As filed with the Securities and Exchange Commission on April 30, 2003

File No. ___________


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10

GENERAL FORM FOR REGISTRATION OF SECURITIES

Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934


Hartman Commercial Properties REIT

(Exact name of registrant as specified in its charter)

                    TEXAS                                 76-0594970
         (State or other jurisdiction                 (I.R.S. Employer
      of incorporation or organization)             Identification Number)

1450 West Sam Houston Parkway North, Suite 100
                Houston, Texas                                   77043
   (Address of principal executive offices)                    (Zip Code)

Registrant's telephone number, including area code: (713) 467-2222


Securities to be registered pursuant to Section 12(b) of the Act:

None

Securities to be registered pursuant to Section 12(g) of the Act:

Common Shares of Beneficial Interest, par value $0.001 per share

(Title of Class)



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This registration statement 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 statement 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 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 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 contained herein could be inaccurate and, therefore, we cannot assure investors that the forward-looking statements included in this registration statement will prove to be accurate.

In light of the significant uncertainties inherent in the forward-looking statements included in this registration statement, including, without limitation, the risks set forth in the "Risk Factors" section contained in Item 1, 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 registration statement will be achieved. We caution investors 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.



ITEM 1. BUSINESS.

SUMMARY

We are a Texas real estate investment trust. We invest in commercial real estate by acquiring retail, office and office/warehouse properties located primarily in the metropolitan Houston, Texas area. We own all our real estate properties and conduct our operations through an "UPREIT" called Hartman REIT Operating Partnership, L.P. To avoid confusion:

. we sometimes refer to ourselves as "HCP";

. we refer to Hartman REIT Operating Partnership, L.P. as the "Operating Partnership";

. we collectively refer to HCP and the Operating Partnership in this registration statement as the "Company"; and

. the use of "we," "our" or similar pronouns in this registration statement refers to HCP or the Company as required by the context in which such pronoun is used.

The term UPREIT stands for "Umbrella Partnership Real Estate Investment Trust." We use this structure because a sale of property directly to HCP in exchange for our shares is generally a taxable transaction to the 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 on a tax-free basis. This allows the seller to defer taxation of gain until the seller exchanges his limited partnership units for our shares. If our shares are publicly traded, the former property owner may be able to achieve liquidity for his investment in order to pay taxes. This structure gives us an advantage in acquiring desired properties from persons who may not otherwise sell their properties because of unfavorable tax results.

We are the sole general partner of the Operating Partnership and, as of December 31, 2002, we owned 53.37% of all of its outstanding OP Units. The term "OP Units" refers to the limited partnership interests in the Operating Partnership. We owned 32 commercial properties as of December 31, 2002, consisting of retail centers, office/warehouse properties and office properties and typically leased to a variety of tenants under long-term leases.

In this registration statement, we refer to an entity that qualifies as a real estate investment trust for U.S. federal income tax purposes as a "REIT." We have made an election to be taxed as a REIT. In general, a REIT is an entity that:

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

. offers the benefits of a diversified portfolio of real estate assets under professional management;

. is able to qualify as a "real estate investment trust" for U.S. federal income tax purposes and is therefore not generally subject to federal corporate income taxes on its net income (to the extent such net income is distributed by it), which substantially eliminates the "double taxation" (i.e., taxation at both the corporate and shareholder levels) that generally results from investments in a corporation; and

. must pay distributions to investors of at least 90% of its taxable income.

As a REIT, we generally are not subject to federal income tax on income that we distribute to our shareholders. We refer to the Internal Revenue Code of 1986, as amended, as the "Internal Revenue Code" in this registration statement. If we fail to qualify for taxation as a REIT in any year, our income will be taxed at regular corporate rates.

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

OUR BUSINESS

GENERAL

We were formed in August 1998 by Allen R. Hartman as a vehicle to consolidate Mr. Hartman's real estate operations. Mr. Hartman has been operating in the Houston, Texas metropolitan real estate industry for over 20 years. On December 31, 2002, we owned the 32 properties located in the metropolitan Houston, Texas area. Although our management does not assess our business on a segment basis, for accounting purposes our properties are divided into the following three reportable segments:

. Retail properties (17 of our properties);

. Office/Warehouse properties (12 of our properties); and

. Office properties (three of our properties).

Please see Note 12 in the Notes to our Consolidated Financial Statements contained in this registration statement for certain financial information related to these segments.

A majority of our properties 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 tenants typically anchors each of our retail properties. In the aggregate, our properties contain approximately 2,350,000 square feet of the gross leasable area. No individual property in our portfolio currently accounts for more than 10% of our aggregate leasable area. No single tenant accounts for more than 10% of our gross rental income.

We have acquired 28 of our 32 properties from entities managed by affiliates of Mr. Hartman. During 1999 we acquired 12 properties. We acquired nine of these properties from six limited partnership affiliated with Mr. Hartman. We also bought three properties from unrelated third parties during 1999. During 2000, we acquired 10 properties. We acquired nine of these properties from partnerships affiliated with Mr. Hartman and we purchased one additional property from Mr. Hartman. During 2001, we bought one property from an unrelated third party. During 2002, we acquired 10 properties and sold one property. We acquired all 10 properties from entities affiliated with Mr. Hartman and sold the one property to an unrelated third party. Overall, we acquired a majority of our properties by merging the seller with and into either HCP or the Operating Partnership. We have also acquired properties by paying cash or issuing common shares or OP Units.

As of December 31, 2002, our properties were approximately 92% leased. As of December 31, 2002, anchor space at the properties, representing approximately 12% of total leasable area, was 100% leased, while non-anchor space, accounting for the remaining 88% balance, was approximately 91% leased. Approximately 72% of our tenants (based on aggregate leasable area) are local tenants and approximately 10% and 18% 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.

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Substantially all of our revenues consist of base rents and additional rents in the form of expense reimbursements received under long-term leases. Approximately 62% of all existing leases provide for annual increases in the base rental payments with a "step up" rental clause.

We currently do not own any individual property that is 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 cost of each of our properties will be depreciated for tax purposes over a 40-year period on a straight-line basis. We believe all of our properties are adequately covered by insurance and are suitable for their intended purposes.

See "Item 3--Properties" below for a description of the properties we owned on December 31, 2002.

We have no employees and are not self-managed. Our operations are managed by Hartman Management, L.P., which is owned by Mr. Hartman. We refer to Hartman Management, L.P. as the "Management Company" in this registration statement.

FINANCING

Description of our Credit Facility

On December 20, 2002, we entered into a credit facility in the aggregate principal amount of $34,440,000 with GMAC Commercial Mortgage Corporation. In connection with this financing, we created Hartman REIT Operating Partnership II, L.P., a Texas limited partnership, which is the borrower under our credit facility. The Operating Partnership is the sole limited partner of this partnership. The Operating Partnership also owns 100% of Hartman REIT Operating Partnership II GP, LLC, the general partner of Hartman REIT Operating Partnership II, L.P. This entity was formed as a "special purpose entity" solely for this financing and it holds, as its sole asset, the title to all of the properties which secure our credit facility.

The indebtedness under the note is secured by, among other things, 18 of our properties and the improvements, personal property and fixtures thereon, as well as certain accounts and intangible assets and an assignment of rents related to such properties. We may prepay the loan after July 1, 2005 without penalty. We must pay a prepayment fee equal to one percent of the outstanding principal balance under the facility if we want to prepay the note prior to July 1, 2005.

We are required to make monthly interest payments under this credit facility. During the initial term of the note, indebtedness under the credit facility bears interest at LIBOR plus 2.5%, adjusted monthly. The interest rate was 3.92% as of December 31, 2002. The credit facility will mature on January 1, 2006, though we have the option, subject to certain conditions, of extending the facility for an additional two-year period. In no event shall the interest rate be lower than 3.82% during the initial term or lower than 4.32% during the extension term.

In addition, we entered into certain covenants pursuant to the credit facility which, among other things, require Hartman REIT Operating Partnership II, L.P. to maintain specified levels of insurance and use the properties securing the note only for retail, light industrial, office, warehouse and commercial office uses. The facility also limits the borrower's ability, without the approval of the lender, to:

. acquire additional material assets;

. merge or consolidate with any other entity;

. engage in any other business or activity other than the ownership, operation and maintenance of the properties securing the note;

. make certain investments;

. incur, assume or guarantee additional indebtedness;

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. grant certain liens; and

. loan money to others. The note and the security documents related thereto also contain customary events of default, including, without limitation, payment defaults, bankruptcy-related defaults and breach of covenant defaults.

Line of Credit

In August 2002, we entered into $2,000,000 line of credit with First Bank & Trust. We may only use this line of credit in connection with acquisitions to purchase interests held by investors who do not qualify as "accredited investors" under the Securities Act of 1933 and the rules and regulations promulgated thereunder. As of December 31, 2002, there were no amounts outstanding under this line of credit. This line of credit is secured by our Bellnot Square property. In the event we borrow amounts under this line of credit, such amounts will accrue interest at a rate equal to the lender's prime rate. This line of credit terminates on July 31, 2004, unless the lender elects to extend the term of the line for additional one year periods. This line of credit contains customary covenants and events of default.

Houston R.E. XVI Note

In November 2002, we borrowed $3,278,000 from Houston R.E. Income Properties XVI, L.P. This debt is evidenced by a promissory note and accrues interest at a rate of 4.25%. The note is secured by our Corporate Park Northwest property and is payable at any time upon the demand of Houston XVI. We used these borrowed funds to repay existing debt. Mr. Hartman controls the general partner of Houston XVI. We are only required to make monthly interest payments under the note.

COMPETITION

Our properties are all located in areas that include highly competitive properties. The number of competitive properties in a particular area could have a material adverse effect on both our ability to lease space at any of our properties or at newly acquired (or developed) properties, and the amount of rent we can charge at our properties. We compete with many property owners, such as corporations, limited partnerships, individual owners, other real estate investment trusts, insurance companies and pension funds. We also compete with other entities controlled by Mr. Hartman and operated by the Management Company.

Many of our competitors have greater financial and other resources than us and may have substantially more operating experience than either us or the Management Company. Generally, there are other neighborhood and community retail centers within relatively close proximity to each of our properties. There is, however, no dominant competitor in the metropolitan Houston, Texas area. Regarding our retail properties, in addition to competitor retail properties, our tenants face increasing competition from outlet malls, internet shopping websites, discount shopping clubs, catalog companies, direct mail and telemarketing.

INSURANCE

We believe that we have property and liability insurance with reputable, commercially rated companies. We also believe that our insurance policies contain commercially reasonable deductibles and limits, adequate to cover our properties. We expect to maintain such insurance coverage and to obtain similar coverage with respect to any additional properties we acquire in the near future. Further, we have title insurance relating to our properties in an aggregate amount which we believe to be adequate.

EMPLOYEES

We have no employees. All personnel required for our operations are provided by the Management Company under a management agreement. Please see "Item 6. Directors and Executive Officers--The Management Company"; and "--The Management Agreement."

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REGULATIONS

Our properties, as well as any other properties which we may acquire in the future, are subject to various federal, state and local laws, ordinances and regulations, including, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. We believe that we have all permits and approvals necessary under current law to operate our properties.

REPORTS TO SHAREHOLDERS

We will furnish each shareholder with an annual report within 120 days following the close of each fiscal year. These annual reports will contain, among other things, financial statements, including a balance sheet, statement of operations, statement of shareholders' equity and statement of cash flows, prepared in accordance with accounting principles generally accepted in the United States which are audited and reported on by independent certified public accountants.

INVESTMENT POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

The following is a discussion of our current policies with respect to investments, borrowing, affiliate transactions, equity capital, joint ventures and certain other activities. All of these policies have been established in our governance documents or by our management and some of our policies may be amended or revised from time to time (and at any time) by our management or trust managers 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 may not be able to achieve our policies or investment objectives at all times.

INVESTMENT POLICIES

Our management and board of trust managers have developed the following policies to govern our investments and the operation of our business.

Investments in Real Estate or Interests in Real Estate

We invest in commercial real estate properties, primarily neighborhood retail centers and office and office/warehouse 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 any 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 two to five years after this filing.

We intend to pursue these objectives by continuing to acquire community retail centers and office and office/warehouse properties for long-term ownership and for the purpose of producing income.

Our policy is to continue to acquire properties in the Houston, Texas metropolitan area, where we believe opportunities exist for acceptable investment returns. We primarily 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

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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 metropolitan area and focusing 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, Texas, we are also exploring specific investment opportunities in San Antonio and Dallas, Texas. Further, we are exploring the feasibility of acquiring properties outside of Texas.

Although we have historically invested in properties that have been constructed and have operating histories, we may invest in raw land or in properties that are under development or construction. We consider the potential for growth in value as a factor in the valuation of income-producing properties and we anticipate that some properties we acquire will both provide cash distributions 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 in the number or size of properties we may acquire or the percentage of capital 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 our capital resources.

Although, we currently intend to invest in or develop community retail centers, office/warehouse and office properties, our future investment activities are not limited to any specified property use. We may invest in other commercial properties such as manufacturing facilities, and warehouse and distribution facilities. Neither our governance documents nor our management policies contain any limitations on the percentage of assets which may be invested in any specific property.

Although we are not limited as to the form our investments may take, all of our properties are owned by the Operating Partnership or a wholly-owned subsidiary of the Operating Partnership 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 or other types of common ownership. We presently have no plans to own any properties jointly with another entity or entities.

The Management Company identifies particular properties as potential acquisitions and manages our day-to-day operations, including all leasing functions. In making investment decisions for us, the Management Company 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.

We have acquired 28 of our 32 of our properties from entities controlled by Mr. Hartman. We anticipate that we will acquire additional properties in the future from entities controlled by, or otherwise affiliated with, Mr. Hartman.

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We will conduct all such transactions in accordance with the related party transactions policies summarized below. We will obtain a third party appraisal or valuation of any property we acquire from an affiliated or related party.

By conducting such transactions in accordance with this policy, we hope to be able to avoid any material disadvantages associated with related party transactions (primarily valuation issues) and achieve advantages, such as avoiding third party broker fees and acquiring properties of which the Management Company has a thorough knowledge.

Investment Limitations

Our declaration of trust places numerous limitations on us with respect to the manner in which we may invest our funds. These limitations cannot be changed unless our declaration of trust is amended, which requires approval of our shareholders. Unless our declaration of trust is amended, we will not:

. borrow in excess of 75% of the aggregate value of all properties owned by us, provided that we may borrow in excess of 50% of the value of an individual property;

. 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. Mortgage debt on any property shall not exceed such property's appraised value. In cases where our board of trust managers determines, and in all cases in which the transaction is with any of our trust managers or Hartman 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. We will also obtain a mortgagee's or owner's title insurance policy as to the priority of the mortgage;

. make or invest in mortgage loans, including construction loans, on any one property if the aggregate amount of all mortgage loans on such property would exceed an amount equal to 85% 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;

. make or invest in mortgage loans that are subordinate to any mortgage or equity interest of any of our trust managers, Mr. Hartman or his affiliates;

. invest in junior debt secured by a mortgage on real property which is subordinate to the lien or other senior debt except where the amount of such junior debt plus any senior debt exceeds 90% of the appraised value of such property, if after giving effect thereto, the value of all such mortgage loans would not then exceed 25% of our net assets, which means our total assets less our total liabilities;

. engage in any short sale or borrow on an unsecured basis, if the borrowing will result in asset coverage of less than 300%. "Asset coverage," for the purpose of this clause, means the ratio which the value of our total assets, less all liabilities and indebtedness for unsecured borrowings, bears to the aggregate amount of all of our unsecured borrowings;

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. make investments in unimproved property or indebtedness secured by a deed of trust or mortgage loans on unimproved property in excess of 10% 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 equity securities which are non-voting or assessable;

. issue "redeemable securities," solely at the option of the holder;

. grant warrants or options to purchase shares to Mr. Hartman or his affiliates or to officers or trust managers affiliated with the Management Company 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% of the outstanding shares on the date of grant of the warrants and options;

. engage in trading, as compared with investment activities, or engage in the business of underwriting or the agency distribution of securities issued by other persons; or

. lend money to our trust managers, or to Mr. Hartman or his affiliates, unless approved by a majority of our independent trust managers.

We will continually review our investment activity to attempt to ensure that we do not come within the definition of an "investment company" under the Act. If at any time the character of our investments could cause us to be deemed an investment company for purposes of the Investment Company Act of 1940, we will take the necessary action to attempt to ensure that we are not deemed to be an "investment company."

Investments in Real Estate 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. We may also invest in participating or convertible mortgages if our trust managers conclude that we and our shareholders may benefit from the cash flow or any appreciation in the value of the subject property. Such mortgages are similar to equity participation. Except as stated herein, our governance documents do not 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.

The governance documents of the Operating Partnership also do not contain any such restrictions.

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

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 discussion of "Federal Income Tax Considerations--Requirements for Qualification as a REIT" in this section below 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

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that we will only acquire securities or other interests in issuers engaged in commercial real estate activities involving retail, office or office/warehouse properties. We may also invest in entities owning undeveloped acreage. Our governance documents do not contain any limitations or restrictions on the percentage of our assets that may be invested in securities of or interests in other issuers. The governance documents of the Operating Partnership also do not contain any such restrictions.

Other than our interest in the Operating Partnership, we currently do not own any securities of other entities. We do not presently intend to acquire securities of any non-affiliated entities.

Periodic Review of Assets

We may dispose any of our properties or any property that may be acquired in the future if our management determines that the disposition of such property is appropriate or necessary. We will consider many relevant economic, tax, strategic and operational factors when determining whether a particular property should be sold.

Change in Investment Objectives and Limitations

Our declaration of trust requires that the independent trust managers review our investment policies at least annually to determine that the policies we are following are in the best interests of our shareholders. Each determination and the basis therefore is required to be set forth in the applicable meeting minutes. 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 trust managers, including a majority of the independent trust managers, without the approval of the shareholders. Those of our investment objectives set forth in our declaration of trust, however, may only be amended by a vote of the shareholders holding a majority of our outstanding shares.

FINANCING POLICIES

As of the date of this registration statement, 20 of our 32 properties are subject to mortgages. If we acquire a property for cash in the future, we will most likely fund a portion of the purchase price with debt. By acquiring and operating 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. See "Risk Factors--Our use of borrowings to fund acquisitions and improvements on properties could result in foreclosures and unexpected debt service expenses upon refinancing" below.

We do not have a policy limiting the amount of mortgages which may be placed on any one piece of property. As of December 31, 2002, we had an aggregate debt to book value ratio of approximately 36%. As a general policy, we intend to maintain a ratio of total indebtedness to market value that is less than 50%. However, we may not be able to continue to achieve this objective.

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 distributions, or for working capital.

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EQUITY CAPITAL POLICIES

In the event that our trust managers determine to raise additional equity capital, they have the authority, without shareholder approval, to issue additional common shares or preferred shares of beneficial interest. Additionally, our trust managers could cause the Operating Partnership to issue OP Units which are convertible into our common shares. Subject to limitations contained in HCP's and the Operating Partnership's governance documents, the trust managers 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.

AFFILIATE TRANSACTION POLICY

Our bylaws provide that no contract or transaction between:

. us and one or more of our trust managers or officers; or

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

will be void or voidable solely because the trust manager or officer is a party to the transaction and/or is present at or participates in the meeting of the trust managers 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 trust managers or the committee, and the trust managers or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested trust managers, even though the disinterested trust managers 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 trust managers, a committee thereof, or the shareholders.

Our bylaws also provide that any of our trust managers 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 trust manager or officer. Further, each of our trust managers and officers is not required to present any investment opportunity to us which comes to him or her in any capacity other than acting solely as our trust manager, officer or agent, even if we could exploit such opportunity if presented to us. We may place contractual restrictions with any trust manager or officer's business interests or activities, but we currently have no such contracts in place with any trust manager or officer.

Our board of trust managers has established a conflicts committee which will review and approve all matters the board believes may involve a conflict of interest. This committee will be composed solely of independent trust managers. Please see "Item 5. Directors and Executive Officers--Committees of the Board of Trust Managers--Conflicts Committee" and "--Certain Conflict Resolution Procedures" below.

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JOINT VENTURE INVESTMENTS

We may 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, we will evaluate the real property that such joint venture owns or is being formed to own under the same criteria described elsewhere in this registration statement for the selection of our real estate property investments.

We may only enter into joint ventures with other Hartman programs for the acquisition of properties if:

. a majority of our trust managers, including a majority of the independent trust managers, approve the transaction as being fair and reasonable to us;

. the investment by us and such affiliate are on substantially the same terms and conditions; 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 were to elect to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the other co-venturer's interest in the property held by the joint venture. 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. Our entering into joint ventures with other Hartman programs will result in certain conflicts of interest.

CERTAIN OTHER POLICIES

We intend to operate in such a manner that we will not be subject to regulation under the Investment Company Act of 1940. 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 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.

RISK FACTORS

We encourage investors to carefully consider the risks described below, together with all other information in this registration statement. We encourage investors to keep these risks in mind when they read this registration statement. If any of the following risks actually occurs, our results of operations and ability to pay distributions would likely suffer materially. As a result, the value and trading price of our common shares may decline, and shareholders could lose all or part of the money they paid to buy our common shares.

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BUSINESS RISKS

Because our portfolio of properties is not geographically diversified, an economic downturn in the metropolitan Houston, Texas area could adversely impact our operations and ability to make distributions to our shareholders.

All of our assets and revenues are currently derived from properties located in the metropolitan Houston, Texas area. Our results of operations are directly contingent on our ability to attract financially sound commercial tenants. If Houston 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 our assets are not diversified geographically, if Houston experiences an economic downturn, our operations and ability to make distributions to our shareholders could be adversely impacted.

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 make distributions to our shareholders in a manner that allows us to meet the foregoing distribution requirement and avoid this 4% excise tax, we cannot assure shareholders that we will always be able to do so.

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

. the amount of the cash available for distribution;

. the Operating Partnership's financial condition;

. the Operating Partnership's capital expenditure requirements; and

. the annual distribution requirements in the Internal Revenue Code 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.

We rely on Allen R. Hartman and the Management Company, and the loss of either could adversely impact our operations.

We are dependent on the efforts of Mr. Hartman. Mr. Hartman has over 30 years of experience in owning, operating, managing, acquiring, developing and redeveloping commercial real estate. Although Mr. Hartman has a significant ownership interest in the Company, he does not have an employment agreement with us and is not obligated to devote his full-time to the Company.

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We are not self-managed. Rather, the Management Company advises us on our day-to-day operations and manages all of our properties. The Management Company is owned and operated by Mr. Hartman and has assembled a team of professionals who have broad experience in the real estate industry in general, and in the management of our properties in particular. The Management Company is also dependent on Mr. Hartman. Further, competition for commercial real estate personnel is intense and we are dependent on the Management Company's ability to attract and retain skilled personnel to operate our business. We have no right or ability to vote on the election of the Management Company's officers and, as a result, we do not have the ability to control the Management Company's operations.

The loss of Mr. Hartman or the Management Company, or the inability of the Management Company to retain skilled personnel, would adversely impact our operations and our ability to make distributions to our shareholders.

Our inability to retain earnings for acquisitions could limit our ability to acquire new properties.

In order to maintain our qualification as a REIT, we are required to distribute to our shareholders at least 90% of our net taxable income (excluding any net capital gain). This requirement limits our ability to retain income or cash flow from operations to finance the acquisition of new properties. We anticipate that we will use debt and equity financing to acquire new properties from time to time. Consequently, if we cannot obtain debt or equity financing on acceptable terms, our ability to acquire new properties and expand our operations will be adversely affected.

We expect to acquire or develop properties in the near future which, if unsuccessful, could adversely impact our ability to make distributions to our shareholders.

We expect to acquire or develop new properties in the near future. The acquisition of additional properties will subject us to risks associated with managing new 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 new real estate investment.

To the extent that we pursue a property which needs substantial renovation or repositioning, we 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 make distributions 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.

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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 new property acquisitions, capital expenditures and other items. As of December 31, 2002, we had aggregate outstanding debt of $37,718,000 secured by our assets. Accordingly, we are subject to the risk that our cash flow will not be sufficient to 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 the Company. Additionally, we may be required to refinance our debt subject to "lump sum" or "balloon" payment maturities on 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.

We could become more highly leveraged, resulting in an increased risk of default and an increase in debt service requirements, which could also adversely affect our financial condition and results of our operations and, consequently, our ability to make distributions 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 metropolitan Houston, Texas area compete with us in developing and acquiring retail, office/warehouse and office properties and seeking tenants to occupy such properties. Such competition could adversely affect our business. There are numerous commercial developers, real estate companies, real estate investment trusts and major retailers that compete with us in seeking properties for acquisition and tenants for properties. Many of these entities have greater financial and other resources, and more operating experience, than us or the Management Company.

Approximately 41.69% of our gross leasable area is subject to leases that expire prior to December 31, 2004.

As of December 31, 2002, 41.69% of the aggregate gross leasable area of our properties is subject to leases that expire in either 2003 or 2004. These leases accounted for 44.39% of our total rental income in 2002. 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

. that 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 make distributions to our shareholders 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 derives 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.

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

As of December 31, 2002, the five largest tenants of our properties generated approximately 7.3% of the combined rent of our properties. The bankruptcy or insolvency of a major tenant or a number of small tenants would

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have an adverse impact on our income and our ability to make distributions to our shareholders. 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 therefore funds may not be available to pay all or part of such claims. During the first quarter of 2003, one of our five largest tenants, Fleming Foods Corporation, filed for bankruptcy protection. Our lease with Fleming expires in June 2003 and rents from this lease represented 1.3% of our total revenues during 2002.

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;

. the risk 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

. the risk 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.

Our business will be directly affected by general economic and regulatory factors that 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 that 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 or environmental 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); and

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

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

We may have difficulty selling real estate investments.

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. We are especially sensitive to this risk considering that all of our properties are located in one metropolitan location. In addition, mortgage payments and, to the extent a property is not 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 revenue from the investment. The occurrence of such events would adversely affect our income.

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

Under various federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. Such laws often impose this liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of any required remediation or removal of such substances may be substantial. Furthermore, laws, ordinances and regulations generally do not limit the owner's liability for such costs of remediation or removal, which could exceed the value of the property. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's ability to sell the property or to borrow using real estate as collateral.

Some of our tenants operate businesses on our properties that may result in contamination of a property by hazardous or toxic materials. In particular, environmental evaluations of one property concluded that the property, at some time, had been slightly impacted by a tenant who conducted a dry cleaning business on the property. However, samples evidencing an impact showed minimal traces of contamination and the contaminant levels were below regulatory limits. Further, environmental evaluations of another property showed potential lead contamination due to a previous use of the facility as a skeet range and potential hydrocarbon contamination from oil/gas exploration activities previously conducted at the site several decades ago. The evaluator determined that the contamination was minimal and not hazardous.

The cost of defending against claims of liability, of compliance with environmental laws and regulations or of remediating any contaminated property could adversely affect our operations and our ability to pay distributions to our shareholders.

The ownership limit in our Declaration of Trust may discourage a takeover attempt.

Our declaration of trust provides that no holder of capital shares, other than any person to whom our board of trust managers grants an exemption, may directly or indirectly own more than 9.8% of the number or value of the outstanding shares of any class or series of our outstanding shares of beneficial interest. This ownership limit may deter tender offers for our common shares, which offers may be attractive to our shareholders. This deterrence may limit the opportunity for shareholders to receive a premium for their common shares that might otherwise exist if an investor attempted to assemble a block of common shares in excess of 9.8% in number or value of the outstanding common shares or otherwise to effect a change of control of HCP. Please read the "Item
11. Description of Registrant's Securities to be Registered--Restrictions on Transfer" section of this registration statement for additional information regarding the restrictions on transfer of our common shares.

CONFLICTS OF INTEREST RISKS

The Management Company may face conflicts of interest when allocating personnel and resources between our operations and the operations of other entities it manages.

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Mr. Hartman strategically directs our day-to-day operations through the Management Company, which he owns and controls, pursuant to the terms of a management agreement. Mr. Hartman also controls other entities which own properties managed by the Management Company. Management Company personnel will not devote their efforts full-time to the property management of our portfolio of 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, the Management Company may have conflicts of interest in allocating its personnel between our operations and the operations of other entities controlled by Mr. Hartman. The failure of the Management Company 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 trust managers face conflicts of interests relating to the positions they hold with other entities.

Certain of our officers and trust managers are also officers and directors of the Management Company and other entities controlled by Mr. Hartman. These personnel 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 us and to our shareholders.

Allen R. Hartman controls other entities that compete with us for his time as well as for 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 in or through other entities. Mr. Hartman currently controls and/or operates three other entities which collectively own eight properties in the Houston metropolitan area. Mr. Hartman spends a material amount of time on 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. Where an investment opportunity is consistent with the investment strategy of several of the entities under his control, Mr. Hartman will present such opportunity to whichever entity has not been presented with an investment opportunity for the longest period of time.

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 the Operating Partnership, 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. HCP, as the general partner of the Operating Partnership, has fiduciary duties to the limited partners of the Operating Partnership, the discharge of which may conflict with the interests of our shareholders.

We have acquired a majority of our properties from entities controlled by Mr. Hartman and we will bear the risk of any deficiencies of such properties.

We have acquired 28 of the 32 properties we owned as of December 31, 2002 from entities controlled by Mr. Hartman. We acquired these properties by either paying cash or issuing common shares or OP Units. No third parties were retained to represent or advise these selling entities against us, or vice versa, and the transactions were not conducted on an "arms'-length" basis.

Mr. Hartman received certain benefits from the acquisitions described above. Mr. Hartman had interests that differed from, and may in certain cases have conflicted with, both the interests of persons acquiring partnership units or common shares in the acquisitions and the interests of our then current shareholders. The benefits Mr. Hartman received might have been different if he had not participated in structuring or valuing the acquisitions. These benefits include the following:

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. 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 selling entities; and

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

Further, Mr. Hartman (either personally or in his capacity as a general partner) made no representations or warranties in regard to the properties or the selling entities in the operative documents executed in order to consummate the consolidations. 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.

TAX RISKS

If we failed to qualify as a REIT, our operations and distributions to our 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, 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 our shareholders when computing our taxable income;

. 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 distribution would be reduced and we would have less cash to distribute to our 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" below.

If the Operating Partnership were classified as a "publicly-traded partnership" under the Internal Revenue Code, our operations and distributions to our shareholders could be adversely affected.

We structured the Operating Partnership 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),

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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 the Operating Partnership as a "publicly traded partnership" for tax purposes, we placed certain restrictions on the transfer and/or redemption of OP units. If the Internal Revenue Service were to assert successfully that the Operating Partnership is a "publicly traded partnership," and substantially all of the Operating Partnership's gross income did not consist of the specified types of passive income, the Internal Revenue Code would treat the Operating Partnership as an association taxable as a corporation.

These topics are discussed in greater detail in "Federal Income Tax Considerations--Tax Aspects of the Operating Partnership" below. 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 the Operating Partnership would reduce our amount of cash available for distribution by HCP to our shareholders.

Distributions 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 stock is not predominately held by qualified employee pension trusts. However, the Internal Revenue Code may classify our distributions 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 "Federal Income Tax Considerations--Taxation of Tax Exempt Entities" below for further discussion of this issue if you are a tax-exempt investor.

FEDERAL INCOME TAX CONSIDERATIONS

GENERAL

The following summary of material federal income tax considerations that may be relevant to a holder of common shares is based on current law and is not intended to be tax advice. The following discussion does not cover all possible tax considerations and does not include a detailed discussion of any state, local or foreign tax considerations. Nor does it discuss all aspects of federal income taxation that may be relevant to a shareholder in light of his or her particular circumstances or to certain types of shareholders (including insurance companies, tax-exempt entities, financial institutions or broker-dealers, foreign corporations and persons who are not citizens or residents of the United States) who are subject to special treatment under the federal income tax laws. For the purposes of this section, we call the Internal Revenue Code the "Code".

The Code provisions governing the federal tax treatment of REITs are highly technical and complex. This summary is based on, and qualified in its entirety by, the following:

. current provisions of the Code;

. existing, temporary and currently proposed Treasury Regulations promulgated under the Code;

. the legislative history of the Code;

. existing administrative rulings; and

. judicial interpretations of the foregoing.

No assurance can be given that legislative, judicial or administrative changes will not affect the accuracy of any statements in this registration statement with respect to transactions entered into or contemplated prior to the effective date of such changes.

This discussion is not intended to be a substitute for careful tax planning. We urge each shareholder to consult with his or her own tax advisor regarding the specific tax consequences applicable to him or her

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relating to the ownership and disposition of our common shares of beneficial interest, including the federal, state, local, foreign and other tax consequences of such ownership, sale and disposition.

We elected to be treated as a REIT under Section 856 through Section 860 of the Code for federal income tax purposes commencing with our taxable year ended December 31, 1999. You should note, however, that we cannot assure you that the Internal Revenue Service will not successfully challenge our status as a REIT.

Moreover, our qualification for taxation as a REIT depends on our ability to meet the various qualification tests imposed by the Code discussed below. The rules governing REITs are highly technical and require ongoing compliance with a variety of tests that depend, among other things, on future operating results. While we expect to satisfy these tests, and will use our best efforts to do so, we can't assure you that the continued actual results of our operations for any particular year will satisfy these requirements. We also can't assure you that the applicable law will not change and adversely affect us and our shareholders. The consequences of failing to be taxed as a REIT are summarized in the "--Failure to Qualify as a REIT" section below.

The following is a summary of the material federal income tax considerations affecting us as a REIT and our shareholders.

REQUIREMENTS FOR QUALIFICATION AS A REIT

Organizational Requirements

In order to maintain our REIT qualification, we must meet the following criteria:

. we must be organized as a domestic entity that would, if we did not maintain our REIT status, be taxable as a regular corporation;

. we can't be a financial institution or an insurance company;

. we must be managed by one or more trustees or directors;

. our taxable year must be a calendar year;

. our beneficial ownership must be evidenced by transferable shares;

. our capital stock must be held by at least 100 persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a taxable year of less than 12 months;

. not more than 50% of the value of our shares of capital stock may be held, directly or indirectly, applying certain constructive ownership rules, by five or fewer individuals at any time during the last half of each of our taxable years; and

. we must elect to be taxed as a REIT and satisfy certain filing and other administrative requirements.

To protect against violations of these requirements, our declaration of trust contains restrictions on transfers of our capital stock, as well as provisions that automatically convert shares of stock into Excess Securities to the extent that the ownership otherwise might jeopardize our REIT status. See "Item 11. Description of Registrant's Securities to be Registered--Restrictions on Transfer." There is no assurance, however, that these restrictions will in all cases prevent us from failing to satisfy the share ownership requirements described above.

