in partnerships, co-tenancies or other co-ownership arrangements with the sellers of the properties, affiliates of the sellers, developers or other persons. Such investments may involve risks not otherwise present with other methods of investment in real estate, including, for example:

    the possibility that our co-venturer, co-tenant or partner in an investment might become bankrupt;

    that such co-venturer, co-tenant or partner may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals; or

    that such co-venturer, co-tenant or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives.

Actions by such a co-venturer, co-tenant or partner might have the result of subjecting the property to liabilities in excess of those contemplated and may have the effect of reducing your returns.

      Hartman Management or its affiliates may have advisory and management arrangements with other Hartman programs, and thus, it is likely that they will encounter opportunities to acquire or sell properties to the benefit of one of the Hartman programs, but not others. Hartman Management or its affiliates may make decisions to buy or sell certain properties, which decisions might disproportionately benefit a Hartman program other than us. In such event, our results of operations and ability to pay dividends to our shareholders could be adversely affected.

      In the event that we enter into a joint venture with any other Hartman program or joint venture, Hartman Management may have a conflict of interest when determining when and whether to buy or sell a particular real estate property, and you may face certain additional risks. For example, other Hartman public real estate programs may never have an active trading market. Therefore, if we become listed on a national exchange, we may develop more divergent goals and objectives from such joint venturers with respect to the resale of properties in the future. In addition, in the event we joint venture with a Hartman program that has a term shorter than ours, the joint venture may be required to sell its properties at the time of the other Hartman program’s liquidation. We may not desire to sell the properties at such time. Although the terms of any joint venture

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agreement between us and another Hartman program would grant us a right of first refusal to buy such properties, we may not have sufficient funds to exercise our right of first refusal under these circumstances.

      Since Allen R. Hartman and his affiliates may control us as well as other Hartman real estate programs, agreements and transactions among the parties with respect to any joint venture between or among such parties will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers. Under these joint venture arrangements, neither co-venturer may have the power to control the venture, and under certain circumstances, an impasse could be reached regarding matters pertaining to the joint venture, which might have a negative influence on the joint venture and decrease potential returns to you. In the event that a co-venturer has a right of first refusal to buy out the other co-venturer, it may be unable to finance such buy-out at that time. It may also be difficult for us to sell our interest in any such joint venture or partnership or as a co-tenant in property. In addition, to the extent that our co-venturer, partner or co-tenant is an affiliate of Hartman Management, certain conflicts of interest will exist. For a more detailed discussion, see “Conflicts of Interest — Joint Ventures with Affiliates of Hartman Management.”

Hartman Management will face conflicts of interest relating to the incentive fee structure under our advisory agreement, which could result in actions that are not necessarily in the long-term best interests of our shareholders.

      Under our advisory agreement, Hartman Management is entitled to fees that are structured in a manner intended to provide incentives to our advisor to perform in our best interests and in the best interests of our shareholders. However, because our advisor does not maintain a significant equity interest in us and is entitled to receive substantial minimum compensation regardless of performance, our advisor’s interests are not wholly aligned with those of our shareholders. In that regard, our advisor could be motivated to recommend riskier or more speculative investments in order for us to generate the specified levels of performance or sales proceeds that would entitle our advisor to fees. In addition, our advisor’s entitlement to fees upon the sale of our assets and to participate in sale proceeds could result in our advisor recommending sales of our investments at the earliest possible time at which sales of investments would produce the level of return that would entitle the advisor to compensation relating to such sales, even if continued ownership of those investments might be in our best long-term interest. Our advisory agreement requires us to pay a performance-based termination fee to our advisor in the event that we terminate the advisor prior to the listing of our shares for trading on an exchange or, absent such listing, in respect of its participation in net sales proceeds. To avoid paying this fee, our independent trustees may decide against terminating the advisory agreement prior to our listing of our shares or disposition of our investments even if, but for the termination fee, termination of the advisory agreement would be in our best interest. In addition, the requirement to pay the fee to the advisor at termination could cause us to make different investment or disposition decisions than we would otherwise make, in order to satisfy our obligation to pay the fee to the terminated advisor. Moreover, our advisor has the right to terminate the advisory agreement upon a change of control and thereby trigger the payment of the performance fee, which could have the effect of delaying, deferring or preventing the change of control.

There is no separate counsel for our affiliates and us, which could result in conflicts of interest.

      Morris, Manning & Martin, LLP acts as legal counsel to us and is also expected to represent our advisor and some of its affiliates from time to time. There is a possibility in the future that the interests of the various parties may become adverse and, under the Code of Professional Responsibility of the legal profession, Morris, Manning & Martin, LLP may be precluded from representing any one or all of such parties. If any situation arises in which our interests appear to be in conflict with those of our advisor or its affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected. Moreover, should such a conflict not be readily apparent, Morris, Manning & Martin, LLP may inadvertently act in derogation of the interest of the parties that could affect our and, therefore, our shareholders’ ability to meet our investment objectives.

Our UPREIT structure may result in potential conflicts of interest.

      Persons holding OP Units have the right to vote on certain amendments to the Agreement of Limited Partnership of Hartman OP, as well as on certain other matters. Persons holding such voting rights may exercise them in a manner that conflicts with the interests of our shareholders. As the general partner of Hartman OP, we have fiduciary duties to the limited partners of Hartman OP, the discharge of which may conflict with interests of our shareholders.

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We have acquired a majority of our properties from entities controlled by Mr. Hartman.

      We acquired 28 of the 33 properties we owned as of December 16, 2003 from entities controlled by Mr. Hartman. We acquired these properties by either paying cash, issuing our shares or issuing OP Units. No third parties were retained to represent or advise these selling entities or us, and the transactions were not conducted on an “arms’-length” basis.

      Mr. Hartman had interests that differed from, and in certain cases conflicted with, his co-investors in these entities. Mr. Hartman received the following as a result of such transactions:

    627,982.66 OP Units in consideration of Mr. Hartman’s general partner interest in the selling entities;

    the ability to limit his future exposure to general partner liability as a result of Mr. Hartman no longer serving as the general partner to certain of the selling entities; and

    the repayment of debt encumbering various of our properties that was personally guaranteed by Mr. Hartman.

      Mr. Hartman might not have been able to negotiate all of these benefits if the transactions were negotiated at arm’s length. Further, Mr. Hartman (neither personally nor in his capacity as a general partner) made any representations or warranties in regard to the properties or the selling entities in the operative documents executed in order to consummate the transactions. Consequently, we essentially acquired the properties on an “as is” basis. Therefore, we will bear the risk associated with any characteristics or deficiencies of our properties unknown at the closing of the acquisitions that may affect the valuation or revenue potential of the properties.

Risks Related to Our Business in General

Our charter permits our board of trustees to issue capital shares with terms that may subordinate the rights of the holders of our current common shares or discourage a third party from acquiring us.

      Our charter permits our board of trustees to issue up to 450,000,000 shares of beneficial interest. Our board of trustees may classify or reclassify any unissued common shares or preferred shares and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, or terms or conditions of redemption of any such shares. Thus, our board of trustees could authorize the issuance of such shares with terms and conditions that could subordinate the rights of the holders of our common shares or have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common shares. See “Description of Shares — Power to Issue Additional Common Shares and Preferred Shares.”

Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired.

      Under Maryland law, “business combinations” between a Maryland real estate investment trust and an interested shareholder or an affiliate of an interested shareholder are prohibited for five years after the most recent date on which the interested shareholder becomes an interested shareholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested shareholder is defined as:

    any person who beneficially owns ten percent or more of the voting power of the trust’s shares; or

    an affiliate or associate of the trust who, at any time within the two-year period prior to the date in question, was the beneficial owner of ten percent or more of the voting power of the then outstanding voting shares of the trust.

      A person is not an interested shareholder under the statute if the board of trustees approved in advance the transaction by which he or she otherwise would have become an interested shareholder. However, in approving a transaction, the board of trustees may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

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      After the five-year prohibition, any business combination between the Maryland real estate investment trust and an interested shareholder generally must be recommended by the board of trustees of the trust and approved by the affirmative vote of at least:

    eighty percent of the votes entitled to be cast by holders of outstanding voting shares of the trust; and

    two-thirds of the votes entitled to be cast by holders of voting shares of the trust other than shares held by the interested shareholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested shareholder.

      These super-majority vote requirements do not apply if the trust’s common shareholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested shareholder for its shares.

      The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of trustees prior to the time that the interested shareholder becomes an interested shareholder. Pursuant to the statute, our board of trustees has exempted any business combination involving an interested shareholder. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between any of them and us. As a result, an interested shareholder may be able to enter into business combinations with us that may not be in the best interest of our shareholders, without compliance with the super-majority vote requirements and the other provisions of the statute.

      The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer. For a more detailed discussion of the Maryland laws governing us and the ownership of our shares of common shares, see the section of this prospectus captioned “Description of Shares.”

Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act.

      We are not registered as an investment company under the Investment Company Act of 1940, as amended (Investment Company Act). If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:

    limitations on capital structure;

    restrictions on specified investments;

    prohibitions on transactions with affiliates; and

    compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.

      In order to maintain our exemption from regulation under the Investment Company Act, we must engage primarily in the business of buying real estate, and these investments must be made within a year after the offering ends. If we are unable to invest a significant portion of the proceeds of this offering in properties within one year of the termination of the offering, we may avoid being required to register as an investment company by temporarily investing any unused proceeds in government securities with low returns. This would reduce the cash available for distribution to investors and possibly reduce the value of your investment in us.

      To maintain compliance with the Investment Company Act exemption, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income or loss generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy. If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court was to require enforcement, and a court could appoint a receiver to take control of us and liquidate our business.

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You are bound by the majority vote on matters on which you are entitled to vote.

      You may vote on certain matters at any annual or special meeting of shareholders, including the election of trustees. However, you will be bound by the majority vote on matters requiring approval of a majority of the shareholders even if you do not vote with the majority on any such matter.

Shareholders have limited control over changes in our policies and operations.

      Our board of trustees determines our major policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our board of trustees may amend or revise these and other policies without a vote of the shareholders. Under the Maryland General Corporation Law and our charter, our shareholders have a right to vote only on the following:

    the election or removal of trustees;

    any amendment of our charter (including a change in our investment objectives), except that our board of trustees may amend our charter without shareholder approval, to increase or decrease the aggregate number of our shares, to increase or decrease the number of our shares of any class or series that we have the authority to issue, or to classify or reclassify any unissued shares by setting or changing the preferences, conversion or other rights, restrictions, limitations as to dividends, qualifications or terms and conditions of redemption of such shares, provided however, that any such amendment does not adversely affect the rights, preferences and privileges of the shareholders;

    our liquidation or dissolution;

    a reorganization as provided in our charter; and

    any merger, consolidation or sale or other disposition of substantially all of our assets.

All other matters are subject to the discretion of our board of trustees.

       You are limited in your ability to sell your shares pursuant to our share redemption program.

      Any shareholder requesting repurchase of their shares pursuant to our share redemption program will be required to certify to us that such shareholder acquired the shares by either (i) a purchase directly from us or (ii) a transfer from the original subscriber by way of a bona fide gift not for value to, or for the benefit of, a member of the subscriber’s immediate or extended family or through a transfer to a custodian, trustee or other fiduciary for the account of the subscriber or his/her immediate or extended family in connection with an estate planning transaction, including by bequest or inheritance upon death or by operation of law. Our share redemption program contains restrictions that may limit your ability to transfer your shares to us. Shares will be redeemed on a first-come, first-served basis, with a priority given to redemptions upon the death of a shareholder. During any calendar year, we will not redeem in excess of 5.0% of the weighted average number of shares outstanding during the prior calendar year. In addition, the cash available for redemption generally will be limited to 1.0% of the operating cash flow from the previous fiscal year, plus any proceeds from our dividend reinvestment plan. Further, our board of trustees reserves the right to reject any request for redemption or to terminate, suspend, or amend the share redemption program at any time. Therefore, in making a decision to purchase our shares, you should not assume that you will be able to sell any of your shares back to us pursuant to our share redemption program. However, subject to the limitations described in this prospectus, we will redeem shares upon the request of the estate, heir or beneficiary of a deceased shareholder. For a more detailed description of our share redemption program, see “Description of Shares – Share Redemption Program.”

If you are able to resell your shares to us pursuant to our redemption program, you will likely receive substantially less than the fair market value for your shares.

      Other than redemptions following the death of a shareholder, for three years after we complete this offering, the purchase price for shares we repurchase under our redemption program will be $9.50 per share. Thereafter, the redemption price will equal 95.0% of our per share value, as estimated by Hartman Management or another financial evaluation firm we choose for this purpose. Accordingly, you would likely receive less by selling your shares back to us than you would receive if our investments were sold for their estimated values and such proceeds were distributed in our liquidation. Even if you have

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your shares purchased by a subsequent third-party purchaser, you will likely receive substantially less than the fair market value of your shares.

Payment of fees to Hartman Management and its affiliates will reduce cash available for investment and dividends.

      Hartman Management and its affiliates will perform services for us in connection with the offer and sale of the shares, the selection and acquisition of our investments, and the management and leasing of our properties, the servicing our mortgage loans and the administration of our other investments. They will be paid substantial fees for these services, which will reduce the amount of cash available for investment in properties or payment of dividends to shareholders. For a more detailed discussion of these fees, see “Management Compensation.”

There can be no assurance that we will be able to pay or maintain cash dividends or that dividends will increase over time.

      There are many factors that can affect the availability and timing of cash dividends to shareholders. Dividends will be based principally on cash available from our properties, real estate securities, mortgage loans and other investments. The amount of cash available for dividends will be affected by many factors, such as our ability to buy properties as offering proceeds become available, the yields on securities of other real estate programs that we invest in, and our operating expense levels, as well as many other variables. Actual cash available for dividends may vary substantially from estimates. We can give no assurance that we will be able to pay or maintain dividends or that dividends will increase over time. Nor can we give any assurance that rents from the properties will increase, that the securities we buy will increase in value or provide constant or increased dividends over time, or that future acquisitions of real properties, mortgage loans or our investments in securities will increase our cash available for dividends to shareholders. Our actual results may differ significantly from the assumptions used by our board of trustees in establishing the dividend rate to shareholders. For a description of the factors that can affect the availability and timing of cash dividends to shareholders, see the section of this prospectus captioned “Description of Shares – Dividends.”

Adverse economic and geopolitical conditions could negatively affect our returns and profitability.

      Recent geopolitical events have exacerbated the general economic slowdown experienced by the nation as a whole and the local economies where our properties may be located. The length and severity of any economic downturn cannot be predicted. The following market and economic challenges may impact negatively our operating results:

    poor economic times may result in tenant defaults under our leases;

    job transfers and layoffs may increase vacancies;

    maintaining occupancy levels may require increased concessions or reduced rental rates; and

    increased insurance premiums, resulting in part from the increased risk of terrorism, may reduce funds available for payment of dividends or, to the extent we can pass such increases through to tenants, may lead to tenant defaults. Increased insurance premiums also may make it difficult to increase rents to tenants on turnover, which may adversely affect our ability to increase our returns.

Our operations could be negatively affected to the extent that an economic downturn is prolonged or becomes more severe.

We are uncertain of our sources for funding of future capital needs, which could adversely affect the value of our investments.

      Substantially all of the gross proceeds of the offering will be used to buy real estate and to pay various fees and expenses. If these reserves are insufficient to meet our cash needs, we may have to obtain financing from either affiliated or unaffiliated sources to fund our cash requirements. Our existing working capital line of credit expires in June 2005 and our revolving loan that provides a source of borrowing for our acquisition of properties expires in December 2005. Accordingly, in the event that we develop a need for additional capital in the future for the improvement of our properties or for any other reason, we may be required to identify sources for such funding. We cannot assure you that sufficient funding will be available or, if available, will be available on economically feasible terms or on terms acceptable to us.

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General Risks Related to Investments in Real Estate

Your investment will be directly affected by general economic and regulatory factors we cannot control or predict.

      We only own commercial real estate. Investments in real estate typically involve a high level of risk as the result of factors we cannot control or predict. One of the risks of investing in real estate is the possibility that our properties will not generate income sufficient to meet operating expenses or will generate income and capital appreciation, if any, at rates lower than those anticipated or available through investments in comparable real estate or other investments. The following factors may affect income from properties and yields from investments in properties and are generally outside of our control:

    conditions in financial markets;

    over-building;

    a reduction in rental income as the result of the inability to maintain occupancy levels;

    adverse changes in applicable tax, real estate, environmental or zoning laws;

    changes in general economic conditions;

    a taking of any of our properties by eminent domain;

    adverse local conditions (such as changes in real estate zoning laws that may reduce the desirability of real estate in the area);

    acts of God, such as earthquakes or floods and other uninsured losses;

    changes in supply of or demand for similar or competing properties in an area;

    changes in interest rates and availability of permanent mortgage funds, which may render the sale of a property difficult or unattractive; and

    periods of high interest rates and tight money supply.

      Some or all of the foregoing factors may affect our properties, which could adversely affect our operations and ability to pay dividends to shareholders.

Properties that have significant vacancies could be difficult to sell, which could diminish the return on your investment.

      A property may incur vacancies either by the continued default of tenants under their leases or the expiration of tenant leases. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in less cash dividends to be distributed to our shareholders. In addition, the resale value of the property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.

If we set aside insufficient working capital or are unable to secure funds for future tenant improvements, we may be required to defer necessary property improvements, which could adversely impact our ability to pay cash dividends to our shareholders.

      When tenants do not renew their leases or otherwise vacate their space, it is usual that, in order to attract replacement tenants, we will be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. If we have insufficient working capital reserves, we will have to obtain financing from other sources. Because the vast majority of our leases will provide for tenant reimbursement of operating expenses, we do not anticipate that we will establish a permanent reserve for maintenance and repairs for our properties. However, to the extent that we have insufficient funds for such purposes, we may establish reserves for maintenance and repairs of our properties from gross proceeds of this offering, out of cash flow generated by operating properties or out of non-liquidating net sale proceeds. If these reserves or any reserves otherwise established are insufficient to meet our cash needs, we may have to obtain financing from either affiliated or unaffiliated sources to fund our cash requirements. We cannot assure you that sufficient financing will be available or, if available, will be available on economically feasible terms or on terms acceptable to us. Additional borrowing for working capital purposes will increase our interest expense, and therefore our financial condition and our ability to pay cash dividends

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to our shareholders may be adversely affected. In addition, we may be required to defer necessary improvements to our properties that may cause our properties to suffer from a greater risk of obsolescence or a decline in value, or a greater risk of decreased cash flow as a result of fewer potential tenants being attracted to our properties. If this happens, we may not be able to maintain projected rental rates for effected properties, and our results of operations may be negatively impacted.

Uninsured losses relating to real property or excessively expensive premiums for insurance coverage may adversely affect your returns.

      Hartman Management will attempt to ensure that all of our properties are adequately insured to cover casualty losses. However, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorism acts could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase specific coverage against terrorism as a condition for providing mortgage loans. It is uncertain whether such insurance policies will be available, or available at reasonable cost, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot assure you that we will have adequate coverage for such losses. In the event that any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by any such uninsured loss. In addition, other than any reserves we may establish, we have no source of funding to repair or reconstruct any uninsured damaged property, and we cannot assure you that any such sources of funding will be available to us for such purposes in the future. Also, to the extent we must pay unexpectedly large insurance premiums, we could suffer reduced earnings that would result in less cash dividends to be distributed to shareholders.

Our operating results may be negatively affected by potential development and construction delays and resultant increased costs and risks.

      We may invest some or all of the proceeds available for investment in the acquisition and development of properties upon which we will develop and construct improvements at a fixed contract price. We will be subject to risks relating to uncertainties associated with re-zoning for development and environmental concerns of governmental entities and/or community groups and our builder’s ability to control construction costs or to build in conformity with plans, specifications and timetables. The builder’s failure to perform may necessitate legal action by us to rescind the purchase or the construction contract or to compel performance. Performance may also be affected or delayed by conditions beyond the builder’s control. Delays in completion of construction could also give tenants the right to terminate preconstruction leases for space at a newly developed project. We may incur additional risks when we make periodic progress payments or other advances to such builders prior to completion of construction. These and other such factors can result in increased costs of a project or loss of our investment. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. Furthermore, we must rely upon projections of rental income and expenses and estimates of the fair market value of property upon completion of construction when agreeing upon a price to be paid for the property at the time of acquisition of the property. If our projections are inaccurate, we may pay too much for a property, and our return on our investment could suffer.

      In addition, we may invest in unimproved real property. Returns from development of unimproved properties are also subject to risks and uncertainties associated with re-zoning the land for development and environmental concerns of governmental entities and/or community groups. Although our intention is to limit any investment in unimproved property to property we intend to develop, your investment nevertheless is subject to the risks associated with investments in unimproved real property.

Uncertain market conditions relating to the future disposition of properties could adversely affect the return on your investment.

      We intend to hold the various real properties in which we invest until such time as Hartman Management determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that such objectives will not be met. Otherwise, Hartman Management, subject to approval of our board of trustees, may exercise its discretion as to whether and when to sell a property, and we will have no obligation to sell properties at any particular time, except upon our liquidation if we do not list the shares within twelve years of the termination of this offering. We cannot predict with any certainty the various market conditions affecting real estate investments that will exist at any particular time in

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the future. Although we generally intend to hold properties for seven to ten years from the date of acquisition, due to the uncertainty of market conditions that may affect the future disposition of our properties, we cannot assure you that we will be able to sell our properties at a profit in the future. Accordingly, the extent to which you will receive cash dividends and realize potential appreciation on our real estate investments will be dependent upon fluctuating market conditions.