We are required to maintain records disclosing the actual ownership of common shares in order to monitor our compliance with the share ownership requirements. To do so, we may demand written statements each year from the record holders of certain percentages of shares in which the record holders must disclose the actual owners of the shares (i.e., the persons required to include our dividends in their gross income). A list of those persons failing or

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refusing to comply with this demand will be maintained as part of our records. Shareholders who fail or refuse to comply with the demand must submit a statement with their tax returns disclosing the actual ownership of the shares and certain other information.

We believe we currently satisfy, and we expect to continue to satisfy, each of the requirements discussed above. We also believe we currently satisfy, and we expect to continue to satisfy, the requirements that are separately described below concerning the nature and amounts of our income and assets and the levels of required annual distributions.

Operational Requirements--Gross Income Tests

In order to qualify as a REIT for a particular year, we also must meet two tests governing the sources of our income. These tests are designed to ensure that a REIT derives its income principally from passive real estate investments. In evaluating a REIT's income, the REIT will be treated as receiving its proportionate share (based on its interest in partnership capital) of the income produced by any partnership in which the REIT holds an interest as a partner. Any such income will retain the character that it has in the hands of the partnership. The Code allows us to own and operate a number of our properties through wholly-owned subsidiaries that are "qualified REIT subsidiaries." The Code provides that a qualified REIT subsidiary is not treated as a separate corporation, and all of its assets, liabilities and items of income, deduction and credit are treated as assets, liabilities and such items of the REIT.

75% Gross Income Test. At least 75% of our gross income for each taxable year must be derived from specified classes of income that are related to real estate or income earned by our cash or cash equivalents. The permitted categories of income currently relevant to us are:

. "rents from real property" (as described below);

. gains from the sale of real property (excluding gain from the sale of property held primarily for sale to customers in the ordinary course of the Company's trade or business, referred to below as "dealer property");

. abatements and refunds of real property taxes; and

. "qualified temporary investment income" (which generally means income that is attributable to stock or debt instruments, is attributable to the temporary investment of capital received from our issuance of capital stock or debt securities that have a maturity of at least five years, and is received or accrued by us within one year from the date we receive such capital).

In evaluating our compliance with the 75% gross income test, as well as the 95% gross income test described below, gross income does not include gross income from "prohibited transactions." In general, a prohibited transaction is one involving a sale of dealer property, not including certain dealer property held by us for at least four years. In other words, we are generally required to acquire and hold properties for investment rather than be in the business of buying and selling properties.

We expect that substantially all of our operating gross income will be considered "rent from real property." "Rent from real property" is qualifying income for purposes of the gross income tests in accordance with the rules summarized below.

. "Rent from real property" can include rent attributable to personal property we lease in connection with the real property so long as the personal property rent is less than 15% of the total rent attributable to the lease. We do not expect to earn material amounts in these categories.

. "Rent from real property" generally does not include rent based on the income or profits of the tenant leasing the property. We do not currently, nor do we intend to, lease property and receive rentals based on the tenant's net income or profit.

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. "Rent from real property" can include rent based on a percentage of a tenant's gross sales or gross receipts. We may have some leases, from time to time, where rent is based on a percentage of gross income.

. "Rent from real property" can not include rent we receive from a person or corporation (or subtenant of such person of corporation) in which we (or any of our 10% or greater owners) directly or constructively own a 10% or greater interest.

. "Rent from real property" can include amounts we receive with respect to services we provide for tenants only if such services are "usually and customarily rendered" in connection with the rental of space for occupancy only and are not considered "rendered to the occupant." If the services we provide do not meet this standard and are impermissible tenant services, the income derived therefrom will not qualify as "rent from real property," unless such income does not exceed one percent of all amounts received from the property, such services are provided to our tenants through an "independent contractor" from whom we do not derive any income, or such are provided to our tenants through a taxable REIT subsidiary.

Upon the ultimate sale of any of our properties, any gains realized also are expected to constitute qualifying income, as gain from the sale of real property (not involving a prohibited transaction).

We have invested proceeds we obtained from our private placement in government securities or certificates of deposit. Income derived from these investments is qualifying income under the 75% gross income test for the first year after receipt of such proceeds. Accordingly, to the extent that proceeds from our private placement are not invested in properties prior to the expiration of this one year period, we may invest such proceeds in less liquid investments such as mortgage-backed securities or shares in other entities taxed as REITs. This would allow us to continue to include the income from such invested proceeds as qualified income for our REIT qualification.

95% Gross Income Test. In addition to earning 75% of our gross income from the sources listed above, at least an additional 20% of our gross income for each taxable year must come either from those sources, or from dividends, interest or gains from the sale or other disposition of stock or other securities that do not constitute dealer property. This test permits a REIT to earn a significant portion of its income from traditional "passive" investment sources that are not necessarily real estate related. The term "interest" (under both the 75% and 95% tests) does not include amounts that are based on the income or profits of any person, unless the computation is based only on a fixed percentage of receipts or sales.

Failing the 75% or the 95% Gross Income Tests; Reasonable Cause. As a result of the 75% and 95% gross income tests, REITs generally are not permitted to earn more than 5% of their gross income from active sources (such as brokerage commissions or other fees for services rendered). We may receive certain types of such income. This type of income will not qualify for the 75% gross income test or the 95% gross income test. But we do not expect our non-qualifying income to be significant and we expect such income will always be less than 5% of our annual gross income. While we do not anticipate we will earn substantial amounts of non-qualifying income, if non-qualifying income exceeds 5% of our gross income, we could lose our REIT status.

If we fail to meet either the 75% or 95% gross income tests during a taxable year, we may still qualify as a REIT for that year if:

. we report the source and nature of each item of our gross income in our federal income tax return for that year;

. the inclusion of any incorrect information in our return is not due to fraud with intent to evade tax; and

. our failure to meet the tests is due to reasonable cause and not to willful neglect.

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However, in that case we would be subject to a 100% tax based on the greater of the amount by which we fail either the 75% or 95% gross income tests for such year, multiplied by a fraction intended to reflect our profitability, as described in the "Taxation as a REIT" section below.

Operational Requirements--Asset Tests

On the last day of each calendar quarter, we also must meet two tests concerning the nature of our investments.

First, at least 75% of the value of our total assets generally must consist of real estate assets, cash, cash items (including receivables) and government securities. For this purpose, "real estate assets" include interests in real property, interests in loans secured by mortgages on real property or by certain interests in real property, shares in other REITs and certain options, but do not include mineral, oil or gas royalty interests. The temporary investment of new capital in debt instruments also qualifies under this 75% asset test, but only for the one-year period beginning on the date we receive the new capital.

Second, although the balance of our assets generally may be invested without restriction, we will not be permitted to own (1) securities of any one non-governmental issuer (other than securities of a taxable REIT subsidiary) that represent more than 5% of the value of our total assets, (2) more than 10% of the outstanding voting securities of any single issuer (other than securities of a taxable REIT subsidiary), (3) securities of any single issuer (other than securities of a taxable REIT subsidiary) which have a value of more than 10% of the total value of all the outstanding securities of such issuer, or (4) securities of one or more taxable REIT subsidiaries that represent more than 20% of the value of our total assets. A REIT, however, may own 100% of the stock of a qualified REIT subsidiary, in which case the subsidiary will be ignored for tax purposes and the assets, liabilities and items of income, deduction and credit of the subsidiary are treated as those of the REIT. In evaluating a REIT's assets, if the REIT invests in a partnership (such as the Operating Partnership), it is deemed to own its proportionate share of the assets of the partnership. We currently comply with, and expect to continue to satisfy, these asset tests.

Operational Requirements--Annual Distribution Requirement

To maintain our REIT status, we generally must distribute to our shareholders in each taxable year at least 90% of our net ordinary income (capital gain is not required to be distributed). More precisely, we must distribute an amount equal to (1) 90% of the sum of (a) our "REIT taxable income" before deduction of dividends paid and excluding any net capital gain and (b) any net income from property we foreclose on less the tax on such income, minus (2) limited categories of "excess noncash income" (including, cancellation of indebtedness and original issue discount income). In order to meet this distribution requirement, the distributions on any particular class of shares must be pro rata, with no preference to any share of stock as compared with other shares of the same class, and with no preference to one class of stock as compared with another class except to the extent that the former is entitled to such preference.

REIT taxable income is defined to be the taxable income of the REIT, computed as if it were a corporation, with certain modifications. For example, the deduction for dividends paid is allowed, but neither net income from foreclosure property nor net income from prohibited transactions, is included. In addition, the REIT may carry over, but not carry back, a net operating loss for 20 years following the year in which it was incurred.

A REIT may satisfy the 90% distribution test with dividends paid during the taxable year and with dividends paid after the end of the taxable year if the dividends fall within one of the following categories:

. Dividends declared by us in October, November, or December of a particular year and payable to shareholders of record on a date during such month of such year will be deemed to have been paid during such year so long as such dividends are actually paid by us by January 31 of the following year.

. Dividends declared after the end of, but before the due date (including extensions) of our tax return for, a particular taxable year will be deemed to have been paid during such taxable year if such dividends are

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actually paid by us (1) within 12 months of the end of such taxable year and (2) no later than the date of our next regular dividend payment made after such declaration.

Dividends that are paid after the close of a taxable year that do not qualify under the rule governing payments made in January (described above) will be taxable to the shareholders in the year paid, even though we may take them into account for a prior year. A nondeductible excise tax equal to 4% will be imposed on us for each calendar year to the extent that dividends declared and distributed or deemed distributed before December 31 are less than the sum of
(1) 85% of our "ordinary income" plus (2) 95% of our capital gain net income plus (3) any undistributed income from prior periods. We will also be taxed at regular corporate rates to the extent we retain any portion of our taxable income.

It is possible that we may not have sufficient cash or other liquid assets to meet the distribution requirements discussed above. This could arise because of competing demands for our funds, or because of timing differences between taxable income recognition and cash receipts and disbursements. Although we do not anticipate any difficulty in meeting the REIT distribution requirements, we can't assure investors that necessary funds will be available. In the event this occurs, we may arrange for short-term, or possibly long-term, borrowings to allow us to pay the required dividends and meet the 90% distribution requirement.

If we fail to meet the 90% distribution requirement because of an adjustment to our taxable income by the Internal Revenue Service, we may be able to retroactively cure the failure by paying a "deficiency dividend," as well as applicable interest and penalties, within a specified period.

In computing our REIT taxable income, we will use the accrual method of accounting. We are required to file an annual federal income tax return, which, like other corporate returns, is subject to examination by the Internal Revenue Service. Because the tax law requires us to make many judgments regarding the proper treatment of a transaction or an item of income or deduction, it is possible that the Internal Revenue Service will challenge positions we take in computing our REIT taxable income and our distributions. Issues could arise, for example, with respect to the allocation of the purchase price of properties between depreciable or amortizable assets and nondepreciable or non-amortizable assets such as land, and the current deductibility of fees paid to the Management Company or its affiliates. If the Internal Revenue Service successfully challenges our characterization of a transaction or determination of our taxable income, we could be found to have failed to satisfy a requirement required to maintain our taxable status as a REIT. If, as a result of a challenge, we are determined to have failed to satisfy the distribution requirements for a taxable year, we would be disqualified as a REIT, unless we were permitted to pay a deficiency distribution to our shareholders, as well as any required interest thereon to the Internal Revenue Service. A deficiency distribution can't be used to satisfy the distribution requirement, however, if the failure to meet the requirement is not due to a later adjustment to our income by the Internal Revenue Service.

Operational Requirements--Recordkeeping

In order to continue to qualify as a REIT, we must maintain certain records as set forth in the Treasury Regulations. Further, as we discussed above, we must request, on an annual basis, certain information designed to disclose the ownership of our outstanding shares. We intend to comply with these requirements.

TAXATION AS A REIT

As a REIT, we generally will not be subject to corporate income tax to the extent we distribute our REIT taxable income to our shareholders. This treatment effectively eliminates the "double taxation" (i.e., taxation at both the corporate and shareholder levels) imposed on investments in most corporations. We generally will be taxed only on the portion of our taxable income that we retain, including any undistributed net capital gain, because we will be entitled to a deduction for dividends paid to shareholders during the taxable year. A "dividends paid" deduction is not available for dividends that are considered preferential within any given class of shares or as between classes except to the extent such class is entitled to such preference. We do not anticipate we will pay any such preferential dividends.

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Even as a REIT, we will be subject to tax in the following circumstances:

. we will be taxed at regular corporate rates on our undistributed taxable income, including undistributed net capital gains;

. a tax of 100% applies to any net income we receive from prohibited transactions, (as previously described, these transactions are usually sales or other dispositions of property held primarily for sale to customers in the ordinary course of business);

. if we fail to meet either the 75% or 95% gross income test previously described, but still qualify for REIT status under the reasonable cause exception to those tests, we will be subject to a 100% tax on the amount obtained by multiplying (1) the greater of the amount, if any, by which we failed either the 75% gross income test or the 95% gross income test, times (2) the ratio of our REIT taxable income to our gross income (excluding capital gain and certain other items);

. under some circumstances, we will be subject to the alternative minimum tax;

. we will be subject to the 4% excise tax discussed earlier if we fail, in any calendar year, to distribute to shareholders an amount equal to the sum of (1) 85% of our REIT ordinary income for such year, (2) 95% of our REIT capital gain net income for such year, and (3) any undistributed taxable income from prior years;

. if we acquire any asset from a C-corporation (i.e., a corporation generally subject to corporate level tax) in a carry-over basis transaction and then recognize gain on the disposition of the asset within ten years after we acquired the asset, then a portion of our gain may by subject to tax at the highest regular corporate rate;

. any income or gain we receive from foreclosure property will be taxed at the highest corporate rate (currently 35%); and

. a tax of 100% applies in certain cases to the extent that income is shifted away from, or deductions are shifted to, any taxable REIT subsidiary through the use of certain non-arm's length pricing arrangements between the REIT and such taxable REIT subsidiary.

FAILURE TO QUALIFY AS A REIT

If we fail to qualify as a REIT and are not successful in obtaining relief, we will be taxed at regular corporate rates on all of our taxable income. Distributions to our shareholders would not be deductible in computing our taxable income and we would no longer be required to make distributions. Any corporate level taxes generally would reduce the amount of cash available for distribution to our shareholders and, because our shareholders would continue to be taxed on any distributions they receive, the net after tax yield to our shareholders likely would be substantially reduced.

As a result, our failure to qualify as a REIT during any taxable year could have a material adverse effect us and our shareholders. If we lose our REIT status, unless we are able to obtain relief, we will not be eligible to elect REIT status again until the fifth taxable year that begins after the taxable year during which our election was terminated.

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TAXATION OF SHAREHOLDERS

DISTRIBUTIONS

In general, distributions will be taxable to shareholders (who are not "Non-U.S. Shareholders, as defined below in "Taxation of Foreign Investors") as ordinary income to the extent of our earnings and profits. Specifically, dividends and distributions will be treated as follows:

. Dividends declared during the last quarter of a calendar year and actually paid during January of the immediately following calendar year are generally treated as if received by the shareholders on December 31 of the calendar year during which they were declared.

. If we declare a dividend after the end of, but before the due date (including applicable extensions) of our tax return for, a particular taxable year, and we distribute such dividend to our shareholders not later than the date of our first regular dividend payment made after such declaration (or, if earlier, within 12 months of the end of such taxable year), we may elect to treat the dividend as having been paid during the taxable year for purposes of satisfying our distribution requirements. However, any such dividend described in the preceding sentence will be treated as received by shareholders in the taxable year in which the distribution is actually made by us.

. Distributions paid to shareholders will not constitute passive activity income, and as a result generally can't be offset by losses from passive activities of a shareholder subject to the passive activity rules.

. Distributions we designate as capital gains dividends generally will be taxed as capital gains to shareholders to the extent that the distributions do not exceed our actual net capital gain for the taxable year. Corporate shareholders may be required to treat up to 20% of any such capital gains dividends as ordinary income.

. If we elect to retain and pay income tax on any net long-term capital gain, our shareholders would include in their income as long-term capital gain their proportionate share of such net long-term capital gain. Each of our shareholders would receive a credit for such shareholder's proportionate share of the tax paid by us on such retained capital gains and an increase in tax basis in their shares in an amount equal to the difference between the undistributed long-term capital gains and the amount of tax we paid.

. Any distributions we make, whether characterized as ordinary income or as capital gains, are not eligible for the "dividends received" deduction for corporations.

. Shareholders are not permitted to deduct our losses or loss carry-forwards.

Future regulations may require that the shareholders take into account, for purposes of computing their individual alternative minimum tax liability, certain of our tax preference items.

We may generate cash in excess of our net earnings. If we distribute cash to our shareholders in excess of our current and accumulated earnings and profits, other than as a capital gain dividend, the excess cash will be deemed to be a non-taxable return of capital to each shareholder to the extent of the adjusted tax basis of the shareholder's shares. Distributions in excess of the adjusted tax basis will be treated as gain from the sale or exchange of the shares. A shareholder who has received a distribution in excess of our current and accumulated earnings and profits may, upon the sale of the shares, realize a higher taxable gain or a smaller loss because the basis of the shares as reduced will be used for purposes of computing the amount of the gain or loss.

DISPOSITIONS OF SHARES

Generally, gain or loss realized by a shareholder upon the sale of common shares will be reportable as capital gain or loss. Such gain or loss will be treated as long-term capital gain or loss if the shares have been held for more

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than 12 months and as short-term capital gain or loss if the shares have been held for 12 months or less. If a shareholder receives a long-term capital gain dividend and has held the shares for six months or less, any loss incurred on the sale or exchange of the shares is treated as a long-term capital loss to the extent of the corresponding long-term capital gain dividend received.

OUR FAILURE TO QUALIFY AS A REIT

In any year in which we fail to qualify as a REIT, our shareholders generally will continue to be treated in the same fashion described above, except that:

. none of our dividends will be eligible for treatment as capital gains dividends;

. corporate shareholders will qualify for the "dividends received" deduction; and

. shareholders will not be required to report any share of the Company's tax preference items.

BACKUP WITHHOLDING

We will report to our shareholders and the Internal Revenue Service the amount of dividends paid during each calendar year and the amount of tax withheld, if any. If a shareholder is subject to backup withholding, we will be required to deduct and withhold from any dividends payable to that shareholder a tax of 30%. (This 30% rate is scheduled to be reduced to 29% for payments received in 2004 and 2005 and to 28% for payments received after 2005). These rules may apply in the following circumstances:

. when a shareholder fails to supply a correct and properly certified taxpayer identification number (which, for an individual, is his or her Social Security Number);

. when the Internal Revenue Service notifies us that the shareholder is subject to the backup withholding rules;

. when a shareholder furnishes an incorrect taxpayer identification number; or

. in the case of corporations or others within certain exempt categories, when they fail to demonstrate that fact when required.

A shareholder that does not provide a correct taxpayer identification number may also be subject to penalties imposed by the Internal Revenue Service. Backup withholding is not an additional tax. Rather, any amount withheld as backup withholding will be credited against the shareholder's actual federal income tax liability. We also may be required to withhold a portion of capital gain distributions made to shareholders that fail to certify their non-foreign status.

TAXATION OF TAX EXEMPT ENTITIES

Income earned by tax-exempt entities (such as employee pension benefit trusts, individual retirement accounts, charitable remainder trusts, etc.) is generally exempt from federal income taxation, unless such income consists of "unrelated business taxable income" ("UBTI") as such term is defined in the Code.

In general, dividends received or gain realized on our shares by a tax-exempt entity will not constitute UBTI. However, if a tax-exempt entity has financed the acquisition of its shares with "acquisition indebtedness" within the meaning of the Code part or all of such income or gain would constitute taxable UBTI.

In the event that we were deemed to be "predominately held" by qualified employee pension benefit trusts that each hold more than 10% (in value) of our shares, such trusts would be required to treat a certain percentage of the dividend distributions paid to them as UBTI. We would be deemed to be "predominately held" by such trusts if

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either (1) one employee pension benefit trust owns more than 25% in value of our shares, or (2) any group of such trusts, each owning more than 10% in value of our shares, holds in the aggregate more than 50% in value our shares. If either of these ownership thresholds were ever exceeded, any qualified employee pension benefit trust holding more than 10% in value of our shares would be subject to tax on that portion of our dividend distributions made to it which is equal to the percentage of our income which would be UBTI if we were a qualified trust, rather than a REIT. We will attempt to monitor the concentration of ownership of employee pension benefit trusts of our shares, and we do not expect our shares to be "predominately held" by qualified employee pension benefit trusts for purposes of the foregoing rules (although there is no assurance in this regard).

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

TAXATION OF FOREIGN INVESTORS

The rules governing federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships and other foreign shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt will be made herein to provide more than a summary of such rules. Non-U.S. investors should consult with their own tax advisors to determine the impact that federal, state and local income tax or similar laws will have on them as a result of an investment in the Company.

Distributions Generally.

Distributions paid by us that are not attributable to gain from our sales or exchanges of United States real property interests and not designated by us as capital gain dividends will be treated as dividends of ordinary income to the extent that they are made out of our current or accumulated earnings and profits. Such dividends to Non-U.S. Shareholders ordinarily will be subject to a withholding tax equal to 30% of the gross amount of the dividend unless an applicable tax treaty reduces or eliminates that tax. However, if income from the investment in the common shares is treated as effectively connected with the Non-U.S. Shareholder's conduct of a United States trade or business, the Non-U.S. Shareholder generally will be subject to a tax at the graduated rates applicable to ordinary income, in the same manner as U.S. shareholders are taxed with respect to such dividends (and may also be subject to the 30% branch profits tax in the case of a shareholder that is a foreign corporation). Dividends in excess of our current and accumulated earnings and profits will not be taxable to a shareholder to the extent they do not exceed the adjusted basis of the shareholder's shares. Instead, they will reduce the adjusted basis of such shares. To the extent that such dividends exceed the adjusted basis of a Non-U.S. Shareholder's shares, they will give rise to tax liability if the Non-U.S. Shareholder would otherwise be subject to tax on any gain from the sale or disposition of his shares, as described below.

Distributions Attributable to Sale or Exchange of Real Property.

Distributions that are attributable to gain from our sales or exchanges of United States real property interests will be taxed to a Non-U.S. Shareholder as if such gain were effectively connected with a United States trade or business. Non-U.S. Shareholders would thus be taxed at the normal capital gain rates applicable to U.S. shareholders, and would be subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals. Also, such dividends may be subject to a 30% branch profits tax in the hands of a corporate Non-U.S. Shareholder not entitled to any treaty exemption.

Tax Withholding on Distributions.

For withholding tax purposes, we will generally withhold tax at the rate of 30% on the amount of any distribution (other than distributions designated as capital gain dividends) made to a Non-U.S. Shareholder, unless the

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Non-U.S. Shareholder provides us with a properly completed Internal Revenue Service (1) Form W-8BEN (in which case we will withhold at the lower treaty rate) or (2) Form W-8ECI claiming that the dividend is effectively connected with the Non-U.S. Shareholder's conduct of a trade or business within the United States (in which case we will not withhold tax). We are also generally required to withhold tax at the rate of 35% on the portion of any dividend to a Non-U.S. Shareholder that is or could be designated by us as a capital gain dividend. Such withheld amounts of tax do not represent actual tax liabilities but, rather, represent payments in respect of those tax liabilities described in the preceding two paragraphs. Thus, such withheld amounts are creditable by the Non-U.S. Shareholder against its actual U.S. federal income tax liabilities, including those described in the preceding two paragraphs. The Non-U.S. Shareholder would be entitled to a refund of any amounts withheld in excess of such Non-U.S. Shareholder's actual U.S. federal income tax liabilities, provided that the Non-U.S. Shareholder files applicable returns or refund claims with the Internal Revenue Service.

Sales of Shares.

Gain recognized by a Non-U.S. Shareholder upon a sale of shares generally will not be subject to U.S. federal income taxation, provided that:

. such gain is not effectively connected with the conduct by such Non-U.S. Shareholder of a trade or business within the United States;

. the Non-U.S. Shareholder is not present in the United States for 183 days or more during the taxable year and certain other conditions apply; and

. we are a "domestically controlled REIT", which generally means that less than 50% in value of our shares continues to be held at all times during a specified testing period directly or indirectly by foreign persons (as is currently the case).

If we were not a domestically controlled REIT, the determination of whether a Non-U.S. Shareholder's sale of common shares would be subject to tax would depend on whether or not the common shares were regularly traded on an established securities market and on the size of selling Non-U.S. Shareholder's interest in our securities. If the gain on the sale of shares were to be subject to taxation, the Non-U.S. Shareholder will be subject to the same treatment as U.S. shareholders with respect to such gain and the purchaser of such common shares may be required to withhold 10% of the gross purchase price.

STATE AND LOCAL TAXES

We may be subject to state or local taxation. In addition, our shareholders may also be subject to state or local taxation. Consequently, you should consult your own tax advisors regarding the effect of state and local tax laws on your investment in our securities.

TAX ASPECTS OF THE OPERATING PARTNERSHIP

The following discussion summarizes the material United States federal income tax considerations applicable to our investment in the Operating Partnership. This summary does not address tax consequences under state, local, or foreign tax laws and does not discuss all aspects of federal law that may affect the tax consequences of the ownership and disposition of an interest in the Operating Partnership.

TAX TREATMENT OF THE OPERATING PARTNERSHIP

The Operating Partnership will be treated as a pass-through entity that does not incur any federal income tax liability, provided that the Operating Partnership is classified for federal income tax purposes as a partnership rather than as a corporation or an association taxable as a corporation. The Operating Partnership has been formed as a Delaware limited partnership under the Delaware Revised Uniform Limited Partnership Act. An organization formed

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as a partnership under applicable state partnership law will be treated as a partnership, rather than as a corporation, for federal income tax purposes if:

. it is not expressly classified as a corporation under Section 301.7701-2(b)(1) through (8) of the Treasury Regulations;

. it does not elect to be classified as an association taxable as a corporation; and

. either (A) it is not classified as a "publicly traded partnership" under Section 7704 of the Code or (B) 90% or more of it's gross income consists of specified types of "qualifying income" within the meaning of Section 7704(c)(2) of the Code (including interest, dividends, "real property rents" and gains from the disposition of real property). A partnership is deemed to be a "publicly traded partnership" if its interests are either (i) traded on an established securities market or (ii) readily tradable on a secondary market (or the substantial equivalent thereof).

Pursuant to the Treasury Regulations under Section 7704, the determination of whether a partnership is publicly traded is generally based on a facts and circumstances analysis. However, the regulations provide limited "safe harbors" which preclude publicly traded partnership status. The Partnership Agreement of the Operating Partnership contains a number of limitations on transfers and redemptions of partnership interests which are intended to cause the Operating Partnership to qualify for an exemption from publicly traded partnership status under one or more of the safe harbors of contain in the applicable regulations. Moreover, the Operating Partnership is not expressly classified as, and will not elect to be classified as, a corporation under the Treasury Regulations. Accordingly, we believe that the Operating Partnership will be treated as a partnership for federal income tax purposes.

If for any reason the Operating Partnership were taxable as a corporation, rather than as a partnership for federal income tax purposes, we would not be able to satisfy the income and asset requirements for REIT status. Further, the Operating Partnership would be required to pay income tax at corporate tax rates on its net income, and distributions to its partners would constitute dividends that would not be deductible in computing the Operating Partnership's taxable income and would be taxable to us. Any change in the Operating Partnership's status for tax purposes could also, in certain cases, be treated as a taxable event, in which case we might incur a tax liability without any related cash distribution.

The following discussion assumes that the Operating Partnership will be treated as a partnership for federal income tax purposes.

TAX TREATMENT OF PARTNERS

Income and Loss Pass-Through.

No federal income tax will be paid by the Operating Partnership. Instead, each partner, including us, is required to report on its income tax return its allocable share of income, gains, losses, deductions and credits of the Operating Partnership, regardless of whether the Operating Partnership makes any distributions. Our allocable shares of income, gains, losses, deductions and credits of the Operating Partnership are generally determined by the terms of the Partnership Agreement.

Pursuant to Section 704(c) of the Code, income, gain, loss and deduction attributable to property that is contributed to a partnership in exchange for an interest in such partnership must be allocated in a manner that takes into account the unrealized tax gain or loss associated with the property at the time of the contribution. The amount of such unrealized tax gain or loss is generally equal to the difference between the fair market value of the contributed property at the time of contribution and the adjusted tax basis of such property at the time of contribution (a "book/tax difference"). Such allocations are solely for federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners. The Operating Partnership was formed by way of contributions of property which have a book/tax difference. Consequently, under the Partnership Agreement, the

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partners will be allocated tax items in a manner designed to eliminate the effects of these differences in manner that is consistent with Section 704(c) of the Code. As a result, (1) certain partners that contributed property with a book/tax difference may be allocated depreciation deductions for tax purposes which are lower than such deductions would be if determined on a pro rata basis and (2) in the event of a disposition of any contributed asset which has a book/tax difference, all income attributable to such book/tax difference will generally be allocated to the partner that contributed such asset to the Operating Partnership and the other partners will generally be allocated only their share of capital gains attributable to the appreciation in the value of such asset, if any, since the date of such contribution.

Although the special allocation rules of Section 704(c) are generally intended to cause the amount of tax allocations with respect to contributed property which are made to partners other than the contributing partner to equal the amount of book allocations to such other partners, the rules do not always have this result. Thus, in certain cases we may be allocated, with respect to property which has a book/tax difference and has been contributed by other partners, tax depreciation and other tax deductions that are less than, and possibly an amount of taxable income or gain on the sale of such property which is greater than, the amount of book depreciation, deductions, income or gain which is allocated to us. This may cause us to recognize taxable income in excess of cash proceeds, which might adversely affect our ability to comply with the REIT distribution requirements.

The foregoing principles also apply in determining our earnings and profits for purposes of determining the portion of distributions taxable as dividend income. The application of these rules over time may result in a higher portion of distributions being taxed as dividends than would have occurred had we purchased the contributed assets entirely for cash.

The characterization of any item of profit or loss (for example, as capital gain or loss rather than ordinary income or loss) which is allocated to us will be the same for us as it was for the Operating Partnership.

Treatment of Distributions and Constructive Distributions.

Distributions we receive from the Operating Partnership will generally be nontaxable to us. However, we would have taxable income in the event the amount of distributions we receive from the Operating Partnership, or the amount of any decrease in our share of the Operating Partnership's indebtedness (any such decrease being considered a constructive cash distribution to us), exceeds our adjusted tax basis in our interest in the Operating Partnership. Such taxable income would normally be characterized as a capital gain, and if our interest in the Operating Partnership has been held for longer than one year, any such gain would constitute long-term capital gain.

Tax Basis in Our Operating Partnership Interest.

Our adjusted tax basis in our interest in the Operating Partnership generally:

. will be equal to the amount of cash and the basis of any other property contributed to the Operating Partnership by us and our proportionate share of the Operating Partnership's indebtedness;

. will be increased by our share of the Operating Partnership's taxable and non-taxable income and any increase in our share of Operating Partnership indebtedness; and

. will be decreased (but not below zero) by the distributions we receive, our share of deductible and non-deductible losses and expenses of the Operating Partnership and any decrease in our share of Operating Partnership indebtedness.

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ITEM 2. FINANCIAL INFORMATION.

SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial information for the Company from the commencement of our operations. You should read this information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and the notes thereto, both of which appear elsewhere in this registration statement.

                                                                            (in thousands except per share data)
                                                                ------------------------------------------------------------
                                                                                  Year Ended December 31,
                                                                ------------------------------------------------------------
                                                                    2002            2001            2000            1999
                                                                ------------    ------------    ------------    ------------
INCOME STATEMENT DATA:
    Revenues....................................                $     20,755    $     11,704    $      9,626    $      5,009
    Operations expenses.........................                       8,243           5,068           3,925           2,017
    Interest....................................                       1,573             812           1,271             732
    Depreciation and amortization...............                       4,041           2,151           1,786             850
                                                                ------------    ------------    ------------    ------------
        Total expenses..........................                      13,857           8,031           6,982           3,599
                                                                ------------    ------------    ------------    ------------
    Income before minority interests............                       6,898           3,673           2,644           1,410
    Minority interest in income.................                      (3,193)         (1,932)         (1,770)         (1,396)
                                                                ------------    ------------    ------------    ------------
    Net income..................................                $      3,705    $      1,741    $        874    $         14
                                                                ============    ============    ============    ============
    Net income per common share.................                $      0.755           0.573    $      0.475    $      0.037
    Weighted average shares outstanding.........                       4,905           3,036           1,841             375

BALANCE SHEET DATA:
    Real estate.................................                $    109,294    $     66,269    $     62,781    $     29,518
    Other assets................................                      17,305           4,170           3,017           3,209
                                                                ------------    ------------    ------------    ------------
        Total assets............................                $    126,599    $     70,439    $     65,798    $     32,727
                                                                ============    ============    ============    ============
    Liabilities.............................                    $     45,252    $     16,072    $     17,439    $     13,038
    Minority interests in Operating Partnership                       38,598          27,264          27,278          15,866
    Shareholders' equity....................                          42,749          27,103          21,081           3,823
                                                                ------------    ------------    ------------    ------------
        Total liabilities and equity............                $    126,599    $     70,439    $     65,798    $     32,727
                                                                ============    ============    ============    ============
CASH FLOW DATA:
    Proceeds from issuance of common shares.....                $        155    $      6,748    $     11,660    $      3,978
    Additions to real estate....................                       1,983           5,027           6,089           6,368

OTHER FINANCIAL DATA:
    Dividends per share.........................                $     0.9625    $     0.8125    $     0.9550    $     0.9250

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

You should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the notes thereto included in this registration statement. For more detailed information regarding the basis of presentation for the following information, you should read the notes to the audited consolidated financial statements included in this registration statement.

OVERVIEW

We owned 32 commercial properties at December 31, 2002, consisting of 17 rental centers, 12 office/warehouse properties and three office buildings. All of our properties are located in the Houston, Texas

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metropolitan area. As of December 31, 2002, we had 636 total tenants. No individual lease or tenant is material to our business. Revenues from our largest lease constituted 2.32% of our total revenues during 2002. Leases for our properties range from one year for our smaller spaces to over ten years for larger tenants. Our leases generally include minimum monthly lease payments and tenant reimbursements for payment of taxes, insurance and maintenance.

We have no employees and we do not manage our properties. Our properties and day-to-day operations are managed by the Management Company under a management agreement. Under this agreement, we pay the Management Company the following amounts:

. a management fee of 5% of our gross effective revenues to manage our properties;

. a leasing fee of 6% of the gross effective revenues from leases originated by the Management Company and a fee of 4% of the gross effective revenues from expansions or renewals of existing leases;

. an administrative fee of 1% of our gross effective revenues for day-to-day supervisory and general administration services; and

. the reimbursement of certain expenses and costs incurred on our behalf.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. We prepared these financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements required us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We based our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Our results may differ from these estimates. Currently, we believe that our accounting policies do not require us to make estimates using assumptions about matters that are highly uncertain. You should read Note 1, Summary of Significant Accounting Policies, to our financial statements in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations.

We have described below the critical accounting policies that we believe could impact our consolidated financial statements most significantly.

Basis of Consolidation. We are the sole general partner of the Operating Partnership and possess full legal control and authority over its operations. As of December 31, 2002, we owned a majority of the partnership interests in the Operating Partnership. Consequently, our consolidated financial statements include the accounts of the Operating Partnership. All significant intercompany balances have been eliminated. Minority interest in the accompanying consolidated financial statements represents the share of equity and earnings of the Operating Partnership allocable to holders of partnership interests other than us. Net income is allocated to minority interests based on the weighted-average percentage ownership of the Operating Partnership during the year. Issuance of additional common shares and OP Units changes our ownership interests as well as those of minority interests.

Real Estate. We record real estate properties at cost, net of accumulated depreciation. We capitalize improvements, major renovations and certain costs directly related to the acquisition, improvement and leasing of real estate. We charge expenditures for repairs and maintenance to operations as they are incurred. We calculate depreciation using the straight-line method over the estimated useful lives of 5 to 39 years of our buildings and improvements. We depreciate tenant improvements using the straight-line method over the life of the lease.

We review our properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through our operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted

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and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, we record a loss for the amount by which the carrying value of the property exceeds its fair value. We have determined that there has been no impairment in the carrying value of our real estate assets as of December 31, 2002.

Revenue Recognition. All leases on properties we hold are classified as operating leases, and we recognize the related rental income on a straight-line basis over the terms of the related leases. We capitalize or charge to accrued rent receivable, as applicable, differences between rental income earned and amounts due per the respective lease agreements. Percentage rents are recognized as rental income when the thresholds upon which they are based have been met. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We provide an allowance for doubtful accounts against the portion of tenant accounts receivable which we estimate to be uncollectible.

Liquidity and Capital Resources

General. During the year ended December 31, 2002, our properties generated sufficient cash flow to cover our operating expenses and to allow us to pay quarterly dividends. We generally lease our properties on a triple-net basis, which means that tenants are required to pay for all repairs and maintenance, property taxes, insurance and utilities. We anticipate that cash flows from operating activities and our borrowing capacity will continue to provide adequate capital for our working capital requirements, anticipated capital expenditures and scheduled debt payments during the next 12 months. We also believe that cash flows from operating activities and our borrowing capacity will allow us to make all dividend payments required for us to continue to qualify to be taxed as a REIT. We also believe that our properties are adequately covered by insurance.

Cash and Cash Equivalents. We had cash and cash equivalents of $6,091,699 on December 31, 2002 as compared to $203,418 on December 31, 2001. This increase resulted primarily from excess loan proceeds from refinancing our debt. We place all cash in short-term, highly liquid investments that we believe provide appropriate safety of principal. We expect our overall holdings of cash and cash equivalents to eventually decrease as we acquire additional properties with such proceeds.

Our Debt for Borrowed Money.

In December 2002, we refinanced most of our debt with a new credit facility from GMAC Commercial Mortgage Corporation. The loan is secured by, among other things, 18 of our properties, which are held by a wholly-owned subsidiary formed for the purpose of this credit facility, and the improvements, personal property and fixtures on the properties, as well as certain accounts and intangible assets and an assignment of rents related to such properties. We may prepay the loan after July 1, 2005 without penalty. We must pay a prepayment fee equal to one percent of the outstanding principal balance under the facility if we prepay the note prior to July 1, 2005.

We are required to make monthly interest payments under this credit facility. During the initial term of the note, indebtedness under the credit facility will bear interest at LIBOR plus 2.5%, adjusted monthly. The interest rate was 3.92% as of December 31, 2002. The credit facility will mature on January 1, 2006, though we have the option, subject to certain conditions, of extending the facility for an additional two-year period. In no event shall the interest rate be lower than 3.82% during the initial term or lower than 4.32% during the extension term.

In addition, the borrower entered into certain covenants pursuant to the credit facility which, among other things, require it to maintain specified levels of insurance and use the properties securing the note only for retail, light industrial, office, warehouse and commercial office uses. The facility also limits, without the approval of the lender, the borrower's ability to:

. acquire additional material assets;

. merge or consolidate with any other entity;

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. engage in any other business or activity other than the ownership, operation and maintenance of the properties securing the note;

. make certain investments;

. incur, assume or guarantee additional indebtedness;

. grant certain liens; and

. loan money to others. The note and the security documents related thereto also contain customary events of default, including, without limitation, payment defaults, bankruptcy-related defaults and breach of covenant defaults.

Upon the closing of this financing, we repaid approximately $24,800,000 of existing debt, placed approximately $2,800,000 in escrows established at the closing for taxes, insurance, agreed capital improvement and other uses required by the lender and paid fees and expenses of approximately $600,000 incurred in connection with the credit facility. The remaining proceeds, approximately $6,200,000, were available for general working capital purposes.

In August 2002, we entered into $2,000,000 line of credit with First Bank & Trust. We may only use this line of credit in connection with acquisitions to purchase interests held by investors who do not qualify as "accredited investors" under the Securities Act of 1933 and the rules and regulations promulgated thereunder. As of December 31, 2002, there were no amounts outstanding under this line of credit. This line of credit is secured by our Bellnot Square property. In the event we borrow amounts under this line of credit, such amounts will accrue interest at a rate equal to the lender's prime rate. This line of credit terminates on July 31, 2004, unless the lender elects to extend the term of the line for additional one year periods. This line of credit contains customary covenants and events of default.

In November 2002, we borrowed $3,278,000 from Houston R.E. Income Properties XVI, L.P. This debt is evidenced by a promissory note and accrues interest at a rate of 4.25%. The note is secured by our Corporate Park Northwest property and is payable at any time upon the demand of Houston XVI. We used these borrowed funds to repay existing debt. Mr. Hartman controls the general partner of Houston XVI. We are only required to make monthly interest payments under the note.

Our Private Placement.

We sold common shares 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, 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 $476,175 in selling commissions to broker-dealers and $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 transferred $23,546,034 of net proceeds to the Operating Partnership as capital contributions and received an aggregate of 2,354,603.4 OP Units therefor.

We used proceeds of the private placement to pay down amounts owed under our then-existing line of credit, to acquire four properties and for general working capital purposes. In addition to the amount we paid to the Management Company for its services in connection with the private placement, we also paid $992,698 to the Management Company for services the Management Company provided, and to reimburse the Management Company for expenses incurred, in connection with locating, evaluating and completing property acquisitions.

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Capital Expenditures. We currently do not expect to make significant capital expenditures or any significant improvements to any of our properties during the next 12 months. However, we may have unexpected capital expenditures or improvements on our existing assets. Additionally, we may incur significant capital expenditures or make significant improvements in connection with any properties we may acquire.

Total Contractual Cash Obligations. A summary of our contractual cash obligations, as of December 31, 2002, is as follows:

                                                                PAYMENT DUE BY PERIOD
                                                        LESS THAN 1                                    MORE THAN 5
CONTRACTUAL OBLIGATIONS                 TOTAL              YEAR           1-3 YEARS      3-5 YEARS        YEARS
Long-Term Debt Obligations         $     37,718,000   $     3,278,000   $  34,440,000        --             --

Capital Lease Obligations                        --                --              --        --             --

Operating Lease Obligations                      --                --              --        --             --

Purchase Obligations                             --                --              --        --             --

Other Long-Term Liabilities

Reflected on the Registrant's

Balance Sheet under GAAP                         --                --              --        --             --

Total                              $     37,718,000   $     3,278,000   $  34,440,000        --             --

We have no commercial commitments such as lines of credit or guarantees that might result from a contingent event that would require our performance pursuant to a funding commitment.

Property Acquisitions. We acquired ten properties from five entities controlled by Mr. Hartman during 2002. We acquired four of these properties by merging the selling entities with and into either HCP or the Operating Partnership. In these mergers we issued common shares or OP Units, as applicable, to equity holders in the selling entities who were accredited investors and paid cash for equity interests held by non-accredited investors. For all ten properties, we issued 1,650,891 common shares, 2,851,066 OP Units (including 1,067,657 issued to HCP), assumed mortgage debt and other liabilities aggregating $15,053,870 and paid approximately $1,811,398 to purchase interests held by non-accredited investors in connection with these mergers.

Common Share Distributions. We declared the following distributions to our shareholders during 2001, 2002 and 2003:

                                TOTAL AMOUNT OF       DISTRIBUTIONS
MONTH PAID                    DISTRIBUTIONS PAID        PER SHARE
---------------------         ------------------      -------------
February 2001                  $       559,440         $    0.2425
May 2001                               541,380              0.2000
August 2001                            602,138              0.2000
November 2001                          635,778              0.2000
February 2002                          687,544              0.2125
May 2002                             1,102,340              0.2250
August 2002                          1,166,709              0.2375
November 2002                        1,226,777              0.2500
February 2003                        1,226,777              0.2500
Average Per Quarter                                    $    0.2242

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OP Unit Distributions. The Operating Partnership declared the following distributions to holders of its OP Units, including HCP, during 2001, 2002 and 2003:

                                TOTAL AMOUNT OF       DISTRIBUTIONS
MONTH PAID                    DISTRIBUTIONS PAID        PER SHARE
---------------------         ------------------      -------------
February 2001                  $     1,196,357         $     0.2425
May 2001                             1,070,594               0.2000
August 2001                          1,126,845               0.2000
November 2001                        1,158,818               0.2000
February 2002                        1,242,869               0.2125
May 2002                             1,942,412               0.2250
August 2002                          2,053,866               0.2375
November 2002                        2,161,143               0.2500
February 2003                        2,179,976               0.2500
Average Per Quarter                                    $     0.2242

Please see "Item 9. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters" for an expanded discussion of our distribution history and policies.

RESULTS OF OPERATIONS

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

General.

The following table provides a general comparison of our results of operations for the years ended December 31, 2001 and December 31, 2002:

                                                       DECEMBER 31, 2001         DECEMBER 31, 2002
                                                       -----------------         -----------------
Number of properties owned and operated                               23                        32
Aggregate gross leasable area (sq. ft.)                        1,461,454                 2,348,862
Aggregated occupancy rate                                             88%                       92%
Total Revenues                                         $      11,703,737         $      20,755,026
Total Operating Expenses                               $       8,031,063         $      13,857,303
Income before Minority Interest                        $       3,672,674         $       6,897,723
Minority Interest in the Operating Partnership         $      (1,931,962)        $      (3,192,605)
Net Income                                             $       1,740,712         $       3,705,118

Revenues.

We had rental income and tenant reimbursements of $20,423,485 for the year December 31, 2002, as compared to revenues of $11,606,031 for the year ended December 31, 2001, an increase of $8,817,454, or 76%. Substantially all of our revenues are derived from rents received from the use of our properties. The increase in our revenues during 2002 as compared to 2001 was due primarily to nine additional properties we acquired in 2002, as well as an increase in occupancy levels and an increase in the amount of rent charged at some locations. Our average occupancy rate in 2002 was 90%, as compared to 85% in 2001, and our average lease rate was $8.84 per square foot in 2002, as compared to an average rate of $8.26 per square foot in 2001.

We had interest and other income of $331,541 for the year ended December 31, 2002, as compared to $97,706 for the year ended December 31, 2001, an increase of $233,835, or 239%. We hold all revenues and proceeds we receive from offerings in money market accounts and other short-term, highly liquid investments. In 2001, we had proceeds from the private placement we completed in December, 2000 that earned interest prior to being invested. The increase in interest and other income during 2002 as compared to 2001 resulted primarily from

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the fact that we had more properties producing non-rent income such as late fees and deposit forfeitures. This increase was offset somewhat by the lower interest rates we earned on our investments in 2002 as compared to 2001. We expect the percentage of our total revenues from interest income from investments in money market accounts or other short term, highly liquid investments to return to 2001 levels or decrease as we invest cash holdings in properties.

Expenses.

Our total operating expenses, including interest expense and depreciation and amortization expense, were $13,857,303 for the year ended December 31, 2002, as compared to $8,031,063 for the year ended December 31, 2001, an increase of $5,826,240, or 73%. We expect that the dollar amount of operating expenses will increase as we acquire additional properties and expand our operations. However, we expect that general and administrative expenses as a percentage of total revenues will decline as we acquire additional properties.

The increase in our operating expenses during 2002 was primarily the result of increased expenses associated with the nine properties we acquired in 2002. Consequently, we had higher expenses directly related to these acquired properties, such as increased maintenance, real estate taxes, utilities and depreciation and amortization expenses.

The amount we pay the Management Company under our management agreement is based on our revenues and the number of leases the Management Company originates. As a result of our increased revenues in 2002, management fees were $1,231,212 in 2002, as compared to $674,529 in 2001, an increase of $556,683, or 83%. Our interest expense increased by $761,241, or 94%, in 2002 as compared to 2001. Although our average outstanding debt increased from $11,887,723 in 2001 to $29,263,144 in 2002, the average interest rate associated with this debt decreased from 6.83% in 2001 to 5.38% in 2002. Finally, general and administrative expenses increased $312,804, or 60%, in 2002 as compared to 2001 primarily as the result of an increase in professional fees.

Net Income.

Income provided by operating activities before minority interest was $6,897,723 for the year ended December 31, 2002, as compared to $3,672,674 for the year ended December 31, 2001, an increase of $3,225,049, or 88%. Net income provided by operating activities for the year ended December 31, 2002 was $3,705,118, as compared to $1,740,712 for the year ended December 31, 2001, an increase of $1,964,406, or 113%.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

General.

The following table provides a general comparison of our results of operations for the years ended December 31, 2000 and December 31, 2001:

                                                       DECEMBER 31, 2000         DECEMBER 31, 2001
                                                       -----------------         -----------------
Number of properties owned and operated                               22                        23
Aggregate gross leasable area (sq. ft.)                        1,371,127                 1,461,454
Aggregated occupancy rate                                             82%                       88%
Total Revenues                                         $       9,625,758         $      11,703,737
Total Operating Expenses                               $       6,981,984         $       8,031,063
Income before Minority Interest                        $       2,643,774         $       3,672,674
Minority Interest in the Operating Partnership         $      (1,770,078)        $      (1,931,962)
Net Income                                             $         873,696         $       1,740,712

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Revenues.

We had rental income and tenant reimbursements of $11,606,031 for the year December 31, 2001, as compared to revenues of $9,564,686 for the year ended December 31, 2000, an increase of $2,041,345, or 21%. Substantially all of our revenues are derived from rents received from the use of our properties. The increase in our revenues during 2001 as compared to 2000 was due primarily to the addition of one property to our portfolio in 2001, as well as higher occupancy and lease rates. Our average occupancy rate in 2001 was 85% as compared to 82% in 2000 and our average lease rate was $8.26 per square foot in 2001 as compared to an average rate of $7.02 per square foot in 2000.

We had interest and other income of $97,706 for the year ended December 31, 2001, as compared to $61,072 for the year ended December 31, 2000, an increase of $36,634, or 60%. We hold all revenues and proceeds we receive from offerings in money market accounts and other short-term, highly liquid investments. In 2001, we had proceeds from the private placement we completed in December 2000 that earned interest prior to being invested. The increase in interest and other income during 2001 as compared to 2000 was primarily the result of the fact that we had more proceeds from our private placement invested during 2001 and we therefore earned more interest in 2001.

Expenses.

Our total operating expenses, including interest expense and depreciation and amortization expense, were $8,031,063 for the year ended December 31, 2001, as compared to $6,981,984 for the year ended December 31, 2000, an increase of $1,049,079, or 15%.

The increase in our operating expenses during 2001 was primarily the result of increased expenses associated with the property we acquired in 2001, as well as an overall increase in repair and maintenance expenses and property taxes. Consequently, we had higher expenses directly related to this acquired property, such as increased maintenance, real estate taxes, insurance, utilities and depreciation and amortization expenses.

As a result of our increased revenues in 2001, our management fees increased from $574,216 in 2000 to $674,529 in 2001, an increase of $100,313, or 17%. The increase in our operating expenses was partially offset by decreases in our interest expense. Our interest expense decreased $459,165, or 36%, in 2001 as compared to 2000. Our average outstanding debt was $11,887,723 in 2001, as compared to $13,502,948 in 2000, a decrease of $1,615,225, or 12%. Although our average outstanding debt remained relatively constant during both 2001 and 2000, the average interest rate associated with this debt decreased from 9.41% in 2000 to 6.83% in 2001. Our general and administrative expenses decreased slightly by $15,796, or 3%.

Net Income.

Income provided by operating activities before minority interest was $3,672,674 for the year ended December 31, 2001, as compared to $2,643,774 for the year ended December 31, 2000, an increase of $1,028,900, or 39%. Net income provided by operating activities for the year ended December 31, 2001 was $1,740,712, as compared to $873,696 for the year ended December 31, 2000, an increase of $867,016, or 99%.

TAXES

We elected to be taxed as a REIT under the Internal Revenue Code beginning with our taxable year ended December 31, 1999. As a REIT, we generally are not subject to federal income tax on income that we distribute to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates. We believe that we are organized and operate in such a manner as to qualify to be taxed as a REIT, and we intend to operate so as to remain qualified as a REIT for federal income tax purposes.

INFLATION

We anticipate that our leases will continue to be triple-net leases and will contain provisions that we believe will mitigate the effect of inflation. In addition, many of our leases are for terms of less than five years, which allows

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us to adjust rental rates to reflect inflation and other changing market conditions when the leases expire. Consequently, increases due to inflation, as well as ad valorem tax rate increases, generally do not have a significant adverse effect upon our operating results.

Environmental Matters

Our properties are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which our operations are conducted. From our inception, we have incurred no significant environmental costs, accrued liabilities or expenditures to mitigate or eliminate future environmental contamination.

Recent Accounting Pronouncements

In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, was issued. This statement requires that an entity recognize all derivatives as either assets or liabilities and measure the instruments at fair value. The accounting for change in fair value of a derivative depends upon its intended use. We adopted the provisions of this statement effective January 1, 2001, and we believe that this statement did not have any material impact on our financial statements.

SFAS No. 141, "Business Combinations," which became effective on July 1, 2001, prohibits pooling-of-interests accounting for acquisitions. The adoption of SFAS 141 did not have a material impact on our financial statements.

SFAS No. 142, "Goodwill and Other Intangible Assets," which became effective on January 1, 2002, specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The effect of adopting SFAS No. 142 did not have a material impact on our financial statements.

On January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," which was issued in June 2001 and is effective for years beginning after June 15, 2002. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of SFAS No. 143 will not have a material impact on our financial statements.

On January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which was issued in August 2001. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for the disposal of a segment of a business (as previously defined in that Opinion). This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption of SFAS No. 144 did not have a material impact on our financial statements.

On April 30, 2002, we adopted SFAS No. 145, "Rescission of SFAS Statements No. 4, 44 and 64, Amendment of SFAS No. 13, Technical Corrections," which was issued in April 2002. The purpose of this statement is to update, clarify and simplify existing accounting standards. The effect of adopting SFAS No. 145 did not have a material impact on our financial statements.

SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123," which was issued in December 2002, is effective for fiscal years beginning after December 15, 2002. This statement provides alternative methods of transition for an entity that voluntarily changes to the fair value-based method of accounting for stock-based employee compensation. It also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We adopted this statement effective January 1, 2003 using the prospective method, and we do not expect the adoption of this statement to have a material impact on our financial position, results of operations or cash flows.

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In November 2002, FASB issued Interpretation No.("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 establishes new disclosure and liability-recognition requirements for direct and indirect debt guarantees with specified characteristics. The initial measurement and recognition requirements of FIN 45 are effective prospectively for guarantees issued or modified after December 31, 2002. However, the disclosure requirements are effective for interim and annual financial statement periods ending after December 15, 2002. We have adopted the disclosure provisions, and we do not expect the full adoption of FIN 45 to have a material impact on our financial statements.

Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices. The principal market risk to which we are exposed is the risk related to interest rate fluctuations. We will be exposed to changes in interest rates as a result of our credit facility which has a floating interest rate. As of December 31, 2002, we had $34,440,000 of indebtedness outstanding under this facility. The impact of a 1% increase in interest rates on our debt would result in an increase in interest expense and a decrease in income of approximately $344,400 annually.

ITEM 3. PROPERTIES.

On December 31, 2002, we owned 32 properties. All of our properties are located in the metropolitan Houston, Texas area. Our properties consist of 17 retail centers, 12 office/warehouse properties and three office properties. Set forth below is additional information relating to our properties.

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 applicable segment, the purchase price we paid for such property and the anchor or largest tenant at such property.

                                   YEAR
                                DEVELOPED/
PROPERTY                        RENOVATED           SEGMENT/USE       PURCHASE PRICE    ANCHOR OR LARGEST TENANT
------------------------        ----------       ----------------     --------------    ---------------------------------
Bissonnet/Beltway                  1978               Retail          $    2,339,771    Cash America International

Webster Point                      1984               Retail               1,700,000    Houston Learning Academy

Centre South                       1974               Retail               1,900,000    Carlos Alvarez

Torrey Square                      1983               Retail               4,500,000    Fleming Foods

Providence                         1980               Retail               4,604,656    Kroger Food Stores, Inc.

Holly Knight                       1984               Retail               1,603,138    Quick Wash Laundry

Plaza Park                         1982          Office/Warehouse          4,250,000    American Medical Response

Northwest Place II                 1984          Office/Warehouse          1,100,000    Terra Mar, Inc.

Lion Square                        1980               Retail               5,900,000    Kroger Food Stores, Inc.

Zeta Building                      1982               Office               2,500,000    Astrium North America

Royal Crest                        1984               Office               1,900,000    Dringle, Jenkins & Associates, PC

Featherwood                        1983               Office               3,000,000    Transwestern Publishing

Interstate 10                      1980          Office/Warehouse          3,740,000    River Oaks, L-M, Inc.

Westbelt Plaza                     1978          Office/Warehouse          2,620,000    National Oilwell

Greens Road                        1979               Retail               1,593,058    Juan Gailegos

Town Park                          1978               Retail               3,585,000    Omar's Meat Market

Northeast Square                   1984               Retail               2,595,751    99 Cent Store

Main Park                          1982          Office/Warehouse          3,780,000    Corum Healthcare

Dairy Ashford                      1981          Office/Warehouse          1,428,492    Kainus Community Church

South Richey                       1980               Retail               3,305,220    Kroger Food Stores, Inc.

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                                   YEAR
                                DEVELOPED/
PROPERTY                        RENOVATED           SEGMENT/USE       PURCHASE PRICE    ANCHOR OR LARGEST TENANT
------------------------        ----------       ----------------     --------------    ---------------------------------
Corporate Park Woodlands           2000          Office/Warehouse          6,012,052    Interceramic

South Shaver                       1978               Retail                 801,092    EZ Pawn

Kempwood Plaza                     1974               Retail               2,948,952    Brookshire Brothers

Bellnot Square                     1982               Retail               5,789,879    Kroger Food Stores, Inc.

Corporate Park Northwest           1981          Office/Warehouse          7,694,654    Region IV Education

Westgate                           1984          Office/Warehouse          3,372,360    Polymeric Process

Garden Oaks                        1954               Retail               6,446,067    Bally Total Fitness

Westchase                          1978               Retail               2,120,777    Jesus Corral

Sunridge                           1979               Retail               1,382,145    Carlos Morales

Holly Hall                         1980          Office/Warehouse          2,828,747    Texas Medical Management

Brookhill                          1979          Office/Warehouse            931,706    T.S. Moly-Lubricants

Corporate Park West                1999          Office/Warehouse         12,817,830    Urethane Products International
                                                                      ==============
Total                               --                  --            $  111,091,347                 --

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
                                                                        ANNUALIZED     EFFECTIVE NET      ANNUAL
                                                   TOTAL LEASABLE     RENTS BASED ON   RENT Per Sq.     PERCENTAGE
PROPERTY                         PERCENT LEASED    AREA (Sq. Ft.)     OCCUPANCY ($)      Ft.  ($)          RENT
------------------------         --------------    --------------     --------------   -------------    ----------
Bissonnet/Beltway                     93.2             29,205                452,270           15.49             0

Webster Point                         82.8             26,060                300,616           11.54             0

Centre South                          88.2             44,593                344,743            7.73             0

Torrey Square                         96.4            105,766                968,867            9.16             0

Providence                            97.6             90,327                957,845           10.60             0

Holly Knight                          90.5             20,015                321,855           16.08             0

Plaza Park                            93.1            105,530                895,603            8.49             0

Northwest Place II                    51.9             27,974                119,560            4.27             0

Lion Square                           98.3            119,621              1,136,559            9.50             0

Zeta Building                         93.6             39,106                530,133           13.56             0

Royal Crest                           87.7             24,825                288,001           11.60             0

Featherwood                           96.3             49,670                823,545           16.58             0

Interstate 10                         95.5            151,000                756,706            5.01             0

Westbelt Plaza                        92.5             65,619                566,126            8.63             0

Greens Road                          100.0             20,507                365,156           17.81             0

Town Park                            100.0             43,526                749,734           17.22             0

Northeast Square                      90.4             40,525                444,612           10.97             0

Main Park                             87.1            113,410                608,378            5.36             0

Dairy Ashford                        100.0             42,902                255,137            5.95             0

South Richey                         100.0             69,928                610,106            8.72             0

Corporate Park Woodlands              75.7             99,937                698,049            6.98             0

South Shaver                          96.8             21,926                230,969           10.53             0

Kempwood Plaza                        92.8            112,359                836,506            7.44    $    9,491

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                                                                          TOTAL
                                                                        ANNUALIZED     EFFECTIVE NET      ANNUAL
                                                   TOTAL LEASABLE     RENTS BASED ON   RENT Per Sq.     PERCENTAGE
PROPERTY                         PERCENT LEASED    AREA (Sq. Ft.)     OCCUPANCY ($)      Ft.  ($)          RENT
------------------------         --------------    --------------     --------------   -------------    ----------

Bellnot Square                        98.1             73,930                749,366           10.14             0

Corporate Park Northwest              90.2            185,625              1,564,923            8.43             0

Westgate                              95.8             97,225                643,340            6.62             0

Garden Oaks                           86.2             95,046              1,026,069           10.80             0

Westchase                             66.4             42,924                304,022            7.08             0

Sunridge                              95.9             49,359                481,256            9.75             0

Holly Hall                           100.0             90,000                485,756            5.40             0

Brookhill                             88.5             74,757                277,685            3.71             0

Corporate Park West                   94.8            175,665              1,688,665            9.61             0

Total/Average                         92.2          2,348,862         $   20,482,158   $        8.72    $    9,491

The following table lists the five properties that generated the most rents during the year 2002.

                                                      PERCENTAGE OF OUR
                                   TOTAL RENTS      TOTAL RENTS RECEIVED
PROPERTY                        RECEIVED IN 2002         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%

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

                                 AVE.                AVE.               AVE.                AVE.               AVE.
                               INCOME              INCOME              INCOME              INCOME             INCOME
                     PERCENT   PER SQ.   PERCENT   per Sq.   PERCENT   per Sq.   PERCENT   PER SQ.  PERCENT   per Sq.
PROPERTY              LEASED   Ft. ($)    LEASED   Ft. ($)    LEASED   Ft. ($)    LEASED   Ft. ($)   LEASED   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

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                           1998                 1999                2000               2001               2002

                                 AVE.                AVE.               AVE.                AVE.               AVE.
                               INCOME              INCOME              INCOME              INCOME             INCOME
                     PERCENT   PER SQ.   PERCENT   PER SQ.   PERCENT   PER SQ.   PERCENT   PER SQ.  PERCENT   PER SQ.
PROPERTY              LEASED   FT. ($)    LEASED   FT. ($)    LEASED   FT. ($)    LEASED   FT. ($)   LEASED   FT. ($)
-------------------  -------   -------   -------   -------   -------   -------   -------   -------  -------   -------
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
Woodlands               --         --       --         --        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       75       7.16      66       8.15

Sunridge                96       9.97       96      10.49       71       4.33       77       9.39      96      10.71

Holly Hall              67       0.67       91       4.09       91       4.56      100       5.12     100       4.63

Brookhill               53       0.33      100       1.98       52       1.59       75       3.43      89       3.45

Corporate Park West     --         --       31       0.41       71       3.88       92       8.47      95       9.79

MAJOR TENANTS

The next table sets forth certain information that relates to the major tenants at each property. This information is as of December 31, 2002. The information summarizes information relating to each anchor or largest tenant at each property. No single lease accounted for more than 5% of our total revenues during 2002.

                                                            TOTAL LEASED      TOTAL        EFFECTIVE       LEASE
                                                             AREA (SQ.       ANNUAL      NET RENT PER    EXPIRATION
PROPERTY                    NAME OF TENANT                      FT.)         RENT ($)     SQ. FT. ($)       DATE
------------------------    --------------------------      ------------     --------    ------------   -----------
Bissonnet/Beltway           Cash America International          5,300         80,068         15.11        4/30/05

Webster Point               Houston Learning Academy            3,976         58,627         14.75        12/31/06

Centre South                Carlos Alvarez                     10,407         71,252          6.85        3/31/06

Torrey Square               Fleming Foods                      35,350        267,368          7.56        6/29/03

Providence                  Kroger                             45,528        368,772          8.10        5/31/04

Holly Knight                Qwick Wash Laundry                  2,460         44,229         17.98        9/30/09

Plaza Park                  American Medical Response          14,765        122,452          8.29        5/31/06

Northwest Place II          Terra Mar, Inc.                    11,167         93,834         10.99        7/31/03

Lion Square                 Kroger                             42,205        253,440          6.00        10/31/05

Zeta Building               Astrium North America               3,690         63,099         17.10        6/30/04

Royal Crest                 Dringle, Jenkins & Associates,      2,450         36,362         14.84        11/30/06
                            PC

Featherwood                 Transwestern Publishing             9,543        159,270         16.69        11/30/07

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                                                            TOTAL LEASED      TOTAL        EFFECTIVE       LEASE
                                                             AREA (SQ.       ANNUAL      NET RENT PER    EXPIRATION
PROPERTY                    NAME OF TENANT                      FT.)         RENT ($)     SQ. FT. ($)       DATE
------------------------    --------------------------      ------------     --------    ------------   -----------
Interstate 10               River Oaks L-M Inc.                38,050        182,640          4.80        12/31/03

Westbelt Plaza              National Oilwell                   14,997        190,590         12.71        3/31/05

Greens Road                 Juan Gailegos                       3,985         23,904          6.00        12/31/11

Town Park                   Omar's Meat Market                  6,450        110,592         17.15        12/31/07

Northeast Square            99 Cent Store                       4,573         40,968          8.96        11/30/05

Main Park                   Transport Sales                    23,882         94,573          3.96        8/31/05

Dairy Ashford               Praise Tabernacle Church           19,127         84,000          4.39        10/31/05

South Richey                Kroger                             42,130        265,416          6.30        2/28/06

Corporate Park Woodlands    Interceramic                       13,500         74,520          5.52        6/30/07

South Shaver                EZ Pawn                             4,547         50,525         11.11        11/30/07

Kempwood Plaza              Brookshire Bros.                   30,558        168,032          5.50        5/19/04

Bellnot Square              Kroger                             42,130        337,044          8.00        7/31/07

Corporate Park Northwest    Region XIV Education                8,388         80,525          9.60        2/28/04

Westgate                    Polymeric Processes                11,878         59,355          5.00        10/31/06

Garden Oaks                 Bally Total Fitness                25,722        256,728          9.98        6/30/05

Westchase                   Jesus Corral                        5,396         46,729          8.66        2/28/07

Sunridge                    Carlos Morales                      9,416         84,744          9.00        1/31/05

Holly Hall                  Texas Medical Mgmt.                30,000        168,168          5.61        12/31/07

Brookhill                   T.S. Molly Lubricants              10,187         37,590          3.69        9/30/07

Corporate Park West         Urethane Products
                            International                      14,730         95,874         6.51        mo.-to-mo.

LEASE EXPIRATIONS

The following table lists, on an aggregate basis, all of our scheduled lease expirations over the next 10 years.

                                           GROSS LEASABLE AREA                   ANNUAL RENTAL INCOME

                                                       PERCENT OF OUR                         PERCENT OF OUR
                                     APPROXIMATE       TOTAL LEASABLE                          TOTAL RENTAL
YEAR           NUMBER OF LEASES      SQUARE FEET            AREA             AMOUNT ($)           INCOME
-----          ----------------      -----------       --------------        ----------       ---------------
2003                  148              548,552             23.35%             4,827,049            23.57%

2004                  142              430,716             18.34%             4,263,638            20.82%

2005                  113              406,214             17.29%             3,669,678            17.92%

2006                   82              310,881             13.24%             2,885,179            14.09%

2007                   72              266,801             11.36%             2,425,141            11.84%

2008                   30               66,114              2.81%               752,036             3.67%

2009                   15               44,214              1.88%               447,960             2.19%

2010                   12               19,427              0.83%               324,372             1.58%

2011                   13               46,269              1.97%               590,087             2.88%

2012                    5               17,312              0.74%               200,919             0.98%

Total                 632            2,156,500             91.81%            20,386,059            99.53%

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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following shows the number and percentage of our outstanding common shares that were owned as of December 31, 2002 by:

. persons known to us to beneficially own more than 5% of our common shares;

. each trust manager and executive officer; and

. all trust managers and executive officers as a group.

The table also shows this ownership information assuming all outstanding OP Units are converted into common shares.

As of December 31, 2002, we had 4,907,107.16 common shares outstanding. As of December 31, 2002, there were 8,719,905.55 OP Units outstanding (of which 4,654,066 were owned by HCP). Each OP Unit is convertible into common shares on a one-for-one basis.

                                              NUMBER OF SHARES OWNED                      OWNERSHIP PERCENTAGE
                                                                ASSUMING                                   ASSUMING
                                                               CONVERSION                                 CONVERSION
             NAME OF                                              OF                                          OF
         SHAREHOLDER/(1)/                ACTUAL               ALL OP UNITS             ACTUAL             ALL OP UNITS
--------------------------------      ------------           --------------          ----------          -------------
Allen R. Hartman                        165,224.27/(2)/        1,763,937.33/(3)/           3.37%              19.66%
Robert W. Engel                                 --                       --                  --                  --
Samuel C. Hathorn                        37,578.29                80,380.88                    *                   *
Jack L. Mahaffey                         47,949.70                70,309.60                    *                   *
Chris A. Minton                          28,949.75                50,111.32                    *                   *
Chand Vyas                              100,000.00               100,000.00                2.04%               1.11%
Allen Cecil                                     --                       --                  --                  --
All trust managers and executive        379,702.01             2,064,739.13                7.74%              15.15%
officers as a group


* = less than 1%.

(1) Each person listed has an address in care of Hartman Commercial Properties REIT, 1450 West Sam Houston Parkway North, Suite 100, Houston, Texas 77043.