The costs of compliance with environmental laws and other governmental laws and regulations may adversely affect our income and the cash available for any dividends.

      All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent such property or to use the property as collateral for future borrowing.

      Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. We cannot assure you that future laws, ordinances or regulations will not impose any material environmental liability, or that the current environmental condition of our properties will not be affected by the operations of the tenants, by the existing condition of the land, by operations in the vicinity of the properties, such as the presence of underground storage tanks, or by the activities of unrelated third parties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations that we may be required to comply with, and which may subject us to liability in the form of fines or damages for noncompliance.

Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.

      Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. The costs of removal or remediation could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets or results of operations and, consequently, amounts available for payments of dividends to you.

Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

      When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property. In addition, the presence of significant mold could expose us to liability from our tenants, their employees and others if property damage or health concerns arise.

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Our costs associated with complying with the Americans with Disabilities Act may affect cash available for dividends.

      Our properties may be subject to the Americans with Disabilities Act of 1990, as amended (Disabilities Act). Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. We will attempt to acquire properties that comply with the Disabilities Act or place the burden on the seller or other third party, such as a tenant, to ensure compliance with the Disabilities Act. However, we cannot assure you that we will be able to acquire properties or allocate responsibilities in this manner. If we cannot, our funds used for Disabilities Act compliance may affect cash available for dividends and the amount of dividends to you, if any.

If we sell properties by providing financing to purchasers, we will bear the risk of default by the purchaser.

      If we decide to sell any of our properties, we intend to use our best efforts to sell them for cash. However, in some instances we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk of default by the purchaser and will be subject to remedies provided by law, which could negatively impact our cash dividends to shareholders. There are no limitations or restrictions on our ability to take purchase money obligations. We may, therefore, take a purchase money obligation secured by a mortgage as a partial payment for the purchase price. The terms of payment to us generally will be affected by custom in the area where the property being sold is located and the then-prevailing economic conditions. If we receive promissory notes or other property in lieu of cash from property sales, the distribution of the proceeds of sales to our shareholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to pay cash dividends to our shareholders.

Risks Associated with Debt Financing

       We may incur mortgage indebtedness and other borrowings, which may increase our business risks.

      If it is determined to be in our best interests, we may, in some instances, acquire real properties by using either existing financing or borrowing new funds. In addition, we may incur or increase our mortgage debt by obtaining loans secured by some or all of our real properties to obtain funds to acquire additional real properties. We may also borrow funds if necessary to satisfy the requirement that we distribute to shareholders as dividends at least 90.0% of our annual REIT taxable income, or otherwise as is necessary or advisable to assure that we maintain our qualification as a REIT for federal income tax purposes.

      We may incur mortgage debt on a particular real property if we believe the property’s projected cash flow is sufficient to service the mortgage debt. However, if there is a shortfall in cash flow, then the amount available for dividends to shareholders may be affected. In addition, incurring mortgage debt increases the risk of loss because defaults on indebtedness secured by a property may result in foreclosure actions initiated by lenders and our loss of the property securing the loan that is in default. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, there is a risk that more than one real property may be affected by a default. If any of our properties are foreclosed upon due to a default, our ability to pay cash dividends to our shareholders will be adversely affected.

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If mortgage debt is unavailable at reasonable rates, we may not be able to finance the properties, which could reduce the number of properties we can acquire and the amount of cash dividends we can make.

      If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when the properties are refinanced, we may not be able to finance the properties and our income could be reduced. If this occurs, it would reduce cash available for payment of dividends to our shareholders, and it may prevent us from raising capital by issuing more shares or prevent us from borrowing more money.

Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to pay dividends to our shareholders.

      In connection with obtaining certain financing, a lender could impose restrictions on us that affect our ability to incur additional debt and our dividend and operating policies. Loan documents we enter into may contain negative covenants that may limit our ability to further mortgage the property, to discontinue insurance coverage, replace Hartman Management as our advisor or impose other limitations. Any such restriction or limitation may have an adverse effect on our operations.

If we enter into financing arrangements involving balloon payment obligations, it may adversely affect our ability to pay dividends.

      Some of our financing arrangements may require us to make a lump-sum or “balloon” payment at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the property. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment. The effect of a refinancing or sale could affect the rate of return to shareholders and the projected time of disposition of our assets. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to make the distributions that we are required to pay to maintain our qualification as a REIT. Any of these results would have a significant, negative impact on your investment.

Risks Associated with Section 1031 Exchange Transactions

We may have increased exposure to liabilities from litigation as a result of any participation by us in Section 1031 Exchange Transactions.

      We may enter into transactions that qualify for like-kind exchange treatment under Section 1031 of the Internal Revenue Code (Section 1031 Exchange Transactions). Section 1031 Exchange Transactions are commonly structured as the acquisition of real estate owned in co-tenancy arrangements with persons (1031 Participants) in tax pass-through entities, including single member limited liability companies or similar entities (Hartman Exchange LLCs). There are significant tax and securities disclosure risks associated with the related private placement offerings of co-tenancy interests to 1031 Participants, including lawsuits by such 1031 Participants. Changes in tax laws may adversely affect Section 1031 Exchange Transactions or cause such transactions not to achieve their intended value. It is currently anticipated that the operating partnership would receive fees in connection with any Section 1031 Exchange Transaction and, as such, we may be named in or otherwise required to defend against any such lawsuits brought by 1031 Participants. Any amounts we are required to expend for any such litigation claims may reduce the amount of funds available for payment of dividends to our shareholders. In addition, disclosure of any such litigation may adversely affect our ability to raise additional capital in the future through the sale of our shares. For a more detailed discussion of Section 1031 Exchange Transactions, see “Investment Objectives and Criteria — Section 1031 Exchange Transactions.”

We will be subject to risks associated with co-tenancy arrangements that otherwise may not be present in a real estate investment.

      If we enter into Section 1031 Exchange Transactions, it is anticipated that at the closing of each property to be acquired by a Hartman Exchange LLC, the operating partnership will enter into a contractual arrangement providing that, in the event that the Hartman Exchange LLC is unable to sell all of the co-tenancy interests in that particular property by the completion of its private placement offering, the operating partnership would purchase, at the Hartman Exchange LLC’s cost,

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any co-tenancy interests remaining unsold. Accordingly, in the event that a Hartman Exchange LLC is unable to sell all co-tenancy interests in one or more of its properties, the operating partnership will be required to purchase the unsold co-tenancy interests in such property or properties and, thus, will be subject to the risks of ownership of properties in a co-tenancy arrangement with unrelated third parties.

      Ownership of co-tenancy interests involves risks generally not otherwise present with an investment in real estate such as the following:

    the risk that a co-tenant may at any time have economic or business interests or goals which are or which become inconsistent with our business interests or goals;

    the risk that a co-tenant may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives; or

    the possibility that a co-tenant might become insolvent or bankrupt, which may be an event of default under mortgage loan financing documents or allow the bankruptcy court to reject the tenants in common agreement or management agreement entered into by the co-tenants owning interests in the property.

Actions by a co-tenant might have the result of subjecting the property to liabilities in excess of those contemplated and may have the effect of reducing your returns.

      In the event that our interests become adverse to those of the other co-tenants in a Section 1031 Exchange Transaction, it is not likely that we would have the contractual right to purchase the co-tenancy interests from the other co-tenants. Even if we are given the opportunity to purchase such co-tenancy interests in the future, we cannot guarantee that we will have sufficient funds available at the time to purchase co-tenancy interests from the 1031 Participants.

      In addition, we may desire to sell our co-tenancy interests in a given property at a time when the other co-tenants in such property do not desire to sell their interests. Therefore, we may not be able to sell our interest in a property at the time we would like to sell. In addition, it is anticipated that it will be much more difficult to find a willing buyer for our co-tenancy interests in a property than it would be to find a buyer for a property we owned outright.

Our participation in the Section 1031 Exchange Transactions may limit our ability to borrow funds in the future, which could adversely affect the value of our investments.

      We may enter into Section 1031 Exchange Transaction agreements that contain obligations to acquire unsold co-tenancy interests in properties may be viewed by institutional lenders as a contingent liability against our cash or other assets, which may limit our ability to borrow funds in the future. Further, such obligations may be viewed by our lenders in such a manner as to limit our ability to borrow funds based on regulatory restrictions on lenders limiting the amount of loans they can make to any one borrower.

Federal Income Tax Risks

If we failed to qualify as a REIT, our operations and dividends to shareholders would be adversely impacted.

      We intend to continue to operate so as to qualify as a REIT under the Internal Revenue Code. A REIT generally is not taxed at the corporate level on income it currently distributes to its shareholders. Qualification as a REIT involves the application of highly technical and complex rules for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to continue to qualify as a REIT. In addition, new legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification.

      If we were to fail to qualify as a REIT in any taxable year:

    we would not be allowed to deduct our distributions to shareholders when computing our taxable income;

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    we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates;

    we would be disqualified from being taxed as a REIT for the four taxable years following the year during which qualification was lost, unless entitled to relief under certain statutory provisions;

    our cash available for dividends would be reduced and we would have less cash to pay dividends to shareholders; and

    we may be required to borrow additional funds or sell some of our assets in order to pay corporate tax obligations we may incur as a result of our disqualification.

      We encourage you to read the “Federal Income Tax Considerations” section of this prospectus for further discussion of the tax issues related to this offering.

If Hartman OP was classified as a “publicly-traded partnership” under the Internal Revenue Code, our operations and dividends to shareholders could be adversely affected.

      We structured Hartman OP so that it would be classified as a partnership for federal income tax purposes. In this regard, the Internal Revenue Code generally classifies “publicly traded partnerships” (as defined in Section 7704 of the Internal Revenue Code) as associations taxable as corporations (rather than as partnerships), unless substantially all of their taxable income consists of specified types of passive income. In order to minimize the risk that the Internal Revenue Code would classify Hartman OP as a “publicly traded partnership” for tax purposes, we placed certain restrictions on the transfer and/or redemption of partnership units in Hartman OP. If the Internal Revenue Service were to assert successfully that Hartman OP is a “publicly traded partnership,” and substantially all of Hartman OP’s gross income did not consist of the specified types of passive income, the Internal Revenue Code would treat Hartman OP as an association taxable as a corporation.

      These topics are discussed in greater detail in the “Federal Income Tax Considerations — Tax Aspects of Our Operating Partnership” section of this prospectus. In such event, the character of our assets and items of gross income would change and would prevent us from continuing to qualify as a REIT. In addition, the imposition of a corporate tax on Hartman OP would reduce our amount of cash available for payment of dividends by us to you. See the “Federal Income Tax Considerations” section of this prospectus.

Dividends to tax-exempt investors may be classified as unrelated business tax income.

      Neither dividend distributions nor income from the sale of common shares should generally constitute unrelated business taxable income to a tax-exempt investor, provided that our shares are not predominately held by qualified employee pension trusts. However, the Internal Revenue Code may classify our dividends to a tax-exempt investor as unrelated business tax income in the event such investor incurs debt in order to acquire common shares. We encourage you to read the “Investment by Tax-Exempt Entities and ERISA Considerations” section of this prospectus for further discussion of this issue if you are a tax-exempt investor.

Investors subject to ERISA must address special consideration when determining whether to acquire common shares.

      The Employee Retirement Income Security Act of 1974, as amended, is referred to in this prospectus as “ERISA.” Fiduciaries of a pension, profit-sharing or other employee benefit plan subject to ERISA should consider whether an investment in our common shares:

    is subject to the “plan assets” rules under ERISA and the Internal Revenue Code;

    satisfies the fiduciary standards of care established under ERISA;

    is subject to the unrelated business taxation rules under Section 511 of the Internal Revenue Code; and

    constitutes a prohibited transaction under ERISA or the Internal Revenue Code. Those investors subject to ERISA should read the “ERISA Considerations” for further discussion of ERISA topics.

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      We intend that Hartman OP will satisfy the “real estate operating company” exception to the plan assets regulations promulgated pursuant to ERISA and that we will satisfy the “venture capital operating company” exception to the plan assets regulations promulgated pursuant to ERISA. Consequently, our assets should not be treated as plan assets of an investing plan subject to ERISA. We cannot assure you, however, that these exceptions will apply to our assets and, if not, our assets our may be treated as plan assets of investing plan subject to ERISA.

Certain fees paid to Hartman OP may affect our REIT status.

      In connection with any Section 1031 Exchange Transactions, Hartman OP would enter into a number of contractual arrangements with Hartman Exchange LLCs that will, in effect, guarantee the sale of the co-tenancy interests being offered by any Hartman Exchange LLC. In consideration for entering into these agreements, Hartman OP will be paid fees which could be characterized by the Internal Revenue Service as non-qualifying income for purposes of satisfying the “income tests” required for REIT qualification. If this fee income were, in fact, treated as non-qualifying, and if the aggregate of such fee income and any other non-qualifying income in any taxable year ever exceeded 5.0% of our gross income for such year, we could lose our REIT status for that taxable year and the four ensuing taxable years. As set forth above, we will use all reasonable efforts to structure our activities in a manner intended to satisfy the requirements for our continued qualification as a REIT. Our failure to qualify as a REIT would adversely affect your return on your investment.

Recharacterization of the Section 1031 Exchange Transactions may result in taxation of income from a prohibited transaction, which would diminish our cash dividends to our shareholders.

      In the event that the Internal Revenue Service were to recharacterize the Section 1031 Exchange Transactions such that Hartman OP, rather than Hartman Exchange LLC, is treated as the bona fide owner, for tax purposes, of properties acquired and resold by a Hartman Exchange LLC in connection with the Section 1031 Exchange Transactions, such characterization could result in the fees paid to Hartman OP by a Hartman Exchange LLC as being deemed income from a prohibited transaction, in which event the fee income paid to us in connection with the Section 1031 Exchange Transactions would be subject to a 100.0% tax. If this occurs, our ability to pay cash dividends to our shareholders will be adversely affected.

You may have tax liability on dividends that you elect to reinvest in our common shares.

      If you participate in our dividend reinvestment plan, you will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in common shares. As a result, unless you are a tax-exempt entity, you may have to use funds from other sources to pay your tax liability on the value of the common shares received.

In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce our cash available for payment of dividends to our shareholders.

      Even if we maintain our status as a REIT, we may become subject to federal income taxes and related state taxes. For example, if we have net income from a “prohibited transaction,” such income will be subject to a 100.0% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our shareholders would be treated as if they earned that income and paid the tax on it directly. However, shareholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly or at the level of the operating partnership or at the level of the other companies through which we indirectly own our assets. Any federal or state taxes paid by us will reduce our cash available for payment of dividends to our shareholders.

We may be subject to adverse legislative or regulatory tax changes that could adversely impact our ability to sell shares in this offering.

      At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect the taxation of us or of you as a shareholder. On May 23, 2003, the President signed the Jobs and Growth Tax Relief Reconciliation Act of 2003, which we refer to as the Jobs and Growth Tax Act. Effective for taxable years beginning after December 31, 2002, the Jobs

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and Growth Tax Act will generally reduce the maximum rate of tax applicable to individuals on the dividend income from regular C corporations from 38.6% to 15.0%. This will reduce substantially the so-called “double taxation” (that is, taxation at both the corporate and shareholder levels) that has generally applied to corporations that are not taxed as REITs. Generally, dividends from REITs will not qualify for the dividend tax reduction because, as a result of the dividends paid deduction to which REITs are entitled, REITs generally do not pay corporate level tax on income that they distribute to shareholders. The implementation of the Jobs and Growth Tax Act could cause individual investors to view stocks of non-REIT corporations are more attractive relative to shares of REITs than was the case previously because the dividends paid by non-REIT corporations would be subject to lower tax rates for the individual. Due to the very recent enactment of this legislation, we cannot predict whether in fact this will occur or, if it occurs, what the impact will be on our ability to sell shares in this offering.

There are special considerations that apply to pension or profit-sharing trusts or IRAs investing in our shares.

      If you are investing the assets of a pension, profit-sharing, 401(k), Keogh or other qualified retirement plan or the assets of an IRA in our common shares, you should satisfy yourself that, among other things:

    your investment is consistent with your fiduciary obligations under ERISA and the Internal Revenue Code;

    your investment is made in accordance with the documents and instruments governing your plan or IRA, including your plan’s investment policy;

    your investment satisfies the prudence and diversification requirements of ERISA;

    your investment will not impair the liquidity of the plan or IRA;

    your investment will not produce UBTI for the plan or IRA;

    you will be able to value the assets of the plan annually in accordance with ERISA requirements; and

    your investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.

      For a more complete discussion of the foregoing issues and other risks associated with an investment in shares by retirement plans, please see the “Investment by Tax-Exempt Entities and ERISA Considerations” section of this prospectus.

Equity participation in mortgage loans may result in taxable income and gains from these properties, which could adversely impact our REIT status.

      If we participate under a mortgage loan in any appreciation of the properties securing the mortgage loan or its cash flow and the Internal Revenue Service characterizes this participation as “equity,” we might have to recognize income, gains and other items from the property. This could affect our ability to maintain our status as a REIT.

Forward-Looking Statements

      This prospectus contains certain “forward-looking statements” regarding our plans and objectives, including, among other things:

    future economic performance;

    plans and objectives of management for future operations; and

    projections of revenue and other financial items.

      Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology. These statements are only predictions and are not historical facts. Actual events or results may differ materially.

      The forward-looking statements included herein are based on our historical performance, current expectations, plans, estimates and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of

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which are difficult or impossible to predict accurately and many of which are beyond our control. Any of the assumptions underlying the forward-looking statements could be inaccurate and, therefore, we cannot assure you that the forward-looking statements included in this prospectus will prove to be accurate.

      In light of the significant uncertainties inherent in the forward-looking statements included in this prospectus, including, without limitation, the risks set forth in the “Risk Factors” section, the inclusion of such information should not be regarded as a representation by us or any other person that the objectives and plans set forth in this prospectus will be achieved. We caution you that forward-looking statements are not guarantees and that the actual results could differ materially from those expressed or implied in the forward-looking statements.

      You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different than that contained in this prospectus. We are offering to sell, and seeking offers to buy, our shares only in jurisdictions where such offers and sales are permitted.

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ESTIMATED USE OF PROCEEDS

      The following table sets forth information about how we intend to use the proceeds raised in this offering, assuming that we sell either the minimum offering of 200,000 shares or the maximum offering of 11,000,000 shares pursuant to this offering. Many of the figures set forth below represent management’s best estimate since they cannot be precisely calculated at this time. For the maximum offering figures, we assume that we would sell 50% of the shares through our dealer manager’s distribution channel in which no other participating broker-dealer is involved, and the commissions that would otherwise be payable with respect to such sales would be retained and used by us for investments. We expect that at least 89.5% of the money that shareholders invest will be used to buy real estate. The remaining approximately 10.5% will be used to pay expenses and fees, including the payment of fees to Hartman Management, our advisor, and              , our dealer manager. Our fees and expenses, as listed below, include the following:

  Selling commissions and dealer manager fee, which consist of selling commissions equal to 7.0% of aggregate gross offering proceeds, which commissions may be waived or reduced under certain circumstances, and a dealer manager fee equal to 2.5% of aggregate gross offering proceeds, both of which are payable to              , an affiliate of our advisor.              may pay commissions of up to 7.0% of the gross offering proceeds to other broker-dealers participating in the offering of our shares. With respect to shares sold by              without the involvement of another participating broker-dealer through its own distribution channel,              has agreed to waive the full amount of the selling commission otherwise payable to it by the purchaser of those shares, which will increase the money that we will use to buy real properties.              may reallow a portion of its dealer manager fee in an aggregate amount up to 1.5% of gross offering proceeds to broker-dealers participating in the offering to be paid as marketing fees, including bona fide conference fees incurred, and due diligence expense reimbursement. In no event shall the total underwriting compensation, including selling commissions, the dealer manager fee and underwriting expense reimbursements, exceed 9.5% of gross offering proceeds. See the “Plan of Distribution” section of this prospectus for a description of additional provisions relating to selling commissions and the dealer manager fee.

  Organization and offering expenses are defined generally as any and all costs and expenses incurred by us, our advisor or an affiliate of our advisor in connection with our formation, qualification and registration and the marketing and distribution of our shares, including, but not limited to, accounting and escrow fees, printing, advertising and marketing expenses, and other accountable offering expenses, other than selling commissions and the dealer manager fee. Hartman Management and its affiliates will be responsible for the payment of organization and offering expenses, other than selling commissions and the dealer manager fee, to the extent they exceed 2.5% of gross offering proceeds, without recourse against or reimbursement by us and, pursuant to our charter, the aggregate sum of such organization and offering expenses, selling commissions and the dealer manager fee, shall in no event exceed 15.0% of the gross offering proceeds.

  Acquisition fees, which are defined generally as fees and commissions paid by any party to any person in connection with identifying, reviewing, evaluating, investing in, and the purchase, development or construction of properties, or the making or investing in mortgage loans or other investments. We will pay Hartman Management, as our advisor, acquisition fees of 2.0% of the gross offering proceeds upon receipt of the offering proceeds rather than at the time a property is acquired. However, if either party terminates or fails to renew the advisory agreement, Hartman Management must return any acquisition fees not yet allocated to one of our investments. Acquisition fees do not include acquisition expenses.

                                   
      MINIMUM OFFERING   MAXIMUM OFFERING
     
 
      Amount   Percent   Amount   Percent
     
 
 
 
Gross offering proceeds
  $ 2,000,000       100.0 %   $ 109,500,000       100.0 %
Less public offering expenses:
                               
Selling commissions and dealer manager fee (1)
    120,000       6.0       6,332,500       5.8  
 
Other organization and offering expenses (2)
    50,000       2.5       2,737,500       2.5  
 
Acquisition fees
    40,000       2.0       2,190,000       2.0  
 
Initial working capital reserve (4)
                       
 
   
     
     
     
 
Amount estimated to be invested (5)
  $ 1,790,000       89.5 %   $ 98,002,500       89.5 %
 
   
     
     
     
 

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(1)   We have assumed that one-half of the shares sold in the offering will be sold by our dealer manager without the involvement of a participating broker-dealer, in which case investors will pay $10.00 per share but no commission will be paid with respect to such purchases. As a result of our dealer manager’s agreement not to charge a commission for such sales, the amounts that would otherwise be paid as commissions will be retained and used by us for investment in real properties. We have also assumed that none of the shares sold by our dealer manager without commission qualify for volume discounts. To the extent that any of such sales qualify for volume discounts, the amount of the volume discount will reduce the proceeds otherwise available to us for investment. For purposes of this table, we have also assumed that the minimum offering amounts do not include any purchases under our dividend reinvestment plan. With respect to purchases under the dividend reinvestment plan, the dealer manager has agreed to reduce its fee to 1.0%, and selling commissions not to exceed 5.0% will only be paid in circumstances where we paid a selling commission in connection with the sale of the underlying shares in our primary offering.
 
(2)   We currently estimate that approximately $400,000 of organization and offering expenses will be incurred if the minimum offering of 200,000 shares ($2.0 million) is sold. However, of such amount, only $50,000 will be paid by us, and the balance will be paid by our advisor. Our advisor will receive funds to pay such expenses from capital contributions from affiliates of our advisor. Organization and offering expenses are required to be reasonable. The advisor or an affiliate of the advisor will pay any amount exceeding 2.5% of the gross offering proceeds. Organization and offering expenses will necessarily increase as the volume of shares sold in the offering increases, in order to pay the increased expenses of qualification and registration of the additional shares and the marketing and distribution of the additional shares.
 
(3)   We will pay Hartman Management, as our advisor, acquisition fees of 2.0% of gross offering proceeds for its services in connection with the selection, purchase, development and construction of real estate. We will pay Hartman Management the acquisition fee amount upon receipt of the offering proceeds rather than at the time a property is acquired. In addition to this acquisition fee, we may also incur customary third-party acquisition expenses in connection with the acquisition (or attempted acquisition) of a property. See Note 5 below.
 
(4)   Because we expect that the vast majority of leases for the properties acquired by us will provide for tenant reimbursement of operating expenses, we do not anticipate that a permanent reserve for maintenance and repairs of real estate properties will be established. However, to the extent that we have insufficient funds for such purposes, we may establish reserves from gross offering proceeds, out of cash flow generated by operating properties or out of non-liquidating net sale proceeds (defined generally to mean the net cash proceeds received by us from any sale or exchange of properties).
 
(5)   The amount estimated to be invested will include customary third-party acquisition expenses, such as legal fees and expenses, costs of appraisal, accounting fees and expenses, title insurance premiums and other closing costs and miscellaneous expenses relating to the acquisition of real estate. We estimate that the third-party costs would average 0.5% of the contract purchase price of property acquisitions.

      Until required in connection with the acquisition and development of properties substantially all of the net proceeds of this offering and, thereafter, our working capital reserves, may be invested in short-term, highly-liquid investments including, but not limited to, government obligations, bank certificates of deposit, short-term debt obligations and interest-bearing accounts.

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DILUTION

      Dilution is the amount by which the offering price paid by purchasers of common shares sold in this offering exceeds the net tangible book value per share on December 31, 2003. On December 31, 2003, we had              issued and outstanding common shares and a net tangible net book value of $              . Therefore, each common share had a net tangible book value of $              . The net tangible book value per common share is determined by subtracting our total liabilities from the value of all our total tangible assets and dividing the difference by the total number of our common shares outstanding.

      Assuming that, on December 31, 2003,

  we sold all 10,000,000 common shares offered by this prospectus to the public;

  we sold all 1,000,000 common shares offered pursuant to our dividend reinvestment plan; and

  we received net proceeds of $              from this offering,

our pro forma net tangible book value would have been $              , or $              per share. This would have represented an immediate increase in net tangible book value of $              per share to existing shareholders and an immediate dilution of $              per share to new investors. The following table illustrates this per share dilution:

         
Per share offering price of this offering before any expenses, commissions and other fees
  $ 10.00  
Per share offering price of shares issuable pursuant to dividend reinvestment plan before expenses, commissions and other fees
  $ 9.50  
Net tangible book value of each common share as December 31, 2003
  $    
 
   
 
Pro forma net tangible book value of each common share assuming the completion of this offering (1)
  $    
 
   
 
Pro forma increase in net tangible book value per common share to existing shareholders attributable to this offering
  $    
 
   
 
Pro forma decrease (dilution) in net tangible book value per common share to new investors
  $    
 
   
 


(1)   This figure assumes that we received net proceeds of $              million from this offering, after deducting 3.5% of gross proceeds for the payment of selling commissions to third party broker dealers. These amounts assume that 50.0% of all shares offered by this prospectus are sold by registered broker dealers on our behalf. We will pay such broker dealers a selling commission of up to 7.0% of all gross proceeds we receive from shares they place. To the extent our executive officers sell shares in this offering, a commission will not be paid for such shares and we will receive the excess proceeds. Consequently, to the extent that our executive officers sell fewer than 50.0% of the shares, our net tangible book value will decrease. We give no effect to the possible conversion of any OP Units into common shares.

      The following table summarizes, on a pro forma basis as of December 31, 2003, the differences in the number of common shares purchased from us, the total consideration paid and the average price per share paid by our existing shareholders and by the new investors purchasing the common shares in this offering and under our dividend reinvestment plan:

                                         
    Shares Purchased (1)   Total Consideration   Average Price Per Share
   
 
 
    Number   Percent   Amount   Percent        
   
 
 
 
       
Existing shareholders
              %   $           %   $      
 
   
     
     
     
     
 
New shareholders
    11,000,000         %   $ 109,500,000         %   $      
 
   
     
     
     
     
 
Total
             100.0 %   $         100.00 %        
 
   
     
     
     
         


(1)   We give no effect to the possible conversion of units of partnership interest of Hartman OP into common shares.

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MANAGEMENT

General Information About Us

      We are a Maryland real estate investment trust formed on December 31, 2003 for the purpose of merging with Hartman Commercial Properties REIT, a Texas real estate investment trust organized on August 20, 1998. The sole purpose of the merger was to change our state of domicile to Maryland. As a result of the merger, we are governed by the laws of the state of Maryland.

      We were initially organized under the laws of the state of Texas by Allen R. Hartman. Mr. Hartman is currently our president and secretary, and is a member of our board of trustees. Concurrently with our reorganization as a Maryland real estate investment trust, our shareholders approved a recapitalization of our outstanding equity such that each common share of beneficial interest outstanding was exchanged for              common shares of beneficial interest. The recapitalization had no effect on the economic interests of our shareholders in us.

      We have a perpetual duration. Our charter permits us to be terminated upon the affirmative vote of the holders of a majority of the outstanding shares entitled to vote and the approval of a majority of the trustees. Our bylaws require us to conduct annual meetings of our shareholders for the purpose of electing our board of trustees, each of whom will serve for a one year term, and to conduct any other proper business as may come before the shareholders.

      We operate under the direction of our board of trustees, the members of which serve in a fiduciary capacity to the company and are accountable to our shareholders as fiduciaries. The board is responsible for the management and control of our affairs. The board has retained Hartman Management to manage our day-to-day affairs and the acquisition and disposition of our investments, subject to the board’s supervision. Our Declaration of Trust has been reviewed and ratified by our board of trustees, including the independent trustees, at their initial meeting and subsequent meetings. This ratification by our board of trustees is required by the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association, also known as the NASAA REIT Guidelines.

      Our Declaration of Trust and bylaws provide that the number of our trustees may be established by a majority of the entire board of trustees. However, the board of trustees must always have at least three members and no more than fifteen members. We currently have a total of six members on our board. The Declaration of Trust also provides that a majority of the trustees must be independent trustees. An “independent trustee” is a person who is not one of our officers or employees or an officer, director or employee of Hartman Management or its affiliates and has not otherwise been affiliated with such entities for the previous two years and does not own or during the previous two years has not owned, an interest in Hartman Management or its affiliates. Of our six current trustees, four are considered independent trustees. Each trustee must have at least three years of relevant experience demonstrating the knowledge and experience required to successfully acquire and manage the type of assets being acquired by us. At least one of the independent trustees must have at least three years of relevant real estate experience. Currently, each of our trustees, including our independent trustees, has substantially in excess of three years of relevant real estate experience.

      Each trustee will serve until the next annual meeting of shareholders and until his successor has been duly elected and qualifies. Although the number of trustees may be increased or decreased, a decrease will not have the effect of shortening the term of any incumbent trustee.

      Any trustee may resign at any time and may be removed with or without cause by the shareholders upon the affirmative vote of not less than a majority of all the votes entitled to be cast at a meeting properly called for the purpose of the proposed removal. The notice of the meeting will indicate that the purpose, or one of the purposes, of the meeting is to determine if the trustee shall be removed. Neither our advisor, any member of our board of trustees nor any of their affiliates may vote or consent on matters submitted to the shareholders regarding the removal of our advisor or any trustee after we accept any subscriptions for the purchase of shares in this offering. In determining the requisite percentage in interest required to approve such a matter after we accept any subscriptions for the purchase of shares in this offering, any shares owned by such persons will not be included.

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      A vacancy created by an increase in the number of trustees or the death, resignation, removal, adjudicated incompetence or other incapacity of a trustee shall be filled by a vote of a majority of the remaining trustees. Independent trustees shall nominate replacements for vacancies in the independent trustee positions. If at any time there are no trustees in office, successor trustees shall be elected by the shareholders. Each trustee will be bound by the Declaration of Trust and the bylaws.

      Our trustees serve in a fiduciary capacity to the company and are accountable to our shareholders as fiduciaries. Generally speaking, this means that our trustees must perform their duties in good faith and in a manner each trustee believes to be in our best interest as well as the best interest of our shareholders. Further, trustees must act with such care as a prudent person in a similar position would use under similar circumstances, including exercising reasonable inquiry, when taking actions.

      However, the trustees are not required to devote all of their time to our business and are only required to devote the time to our affairs as their duties require. The trustees will meet quarterly or more frequently if necessary. We do not expect that the trustees will be required to devote a substantial portion of their time to discharge their duties as our trustees. Consequently, in the exercise of their responsibilities, the trustees will be relying heavily on our advisor. Our trustees shall have a fiduciary duty to our shareholders to supervise the relationship between our advisor and us. The board is empowered to fix the compensation of all officers that it selects and approve the payment of compensation to trustees for services rendered to us in any other capacity.

      In addition to the investment policies set forth in our Declaration of Trust, our board of trustees has established written policies on investments and acquisitions, development, borrowing and transactions with affiliates, which are set forth in this prospectus. The trustees may establish further written policies on such matters or amend our current policies at any time. The board shall monitor our administrative procedures, investment operations and performance to ensure that the policies are fulfilled and are in the best interest of the shareholders. We will follow the policies on investments and borrowings set forth in this prospectus unless and until they are modified in accordance with our Declaration of Trust.

      As described below, the conflicts committee of our board of trustees is also responsible for reviewing our fees and expenses with sufficient frequency to determine that the expenses incurred are in the best interest of our shareholders. In anticipation of this offering, on              , 2004 we entered into an amended and restated property management agreement (Management Agreement). All future amendments to the Management Agreement and all other agreements or transactions between Hartman Management and us must be approved by the conflicts committee, which is composed solely of independent trustees. Additionally, the conflicts committee must approve all material transactions between us and any entities affiliated with Mr. Hartman. See “Conflicts of Interest — Certain Relationships and Related Transactions.”

      In addition, a majority of the trustees, including a majority of the independent trustees, who are not otherwise interested in the transaction must approve all transactions between us and Hartman Management or its affiliates. The independent trustees will also be responsible for reviewing the performance of Hartman Management and determining that the compensation to be paid to Hartman Management is reasonable in relation to the nature and quality of services to be performed and that the provisions of the advisory agreement are being carried out. Specifically, the independent trustees will consider factors such as:

  the amount of the fees paid to Hartman Management in relation to the size, composition and performance of our investments;

  the success of Hartman Management in generating appropriate investment opportunities;

  rates charged to other REITs, especially REITs of similar structure, and to investors other than REITs by advisors performing the same or similar services;

  additional revenues realized by Hartman Management and its affiliates through their relationship with us, whether they are paid by us or they are paid by others with whom we do business;

  the quality and extent of service and advice furnished by Hartman Management and the performance of our investment portfolio; and

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  the quality of our portfolio relative to the investments generated by Hartman Management or its affiliates for their own accounts.

Committees of the Board of Trustees

      Our entire board of trustees considers all major decisions concerning our business. However, our board has established an audit committee, a compensation committee and a conflicts committee so that these important areas can be addressed in more depth than may be possible at a full board meeting and to also ensure that that these areas are addressed by non-interested members of the board. Independent trustees comprise a majority of the members of the audit committee, the compensation committee, and the conflicts committee.

Audit Committee

      The audit committee will meet on a regular basis at least once a year. The current audit committee members are independent trustees Chris A. Minton and Samuel C. Hathorn. The audit committee’s primary function is to assist the board of trustees in fulfilling its oversight responsibilities by reviewing the financial information to be provided to the shareholders and others, the system of internal controls which management has established, and the audit and financial reporting process.

Compensation Committee

      The board of trustees also established a compensation committee to administer our equity compensation plans described below. The compensation committee is comprised of independent trustees Chand Vyas and Jack L. Mahaffey. The primary function of the compensation committee is to administer the granting of options to purchase common shares and other incentive awards to employees of Hartman Management. The compensation committee will also set the terms and conditions of such awards in accordance with our equity compensation plans.

Conflicts Committee

      At least three trustees will serve on a conflicts committee to review specific matters that the board believes may involve conflicts of interest. The conflicts committee will determine if the resolution of the conflict of interest is fair and reasonable to us. The members of the conflicts committee may not be officers or employees of us or any of our affiliates (including Hartman Management) and must otherwise be independent trustees. Any matters approved by the conflicts committee will be conclusively deemed to be fair and reasonable to us. The current members of the conflicts committee are independent trustees Chand Vyas and Jack L. Mahaffey.

Executive Officers and Trustees

      We have provided below certain information about our executive officers and trustees.

             
Name   Age   Position(s)

 
 
Allen R. Hartman  
51

  President, Secretary and Trustee
Robert W. Engel  
49

  Chief Financial Officer and Trustee
Samuel C. Hathorn  
60

  Trustee
Jack L. Mahaffey  
72

  Trustee
Chris A. Minton  
67

  Trustee
Chand Vyas  
59

  Trustee

       Allen R. Hartman has been our president, secretary and a member of our board of trustees since our formation in 1998. He is also the sole limited partner of our advisor and property manager, Hartman Management, L.P., as well as the president, secretary, sole trustee and sole shareholder of the general partner of Hartman Management. Since 1984, Mr. Hartman, as an individual general partner, has been the sponsor of 17 private limited and general partnerships that have invested in commercial real estate in Houston, Texas. Mr. Hartman has over 30 years of experience in the commercial real estate industry. From 1978 to 1983, Mr. Hartman owned and operated residential rental properties. From 1972 to 1978, Mr. Hartman worked as an independent contractor in the real estate construction industry. In 1978, Mr. Hartman formed

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Hartman Investment Properties (a Texas sole proprietorship) to develop, acquire, manage, and lease commercial real estate ventures.

       Robert W. Engel has been our Chief Financial Officer and a member of our board of trustees since 2000, and is the controller of Hartman Management. Mr. Engel is a graduate from the University of Texas with a BBA with highest honors with a major in Accounting. Mr. Engel is a CPA and holds memberships in the American Institute of Certified Public Accountants, and the Texas Society of Certified Public Accountants. Mr. Engel is also a CPM, with membership in the Institute of Real Estate Management, and a CCIM as a member of the CCIM Institute. He is a licensed real estate broker in the State of Texas. From 1991 to 1999, Mr. Engel served as vice president and controller for Reignquest/Fred Rizk Construction Company.

       Chand Vyas has been a member of our board of trustees since 2002. Mr. Vyas is the Chairman and Chief Executive Officer of EPS Technology, a global information technology and business process outsourcing company that he founded in 2000. From 1982 until 1998, Mr. Vyas served as Chief Executive Officer of Ziegler Coal Holding Company, where he led a buyout of Ziegler from its parent company, Houston Natural Gas, in 1985. In subsequent years, under Mr. Vyas’ leadership, Ziegler grew many fold through acquisitions including the purchase of Old Ben Coal from British Petroleum as well as Shell Mining Company from Shell Oil. Ziegler Coal Holding Company went public in 1994 with the largest initial public offering underwritten during that year’s third quarter.

       Jack L. Mahaffey has been a member of our board of trustees since 2000. Mr. Mahaffey served as the President of Shell Mining Co. from 1984 until 1991. Since his retirement in 1991, Mr. Mahaffey has managed his personal investments. Mr. Mahaffey graduated from Ohio State University with a B.S. and M.S. in Petroleum Engineering and served in the United States Air Force. He is a former board member of the National Coal Association and the National Coal Council.

       Samuel C. Hathorn has been a member of our board of trustees since 2000. Mr. Hathorn has been in the home building and land development business for over thirty years. He has held both divisional and senior management positions with three different large publicly held home builders/developers during his real estate career. For the last twenty-one years,

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Mr. Hathorn has been a senior executive with Weyerhaeuser Real Estate Company (WRECO), a wholly owned subsidiary of Weyerhaeuser Company (NYSE). Since 1984, Mr. Hathorn has been President and Chief Executive Officer of Trendmaker Homes, the Houston, Texas based home building and land development subsidiary of WRECO. Mr. Hathorn is a licensed CPA in the State of California and holds a Bachelor of Science degree in accounting. He currently serves as a director of National Beverage Corp. (AMEX).

       Chris A. Minton has been a member of our board of trustees since 2000. Mr. Minton was employed by Lockheed Martin for 35 years and was a Vice-President of Lockheed’s Technology Services Group from 1993 until 1995. While employed at Lockheed, he supervised the business operations of six operating companies that employed over 30,000 people. Since his retirement from Lockheed in 1995, Mr. Minton has managed his personal investments and served as a consultant to a privately held aircraft mechanics school and to a Lockheed Martin subsidiary company. Mr. Minton graduated from Villanova University with a Bachelors Degree, and he is a licensed C.P.A. (retired status) in the State of Texas. He has been awarded the Gold Knight of Management award for achievements as a professional manager by the National Management Association.

Compensation of Trustees

      We pay our independent trustees an annual fee of $5,000, $1,000 for each meeting attended, and $1,000 for each committee attended, payable (at our option) in either cash or by issuing such trustees common shares of beneficial interest. Although we have not granted any awards under our equity compensation plans to any of our trustees, the compensation committee may also grant options to purchase common shares or other incentive awards to members of the board. All trustees are reimbursed for reasonable out-of-pocket expenses incurred in connection with attendance at meetings of the board of trustees. If a trustee is also an officer of Hartman Management, we do not pay separate compensation for services rendered as a trustee.

Provisions Applicable to Our Equity Compensation Plans

      In no event shall an option be granted to a trustee or executive officer if the shares available for purchase subject to such grant, when added to all other shares available for purchase and all other shares purchased pursuant to other issued and outstanding options, would exceed 10.0% of the issued and outstanding shares of common shares determined as of the date of grant of such option. Except as otherwise provided in an option agreement, if a change of control occurs and the agreements effectuating the change of control do not provide for the assumption or substitution of all options granted under our equity compensation plans, options granted under the non-assumed plan shall terminate and be forfeited immediately upon the occurrence of the change of control. However, the board in its sole and absolute discretion, may, with respect to any or all of such options, take any or all of the following actions to be effective as of the date of the change of control (or as of any other date fixed by the board occurring within the 30-day period immediately preceding the date of the change of control, but only if such action remains contingent upon the change of control), such date being referred to herein as the “Action Effective Date”:

   

          •   accelerate the vesting and/or exercisability of the non-assumed option; and/or

          •   unilaterally cancel such non-assumed option in exchange for:

     
-   whole and/or fractional shares (or for whole shares and cash in lieu of any fractional share) or whole and/or fractional shares of a successor (or for whole shares of a successor and cash in lieu of any fractional share) which, in the aggregate, are equal in value to the excess of the fair market value of the shares that could be purchased subject to such non-assumed option determined as of the Action Effective Date (taking into account vesting) over the aggregate exercise price for such shares; or
     
-   cash or other property equal in value to the excess of the fair market value of the shares that could be purchased subject to such non-assumed option determined as of the Action Effective Date (taking into account vesting) over the aggregate exercise price for such shares; and/or,

          •   unilaterally cancel such non-assumed option after providing the holder of such option with (1) an opportunity to exercise such non-assumed option to the extent vested within a specified period prior to the date of the change of control, and (2) notice of such opportunity to exercise prior to the commencement of such specified period.