(2) Includes 118,855 shares owned by Hartman Partnership, Inc., a company wholly-owned by Mr. Hartman.

(3) Includes 861,976.37 OP Units owned by Houston R.E. Income Properties XIV, LP, 342,429.52 OP Units held by Hartman Partnership, Inc., 49,418.39 OP Units held by Hartman Partnership XII, L.P. and 39 OP Units held by Hartman Partnership XV, LLC. Mr. Hartman and his affiliates own Hartman Partnership XII, L.P. and Hartman Partnership XV, LLC. Mr. Hartman does not own any limited partner interests in Houston R.E. Income Properties XIV, L.P. 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 Houston R.E. Income Properties XIV, L.P. 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 all common shares into which such OP Units are convertible.

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ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.

GENERAL

We operate under the direction of our board of trust managers. The board is ultimately responsible for the management and control of our business and operations. We have no employees. We have retained the Management Company to manage our day-to-day operations. The Management Company also manages the acquisition, development and operation of our properties, subject to the board's supervision.

Our declaration of trust and bylaws provide that the number of trust managers that serve on our board of trust managers may be established by a majority of the entire board of trust managers. However, the board of trust managers must always have at least three members and no more than ten members. We currently have a total of seven members on our board. Of our current seven board members, five members are independent trust managers. Our declaration of trust requires that a majority of the members of our board of trust managers be independent trust managers. An "independent trust manager" is a person who is not an officer or employee of HCP or the Operating Partnership, is not an officer, director or employee of the Management Company or its affiliates, has not otherwise been affiliated with such entities for the previous two years and does not have a material business or professional relationship with the Management Company or its affiliates.

Each trust manager serves on the board until the next annual meeting of shareholders or until his or her successor has been duly elected and qualified. Although the number of trust managers may be increased or decreased, a decrease may not have the effect of shortening the term of any incumbent trust managers. Any trust manager may resign at any time and may be removed with or without cause by the shareholders upon the affirmative vote of least two-thirds of all votes entitled to be cast at a meeting called for the purpose of the proposed removal. A vacancy created by either an increase in the number of trust managers or the death, removal, resignation, incompetence or other incapacity of a trust manager may be filled by a vote of the remaining trust managers, unless the vacancy is filled by a vote of shareholders as permitted by the Texas Real Estate Investment Trust Act.

Our trust managers are accountable to us and our shareholders as fiduciaries. Generally speaking, this means that our trust managers must perform their duties in good faith and in a manner each trust manager believes to be in our best interest as well as the best interest of our shareholders. Further, trust managers 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 trust managers are not required to devote all or any specific amount of their time to our business. The trust managers are only required to devote the time to our business as their duties require. We anticipate that our trust managers will meet at least quarterly, or more frequently if necessary. We do not expect that our trust managers will be required to devote a substantial portion of their time to discharge their duties as trust managers. In the exercise of their fiduciary responsibilities, the trust managers will be relying heavily on the Management Company. Although we currently do not have any employees and we do not pay our officers a salary, the board is empowered to fix the compensation of all officers that it selects and it may choose to compensate officers for their service.

Our general policies governing investments and acquisitions, development, borrowing and transactions with affiliates are set forth in this registration statement. The board may establish additional written policies or amend our current policies at any time. The board will monitor our administrative procedures, investment operations and performance to ensure that our policies are being followed and continue to be in the best interest of our shareholders. We will follow the policies outlined in this registration statement unless and until such policies are modified by the board of trust managers and, when required, our shareholders.

As described below, the conflicts committee of our board of trust managers 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. Our management agreement with the Management Company was signed when Mr. Hartman was our sole trust manager. However, all amendments to the Management Agreement and all other agreements or transactions

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between the Management Company and the Company must be approved by the conflicts committee, which is composed of independent trust managers. Additionally, the conflicts committee must approve all transactions between the Company and any entities affiliated with Mr. Hartman.

TRUST MANAGERS AND EXECUTIVE OFFICERS

Following is certain information about our trust managers and executive officers. Our trust managers and officers are elected for one-year terms.

NAME                  AGE                     POSITION(s)
-----------------     ------   -----------------------------------------
Allen R. Hartman       51        President, Secretary and Trust Manager
Robert W. Engel        48      Chief Financial Officer and Trust Manager
Samuel C. Hathorn      59                    Trust Manager
Jack L. Mahaffey       71                    Trust Manager
Chris A. Minton        66                    Trust Manager
Chand Vyas             59                    Trust Manager
Allen Cecil            59                    Trust Manager

Allen R. Hartman is the President, Secretary and a trust manager of HCP. He is also the President, Secretary, sole director and sole shareholder of the general partner of the Management Company and the sole limited partner of the Management Company. Since 1984 to the present, Mr. Hartman, as an individual general partner, has been the sponsor of 15 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 Hartman Investment Properties, a Texas sole proprietorship, to develop, acquire, manage, and lease commercial real estate ventures.

In 1986, Mr. Hartman established Hartman Securities, Inc., a Texas corporation, to underwrite private placements sponsored by Hartman. Mr. Hartman was the sole shareholder, officer and director of Hartman Securities. On August 26, 1998, Mr. Hartman, Hartman Securities and the Texas State Securities Board (the "TSSB") entered into a Disciplinary Order Reprimanding and Suspending a Dealer and an Agent. The TSSB alleged that (1) Hartman Securities had offered for sale and sold securities at a time when neither was properly registered with the Texas Securities Commissioner as required by the Texas Securities Act and
(2) Hartman Securities had offered for sale and sold securities through agents who were not properly registered with the Texas Securities Commission as required by the Texas Securities Act. Without admitting or denying these allegations, Hartman Securities and Mr. Hartman agreed to the disciplinary order which contained a reprimand and provided for a $8,500 fine. Additionally, pursuant to the order, Hartman Securities and Mr. Hartman temporarily engaged third parties to perform certain monitoring and audit reviews of the operational activities of Mr. Hartman and Hartman Securities. These third parties provided the TSSB with certain reports and recommendations as a results of their activities. Mr. Hartman believes that both he and Hartman Securities have fully complied with the disciplinary order. Simultaneous with the reprimand and suspension, the TSSB granted the dealer registration of Hartman Securities and the registration of Mr. Hartman as an agent of Hartman Securities, provided that both Hartman Securities and Mr. Hartman were suspended from soliciting new clients for a period of 30 days from the date of the disciplinary order. Hartman Securities is currently dormant.

On April 12, 1997, the NASD rendered a decision on an appeal made by Mr. Hartman and Hartman Securities from a decision of the NASD dated June 6, 1996 in which Mr. Hartman and Hartman Securities were found to have violated certain rules of NASD in connection with the conduct of their business during the period from June 1989 through July 1993. The decision resulted from a complaint filed by NASD against Mr. Hartman and Hartman Securities in July 1995. The decision found violations of certain rules relating to the creation and proper maintenance of an escrow account created for an offering by Hartman Securities in 1992 (thereby inadvertently triggering additional net capital requirements for Hartman Securities) and that Hartman Securities had conducted securities transactions while a member of the NASD at a time when the NASD believed that the firm was inactive. Mr. Hartman and Hartman Securities appealed the decision because they believed the sanctions were excessive under the

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circumstances and no harm had resulted to any customer of Hartman Securities as a result of the violations. The NASD found in favor of Mr. Hartman and Hartman Securities on two counts and against them on the remaining two counts. As a result of the appeal, the NASD affirmed a two-week suspension of the memberships of Mr. Hartman and Hartman Securities and reduced the fine to $20,000.

Robert W. Engel is the Chief Financial Officer and a trust manager of HCP, and the Controller of the Management Company. 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 trust manager since 2002. Mr. Vyas is the Chairman and Chief Executive Officer of EPS Technology, a global information technology and business process outsourcing company founded by Mr. Vyas in 2000. From 1982 to 1998, Mr. Vyas served as a senior executive including the Chief Executive Officer of Ziegler Coal Holding Co. Prior to working for Ziegler, Mr. Vyas held various management positions with Consolidated Coal and International Harvester.

Allen Cecil has been a trust manager since 2002. Mr. Cecil was employed by Exxon Mobil for 31 years. Prior to his retirement in 1999, he held a number of senior management positions in both operations and engineering in the United States and overseas. Mr. Cecil attended the University of Houston and graduated with honors. He holds a Bachelor of Science and a Masters Degree in Petroleum Engineering.

Jack L. Mahaffey has been a trust manager since 2001. Mr. Mahaffey was employed by Shell Oil Company for 32 years. Prior to his retirement in 1991, Mr. Mahaffey was the President of Shell Mining Co. Mr. Mahaffey graduated from Ohio State University with a B.S. and M.S. in Petroleum Engineering and served in the U.S. Air Force. He is a former board member of the National Coal Association and the National Coal Council.

Samuel C. Hathorn has been a trust manager since 2001. 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 21 years, Mr. Hathorn has been a senior executive with Weyerhaeuser Real Estate Company, a wholly owner 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 Weyerhaeuser Real Estate Company. 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 trust manager since 2001. Mr. Minton was employed by Lockheed Martin for 35 years and was a Vice-President for Business Operations of Lockheed's Technology Services Group. Mr. Minton retired from Lockheed in 1995. Mr. Minton graduated from Villanova University with a Bachelors Degree, and he is a licensed CPA (retired status) in the State of Texas. He has been awarded the Gold Knight of Management for achievements as a professional manager by the National Management Association.

COMMITTEES OF THE BOARD OF TRUST MANAGERS

Our entire board of trust managers considers all major decisions concerning our business. However, the board has established an audit 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.

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AUDIT COMMITTEE

The audit committee will meet on a regular basis at least once a year. The current audit committee members are Messrs. Minton, Cecil and Hathorn. The audit committee's primary function is to assist the board of trust managers 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.

CONFLICTS COMMITTEE

At least three trust managers 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 the Company, officers, or employees of its affiliates (including the Management Company) and must otherwise be independent trust managers. Any matters approved by the conflicts committee will be conclusively deemed to be fair and reasonable to us. The current members of our conflicts committee are Messrs. Cecil, Vyas and Mahaffey.

COMPENSATION OF TRUST MANAGERS

We pay our independent trust managers an annual fee of $5,000, $1,000 for each board meeting attended and $1,000 per quarter for attendance at board committee meetings, payable in either cash or by issuing such trust managers common shares. Although we have not granted any awards under our Incentive Share Plan to any of our trust managers, we may also grant stock options or other incentive awards to members of the board. All trust managers are reimbursed for reasonable out-of-pocket expenses incurred in connection with attendance at meetings of the board of trust managers. If a trust manager is also an officer of the Management Company, we do not pay separate compensation for services rendered as a trust manager.

LIMITED LIABILITY AND INDEMNIFICATION OF TRUST MANAGERS, OFFICERS, EMPLOYEES AND OTHER AGENTS

Our declaration of trust provides that none of our trust managers or officers will be liable to us for any act, omission, loss, damage or expense arising from the performance of his or her duties as a trust manager and/or officer, except for his or her own willful misfeasance, willful malfeasance or gross negligence. We also maintain a directors and officers liability insurance policy.

Subject to limited exceptions, our declaration of trust and bylaws provide that we will indemnify each of our trust managers, officers, employees and agents to the fullest extent allowed by the Texas Real Estate Investment Trust Act. The Texas Real Estate Investment Trust Act generally allows trust managers and officers to be indemnified against all judgments, penalties (including taxes), fines, amounts paid in settlement and reasonable expenses incurred in connection with any proceeding unless:

. the trust manager or officer is found liable to us on the basis that such trust manager or officer improperly received a personal benefit; or

. the trust manager or officer is found liable for willful or intentional misconduct in the performance of his or her duty to us.

In spite of the above provisions of Texas law, our declaration of trust provides that our trust managers and officers will be indemnified by us for losses arising from our operation only if all of the following conditions are met:

. the indemnified person determined, in good faith, that the course of conduct which caused the loss or liability was in our best interests;

. the indemnified person was acting on our behalf or performing services for us;

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. in the case of affiliated trust managers and officers, the liability or loss was not the result of negligence or misconduct by the party seeking indemnification; and

. in the case of independent trust managers, the liability or loss was not the result of gross negligence or willful misconduct by the party seeking indemnification.

Any indemnification is recoverable only out of our assets and not from our shareholders. Indemnification could reduce the legal remedies available to us and our shareholders against the indemnified individuals. These rights do not limit a shareholder's ability to obtain injunctive relief or other equitable remedies for a violation of a trust manager's or an officer's duties to us, although the equitable remedies may not be an effective remedy in some circumstances. The general effect to investors of any arrangement under which any of our trust managers, officers, employees or agents are indemnified against liability is a potential reduction in distributions resulting from such obligations or from our payment of premiums associated with any insurance we may obtain in relation to these obligations.

The Securities and Exchange Commission takes the position that indemnification against liabilities arising under the Securities Act of 1933 is against public policy and unenforceable. Indemnification of trust managers or officers 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 the securities were offered as to indemnification for violations of securities laws.

Indemnification will be allowed for settlements and related expenses of lawsuits alleging securities laws violations and for expenses incurred in successfully defending any lawsuits, provided that a court either:

. approves the settlement and finds that indemnification of the settlement and related costs should be made; or

. dismisses with prejudice or there is a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee and a court approves the indemnification.

THE MANAGEMENT COMPANY

All of our day-to-day operations are managed and performed by the Management Company. Some of our trust managers and officers are also directors and officers of the Management Company. The directors and executive officers of the Management Company are as follows:

NAME                     AGE                    POSITION
------------------      ------    ------------------------------------
Allen R. Hartman         51         President, Secretary and Director
Terry L. Henderson       51              Chief Financial Officer
Robert W. Engel          48                    Controller
John Crossin             63       Director of Leasing and Acquisitions
Valarie L. King          42        Director of Property Management

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The backgrounds of Messrs. Hartman and Engel are described above. Below is a brief description of the other executive officers of the Management Company:

Terry L. Henderson is the Chief Financial Officer of the Management Company. Mr. Henderson joined the Management Company in 2002. His responsibilities include the various financial and administrative functions, as well as the construction and renovations activities, of the Management Company. 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 the Management Company, Mr. Henderson was the Chief Financial Officer for Senterra Real Estate Group in Houston, Texas from 1990 to 2002.

John Crossin is the Director of Leasing for the Management Company. In this capacity, he is responsible for 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 the Management Company in 2001. Mr. Crossin has more than 25 years of experience in the leasing, sale and marketing of commercial real estate including office, retail and industrial properties with C.B. Richard Ellis, Grubb & Ellis and Crossin & Company.

Valarie L. King is the Senior Property Manager. In this capacity, she is responsible for all property management activities. Mrs. King has 15 years of property management experience in Houston, Texas. Prior to joining the Management Company in 2000, she was Property Manager at Helmsley Spear National Realty from 1986 to 1990, where she was responsible for running the Houston office, including property management, leasing and construction.

THE MANAGEMENT AGREEMENT

We entered into a Property and Partnership Management Agreement with the Management Company in January 1999. Pursuant to this agreement, we appointed the Management Company to manage, operate, direct and supervise all of the properties we own from time to time. We do not have any employees. Therefore, the Management Company also agreed to perform various administrative services for us.

The compensation we pay the Management Company under this agreement is summarized in the "Item 7. Certain Relationships and Related Transactions--Management of our Properties and the Operating Partnership" section of this registration statement.

The agreement automatically renews for successive one-year terms, unless it is terminated by either party in writing at least 30 days prior to the expiration of a previous term. We can terminate the agreement if the Management Company fails to perform its duties thereunder and such failure continues for 30 days after we provide the Management Company written notice of the failure. We may also terminate the agreement upon 30 days advance notice in the event we sell our properties to an unaffiliated third party in a bona fide transaction. Finally, in accordance with our declaration of trust, a majority of our independent trust managers may terminate the Management Agreement upon 60 days written notice at any time.

The Management Company has agreed to deal at all times with third parties, including affiliates of the Management Company, on an arms' length and in our interest. The Management Company may not enter into any contract with any party affiliated with the Management Company in relation to the services it provides under the agreement without our consent, which we can withhold in our sole discretion. The Management Company is responsible for the supervision, employment and discharge of all employees managing, maintaining or otherwise operating our properties. We have the right to reasonably request that a Management Company employee be removed from the management of any of our properties if we reasonably deem such employee to be incompetent, careless, subordinate or otherwise objectionable.

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Each year we will agree on an operating budget with the Management Company 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. Otherwise, we will reimburse the Management Company for all costs, expenses and disbursements reasonably and properly incurred by the Management Company in accordance with the agreement, including the employment costs, or a pro rata portion thereof, of all personnel managing our properties.

Each year, we will also agree on leasing and marketing guidelines with the Management Company. Although the Management Company must use diligent efforts to collect rents, the Management Company is not authorized to terminate any lease, lock out a tenant or institute any proceedings in relation to a lease without our prior written approval. Additionally, the Management Company does not have signatory authority to execute any lease or related document and we must approve all significant capital improvements.

The Management Company is not liable to us for any act or omission of any agent or employee of the Management Company except for liabilities resulting from:

. the gross negligence or willful misconduct of the Management Company, or any of its officers, agents or employees; or

. any breach of the agreement.

The Management Company must indemnify us from and against any and all causes of action, claims, losses, costs, expenses, liabilities, damages or injuries that result from:

. the gross negligence or willful misconduct of the Management Company and/or its officers, agents or employees, acting within the scope of their office, agency or employment; or

. any breach of the agreement by the Management Company.

All amendments to the agreement must be approved by us and the Management Company. However, the agreement will not be amended without the approval of the conflicts committee of our board of trust managers.

The Management Company must reimburse us at least annually for amounts paid to the Management Company in any year to the extent that such payments cause our operating expenses to exceed the greater of (1) 2% of our average invested assets, which consists of the average book value of our real estate properties, both equity interests in and loans secured by real estate, before reserves for depreciation or bad debts or other similar non-cash reserves, or
(2) 25% of our net income, which is defined as our total revenues less total operating expenses for any given period. Operating expenses includes all expenses paid or incurred by us as determined by generally accepted accounting principles, such as:

. real estate operating costs, net of reimbursements,

. management and leasing fees,

. general and administrative expenses, including legal and accounting expenses,

but excluding

. expenses of raising capital such as organizational and offering expenses,

. interest payments, taxes, and non-cash expenditures such as depreciation, amortization and bad debt reserves, and

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. amounts payable out of capital contributions which are not treated as operating expenses under generally accepted accounting principles such as the acquisition and advisory fees payable to the Management Company.

To the extent that operating expenses payable or reimbursable by us exceed this limit and the independent trust managers determine that the excess expenses were justified based on unusual and nonrecurring factors which they deem sufficient, the Management Company may be reimbursed in future years for the full amount of the excess expenses, or any portion thereof, but only to the extent the reimbursement would not cause our operating expenses to exceed the limitation in any year. Within 60 days after the end of any of our fiscal quarters for which total operating expenses for the 12 months then ended exceed the limitation, we will send to our shareholders a written disclosure, together with an explanation of the factors the independent trust managers considered in arriving at the conclusion that the excess expenses were justified.

CERTAIN CONFLICT RESOLUTION PROCEDURES

In order to reduce or eliminate certain potential conflicts of interest, our declaration of trust contains a number of restrictions relating to (1) transactions we enter into with Mr. Hartman and his affiliates, (2) certain future offerings, and (3) allocation of properties among affiliated entities. These restrictions include, among others, the following:

. Except as otherwise described in this registration statement, we will not accept goods or services from Mr. Hartman or his affiliates unless a majority of our trust managers, including a majority of the independent trust managers, not otherwise interested in the transactions, approve such transactions as fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.

. We will not purchase or lease properties in which Mr. Hartman or his affiliates has an interest without a determination by a majority of our trust managers, including a majority of the independent trust managers, not otherwise interested in such transaction, that such transaction is competitive and commercially reasonable to us and at a price no greater than the cost of the property to Mr. Hartman or his affiliates, 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 Mr. Hartman or his affiliates or to our trust managers unless a majority of our trust managers, including a majority of the independent trust managers, not otherwise interested in the transaction, determine the transaction is fair and reasonable to us.

. Except as disclosed in this registration statement, we will not make any loans to Mr. Hartman or his affiliates or to our trust managers. In addition, Mr. Hartman and his affiliates will not make loans to us or to joint ventures in which we are a joint venture partner for the purpose of acquiring properties. Any loans made to us by Mr. Hartman or his affiliates or our trust managers for other purposes must be approved by a majority of our trust managers, including a majority of the independent trust managers, not otherwise interested in the transaction, as fair, competitive and commercially reasonable, and no less favorable to us than comparable loans between unaffiliated parties. Mr. Hartman and his affiliates shall be entitled to reimbursement, at cost, for actual expenses incurred by them on our behalf or joint ventures in which we are a joint venture partner, subject to the limitation on reimbursement of operating expenses to the extent that they exceed the greater of 2% of our average invested assets or 25% of our net income, as described in the "--The Management Agreement" above.

. In the event that an investment opportunity becomes available which is suitable for us and one or more entities affiliated with Mr. Hartman and his affiliates, then the entity which has had the longest period of time elapse since it was offered an investment opportunity will first be offered such investment opportunity. In determining whether or not an investment opportunity is suitable for more than one

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program, the Management Company, subject to approval by our board of trust managers, shall examine, among others, the following factors:

. the cash requirements of each program;

. the effect of the acquisition both on diversification of each program's investments by type of commercial property and geographic area, and on diversification of the tenants of its properties;

. the policy of each program relating to leverage of properties;

. the anticipated cash flow of each program;

. the income tax effects of the purchase of 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 event or development, such as a delay in the closing of a property or a delay in the construction of a property, that the Management Company determines causes any such investment to be more appropriate for a program other than the program that committed to make the investment, the Management Company may determine that another program affiliated with Mr. Hartman or his affiliates will make the investment. Our board of trust managers has a duty to ensure that the method used by the Management Company for the allocation of the acquisition of properties by two or more affiliated programs seeking to acquire similar types of properties shall be reasonable.

ITEM 6. EXECUTIVE COMPENSATION.

We have no employees. Our operations are conducted by the Management Company pursuant to the Management Agreement which is described above. The compensation we pay the Management Company under this agreement is summarized in "Item 7. Certain Relationships and Related Transactions--Management of our Properties and the Operating Partnership" section of this registration statement.

We adopted an Incentive Share Plan to:

. furnish incentives to individuals chosen to receive share-based awards because they are considered capable of improving operations and increasing profits;

. encourage selected persons to accept or continue employment with the Management Company; and

. increase the interest of our trust managers in our welfare through their participation in the growth in the value of our common shares.

The total number of common shares that may be issued under the Incentive Share Plan is currently 5,000,000 common shares. As of the date hereof, no options or awards to purchase common shares have been granted under the Incentive Share Plan.

The Incentive Share Plan provides for the award to our full-time employees and trust managers, and certain of our consultants, of a broad variety of equity-based compensation alternatives such as nonqualified share options, incentive share options, restricted shares appreciation rights, and dividend equivalent rights. All awards under the Incentive Share Plan are subject to the ownership limits contained in our declaration of trust.

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Options entitle the holder to purchase common shares for a specified exercise price during a specified period. Under the Incentive Share Plan, we may grant options that are intended to be incentive stock options within the meaning of Section 422 of the Internal Revenue Code ("incentive stock options") or options that are not incentive stock options ("nonqualified stock options"). Incentive stock options and nonqualified stock options generally may not have an exercise price less than 100% of the fair market value of the common shares on the date of grant and will expire, with certain exceptions, 10 years after such date. Under the Incentive Share Plan, any option or portion thereof that has not vested on or before the termination of employment of an optionee expires on the date of such termination.

Restricted share awards entitle the recipient to purchase common shares from us in consideration of a specified exercise price under terms that provide for vesting over a specified period of time. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with us. Restricted shares may not be issued to non-employee trust managers. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive distributions prior to the time when the restrictions lapse.

Share appreciation rights entitle the recipient to receive from us (at the time of exercise) a per share amount equal to the excess of the fair market value at the date of exercise of a common share over a price specified at the time of grant, which cannot be less than the fair market value of the common shares on the grant date. Share appreciation rights may not be issued to non-employee trust managers.

Dividend equivalent rights entitle the recipient to receive, for a specified period, a payment equal to the quarterly dividend declared and paid by us on one common share. Dividend equivalent rights may not be granted to non-employee trust managers and are forfeited to us upon the termination of the recipient's employment or other relationship with us.

The Incentive Share Plan will be administered by the board of trust managers. This board will determine:

. the eligible persons to whom awards will be granted;

. the time or times at which awards will be granted;

. the number of shares to be subject to such awards and the terms and conditions thereof; and

. administrative and interpretive rules and regulations relating to the plan and any modifications and revisions of such rules and regulations.

ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

GENERAL

Mr. Hartman and entities controlled by Mr. Hartman owned, as of December 31, 2002, approximately 3.4% of our issued and outstanding common shares, and approximately 19.7% of our issued and outstanding common shares assuming all outstanding OP Units are converted in common shares on a one-for-one basis. Mr. Hartman is also on our board of trust managers and is our chief executive officer. Mr. Hartman owns 100% of the Management Company.

Potential conflicts of interest may exist among us, Mr. Hartman, the Management Company and other affiliates of Mr. Hartman, in relation to how we have operated and will operate. Currently, five of our seven trust managers are independent trust managers. The trust managers have an obligation to function on our behalf in all situations in which a conflict of interest may arise and have a statutory obligation to act in the best interests of the shareholders. All conflict of interest transactions must be approved by a majority of our independent trust managers in the manner set forth in our declaration of trust and bylaws.

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PAYMENTS TO AFFILIATES OF MR. HARTMAN

The following table summarizes the compensation we will pay the Management Company and other fees or compensation we have paid to Mr. Hartman or his affiliates in the past. Other than the fees described below, we currently pay no salary or other fees to Mr. Hartman, the Management Company or any of their affiliates. Such fees were not determined on an arm's-length basis:

FORMATION STAGE

Initial Investment......................    At our formation, Mr. Hartman
                                            received 126,000 common shares for
                                            services he provided in connection
                                            with our formation and initial
                                            capitalization.

Property Acquisitions...................    We have acquired 28 of our 32
                                            properties to date by consolidating
                                            entities controlled by Mr. Hartman.
                                            These acquisitions are described
                                            below in the section entitled
                                            "--Property Acquisitions from
                                            Entities Controlled by Mr. Hartman."

        SECURITIES OFFERINGS

Private Placement.......................    In connection with our $25,000,000
                                            private placement of common shares
                                            we closed in December 2000, we paid
                                            the Management Company $438,027 for
                                            advisory and management services
                                            provided, and for the reimbursement
                                            of expenses incurred, in connection
                                            with the private placement.

        OPERATIONAL STAGE

Acquisition Advisory Fees...............    We paid the Management Company 4% of
                                            the gross proceeds we received from
                                            the private placement we closed in
                                            December 2000 for acquisition
                                            advisory fees, resulting in
                                            aggregate payments of $992,698.

Property Management and Leasing Fees....    We pay the Management Company 5% of
                                            our effective gross revenues for the
                                            management of our properties. We
                                            will also pay the Management Company
                                            6% of the effective gross revenues
                                            of leases originated by the
                                            Management Company and 4% of
                                            effective gross revenues from
                                            expansions and renewals of current
                                            or existing leases by the Management
                                            Company. Because the amount we pay
                                            the Management Company for these
                                            services is dependent on future
                                            revenues, we are unable to determine
                                            the amount we may pay the Management
                                            Company in the future for these
                                            services.

Partnership Management..................    We pay the Management Company 1% of
                                            our effective gross revenues for the
                                            day-to-day operations of the
                                            Operating Partnership and for
                                            providing general administrative
                                            services for us. Because the amount
                                            we pay the Management Company for
                                            these services is dependent on
                                            future revenues, we are unable to
                                            determine the amount we may pay the
                                            Management Company in the future for
                                            these services.

Reimbursement of Expenses...............    We reimburse the Management Company
                                            for all reasonable and necessary
                                            expenses incurred or funds advanced
                                            in connection with the management
                                            and operation of our properties. We
                                            will not reimburse the Management
                                            Company for its overhead expenses,

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                                            including salaries and expenses of
                                            centralized employees other than
                                            salaries of certain maintenance and
                                            construction employees.

Distributions...........................    We will pay distributions on common
                                            shares owned by Mr. Hartman and his
                                            affiliates on the same basis as the
                                            distributions paid to other
                                            shareholders.

These fees are described more fully, and amounts actually paid to the Management Company are set forth, below in the section entitled "--Management of Our Properties and the Operating Partnership."

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.

                                                                 YEAR PRIOR
                                                                    OWNER        YEAR WE     PURCHASE PRICE          PURCHASE
                                                                  ACQUIRED      ACQUIRED      PAID BY THE         PRICE PAID BY
    PROPERTY                    NAME OF PRIOR OWNER               PROPERTY      PROPERTY      COMPANY(1)          PRIOR OWNER
------------------     ------------------------------------     ----------     ---------    --------------       --------------
Holly Knight           Holly Knight Plaza, Ltd.                     1984          2000      $    1,603,138/(2)/  $    1,399,141

Bissonnet/Beltway      Bissonnet/Beltway Plaza, Ltd.                1987          1999      $    2,339,771       $    1,694,502

Interstate 10          Interstate 10 Office/Warehouse, Ltd.         1986          1999      $    3,740,000       $    2,315,000

Kempwood Plaza         Kempwood Plaza, Ltd.                         1986          1999      $    2,948,952       $    2,900,000

Westbelt Plaza         Westbelt Plaza, Ltd.                         1988          1999      $    2,620,000       $    1,025,000

Greens Road            Houston R.E. Income Properties, Ltd.         1990          1999      $    1,593,058       $      703,950

Town Park              Houston R.E. Income Properties, Ltd.         1990          1999      $    3,585,000       $      905,100

Bellnot Square         Houston R.E. Income Properties VIII,
                       Ltd.                                         1990          2002      $    5,789,879       $    4,100,000

Corporate Park
Northwest              Houston R.E. Income Property IX, Ltd.        1992          2002      $    7,694,654       $    4,100,000

Webster Point          Houston R.E. Income Properties X, Ltd.       1992          2000      $    1,700,000       $      800,000

Centre South           Houston R.E. Income Properties X, Ltd.       1993          2000      $    1,900,000       $      600,000

Torrey Square          Houston R.E. Income Properties X, Ltd.       1994          2000      $    4,500,000       $    3,000,000

Main Park              Houston R.E. Income Properties XI, Ltd.      1994          1999      $    3,780,000       $    1,950,000

Dairy Ashford          Houston R.E. Income Properties XI, Ltd.      1994          1999      $    1,428,492       $      700,000

Westgate               Houston R.E. Income Properties XI, Ltd.      1994          2002      $    3,372,360       $    1,450,000

Northeast Square       Houston R.E. Income Properties XI, Ltd.      1995          1999      $    2,595,751       $    1,450,000

Plaza Park             Houston R.E. Income Properties XII, L.P.     1995          2000      $    4,250,000       $    1,550,000

Northwest Place II     Houston R.E. Income Properties XII, L.P.     1996          2000      $    1,100,000       $      850,000

Lion Square            Houston R.E. Income Properties XII, L.P.     1997          2000      $    5,900,000       $    4,250,000

Zeta Building          Houston R.E. Income Properties XII, L.P.     1997          2000      $    2,500,000                     /(3)/

Royal Crest            Houston R.E. Income Properties XII, L.P.     1997          2000      $    1,900,000                     /(3)/

Featherwood            Houston R.E. Income Properties XII, L.P.     1997          2000      $    3,000,000                     /(3)/

Garden Oaks            Houston R.E. Income Properties XIV, L.P.     1997          2002      $    6,446,067       $    4,150,000

Westchase              Houston R.E. Income Properties XIV, L.P.     1998          2002      $    2,120,777       $    1,400,000

Sunridge               Houston R.E. Income Properties XIV, L.P.     1998          2002      $    1,382,145       $    2,228,750

Holly Hall             Houston R.E. Income Properties XIV, L.P.     1998          2002      $    2,828,747       $    1,590,000

Brookhill              Houston R.E. Income Properties XIV, L.P.     1998          2002      $      931,706       $      970,000

Corporate Park West    Houston R.E. Income Properties XV, L.P.      1998          2002      $   12,817,830       $   10,858,517/(4)/
----------

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(1) We paid for these properties using common shares or OP Units unless otherwise noted, valued at $10 per share or unit as applicable.
(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, Inc. Total construction costs were $8,889,544, plus $1,966,973 in organizational and offering costs.

We use several steps when 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 developed by the Management Company are then reviewed by outside real estate and accounting consultants, the board of trust managers and real estate appraisers.

We acquired the properties listed above as the result of consolidating several individual programs managed by the Management Company 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 consummate the consolidations. Consequently, the Operating Partnership essentially acquired the properties on an "as is" basis.

MANAGEMENT OF OUR PROPERTIES AND THE OPERATING PARTNERSHIP

In January 1999, we entered into a management agreement with the Management Company. Pursuant to this management agreement, our properties are under the supervision and control of the Management Company. In addition to supervising and controlling our properties, the Management Company further provides us with investment advisory services and day-to-day administrative services. Subject to a budget approved by us on an annual basis, the Management Company has discretion in all matters relating to the management and operation of our properties and determines such operational policies as rent, supplies and services, and the extent and expense of advertising, promotional activities and publicity.

Moreover, the Management Company determines the assignments of key personnel and the allocation of management and staff time to our properties and other day-to-day operations. In the course of its management of our properties, the Management Company manages the marketing of other properties for which they have management responsibilities. In allocating employees and services among, and in soliciting business for, such properties, the Management Company also may be in a conflict of interest position upon a potential sale of our properties. The

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Management Company may only be terminated by us as to a particular property upon the sale of such property or upon the failure by the Management Company to perform its duties under the management agreement.

We pay the Management Company a management fee for performing the duties and obligations set forth in the management agreement. The management fee is 5% of "Effective Gross Revenues" from our properties. The management agreement defines "Effective Gross Revenues" as all payments actually collected from tenants and occupants of our properties, exclusive of:

. security payments and deposits (unless and until such deposits have been applied to the payment of current or past due rent); and

. payments received from tenants in reimbursement of expenses of repairing damage caused by tenants.

Further, we pay the Management Company a leasing fee in the amount of:

. 6% of the Effective Gross Revenues from leases originated by the Management Company; and

. 4% of the Effective Gross Revenues from expansions and renewals of leases by the Management Company.

We must reimburse the Management Company for all reasonable and necessary expenses incurred or funds advanced in connection with the management and operation of our properties; provided, however, that we will not reimburse the Management Company for its overhead, including salaries and expenses of centralized employees other than salaries of certain maintenance and construction personnel.

We also retained the Management Company to perform various general supervisory and administrative services on our behalf in our capacity as general partner of the Operating Partnership. We pay the Management Company a partnership management fee of 1% of the Effective Gross Revenues from our properties for managing the day-to-day affairs of the Operating Partnership and for providing other general administrative services described in the Management Agreement.

In connection with our $25,000,000 private placement we completed in December 2000, we also paid the Management Company:

. approximately 1.8% of gross proceeds for advisory and management services provided by the Management Company in connection with the private placement, and the reimbursement of offering and organizational fees and expenses paid by the Management Company on our behalf; and

. 4% of the proceeds contributed to the Operating Partnership for advisory services it provided in connection with locating and acquiring properties and to reimburse the Management Company for expenses incurred in connection with these services.

The following table summarizes all payments made to the Management Company during 2000, 2001 and 2002:

               TOTAL AMOUNT PAID IN
            TOTAL AMOUNT PAID UNDER THE    CONNECTION WITH OUR PRIVATE
 YEAR           MANAGEMENT AGREEMENT                 PLACEMENT                  TOTAL
-------     ---------------------------    ---------------------------      --------------
 2000           $          1,123,454             $        726,612           $    1,850,066
 2001           $          1,399,640             $        426,210           $    1,825,850
 2002           $          2,122,065             $         10,024           $    2,132,089

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COMPETITIVE ACTIVITIES OF MR. HARTMAN AND HIS AFFILIATES

Mr. Hartman and his affiliates have engaged in and will continue to engage in the operation, management and ownership of other properties in Houston, Texas. The facilities and clientele of such properties will, in many instances, be similar to those of our properties. Mr. Hartman has economic interests in commercial properties that we do not own. Mr. Hartman has not included these properties in our portfolio because the asset profile or condition of such properties is inconsistent with our investment or operating policies.

As of the date of this registration statement, Mr. Hartman controls and/or has economic interests in three entities that own commercial properties in the Houston, Texas metropolitan area. These entities own, in the aggregate, eight commercial properties and have investment objectives similar to ours. The Management Company manages and operates these entities and their properties. Mr. Hartman is not prohibited from developing, acquiring or managing additional properties that may compete directly with our properties. We expect that Mr. Hartman will organize similar entities in the future. The Management Company is also free to manage and otherwise operate additional properties that may directly or indirectly compete with our properties.

Mr. Hartman is not employed by us. Mr. Hartman is required to devote only such time to the operation of our properties as in his judgment is reasonably required. The Management Company is required to devote only such time as to the management or operation of our properties as is necessary to fulfill its obligations under our management agreement.

COMPETITIVE ACTIVITIES OF THE MANAGEMENT COMPANY

The Management Company personnel will not devote their efforts full-time to the property management of our properties, but will devote a material amount of their time to the management of the business of other property-owning entities controlled by Mr. Hartman, but otherwise unaffiliated with us. Often, these properties directly compete with our properties. In allocating employees and services among, and in soliciting business for, such properties, the Management Company or its affiliates may face conflicts of interest. The Management Company also may be in a conflict of interest position upon a potential sale of our properties as well as locating new tenants for available space and/or negotiating with current tenants to renew expiring leases.

FEES AND OTHER COMPENSATION PAYABLE TO MR. HARTMAN AND HIS AFFILIATES

Transactions involving the purchase, financing, leasing, and sale of our properties may involve substantial commissions, fees, compensation, and other income to Mr. Hartman, the Management Company or their affiliates. The Management Company and Mr. Hartman have considerable discretion with respect to these transactions, subject to the express provisions of our governance documents, our policies governing related party transactions and the management agreement.

We may purchase properties in which Mr. Hartman or his affiliates directly or indirectly may have an interest. Any such acquisitions shall be consummated in accordance with the conflict of interest policies set forth in this registration statement and will be approved by the Conflicts Committee of the board of trust managers. Please see "Item 1. Business--Investment Policies and Policies with Respect to Certain Activities--Affiliate Transaction Policy."

LACK OF SEPARATE REPRESENTATION

The Operating Partnership, the Management Company, Mr. Hartman, HCP and their affiliates may be represented by the same legal counsel and may retain the same accountants and other experts. Should a dispute arise which involves conflicts of interest between or among these parties, we anticipate that, as appropriate, separate counsel will be retained for such matters.

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NO ARM'S-LENGTH AGREEMENTS

All agreements, contracts or arrangements between or among Mr. Hartman and his affiliates, including the Management Company, and us were not be negotiated at arm's-length. Such agreements include our management agreement, our declaration of trust, the Operating Partnership'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 which arise from such relationships. All conflict of interest transactions must also be approved by the Conflicts Committee of our board of trust managers in the future. Please see "Item 1. Business--Investment Policies and Policies with Respect to Certain Activities--Affiliate Transaction Policy."

INDEBTEDNESS OF MANAGEMENT

The following is a list of the entities affiliated with the Company that have been indebted to the Company in excess of $60,000 at any time since January 1, 2002, as well as a brief description of the loans made by the Company to each person listed below.

PAYER                                                DESCRIPTION
---------------------------------------     ------------------------------------
Houston R.E. Income Properties XI, Ltd.     Houston R.E. XI owed the Company
                                            approximately $195,000 on December
                                            31, 2001. This loan evidenced cash
                                            advances made to the Company in 1999
                                            in connection with the acquisition
                                            by the Company of properties owned
                                            by Houston R.E. XI. The loan was
                                            repaid in connection with the merger
                                            of Houston R.E. XI with and into the
                                            Operating Partnership which was
                                            effective as of January 1, 2002. An
                                            affiliate of Mr. Hartman was the
                                            general partner of Houston R.E. XI.

Houston R.E. Income Properties XVI, Ltd.    In December 2001, the Company loaned
                                            Houston R.E. XVI $780,000 to allow
                                            Houston R.E. XVI to complete an
                                            acquisition. The loan was made in
                                            the form of a demand note and
                                            accrued interest at a rate of 8%.
                                            The note was repaid, together with
                                            accrued interest, in January 2002.
                                            An affiliate of Mr. Hartman is the
                                            general partner of Houston R.E. XVI.

Houston R.E. Income Properties XIV, L.P.    Effective January 2002, Houston R.E.
                                            XIV contributed five properties to
                                            the Operating Partnership in
                                            exchange for OP Units. Houston R.E.
                                            XIV continued to own two additional
                                            properties, one of which was
                                            contributed to the Operating
                                            Partnership in October 2002 in
                                            exchange for OP Units. All of these
                                            properties secured a single loan,
                                            which was repaid by the Company in
                                            December 2002. Houston R.E. XIV
                                            agreed to pay the Company the
                                            portion of the loan repaid by the
                                            Company that was attributable to the
                                            last property held by Houston R.E.
                                            XIV. As of December 31, 2002,
                                            Houston R.E. XIV owed the Company
                                            $2,626,269. The loan accrues
                                            interest at a rate of 2.5% over
                                            LIBOR and payable upon demand. An
                                            affiliate of Mr. Hartman is the
                                            general partner of Houston R.E. XIV.

ADDITIONAL CONFLICTS OF INTEREST

We have a loan with a an entity controlled by Mr. Hartman. See "Item 1. Our Business - Financing -- Houston R.E. XVI Note" for a discussion of this note. The Management Company leases office space from the Company on a month-to-month basis. The Management Company pays us approximately $8,000 a month for this

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space which is calculated based on previaling market rates. Either party can terminate this lease at any time upon 30 days written notice.

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

. computation of fees and/or reimbursements under the Operating Partnership'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 the Operating Partnership, including amounts guaranteed by or due to Mr. Hartman or his affiliates;

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

. 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 non-recourse indebtedness and the terms of any such refinancing.

ITEM 8. LEGAL PROCEEDINGS.

We are not presently involved in any litigation nor, to our knowledge, is any litigation threatened against us or any of our properties, except for routine litigation arising in the ordinary course of business which, in the opinion of our executive officers, would not have a material adverse effect on us.

ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.

Our common shares are not currently traded on any exchange, and there is no established public trading market for our stock. We currently have no outstanding options or warrants to purchase common shares. OP Units are convertible into common shares on a one-for-one basis. As of December 31, 2002, there were 8,719,905.55 OP Units outstanding. We have not agreed to register any common shares or OP Units under the Securities Act of 1933 for sale by security holders and, currently, no common shares or OP Units could be sold pursuant to Rule 144 under the Securities Act of 1933. As of March 31, 2003, we had 621 shareholders and the Operating Partnership had 417 partners.

We have paid and intend to continue to pay regular distributions to our shareholders. Because all of our operations are performed through the Operating Partnership, our ability to pay distributions depends on the Operating Partnership's ability to make distributions to us and its other partners. Prior to April 2003, we paid quarterly distributions in February, May, August and September of each year. Beginning April 2003, we began paying distributions monthly whereby the distribution attributable to a calendar quarter would be paid in three equal monthly payments during the next quarter.

The following table shows the distributions we have paid (including the total amount paid and the amount paid on a per share basis) since we commenced operations:

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                              TOTAL AMOUNT OF         DISTRIBUTION
MONTH PAID                  DISTRIBUTIONS PAID         PER SHARE
-------------------         ------------------        ------------
November 1999               $           59,365           0.2300
February 2000                          109,294           0.2325
May 2000                               320,276           0.2350
August 2000                            402,124           0.2375
November 2000                          478,206           0.2400
February 2001                          559,940           0.2425
May 2001                               541,380           0.2000
August 2001                            602,138           0.2000
November 2001                          635,778           0.2000
February 2002                          687,544           0.2125
May 2002                             1,102,340           0.2250
August 2002                          1,166,709           0.2375
November 2002                        1,226,777           0.2500
February 2003                        1,226,777           0.2500
                                                       ===========
Average Per Quarter                                      0.2242

We expect to maintain the distribution rate paid in February 2003, unless our results of operations, our general financial condition, general economic conditions or other factors prohibit us from doing so. The funds we receive from operations that are available for distribution may be affected by a number of factors, including:

. our operating and interest expenses;

. the ability of tenants to meet their obligations under the leases associated with our properties;

. our ability to keep our properties occupied;

. our ability to maintain or increase rental rates when renewing or replacing current leases; and

. unanticipated capital expenditures.

We may not be able to maintain our historical or expected level of distributions in the future. Our ability to pay dividends will be impacted by our investing and financing strategies. In particular, we expect to continue to finance certain acquisitions and redevelopments partially through borrowings. As a result, our need to repay and/or refinance such indebtedness may adversely affect our ability to make future distributions. We must distribute to our shareholders at least 90% of our taxable income in order to meet the requirements for being treated as a REIT under the Internal Revenue Code. This requirement is described in greater detail in "Item 1. Business--Federal Income Tax Consequences--Requirements For Qualification as a REIT" section of this registration statement. Our trust managers may increase this percentage as they deem appropriate. Since the Internal Revenue Code's distribution requirements are calculated after inclusion of certain non-cash income items and deduction of certain non-cash charges, we expect normal distributions of our funds from operations will exceed any such distribution requirements. However, on occasion, we may have to distribute more than our funds generated from operations in order to maintain our qualification as a REIT. On such occasions, we may have to borrow the excess funds required from third parties.

ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.

HCP and the Operating Partnership issued securities in the following transactions, each of which was exempt from the registration requirements of the Securities Act of 1933, as amended, under Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering, or under Rule 506 of Regulation D promulgated under the Securities Act. All of the securities referenced below are restricted securities for the purposes of the Securities Act of 1933. With respect to the sale of these securities, we required each purchaser to represent in writing that he or she was purchasing the securities for long-term investment purposes, and to agree not to offer, sell or transfer any of the common shares unless a registration statement with respect to such securities had been declared effective, or an exemption from registration was available. Further, each purchaser was required to represent to us that such

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purchaser was an "accredited investor" under the Securities Act of 1933. No underwriters were involved in any of the issuances listed below.

Effective January 2000, we issued an aggregate of 648,482 common shares to shareholders of Houston R.E. Income Properties X, Inc., the sole limited partner of Houston R.E. Income Properties X, Ltd., in connection with the merger of such corporation with and into HCP. Only shareholders we reasonably believed were accredited investors received common shares. All non-accredited shareholders received cash for their shares in the merged entity. Our shares were issued based on a $10 per share value.

Effective January 2000, the Operating Partnership issued an aggregate of 1,115,987 OP Units to Houston R.E. Income Properties XII, L.P. in connection with the contribution of properties owned by Houston R.E. Income Properties XII, L.P. to the Operating Partnership. The OP Units were issued based on a $10 per unit value.

Effective January 2000, the Operating Partnership issued 118,196 OP Units to Mr. Hartman in exchange for the cancellation of amounts and other certain rights owed to him by Houston R.E. Income Properties X, Ltd. and Houston R.E. Income Properties XII, L.P. Our shares and OP Units were issued based on a $10 per unit value.

We conducted a private placement of common shares from May 1999 until December 2000. Shares were only sold to investors we reasonably believed were accredited investors. We issued an aggregate of 2,481,745.10 common shares at a purchase price of $10 per share (subject to certain volume discounts) in connection with a private placement. We received $24,817,451 in gross proceeds from this offering. We paid a total of $476,175 in commissions to broker dealers in connection with this offering.

Effective January 2002, we issued an aggregate of 1,650,891 common shares to shareholders in connection with the mergers of Houston R.E. Income Properties XI REIT, Inc. and Houston R.E. Income Properties XV REIT, Inc. with and into HCP. Only shareholders we reasonably believed were accredited investors received common shares. All non-accredited shareholders received cash for their shares in the merged entity. Our shares were issued based on a $10 per share value.

Effective January 2002, the Operating Partnership issued an aggregate of 844,596 OP Units to limited partners in connection with the mergers of Houston R.E. Income Properties VIII, Ltd. and Houston R.E. Income Properties IX, Ltd. with and into the Operating Partnership. OP Units were issued to limited partners we reasonably believed were accredited investors. All non-accredited investors received cash for their interests. The Operating Partnership also issued 826,925 OP Units to Houston R.E. Income Properties XIV, L.P. in consideration of five properties contributed by Houston R.E. Income Properties XIV, L.P. to the Operating Partnership. The OP Units were issued based on a $10 per unit value.

ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.

Our declaration of trust authorizes us to issue up to 100,000,000 common shares of beneficial interest at $0.001 par value per share and 10,000,000 preferred shares of beneficial interest at $0.001 par value per share. As of December 31, 2002, we had 4,907,107.16 common shares and no preferred shares issued and outstanding.

COMMON SHARES OF BENEFICIAL INTEREST

Each outstanding common share entitles the holder to one vote on all matters submitted to a vote of shareholders, including the election of trust managers. Our common shares have no cumulative voting in the election of trust managers or for any other matter. Holders of common shares are entitled to such distributions as may be declared from time to time by the trust managers out of funds legally available.

Holders of common shares have no conversion, redemption or preemptive rights to subscribe for any of our securities. All outstanding common shares are fully paid and non-assessable.

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In the event of any liquidation, dissolution or winding-up of our affairs, holders of common shares will be entitled to share ratably in our assets remaining after provision for payment of liabilities to creditors and payment of liquidation preferences to holders of outstanding preferred shares, if any.

PREFERRED SHARES

Our declaration of trust authorizes our trust managers (without any further action by the shareholders) to issue preferred shares in one or more series, and to fix the voting rights, liquidation preferences, dividend rates, conversion rights, redemption rights and terms, including sinking fund provisions, and certain other rights and preferences with respect to such preferred shares. If we ever created and issued preferred shares with a dividend preference over common shares, payment of any dividend preferences of outstanding preferred shares would reduce the amount of funds available for the payment of dividends on the common shares. Further, holders of preferred shares are normally entitled to receive a preference payment in the event we liquidate, dissolve or wind up before any payment is made to the common shareholders, likely reducing the amount common shareholders would otherwise receive upon such an occurrence. In addition, under certain circumstances, the issuance of preferred shares may render more difficult or tend to discourage:

. a merger, offer or proxy contest;

. the assumption of control by a holder of a large block of our securities; or the removal of incumbent management.

Also, the trust managers, without shareholder approval, may issue preferred shares with voting and conversion rights which could adversely affect the holders of common shares.

We have no present intention to issue any preferred shares or any other new class of securities.

RESTRICTIONS ON TRANSFER

To maintain our REIT qualification under the Internal Revenue Code:

. five or fewer individuals (as defined in the Internal Revenue Code to include certain tax exempt organizations and trusts) may not own, directly or indirectly, more than 50% in value of our outstanding shares during the last half of a taxable year; and

. 100 or more persons must beneficially own our shares during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year.

Because we believe it is essential for us to continue to qualify as a REIT, our declaration of trust provides (subject to certain exceptions) that no holder may own, or be deemed to own by virtue of the attribution provisions of the Internal Revenue Code, more than 9.8% of the number or value (in either case as determined in good faith by the trust managers) of any class or series of our outstanding shares. Our trust managers may waive this ownership limit if evidence satisfactory to our trust managers and our tax counsel is presented that such ownership will not then or in the future jeopardize our status as a REIT. Also, these restrictions on transferability and ownership will not apply if our trust managers determine that it is no longer in our best interests to continue to qualify as a REIT.

Additionally, the transfer or issuance of our shares or any security convertible into our shares will be null and void, and the intended transferee will acquire no rights to our shares, if such transfer or issuance:

. creates a direct or indirect ownership of our shares in excess of the 9.8% ownership limit described above;

. with respect to transfers only, results in the our shares being owned by fewer than 100 persons;

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. results in us being "closely held" within the meaning of Section 856(h) of the Internal Revenue Code;

. results in us owning, directly or indirectly, 10% or more of the ownership interests in any tenant or subtenant; or

. results in our disqualification as a REIT.

Our declaration of trust provides that any shares proposed to be transferred pursuant to a transfer which, if consummated, would violate these restrictions on transfer, will be deemed to be transferred to a trust to be held for the exclusive benefit of a charitable beneficiary. To avoid confusion, these shares will be referred to in this registration statement as the "Excess Securities." The trustee of the beneficial trust, as record holder of the Excess Securities, will be entitled to receive all dividends and distributions declared by the trust managers on such securities for the benefit of the charitable beneficiary. Our declaration of trust further entitles the trustee of the beneficial trust to vote all Excess Securities.

The trustee of the beneficial trust may select a transferee to whom the securities may be sold as long as such sale does not violate the 9.8% ownership limit or the other restrictions on transfer. The intended transferee (the transferee of the Excess Securities whose ownership would violate the 9.8% ownership limit or the other restrictions on transfer) will receive from the trustee of the beneficial trust the lesser of such sale proceeds, or the price per share the intended transferee paid for the Excess Securities (or, in the case of a gift or devise to the intended transferee, the price per share equal to the market value per share on the date of the transfer to the intended transferee). The trustee of the beneficial trust will distribute to the charitable beneficiary any amount the trustee receives in excess of the amount to be paid to the intended transferee.

In addition, we have the right to purchase any Excess Securities for a period of ninety days after the transfer that created such Excess Securities. We will pay the trustee of the beneficial trust (for the benefit of the beneficial trust) the amount of any dividend or distribution we pay to an intended transferee on Excess Securities prior to our discovery that such Excess Securities have been transferred in violation of the provisions of the declaration of trust. If any legal decision, statute, rule or regulation deems or declares the transfer restrictions described in this section of the registration statement to be void or invalid, then we may, at our option, deem the intended transferee of any Excess Securities to have acted as an agent on our behalf in acquiring such Excess Securities and to hold such Excess Securities on our behalf.

SHARE DISTRIBUTIONS

Our declaration of trust allows us to make common share distributions in common shares, cash or property, affording us greater flexibility in the means by which we pay distributions to our shareholders. When making a determination of whether to declare a distribution, the trust managers will make the determination consistent with their fiduciary duties as trust managers. Our distribution policy is summarized in "Item 9. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters." We will not make or pay a distribution, however, when we are unable to pay our debts as they become due in the usual course of its business, or when the payment of such distribution would result in us being unable to pay our debts as they become due in the usual course of business.

REDEMPTION OF COMPANY SHARES

We may purchase or redeem our own shares, subject to the limitations of the Texas Real Estate Investment Trust Act. The Texas Real Estate Investment Trust Act allows real estate investment trusts to redeem or repurchase shares, unless after giving effect to such a redemption or repurchase, we would be insolvent or the amount paid for such shares would exceed the our surplus. This provision allows us to distribute assets by acquiring shares and redeem shares in transactions in which such a redemption may be beneficial to us and our shareholders.

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VOTING RIGHTS

Each shareholder is entitled at each meeting of shareholders to one vote on all matters submitted to a vote of shareholders. When a quorum is present at any meeting, the votes of a majority of the common shares entitled to vote, present in person or by proxy, will decide any matter submitted to such meeting, unless our declaration of trust, our bylaws or the law requires a greater number, in which case the vote of such greater number will govern and control. In determining the number of common shares entitled to vote, shares abstaining from voting or not voted on a matter will not be treated as entitled to vote.

Shareholders are entitled to receive a copy of our shareholder list upon request. This list will include each shareholder's name, address and telephone number, if available, and the number of shares owned by such shareholder. The requesting shareholder will need to represent to us that the list will not be used for commercial interests. We will send this list within 10 days after we receive the applicable request. A shareholder requesting a list will be required to pay reasonable costs of postage and duplication.

In addition to the foregoing, shareholders have rights under Rule 14a-7 under the Securities Exchange Act which provides that, upon the request of investors and the payment of expenses of distribution, we are required to distribute specific materials to shareholders in the context of the solicitation of proxies for voting on matters presented to shareholders or at our option, provide requesting shareholders with a copy of the list of shareholders so that the requesting shareholders may make the distribution of proxies themselves.

SHAREHOLDER LIABILITY

Both the Texas Real Estate Investment Trust Act, our declaration of trust and our bylaws provide that our shareholders:

. are not liable personally or individually in any manner whatsoever for any debt, act, omission or obligation incurred by us or the trust managers; and

. are under no obligation to us or our creditors with respect to their shares other than the obligation to pay to us the full amount of the consideration for which their shares were issued.

TRUST MANAGER LIABILITY

In accordance with the Texas Real Estate Investment Trust Act, our declaration of trust provides that we will indemnify each trust manager against all judgments, penalties, fines, amounts paid in settlement and reasonable expenses actually incurred by the trust manager in connection with any threatened, pending or completed action, suit or proceeding, in which he or she is involved by reason of his or her serving as a trust manager, to the fullest extent Texas law permits indemnification. See "Item 12. Indemnification of Directors and Officers." This indemnification will not preclude any other rights to which those seeking indemnification may at any time be entitled under our bylaws, any law, agreement or vote of shareholders or disinterested trust managers, or otherwise.

Pursuant to our bylaws, no trust manager or officer will be liable to us for any act, omission, loss, damage, or expense arising from the performance of his or her duties, unless such trust manager is willful or grossly negligent. In discharging their duties, our trust managers and officers will be entitled to rely on expert and other matters as provided in the Texas Real Estate Investment Trust Act and in our bylaws.

BOARD OF TRUST MANAGERS

Our declaration of trust and bylaws together provide that our board of trust managers must consist of no fewer than three individuals nor more than 10 individuals. Our board of trust managers currently consists of seven persons. The term of office for each board member is one year. Our bylaws also provide that nominations of persons for election as trust managers may be made at any annual meeting of shareholders:

. by or at the direction of the trust managers; or

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. by any shareholder who is a shareholder of record on the date of the giving of notice provided for in the bylaws and on the record date for the determination of shareholders entitled to vote at such annual meeting and who complies with the notice procedures set forth in the bylaws.

RESTRICTIONS ON ROLL-UP TRANSACTIONS

In connection with any proposed transaction considered a "Roll-up Transaction" involving us and the issuance of securities of an entity (a "Roll-up Entity") that would be created or would survive after the successful completion of the Roll-up Transaction, an appraisal of all properties shall be obtained from a competent independent appraiser. The properties shall be appraised on a consistent basis, and the appraisal shall be based on the evaluation of all relevant information and shall indicate the value of the properties as of a date immediately prior to the announcement of the proposed Roll-up Transaction. The appraisal shall assume an orderly liquidation of properties over a 12-month period. The terms of the engagement of the independent appraiser shall clearly state that the engagement is for our benefit and the shareholders. A summary of the appraisal, indicating all material assumptions underlying the appraisal, shall be included in a report to shareholders in connection with any proposed Roll-up Transaction.

A "Roll-up Transaction" is a transaction involving the acquisition, merger, conversion or consolidation, directly or indirectly, of us and the issuance of securities of a Roll-up Entity. This term does not include:

. a transaction involving our securities that have been for at least 12 months listed on a national securities exchange or included for quotation on NASDAQ; or

. a transaction involving our conversion to corporate, trust, or association form if, as a consequence of the transaction, there will be no significant adverse change in any of the following:
shareholder voting rights; the term of our existence; compensation to the Management Company; or our investment objectives.

In connection with a proposed Roll-up Transaction, the person sponsoring the Roll-up Transaction must offer to shareholders who vote "no" on the proposal the choice of:

. accepting the securities of a Roll-up Entity offered in the proposed Roll-up Transaction; or

. one of the following:

. remaining as shareholders of HCP and preserving their interests therein on the same terms and conditions as existed previously, or

. receiving cash in an amount equal to the shareholder's pro rata share of the appraised value of our net assets.

We are prohibited from participating in any proposed Roll-up Transaction:

. that would result in the shareholders having democracy rights in a Roll-up Entity that are less than those provided in our declaration of trust and bylaws, including rights with respect to the election and removal of trust managers, annual reports, annual and special meetings, amendment of our declaration of trust, and our dissolution;

. that includes provisions that would operate to materially impede or frustrate the accumulation of shares by any purchaser of the securities of the Roll-up Entity, except to the minimum extent necessary to preserve the tax status of the Roll-up Entity, or which would limit the ability of an investor to exercise the voting rights of its securities of the Roll-up Entity on the basis of the number of shares held by that investor;

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. in which investor's rights to access of records of the Roll-up Entity will be less than those provided in the our governance documents; or

. in which any of the costs of the Roll-up Transaction would be borne by us if the Roll-up Transaction is not approved by the shareholders.

ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Subsection (B) of Section 9.20 of the Texas Real Estate Investment Trust Act authorizes a Texas real estate investment trust to indemnify any person who was, is, or is threatened to be made a named defendant or respondent in any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding, or any inquiry or investigation that can lead to such an action, suit or proceeding because the person is or was a trust manager, officer, employee or agent of the trust or is or was serving at the request of the trust as a trust manager, director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another real estate investment trust, corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise against reasonable expenses (including court costs and attorney's fees), judgments, penalties (including excise and similar taxes), fines and settlements if he conducted himself in good faith and reasonably believed his conduct was in or not opposed to the best interests of the trust and, in the case of any criminal proceeding, had no reasonable cause to believe that his conduct was unlawful.

The Texas Real Estate Investment Trust Act further provides that, except to the extent otherwise permitted by the Texas Real Estate Investment Trust Act, indemnification in respect of a proceeding in which the person is found liable on the basis that personal benefit was improperly received by him or in which the person is found liable to the trust is limited to reasonable expenses actually incurred by such person. Indemnification pursuant to Subsection (B) of
Section 9.20 of the Texas Real Estate Investment Trust Act may not be made in respect of any proceeding in which the person has been found liable for willful or intentional misconduct in the performance of his duty to the trust.

Subsection (C) of Section 15.10 of the Texas Real Estate Investment Trust Act provides that a trust manager shall not be liable for any claims or damages that may result from his acts in the discharge of any duty imposed or power conferred upon him by the trust if, in the exercise of ordinary care, he acted in good faith and in reliance upon information, opinions, reports or statements, including financial statements and other financial data, concerning the trust or another person, that were prepared or presented by officers or employees of the trust, legal counsel, public accountants, investment bankers or certain other professionals or a committee of trust managers of which the trust manager is not a member. In addition, no trust manager shall be liable to the trust for any act, omission, loss, damage or expense arising from the performance of his duty to the trust, save only for his own willful misfeasance, willful malfeasance or gross negligence.

Our declaration of trust requires us to indemnify our trust managers and officers to the fullest extent permitted by the Texas Real Estate Investment Trust Act, subject to limited exceptions. See "Item 5. Directors and Executive Officers -- Limited Liability and Indemnification of Trust Managers, Officers, Employees and Other Agents."

We intend to maintain director and officer liability insurance.

ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See the Financial Statements beginning on page F-1 of this registration statement.

ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

The Company engaged Deloitte & Touche LLP to audit its 1999 and 2000 financial statements. Deloitte & Touche issued an Independent Auditors' Report for such financial statements which did not contain an adverse opinion, or a disclaimer of opinion, and which was not qualified or modified as to uncertainty, audit scope or accounting principle. Deloitte & Touche was not engaged to audit any of the Company's subsequent financial

-70-

statements. Deloitte & Touche terminated the client-auditor relationship between it and the Company by a letter dated January 21, 2002.

The Company engaged Pannell Kerr Forster of Texas, P.C. on July 24, 2002 as the Company's independent auditors. Our board of trust managers approved this appointment. Pannell Kerr Forster of Texas, P.C. audited the Company's 2000, 2001 and 2002 financial statements included with this registration statement.

There were no "reportable events" or disagreements between the Company and Deloitte & Touche on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure during any period preceding Deloitte & Touche's termination of its relationship with the Company.

ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements

The following financial statements are included in this registration statement.

                                                                                 PAGE
DESCRIPTION OF FINANCIAL STATEMENTS                                             NUMBER
--------------------------------------------------------------------------      ------
HCP Consolidated Financial Statements
  Independent Auditors' Report                                                    F-2
  Consolidated Balance Sheets as of December 31, 2002 and 2001                    F-3
  Consolidated Statements of Income for each of the years ended                   F-5
   December 31, 2002, 2001 and 2000
  Consolidated Statements of Changes in Shareholders' Equity for each of          F-6
   the years ended December 31, 2002, 2001 and 2000
  Consolidated Statements of Cash Flows for each of the years ended               F-7
   December 31, 2002, 2001 and 2000
  Notes to Consolidated Financial Statements                                      F-8
2002 Acquisition Properties
  Independent Auditors' Report                                                   F-23
  Statement of Revenue and Certain Expenses for each of the years ended          F-24
   December 31, 2001 and 2000
   Notes to the Statement of Revenue and Certain Expenses for each of the        F-25
    years ended December 31, 2001 and 2000

 (b)     The following documents are filed as exhibits hereto:

EXHIBIT NO.                        DESCRIPTION
-----------   -----------------------------------------------------------
   3.1        Amended and Restated Declaration of Trust of Hartman
              Commercial Properties REIT

   3.2        Bylaws of Hartman Commercial Properties REIT

   4.1        Specimen certificate for the common shares of beneficial
              interest, par value $.001, of Hartman Commercial Properties
              REIT

  10.1        Agreement of Limited Partnership of Hartman REIT Operating
              Partnership, L.P.

  10.2        Property and Partnership Management Agreement, dated as of
              January 28, 1999, by

                               -71-

EXHIBIT NO.                        DESCRIPTION
-----------   -----------------------------------------------------------
              and between Hartman REIT Operating Partnership, L.P. and
              Hartman Management, L.P. (f/k/a Hartman Management, Inc.)

  10.3        Certificate of Formation of Hartman REIT Operating
              Partnership II GP, LLC.

  10.4        Limited Liability Agreement of Hartman REIT Operating
              Partnership II GP, LLC

  10.5        Certificate of Limited Partnership of Hartman REIT
              Operating Partnership II, L.P.

  10.6        Agreement of Limited Partnership of Hartman REIT Operating
              Partnership II, L.P.

  10.7        Promissory Note, dated December 20, 2002, between Hartman
              REIT Operating Partnership II, L.P. and GMAC Commercial
              Mortgage Corporation.

  10.8        Deed of Trust and Security Agreement, dated December 20,
              2002, between Hartman REIT Operating Partnership II, L.P.
              and GMAC Commercial Mortgage Corporation.

  10.9        Employee and Trust Manager Incentive Plan

  16.1        Letter from Deloitte & Touche LLP regarding its concurrence
              or disagreement with the statements made by the Company in
              the registration statement concerning the resignation as
              the Company's principal accountant

  21.1        List of Subsidiaries of Hartman Commercial Properties REIT

  23.1        Consent of Pannell Kerr Forster of Texas, P.C.

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

Hartman Commercial Properties REIT

Dated: April 30, 2003

                                          By:  /s/ Allen R. Hartman
                                              ---------------------
                                          Name:  Allen R. Hartman
                                          Title: President

-72-

INDEX TO FINANCIAL STATEMENTS

PAGE

HCP Consolidated Financial Statements
  Independent Auditors' Report                                               F-2
  Consolidated Balance Sheets as of December 31, 2002 and 2001               F-3
  Consolidated Statements of Income for each of the years ended
   December 31, 2002, 2001 and 2000                                          F-5
  Consolidated Statements of Changes in Shareholders' Equity for each of
   the years ended December 31, 2002, 2001 and 2000                          F-6
  Consolidated Statements of Cash Flows for each of the years ended
   December 31, 2002, 2001 and 2000                                          F-7
  Notes to Consolidated Financial Statements                                 F-8
2002 Acquisition Properties
  Independent Auditors' Report                                              F-23
  Statement of Revenue and Certain Expenses for each of the years ended
   December 31, 2001 and 2000                                               F-24

Notes to the Statement of Revenue and Certain Expenses for each of the years ended December 31, 2001 and 2000 F-25

F-1

INDEPENDENT AUDITORS' REPORT

To the Board of Trust Managers and Shareholders of Hartman Commercial Properties REIT

We have audited the accompanying consolidated balance sheets of Hartman Commercial Properties REIT and subsidiary (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders' equity and cash flows, for each of the three years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hartman Commercial Properties REIT and subsidiary as of December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

/s/ PANNELL KERR FORSTER OF TEXAS, P.C.

Houston, Texas
March 28, 2003

F-2

Hartman Commercial Properties REIT and Subsidiary

Consolidated Balance Sheets

                                                                            December 31,
                                                                  --------------------------------
                                                                       2002              2001
                                                                  --------------    --------------
                             ASSETS

Real estate
   Land                                                           $   24,044,499    $   15,323,934
   Buildings and improvements                                         92,984,637        55,130,010
                                                                  --------------    --------------

                                                                     117,029,136        70,453,944

Less accumulated depreciation                                         (7,735,355)       (4,185,030)
                                                                  --------------    --------------

         Real estate, net                                            109,293,781        66,268,914

Cash and cash equivalents                                              6,091,699           203,418

Escrows and acquisition deposits                                       2,891,300                 -

Note receivable                                                          421,890                 -

Receivables
   Accounts receivable, net of allowance for doubtful
    accounts of $391,500 and $225,800 in 2002
    and 2001, respectively                                               339,044           436,819
   Accrued rent receivable                                             1,700,076           972,469
   Due from affiliates                                                 2,847,600         1,052,789
                                                                  --------------    --------------

         Receivables, net                                              4,886,720         2,462,077
                                                                  --------------    --------------

Deferred costs, net                                                    2,918,210         1,490,058

Prepaid expenses and other assets                                         95,583            14,463
                                                                  --------------    --------------

Total assets                                                      $  126,599,183    $   70,438,930
                                                                  --------------    --------------

See notes to consolidated financial statements.