      If the number of our outstanding shares is changed into a different number or kind of shares or securities through a reorganization or merger in which we are the surviving entity, or through a combination, recapitalization or otherwise, an appropriate adjustment will be made in the number and kind of shares that may be issued pursuant to exercise of options

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granted under our equity compensation plans. A corresponding adjustment to the exercise price of such options granted prior to any change will also be made. Any such adjustment, however, will not change the total payment, if any, applicable to the portion of the options or warrants not exercised, but will change only the exercise price for each share.

      Fair market value for purposes of our equity compensation plans is defined generally to mean:

  the average closing sale price for the five consecutive trading days ending on such date, if the shares are traded on a national stock exchange;

  the average of the high bid and low asked prices on such date, if the shares are quoted on the Nasdaq Stock Market;

  the per share offering price of our common shares, if there is a current public offering and the shares are not traded or listed as provided above; or

  the fair market value as determined by our board of trustees.

Limited Liability and Indemnification of Trustees, Officers, Employees and Other Agents

      We are permitted to limit the liability of our trustees, officers, employees and other agents, and to indemnify them, only to the extent permitted by Maryland law and the NASAA REIT Guidelines. In addition, the Securities and Exchange Commission takes the position that indemnification against liabilities arising under the Securities Act of 1933, as amended (Securities Act), is against public policy and unenforceable.

      Maryland law permits us to include in our Declaration of Trust a provision limiting the liability of our trustees and officers to us and our shareholders for money damages, except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment and that is material to the cause of action. Our Declaration of Trust contains a provision that eliminates trustees’ and officers’ liability to the maximum extent permitted by Maryland law.

      Maryland law permits a Maryland real estate investment trust to indemnify and advance expenses to its trustees, officers, employees and agents to the same extent as permitted for directors and officers of Maryland corporations. Maryland law permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that:

  the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty,

  the director or officer actually received an improper personal benefit in money, property or services or

  in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

      However, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses.

      Our Declaration of Trust provides that we will indemnify and hold harmless a trustee, officer, employee, agent, advisor or affiliate against any and all losses or liabilities reasonably incurred by such trustee, officer, employee, agent, advisor or affiliate in connection with or by reason of any act or omission performed or omitted to be performed on our behalf in such capacity. However, our Declaration of Trust limits our ability to indemnify our trustees, officers, employees, agents, advisor and affiliates for losses arising from our operation by requiring that the following additional conditions are met:

  the trustees, advisor or affiliates have determined, in good faith, that the course of conduct that caused the loss or liability was in our best interests;

  the trustees, advisor or affiliates were acting on our behalf or performing services for us;

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  in the case of our non-independent trustees, advisor or affiliates, the liability or loss was not the result of negligence or misconduct by the party seeking indemnification;

  in the case of independent trustees, the liability or loss was not the result of gross negligence or willful misconduct by the party seeking indemnification; and

  the indemnification or agreement to hold harmless is recoverable only out of our net assets and not from the shareholders.

      Indemnification of the trustees, officers, employees, agents, our advisor or affiliates will not be allowed for liabilities arising from or out of a violation of state or federal securities laws, unless one or more of the following conditions are met:

  there has been a successful adjudication on the merits of each count involving alleged securities law violations;

  such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction; or

  a court of competent jurisdiction approves a settlement of the claims against the indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and of the published position of any state securities regulatory authority in which our securities were offered as to indemnification for violations of securities laws.

      Our Declaration of Trust provides that the advancement of our funds to our trustees, officers, employees, agents, advisor or affiliates for legal expenses and other costs incurred as a result of any legal action for which indemnification is being sought is permissible only if all of the following conditions are satisfied:

  the legal action relates to acts or omissions with respect to the performance of duties or services on behalf of us;

  our trustees, officers, employees, agents, advisor or affiliates provide us with written affirmation of their good faith belief that they have met the standard of conduct necessary for indemnification;

  the legal action is initiated by a third party who is not a shareholder or, if the legal action is initiated by a shareholder acting in his or her capacity as such, a court of competent jurisdiction specifically approves such advancement; and

  our trustees, officers, employees, agents, advisor or affiliates agree in writing to repay the advanced funds to us together with the applicable legal rate of interest thereon, in cases in which such trustees, officers, employees, agents, advisor or affiliates are found not to be entitled to indemnification.

The Advisor and Property Manager

      Hartman Management employs personnel, in addition to the individuals listed above, who have extensive experience in selecting and managing similar to the properties sought to be acquired by us.

      All of our day-to-day operations are managed and performed by Hartman Management. It also manages our portfolio of properties. Some of our trustees and officers are also directors and officers of Hartman Management. The trustees and executive officers of our advisor are as follows:

             
Name   Age   Position

 
 
Allen R. Hartman  
51

  President, Secretary and Trustee
Terry L. Henderson  
53

  Chief Financial Officer
Robert W. Engel  
49

  Controller
John Crossin  
64

  Director of Leasing and Acquisitions
Valarie L. King  
42

  Director of Property Management

      The backgrounds of Messrs. Hartman and Engel are described in the “Management – Executive Officers and Trustees” section of this prospectus. Below is a brief description of the other executive officers of Hartman Management:

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       John Crossin is the Director of Leasing and Acquisitions for Hartman Management. In this capacity, he is responsible for acquiring and leasing retail, office and warehouse space through the prospecting and closing of individual tenants and by directing a staff of agents and lead generators. Mr. Crossin has a degree in finance from Scranton Jesuit University and did graduate work in business management at Temple University in Philadelphia. Mr. Crossin joined Hartman Management in 2001. Mr. Crossin has more than twenty-five years of experience in the leasing, sale and marketing of commercial real estate including office, retail and industrial properties with C.B. Richard Ellis and Grubb & Ellis, national real estate management companies, and Crossin & Company, a Houston-based real estate company. Mr. Crossin joined Hartman Management in January 2001. For the previous five years, Mr. Crossin served as President of Crossin & Co., a commercial real estate corporate advisory firm based in Houston, Texas.

       Terry L. Henderson is the Chief Financial Officer of Hartman Management. Mr. Henderson joined Hartman Management in 2003. His responsibilities include the various financial and administrative, including legal liaison and risk management functions, of Hartman Management. Mr. Henderson is a Certified Public Accountant and a member of various professional CPA organizations. He holds a Bachelor of Business Administration in Accounting from Texas Tech University. Prior to joining Hartman Management, Mr. Henderson was the Chief Financial Officer for Senterra Real Estate Group in Houston, Texas from 1990 to 2003.

       Valarie L. King is the Director of Property Management. In this capacity, she is responsible for all property management activities. Mrs. King is a mentor and coach for a staff of nine property managers. She oversees the day-to-day operations of the properties as well as a maintenance team of nine employees to ensure that labor time is efficiently managed. Additionally, Mrs. King performs quarterly property inspections, oversees monthly collections and is responsible for negotiating our leases and lease renewals. She is responsible for the preparation of annual budgets and meeting budget expectations. Mrs. King has 15 years of property management experience in Houston, Texas. Ms. King joined Hartman Management in 2000. From 1986 until 1989, she was Property Manager at Helmsley Spear National Realty, a New York-based company, where she was responsible for running the Houston office, including property management, leasing and construction.

The Advisory Agreement

      Under the terms of the advisory agreement, Hartman Management will use its reasonable efforts to present to us investment opportunities to provide a continuing and suitable investment program consistent with our investment policies and objectives as adopted by our board of trustees. The advisory agreement calls for Hartman Management to provide for our day-to-day management and to retain property managers, subject to the authority of our board of trustees, and to perform other duties including the following:

  find, present and recommend to us real estate investment opportunities consistent with our investment policies and objectives;

  structure the terms and conditions of our real estate acquisitions, sales or joint ventures;

  acquire properties on our behalf in compliance with our investment objectives and policies;

  arrange for financing and refinancing for our properties;

  enter into leases and service contracts for our properties;

  oversee the property managers’ performance;

  review and analyze the properties’ operating and capital budgets;

  generate an annual budget for us;

  review and analyze financial information for each property and the overall portfolio;

  formulate and oversee the implementation of strategies for the administration, promotion, management, operation, maintenance, improvement, financing and refinancing, marketing, leasing and disposition of properties;

  perform transfer agent functions; and

  engage our agents.

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     The fees payable to Hartman Management under the advisory agreement are described in detail in the “Management Compensation” section of this prospectus. We also describe in that section our obligation to reimburse Hartman Management for organization and offering expenses, administrative and management services and payments made by Hartman Management to third parties in connection with potential acquisitions.

      The term of the advisory agreement ends after one year and may be renewed for an unlimited number of successive one-year periods upon mutual consent of Hartman Management and us. Additionally, either party may terminate without penalty the advisory agreement upon 60 days written notice.

      Hartman Management and its affiliates expect to engage in other business ventures and, as a result, their resources will not be dedicated exclusively to our business. However, pursuant to the advisory agreement, Hartman Management must devote sufficient resources to our administration to discharge its obligations. Hartman Management may assign the advisory agreement to an affiliate upon our approval. We may assign or transfer the advisory agreement to a successor entity.

      The Management Company and its officers, employees and affiliates expect to engage in other business ventures and, as a result, their resources will not be dedicated exclusively to our business. However, pursuant to the advisory agreement, Hartman Management must devote sufficient resources to our administration to discharge its obligations.

The Property Management Agreement

      We entered into a property and partnership management agreement with Hartman Management in January 1999. Since that time, Hartman Management has managed our day-to-day operations and our portfolio of properties. In anticipation of this offering, on              , 2004, we entered into the Management Agreement, which governs the relationship between Hartman OP and Hartman Management.

      This summary is provided to illustrate the material functions that Hartman Management will perform for us as our property manager, and it is not intended to include all of the services that may be provided to us by third parties. Under the terms of the Management Agreement, Hartman Management undertakes to use its best efforts to manage, operate, maintain and lease properties in a diligent, careful and vigilant manner. In its performance of this undertaking, Hartman Management, either directly or indirectly by engaging an affiliate, shall, subject to the authority of the board:

  perform the duties of a landlord under all lease insofar as such duties relate to operation, maintenance, and day-to-day management;

  cause the properties to be maintained in the same manner as similar properties in the area;

  coordinate the leasing of properties and negotiate and use its best efforts to secure executed leases from qualified tenants for available space in the properties;

  forward notices of violations or other notices from any governmental authority, board of fire underwriters or any insurance company;

  enter into or renew contracts for electricity, gas, steam, landscaping, fuel, oil, maintenance and other services as are customarily furnished or rendered;

  analyze and pay all bills received for services, work and supplies in connection with maintaining and operating the properties;

  collect all rent and other monies from tenants and any sums otherwise due with respect to the properties; and

  establish and maintain a separate checking account for funds relating to the properties.

      The Management Agreement automatically renews for successive seven-year terms, unless it is terminated by either party in writing at least 30 days prior to the expiration of a pervious term. In addition, the agreement can be terminated at any time upon 30 days written notice if there is a showing of willful misconduct, gross negligence, or deliberate malfeasance by Hartman Management in the performance of its duties thereunder. The agreement may also be terminated if Hartman Management is adjudicated as bankrupt or insolvent, if Hartman Management files a petition seeking reorganization, readjustment, arrangement, composition or similar relief, or if Hartman Management institutes proceedings to be adjudicated a voluntary bankrupt or insolvent. It will be the duty of our board of trustees to evaluate the performance of our advisor before

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entering into or renewing this agreement. The criteria used in such evaluation will be reflected in the minutes of such meeting. The compensation we pay Hartman Management under this agreement is summarized in the “Management Compensation” section of this prospectus.

      The Management Company may not enter into any contract with any third party in relation to the services it provides under the Management Agreement without our consent.

      Each year we will agree on an operating budget with Hartman Management for the operation of our properties. The Management Company must use diligence and employ all reasonable efforts to ensure that actual costs do not exceed the applicable approved budget items.

      Our advisor will promulgate leasing guidelines for use by Hartman Management in evaluating prospective tenants and lease terms for our properties. Hartman Management will have the authority to enter into leases for our properties consistent with these guidelines without the requirement to obtain further approval of our advisor or board of trustees.

      The Management Company will be indemnified and held harmless from and against any and all claims, losses and fines related to the properties and from liability for damage to the properties and injuries to or the death of any person, except for liabilities and losses resulting from the gross negligence, willful misconduct and/or unlawful acts of Hartman Management.

      The Management Company must indemnify us from and against all claims or liability for any injury or damage to any person or property for which the Management Company is responsible occurring in, on, or about the properties.

      Hartman Management may subcontract on-site property management to other management companies which will also be authorized to lease our properties consistent with the leasing guidelines promulgated by our advisor. In any event, Hartman Management will directly manage all financial aspects of property management. To the extent Hartman Management directly performs on-site management, it will hire, direct and establish policies for employees who will have direct responsibility for such property’s operations, including resident managers and assistant managers, as well as building and maintenance personnel. For any properties for which the on-site management is subcontracted, Hartman Management will approve all personnel of such subcontractor and establish policies for such properties’ operations. Hartman Management will also direct the purchase of equipment and supplies and will supervise all maintenance activity.

      The management fees to be paid to Hartman Management will cover, without additional expense to us, the property manager’s general overhead costs such as its expenses for rent and utilities.

      The principal office of Hartman Management is located at 1450 West Sam Houston Parkway North, Suite 100, Houston, Texas 77043.

The Dealer Manager

                    , our dealer manager, is a member firm of the National Association of Securities Dealers, Inc. (NASD).              was organized in December 2003 for the purpose of participating in and facilitating the distribution of securities of Hartman real estate programs.

                    will provide certain wholesaling, sales, promotional and marketing assistance services to us in connection with the distribution of the shares offered pursuant to this prospectus. It may also sell shares at the retail level.

                    is the general partner of              . Terry L. Henderson and Richard A. Vaughan are the co-managers of              and are the limited partners of              .

       Richard A. Vaughan is Vice President and Director of Investor Services for Hartman Management. Mr. Vaughan is responsible for raising capital, through Hartman Management’s broker-dealer network, in order to fund property acquisitions for the entities that Hartman Management manages, for other investor services, and for Hartman Management’s advertising and public relations. Mr. Vaughan has more than 30 years of experience in the financial services and products industry. Prior to joining Hartman Management, Mr. Vaughan held senior positions with national responsibilities for a major financial services firm, and held a senior marketing and management position with a large international financial services firm.

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      The background of Mr. Henderson is described in the “Management – The Advisor and Property Manager” section of this prospectus.

Management Decisions

      Allen R. Hartman is responsible for the management decisions of Hartman Management and its affiliates, including the selection of investment properties to be recommended to our board of trustees, the negotiation for these investments, and the property management and leasing of these investment properties. Hartman Management seeks to invest in commercial properties that satisfy our investment objectives, typically retail, industrial and office properties. Our board of trustees, including a majority of our independent trustees, must approve all acquisitions of real estate properties.

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MANAGEMENT COMPENSATION

      Although we have executive officers who will manage our operation, we do not have any paid employees. Except with respect to options to purchase common shares that may be granted to our executive officers, only our non-employee trustees will be compensated for their services to us as described in the “Management — Compensation of Trustees” section above. The following table summarizes all of the compensation and fees we will pay to Hartman Management and its affiliates, including amounts to reimburse their costs of providing services, during the various phases of our organization and operation.

         
        Estimated Amount for
Type of Compensation   Form of Compensation   Maximum Offering (1)

Offering Stage

Selling Commissions –   Up to 7.0% of gross offering proceeds (5.0% for dividend reinvestment plan purchases) for sales through participating broker-dealers before reallowance of commissions earned by participating broker-dealers.      intends to reallow 100.0% of commissions earned to participating broker-dealers.   $3,737,500(2)

Dealer Manager Fee –   Up to 2.5% of gross offering proceeds (1.0% for dividend reinvestment plan purchases) before reallowance to participating broker-dealers.      may reallow a portion of its dealer manager fee to such participating broker-dealers as marketing fees, including bona fide conference fees incurred, and due diligence expense reimbursement.   $2,595,000

Reimbursement of Organization and Offering Expenses – Hartman Management (3)   Up to 2.5% of gross offering proceeds. Hartman Management will pay our organization and offering expenses (excluding selling commissions and the dealer manager fee). We will then reimburse Hartman Management for these amounts up to 2.5% of gross offering proceeds.   $2,737,500

Acquisition and Development Stage

Acquisition Fees –
Hartman Management (4)(5)
  Up to 2.0% of the gross offering proceeds for services in connection with the selection, purchase, development or construction of real property.   $2,190,000

Operational Stage

Property Management and Leasing Fees –
Hartman Management
  For the management and leasing of our properties, we will pay Hartman Management, our property manager, property management and leasing fees equal to what other management companies generally charge for the management and leasing of similar properties in the applicable geographic location of such properties (i.e., generally 2.0% to 4.0% of gross revenues for management of commercial office buildings and 5.0% of gross revenues for management of retail and industrial properties), which may include reimbursement of the costs and expenses Hartman Management incurs in managing the properties. Reimbursable costs and expenses include wages and salaries and other expenses of employees engaged in operating, managing, maintaining and leasing the properties.   Actual amounts are dependent upon results of operations and therefore cannot be determined at the present time.

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        Estimated Amount for
Type of Compensation   Form of Compensation   Maximum Offering (1)

Asset Management Fee –
Hartman Management (6)
  Annual fee of 0.25% of gross asset value of our real estate portfolio. The fee is payable quarterly in an amount equal to 0.0625% of gross asset value as of the last day of the immediately preceding quarter. Any portion of the asset management fee may be deferred and paid in a subsequent quarter.   Actual amounts are dependent upon results of operations and therefore cannot be determined at the present time.

Real Estate Commissions
– Hartman Management
  If our advisor provides a substantial amount of services, as determined by our independent trustees, in connection with the sale of our properties, we will pay our advisor an amount equal to 1.0% of the contract price of each property sold; provided, however, in no event may the real estate commission paid to Hartman Management, its affiliates and unaffiliated third parties exceed 6.0% of the contract sales price.   Actual amounts are dependent upon results of operations and therefore cannot be determined at the present time.

Subordinated Participation in Net Sale Proceeds – Hartman Management and        (7)(8)(9)   After investors have received a return of their net capital contributions and a 7.0% annual, cumulative, noncompounded return, then Hartman Management is entitled to receive 15.0% of remaining net sale proceeds. Hartman Management will distribute 20.0% of any subordinate participation in net sale proceeds (up to an amount not to exceed 1.0% of gross offering proceeds) to the dealer manager, which will redistribute such amount to certain participating broker-dealers. Any such fees that are not paid at the date of sale, because investors have not yet received their required minimum distributions, will be deferred and paid at such time as these subordination conditions have been satisfied.   Actual amounts are dependent upon results of operations and therefore cannot be determined at the present time.

Subordinated Incentive Listing Fee – Hartman Management and       (7)(8)(9)(10)   Upon listing our shares on a national securities exchange or quotation on the Nasdaq Stock Market, a fee equal to 15.0% of the amount, if any, by which (1) the market value of our outstanding common shares plus dividends paid by us prior to listing, exceeds (2) the sum of the total amount of capital raised from investors and the amount of cash flow necessary to generate a 7.0% annual, cumulative, noncompounded return to investors. Hartman Management will distribute 20.0% of any incentive listing fee (up to an amount not to exceed 1.0% of gross offering proceeds) to the dealer manager, which will redistribute such amount to certain participating broker-dealers.   Actual amounts are dependent upon results of operations and therefore cannot be determined at the present time.

Operating Expenses –
Hartman Management
  We will reimburse our advisor for all expenses incurred by our advisor in connection with the services provided to us, subject to the limitation that we will not reimburse for any amount by which our operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of: (i) 2.0% of our average invested assets, or (ii) 25.0% of our net income other than any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of our assets for that period.   Actual amounts are dependent upon results of operations and therefore cannot be determined at the present time.


(1)   The estimated maximum dollar amounts are based on the sale of a maximum of 11,000,000 shares to the public, including 1,000,000 shares sold pursuant to our dividend reinvestment plan.
 
(2)   We will not pay selling commissions in respect of any shares sold by our dealer manager without the involvement of another participating broker-dealer. We estimate that our dealer manager will sell approximately 50.0% of the shares sold

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    pursuant to this offering in this manner. Accordingly, the estimated amounts assume that selling commissions apply to 50.0% of the shares registered in this offering. Actual amounts could be more or less than the amount shown. If the actual amount of shares sold by our dealer manager is less than 50.0% of the shares being registered, we would have to use more of our offering proceeds to pay commissions and, as a result, less of the proceeds would be available for investments in properties. In addition, selling commissions on dividend reinvestment plan purchases are calculated based upon the $9.50 per share purchase price under such plan and also assume that selling commissions apply to 50.0% of such purchases. To the extent that we sell shares without the payment of commissions, we will apply the additional proceeds to us resulting from the elimination of the commission to investments in properties and working capital purposes.
 
(3)   Organization and offering expenses are only those expenses associated with our organization and this offering. They do not include expenses associated with the organization of our advisor or any other affiliate.
 
(4)   Under our charter, the total of all acquisition fees and acquisition expenses shall not exceed, in the aggregate, an amount equal to 6.0% of the contract price of all of the properties that we will purchase. However, a majority of our independent trustees may approve fees and expenses in excess of this limit if they determine the transaction to be commercially competitive, fair and reasonable to us.
 
(5)   We will pay Hartman Management the acquisition fee amount upon receipt of the offering proceeds rather than at the time a property is acquired. However, if either party terminates or fails to renew the advisory agreement, Hartman Management must return any acquisition fees not yet allocated to one of our investments.
 