F-3

                                                                                       December 31,
                                                                             --------------------------------
                                                                                  2002              2001
                                                                             --------------    --------------
                   LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
   Notes payable                                                             $   37,718,000    $   11,997,058
   Accounts payable and accrued expenses                                          3,308,345         1,173,345
   Due to affiliates                                                                864,487           712,281
   Tenants' security deposits                                                     1,117,705           638,652
   Dividends payable                                                              1,226,777           941,749
   Other liabilities                                                              1,016,460           608,951
                                                                             --------------    --------------

         Total liabilities                                                       45,251,774        16,072,036
                                                                             --------------    --------------

Minority interests of unit holders in Operating Partnership; 4,065,840 and
 2,865,654 units at December 31, 2002 and 2001, respectively                     38,598,491        27,264,090

Commitments and Contingencies                                                             -                 -

Shareholders' equity
   Preferred shares, $0.001 par value per share; 10,000,000
    shares authorized; none issued and outstanding
    at December 31, 2002 and 2001                                                         -                 -
   Common shares, $0.001 par value per share; 100,000,000
    shares authorized; 4,907,107 and 3,239,316 issued and
    outstanding at December 31, 2002 and 2001, respectively                           4,907             3,239
   Additional paid-in capital                                                    45,529,255        28,867,324
   Accumulated deficit                                                           (2,785,244)       (1,767,759)
                                                                             --------------    --------------

         Total shareholders' equity                                              42,748,918        27,102,804
                                                                             --------------    --------------

Total liabilities and shareholders' equity                                   $  126,599,183    $   70,438,930
                                                                             --------------    --------------

See notes to consolidated financial statements.

F-4

Hartman Commercial Properties REIT and Subsidiary

Consolidated Statements of Income

                                                            Year Ended December 31,
                                                -----------------------------------------------
                                                     2002             2001             2000
                                                -------------    -------------    -------------
Revenues
   Rental income                                $  16,794,963    $   9,352,910    $   7,853,568
   Tenants' reimbursements                          3,628,522        2,253,121        1,711,118
   Interest and other income                          331,541           97,706           61,072
                                                -------------    -------------    -------------

         Total revenues                            20,755,026       11,703,737        9,625,758
                                                -------------    -------------    -------------

Expenses
   Operation and maintenance                        2,299,377        1,417,820          998,166
   Interest expense                                 1,573,270          812,029        1,271,194
   Real estate taxes                                2,629,122        1,529,350        1,160,019
   Insurance                                          381,155          175,442          114,573
   Electricity, water and gas utilities               795,431          700,976          508,775
   Management and partnership
    management fees                                 1,231,212          674,529          574,216
   General and administrative                         831,675          518,871          534,667
   Depreciation                                     3,550,325        1,922,247        1,593,779
   Amortization                                       491,536          229,499          192,095
   Bad debt expense                                    74,200           50,300           34,500
                                                -------------    -------------    -------------

         Total operating expenses                  13,857,303        8,031,063        6,981,984
                                                -------------    -------------    -------------

Income before minority interests                    6,897,723        3,672,674        2,643,774

Minority interests in Operating Partnership        (3,192,605)      (1,931,962)      (1,770,078)
                                                -------------    -------------    -------------

Net income                                      $   3,705,118    $   1,740,712    $     873,696
                                                -------------    -------------    -------------

Net income per common share                     $       0.755    $       0.573    $       0.475
                                                -------------    -------------    -------------

Weighted-average shares outstanding                 4,905,022        3,035,521        1,840,700
                                                -------------    -------------    -------------

See notes to consolidated financial statements.

F-5

Hartman Commercial Properties REIT and Subsidiary

Consolidated Statements of Changes in Shareholders' Equity

                                                         Common Stock
                                                -----------------------------
                                                                                  Additional
                                                                                   Paid-in       Accumulated
                                                    Shares          Amount         Capital         Deficit           Total
                                                -------------   -------------   -------------   -------------    -------------
Balance, December 31, 1999                            572,466   $         572   $   3,977,332   $    (154,781)   $   3,823,123

   Issuance of common stock for cash,
    net of offering costs                           1,273,007           1,273      11,658,960               -       11,660,233

   Issuance of common stock to acquire
    Operating Partnership units                       648,482             649       6,484,176               -        6,484,825

   Net income                                               -               -               -         873,696          873,696

   Dividends                                                -               -               -      (1,760,546)      (1,760,546)
                                                -------------   -------------   -------------   -------------    -------------

Balance, December 31, 2000                          2,493,955           2,494      22,120,468      (1,041,631)      21,081,331

   Issuance of common stock for cash,
    net of offering costs                             745,361             745       6,746,856               -        6,747,601

   Net income                                               -               -               -       1,740,712        1,740,712

   Dividends                                                -               -               -      (2,466,840)      (2,466,840)
                                                -------------   -------------   -------------   -------------    -------------

Balance, December 31, 2001                          3,239,316           3,239      28,867,324      (1,767,759)      27,102,804

   Issuance of common stock for cash,
    net of offering costs                              16,912              17         154,792               -          154,809

   Issuance of common stock to acquire
    Operating Partnership units                     1,067,646           1,068      10,675,392               -       10,676,460

   Issuance of common stock in exchange for
    Operating Partnership units                       583,233             583       5,831,747               -        5,832,330

   Net income                                               -               -               -       3,705,118        3,705,118

   Dividends                                                -               -               -      (4,722,603)      (4,722,603)
                                                -------------   -------------   -------------   -------------    -------------

Balance, December 31, 2002                          4,907,107   $       4,907   $  45,529,255   $  (2,785,244)   $  42,748,918
                                                -------------   -------------   -------------   -------------    -------------

See notes to consolidated financial statements.

F-6

Hartman Commercial Properties REIT and Subsidiary

Consolidated Statements of Cash Flows

                                                                       Years Ended December 31,
                                                          --------------------------------------------------
                                                               2002              2001              2000
                                                          --------------    --------------    --------------
Cash flows from operating activities:
   Net income                                             $    3,705,118    $    1,740,712    $      873,696
   Adjustments to reconcile net income to
    net cash provided by (used in)
    operating activities:
       Depreciation                                            3,550,325         1,922,247         1,593,779
       Amortization                                              491,536           229,499           192,095
       Minority interests in Operating Partnership             3,192,605         1,931,962         1,770,078
       Bad debt expense                                           74,200            50,300            34,500
       Changes in operating assets and liabilities:
         Due from affiliates                                     847,608        (1,557,318)          262,375
         Escrows and acquisition deposits                       (956,051)          727,264           (24,579)
         Receivables                                            (557,277)         (403,321)         (529,364)
         Deferred costs                                         (894,076)         (725,107)         (322,064)
         Prepaid expenses and other assets                        77,130            33,002            34,941
         Accounts payable and accrued expenses                   987,052          (972,043)          747,858
         Tenants' security deposits                               67,876           141,526            82,666
                                                          --------------    --------------    --------------

           Net cash provided by operating activities          10,586,046         3,118,723         4,715,981
                                                          --------------    --------------    --------------

Cash flows used in investing activities:
   Additions to real estate                                   (1,982,508)       (5,027,727)       (6,089,034)
   Proceeds from sale of property                                 60,000                 -                 -
                                                          --------------    --------------    --------------

           Net cash used in investing activities              (1,922,508)       (5,027,727)       (6,089,034)
                                                          --------------    --------------    --------------
Cash flows from financing activities:
   Dividends paid                                             (4,437,575)       (2,233,080)       (1,190,831)
   Distributions paid to OP unit holders                      (3,998,069)       (2,405,038)       (2,681,327)
   Purchase of nonaccredited investors' shares                (1,452,960)                -          (339,791)
   Proceeds from issuance of common shares                       154,809         6,747,601        11,660,233
   Proceeds from notes payable                                22,020,991         9,230,000         3,211,000
   Repayments of notes payable                               (14,639,488)       (9,233,753)      (10,502,281)
   Payments of loan origination costs                           (422,965)         (304,000)                -
                                                          --------------    --------------    --------------

           Net cash provided by financing activities          (2,775,257)        1,801,730           157,003
                                                          --------------    --------------    --------------

Net increase (decrease) in cash and cash equivalents           5,888,281          (107,274)       (1,216,050)

Cash and cash equivalents at beginning of year                   203,418           310,692         1,526,742
                                                          --------------    --------------    --------------

Cash and cash equivalents at end of year                  $    6,091,699    $      203,418    $      310,692
                                                          --------------    --------------    --------------

Supplemental disclosure of cash flow information:

     Debt assumed in connection with acquisition
      of properties                                       $   13,595,156    $            -    $    8,676,104
                                                          --------------    --------------    --------------
     OP units issued in connection
      with acquisition of properties                      $   28,510,660    $      382,521    $   18,853,165
                                                          --------------    --------------    --------------
     Shares issued in connection with
      acquisition of properties                           $   10,676,460    $            -    $    6,484,825
                                                          --------------    --------------    --------------

See notes to consolidated financial statements.

F-7

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business and nature of operations

Hartman Commercial Properties REIT ("HCP") was formed as a real estate investment trust, pursuant to the Texas Real Estate Investment Trust Act on August 20, 1998 to consolidate and expand the real estate investment strategy of Allen R. Hartman ("Hartman") in acquiring and managing office and retail properties. Hartman, HCP's Chairman of the Board of Trust Managers, has been engaged in the ownership, acquisition, and management of commercial properties in the Houston, Texas, metropolitan area for over 20 years. HCP serves as the general partner of Hartman REIT Operating Partnership, L.P. (the "Operating Partnership" or "HROP") which was formed on December 31, 1998 as a Delaware limited partnership. HCP and the Operating Partnership are collectively referred to herein as the "Company". HCP currently conducts substantially all of its operations and activities through the Operating Partnership. As the general partner of the Operating Partnership, HCP has the exclusive power to manage and conduct the business of the Operating Partnership, subject to certain customary exceptions. Hartman Management, L.P. (the "Management Company"), a company wholly-owned by Hartman, provides a full range of real estate services including leasing and property management, accounting, asset management and investor relations for the Company.

In January 1999, the Company acquired nine commercial properties (the "First Consolidation") pursuant to (i) a merger at fair values of four privately-held limited partnerships (Houston R.E. Income Properties IV, V, VI and VII Ltd.) controlled and operated by Hartman, with and into the Operating Partnership; (ii) a contribution by Houston R.E. Income Properties XI, Ltd. of certain of its properties to the Operating Partnership in exchange for Operating Units ("OP Units") of the Operating Partnership, and (iii) a purchase of one property from a limited partnership for cash. During 1999, the Company bought an additional three properties from unrelated parties.

Effective January 2000, the Company acquired nine additional commercial properties (the "Second Consolidation"). Three of these commercial properties were acquired by merging at fair values a Hartman controlled entity (Houston R.E. Income Properties X REIT, Inc.) into HCP. Further, a separate Hartman controlled limited partnership (Houston R.E. Income Properties XII, L.P.), contributed six commercial properties to the Operating Partnership in exchange for OP Units. On August 31, 2000, the Company bought another property controlled by Hartman. During 2001, the Company acquired another property from an unrelated party.

Effective January 2002, the Company acquired nine additional commercial properties. Five of these properties were contributed at fair values by Houston R.E. Income Properties XIV, L.P., a limited partnership controlled by Hartman, to the Operating Partnership in exchange for OP Units. Further, two properties were acquired when Hartman controlled limited partnerships Houston R.E. Income Properties VIII, Ltd. and Houston R.E. Income Properties IX, Ltd. were merged at fair value with and into the Operating Partnership in exchange for OP units. Two additional properties were acquired when Hartman controlled entities Houston R.E. Income Properties XI REIT, Inc. and Houston R.E. Income Properties XV REIT, Inc. were merged at fair value into the Company in exchange for HCP common shares. In addition, another property was acquired during 2002 and subsequently sold to an unrelated party (see Note 2). As of December 31, 2002, 2001 and 2000, the Company owned and operated 32, 23 and 22 office and retail properties, respectively, located in and around Houston, Texas.

F-8

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Basis of consolidation

HCP is the sole general partner of the Operating Partnership and possesses full legal control and authority over the operations of the Operating Partnership. As of December 31, 2002, HCP owned a majority of the partnership interests in the Operating Partnership. Consequently, the accompanying consolidated financial statements of the Company include the accounts of the Operating Partnership. All significant intercompany balances have been eliminated. Minority interest in the accompanying consolidated financial statements represents the share of equity and earnings of the Operating Partnership allocable to holders of partnership interests other than the Company. Net income is allocated to minority interests based on the weighted-average percentage ownership of the Operating Partnership during the year. Issuance of additional common shares and OP Units changes the ownership interests of both the minority interests and the Company.

Basis of accounting

The financial records of the Company are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred.

Cash and cash equivalents

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents at December 31, 2002 and 2001 consist of demand deposits at commercial banks and money market funds.

Due from affiliates

Due from affiliates include amounts owed to the Company from Hartman controlled limited partnerships and other entities.

Escrows and acquisition deposits

Escrow deposits include escrows established pursuant to certain mortgage financing arrangements for real estate taxes, insurance, maintenance and capital expenditures. Acquisition deposits include earnest money deposits on future acquisitions.

Real estate

Real estate properties are recorded at cost, net of accumulated depreciation. Improvements, major renovations, and certain costs directly related to the acquisition, improvement, and leasing of real estate are capitalized. Expenditures for repairs and maintenance are charged to operations as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for the buildings and improvements. Tenant improvements are depreciated using the straight-line method over the life of the lease.

F-9

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Real estate (continued)

Management reviews its properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. Management determines whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value. Management has determined that there has been no impairment in the carrying value of the Company's real estate assets as of December 31, 2002.

Deferred costs

Deferred costs consist primarily of leasing commissions and deferred financing costs. Leasing commissions are amortized on the straight-line method over the terms of the related lease agreements. Deferred financing costs are amortized on the straight-line method over the terms of the loans, which approximates the interest method.

Offering costs

Offering costs include selling commissions, issuance costs, investor relations fees and unit purchase discounts. These costs were incurred in the raising of capital through the sale of common shares and are treated as a reduction of shareholders' equity.

Revenue recognition

All leases on properties held by the Company are classified as operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rent receivable. Percentage rents are recognized as rental income when the thresholds upon which they are based have been met. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. The Company provides an allowance for doubtful accounts against the portion of tenant accounts receivable which is estimated to be uncollectible.

Federal income taxes

The Company is qualified as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986 and is therefore not subject to Federal income taxes provided it meets all conditions specified by the Internal Revenue Code for retaining its REIT status. The Company believes it has continuously met these conditions since reaching 100 shareholders in 1999 (see Note 7).

F-10

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates used by the Company include the estimated useful lives for depreciable and amortizable assets and costs, and the estimated allowance for doubtful accounts receivable. Actual results could differ from those estimates.

Fair value of financial instruments

The Company's financial instruments consist primarily of cash, cash equivalents, accounts receivable and accounts and notes payable. The carrying value of cash, cash equivalents, accounts receivable and accounts payable are representative of their respective fair values due to the short-term nature of these instruments. The fair value of the Company's debt obligations is representative of its carrying value based upon current rates offered for similar types of borrowing arrangements.

Concentration of risk

Substantially all of the Company's revenues are obtained from office, industrial and retail locations in the Houston, Texas, metropolitan area.

The Company maintains cash accounts in major U.S. financial institutions. The terms of these deposits are on demand to minimize risk. The balances of these accounts occasionally exceed the federally insured limits, although no losses have been incurred in connection with such cash balances.

Comprehensive income

The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in 1999. For the years presented, the Company did not have significant amounts of comprehensive income.

New accounting pronouncements

In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, was issued. This statement requires that an entity recognize all derivatives as either assets or liabilities and measure the instruments at fair value. The accounting for change in fair value of a derivative depends upon its intended use. The Company adopted the provisions of this statement effective January 1, 2001 and believes that this statement did not have any material impact on the Company's consolidated financial statements.

F-11

Hartman Commercial Properties REIT and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

New accounting pronouncements (continued)

SFAS No. 141, "Business Combinations" was effective July 1, 2001 and prohibits pooling-of-interests accounting for acquisitions. The effect of adopting SFAS 141 did not have a material impact on the Company's financial statements.

SFAS No. 142, "Goodwill and Other Intangible Assets" is effective January 1, 2002 and specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The effect of adopting SFAS No. 142 did not have a material impact on the Company's financial statements.

SFAS No. 143, "Accounting for Asset Retirement Obligations" was issued in June 2001, is effective for years beginning after June 15, 2002, and will be adopted by the Company on January 1, 2003. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of SFAS No. 143 will not have a material impact on the Company's financial statements.

SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" was issued in August 2001, and was adopted by the Company on January 1, 2002. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business (as previously defined in that Opinion). This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The effect of adopting SFAS No. 144 did not have a material impact on the Company's financial statements.

SFAS No. 145, "Rescission of SFAS Statements No. 4, 44 and 64, Amendment of SFAS No. 13, Technical Corrections" was issued in April 2002 and adopted by the Company on April 30, 2002. The purpose of this statement is to update, clarify and simplify existing accounting standards. The effect of adopting SFAS No. 145 did not have a material impact on the Company's financial statements.

F-12

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

New accounting pronouncements (continued)

SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure - an amendment of FASB Statement No. 123," was issued in December 2002 and is effective for fiscal years beginning after December 15, 2002. This statement provides alternative methods of transition for an entity that voluntarily changes to the fair value-based method of accounting for stock-based employee compensation. It also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company will adopt this statement effective January 1, 2003 using the prospective method, and does not expect the adoption of this statement to have a material impact on its financial position, results of operations or cash flows.

In November 2002, FASB issued Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 establishes new disclosure and liability-recognition requirements for direct and indirect debt guarantees with specified characteristics. The initial measurement and recognition requirements of FIN 45 are effective prospectively for guarantees issued or modified after December 31, 2002. However, the disclosure requirements are effective for interim and annual financial-statement periods ending after December 15, 2002. The Company has adopted the disclosure provisions, and does not expect the full adoption of FIN 45 to have a material impact on the Company's financial statements.

NOTE 2 - REAL ESTATE

During 2001, the Company acquired from an unrelated party one grocery-anchored shopping center comprising approximately 90,327 square feet of gross leaseable area ("GLA"). The property was acquired for cash consideration of approximately $4,600,000.

During 2002, the Company completed a series of transactions to acquire ten commercial real estate properties from affiliated partnerships. Approximately 883,494 square feet of GLA was acquired for the following consideration:

2,851,066 HCP shares of beneficial interest and
HROP partnership units convertible one for one into
HCP shares                                                $ 28,510,660

Assumption of mortgage debt                                 13,595,156

Cash                                                         1,811,398

Other liabilities assumed, net of other assets acquired      1,458,714
                                                          ------------
                                                          $ 45,375,928
                                                          ------------

F-13

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2002

NOTE 2 - REAL ESTATE (Continued)

Effective November 19, 2002, the Company sold one of the properties acquired during 2002 to an unrelated third party. The sales price of the property equaled its carrying value and no gain or loss from disposition was recorded. Revenues and operating expenses of the property were minimal and are recorded in the consolidated statements of income for the year ended December 31, 2002. Consideration from the sale included a note receivable from the purchaser maturing December 4, 2004. Interest is payable monthly at 6% per annum with the unpaid principal due on maturity.

At December 31, 2002, the Company owned 32 commercial properties in the Houston, Texas area comprising approximately 2,349,000 square feet of GLA.

NOTE 3 - DEFERRED COSTS

Deferred costs consist of the following:

                                               December 31,
                                      ------------------------------
                                           2002             2001
                                      -------------    -------------
Leasing commissions                   $   2,402,151    $   1,507,826
Deferred financing costs                  1,271,043          510,705
                                      -------------    -------------

                                          3,673,194        2,018,531

Less: accumulated amortization             (754,984)        (528,473)
                                      -------------    -------------

                                      $   2,918,210    $   1,490,058
                                      -------------    -------------

NOTE 4 - FUTURE MINIMUM LEASE INCOME

The Company leases the majority of its office and retail properties under noncancelable operating leases which provide for minimum base rentals plus, in some instances, contingent rentals based upon a percentage of the tenants' gross receipts.

A summary of minimum future rentals to be received (exclusive of renewals, tenant reimbursements, and contingent rentals) under noncancelable operating leases in existence at December 31, 2002, is as follows:

Years Ended December 31,

2003                              $   14,528,666
2004                                  12,246,666
2005                                   9,165,830
2006                                   6,823,664
2007                                   3,819,685
Thereafter                             6,864,712
                                  --------------

                                  $   53,449,223
                                  --------------

F-14

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2002

NOTE 5 - NOTES PAYABLE

Mortgages and other notes payable consist of the following:

                                               December 31,
                                       ---------------------------
                                           2002           2001
                                       ------------   ------------

Mortgages and other notes payable      $ 34,440,000   $  6,422,058
Demand note, Houston R.E. Income
  Properties XVI, Ltd.                    3,278,000              -
Revolving loan secured by properties              -      5,575,000
                                       ------------   ------------

         Total                         $ 37,718,000   $ 11,997,058
                                       ------------   ------------

Upon completion of the First Consolidation in January 1999, the Company entered into a credit facility with Coastal Banc ssb which provided the Company with a $9,000,000 line of credit (the "Financing") to refinance all debt associated with the acquired properties, to purchase certain limited partnership interests in connection with the merger of four privately-held limited partnerships, to facilitate the acquisition of one property for cash, to pay other expenses associated with the consolidation, and to cover general working capital needs. The interest rate is indexed to the 30-day London Interbank Offered Rate ("LIBOR") plus 2.15% to 2.75% based on the average balance of compensating deposits held by Coastal Banc ssb. Borrowings under the Financing are secured by the properties with recourse to the Company.

In May 2000, the Financing was modified in connection with the Second Consolidation and extended until April 1, 2002. Additionally, in connection with the Second Consolidation, the Company assumed three notes payable to Coastal Banc ssb with an aggregate balance of $6,449,238. The interest rate on these three notes is indexed to the 30-day LIBOR plus 2.40%, and the maturity date of these notes was also extended to April 1, 2002. The interest rate on outstanding borrowings was 4.5% at December 31, 2001.

In December 2002, the Company refinanced substantially all of its mortgage debt with a three-year floating rate mortgage loan collateralized by 18 of the Company's properties and a maturity date of January 1, 2006. The loan bears interest at 2.5% over a LIBOR rate (3.92% at December 31, 2002) and has a two-year extension option. Interest only payments are due monthly for the first 30 month period after the origination date, after which, the loan may be repaid in full or in $100,000 increments, with a final balloon payment due upon maturity. The Company capitalized loan costs of $1,271,043 financed from the proceeds of the refinancing.

In August 1999, the Company assumed a non-recourse note in the amount of $1,905,000 in connection with the acquisition of South Richey Shopping Center. The note's interest rate is fixed at 10% with payments of principal and interest aggregating $87,809 due monthly. The note was collateralized by a final mortgage lien on the South Richey Shopping Center and was paid in full on August 31, 2001.

The Company also assumed an unsecured, demand note payable to Hartman Management, Inc., a related party, in connection with the acquisition of Holly Knight Plaza in August 2000 in the amount of $129,583. The interest rate is fixed at 8% and the note was payable on demand. The note was paid in January 2001.

F-15

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2002

NOTE 5 - NOTES PAYABLE (Continued)

In November 2002, the Company issued a $3,278,000 note payable bearing interest at 4.25% per annum to Houston R.E. Income Properties XVI, Ltd., a related party controlled by Hartman. The note is secured by property and due upon demand with interest only payments due monthly.

The Company also has available a $2,000,000 revolving line of credit maturing in July 2004 from a bank. The revolver note bears interest at the bank's prime rate and is secured by property. No amounts were outstanding on the line of credit at December 31, 2002.

The Company made cash payments for interest on debt of $1,636,904, $812,029 and $1,150,960 for the years ended December 31, 2002, 2001 and 2000, respectively.

NOTE 6 - EARNINGS PER SHARE

Basic earnings per share is computed using net income to common shareholders and the weighted average number of common shares outstanding. Diluted earnings per share reflects common shares issuable from the assumed conversion of OP units convertible into common shares. Only those items that have a dilutive impact on basic earnings per share are included in the diluted earnings per share. Accordingly, because all OP units are convertible into common shares on a one-for-one basis, no OP units were included in the diluted earnings per share calculations.

                                                       Years Ended December 31,
                                               ---------------------------------------
                                                   2002          2001          2000
                                               -----------   -----------   -----------
Basic and diluted earnings per share
  Weighted average common shares outstanding     4,905,022     3,035,521     1,840,700

  Basic and diluted earnings per share         $     0.755   $     0.573   $     0.475

  Net income                                   $ 3,705,118   $ 1,740,712   $   873,696

NOTE 7 - FEDERAL INCOME TAXES

Federal income taxes are not provided because the Company intends to and believes it qualifies as a REIT under the provisions of the Internal Revenue Code. Shareholders of the Company include their proportionate taxable income in their individual tax returns. As a REIT, the Company must distribute at least 90% (95% in 2000) of its ordinary taxable income to its shareholders and meet certain income sources and investment restriction requirements. In addition, REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates.

Taxable income differs from net income for financial reporting purposes principally due to differences in the timing of recognition of interest, real estate taxes, depreciation and rental revenue.

F-16

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2002

NOTE 7 - FEDERAL INCOME TAXES (Continued)

For Federal income tax purposes, the cash dividends distributed to shareholders are characterized as follows for the years ended December 31:

                                            2002      2001      2000
                                           ------    ------    ------
Ordinary income (unaudited)                  85.1%     70.5%     75.9%
Return of capital (unaudited)                14.9%     29.5%     24.1%
Capital gain distributions (unaudited)          0%        0%        0%
                                           ------    ------    ------
        Total                                 100%      100%      100%
                                           ------    ------    ------

NOTE 8 - RELATED-PARTY TRANSACTIONS

In January 1999, the Company entered into a property management agreement with the Management Company. In consideration for supervising the management and performing various day-to-day affairs, the Company pays the Management Company a management fee of 5% and a partnership management fee of 1% based on Effective Gross Revenues from the properties, as defined. The Company incurred total management and partnership fees of $1,231,212, $674,529 and $574,216 for the years ended December 31, 2002, 2001 and 2000, respectively, of which $81,094 and $89,244 were payable at December 31, 2002 and 2001, respectively.

Under the provisions of the property management agreement, costs incurred by the Management Company for the management and maintenance of the properties are reimbursable to the Management Company. At December 31, 2002 and 2001, $382,231 and $249,810, respectively, was payable to the Management Company related to these reimbursable costs.

In consideration of managing and leasing the properties, the Company also pays the Management Company leasing commissions of 6% for leases originated by the Management Company and 4% for expansions and renewals of existing leases based on Effective Gross Revenues from the properties. The Company incurred total leasing commissions to the Management Company of $890,852, $725,109 and $549,238 for the years ended December 31, 2002, 2001 and 2000, respectively, of which $200,747 and $187,474 were payable at December 31, 2002 and 2001, respectively.

Also, we paid the Management Company a fee of up to 2% of the gross selling price of all common shares sold in consideration of offering services performed by the Management Company. The Company incurred total fees of $3,259, $128,066 and $217,410 for the years ended December 31, 2002, 2001 and 2000, respectively. Such fees have been treated as offering costs and netted against the proceeds from the sale of common shares.

The Management Company also receives acquisition fees equal to 4% of the gross selling price of all common shares sold as a reimbursement of expenses incurred in identifying reviewing, and acquiring properties for the Company. The Company incurred total fees of $6,766, $298,144 and $509,202 for the years ended December 31, 2002, 2001 and 2000, respectively. Such fees have been treated as offering costs and netted against the proceeds from the sale of common shares.

F-17

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2002

NOTE 8 - RELATED-PARTY TRANSACTIONS (Continued)

In conjunction with the acquisition of certain properties, the Company assumed liabilities payable to the Management Company. At December 31, 2002 and 2001, $200,415 and $185,753, respectively, was payable to the Management Company related to these liabilities.

The Company's day-to-day operations are strategically directed by the Board of Trust Managers and implemented through the Management Company. Hartman is the Company's Board Chairman and sole owner of the Management Company. Hartman was owed $31,500 and $280,980 in dividends payable on his common shares at December 31, 2002 and 2001, respectively. Hartman owned 3.4%, 4.5% and 5.7% of the issued and outstanding common shares of the Company as of December 31, 2002, 2001 and 2000, respectively.

The Company was a party to various other transactions with related parties which are reflected in due to/from affiliates in the accompanying consolidated balance sheets and also disclosed in Notes 2, 5 and 9.

NOTE 9 - SHAREHOLDERS' EQUITY

The Charter and Bylaws of the Company authorize the Company to issue up to 100,000,000 common shares at $.001 par value per share, and 10,000,000 Preferred Shares at $.001 par value per share. The Company commenced a private offering (the "Offering") in May 1999 to sell 2,500,000 common shares, par value $.001 per share, at a price of $10 per common share for a total Offering of $25,000,000. The Company intended that the Offering be exempt from the registration requirements of the Securities Act of 1933 and Regulation D promulgated there under. The common shares are "restricted securities" and are not transferable unless they subsequently are registered under the 1933 Act and applicable state securities laws or an exemption from such registration is available. The Offering was directed solely to "accredited investors" as such term is defined in Regulation D. Pursuant to the Offering, the Company sold for cash or issued in exchange for property or OP Units, 4,907,107, 3,239,316 and 2,493,955 shares as of December 31, 2002, 2001 and 2000, respectively. HCP conducts substantially all of its operations through the Operating Partnership. All net proceeds of the Offering were contributed by HCP to the Operating Partnership in exchange for OP Units. The Operating Partnership used the proceeds to acquire additional commercial properties and for general working capital purposes. HCP received one OP Unit for each $10 contributed to the Operating Partnership, which was the OP Unit valuation used in the Consolidations.

Operating partnership units

In January 1999, in connection with the First Consolidation, the Company acquired its first properties by merging four privately held limited partnerships (the "Merged Partnerships") into the Operating Partnership. The Operating Partnership also purchased a property from a limited partnership controlled by Hartman and received three properties from Houston R.E. Income Properties XI, Ltd. ("HREIP XI, Ltd.") in exchange for OP Units. In connection with these transactions, the Operating Partnership issued, in the aggregate, 1,593,218 OP Units to either (i) limited partners of the Merged Partnerships who were accredited investors in exchange for their limited partner interests in the Merged Partnerships, or (ii) to HREIP XI, Ltd. in consideration for its contribution of real estate properties.

F-18

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2002

NOTE 9 - SHAREHOLDERS' EQUITY (Continued)

Operating partnership units (continued)

In January 2000, in connection with the Second Consolidation, the Company acquired nine additional commercial properties from two limited partnerships controlled by Hartman. The Company acquired three commercial properties from Houston R.E. Income Properties X, Ltd. pursuant to a series of transactions. As a result of these transactions, HCP received 648,482 OP Units and Hartman received 68,488 OP Units.

The Company also acquired six commercial properties from Houston R.E. Income Properties XII, L.P. ("HREIP XII, L.P."). HREIP XII, L.P. contributed these properties to the Operating Partnership in exchange for 1,165,696 OP Units. As a result of this transaction, Hartman received 49,709 OP Units in exchange for the cancellation of certain rights owed to him by HREIP XII, L.P.

During 2002, the Company acquired ten properties from various Hartman controlled limited partnerships in exchange for 2,851,066 OP Units.

Limited partners in the Operating Partnership holding OP Units have the right to convert their OP Units into common shares at a ratio of one OP Unit for one common share. Subject to certain restrictions, OP Units are not convertible into common shares until the later of one year after acquisition or an initial public offering of the common shares. As of December 31, 2002 and 2001, there were 8,719,906 and 5,852,661 OP Units outstanding, respectively. HCP owned 4,654,066 and 2,987,007 Units as of December 31, 2002 and 2001, respectively. HCP's weighted-average share ownership in the Operating Partnership was approximately 53.71%, 49.59% and 36.99% during the years ended December 31, 2002, 2001 and 2000, respectively.

Dividends and distributions

The following tables summarize the cash dividends/distributions payable to holders of common shares and holders of OP Units related to the years ended December 31, 2002, 2001 and 2000.

                        HCP Shareholders
-----------------------------------------------------------------
Dividend/Distribution per        Date Dividend       Total Amount
       Common Share                 Payable            Payable
-------------------------        -------------       ------------

          0.2350                     5/15/00         $    320,276
          0.2375                     8/15/00              402,124
          0.2400                    11/15/00              478,206
          0.2425                     2/15/01              559,940
          0.2000                     5/15/01              541,380
          0.2000                     8/15/01              602,138
          0.2000                    11/15/01              635,778
          0.2125                     2/15/02              687,544
          0.2250                     5/15/02            1,102,340
          0.2375                     8/15/02            1,166,709
          0.2500                    11/15/02            1,226,777
          0.2500                     2/15/03            1,226,777

F-19

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2002

NOTE 9 - SHAREHOLDERS' EQUITY (Continued)

Dividends and distributions (continued)

OP Unit Holders Including Minority Unit Holders

          Dividend/Distribution per        Date Dividend       Total Amount
                   OP Unit                    Payable            Payable
          -------------------------        -------------       ------------

                    0.2350                     5/15/00         $    946,842
                    0.2375                     8/15/00            1,032,482
                    0.2400                    11/15/00            1,111,729
                    0.2425                     2/15/01            1,196,357
                    0.2000                     5/15/01            1,070,594
                    0.2000                     8/15/01            1,126,845
                    0.2000                     11/15/1            1,158,818
                    0.2125                     2/15/02            1,242,869
                    0.2250                     5/15/02            1,942,412
                    0.2375                     8/15/02            2,053,866
                    0.2500                    11/15/02            2,161,143
                    0.2500                     2/15/03            2,179,976

NOTE 10-  INCENTIVE SHARE PLAN

The Company has adopted an Employee and Trust Manager Incentive Share Plan (the "Incentive Share Plan") to (i) furnish incentives to individuals chosen to receive share-based awards because they are considered capable of improving operations and increasing profits;
(ii) encourage selected persons to accept or continue employment with the Company; and (iii) increase the interest of employees and Trust Managers in the Company's welfare through their participation and influence on the growth in value of the common shares. The total number of common shares that may be issued under the Incentive Share Plan is an amount of shares equal to 5% of the outstanding shares on a fully diluted basis. As of December 31, 2002, no options or awards to purchase common shares have been granted under the Incentive Share Plan.

NOTE 11- COMMITMENTS AND CONTINGENCIES

The Company is a participant in various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a material effect on the financial position, results of operations, or cash flows of the Company.

NOTE 12- SEGMENT INFORMATION

The operating segments presented are the segments of the Company for which separate financial information is available, and operating performance is evaluated regularly by senior management in deciding how to allocate resources and in assessing performance. The Company evaluated the performance of its operating segments based on net operating income that is defined as total revenues less operating expenses and ad valorem taxes. Management does not consider gains or losses from the sale of property in evaluating ongoing operating performance.

F-20

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2002

NOTE 12- SEGMENT INFORMATION (Continued)

The retail segment is engaged in the acquisition, development and management of real estate, primarily anchored neighborhood and community shopping centers located in Houston, Texas. The customer base includes supermarkets and other retailers who generally sell basic necessity-type commodities. The office/warehouse segment is engaged in the acquisition, development and management of office and warehouse centers located in Houston, Texas and has a diverse customer base. The office segment is engaged in the acquisition, development and management of commercial office space. Included in "Other" are corporate related items, insignificant operations and costs that are not allocated to the reportable segments.

Information concerning the Company's reportable segments for the years ended December 31 is as follows:

                                          Office
                          Retail         Warehouse        Office           Other            Total
                       -------------   -------------   -------------   -------------    -------------
2002
Revenues               $  10,851,942   $   8,282,170   $   1,558,335   $      62,579    $  20,755,026
Net operating income       7,200,296       5,361,944         759,761          22,528       13,344,529
Total assets              53,936,120      50,685,602       7,628,230      14,349,231      126,599,183
Capital expenditures      17,005,552      29,411,594         158,046               -      46,575,1912

2001
Revenues               $   7,284,444   $   3,099,998   $   1,289,893   $      29,402    $  11,703,737
Net operating income       4,849,565       1,752,006         539,004          14,745        7,155,320
Total assets              38,015,144      22,534,392       7,746,679       2,142,715       70,438,930
Capital expenditures       4,872,237         282,228         255,784               -        5,410,249

2000
Revenues               $   5,997,889   $   2,727,976   $     925,051   $     (25,158)   $   9,625,758
Net operating income       4,019,324       1,717,804         386,259         112,122        6,235,509
Total assets              34,080,691      23,062,130       7,516,715       1,138,006       65,797,542
Capital expenditures      15,460,642      11,927,147       7,469,215               -       34,857,004

Net operating income reconciles to income before minority interests shown on the consolidated statements of income for the years ended December 31 as follows:

                                                     2002             2001             2000
                                                -------------    -------------    -------------
Total segment operating income                  $  13,344,529    $   7,155,320    $   6,235,509
Less:
 Depreciation and amortization                      4,041,861        2,151,746        1,785,874
 Interest                                           1,573,270          812,029        1,271,194
 General and administrative                           831,675          518,871          534,667
                                                -------------    -------------    -------------

Income before minority interests                    6,897,723        3,672,674        2,643,774

Minority interests in Operating Partnership        (3,192,605)      (1,931,962)      (1,770,078)
                                                -------------    -------------    -------------

Net income                                      $   3,705,118    $   1,740,712    $     873,696
                                                -------------    -------------    -------------

F-21

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2002

NOTE 13- PRO FORMA FINANCIAL INFORMATION (Unaudited)

During the year ended December 31, 2002 the Company acquired four retail centers and five office/warehouse centers totaling $44,595,928 million. The pro forma financial information for the years ended December 31, 2001 and 2000 is based on the historical statements of the Company after giving effect to the acquisitions as if such acquisitions took place on January 1, 2000.

The pro forma financial information shown below is presented for information purposes only and may not be indicative of results that would have actually occurred if the acquisitions had been in effect at the date indicated, nor does it purport to be indicative of the results that may be achieved in the future.

                                               2001           2000
                                           ------------   ------------

Pro forma revenues                         $ 18,612,639   $ 14,940,066
                                           ------------   ------------

Pro forma net income available to
 common shareholders                       $  3,085,173   $  1,538,641
                                           ------------   ------------

Pro forma basic and diluted earnings per
 common share                              $      0.658   $      0.441
                                           ------------   ------------

F-22

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of Hartman Commercial Properties REIT

We have audited the accompanying Statement of Revenue and Certain Expenses, for the properties known as 2002 Acquisition Properties, as more fully described in Note 1, for the years ended December 31, 2001 and 2000. The financial statement is the responsibility of the properties' management. Our responsibility is to express an opinion on this financial statement based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

The accompanying Statement of Revenue and Certain Expenses was prepared as described in Note 2, for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in the Form 10 of Hartman Commercial Properties REIT) and is not intended to be a complete presentation of 2002 Acquisition Properties revenue and expenses.

In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenue and certain expenses of 2002 Acquisition Properties for the years ended December 31, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America.

/s/ PANNELL KERR FORSTER OF TEXAS, P.C.

Houston, Texas
March 28, 2003

F-23

Hartman Commercial Properties REIT

2002 Acquisition Properties

Statement of Revenue and Certain Expenses

                                                       Year Ended December 31,
                                                     ---------------------------
                                                         2001           2000
                                                     ------------   ------------
Revenue
   Rent                                              $  5,914,917   $  4,526,906
   Recoveries from tenants                                942,934        699,350
   Other                                                   51,051         88,052
                                                     ------------   ------------

        Total revenue                                   6,908,902      5,314,308
                                                     ------------   ------------

Certain expenses
   Operation and maintenance                              635,903        503,906
   Interest                                               979,196      1,071,963
   Real estate taxes                                      984,105        950,015
   Insurance                                               95,835         96,073
   Electricity, water and gas utilities                   218,286        210,061
   Management fees                                        404,605        346,618
   General and administrative                             130,647        117,288
   Bad debts                                               46,473         55,500
   Tenant-in-common interest                               22,858         25,285
                                                     ------------   ------------

                                                        3,517,908      3,376,709
                                                     ------------   ------------

   Revenue in excess of certain expenses             $  3,390,994   $  1,937,599
                                                     ------------   ------------

The accompanying notes are an integral part of this Statement of Revenue and Certain Expenses.

F-24

Hartman Commercial Properties REIT

2002 Acquisition Properties

Notes to Statement of Revenue and Certain Expenses

Years Ended December 31, 2001 and 2000

NOTE 1 - ORGANIZATION AND OPERATION OF PROPERTIES

Effective January 2, 2002, Hartman REIT Operating Partnership, L.P. ("HROP") acquired nine commercial real estate properties (the "Properties"). HROP is a Delaware limited partnership formed to acquire, own, lease, operate, and manage real properties on behalf of Hartman Commercial Properties REIT ("HCP"), a Texas real estate investment trust. As the sole general partner of HROP, HCP possesses full legal control and authority over the operations of HROP.

The Properties comprise approximately 884,000 square feet of gross leaseable area ("GLA"). Three of the Properties are classified as anchored shopping centers and have an aggregate GLA of approximately 266,000 square feet; two of the Properties are classified as unanchored shopping centers with an aggregate GLA of approximately 92,000 square feet; and four of the Properties are classified as office/warehouse centers with an aggregate GLA of approximately 525,000 square feet. The Properties are leased to multiple tenants (see Note 4).

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying statements of revenue and certain expenses are presented in conformity with accounting principles generally accepted in the United States of America and in accordance with the applicable rules and regulations of the Securities and Exchange Commission for real estate properties acquired. Accordingly, these statements exclude certain historical expenses that are not comparable to the proposed future operations of the property such as depreciation and amortization. Therefore, these statements are not comparable to the statement of operations of the Properties after their acquisition by HROP.

Rental income is recognized on a straight-line basis over the terms of the respective leases. Percentage rents are recognized as rental income when the thresholds upon which they are based have been met. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenue in the period the corresponding costs are incurred.

The preparation of the financial statement in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 3 - MORTGAGE NOTES PAYABLE

HROP acquired the Properties subject to certain mortgage loans with an aggregate outstanding balance of approximately $13,300,000. All of the loans were repaid in November 2002 with proceeds from a new loan for which the Properties served as collateral.

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Hartman Commercial Properties REIT

2002 Acquisition Properties

Notes to Statement of Revenue and Certain Expenses

Year Ended December 31, 2001 and 2000

NOTE 4 - FUTURE MINIMUM RENTAL COMMITMENTS

As of January 2, 2002, the Properties had approximately 240 tenants with remaining lease terms ranging from 1 month to 10 years. Future minimum rental commitments (exclusive of renewals, tenant reimbursements, and contingent rentals) under noncancelable operating leases in existence at December 31, 2001 are as follows:

Year Ending December 31,

2002                    $  5,373,539
2003                       4,104,974
2004                       3,067,560
2005                       2,001,313
2006                       1,240,169
Thereafter                 1,407,781
                        ------------

Total                   $ 17,195,336
                        ------------

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EXHIBIT 3.1

ARTICLES OF AMENDMENT AND RESTATEMENT
OF
THE DECLARATION OF TRUST
OF
HARTMAN COMMERCIAL PROPERTIES REIT

APRIL 25, 2003

Hartman Commercial Properties REIT, a real estate investment trust organized and existing under and by virtue of the Texas Real Estate Investment Trust Act (the "Trust"), does hereby certify that:

ARTICLE ONE

The name of the real estate investment trust is Hartman Commercial Properties REIT.

ARTICLE TWO

The Declaration of Trust of the Trust is hereby amended and restated in its entirety and the entire text of the Amended and Restated Declaration of Trust of the Trust is attached hereto as Exhibit A. Any amendment to the Trust's Declaration of Trust has been effected in conformity with the provisions of the Texas Real Estate Investment Trust Act. The complete text of the Amended and Restated Declaration of Trust is set forth on Exhibit A attached hereto and this text accurately copies the Trust's Declaration of Trust and all amendments to such Declaration of Trust that are in effect on the date hereof and as further amended by the restated Declaration of Trust approved by the shareholders of the Trust. The Amended and Restated Declaration of Trust contains no other alteration in any provision of the Trust's Declaration of Trust.

ARTICLE THREE

The Amended and Restated Declaration of Trust was approved and adopted by the shareholders of the Trust on April 11, 2003. The number of shares outstanding and entitled to vote on the approval and adoption of this Amended and Restated Declaration of Trust was 4,907,107. The number of shares that voted for the Amended and Restated Declaration of Trust was 3,540,156. The number of shares that voted against the Amended and Restated Declaration of Trust was 51,156.

[signature page follows]

1

IN WITNESS WHEREOF, the undersigned hereby executes these Articles of Amendment and Restatement of Declaration of Trust on behalf of Hartman Commercial Properties REIT as of the 25th day of April, 2003.

/s/ Allen R. Hartman
-----------------------------
Allen R. Hartman, President

STATE OF TEXAS      )
                    )
COUNTY OF HARRIS    )

BEFORE ME, the undersigned Notary Public, duly commissioned and qualified within and for the State and County aforesaid, personally came and appeared Allen R. Hartman, in his capacity as President of Hartman Commercial Properties REIT, and acknowledged to me, Notary, in the presence of ______________________and _______________________, that he executed the foregoing instrument in the presence of the witnesses on behalf of the said entity, as his own free and voluntary act and deed, for the uses, purposes and considerations therein expressed.

IN WITNESS WHEREOF, said Appearer has executed these presents together with me, Notary, and the undersigned competent witnesses, at my office in the County and State aforesaid, on the ___ day of April, 2003.

My commission expires:

2

EXHIBIT A

AMENDED AND RESTATED DECLARATION OF TRUST

OF

HARTMAN COMMERCIAL PROPERTIES REIT

Hartman Commercial Properties Trust, a real estate investment trust organized under the Texas Real Estate Investment Trust Act, as amended (the "Texas REIT Act"), hereby adopts the following Amended and Restated Declaration of Trust.

ARTICLE I

THE TRUST; DEFINITIONS

SECTION 1.1 Name. The name of the trust (the "Company") is "Hartman Commercial Properties REIT." An assumed name certificate setting forth such name has been filed in the manner prescribed by law.

SECTION 1.2 Resident Agent and Principal Business Address. The street address of the Company's registered office is 1450 West Sam Houston Parkway, Suite 100, Houston, Texas 77043. The name of the Company's registered agent at that address is Allen R. Hartman. The address of the Company's principal office and place of business is 1450 West Sam Houston Parkway, Suite 100, Houston, Texas 77043.

SECTION 1.3 Purpose.

(a) The purpose of the Company is to purchase, hold, lease, manage, sell, exchange, develop, subdivide and improve real property and interests in real property, and in general, to carry on any other business and do any other acts in connection with the foregoing and to have and exercise all powers conferred by the laws of the State of Texas upon real estate investment trusts formed under the Texas REIT Act, and to do any or all of the things hereinafter set forth to the same extent as natural persons might or could do. The term "real property" and the term "interests in real property" for the purposes stated herein shall not include severed mineral, oil or gas royalty interests. The Company will not commence business until it has received for the issuance of Shares consideration of at least $1,000 value.

(b) Without in any manner limiting the generality of the foregoing, and in addition to all the powers conferred by the laws of the State of Texas now or hereafter in force upon real estate investment trusts formed under the Texas REIT Act, or any successor statute, in each case as the same may be amended, modified or supplemented from time to time, the Company shall have the power (i) to acquire, hold, own, develop, construct, improve, maintain, operate, sell, lease, transfer, encumber, convey, exchange and otherwise dispose of or deal with real and personal property directly or through one or more subsidiaries or affiliates; (ii) to enter into any partnership, joint venture or other similar arrangement to engage in any of the foregoing; and (iii)

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in general, to possess and exercise all the purposes, powers, rights and privileges granted to, or conferred upon real estate investment trusts by the laws of the State of Texas now or hereafter in force, and to exercise any powers suitable, convenient or proper for the accomplishment of any of the purposes herein enumerated, implied or incidental to the powers or purposes herein specified, or which at any time may appear conducive to or expedient for the accomplishment of any such purposes.

SECTION 1.4 Definitions. In addition to other terms defined in throughout this Declaration of Trust, the following terms shall have the following meanings unless the context otherwise requires:

"Acquisition Expenses" means any and all expenses incurred by the Company, the Advisor, or any Affiliate of either in connection with the selection or acquisition of any Property, whether or not acquired, including, without limitation, legal fees and expenses, travel and communications expenses, costs of appraisals, nonrefundable option payments on property not acquired, accounting fees and expenses, and title insurance.

"Acquisition Fee" means any and all fees and commissions, exclusive of Acquisition Expenses, paid by any Person to any other Person (including any fees or commissions paid by or to any Affiliate of the Company or the Advisor) in connection with the purchase, development or construction of a Property, including, without limitation, real estate commissions, acquisition fees, finder's fees, selection fees, Development Fees, Construction Fees, nonrecurring management fees, consulting fees, loan fees, points, or any other fees or commissions of a similar nature. Excluded shall be Development Fees and Construction Fees paid to any Person or entity not affiliated with the Advisor in connection with the actual development and construction of any Property.

"Advisor" or "Advisors" means the Person or Persons, if any, appointed, employed or contracted with by the Company pursuant to Section 4.1 hereof and responsible for directing or performing the day-to-day business affairs of the Company, including any Person to whom the Advisor subcontracts substantially all of such functions.

"Advisory Agreement" means the agreement between the Company and the Advisor pursuant to which the Advisor will direct or perform the day-to-day business affairs of the Company.

"Affiliate" or "Affiliated" means, as to any Person, (i) any Person directly or indirectly through one or more intermediaries controlling, controlled by, or under common control with such Person; (ii) any Person, directly or indirectly owning, controlling, or holding with power to vote ten percent or more of the outstanding voting securities of such Person; (iii) any officer, director, trust manager, general partner or trustee of such Person;
(iv) any Person ten percent or more of whose outstanding voting securities are directly or indirectly owned, controlled or held, with power to vote, by such other Person; and (v) if such other Person is an officer, director, trust manager, general partner, or trustee of a Person, the Person for which such Person acts in any such capacity.

"Average Invested Assets" means, for a specified period, the average of the aggregate book value of the assets of the Company invested, directly or indirectly, in equity interests in and loans secured by real estate before reserves for depreciation or bad debts or other similar non-

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cash reserves, computed by taking the average of such values at the end of each month during such period.

"Bylaws" means the bylaws of the Company, as the same are in effect from time to time.

"Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. Reference to any provision of the Code shall mean such provision as in effect from time to time, as the same may be amended, and any successor provision thereto, as interpreted by any applicable regulations as in effect from time to time.

"Common Shares" is defined in Section 7.1(a).

"Company Property" means any and all property, real, personal or otherwise, tangible or intangible, which is transferred or conveyed to the Company (including all rents, income, profits and gains therefrom), which is owned or held by, or for the account of, the Company.

"Competitive Real Estate Commission" means a real estate or brokerage commission for the purchase or sale of property which is reasonable, customary, and competitive in light of the size, type, and location of the property.

"Construction Fee" means a fee or other remuneration for acting as general contractor and/or construction manager to construct improvements, supervise and coordinate projects or to provide major repairs or rehabilitation on a Property.

"Contract Price for the Property" means the amount actually paid or allocated to the purchase, development, construction or improvement of a property exclusive of Acquisition Fees and Acquisition Expenses.

"Development Fee" means a fee for the packaging of a Property; including negotiating and approving plans, and undertaking to assist in obtaining zoning and necessary variances and financing for the specific Property, either initially or at a later date.

"Distributions" means any distributions of money or other property by the Company to owners of Shares, including distributions that may constitute a return of capital for federal income tax purposes. The Company will make no distributions other than distributions of money or readily marketable securities unless the requirements of Section 7.1(e) hereof are satisfied.

"Independent Expert" means a Person or entity with no material current or prior business or personal relationship with the Advisor or the Trust Managers and who is engaged to a substantial extent in the business of rendering opinions regarding the value of assets of the type held by the Company.

"Independent Trust Manager" means a Trust Manager who is not, and within the last two years has not been, directly or indirectly associated with the Advisor by virtue of (i) ownership of an interest in the Advisor or its Affiliates, (ii) employment by the Advisor or its Affiliates, (iii) service as an officer, trust manager or director of the Advisor or its Affiliates, (iv) performance of services, other than as a Trust Manager, for the Company, (v) service as a director, trust manager or trustee of more than three real estate investment trusts advised by the Advisor, or (vi) maintenance of a material business or professional relationship with the Advisor or any of its Affiliates. An indirect relationship shall include circumstances in which a Trust Manager's spouse, parents, children, siblings, mothers- or fathers-in-law, sons- or daughters-in-law or brothers- or sisters-in-law is or has been associated with the Advisor, any of its Affiliates or the Company. A business or professional relationship is considered material if the gross

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revenue derived by the Trust Manager from the Advisor and Affiliates exceeds five percent of either the Trust Manager's annual gross revenue during either of the last two years or the Trust Manager's net worth on a fair market value basis.

"Invested Capital" means the amount calculated by multiplying the total number of Shares purchased by Shareholders by the issue price, reduced by the portion of any Distribution that is attributable to net sales proceeds of any Properties.

"Gross Proceeds" means the aggregate purchase price of all Shares sold for the account of the Company, without deduction for Selling Commissions, volume discounts, any marketing support and due diligence expense reimbursement fees or other Organizational and Offering Expenses. For the purpose of computing Gross Proceeds, the purchase price of any share for which reduced Selling Commissions are paid to the Advisor or a Soliciting Dealer (where net proceeds to the Company are not reduced) shall be deemed to be the full amount of the offering price per Share.

"Joint Ventures" means those joint venture or general partnership arrangements in which the Company is a co-venturer or general partner which are established to acquire Properties.

"Leverage" means the aggregate amount of indebtedness of the Company for money borrowed (including purchase money mortgage loans) outstanding at any time, both secured and unsecured.

"Listing" means the listing of the Shares of the Company on a national securities exchange or over-the-counter market.

"Net Assets" means the total assets of the Company (other than intangibles), at cost, before deducting depreciation or other non-cash reserves, less total liabilities, calculated quarterly by the Company on a basis consistently applied.

"Net Income" means for any period, the total revenues applicable to such period, less the total expenses applicable to such period excluding additions to reserves for depreciation, bad debts or other similar non-cash reserves; provided, however, Net Income for purposes of calculating total allowable Operating Expenses shall exclude the gain from the sale of the Company's assets.

"Operating Expenses" means all costs and expenses incurred by the Company, as determined under generally accepted accounting principles, which in any way are related to the operation of the Company or to Company business, including advisory expenses, but excluding (i) the expenses of raising capital such as Organizational and Offering Expenses, legal, audit, accounting, underwriting, brokerage, listing, registration, and other fees, printing and other such expenses and tax incurred in connection with the issuance, distribution, transfer, registration and Listing of the Shares, (ii) interest payments, (iii) taxes, (iv) non-cash expenditures such as depreciation, amortization and bad debt reserves, (v) Acquisition Fees and Acquisition Expenses, and (vi) real estate commissions on the Sale of property, and other expenses connected with the acquisition and ownership of real estate interests, mortgage loans, or other property (such as the costs of foreclosure, insurance premiums, legal services, maintenance, repair, and improvement of property).

"Operating Partnership" means Hartman REIT Operating Partnership, L.P., a Delaware limited partnership.

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"Op Units" means a unit of limited partnership interest in the Operating Partnership.

"Organizational and Offering Expenses" means any and all costs and expenses incurred by the Company and to be paid in connection with the marketing and distribution of Shares, including, without limitation, the following: total underwriting and brokerage discounts and commissions (including fees of the underwriters' attorneys), expenses for printing, engraving, amending, supplementing, mailing and distributing costs, salaries of employees while engaged in sales activity, all advertising and marketing expenses (including the costs related to investor and broker-dealer sales meetings), charges of transfer agents, registrars, trustees, escrow holders, depositories, experts, and fees, expenses and taxes related to the filing, registration and qualification of the sale of the securities under Federal and State laws, including accountants' and attorneys' fees.

"Person" means an individual, corporation, partnership, association, joint stock company, limited liability company, trust, unincorporated association or other entity and also includes a "group" as that term is defined in Section 13(d)(3) of the Securities Exchange Act of 1934.

"Preferred Shares" is defined in Section 7.1(a).

"Property" or "Properties" means the real properties which are acquired by the Company, either directly or through Joint Venture arrangements, the Operating Partnership or other partnerships.

"Real Property" or "Real Estate" means land, rights in land (including leasehold interests), and any buildings, structures, improvements, furnishings, fixtures and equipment located on or used in connection with land and rights or interests in land.

"REIT" means a "real estate investment trust" as defined in Section 856 of the Code and applicable Treasury Regulations.

"REIT Provisions" means Sections 856 through 860 of the Code and any successor or other provisions of the Code relating to real estate investment trusts (including provisions as to the attribution of ownership of beneficial interests therein) and the regulations promulgated thereunder.

"Restricted Initial Investment" means the first $200,000 (in the form of 20,000 OP Units of the Operating Partnership) invested by the Sponsor as a portion of the initial capitalization of the Company (by an investment in the Operating Partnership) contributed by the Sponsor or its Affiliates.

"Roll-up Entity" means a partnership, real estate investment trust, corporation, trust or similar entity that would be created or would survive after the successful completion of a proposed Roll-Up Transaction.

"Roll-up Transaction" means a transaction involving the acquisition, merger, conversion, or consolidation, directly or indirectly, of the Company and the issuance of securities of a Roll-Up Entity. Such term does not include: (i) a transaction involving securities of the Company that have been listed on a national securities exchange or included for quotation on the National Market System of the National Association of Securities Dealers Automated Quotation System for at least 12 months; or (ii) a transaction involving the conversion to corporate, trust, or association form of only the Company if, as a consequence of the transaction, there will be no

A-5

significant adverse change in Shareholder voting rights, the term of existence of the Company, compensation to the Advisor or the investment objectives of the Company.

"Sale" or "Sales" (i) means any transaction or series of transactions whereby: (A) the Company sells, grants, transfers, conveys or relinquishes its ownership of any Property or portion thereof, including the lease of any Property consisting of the building only, and including any event with respect to any Property which gives rise to a significant amount of insurance proceeds or condemnation awards; (B) the Company sells, grants, transfers, conveys or relinquishes its ownership of all or substantially all of the interest of the Company in any Joint Venture in which it is a co-venturer or partner; (C) any Joint Venture in which the Company as a co-venturer or partner sells, grants, transfers, conveys or relinquishes its ownership of any Property or portion thereof, including any event with respect to any Property which gives rise to insurance claims or condemnation awards; or (D) the Company sells, grants, conveys, or relinquishes its interest in any asset, or portion thereof, including and event with respect to any asset which gives rise to a significant amount of insurance proceeds or similar awards, but (ii) shall not include any transaction or series of transactions specified in clause (i)(A), (i)(B), or
(i)(C) above in which the proceeds of such transaction or series of transactions are reinvested in one or more Properties within 180 days thereafter.

"Securities" means Shares, any other stock, shares or other evidences of equity or beneficial or other interests, voting trust certificates, bonds, debentures, notes or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities" or any certificates of interest, shares or participations in, temporary or interim certificates for, receipts for, guarantees of, or warrants, options or rights to subscribe to, purchase or acquire, any of the foregoing.

"Selling Commissions" means any and all commissions payable to underwriters, dealer managers, or other broker-dealers in connection with the sale of Shares.

"Shareholders" means the registered holders of the Company's Shares.

"Shares" is defined in Section 7.1(a).

"Soliciting Dealers" means those broker-dealers that are members of the National Association of Securities Dealers, Inc., or that are exempt from broker-dealer registration, and that, in either case, enter into participating broker or other agreements with the Advisor to sell Shares.

"Sponsor" means any Person directly or indirectly instrumental in organizing, wholly or in part, the Company or any Person who will control, manage or participate in the management of the Company, and any Affiliate of such Person. Not included is any Person whose only relationship with the Company is that of an independent property manager of Company assets, and whose only compensation is as such. Sponsor does not include wholly independent third parties such as attorneys, accountants, and underwriters whose only compensation is for professional services. A Person may also be deemed a Sponsor of the Company by:

a. taking the initiative, directly or indirectly, in founding or organizing the business or enterprise of the Company, either alone or in conjunction with one or more other Persons;

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b. receiving a material participation in the Company in connection with the founding or organizing of the business of the Company, in consideration of services or property, or both services and property;

c. having a substantial number of relationships and contacts with the Company;

d. possessing significant rights to control Company properties;

e. receiving fees for providing services to the Company which are paid on a basis that is not customary in the industry; or

f. providing goods or services to the Company on a basis which was not negotiated at arms length with the Company.

"Successor" means any successor in interest of the Company.

"Trust Managers," "Board of Trust Managers" or "Board" means, collectively, the individuals named in Section 2.1 so long as they continue in office and all other individuals who have been duly elected and qualify as Trust Managers of the Company hereunder.

"Unimproved Real Property" means Property in which the Company has an equity interest that is not acquired for the purpose of producing rental or other operating income, that has no development or construction in process and for which no development or construction is planned, in good faith, to commence within one year.

ARTICLE II

BOARD OF TRUST MANAGERS

SECTION 2.1 Number. The number of Trust Managers shall be seven. The number of Trust Managers shall be fixed by, or in the manner provided in, the Bylaws of the Company, and may be increased or decreased from time to time in a manner as prescribed by the Bylaws. A Trust Manager may be removed by the vote of the holders of two-thirds of the outstanding Shares at a special meeting of the Shareholders called for such purpose pursuant to the Bylaws. The notice of such meeting shall indicate that the purpose, or one of the purposes, of such meeting is to determine if a Trust Manager should be removed. The name and business address of the Trust Managers are as follows:

      Name                                Business Address
----------------            --------------------------------------------

Allen R. Hartman            1450 W. Sam Houston Parkway North, Suite 100
                            Houston, Texas 77043

Robert W. Engel             1450 W. Sam Houston Parkway North, Suite 100
                            Houston, Texas 77043

Jack L. Mahaffey            1450 W. Sam Houston Parkway North, Suite 100
                            Houston, Texas 77043

                               A-7

      Name                                Business Address
----------------            --------------------------------------------

Chris A. Minton             1450 W. Sam Houston Parkway North, Suite 100
                            Houston, Texas 77043

Sam Hathorn                 1450 W. Sam Houston Parkway North, Suite 100
                            Houston, Texas 77043

Chand Vyas                  1450 W. Sam Houston Parkway North, Suite 100
                            Houston, Texas 77043

Allen Cecil                 1450 W. Sam Houston Parkway North, Suite 100
                            Houston, Texas 77043

A majority of the Board of Trust Managers will be Independent Trust Managers except for a period of 60 days after the death, removal or resignation of an Independent Trust Manager. Any vacancies will be filled by the affirmative vote of a majority of the remaining Trust Managers, though less than a quorum. Independent Trust Managers shall nominate replacements for vacancies in the Independent Trust Manager positions. No reduction in the number of Trust Managers shall cause the removal of any Trust Manager from office prior to the expiration of his term. Cumulative voting for the election of Trust Managers is prohibited.

SECTION 2.2 Experience. A Trust Manager shall have had 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 the Company. At least one of the Independent Trust Managers shall have three years of relevant real estate experience.

SECTION 2.3 Committees. Subject to the Texas REIT Act and the Bylaws, the Trust Managers may establish such committees as they deem appropriate, in their discretion, provided that the majority of the members of each committee are Independent Trust Managers.

SECTION 2.4 Term. Each Trust Manager shall hold office for one year, until the next annual meeting of Shareholders, or (if longer) until his a successor has been duly elected and qualified. Trust Managers may be elected to an unlimited number of successive terms.

SECTION 2.5 Fiduciary Obligations. The Trust Managers serve in a fiduciary capacity to the Company and have a fiduciary duty to the Shareholders of the Company, including a specific fiduciary duty to supervise the relationship of the Company with the Advisor.

SECTION 2.6 Approval by Independent Trust Managers. A majority of Independent Trust Managers must approve all applicable matters to which Sections 2.1, 4.1, 4.2, 4.5, 4.6, 4.8, 4.9, 4.10, 5.2, 5.3, 5.4(f), 5.4(k), 7.7, 8.1 and 9.2 herein apply.

SECTION 2.7 Resignation. Any Trust Manager may resign by written notice to the Board of Trust Managers, effective upon execution and delivery to the Company of such written notice or upon any future date specified in the notice.

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ARTICLE III

POWERS OF TRUST MANAGERS

SECTION 3.1 General. Subject to the express limitations herein or in the Bylaws and to the general standard of care required of Trust Managers under the Texas REIT Act and other applicable law, the business and affairs of the Company shall be managed under the direction of the Board of Trust Managers and the Trust Managers shall have full, exclusive and absolute power, control and authority over the business of the Company. The Trust Managers have established the written policies on investments and borrowing set forth in this Article III and Article V hereof and shall monitor the administrative procedures, investment operations and performance of the Company and the Advisor to assure that such policies are carried out. The Trust Managers may take any actions that, in their sole judgment and discretion, are necessary or desirable to conduct the business of the Company. A majority of the Board of Trust Managers, including a majority of Independent Trust Managers, have ratified this Declaration of Trust, which shall be construed with a presumption in favor of the grant of power and authority to the Trust Managers. Any construction of this Declaration of Trust or determination made in good faith by the Trust Managers concerning their powers and authority hereunder shall be conclusive.

SECTION 3.2 Specific Powers and Authority. Subject only to the express limitations herein, and in addition to all other powers and authority conferred by this Declaration of Trust, the Bylaws or applicable law, the Trust Managers, without any vote, action or consent by the Shareholders, shall have and may exercise, at any time or times, in the name of the Company or on its behalf the following powers and authorities:

(a) Subject to Article V and Section 9.5 hereof, to invest in, purchase or otherwise acquire and to hold real, personal or mixed, tangible or intangible, property of any kind wherever located, or rights or interests therein or in connection therewith, all without regard to whether such property, interests or rights are authorized by law for the investment of funds held by trustees or other fiduciaries, or whether obligations the Company acquires have a term greater or lesser than the term of office of the Trust Managers or the possible termination of the Company, for such consideration as the Trust Managers may deem proper (including cash, property of any kind or Securities of the Company).

(b) The Board of Trust Managers shall use its best efforts to cause the Company to qualify as a REIT for U.S. federal income tax treatment in accordance with the REIT Provisions. In furtherance of the foregoing, the Board of Trust Managers shall use its best efforts to take such actions as are necessary, and may take such actions as it deems desirable (in its sole discretion), to preserve the status of the Company as a REIT; provided, however, that in the event that the Board of Trust Managers determines, by vote of at least two-thirds of the Trust Managers, that it no longer is in the best interests of the Company to qualify as a REIT, the Board of Trust Managers shall take such actions as are required by the Code, the Texas REIT Act and other applicable law, to cause the matter of termination of qualification as a REIT to be submitted to a vote of the Shareholders of the Company pursuant to Section 8.2.

(c) Subject to the provisions of Article VII hereof, the Texas REIT Act and applicable law, to create and authorize and direct the issuance (on either a pro rata or a non-pro rata basis) by the Company, in shares, units or amounts of one or more types, series or classes, of Securities of the Company, which may have such voting rights, dividend or interest rates,

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powers, preferences, conversion or redemption prices or other rights as the Trust Managers may determine, without vote of or other action by the Shareholders, to such Persons for such consideration, at such time or times and in such manner and on such terms as the Trust Managers determine; and to purchase or otherwise acquire, hold, cancel, reissue, sell and transfer any Securities of the Company.

(d) To terminate the status of the Company as a REIT under the REIT Provisions; provided, however, that the Board of Trust Managers shall take no action to terminate the Company's status as a REIT under the REIT Provisions until such time as (i) the Board of Trust Managers adopts a resolution recommending that the Company terminate its status as a REIT under the REIT Provisions, (ii) the Board of Trust Managers presents the resolution at an annual or special meeting of the Shareholders, and (iii) such resolution is approved by the holders of a majority of the issued and outstanding Shares.

(e) To adopt, implement and from time to time alter, amend or repeal the Bylaws of the Company relating to the business and organization of the Company, provided that such amendments are not inconsistent with the provisions of this Declaration of Trust, and further provided that the Trust Managers may not amend the Bylaws, without the affirmative vote of a majority of the Shares, to the extent that such amendments adversely affect the rights, preferences and privileges of Shareholders.

(f) To do all other acts and things and execute and deliver all instruments incident to the foregoing powers, and to exercise all powers which they deem necessary, useful or desirable to carry on the business of the Company or to carry out the provisions of this Declaration of Trust, even if such powers are not specifically provided hereby.

ARTICLE IV

ADVISOR

SECTION 4.1 Appointment and Initial Investment of Advisor. The Trust Managers are responsible for setting the general policies of the Company and for the general supervision of the Company's business. However, the Trust Managers are not required personally to conduct the business of the Company, and they may (but need not) appoint, employ or contract with any Person (including a Person Affiliated with any Trust Manager) as an Advisor and may grant or delegate such authority to the Advisor as the Trust Managers may, in their sole discretion, deem necessary or desirable. The term of retention of any Advisor shall not exceed one year, although there is no limit to the number of times that a particular Advisor may be retained. The Sponsor or any Affiliate may not sell the Restricted Initial Investment while the Sponsor remains the initial Advisor.