(6)   Gross asset value will be equal to the aggregate book value of our assets (other than investments in bank accounts, money market funds or other current assets), before depreciation, bad debts or other similar non-cash reserves and without reduction for any debt relating to such assets, at the date of measurement, except that during such periods in which we are obtaining regular independent valuations of the current value of our assets for purposes of enabling fiduciaries of employee benefit plan shareholders to comply with applicable Department of Labor reporting requirements, gross asset value is the greater of (i) the amount determined pursuant to the foregoing or (ii) our assets’ aggregate valuation established by the most recent such valuation report without reduction for depreciation, bad debts or other similar non-cash reserves and without reduction for any debt relating to such assets.
 
(7)   In the event that our common shares become listed and Hartman Management receives the subordinated incentive listing fee, as of the date of listing Hartman Management will no longer be entitled to any participation in net sale proceeds other than accrued and unpaid amounts.
 
(8)   Upon termination of the advisory agreement, Hartman Management may be entitled to a similar fee if Hartman Management would have been entitled to a subordinated participation in net sale proceeds had the portfolio been liquidated (based on independent appraised value of the portfolio) on the date of termination. The subordinated participation in net sale proceeds and the subordinated incentive listing fee to be received by Hartman Management are mutually exclusive of each other. Hartman Management cannot earn both fees.
 
(9)   In order for any broker-dealer to participate in any subordinated participation in net sale proceeds or subordinated incentive listing fee, such broker-dealer must (1) be unaffiliated with us and Hartman Management, (2) continue to be a party to a selected dealer agreement with the dealer manager at the time of the payment of any such fee and (3) have sold a minimum of $1.0 million of our shares. The portion of the subordinated participation in net sales proceeds or subordinated incentive listing fee distributed to the dealer manager will be redistributed to the participating broker-dealers meeting this criteria pro rata based upon the relative value of the total amount of shares sold by each broker-dealer. In no event will the broker-dealers’ portion of the subordinated participation in net sales proceeds or subordinated incentive listing fee, as the case may be, exceed in the aggregate 1.0% of the gross proceeds from this offering. If no broker-dealer qualifies for participation in any subordinated participation in net sales proceeds or subordinated incentive listing fee, then Hartman Management will not distribute any portion of its subordinated participation in net sales proceeds or subordinated incentive listing fee, as the case may be, to the dealer manager.
 
(10)   The market value of our outstanding shares will be calculated based on the average market value of the shares issued and outstanding at listing over the 30 trading days beginning 180 days after the shares are first listed on a stock exchange. Payment of the subordinated incentive listing fee will be made from the net sales proceeds from our assets as we dispose of them. We shall have the option to pay this fee in the form of cash, Shares, a promissory note or any combination of the foregoing.

      Our independent trustees will determine, from time to time but at least annually, that our total fees and expenses are reasonable in light of our investment performance, net assets, net income and the fees and expenses of other comparable unaffiliated REITs. Each such determination will be reflected in the minutes of our board of trustees. Our independent trustees shall also supervise the performance of our advisor and the compensation that we pay to it to determine that the provisions of our advisory agreement are being carried out. Each such determination will be recorded in the minutes of our board of trustees and based on the factors set forth below and other factors that the independent trustees deem relevant:

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  the size of the advisory fee in relation to the size, composition and profitability of our portfolio;

  the success of Hartman Management in generating opportunities that meet our investment objectives;

  the rates charged to other REITs, especially similarly structured REITs, and to investors other than REITs by advisors performing similar services;

  additional revenues realized by Hartman Management through their relationship with us;

  the quality and extent of service and advice furnished by Hartman Management;

  the performance of our investment portfolio, including income, conservation or appreciation of capital, frequency of problem investments and competence in dealing with distress situations; and

  the quality of our portfolio in relationship to the investments generated by Hartman Management for the account of other clients.

      Because Hartman Management and its affiliates are entitled to differing levels of compensation for undertaking different transactions on our behalf such as the property management fees for operating our properties and the subordinated participation in net sale proceeds, our advisor has the ability to affect the nature of the compensation it receives by undertaking different transactions. However, Hartman Management is obligated to exercise good faith and integrity in all its dealings with respect to our affairs pursuant to the advisory agreement. See “– The Advisory Agreement” section above. Because these fees or expenses are payable only with respect to certain transactions or services, they may not be recovered by Hartman Management or its affiliates by reclassifying them under a different category.

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OWNERSHIP OF SHARES

      The following table shows, as of November 30, 2003, the amount of our common shares beneficially owned (unless otherwise indicated) by (1) any person who is known by us to be the beneficial owner of more than 5.0% of the outstanding shares of common shares, (2) our trustees, (3) our executive officers, and (4) all of our trustees and executive officers as a group. The table also shows this ownership information assuming all outstanding OP Units are converted into our common shares. The table does not give effect to our reorganization as a Maryland real estate investment trust and our concurrent recapitalization, which we expect to occur immediately prior to the commencement of this offering. See “Management – General Information About Us” for a more detailed discussion of our reorganization and recapitalization.

      As of November 30, 2003, we had 4,907,107.16 common shares outstanding. After this offering, assuming all 10,000,000 shares offered by this prospectus to the public and all 1,000,000 shares offered under our dividend reinvestment plan are sold,              common shares will be outstanding, without taking into consideration our recapitalization and assuming no other shares are issued during this offering. As of November 30, 2003, there were also 8,719,905.55 OP Units outstanding (of which 4,654,065.51 were owned by us), each convertible into our common shares on a one-for-one basis. After our recapitalization, OP Units will continue to be exchangeable for our common shares on a one-for-one basis.

                                                 
    Number of                   Percent Assuming
    Shares Beneficially Owned (1)   Percent Prior to the Offering   Completion of the Offering (2)
   
 
 
            Assuming           Assuming           Assuming
Name of           Conversion           Conversion           Conversion
Beneficial Owner (3)   Actual   of OP Units   Actual   of OP Units   Actual   of All OP Units

 
 
 
 
 
 
Allen R. Hartman (4)(5)
    165,224.27       1,766,732.32       3.37 %     27.14 %     %       %  
Robert W. Engel
                                       
Samuel C. Hathorn
    37,578.29       80,380.88       *       1.62                  
Jack L. Mahaffey
    47,949.70       70,309.60       *       1.43                  
Chris A. Minton
    28,949.75       50,111.32       *       1.02                  
Chand Vyas
    100,000.00       100,000.00       2.04       2.04                  
All trustees and executive officers as a group (6 persons)
    379,702.01       2,067,534.12       7.74       31.35                  


*   Less than 1%.
 
(1)   Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission that deem shares to be beneficially owned by any person or group who has or shares voting and investment power with respect to such shares. Actual amounts do not take into account OP Units held by the named person which are exchangeable for our common shares. Percentage ownership assuming conversion of OP Units assumes only the named person has converted his OP Units for our shares and does not take into effect any conversion by any other person.
 
(2)   Assumes the shareholders listed do not purchase any shares in this offering.
 
(3)   Each person listed has an address in care of Hartman Commercial Properties REIT, 1450 West Sam Houston Parkway North, Suite 100, Houston, Texas 77043.
 
(4)   Includes shares and OP Units held by Hartman Partnership, Inc. (118,855.00 shares and 342,429.52 OP Units), Hartman Partnership XII, Inc. (49,418.39 OP Units) and Hartman Partnership XV, LLC (33.00 OP Units), each of which is controlled by Mr. Hartman.
 
(5)   Includes 861,976.37 OP Units owned by Houston R.E. Income Properties XIV, LP. Mr. Hartman does not own any limited partner interests in this partnership. However, Mr. Hartman owns 100% of the equity of the general partner of this partnership. As a result, Mr. Hartman may be deemed to be the beneficial owner of the securities held by this partnership. Therefore, the number of OP Units reported herein as beneficially owned by Mr. Hartman includes the 861,976.37 OP Units owned by Houston R.E. Income Properties XIV, LP. Consequently, for purposes of this table, Mr. Hartman is deemed to beneficially own the 861,976.37 common shares into which these OP Units are convertible. Mr. Hartman disclaims beneficial ownership of these OP Units and, for the purposes of this table, all common shares into which such OP Units are convertible.

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CONFLICTS OF INTEREST

      We are subject to various conflicts of interest arising out of our relationship with Hartman Management, our advisor, and its affiliates, including conflicts related to the arrangements pursuant to which Hartman Management and its affiliates will be compensated by us. Some of the conflicts of interest in our transactions with our advisor and its affiliates, and the corporate governance measures we adopted to address these conflicts, are described below.

Interests in Other Real Estate Programs

      Hartman Management and its partners, officers, employees or affiliates are advisors or general partners of other Hartman programs, including partnerships that have investment objectives similar to ours, and we expect that they will organize other such programs in the future. Hartman Management and such officers, employees or affiliates have legal and financial obligations with respect to these programs that are similar to their obligations to us.

      As described in the “Prior Performance Summary,” Allen R. Hartman and his affiliates have sponsored other privately offered real estate programs with substantially similar investment objectives as ours, and which are still operating and may acquire additional properties in the future. Conflicts of interest may arise between these entities and us.

      Mr. Hartman or his affiliates may acquire, for their own account or for private placement, properties that Mr. Hartman deems not suitable for purchase by us, whether because of the greater degree of risk, the complexity of structuring inherent in such transactions, financing considerations or for other reasons, including properties with potential for attractive investment returns.

Property Acquisitions From Entities Controlled by Mr. Hartman

      The following table compares the price we paid for all properties we acquired from affiliates of Mr. Hartman and the original purchase price paid by the applicable seller.

                             
                        Purchase Price
        Year Prior Owner   Purchase Price   Paid by
Property   Name of Prior Owner Acquired Property Paid by Us (1)   Prior Owner

 


 
Holly Knight (2)   Holly Knight Plaza, Ltd.  
1984

  $
1,612,801

  $
1,399,141

Bissonnet/Beltway   Bissonnet/Beltway Plaza, Ltd.  
1987

 
2,361,323

 
1,694,502

Interstate 10   Interstate 10 Office/Warehouse, Ltd.  
1986

 
3,908,072

 
2,315,000

Kempwood Plaza   Kempwood Plaza, Ltd.  
1986

 
2,531,876

 
2,900,000

Westbelt Plaza   Westbelt Plaza, Ltd.  
1988

 
2,733,009

 
1,025,000

Greens Road   Houston R.E. Income Properties, Ltd.  
1990

 
1,637,217

 
703,950

Town Park   Houston R.E. Income Properties, Ltd.  
1990

 
3,760,735

 
905,100

Bellnot Square   Houston R.E. Income Properties VIII, Ltd.  
1990

 
5,792,294

 
4,100,000

Corporate Park
Northwest
  Houston R.E. Income Property IX, Ltd.  
1992

 
7,839,539

 
4,100,000

Webster Point   Houston R.E. Income Properties X, Ltd.  
1992

 
1,870,365

 
800,000

Centre South   Houston R.E. Income Properties X, Ltd.  
1993

 
2,077,198

 
600,000

Torrey Square   Houston R.E. Income Properties X, Ltd.  
1994

 
4,952,317

 
3,000,000

Main Park   Houston R.E. Income Properties XI, Ltd.  
1994

 
4,048,837

 
1,950,000

Dairy Ashford   Houston R.E. Income Properties XI, Ltd.  
1994

 
1,437,020

 
700,000

Westgate   Houston R.E. Income Properties XI, Ltd.  
1994

 
3,448,182

 
1,450,000

Northeast Square   Houston R.E. Income Properties XI, Ltd.  
1995

 
2,572,512

 
1,450,000

Plaza Park   Houston R.E. Income Properties XII, L.P.  
1995

 
4,195,116

 
1,550,000

Northwest Place II   Houston R.E. Income Properties XII, L.P.  
1996

 
1,089,344

 
850,000

Lion Square   Houston R.E. Income Properties XII, L.P.  
1997

 
5,835,108

 
4,250,000

Zeta Building (3)   Houston R.E. Income Properties XII, L.P.  
1997

 
2,456,589

 


Royal Crest (3)   Houston R.E. Income Properties XII, L.P.  
1997

 
1,864,065

 


Featherwood (3)   Houston R.E. Income Properties XII, L.P.  
1997

 
2,959,309

 


Garden Oaks   Houston R.E. Income Properties XIV, Ltd.  
1997

 
6,577,782

 
4,150,000

Westchase   Houston R.E. Income Properties XIV, Ltd.  
1998

 
2,173,300

 
1,400,000

Sunridge   Houston R.E. Income Properties XIV, Ltd.  
1998

 
1,461,571

 
2,228,750

Holly Hall   Houston R.E. Income Properties XIV, Ltd.  
1998

 
3,123,400

 
1,590,000

Brookhill   Houston R.E. Income Properties XIV, Ltd.  
1998

 
973,264

 
970,000

Corporate Park West (4)   Houston R.E. Income Properties XV, Ltd.  
1998

 
13,062,980

 
10,856,517

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(1)   We paid for these properties using common shares or Operating Partnership units unless otherwise noted.
 
(2)   Purchased with cash.
 
(3)   Houston R.E. Income Properties XII, L.P. purchased the Featherwood, Zeta and Royal Crest office buildings from a single seller for an aggregate purchase price of $6,950,000.
 
(4)   This property was developed by Houston R.E. Income Properties XV, Ltd. Total construction costs were $8,889,544, plus $1,966,973 in organizational and offering costs.

      Several steps are followed in valuing properties acquired from affiliated entities. Projections of future income and capital requirements are made for the properties. Then a market capitalization rate is selected based on various risk factors of the properties, including age, location, quality of construction and the quality of tenants. The projected income is capitalized at this rate for a preliminary value. Then the projected cost of capital improvements and leasing commissions necessary to achieve the projected income are subtracted from the preliminary value to arrive at the final value. The assumptions used in the income projections, selection of capitalization rate, and projections of capital costs are by Mr. Hartman and the financial staff and are carefully reviewed by outside real estate and accounting consultants, the board of trustees and real estate appraisers.

      The following properties were acquired by affiliates of Mr. Hartman within five years of being sold to us. The depreciation claimed by the affiliates for federal income tax purposes was as follows:

                 
    Date Through Which   Depreciation
Property   Depreciation Claimed   Claimed

 
 
Main Park
    12/31/98     $ 242,297  
Dairy Ashford
    12/31/98       76,841  
Northeast Square
    12/31/98       115,045  
Plaza Park
    12/31/99       175,556  
Northwest Place II
    12/31/99       89,584  
Lion Square
    12/31/99       363,076  
Zeta Building
    12/31/99       115,915  
Royal Crest
    12/31/99       97,795  
Featherwood
    12/31/99       206,525  
Garden Oaks
    12/31/01       481,624  
Westchase
    12/31/01       117,884  
Sunridge
    12/31/01       193,231  
Holly Hall
    12/31/01       92,130  
Brookhill
    12/31/01       88,038  
Corporate Park West
    12/31/01       970,298  

      We acquired the properties listed above as the result of consolidating several individual programs managed by Hartman Management into us. Many of these properties were acquired as the result of mergers or the contribution of properties to us. Mr. Hartman received certain benefits from these transactions. Mr. Hartman had interests that differed from, and may in certain cases have conflicted with, the interests of persons acquiring partnership units or common shares in the transactions. The benefits Mr. Hartman received might have been different if he had not participated in structuring the transactions. These benefits include the following:

  the receipt of 627,982.66 OP Units in consideration of Mr. Hartman’s general partner interest in the selling entities;

  the ability to limit his future exposure to general partner liability as a result of Mr. Hartman no longer serving as the general partner to certain of the entities; and

  the repayment of debt encumbering various of our properties which was personally guaranteed by Mr. Hartman.

      Further, Mr. Hartman (neither personally nor in his capacity as a general partner when applicable) made no representations or warranties in regard to the properties or the merged entities in the operative documents executed in order to

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consummate the consolidations. Consequently, Hartman OP essentially acquired the properties on an “as is” basis. Therefore, we will bear the risk associated with any characteristics or deficiencies of our properties unknown at the closing of the acquisitions that may affect the valuation or revenue potential of the properties.

Certain Relationships and Related Transactions

      In January 1999, we entered into a property management agreement with Hartman Management. In consideration for supervising the management and performing various day-to-day affairs, we pay Hartman Management a management fee of 5.0% and a partnership management fee of 1.0% based on effective gross revenues from the properties as defined in the agreement. We incurred total management and partnership fees of $939,336 for the nine months ended September 30, 2003. Such fees totaling $100,726 were payable at September 30, 2003. Contemporaneously with the effectiveness of this offering, this agreement will be replaced by the Amended and Restated Property Management Agreement described elsewhere in this prospectus.

      Under the provisions of the current property management agreement, costs incurred by Hartman Management for the management and maintenance of the properties are reimbursable to Hartman Management. At September 30, 2003, $284,990 was payable to Hartman Management related to these reimbursable costs.

      In consideration of managing and leasing the properties, we also pay Hartman Management leasing commissions of 6.0% for leases originated by Hartman Management and 4.0% for expansions and renewals of existing leases based on effective gross revenues from the Properties. We incurred total leasing commissions to Hartman Management of $713,586 for the nine months ended September 30, 2003. At September 30, 2003, $180,443 was payable to Hartman Management relating to leasing commissions.

      Hartman Management paid us $61,936 for office space during the nine months ended September 30, 2003. Such amounts are included in rental income in the consolidated statements of income.

      In conjunction with the acquisition of certain properties, we assumed liabilities payable to Hartman Management. At September 30, 2003 and December 31, 2002, $200,415 was payable to Hartman Management related to these liabilities.

       Relationships and Related Transactions with Mr. Hartman

      Hartman Management, L.P., our advisor, is primarily responsible for managing our day-to-day business affairs and assets and carrying out the directives of our board of trustees. Hartman Management, L.P. is wholly owned by Mr. Hartman.

      Before the commencement of this offering of our common shares of beneficial interest, Mr. Hartman received 126,000 of our common shares of beneficial interest for services he provided in connection with our formation and initial capitalization.

      As of December 16, 2003, we had acquired a total of 33 properties. We acquired 28 of those 33 properties from entities controlled by Mr. Hartman. We acquired these properties by either paying cash, issuing our shares or issuing OP Units. In total, Mr. Hartman received the following as a result of such transactions:

  627,982.66 OP Units in consideration of Mr. Hartman’s general partner interest in the selling entities;

  the ability to limit his future exposure to general partner liability as a result of Mr. Hartman no longer serving as the general partner to certain of the selling entities; and

  the repayment of debt encumbering various of our properties which was personally guaranteed by Mr. Hartman.

      We owed $41,306 in dividends payable to Mr. Hartman on his common shares at September 30, 2003 and December 31, 2002, respectively. Mr. Hartman owned 3.4% of our issued and outstanding common shares as of September 30, 2003 and December 31, 2002, respectively.

       Private Placement

      We sold common shares of beneficial interest between May 1999 and December 2000 in a private placement. As a result of this private placement, we received subscriptions to purchase 2,481,745 common shares at a price of $10 per share,

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resulting in aggregate proceeds of $24,817,451. Although we closed this offering in December 2000, we received approximately $7,454,000 in gross proceeds in 2001 and approximately $169,000 in gross proceeds in 2002 in accordance with subscription agreements executed prior to December 2000.

      After accounting for volume discounts offered to investors, we paid $438,027 to the Management Company for advisory and management services provided in connection with the private placement and for the reimbursement of offering and organizational fees and expenses paid by the Management Company on our behalf. We also paid the Management Company 4.0% of the gross proceeds we received from the private placement, resulting in aggregate payments of $992,698. In addition, we transferred $23,546,034 of net proceeds to Hartman OP as capital contributions and received an aggregate of 2,354,603.4 OP Units in exchange therefor.

       Advisory Agreement

      We entered into a property and partnership management agreement with Hartman Management in January 1999. That agreement was replaced by the Property Management Agreement in              2004. Pursuant to the Property Management Agreement, we appointed Hartman Management to manage, operate, direct and supervise all of the properties we own from time to time. In connection with the Management Agreement, we will pay Hartman Management up to 2.5% of the gross offering proceeds of this offering. In addition, we will pay Hartman Management up to 2.0% of the gross offering proceeds of this offering for services in connection with the selection, purchase, development or construction of real property. Hartman Management will pay our organization and offering expenses (excluding selling commissions and the dealer manager fee).

      Furthermore, pursuant to the Management Agreement, we will pay Hartman Management an annual fee of 0.25% of the gross asset value of our real estate portfolio. The fee is payable quarterly in an amount equal to 0.0625% of the gross asset value as of the last day of the immediately preceding quarter.

       Property Management

      For the management and leasing of our properties, pursuant to the Management Agreement, we will pay Hartman Management, our property manager, property management and leasing fees equal to what other management companies generally charge for the management and leasing of similar properties in the applicable geographic location of such properties (i.e., generally 2.0 to 4.0% of gross revenues for commercial office buildings and 5.0% of gross revenues for retail and industrial properties), which may include reimbursement of the costs and expenses Hartman Management incurs in managing the properties. Reimbursable costs and expenses include wages and salaries and other expenses of employees engaged in operating, managing, maintaining and leasing the properties. In addition, we may pay Hartman Management a separate one-time fee for the initial leasing of newly constructed properties in an amount equal to one-month’s rent.

       Partnership Management

      Pursuant to the Management Agreement, we will pay the Management Company 1.0% of our effective gross revenues for the day-to-day operations of Hartman OP and for providing general administrative services for us.

Competition in Acquiring Properties

      Conflicts of interest will exist to the extent that we may acquire properties in the same geographic areas where properties owned by other Hartman programs are located. In such a case, a conflict could arise in the leasing of properties in the event that we and another Hartman program were to compete for the same tenants in negotiating leases, or a conflict could arise in connection with the resale of properties in the event that we and another Hartman program were to attempt to sell similar properties at the same time. Conflicts of interest may also exist at such time as we or our affiliates managing property on our behalf seek to employ developers, contractors or building managers as well as under other circumstances. Hartman Management will seek to reduce conflicts relating to the employment of developers, contractors or building managers by making prospective employees aware of all such properties seeking to employ such persons. In addition, Hartman Management will seek to reduce conflicts that may arise with respect to properties available for sale or rent by making prospective purchasers or tenants aware of all such properties. However, these conflicts cannot be fully avoided in that there

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may be established differing compensation arrangements for employees at different properties or differing terms for resales or leasing of the various properties.

Affiliated Dealer Manager

      Because              , our dealer manager, is an affiliate of Hartman Management, we will not have the benefit of an independent due diligence review and investigation of the type normally performed by an unaffiliated, independent underwriter in connection with the offering of securities. See “Plan of Distribution.”

Affiliated Property Manager

      We anticipate that properties we acquire will be managed and leased by Hartman Management, our affiliated property manager. Our agreement with Hartman Management has a three-year term, which we can terminate only in the event of gross negligence or willful misconduct on the part of Hartman Management. We expect Hartman Management to also serve as property manager for properties owned by affiliated real estate programs, some of which may be in competition with our properties. Management fees to be paid to our property manager are based on a percentage of the rental income received by the managed properties. For a more detailed discussion of the anticipated fees to be paid for property management services, see “Management — The Property Management Agreement.”

Lack of Separate Representation

      Morris, Manning & Martin, LLP acts as counsel to us, Hartman Management,              and their affiliates in connection with this offering and may in the future act as counsel to us, Hartman Management,              and their affiliates. There is a possibility that in the future the interests of the various parties may become adverse, and under the Code of Professional Responsibility of the legal profession, Morris, Manning & Martin, LLP may be precluded from representing any one or all of such parties. In the event that a dispute were to arise between us, Hartman Management,              or any of their affiliates, separate counsel for such matters will be retained as and when appropriate.

Joint Ventures with Affiliates of Hartman Management

      We may determine to enter into joint ventures with other Hartman programs (as well as other parties) for the acquisition, development or improvement of properties. See “Investment Objectives and Criteria – Joint Venture Investments.” Hartman Management and its affiliates may have conflicts of interest in determining which Hartman program should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals which are or which may become inconsistent with our business interests or goals. In addition, should any such joint venture be consummated, Hartman Management may face a conflict in structuring the terms of the relationship between our interests and the interest of the co-venturer and in managing the joint venture. Since Hartman Management and its affiliates will control both us and any affiliated co-venturer, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers.

Receipt of Fees and Other Compensation by Hartman Management and Its Affiliates

      A transaction involving the purchase and sale of properties may result in the receipt of commissions, fees and other compensation by Hartman Management and its affiliates, including acquisition fees, the dealer manager fee, property management and leasing fees, real estate brokerage commissions, and participation in nonliquidating net sale proceeds. However, the fees and compensation payable to Hartman Management and its affiliates relating to the sale of properties are only payable after the return to the shareholders of their capital contributions plus cumulative returns on such capital. Subject to oversight by our board of trustees, Hartman Management has considerable discretion with respect to all decisions relating to the terms and timing of all transactions. Therefore, Hartman Management may have conflicts of interest concerning certain actions taken on our behalf, particularly due to the fact that such fees will generally be payable to Hartman Management and its affiliates regardless of the quality of the properties acquired or the services provided to us. See “Management Compensation.”

      Every transaction that we enter into with Hartman Management or its affiliates is subject to an inherent conflict of interest. Our board of trustees may encounter conflicts of interest in enforcing our rights against any affiliate in the event of a default by or disagreement with an affiliate or in invoking powers, rights or options pursuant to any agreement between us and

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Hartman Management or any of its affiliates. A majority of the independent trustees who are otherwise disinterested in the transaction must approve each transaction between us and Hartman Management or any of its affiliates as being fair and reasonable to us and on terms and conditions no less favorable to us than those available from unaffiliated third parties.

No Arm’s-Length Agreements

      All agreements, contracts or arrangements between or among Mr. Hartman and his affiliates, including Hartman Management, and us were not negotiated at arm’s-length. Such agreements include the Management Agreement, our Declaration of Trust, Hartman OP’s partnership agreement, and various agreements involved in our acquisition of properties acquired from Mr. Hartman or his affiliates. The policies with respect to conflicts of interest described herein were designed to lessen the potential conflicts that arise from such relationships. All conflict of interest transactions must also be approved by the Conflicts Committee of our board of trustees in the future. Please see “Investment Objectives and Criteria — Affiliate Transaction Policy.”

Indebtedness of Management

      The following is a list of the persons who are affiliated with us and have been indebted to us in excess of $60,000 at any time since our inception, as well as a brief description of the loans made by us to each person listed below.

                 
Debt Payable by Affiliated Entity   Balance   As of   Description

 
 
 
Hartman Management, L.P.  
$519,847

  12/31/99   Accrued fees arising in normal course of business
Hartman Management, L.P.  
527,498

  12/31/00   Accrued fees arising in normal course of business
Allen R. Hartman  
148,536

  12/31/00   Balance of purchase price of Holly Knight; repaid 1/1/01
Hartman Management, L.P.  
129,583

  12/31/00   Demand loan, 8% interest only, assumed on purchase of Holly Knight; repaid 1/1/01
Hartman Management, L.P.  
478,302

  12/31/01   Accrued fees arising in normal course of business
Hartman Management, L.P.  
536,799

  12/31/02   Accrued fees arising in normal course of business
                 
Debt Receivable by Affiliated Entity   Balance   As of   Description

 
 
 
Houston R.E. Income Properties XI, Ltd.  
$361,547

  12/31/99   Intercompany balance resulting from partial merger of properties; repaid 1/1/02
Houston R.E. Income Properties XI, Ltd.  
194,445

  12/31/00   Intercompany balance resulting from partial merger of properties; repaid 1/1/02
Houston R.E. Income Properties XI, Ltd.  
194,446

  12/31/01   Intercompany balance resulting from partial merger of properties; repaid 1/1/02
Houston R.E. Income Properties XIV, Ltd.  
780,000

  12/31/01   Demand loan made in Dec. 2001 at 8% interest only; repaid in January 2002
Houston R.E. Income Properties XVI, Ltd.  
2,626,269

  12/31/02   Advance made in anticipation of merger to pay off its allocated portion of bank loan

Additional Conflicts of Interest

      We will potentially be in conflict of interest positions with Mr. Hartman and Hartman Management as to various other matters in our day-to-day operations, including matters related to the:

  computation of fees and/or reimbursements under Hartman OP’s partnership agreement and the management agreement;

  enforcement of the management agreement;

  termination of the management agreement;

  order and priority in which we pay the obligations of Hartman OP, including amounts guaranteed by or due to Mr. Hartman or his affiliates;

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  order and priority in which we pay amounts owed to third parties as opposed to amounts owed to Hartman Management;

  timing, amount and manner in which we refinance any indebtedness; and

  extent to which we repay or refinance the indebtedness which is recourse to Mr. Hartman prior to nonrecourse indebtedness and the terms of any such refinancing.

Certain Conflict Resolution Procedures

       Conflicts Committee

      In order to reduce or eliminate certain potential conflicts of interest, we have created a conflicts committee of our board of trustees comprised of all of our independent trustees. Serving on the board or, or owning an interest in, the company will not, by itself, preclude a trustee from serving on the conflicts committee. The conflicts committee is empowered to act on any matter permitted under Maryland law, provided that it first determine that the matter at issue is such that the exercise of independent judgment by Hartman Management affiliates could reasonably be compromised. Those conflict of interest matters that we cannot delegate to a committee under Maryland law must be acted upon by both the board of trustees and the conflicts committee. Among the matters we expect the conflicts committee to act upon are:

  the continuation, renewal or enforcement of our agreements with Hartman Management and its affiliates, including the advisory agreement and the dealer manager agreement;

  public offering of securities;

  property sales;

  property acquisitions;

  transactions with affiliates;

  compensation of our officers and trustees who are affiliated with our advisors;

  whether and when we seek to list our common shares on a national securities exchange or the Nasdaq National Market; and

  whether and when we seek to sell the company or its assets.

       Other Charter Provisions Relating to Conflicts of Interest

      In addition to the creation of the conflicts committee, our charter contains many other restrictions relating to (1) transactions we enter into with Hartman Management and its affiliates, (2) certain future offerings, and (3) allocation of investment opportunities among affiliated entities. These restrictions include, among others, the following:

  We will not purchase or lease properties in which Hartman Management, any of our trustees or any of their respective affiliates has an interest without a determination by a majority of the trustees, including a majority of the independent trustees, not otherwise interested in such transaction that such transaction is fair and reasonable to us and at a price to us no greater than the cost of the property to the seller or lessor unless there is substantial justification for any amount that exceeds such cost and such excess amount is determined to be reasonable. In no event will we acquire any such property at an amount in excess of its appraised value. We will not sell or lease properties to Hartman Management, any of our trustees or any of their respective affiliates unless a majority of the trustees, including a majority of the independent trustees, not otherwise interested in the transaction, determines the transaction is fair and reasonable to us.

  We will not make any loans to Hartman Management, any of our trustees or any of their respective affiliates, except that we may make or invest in mortgage loans involving Hartman Management, our trustees or their respective affiliates, provided that an appraisal of the underlying property is obtained from an independent appraiser and the transaction is approved as fair and reasonable to us and on terms no less favorable to us than those available from third parties. In addition, Hartman Management, any of our trustees and any of their respective affiliates will not make loans to us or to joint ventures in which we are a joint venture partner unless approved by a majority of the trustees, including a majority of the independent trustees, not otherwise interested

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    in the transaction as fair, competitive and commercially reasonable, and no less favorable to us than comparable loans between unaffiliated parties.

  Hartman Management and its affiliates shall be entitled to reimbursement, at cost, for actual expenses incurred by them on behalf of us or joint ventures in which we are a joint venture partner, subject to the limitation that for any year in which we qualify as a REIT, Hartman Management must reimburse us for the amount, if any, by which our total operating expenses, including the asset management fee, paid during the previous fiscal year exceeds the greater of: (i) 2.0% of our average invested assets for that fiscal year, or (ii) 25.0% of our net income, before any additions to reserves for depreciation, bad debts or other similar non-cash reserves and before any gain from the sale of our assets, for that fiscal year.

  In the event that an investment opportunity becomes available that is suitable, under all of the factors considered by Hartman Management, for both us and one or more other entities affiliated with Hartman Management and its affiliates, and for which more than one of such entities has sufficient uninvested funds, then the entity that has had the longest period of time elapse since it was offered an investment opportunity will first be offered such investment opportunity. It shall be the duty of our board of trustees, including the independent trustees, to insure that this method is applied fairly to us. In determining whether or not an investment opportunity is suitable for more than one program, Hartman Management, subject to approval by our board of trustees, shall examine, among others, the following factors:

 
- the anticipated cash flow of the property to be acquired and the cash requirements of each program;
 
- the effect of the acquisition both on diversification of each program’s investments by type of property and geographic area and on diversification of the tenants of its properties;
 
- the policy of each program relating to leverage of properties;
 
- the income tax effects of the purchase to each program;
 
- the size of the investment; and
 
- the amount of funds available to each program and the length of time such funds have been available for investment

  If a subsequent development, such as a delay in the closing of a property or a delay in the construction of a property, causes any such investment, in the opinion of our board of trustees and Hartman Management, to be more appropriate for a program other than the program that committed to make the investment, Hartman Management may determine that another program affiliated with Hartman Management or its affiliates will make the investment. Our board of trustees has a duty to ensure that the method used by Hartman Management for the allocation of the acquisition of properties by two or more affiliated programs seeking to acquire similar types of properties is applied fairly to us.

  We will not accept goods or services from Hartman Management or its affiliates or enter into any other transaction with Hartman Management or its affiliates unless a majority of our trustees, including a majority of the independent trustees, not otherwise interested in the transaction approve such transaction as fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.

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INVESTMENT OBJECTIVES AND CRITERIA

      The following is a discussion of our current policies with respect to investments, borrowing, affiliate transactions, equity capital and certain other activities. All of these policies have been established in our governance documents or by our management and may be amended or revised from time to time (and at any time) by our management or trustees without a vote or the approval of our shareholders. Any change to these policies would be made, however, only after a review and analysis of such change, in light of then existing business and other circumstances, and then only if we believe that it is advisable to do so in the best interest of our shareholders. We cannot assure you that our policies or investment objectives will be attained or that the value of our common shares will not decrease.

General

      We invest in commercial real estate properties, primarily neighborhood retail centers and office and industrial properties. Our primary business and investment objectives are:

  to maximize cash dividends paid to our shareholders;

  to continue to qualify as a REIT for federal income tax purposes;

  to obtain and preserve long-term capital appreciation in the value of our properties to be realized upon our ultimate sale of such properties; and

  to provide our shareholders with liquidity for their investment in us by listing our shares on a national securities exchange within three to twelve years after the completion of this offering.

      In addition, to the extent that our advisor determines that it is advantageous to make or invest in mortgage loans, we will also seek to obtain fixed income through the receipt of payments on mortgage loans. Our management intends to limit such mortgage investments to 15.0% of our total investment portfolio unless our management determines that prevailing economic or portfolio circumstances require otherwise. We cannot assure you that we will attain these objectives or that our capital will not decrease. Pursuant to our advisory agreement, our advisor will be indemnified for claims relating to any failure to succeed in achieving these objectives, including for any reason and as identified in the description of risks of our business set forth herein. See “Risk Factors.”

      We may not materially change our investment objectives, except upon approval of shareholders holding a majority of the shares. Our independent trustees will review our investment objectives at least annually to determine that our policies are in the best interests of our shareholders. Each such determination will be set forth in the minutes of our board of trustees.

      Decisions relating to the purchase or sale of our investments will be made by Hartman Management, as our advisor, subject to approval by our board of trustees, including a majority of our independent trustees. See “Management” for a description of the background and experience of the trustees and executive officers.

Acquisition and Investment Policies

      We intend to continue to acquire community retail centers and office and industrial properties for long-term ownership and for the purpose of producing income. These are properties that generally have premier business addresses in especially desirable locations. Such properties generally are of high quality construction, offer personalized tenant amenities and attract higher quality tenants. We intend to hold our properties seven to ten years from the termination of this offering, which we believe is the optimal period to enable us to capitalize on the potential for increased income and capital appreciation of our properties. However, economic or market conditions may influence us to hold our investments for different periods of time. Also, it is our management’s belief that targeting this type of property for investment will enhance our ability to enter into joint ventures with other institutional real property investors (such as pension funds, public REITs and other large institutional real estate investors), thus allowing greater diversity of investment by increasing the number of properties in which we invest. Our management also believes that a portfolio consisting of a preponderance of this type of property enhances our liquidity opportunities for investors by making the sale of individual properties, multiple properties or our investment portfolio as a whole attractive to institutional investors and by making a possible listing of our shares attractive to the public investment community.

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      We acquire assets primarily for income. Although we have historically invested in properties that have been constructed and have operating histories, we anticipate that we may become more active in investing in raw land or in properties that are under development or construction. We consider the potential for growth in value as a significant factor in the valuation of income-producing properties and we anticipate that some properties we acquire will both provide cash dividends to shareholders and have the potential for growth in value. To the extent feasible, we will strive to invest in a diversified portfolio of properties, in terms of type of property and industry group of tenants, which will satisfy our investment objectives. We are not specifically limited by our governance documents, our management policies, or the governance documents of Hartman OP in the number or size of properties we may acquire or the percentage of net proceeds of this offering that we may invest in a single property. The number and mix of properties we acquire will depend on real estate and market conditions existing at the time we acquire properties and the amount of proceeds we raise in this offering.

      We will seek to invest in properties that will satisfy our objective of providing cash dividends to our shareholders. However, because a significant factor in the valuation of income-producing real properties is their potential for future appreciation in value, we anticipate that the majority of properties we acquire will have the potential for both capital appreciation and the ability to provide cash dividends to shareholders. To the extent feasible, we will invest in a portfolio of properties that will satisfy our investment objectives of maximizing cash available for payment of dividends, preserving our capital and realizing capital appreciation upon the ultimate sale of our properties.

      Our policy is to continue to acquire properties in the Houston and San Antonio, Texas metropolitan areas where we believe opportunities exist for acceptable investment returns. We acquire assets for income rather than capital gain. We anticipate that we will continue to focus on properties in the $1,000,000 to $10,000,000 value range. We typically lease our properties to a wide variety of tenants on a “triple-net” basis which means that the tenant is responsible for paying the cost of all maintenance and minor repairs, property taxes and insurance relating to its leased space. Our management believes that its extensive experience, market knowledge and network of industry contacts in the Houston and San Antonio metropolitan areas, and the limitation of our investments to this area, gives us a competitive advantage and enhances our ability to identify and capitalize on acquisitions. Although we anticipate that we will continue to focus primarily on acquisition opportunities in Houston and San Antonio, Texas, we are also exploring opportunities in Texas outside of Houston and San Antonio. Specifically, we are exploring the feasibility of acquiring commercial real estate in Dallas, Texas.

      Although, we currently intend to invest in or develop community retail centers and other office and industrial properties in the Houston and San Antonio metropolitan areas, our future investment or redevelopment activities are not limited to any geographic area or to a specified property use. We may invest in any geographic area and we may invest in other commercial properties such as manufacturing facilities, and warehouse and distribution facilities in order to reduce overall portfolio risk, enhance overall portfolio returns, or respond to changes in the real estate market if our advisor determines that it would be advantageous to do so. Further, to the extent that our advisor determines it is in our best interest, due to the state of the real estate market or in order to diversify our investment portfolio or otherwise, we may make or invest in mortgage loans secured by the same types of commercial properties in which we intend to invest. Our management intends to limit such mortgage investments to 15.0% of our total investment portfolio unless our management determines that prevailing economic or portfolio circumstances require otherwise. See “- Terms of Leases and Tenant Creditworthiness” below.

      We anticipate that a minimum of 89.5% of the proceeds from the sale of our shares will be used to invest in real estate properties and other investments, and the balance will be used to pay various fees and expenses. See “Estimated Use of Proceeds.”

      We will not invest more than 10.0% of the net offering proceeds available for investment in properties in unimproved or non-income producing properties or in mortgage loans secured by such properties. If a property is expected to produce income within two years of its acquisition, we will not consider it a non-income producing property.

      Although we are not limited as to the form our investments may take, all of our properties are owned by Hartman OP or a wholly owned subsidiary of Hartman OP in fee simple title. We expect to continue to pursue our investment objectives through the direct ownership of properties. However, in the future, we may also participate with other entities (including non-affiliated entities) in property ownership, through joint ventures, limited liability companies, partnership, co-tenancies or other types of common ownership. See “The Operating Partnership Agreement” and “- Joint Venture Investments” below. We presently have no plans to own any properties jointly with another entity or entities. In addition, we may purchase properties and lease them back to the sellers of such properties. While we will use our best efforts to structure any such sale-leaseback

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transaction such that the lease will be characterized as a “true lease” so that we will be treated as the owner of the property for federal income tax purposes, we cannot assure you that the Internal Revenue Service will not challenge such characterization. In the event that any such sale-leaseback transaction is recharacterized as a financing transaction for federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. See “Federal Income Tax Considerations - Sale-Leaseback Transactions.”

      Successful commercial real estate investment requires the implementation of strategies that permit favorable purchases, effective asset and property management for enhanced current returns and maintenance of higher relative property values, and timely disposition for attractive capital appreciation. Our advisor has developed and uses proprietary modeling tools that our management believes will help it to identify favorable property acquisitions, enable it to forecast growth and make predictions at the time of the acquisition of a property as to optimal portfolio blend, disposition timing and sales price. Using these tools in concert with our overall strategies, including individual market monitoring and ongoing analysis of macro- and micro-regional economic cycles, we expect to be better able to identify favorable acquisition targets, increase current returns and resultant current dividends to investors and maintain higher relative portfolio property values, and execute timely dispositions at appropriate sales prices to enhance capital gains distributable to our investors.

      Hartman Management identifies particular properties as potential acquisitions. Based on the recommendations made by Hartman Management, our trustees decide on whether to make a particular investment. Hartman Management manages our day-to-day operations, including all leasing functions. In making investment decisions for us, Hartman Management will consider relevant real estate property and financial factors, including:

  the location of the property;

  the property’s condition, suitability for the current or proposed use and any refurbishment needs;

  the property’s historical operation and any potential liabilities associated therewith;

  information learned from surveys, environmental reports, title reports and policies and similar materials;

  the property’s income-producing history and capacity;

  the property’s prospects for long-term appreciation;

  the potential liquidity of the property; and

  income tax considerations.

      Our obligation to purchase any property will generally be conditioned upon the delivery and verification of certain documents from the seller or developer, including, where appropriate:

  plans and specifications;

  environmental reports;

  surveys;

  evidence of marketable title subject to such liens and encumbrances as are acceptable to Hartman Management;

  audited financial statements covering recent operations of properties having operating histories; and

  title and liability insurance policies.

      We will not purchase any property unless and until we obtain what is generally referred to as a “Phase I” environmental site assessment and are generally satisfied with the environmental status of the property. A Phase I environmental site assessment basically consists of a visual survey of the building and the property in an attempt to identify areas of potential environmental concerns, visually observing neighboring properties to assess surface conditions or activities that may have an adverse environmental impact on the property, and contacting local governmental agency personnel and performing a regulatory agency file search in an attempt to determine any known environmental concerns in the immediate vicinity of the property. A Phase I environmental site assessment does not generally include any sampling or testing of soil, groundwater or building materials from the property.

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      We may also enter into arrangements with the seller or developer of a property whereby the seller or developer agrees that, if during a stated period the property does not generate a specified cash flow, the seller or developer will pay in cash to us a sum necessary to reach the specified cash flow level, subject in some cases to negotiated dollar limitations.

      In determining whether to purchase a particular property, we may, in accordance with customary practices, obtain an option on such property. The amount paid for an option, if any, is normally surrendered if the property is not purchased and is normally credited against the purchase price if the property is purchased.

      In purchasing, leasing and developing properties, we will be subject to risks generally incident to the ownership of real estate, including:

  changes in general economic or local conditions;

  changes in supply of or demand for similar or competing properties in an area;

  changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;

  changes in tax, real estate, environmental and zoning laws;

  periods of high interest rates and tight money supply that may make the sale of properties more difficult;

  tenant turnover; and

  general overbuilding or excess supply in the market area.

See “Risk Factors – General Risks Related to Investments in Real Estate.”

Development and Construction of Properties

      We may invest substantially all of the net proceeds available for investment in properties on which improvements are to be constructed or completed, although we may not invest in excess of 10.0% of the offering proceeds available for investment in properties that are not expected to produce income within two years of their acquisition or in mortgage loans secured by such properties. To help ensure performance by the builders of properties that are under construction, completion of such properties will be guaranteed either by completion bond or performance bond. Hartman Management will enter into contracts on our behalf with contractors or developers for such construction services on terms and conditions approved by our board of trustees. Hartman Management may rely upon the substantial net worth of the contractor or developer or a personal guarantee accompanied by financial statements showing a substantial net worth provided by an affiliate of the person entering into the construction or development contract as an alternative to a completion bond or performance bond. Development of real estate properties is subject to risks relating to a builder’s ability to control construction costs or to build in conformity with plans, specifications and timetables. See “Risk Factors – General Risks Related to Investments in Real Estate.”

      We may make periodic progress payments or other cash advances to developers and builders of our properties prior to completion of construction only upon receipt of an architect’s certification as to the percentage of the project then-completed and as to the dollar amount of the construction then-completed. We intend to use such additional controls on disbursements to builders and developers as we deem necessary or prudent.

      We may directly employ one or more project managers to plan, supervise and implement the development of any unimproved properties that we may acquire. Such persons would be compensated directly by us.

Affiliate Transaction Policy

      Our bylaws provide that no contract or transaction between:

  us and one or more of our trustees or officers; or

  us and any other real estate investment trust, partnership, association or other organization in which one or more of our trustees or officers are trustees, directors or officers, or have a financial interest;

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will be void or voidable solely for this reason, solely because the trustee or officer is present at or participates in the meeting of the trustee or committee thereof which authorizes the contract or transaction, or solely because his, her, or their votes are counted for such purpose, if:

  the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the trustees or the committee, and the trustees or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested trustees, even though the disinterested trustees constitute less than a quorum;

  the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or

  the contract or transaction is fair to us at the time it is authorized, approved or ratified by the trustees, a committee thereof, or the shareholders.

      Our bylaws also provide that any of our trustees or officers may have business interests and engage in business activities similar (and even competitive) to or in addition to those relating to our business as long as they act in a capacity other than that of our trustee or officer. Further, each of our trustees and officers is not required to present any investment opportunity to us that comes to him or her in any capacity other than acting solely as our trustee, officer or agent, even if we could exploit such opportunity if presented to us. We may place contractual restrictions with any trustee or officer’s business interests or activities, but we currently have no such contracts in place with any trustee or officer. See “Conflicts of Interest — Certain Relationships and Related Transactions.”

      Our board of trustees has established a conflicts committee that will review and approve all matters the board believes may involve a conflict of interest. This committee will be composed solely of independent trustees. Please see “Management — Conflicts Committee.”

Terms of Leases and Tenant Creditworthiness

      The terms and conditions of any lease that we enter into with our tenants may vary substantially from those we describe in this prospectus. However, we expect that a majority of our leases will be office leases customarily used between landlords and tenants in the geographic area where the property is located. Such leases generally provide for terms of three to five years and require the tenant to pay a pro rata share of building expenses. Under such typical leases, the landlord is directly responsible for all real estate taxes, sales and use taxes, special assessments, utilities, insurance and building repairs, and other building operation and management costs.

      We will execute new tenant leases and tenant lease renewals, expansions and extensions with terms that are dictated by the current submarket conditions and the verifiable creditworthiness of each particular tenant. We will use a number of industry credit rating services to determine the creditworthiness of potential tenants and any personal guarantor or corporate guarantor of each potential tenant. The reports produced by these services will be compared to the relevant financial data collected from these parties before consummating a lease transaction. Relevant financial data from potential tenants and guarantors include income statements and balance sheets for the current year and for prior periods, net worth or cash flow statements of guarantors and other information we deem relevant. Our advisor will promulgate leasing guidelines for use by Hartman Management in evaluating prospective tenants and proposed lease terms and conditions. Hartman Management will have the authority to enter into leases of our properties consistent with these guidelines.

      We anticipate that tenant improvements required to be funded by us in connection with newly acquired properties will be funded from our offering proceeds. At such time as one of our tenants does not renew its lease or otherwise vacates its space in one of our buildings, it is likely that, in order to attract new tenants, we will be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. We will fund such tenant improvements either from our offering proceeds or from working capital reserves established for the property for which such improvements are required. See “Risk Factors — General Risks Related to Investments in Real Estate.”

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Joint Venture Investments

      We may determine to enter into joint ventures with affiliated entities for the acquisition, development or improvement of properties for the purpose of diversifying our portfolio of assets. We may also enter into joint ventures, partnerships, co-tenancies and other co-ownership arrangements or participations with real estate developers, owners and other affiliated third parties for the purpose of developing, owning and operating real properties. In determining whether to invest in a particular joint venture, Hartman Management will evaluate the real property that such joint venture owns or is being formed to own under the same criteria described elsewhere in this prospectus for our selection of real property investments. See, generally, the section of this prospectus captioned “Conflicts of Interest” and the other subsections under this section of the prospectus.

      At such time during the term of this offering as Hartman Management believes that a reasonable probability exists that we will enter into a joint venture with an affiliated program for the acquisition or development of a specific property, this prospectus will be supplemented to disclose the terms of such proposed investment transaction. We expect that in connection with the development of a property that is currently owned by an affiliated program, this would normally occur upon the signing of a purchase agreement for the acquisition of a specific property or leases with one or more major tenants for occupancy at a particular property and the satisfaction of all major contingencies contained in such purchase agreement, but may occur before or after any such time, depending upon the particular circumstances surrounding each potential investment. You should not rely upon such initial disclosure of any proposed transaction as an assurance that we will ultimately consummate the proposed transaction or that the information we provide in any supplement to this prospectus concerning any proposed transaction will not change after the date of the supplement.

      We may enter into joint ventures with other affiliated programs for the acquisition of properties provided that:

    a majority of our trustees, including a majority of the independent trustees, approve the transaction as being fair and reasonable to us and on substantially the same terms and conditions as those received by other joint venturers; and

    we will have a right of first refusal to buy if such co-venturer elects to sell its interest in the property held by the joint venture.

      In the event that the co-venturer elects to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal. In the event that any joint venture with an affiliated entity holds interests in more than one property, the interest in each such property may be specially allocated based upon the respective proportion of funds invested by each co-venturer in each such property. Entering into joint ventures with affiliated programs will result in certain conflicts of interest. See “Risk Factors – Risks Related to Conflicts of Interest” and “Conflicts of Interest – Joint Ventures with Affiliates of Hartman Management.”

      We expect that from time to time our advisor will be presented with an opportunity to purchase all or a portion of a mixed-use property. In such instances, it is possible that we would work in concert with other affiliated programs to apportion the assets within the property among us and the other affiliated programs in accordance with the investment objectives of the various programs. After such apportionment, the mixed-use property would be owned by two or more affiliated programs or joint ventures comprised of affiliated programs. The negotiation of how to divide the property among the various affiliated programs will not be arm’s-length and conflicts of interest will arise in the process. It is possible that in connection with the purchase of a mixed-use property or in the course of negotiations with other affiliated programs to allocate portions of such mixed-use property, we may be required to purchase a property that we would otherwise consider inappropriate for our portfolio, in order to also purchase a property that our advisor considers desirable. Although independent appraisals of the assets comprising the mixed-use property will be conducted prior to apportionment, it is possible that we could pay more for an asset in this type of transaction than we would pay in an arm’s-length transaction with an unaffiliated third party.

Making Loans and Investments in Mortgages

      While we intend to emphasize equity real estate investments, we may invest in first or second mortgages or other real estate interests consistent with our REIT status. Such mortgages may or may not be insured or guaranteed by the Federal Housing Administration, the Veterans Administration or another third party. Second mortgages are secured by second deeds of trust on real property which is already subject to prior mortgage indebtedness, in an amount which, when added to the existing indebtedness, does not generally exceed 75.0% of the appraised value of the mortgage property. We may also invest in

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participant or convertible mortgages if our trustees conclude that our shareholders and we may benefit from the cash flow or any appreciation in the value of the subject property. Such mortgages are similar to equity participation. Neither our Declaration of Trust, our bylaws, nor the governance documents of Hartman OP place any limit or restriction on:

    the percentage of our assets that may be invested in any type of mortgage or in any single mortgage; or

    the types of properties subject to mortgages in which we may invest.

      Presently, we have no intention of investing in real estate mortgages. We also have no present intention of originating, servicing or warehousing mortgages.

      We will not make loans to other entities or other persons unless secured by mortgages. We will not make or invest in mortgage loans unless we obtain an appraisal concerning the underlying property from a certified independent appraiser except for mortgage loans insured or guaranteed by a government or government agency. We will maintain each appraisal in our records for at least five years, and will make it available during normal business hours for inspection and duplication by any shareholder at such shareholder’s expense. In addition to the appraisal, we will seek to obtain a customary lender’s title insurance policy or commitment as to the priority of the mortgage or condition of the title.

      We will not make or invest in mortgage loans on any one property if the aggregate amount all mortgage loans outstanding on the property, including our borrowings, would exceed an amount equal to 85.0% of the appraised value of the property, unless we find substantial justification due to the presence of other underwriting criteria. We may find such justification in connection with the purchase of mortgage loans in cases in which we believe there is a high probability of our foreclosure upon the property in order to acquire the underlying assets and in which the cost of the mortgage loan investment does not exceed the appraised value of the underlying property. We may find such justification in connection with the purchase of mortgage loans that are in default where we intend to foreclose upon the property in order to acquire the underlying assets and where the cost of the mortgage loan investment does not exceed the appraised value of the underlying property.

      We may invest in wraparound mortgage loans, construction mortgage loans on real property, and loans on leasehold interest mortgages. We also may invest in participations in mortgage loans. Wraparound mortgage loans are secured by wraparound deeds of trust on real property which is already subject to prior mortgage indebtedness, in an amount which, when added to the existing indebtedness, does not generally exceed 75.0% of the appraised value of the mortgage property. A wraparound loan is one or more junior mortgage loans having a principal amount equal to the outstanding balance under the existing mortgage loan, plus the amount actually to be advanced under the wraparound mortgage loan. Under a wraparound loan, we would generally make principal and interest payments on behalf of the borrower to the holders of the prior mortgage loans. Construction loans are loans made for either original development or renovation of property. Construction loans in which we would generally consider an investment would be secured by first deeds of trust on real property for terms of six months to two years. In addition, if the mortgage property is being developed, the amount of such loans generally will not exceed 75.0% of the post-development appraised value. Loans on leasehold interests are secured by an assignment of the borrower’s leasehold interest in the particular real property. These loans are generally for terms of from six months to 15 years. Leasehold interest loans generally do not exceed 75.0% of the value of the leasehold interest and require personal guaranties of the borrowers. The leasehold interest loans are either amortized over a period that is shorter than the lease term or have a maturity date prior to the date the lease terminates. These loans would generally permit us to cure any default under the lease. Mortgage participation investments are investments in partial interests of mortgages of the type described above that are made and administered by third-party mortgage lenders.

      In evaluating prospective mortgage loan investments, our advisor will consider factors such as the following:

    the ratio of the amount of the investment to the value of the property by which it is secured;

    the property’s potential for capital appreciation;

    expected levels of rental and occupancy rates;

    current and projected cash flow of the property;

    potential for rental increases;

    the degree of liquidity of the investment;

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    geographic location of the property;

    the condition and use of the property;

    the property’s income-producing capacity;

    the quality, experience and creditworthiness of the borrower;

    general economic conditions in the area where the property is located; and

    any other factors that the advisor believes are relevant.

      We may originate loans from mortgage brokers or personal solicitations of suitable borrowers, or may purchase existing loans that were originated by other lenders. Our advisor will evaluate all potential mortgage loan investments to determine if the security for the loan and the loan-to-value ratio meets our investment criteria and objectives. An officer, trustee, agent or employee of our advisor will inspect the property during the loan approval process. We do not expect to make or invest in mortgage loans with a maturity of more than ten years from the date of our investment, and anticipate that most loans will have a term of five years. Most loans which we will consider for investment would provide for monthly payments of interest and some may also provide for principal amortization, although many loans of the nature which we will consider provide for payments of interest only and a payment of principal in full at the end of the loan term. We will not originate loans with negative amortization provisions.

      We do not have any policies directing the portion of our assets that may be invested in construction loans, loans secured by leasehold interests and second and wraparound mortgage loans. However, we recognize that these types of loans are riskier than first deeds of trust or first priority mortgages on income-producing, fee-simple properties, and expect to seek to minimize the amount of these types of loans in our portfolio, to the extent that we make or invest in mortgage loans. Our advisor will evaluate the fact that these types of loans are riskier in determining the rate of interest on the loans. Pursuant to our advisory agreement, our advisor will be responsible for servicing and administering any mortgage loans in which we invest.

      Our mortgage loan investments may be subject to regulation by federal, state and local authorities and subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, including among other things, regulating credit granting activities, establishing maximum interest rates and finance charges, requiring disclosures to customers, governing secured transactions and setting collection, repossession and claims handling procedures and other trade practices. In addition, certain states have enacted legislation requiring the licensing of mortgage bankers or other lenders and these requirements may affect our ability to effectuate our proposed investments in mortgage loans. Commencement of operations in these or other jurisdictions may be dependent upon a finding of our financial responsibility, character and fitness. We may determine not to make mortgage loans in any jurisdiction in which the regulatory authority believes that we have not complied in all material respects with applicable requirements.

Section 1031 Exchange Transactions

      We may form one or more single member limited liability companies or similar entities (each of which is referred to in this prospectus as a Hartman Exchange LLC) for the purpose of facilitating the acquisition of real estate properties to be owned in co-tenancy arrangements with persons, referred to herein as 1031 Participants, who wish to invest the proceeds from a sale of real estate in another real estate investment for purposes of qualifying for like-kind exchange treatment under Section 1031 of the Internal Revenue Code. Under such arrangements, our affiliates would sponsor a series of private placement offerings of interests in limited liability companies or similar entities owning co-tenancy interests in various properties to 1031 Participants.

      Properties acquired by a Hartman Exchange LLC in connection with the Section 1031 Exchange Transactions would be financed by obtaining a new first mortgage secured by the property acquired. In order to finance the remainder of the purchase price for properties to be acquired, a single member Hartman Exchange LLC would obtain a short-term loan from an institutional lender for each property. Following its acquisition of a property, the Hartman Exchange LLC would attempt to sell co-tenancy interests to 1031 Participants, the proceeds of which would be used to pay off the short-term loan. At the closing of each property to be acquired by a Hartman Exchange LLC, Hartman OP would enter into a contractual arrangement, providing that, in the event that the Hartman Exchange LLC is unable to sell all of the co-tenancy interests in that property to 1031 Participants, Hartman OP would purchase, at the Hartman Exchange LLC’s cost, any co-tenancy interests remaining

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unsold. (See “Risk Factors – Risks Associated with Section 1031 Exchange Transactions.”) In addition, under such transactions Hartman OP would enter into one or more additional contractual arrangements obligating it to purchase co-tenancy interests in a particular property directly from the 1031 Participants. In consideration for such obligations, the Hartman Exchange LLC would pay Hartman OP a fee in an amount currently anticipated to range between 1.0% and 1.5% of the amount of the short-term loan obtained by the Hartman Exchange LLC. See “Risk Factors – Federal Income Tax Risks.”

      Our board of trustees, including a majority of our independent trustees, will be required to approve each property acquired pursuant to any Section 1031 Exchange Transaction in the event that Hartman OP has any potential obligation to acquire any interest in the property. Accordingly, the Hartman Exchange LLC would intend to purchase only real estate properties that otherwise meet our investment objectives. Under any such program, Hartman OP would not execute any agreement providing for the potential purchase of the unsold co-tenancy interests from a Hartman Exchange LLC or directly from the 1031 Participants until a majority of our trustees, including a majority of our independent trustees, not otherwise interested in the transaction approve of the transaction as being fair, competitive and commercially reasonable to Hartman OP and at a price to Hartman OP no greater than the cost of the co-tenancy interests to the Hartman Exchange LLC. If the price to Hartman OP is in excess of such cost, our trustees must find substantial justification for such excess and that such excess is reasonable. In addition, under any such program, a fair market value appraisal for each property must be obtained from an independent expert selected by our independent trustees, and in no event would Hartman OP purchase co-tenancy interests at a price that exceeds the current appraised value for the property interests.

      All purchasers of co-tenancy interests, including Hartman OP in the event that it is required to purchase co-tenancy interests, would be required to execute a tenants-in-common agreement with the other purchasers of co-tenancy interests in the property and a property management agreement providing for the property management and leasing of the property by Hartman Management and the payment of property management fees to Hartman Management equal to 2.0 – 5.0% of gross revenues plus leasing commissions based upon the customary fees and commissions applicable to the geographic location of property. Accordingly, in the event that Hartman OP is required to purchase co-tenancy interests pursuant to one or more of these contractual arrangements, we would be subject to various risks associated with co-tenancy arrangements which are not otherwise present in real estate investments, such as the risk that the interests of the 1031 Participants will become adverse to our interests. See “Risk Factors - Risks Associated with Section 1031 Exchange Transactions.”

Borrowing Policies

      All of our current properties are subject to mortgages. These loans are described in the “Description of Real Estate and Operating Data — Financing” section of this prospectus. If we acquire a property for cash in the future, we will most likely fund a portion of the purchase price with debt. By operating and acquiring on a leveraged basis, we will have more funds available for investment in properties. This will allow us to make more investments than would otherwise be possible, resulting in a more diversified portfolio of assets. However, this also subjects us to risks associated with borrowing. For example, our ability to increase our diversification through borrowing could be adversely impacted if banks and other lending institutions reduce the amount of funds available for loans secured by real estate. See “Risk Factors — Risks Related to an Investment In Hartman Commercial Properties REIT — Our use of borrowings to fund acquisitions and improvements on properties could result in foreclosures and unexpected debt service expenses upon refinancing.” When interest rates on mortgage loans are high or financing is otherwise unavailable on a timely basis, we may purchase certain properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time.

      The organizational and governance documents of neither Hartman OP nor us contain any limitations on the amount or percentage of indebtedness we may incur. Further, we do not have a policy limiting the amount of indebtedness we may incur or the amount of mortgages which may be placed on any one piece of property. As a general policy, however, we intend to maintain a ratio of total indebtedness to book value that is less than 50%. As of September 30, 2003, we had an aggregate debt to book value ratio of 34.2%. However, we cannot assure you that we will be able to continue to achieve this objective.

      By operating on a leveraged basis, we expect that we will have more funds available for investment in properties and other investments. This will allow us to make more investments than would otherwise be possible, resulting in a more diversified portfolio. Although we expect our liability for the repayment of indebtedness to be limited to the value of the property securing the liability and the rents or profits derived therefrom, our use of leveraging increases the risk of default on the mortgage payments and a resulting foreclosure of a particular property. See “Risk Factors — General Risks Related to Investments in Real Estate.” To the extent that we do not obtain mortgage loans on our properties, our ability to acquire

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additional properties will be restricted. Hartman Management will use its best efforts to obtain financing on the most favorable terms available to us. Lenders may have recourse to assets not securing the repayment of the indebtedness.

      We may reevaluate and change our debt policy in the future without a shareholder vote. Factors that we would consider when reevaluating or changing our debt policy include then-current economic conditions, the relative cost of debt and equity capital, any acquisition opportunities, the ability of our properties to generate sufficient cash flow to cover debt service requirements and other similar factors. Further, we may increase or decrease our ratio of debt to book value in connection with any change of policy.

      We may incur indebtedness in the form of bank borrowings, purchase money obligations to the sellers of properties, publicly or privately-placed debt instruments or financing from institutional investors or other lenders. This indebtedness may be unsecured or may be secured by mortgages or other interests in our properties, or may be limited to the particular property to which the indebtedness relates. We may use borrowing proceeds to finance acquisitions of new properties, to refinance existing indebtedness, for the payment of dividends, or for working capital.

      Hartman Management will refinance properties during the term of a loan only in limited circumstances, such as when a decline in interest rates makes it beneficial to prepay an existing mortgage, when an existing mortgage matures or if an attractive investment becomes available and the proceeds from the refinancing can be used to purchase such investment. The benefits of the refinancing may include an increased cash flow resulting from reduced debt service requirements, an increase in dividend distributions from proceeds of the refinancing, and an increase in property ownership if refinancing proceeds are reinvested in real estate.

      We may not borrow money from any of our trustees or from Hartman Management and its affiliates unless such loan is approved by a majority of the trustees, including a majority of the independent trustees, not otherwise interested in the transaction as fair, competitive and commercially reasonable and no less favorable to us than a comparable loan between unaffiliated parties.

Disposition Policies

      We intend to hold each property that we acquire for an extended period, and we have no current intention to dispose of any of our properties. However, circumstances may arise that could require the early sale of some properties. A property may be sold before the end of the expected holding period if, in the judgment of Hartman Management, the value of the property might decline substantially, an opportunity has arisen to improve other properties, we can increase cash flow through the disposition of the property, or the sale of the property is in our best interests.

      The determination of whether a particular property should be sold or otherwise disposed of will be made after consideration of relevant factors, including prevailing economic conditions, with a view to achieving maximum capital appreciation. We cannot assure you that this objective will be realized. The selling price of a leased property will be determined in large part by the amount of rent payable by the tenants. See “Federal Income Tax Considerations — Failure to Qualify as a REIT.” The terms of payment will be affected by custom in the area in which the property being sold is located and the then-prevailing economic conditions.

      If our shares are not listed for trading on a national securities exchange or included for quotation on the Nasdaq Stock Market within twelve years of the termination of this offering, unless such date is extended by the majority vote of both our board of trustees and our independent trustees, our charter requires us to begin the sale of all of our properties and distribution to our shareholders of the net sale proceeds resulting from our liquidation. If at any time after twelve years of the termination of this offering we are not in the process of either (i) listing our shares for trading on a national securities exchange or including such shares for quotation on the Nasdaq Stock Market or (ii) liquidating our assets, investors holding a majority of our shares may vote to liquidate us in response to a formal proxy to liquidate. Depending upon then prevailing market conditions, it is our management’s intention to begin to consider the process of listing or liquidation prior to the twelfth anniversary of the termination of this offering. In making the decision to apply for listing of our shares, the trustees will try to determine whether listing our shares or liquidating our assets will result in greater value for our shareholders. The circumstances, if any, under which the trustees will agree to list our shares cannot be determined at this time. Even if our shares are not listed or included for quotation, we are under no obligation to actually sell our portfolio within this period since the precise timing will depend on real estate and financial markets, economic conditions of the areas in which the properties are

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located and federal income tax effects on shareholders that may prevail in the future. Furthermore, we cannot assure you that we will be able to liquidate our assets. We will continue in existence until all properties are sold and our other assets are liquidated.

Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers

      We may acquire securities of entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities. However, all acquisitions of securities of such entities will be subject to the percentage ownership limitations and gross income tests necessary for REIT qualification. We refer you to the “Federal Income Tax Considerations — Requirements for Qualification as a REIT” section of this prospectus for a discussion of these tests. We may acquire all or substantially all of the securities or assets of REITs or similar entities where such investments would be consistent with our investment policies. We anticipate that we will only acquire securities or other interests in issuers engaged in commercial real estate activities involving retail, office or industrial properties. We may also invest in entities owning undeveloped acreage. Neither our Declaration of Trust nor our bylaws place any limit or restriction on the percentage of our assets that may be invested in securities of or interests in other issuers. The governance documents of Hartman OP also do not contain any such restrictions.

      Other than our interest in Hartman OP, we currently do not own any securities of other entities. We do not presently intend to acquire securities of any non-affiliated entities.

Equity Capital

      In the event that our trustees determine to raise additional equity capital, they have the authority, without shareholder approval, to issue additional common shares or preferred shares of beneficial interests. Additionally, our trustees could cause Hartman OP to issue OP Units which are convertible into our common shares. Subject to limitations contained in the organizational and governance documents of Hartman OP and us, the trustees could issue, or cause to be issued, such securities in any manner (and on such terms and for such consideration) they deem appropriate, including in exchange for real estate. We have issued securities in exchange for real estate and we expect to continue to do so in the future. Existing shareholders have no preemptive right to purchase such shares in any offering, and any such offering might cause a dilution of a shareholder’s initial investment.

Other Investments

      We may also invest in limited partnership and other ownership interests in entities that own real property. We expect that we may make such investments when we consider it more efficient to acquire an entity owning such real property rather than to acquire the properties directly. We also may acquire less than all of the ownership interests of such entities if we determine that such interests are undervalued and that a liquidation event in respect of such interests are expected within the investment holding periods consistent with that for our direct property investments.

Investment Limitations

      Our charter places numerous limitations on us with respect to the manner in which we may invest our funds. These limitations cannot be changed unless our charter is amended pursuant to the affirmative vote of the holders of a majority of our shares. Unless the charter is amended, we will not:

    invest in commodities or commodity futures contracts, except for futures contracts when used solely for the purpose of hedging in connection with our ordinary business of investing in real estate assets and mortgages;

    invest in real estate contracts of sale, otherwise known as land sale contracts, unless the contract is in recordable form and is appropriately recorded in the chain of title;

    make or invest in mortgage loans unless an appraisal is obtained concerning the underlying property, except for those mortgage loans insured or guaranteed by a government or government agency. In cases where our independent trustees determine, and in all cases in which the transaction is with any of our trustees or Hartman Management and its affiliates, such appraisal shall be obtained from an independent appraiser. We will maintain such appraisal in our records for at least five years, and it will be available for inspection and duplication by our shareholders. We will also obtain a mortgagee’s or owner’s title insurance policy as to the priority of the mortgage;

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    make or invest in mortgage loans that are subordinate to any mortgage or equity interest of any of our trustees, Hartman Management or its affiliates;

    make or invest in mortgage loans, including construction loans, on any one property if the aggregate amount of all mortgage loans on such property, including loans to us, would exceed an amount equal to 85.0% of the appraised value of such property as determined by appraisal unless substantial justification exists for exceeding such limit because of the presence of other underwriting criteria;

    borrow in excess of 55.0% of the aggregate value of all assets owned by us as of the date of any borrowing without approval from a majority of our independent trustees;

    make investments in unimproved property or indebtedness secured by a deed of trust or mortgage loans on unimproved property in excess of 10.0% of our total assets;

    issue equity securities on a deferred payment basis or other similar arrangement;

    issue debt securities in the absence of adequate cash flow to cover debt service;

    issue securities which are redeemable solely at the option of the holder (except for shares offered by shareholders to us pursuant to our share repurchase plan);

    grant warrants or options to purchase shares to officers or affiliated trustees or to Hartman Management or its affiliates except on the same terms as the options or warrants are sold to the general public and the amount of the options or warrants does not exceed an amount equal to 10.0% of the outstanding shares on the date of grant of the warrants and options; or

    make any investment that we believe would be inconsistent with our objectives of qualifying and remaining qualified as a REIT.

Change in Investment Objectives and Limitations

      Our charter requires that our independent trustees review our investment policies at least annually to determine that the policies we follow are in the best interest of our shareholders. Each determination and the basis therefor shall be set forth in the minutes of our board of trustees. The methods of implementing our investment policies also may vary as new investment techniques are developed. The methods of implementing our investment objectives and policies, except as otherwise provided in the organizational documents, may be altered by a majority of our trustees, including a majority of the independent trustees, without the approval of our shareholders.

Real Property Investments

      Our advisor is continually evaluating various potential property investments and engaging in discussions and negotiations with sellers, developers and potential tenants regarding the purchase and development of properties for us and other affiliated programs. At such time while this offering is pending, if we believe that a reasonable probability exists that we will acquire a specific property, this prospectus will be supplemented to disclose the negotiations and pending acquisition of such property. We expect that this will normally occur upon the signing of a purchase agreement for the acquisition of a specific property, but may occur before or after such signing or upon the satisfaction or expiration of major contingencies in any such purchase agreement, depending on the particular circumstances surrounding each potential investment. A supplement to this prospectus will describe any improvements proposed to be constructed thereon and other information that we consider appropriate for an understanding of the transaction. Further data will be made available after any pending acquisition is consummated, also by means of a supplement to this prospectus, if appropriate. YOU SHOULD UNDERSTAND THAT THE DISCLOSURE OF ANY PROPOSED ACQUISITION CANNOT BE RELIED UPON AS AN ASSURANCE THAT WE WILL ULTIMATELY CONSUMMATE SUCH ACQUISITION OR THAT THE INFORMATION PROVIDED CONCERNING THE PROPOSED ACQUISITION WILL NOT CHANGE BETWEEN THE DATE OF THE SUPPLEMENT AND ANY ACTUAL PURCHASE.

      We intend to obtain adequate insurance coverage for all properties in which we invest.

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Certain Other Policies

      Hartman Management will continually review our investment activity to attempt to ensure that we do not come within the application of the Investment Company Act of 1940. Among other things, Hartman Management will attempt to monitor the proportion of our portfolio that is placed in various investments so that we do not come within the definition of an “investment company” under the Investment Company Act. We do not intend to:

    invest in the securities of other issuers for the purpose of exercising control over such issuer (except as described above;

    underwrite securities of other issuers; or

    actively trade in loans or other investments.

      Subject to certain restrictions we are subject to in order to qualify to be taxed as a REIT, we may make investments other than as previously described, although we do not currently intend to do so. We have authority to purchase or otherwise reacquire our common shares or any of our other securities. We have no present intention of repurchasing any of our common shares, and we would only take such action in conformity with applicable federal and state laws and the requirements for qualifying as a REIT under the Internal Revenue Code.

      We have not made any loans to third parties and we have no present intention to do so. However, we may in the future make loans to third parties, including, without limitation, loans to joint ventures in which we participate. We have not engaged in the trading, underwriting or agency distribution or sale of securities of other issuers, and we do not intend to do so in the future.

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DESCRIPTION OF REAL ESTATE AND OPERATING DATA

      On December 31, 2002, we owned the 32 properties discussed below. All of our properties are located in the metropolitan Houston, Texas area. Our properties primarily consist of retail centers and each is designed to meet the needs of surrounding local communities. A supermarket or one or more nationally and/or regionally recognized tenant typically anchors each of our properties. In the aggregate, our properties contain approximately 2,349,000 square feet of the gross leasable area. No individual property in our portfolio currently accounts for more than 10% of our aggregate leasable area.

      As of December 31, 2002, our properties were approximately 92.2% leased. As of December 31, 2002, anchor space at the properties, representing approximately 12.0% of total leasable area was 100.0% leased, while non-anchor space, accounting for the remaining 88.0% balance, was approximately 91.1% leased. A substantial number of our tenants are local tenants. Indeed, 72.5% of our tenants are local tenants and 9.7% and 17.8% of our tenants are national and regional tenants, respectively. We define:

    national tenants as any tenant that operates in at least four metropolitan areas located in more than one region (i.e. northwest, midwest, southwest or southeast);

    regional tenants as any tenant that operates in two or more metropolitan areas located within the same region; and

    local tenants as any tenant that operates stores only within the metropolitan Houston, Texas area.

      Substantially all of our revenues consist of base rents and percentage rents received under long-term leases. For the year ended December 31, 2002, total rents and other income and percentage rents from the properties were $20,755,026 and $9,491 and, respectively. Approximately 61.9% of all existing leases provide for annual increases in the base rental payments with a “step up” rental clause.

      The following table lists the five properties that generated the most rents during the year 2002.

                   
      Total Rents   Percent of Our Total
Property   Received in 2002   Rents Received in 2002

 
 
Corporate Park West
  $ 1,720,050       8.30 %
Corporate Park Northwest
    1,622,470       7.83  
Lion Square
    1,185,588       5.72  
Providence
    1,148,480       5.54  
Torrey Square
    1,038,646       5.01  
 
   
     
 
 
Total
  $ 6,715,234       32.40  
 
   
     
 

      We currently do not have any individual properties that are material to our operations. As of December 31, 2002, we had no property that accounted for over 10% of either our total assets or total gross revenue.

      The next several pages contain summary information for the properties we owned on December 31, 2002.

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General Physical Attributes

      The following table lists, for all properties we owned on December 31, 2002, the year each property was developed or significantly renovated, the total leasable area of each property, the purchase price we paid for such property and the anchor or largest tenant at such property.

                             
    Year            
    Developed/   Total Leasable   Purchase    
Property   Renovated   Area (Sq. Ft.)   Price   Anchor or Largest Tenant

 
 
 
 
Bissonnet/Beltway  
1978

 
29,205

  $
2,361,323

  Cash America International
Webster Point  
1984

 
26,060

 
1,870,365

  Houston Learning Academy
Centre South  
1974

 
44,593

 
2,077,198

  Carlos Alvarez
Torrey Square  
1983

 
105,766

 
4,952,317

  Fleming Foods
Providence  
1980

 
90,327

 
4,592,668

  Kroger Food Stores, Inc.
Holly Knight  
1984

 
20,015

 
1,612,801

  Quick Wash Laundry
Plaza Park  
1982

 
105,530

 
4,195,116

  American Medical Response
Northwest Place II  
1984

 
27,974

 
1,089,344

  Terra Mar, Inc.
Lion Square  
1980

 
119,621

 
5,835,108

  Kroger Food Stores, Inc.
Zeta Building  
1982

 
39,106

 
2,456,589

  Astrium North America
Royal Crest  
1984

 
24,825

 
1,864,065

  Dringle, Jenkins & Associates, PC
Featherwood  
1983

 
49,670

 
2,959,309

  Transwestern Publishing
Interstate 10  
1980

 
151,000

 
3,908,072

  River Oaks, L-M, Inc.
Westbelt Plaza  
1978

 
65,619

 
2,733,009

  National Oilwell
Greens Road  
1979

 
20,507

 
1,637,217

  Juan Gailegos
Town Park  
1978

 
43,526

 
3,760,735

  Omar’s Meat Market
Northeast Square  
1984

 
40,525

 
2,572,512

  99 Cent Store
Main Park  
1982

 
113,410

 
4,048,837

  Transport Sales
Dairy Ashford  
1981

 
42,902

 
1,437,020

  Praise Tabernacle Church
South Richey  
1980

 
69,928

 
3,361,887

  Kroger Food Stores, Inc.
Corporate Park Woodlands  
2000

 
99,937

 
6,028,362

  Interceramic
South Shaver  
1978

 
21,926

 
817,003

  EZ Pawn
Kempwood Plaza  
1974

 
112,359

 
2,531,876

  Brookshire Brothers
Bellnot Square  
1982

 
73,930

 
5,792,294

  Kroger Food Stores, Inc.
Corporate Park Northwest  
1981

 
185,625

 
7,839,539

  Region IV Education
Westgate  
1984

 
97,225

 
3,448,182

  Polymeric Process
Garden Oaks  
1954

 
95,046

 
6,577,782

  Bally Total Fitness
Westchase  
1978

 
42,924

 
2,173,300

  Jesus Corral
Sunridge  
1979

 
49,359

 
1,461,571

  Carlos Morales
Holly Hall  
1980

 
90,000

 
3,123,400

  Texas Medical Management
Brookhill  
1979

 
74,757

 
973,264

  T.S. Moly-Lubricants
Corporate Park West  
1999

 
175,665

 
13,062,980

  Urethane Products International
           



 



   
Total          
2,348,862

  $
113,155,045

   
           



 



   

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General Economic Attributes

      The following table lists certain information that relates to the rents generated by each property. All of the information listed in this table is as of December 31, 2002.

                                         
                    Total        
            Total   Annualized   Effective   Annual
    Percent   Leasable   Rents Based   Net Rent   Percentage
Property   Leased   Area (Sq. Ft.)   on Occupancy   Per Sq. Ft.   Rents

 
 
 
 
 
Bissonnet/Beltway
    93.2 %     29,205     $ 452,270     $ 15.49        
Webster Point
    82.8       26,060       300,616       11.54        
Centre South
    88.2       44,593       344,743       7.73        
Torrey Square
    96.4       105,766       968,867       9.16        
Providence
    97.6       90,327       957,845       10.60        
Holly Knight
    90.5       20,015       321,855       16.08        
Plaza Park
    93.1       105,530       895,603       8.49        
Northwest Place II
    51.9       27,974       119,560       4.27        
Lion Square
    98.3       119,621       1,136,559       9.50        
Zeta Building
    93.6       39,106       530,133       13.56        
Royal Crest
    87.7       24,825       288,001       11.60        
Featherwood
    96.3       49,670       823,545       16.58        
Interstate 10
    95.5       151,000       756,706       5.01        
Westbelt Plaza
    92.5       65,619       566,126       8.63        
Greens Road
    100.0       20,507       365,156       17.81        
Town Park
    100.0       43,526       749,734       17.22        
Northeast Square
    90.4       40,525       444,612       10.97        
Main Park
    87.1       113,410       608,378       5.36        
Dairy Ashford
    100.0       42,902       255,137       5.95        
South Richey
    100.0       69,928       610,106       8.72        
Corporate Park Woodlands
    75.7       99,937       698,049       6.98        
South Shaver
    96.8       21,926       230,969       10.53        
Kempwood Plaza
    92.8       112,359       836,506       7.44     $ 9,491  
Bellnot Square
    98.1       73,930       749,366       10.14        
Corporate Park Northwest
    90.2       185,625       1,564,923       8.43        
Westgate
    95.8       97,225       643,340       6.62        
Garden Oaks
    86.2       95,046       1,026,069       10.80        
Westchase
    66.4       42,924       304,022       7.08        
Sunridge
    95.9       49,359       481,256       9.75        
Holly Hall
    100.0       90,000       485,756       5.40        
Brookhill
    88.5       74,757       277,685       3.71        
Corporate Park West
    94.8       175,665       1,688,665       9.61        
 
   
     
     
     
     
 
Total/Average
    92.2 %     2,348,862     $ 20,482,158     $ 8.72     $ 9,491  
 
   
     
     
     
     
 

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      The following table lists for each property, as of December 31 of each of the last five years or as for long as we have owned the property, both the occupancy of each property and the average rental and other income per square foot of gross leasable area.

                                                                                 
    1998   1999   2000   2001   2002
   
 
 
 
 
            Average           Average           Average           Average           Average
            Income           Income           Income           Income           Income
    Percent   per   Percent   per   Percent   per   Percent   per   Percent   per
Property   Leased   Sq. Ft.   Leased   Sq. Ft.   Leased   Sq. Ft.   Leased   Sq. Ft.   Leased   Sq. Ft.

 
 
 
 
 
 
 
 
 
 
Bissonnet/Beltway
    100 %   $ 12.86       100 %   $ 13.95       100 %   $ 14.42       100 %   $ 17.02       93 %   $ 16.50  
Webster Point
    92       9.65       79       10.19       86       10.92       93       10.57       83       11.83  
Centre South
    80       5.90       73       5.55       71       6.31       88       7.96       88       7.40  
Torrey Square
    97       6.63       96       8.02       96       7.69       99       9.71       96       9.82  
Providence
                                        100       8.81       98       12.71  
Holly Knight
    93       13.61       88       13.09       93       14.02       100       17.58       91       16.46  
Plaza Park
    78       5.51       88       6.32       85       6.26       83       7.60       93       7.89  
Northwest Place II
    90       6.51       71       6.84       80       5.76       52       5.31       52       4.40  
Lion Square
    95       7.38       99       8.28       97       8.84       100       9.59       98       9.91  
Zeta Building
    84       12.10       92       12.50       86       12.96       91       13.36       94       13.72  
Royal Crest
    87       13.08       83       12.43       73       10.34       73       7.38       88       10.24  
Featherwood
    100       14.34             10.74       77       2.01       96       12.86       96       15.46  
Interstate 10
    96       3.79       91       4.30       82       3.97       97       4.36       96       4.78  
Westbelt Plaza
    84       6.00       90       6.38       93       6.92       85       7.21       92       8.88  
Greens Road
    82       14.12       78       14.50       78       15.83       100       16.54       100       18.60  
Town Park
    100       14.72       100       14.93       100       16.09       100       19.01       100       17.88  
Northeast Square
    100       12.31       68       11.39       81       9.91       84       9.14       90       11.81  
Main Park
    93       5.59       93       6.01       81       5.41       89       4.89       87       5.53  
Dairy Ashford
    96       3.64       100       5.90       80       5.94       100       6.11       100       5.83  
South Richey
                88       2.60       100       8.72       94       9.45       100       9.63  
Corporate Park Woodland
                            4       0.06       19       1.75       76       4.70  
South Shaver
                            57       5.11       83       7.29       97       9.82  
Kempwood Plaza
    84       4.68       94       5.29       95       5.79       91       5.72       93       6.73  
Bellnot Square
    94       10.17       96       10.55       96       10.70       98       11.71       98       11.53  
Corporate Park Northwest
    97       7.23       93       7.38       92       7.38       91       8.28       90       8.74  
Westgate
    85       4.69       59       4.14       83       4.26       96       5.54       96       6.78  
Garden Oaks
    78       8.28       82       9.02       86       9.44       82       10.32       86       10.69  
Westchase
    62       6.76       57       8.68       50       2.51