SECTION 4.2 Supervision of Expenses and the Advisor.

(a) The Trust Managers shall evaluate the performance of the Advisor before entering into or renewing an advisory contract and the criteria used in such evaluation shall be reflected in the minutes of meetings of the Board. The Trust Managers may exercise broad discretion in allowing the Advisor to administer and regulate the operations of the Company, to act as agent for the Company, to execute documents on behalf of the Company and to make executive decisions which conform to general policies and principles established by the Trust Managers.

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The Trust Managers shall monitor the Advisor to assure that the administrative procedures, operations and programs of the Company are in the best interests of the Shareholders and are fulfilled.

(b) The Independent Trust Managers are responsible for reviewing the fees and expenses of the Company at least annually or with sufficient frequency to determine that the expenses incurred are reasonable in light of the investment performance of the Company, its Net Assets, its Net Income and the fees and expenses of other comparable unaffiliated companies. Each such determination shall be reflected in the minutes of the meetings of the Board of Trust Managers. In addition, from time to time, but at least annually, a majority of the Independent Trust Managers and a majority of Trust Managers not otherwise interested in the transaction must approve each transaction with the Advisor or its Affiliates. The Independent Trust Managers also will be responsible for reviewing the performance of the Advisor and determining that compensation to be paid to the Advisor is reasonable in relation to the nature and quality of services performed and the investment performance of the Company and that the provisions of the Advisory Agreement are being carried out. Specifically, the Independent Trust Managers will consider factors such as:

(i) the Net Assets and Net Income of the Company,

(ii) the amount of the fee paid to the Advisor in relation to the size, composition and performance of the Company's portfolio,

(iii) the success of the Advisor in generating opportunities that meet the investment objectives of the Company,

(iv) rates charged to comparable companies and to investors other than comparable companies by advisors performing the same or similar services,

(v) additional revenues realized by the Advisor and its Affiliates through their relationship with the Company, whether paid by the Company or by others with whom the Company does business,

(vi) the quality and extent of service and advice furnished by the Advisor,

(vii) the performance of the investment portfolio of the Company, including income, conservation or appreciation of capital, frequency of problem investments and competence in dealing with distress situations, and the quality of the portfolio of the Company relative to the investments generated by the Advisor for its own account.

The Independent Trust Managers may also consider all other factors which they deem relevant and the findings of the Independent Trust Managers on each of the factors considered shall be recorded in the minutes of the Board of Trust Managers.

(c) The Board of Trust Managers shall determine whether any successor Advisor possesses sufficient qualifications to perform the advisory function for the Company and whether the compensation provided for in its contract with the Company is justified.

SECTION 4.3 Fiduciary Obligations. The Advisor has a fiduciary responsibility to the Company and to the Shareholders.

SECTION 4.4 Termination. Either a majority of the Independent Trust Managers or the Advisor may terminate the advisory contract on 60 days' written notice without cause or

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penalty, and, in such event, the Advisor will cooperate with the Company and the Trust Managers in making an orderly transition of the advisory function.

SECTION 4.5 Real Estate Commission on Sale of Property. The Company may pay the Advisor a real estate disposition fee upon Sale of one or more Properties, in an amount equal to the lesser of (i) one-half of a Competitive Real Estate Commission, or (ii) three percent of the sales price of such Property or Properties. In addition, the amount paid when added to the sums paid to unaffiliated parties in such a capacity shall not exceed the lesser of the Competitive Real Estate Commission or an amount equal to 6% of the sales price of such Property or Properties. Payment of such fee shall be made only if the Advisor provides a substantial amount of services in connection with the Sale of a Property or Properties.

SECTION 4.6 Organizational and Offering Expenses. The Company shall only pay reasonable Organizational and Offering Expenses and in all events such expenses shall not exceed 15% of Gross Proceeds of any applicable offering.

SECTION 4.7 Acquisition Fees and Expenses. The Company may pay the Advisor and its Affiliates and amount of up to 3% of the Gross Proceeds for the review and evaluation of potential Real Property acquisitions. The Company shall reimburse the Advisor and its Affiliates an amount of up to 0.5% of the Gross Proceeds for Acquisition Expenses incurred by the Advisor or its Affiliates.

SECTION 4.8 Reimbursement for Operating Expenses. The Company shall reimburse the Advisor, at the end of each fiscal quarter, for Operating Expenses incurred by the Advisor; provided, however that the Company shall not reimburse the Advisor at the end of any fiscal quarter for Operating Expenses that, in the four consecutive fiscal quarters then ended exceed the greater of 2% of Average Invested Assets or 25% of Net Income (the "2%/25% Guidelines") for such year. Within 60 days after the end of each fiscal quarter, the Advisor will reimburse the Company for any amounts by which the Operating Expenses exceeded the 2% / 25% Guidelines for such year, unless the Independent Trust Managers determine that such excess was justified. Within 60 days after the end of any fiscal quarter of the Company for which Operating Expenses (for the 12 months just ended) exceed the 2%/25% Guidelines, the Advisor shall send a written disclosure of such fact to the Shareholders containing an explanation of the factors the Independent Trust Managers considered in arriving at the conclusion of whether or not such higher Operating Expenses were justified. If the Independent Trust Managers do not determine that such excess Operating Expenses are justified, the Advisor shall reimburse the Company within a reasonable time after the end of such 12-month period the amount by which the Operating Expenses exceeded the 2%/25% Guidelines.

SECTION 4.9 Reimbursement Limitation. The Company shall not reimburse the Advisor or its Affiliates for services for which the Advisor or its Affiliates are entitled to compensation in the form of a separate fee.

SECTION 4.10 Limitation on Acquisition Fees and Acquisition Expenses. Notwithstanding anything contained in this Article IV, the total of all Acquisition Fees and Acquisition Expenses shall not exceed, in the aggregate, an amount equal to 6% of the Contract Price for the Property with respect to Properties purchased by the Company; provided, however, that a majority of the Trust Managers (including a majority of the Independent Trust Managers) not otherwise interested in the transaction may approve fees and expenses in excess of this limit

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if they determine the transaction to be commercially competitive, fair and reasonable to the Company.

ARTICLE V

INVESTMENT OBJECTIVES AND LIMITATIONS

SECTION 5.1 Investment Objectives. The Company's primary investment objectives are: (i) to maximize cash available for Distribution; (ii) to realize capital appreciation upon the ultimate sale of the Company's Properties; (iii) to provide Shareholders with liquidity of their investment through the Listing of the Shares, and (iv) to conduct the affairs of the Company in such a manner as to continue to qualify the Company for the tax treatment provided in the REIT Provisions. The sheltering from tax of income from other sources is not an objective of the Company.

SECTION 5.2 Review of Objectives. The Independent Trust Managers shall review the investment policies of the Company with sufficient frequency and at least annually to determine that the policies being followed by the Company at any time are in the best interests of its Shareholders. Each such determination and the basis therefor shall be set forth in the minutes of the meetings of the Board of Trust Managers.

SECTION 5.3 Certain Permitted Investments.

(a) The Company may invest in Properties. The Company shall ordinarily purchase or invest in Properties based on their fair market value as determined by a majority of the Trust Managers or, if decided by a majority of the Independent Trust Managers, as determined by an Independent Expert.

(b) The Company may invest in Joint Ventures with the Sponsor, Advisor, one or more Trust Managers or any Affiliate, if a majority of Trust Managers (including a majority of Independent Trust Managers) not otherwise interested in the transaction, approve such investment as being fair and reasonable to the Company and on substantially the same terms and conditions as those received by the other joint venturers.

(c) Subject to any limitations in Section 5.4(h), the Company may invest in equity securities if a majority of Trust Managers (including a majority of Independent Trust Managers) not otherwise interested in the transaction approve such investment as being fair, competitive and commercially reasonable.

SECTION 5.4 Investment Limitations. In addition to other investment restrictions imposed by the Trust Managers from time to time, consistent with the Company's objective of qualifying as a REIT, the following shall apply to the Company's investments:

(a) Not more than 10% of the Company's total assets shall be invested in Unimproved Real Property or mortgage loans on Unimproved Real Property.

(b) The Company shall not invest in commodities or commodity future contracts. This limitation is not intended to apply to futures contracts, when used solely for hedging purposes in connection with the Company's ordinary business of investing in real estate assets and mortgages.

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(c) The Company shall not invest in or make mortgage loans unless an appraisal is obtained concerning the underlying property except for those loans insured or guaranteed by a government or government agency. Mortgage indebtedness on any property shall not exceed such property's appraised value. In cases in which a majority of Independent Trust Managers so determine, and in all cases in which the transaction is with the Advisor, Trust Managers, or any Affiliates, such appraisal of the underlying property must be obtained from an Independent Expert. Such appraisal shall be maintained in the Company's records for at least five years and shall be available for inspection and duplication by any Shareholder. In addition to the appraisal, a mortgagee's or owner's title insurance policy or commitment as to the priority of the mortgage or condition of the title must be obtained.

(d) The Company shall not make or invest in mortgage loans, including construction loans, on any one Property if the aggregate amount of all mortgage loans outstanding on the Property, including the loans of the Company, would exceed an amount equal to 85% of the appraised value of the Property as determined by appraisal unless substantial justification exists because of the presence of other underwriting criteria. For purposes of this subsection, the "aggregate amount of all mortgage loans outstanding on the Property, including the loans of the Company" shall include all interest (excluding contingent participation in income and/or appreciation in value of the mortgaged Property), the current payment of which may be deferred pursuant to the terms of such loans, to the extent that deferred interest on each loan exceeds five percent per annum of the principal balance of the loan.

(e) The Company shall not invest in indebtedness ("Junior Debt") secured by a mortgage on real property which is subordinate to the lien or other indebtedness ("Senior Debt"), except where such amount of such Junior Debt, plus the outstanding amount of Senior Debt, does not exceed 90% of the appraised value of such property, if after giving effect thereto, the value of all such mortgage loans of the Company (as shown on the books of the Company in accordance with generally accepted accounting principles, after all reasonable reserves but before provision for depreciation) would not then exceed 25% of the Company's Net Assets. The value of all investments in Junior Debt of the Company which does not meet the aforementioned requirements shall be limited to 10% of the Company's tangible assets (which would be included within the 25% limitation).

(f) The Company shall not engage in any short sale, or borrow, on an unsecured basis, if such borrowing will result in an Asset Coverage of less than 300%, except that such borrowing limitation shall not apply to a first mortgage trust. "Asset Coverage," for the purpose of this Section 5.4(f) means the ratio which the value of the total assets of an issuer, less all liabilities and indebtedness except indebtedness for unsecured borrowings, bears to the aggregate amount of all unsecured borrowings of such issuer.

(g) The Company shall not make or invest in any mortgage loans that are subordinate to any mortgage, other indebtedness or equity interest of the Advisor, the Trust Managers, the Sponsor or an Affiliate of the Company. In addition, the Company shall not invest in any security of any entity holding investments or engaging in activities prohibited by this Declaration of Trust.

(h) The Company shall not underwrite the Securities of other issuers. In addition, the Company shall not invest in Securities of other issuers, except for investments in Joint Ventures as described herein, unless a majority of the Trust Managers (including a majority of

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Independent Trust Managers) not otherwise interested in such transaction approve the transaction as being fair, competitive and commercially reasonable.

(i) The Company shall not issue (i) equity securities redeemable solely at the option of the holder; (ii) non-voting or non-assessable securities; (iii) options, warrants, or similar evidences of a right to buy its securities (collectively, "Options") unless (1) issued to all of its Shareholders ratably, (2) as part of a financing arrangement, or (3) as part of a Stock Option Plan available to Trust Managers, officers or employees of the Company or the Advisor. Options may not be issued to the Advisor, Trust Manager, Sponsor or any Affiliate thereof except on the same terms as such Options are sold to the general public, when applicable. Options may be issued to persons other than the Advisor, Trust Managers, Sponsor or any Affiliate thereof but not at exercise prices less than the fair market value of the underlying securities on the date of grant and not for consideration that in the judgment of the Independent Trust Managers has a market value less than the value of such Option on the date of grant. Options issuable to the Advisor, Trust Managers, Sponsor or any Affiliate thereof shall not exceed 10% of the outstanding Shares on the date of grant.

(j) A majority of the Trust Managers shall authorize the consideration to be paid for each Property, based on the fair market value of the Property. If a majority of the Independent Trust Managers determine, or if the Property is acquired from the Advisor, a Trust Manager, the Sponsor or their Affiliates, such fair market value shall be determined by an Independent Expert selected by the Independent Trust Managers.

(k) The aggregate Leverage of the Company shall be reasonable in relation to the Net Assets of the Company and shall be reviewed by the Trust Managers at least quarterly. The maximum amount of such Leverage shall not exceed 75% of the Properties' aggregate value, provided, that Leverage on individual Properties may exceed such limit, unless approved by the Independent Trust Managers and disclosed to the Shareholders in the next quarterly report of the Company.

(l) The Sponsor, Advisor, Trust Managers and any Affiliates thereto shall not make loans to the Company, or to Joint Ventures, for the purpose of acquiring Properties. Any loans to the Company by such parties for other purposes must be approved by a majority of Trust Managers (including a majority of Independent Trust Managers) not otherwise interested in the transaction as fair, competitive and commercially reasonable and no less favorable to the Company than comparable loans between unaffiliated parties.

(m) The Company shall not make loans to the Sponsor, Advisor, Trust Managers, officers or any principal of the Company or any of its Affiliate.

(n) The Company shall not operate so as to be classified as an "investment company" under the Investment Company Act of 1940, as amended.

(o) The Company shall not issue (i) debt securities unless the historical debt service coverage (in the most recently completed fiscal year) as adjusted for known changes is sufficient to properly service that higher level of debt; or (ii) Shares on a deferred payment basis or under similar arrangements.

(p) The Company shall not invest in real estate contracts of sale unless such contracts of sale are in recordable form and appropriately recorded in the chain of title.

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The foregoing investment limitations may not be modified or eliminated without the approval of Shareholders owning a majority of the outstanding Shares and a majority of the Independent Trust Managers not otherwise interested in the transaction.

ARTICLE VI

CONFLICTS OF INTEREST

SECTION 6.1 Sales and Leases to Company. The Company may purchase or lease a Property or Properties from the Sponsor, Advisor, a Trust Manager, or any Affiliate upon a finding by a majority of Trust Managers (including a majority of Independent Trust Managers) not otherwise interested in the transaction that such transaction is competitive and commercially reasonable to the Company and at a price to the Company no greater than the cost of the asset to such Sponsor, Advisor, Trust Manager or Affiliate, or, if the price to the Company is in excess of such cost, that substantial justification for such excess exists and such excess is reasonable, and there is appropriate disclosure of the material facts concerning each such transaction. In no event shall the cost of such asset to the Company exceed its current appraised value.

SECTION 6.2 Sales and Leases to the Sponsor, Advisor, Trust Managers or Affiliates. An Advisor, Trust Manager or Affiliate may purchase or lease a Property or Properties from the Company if a majority of Trust Managers (including a majority of Independent Trust Managers) not otherwise interested in the transaction determine that the transaction is fair and reasonable to the Company.

SECTION 6.3 Other Transactions.

(a) No goods or services will be provided by the Advisor or its Affiliates to the Company, except for transactions in which the Advisor or its Affiliates provide goods or services to the Company in accordance with this Declaration of Trust or if a majority of the Trust Managers (including a majority of the Independent Trust Managers) not otherwise interested in such transactions approve such transactions as fair and reasonable to the Company and on terms and conditions not less favorable to the Company than those available from unaffiliated third parties.

(b) The Company shall not make loans to the Sponsor, Advisor, Trust Managers or any Affiliates thereof. The Sponsor, Advisor, Trust Managers and any Affiliates thereof shall not make loans to the Company, or to Joint Ventures, for the purpose of acquiring Properties. Any loans to the Company by such parties for other purposes must be approved by a majority of the Trust Managers (including a majority of the Independent Trust Managers) not otherwise interested in such transaction as fair, competitive, and commercially reasonable, and no less favorable to the Company than comparable loans between unaffiliated parties.

SECTION 6.4 Conflict Resolution Procedures. In the event that an investment opportunity becomes available which is suitable for both the Company and a public or private entity with which the Advisor or its Affiliates are affiliated, for which both entities have sufficient uninvested funds, then the entity which has had the longest period of time elapse since it was offered an investment opportunity will first be offered the investment opportunity. An investment opportunity will not be considered suitable for an entity if the 2%/25% Guidelines could not be satisfied if the entity were to make the investment. In determining whether or not

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an investment opportunity is suitable for more than one entity, the Board of Trust Managers and the Advisor will examine such factors, among others, as the cash requirements of each entity, the effect of the acquisition both on diversification of each entity's investments by types of commercial office properties and geographic area, and on diversification of the tenants of its properties (which also may affect the need for one of the entities to prepare or produce audited financial statements for a property or a tenant), the anticipated cash flow of each entity, the size of the investment, the amount of funds available to each program, and the length of time such funds have been available for investment. If the 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 the Board of Trust Managers and the Advisor, to be more appropriate for an entity other than the entity which committed to make the investment, however, the Advisor has the right to agree that the other entity Affiliated with the Advisors or its Affiliates may make the investment. The Independent Trust Managers have a duty to insure that this allocation of investment opportunities is applied fairly to the Company.

SECTION 6.5 Transactions with Affiliates. The Company shall not engage in transactions with any Affiliates, except to the extent that each such transaction has, after disclosure of such affiliation, been approved or ratified by the affirmative vote of a majority of the Trust Managers (including a majority of the Independent Trust Managers) not Affiliated with the person who is party to the transaction and:

(i) The transaction is fair and reasonable to the Company and its Shareholders.

(ii) The terms of such transaction are at least as favorable as the terms of any comparable transactions made on an arms-length basis and known to the Trust Managers.

(iii) The total consideration is not in excess of the appraised value of the property being acquired, if an acquisition is involved, as determined by an Independent Expert.

(iv) Payments to the Advisor, its Affiliates and the Trust Managers for services rendered in a capacity other than that as Advisor or Trust Manager may only be made upon a determination that:

(a) The compensation is not in excess of their compensation paid for any comparable services; and

(b) The compensation is not greater than the charges for comparable services available from others who are competent and not Affiliated with any of the parties involved.

(v) The Company will not make loans to the Advisor or other Affiliates, or to any trust managers, director, officer or principal of the Company or any of its Affiliates.

Transactions between the Company and its Affiliates are further subject to any express restrictions in this Declaration of Trust or adopted by the Trust Managers in the Bylaws or by resolution, and other applicable law.

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ARTICLE VII

SHARES

SECTION 7.1 Authorized Capital Stock.

(a) The aggregate number of shares of beneficial interest of all classes of shares of beneficial interest that the Trust shall have authority to issue is 450,000,000 shares, consisting of (i) 400,000,000 common shares, $0.001 par value per share ("Common Shares"), and (ii) 50,000,000 preferred shares, $0.001 par value per share ("Preferred Shares"). Unless otherwise specified, the term "Shares" in this Declaration of Trust shall be deemed to refer to the Common Shares and, solely to the extent specifically required by law or as specifically provided in any resolution or resolutions of the Trust Managers providing for the issue of any particular series of Preferred Shares, to the Preferred Shares. For purposes of Section 7.4 (other than Section 7.4(j)) of this Declaration of Trust, the term Shares shall be deemed to refer to both the Common Shares and the Preferred Shares and, for purposes of Section 7.4 (other than Section 7.4(j)), the number of outstanding Shares shall be deemed to be equal to the value of the Company's outstanding Shares as determined from time to time by resolution of the Trust Managers, such determination to include an allocation of relative value among the Common Shares and any outstanding series of Preferred Shares.

(b) The Company may issue one or more series of Preferred Shares, each such series to consist of such number of shares as shall be determined by resolution of the Trust Managers creating such series. The Preferred Shares of each such series shall have such designations, preferences, conversion, exchange or other rights, participations, voting powers, options, restrictions, limitations, special rights or relations, limitations as to dividends, qualifications or terms, or conditions of redemption thereof, as shall be stated and expressed by the Trust Managers in the resolution or resolutions providing for the issuance of such series of Preferred Shares pursuant to the authority to do so which is hereby expressly vested in the Trust Managers. Except as otherwise specifically provided in any resolution or resolutions of the Trust Managers providing for the issue of any particular series of Preferred Shares, the number of shares of any such series so set forth in such resolution or resolutions may be increased or decreased (but not below the number of shares of such series then outstanding) by a resolution or resolutions likewise adopted by the Trust Managers. Except as otherwise specifically provided in any resolution or resolutions of the Trust Managers providing for the issue of any particular series of Preferred Shares, Preferred Shares redeemed or otherwise acquired by the Trust shall assume the status of authorized but unissued Preferred Shares and shall be unclassified as to series and may thereafter, subject to the provisions of this Article Seven and to any restrictions contained in any resolution or resolutions of the Trust Managers providing for the issuance of any such series of Preferred Shares, be reissued in the same manner as other authorized but unissued Preferred Shares.

(c) All of the Common Shares shall be equal in all respects to each other and shall have no preference, conversion, exchange or preemptive rights. Except as otherwise specifically required by law or this Declaration of Trust, or as specifically provided in any resolution or resolutions of the Trust Managers providing for the issuance of any particular series of Preferred Shares, the exclusive voting power of the Trust shall be vested in the Common Shares. Each Common Share entitles the holder thereof to one vote at all meetings of the Shareholders.

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(d) The Company shall issue Shares for consideration consisting of any tangible or intangible benefit to the Company, including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the Company, such consideration to be determined by the Trust Managers. When issued, all Shares are non-assessable.

(e) The Trust Managers from time to time may authorize and the Company may pay to Shareholders such Distributions in cash or other property as the Trust Managers in their discretion shall determine. The Trust Managers shall endeavor to authorize and the Company may pay such Distributions as shall be necessary for the Company to qualify as a REIT; provided, however, Shareholders shall have no right to any Distribution unless and until declared by the Trust Managers. The exercise of the powers and rights of the Trust Managers pursuant to this section shall be subject to the provisions of any class or series of Shares at the time outstanding. The receipt by any Person in whose name any Shares are registered on the records of the Company or by his duly authorized agent shall be a sufficient discharge for all Distributions payable or deliverable in respect of such Shares and from all liability to see to the application thereof. Distributions in kind shall not be permitted, except for distributions of readily marketable securities and distributions of beneficial interests in a liquidating trust established for the dissolution of the Company and the liquidation of its assets in accordance with the terms of these Articles of Incorporation.

SECTION 7.2 General Nature of Shares. All Shares shall be personal property entitling the Shareholders only to those rights provided in this Declaration of Trust, the Texas REIT Act or in the resolution creating any class or series of Shares. The legal ownership of the Company Property and the right to conduct the business of the Company are vested exclusively in the Trust Managers; the Shareholders shall have no interest therein other than the beneficial interest in the Company conferred by their Shares and shall have no right to compel any partition, division, dividend or Distribution of the Company or any Company Property. The death of a Shareholder shall not terminate the Company or give his legal representative any rights against other Shareholders, the Trust Managers or the Company Properties, except the right, exercised in accordance with applicable provisions of the Bylaws, to require the Company to reflect on its books the change in ownership of the Shares. Shareholders shall not have any preemptive or other right to purchase or subscribe for any Securities of the Company which the Company may at any time issue or sell.

SECTION 7.3 Suitability Standards.

(a) Subject to suitability standards established by individual states or any higher standards established by the Board, to become a Shareholder in the Company, if such prospective Shareholder is an individual (including an individual beneficiary of a purchasing Individual Retirement Account), or if the prospective Shareholder is a fiduciary (such as a trustee of a trust or corporate pension or profit sharing plan, or other tax-exempt organization, or a custodian under a Uniform Gifts to Minors Act), such individual or fiduciary, as the case may be, must represent to the Company, among other requirements as the Company may require from time to time:

(i) that such individual (or, in the case of a fiduciary, that the fiduciary account or the donor who directly or indirectly supplies the funds to purchase the Shares) has a minimum annual gross income of $45,000 and a net worth (excluding home, furnishings and automobiles) of not less than $45,000; or

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(ii) that such individual (or, in the case of a fiduciary, that the fiduciary account or the donor who directly or indirectly supplies the funds to purchase the Shares) has a net worth (excluding home, furnishings and automobiles) of not less than $150,000.

(b) The Sponsor and each Person selling Shares on behalf of the Sponsor or the Company shall make every reasonable effort to determine that the purchase of Shares is a suitable and appropriate investment for each Shareholder. In making this determination, the Sponsor or each Person selling Shares on behalf of the Sponsor or the Company shall ascertain that the prospective Shareholder:

(i) meets the minimum income and net worth standards established for the Company;

(ii) can reasonably benefit from the Company based on the prospective Shareholder's overall investment objectives and portfolio structure;

(iii) is able to bear the economic risk of the investment based on the prospective Shareholder's overall financial situation; and

(iv) has apparent understanding of: (1) the fundamental risks of the investment; (2) the risk that the Shareholder may lose the entire investment; (3) the lack of liquidity of Company Shares; (4) the restrictions on transferability of Company Shares; (5) the background and qualifications of the Sponsor or the Advisor; and (6) the tax consequences of the investment.

The Sponsor or each Person selling shares on behalf of the Sponsor or the Company shall make this determination on the basis of information it has obtained from a prospective Shareholder. Relevant information for this purpose will include at least the age, investment objectives, investment experiences, income, net worth, financial situation, and other investments of the prospective Shareholder, as well as any other pertinent factors. The Sponsor or each Person selling Shares on behalf of the Sponsor or the Company shall maintain records of the information used to determine that an investment in Shares is suitable and appropriate for a Shareholder. The Sponsor or each Person selling Shares on behalf of the Sponsor or the Company shall maintain these records for at least six years.

(c) Subject to certain individual state requirements or higher standards established by the Board from time to time, no sale or transfer of Shares will be permitted of a number of Shares valued at less than $1,000, and a Shareholder shall not transfer, fractionalize or subdivide such Shares so as to retain less than such minimum number thereof.

SECTION 7.4 Restrictions on Ownership and Transfer.

(a) For purposes of this Section 7.4:

(i) The term "Charitable Beneficiary" shall mean, with respect to any Beneficial Trust (as defined below), one or more organizations described in each of Section 170(b)(1)(A) (other than clauses (vii) or (viii) thereof) and Section 170(c)(2) of the Code that are named by the Trustee (as defined below) as the beneficiary or beneficiaries of such Beneficial Trust, in accordance with the provisions of Section 7.4(e)(1).

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(ii) The term "Convertible Securities" means any securities of the Company that are convertible into Shares.

(iii) The term "individual" shall mean any natural person as well as those organizations treated as natural persons under Section 542(a) of the Code.

(iv) The term "Market Price" means the average of the last reported sales price of Common Shares reported on the New York Stock Exchange on the five trading days immediately preceding the relevant date, or if the Common Shares are not then traded on the New York Stock Exchange, the last reported sales price of the Common Shares on the five trading days immediately preceding the relevant date as reported on any exchange or quotation system over which the Common Shares may be traded, or if the Common Shares are not then traded over any exchange or quotation system, then the market price of the Common Shares on the relevant date as determined in good faith by the Trust Managers.

(v) The term "ownership" (including "own" or "owns") of Shares means beneficial ownership. Beneficial ownership, for this purpose shall be defined to include actual ownership by a Person as well as constructive ownership by such Person after application of principles in accordance with or by reference to Sections 544 or 856 of the Code.

(vi) The term "Permitted Transferee" shall mean any Person designated as a Permitted Transferee in accordance with the provisions of Section 7.4(e)(v).

(vii) The term "Purported Beneficial Transferee" shall mean, with respect to any purported transfer that results in Excess Securities (as defined herein), the purported beneficial transferee for whom the Purported Record Transferee would have acquired Securities of the Trust if such transfer had been valid under Section 7.4(b).

(viii) The term "Purported Record Transferee" shall mean, with respect to any purported transfer which results in Excess Securities, the Person who would have been the record holder of the Securities of the Trust if such transfer had been valid under Section 7.4(b).

(ix) The term "Securities" means Shares and Convertible Securities, for the purposes of this Section 7.4 only.

(b) No Person may own Shares of any class with an aggregate value in excess of 9.8% of the aggregate value of all outstanding Shares of such class of Shares or more than 9.8% of the number of outstanding Shares of any class of Shares (the limitation on the ownership of outstanding Shares is referred to in this Section 7.4 as the "Ownership Limit" and the 9.8% threshold is referred to in this Section 7.4 as the "Percentage Limit"), and no Securities shall be accepted, purchased, or in any manner acquired by any Person if such issuance or transfer would result in that Person's ownership of Shares exceeding the Percentage Limit. For purposes of determining if the Ownership Limit is exceeded by a Person, Convertible Securities owned by such Person shall be treated as if the Convertible Securities owned by such Person had been converted into Shares if the effect of such treatment would be to increase the ownership percentage of such Person in the Company. The Ownership Limit shall not apply (i) to acquisitions of Securities by any Person that has made a tender offer for all outstanding Shares (including Convertible Securities) in conformity with applicable federal securities laws, (ii) to

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the acquisition of Securities of the Trust by an underwriter in a public offering of Securities of the Company, or in any transaction involving the issuance of Securities by the Company, in which a majority of the Trust Managers determines that the underwriter or other Person or party initially acquiring such Securities will timely distribute such Securities to or among others so that, following such distribution, none of such Securities will be Excess Securities, (iii) to the acquisition of Securities pursuant to the exercise of employee share options, or (iv) to the acquisition of Securities pursuant to an exception made pursuant to Section 7.4(h).

(c) Nothing in this Section 7.4 shall preclude the settlement of any transaction in Securities entered into through the facilities of the New York Stock Exchange. If any Securities are accepted, purchased, or in any manner acquired by any Person which results in a violation of Section 7.4(b) or (f) hereof, such issuance or transfer shall be valid only with respect to such amount of Securities issued or transferred as does not result in a violation of
Section 7.4(b) or (f) hereof, and such acceptance, purchase or acquisition shall be void ab initio with respect to the amount of Securities that results in a violation of Section 7.4(a) or (e) hereof (the "Excess Securities"), and the intended transferee of such Excess Securities shall acquire no rights in such Excess Securities except as set forth in Section 7.4(e) below.

(d) Each Shareholder shall, within ten days of demand by the Company, disclose to the Company in writing such information with respect to his, her or its ownership of Shares as the Trust Managers in their discretion deem necessary or appropriate in order that the Company may fully comply with all REIT Provisions and to comply with the requirements of any taxing authority or governmental agency. All Persons who own Shares in excess of the Percentage Limit must disclose in writing such ownership information to the Trust no later than January 31 of each year. Failure to provide such information, upon reasonable request, shall result in the Securities so owned being treated as Excess Securities pursuant to this Section 7.4 for so long as such failure continues.

(e) The Excess Securities, and the owners thereof, shall have the following characteristics, rights and powers:

(i) Upon any purported purchase, sale, exchange, acquisition, disposition or other transfer or upon any change in the capital structure of the Trust (including any redemption of Securities) that results in Excess Securities pursuant to Section 7.4(b) or (f), such Excess Securities shall be deemed to have been transferred to a trust ("Beneficial Trust") for registration in the name of the trustee named by the Company (the "Trustee") for the exclusive benefit of the Charitable Beneficiary to whom an interest in such Excess Securities may later be transferred pursuant to Section 7.4(e)(v). The Company shall name a Trustee and Charitable Beneficiary of each Beneficial Trust within five days after discovery of the existence thereof. Any such Excess Securities so held in the Beneficial Trust shall be issued and outstanding shares of the Company. The Purported Record Transferee (or Purported Beneficial Transferee, if applicable) shall have no rights in such Excess Securities except as provided in this Section 7.4(e).

(ii) The Trustee, as record holder of the Excess Securities, shall be entitled to receive all Distributions as may be declared by the Trust Managers on such Excess Securities, and shall hold such Distributions in trust for the benefit of the Charitable Beneficiary. The Purported Record Transferee (or Purported Beneficial Transferee, if applicable) with respect to the Excess Securities shall repay to the Trustee the amount of

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any Distributions received by it that (1) are attributable to any Excess Securities and (2) the record date of which was on or after the date that such shares became Excess Securities. The Company shall take all measures that it determines reasonably necessary to recover the amount of any such Distribution paid to the Purported Record Transferee (or Purported Beneficial Transferee, if applicable), including, if necessary, withholding any portion of future Distributions payable on Excess Securities beneficially owned or constructively owned by the Person who, but for the provisions of Section 7.4(e)(i), would constructively own or beneficially own the Excess Securities; and, as soon as reasonably practicable following the Trust's receipt or withholding thereof, shall pay over to the Trustee for the benefit of the Charitable Beneficiary the Distributions so received or withheld, as the case may be.

(iii) In the event of any voluntary or involuntary liquidation, dissolution or winding up of, or any distribution of the assets of the Company (other than a Distribution), the Trustee of each Beneficial Trust shall be entitled to receive, ratably with each other holder of Securities of the same class or series, that portion of the assets of the Company which is available for distribution to the holders of such class and series of Securities. The Trustee shall distribute to the Purported Record Transferee the amounts received upon such liquidation, dissolution, or winding up, or distribution, provided, however, that the Purported Record Transferee shall not be entitled to receive amounts pursuant to this Section 7.4(e)(iii) in excess of, in the case of a purported transfer in which the Purported Record Transferee gave value for Securities and which transfer resulted in the transfer of Excess Securities to the Beneficial Trust, the price per share or security, if any, such Purported Record Transferee paid for the Securities and, in the case of a transfer in which the Purported Record Transferee did not give value for such Securities (e.g., if the Securities were received through a gift or devise) and which transfer resulted in the transfer of Excess Securities to the Beneficial Trust, the price per share or security equal to the Market Price on the date of such transfer. Any remaining amount in such Beneficial Trust shall be distributed to the Charitable Beneficiary.

(iv) The Trustee shall be entitled to vote all Excess Securities. Any vote by a Purported Record Transferee as a holder of Shares or Securities prior to the discovery by the Company that the Securities are Excess Securities shall, subject to applicable law, be rescinded and shall be void ab initio with respect to such Excess Securities and the Purported Record Transferee shall be deemed to have given, as of the close of business on the business day prior to the date of the purported transfer that results in the transfer to the Beneficial Trust of Excess Securities under Section 7.4(e)(i), an irrevocable proxy to the Trustee to vote the Excess Securities in the manner in which the Trustee, in its sole and absolute discretion, desires.

(v) The Trustee shall have the exclusive and absolute right to designate a Permitted Transferee (as hereinafter defined) of any Excess Securities. In an orderly fashion so as to not materially and adversely affect the Market Price of the Excess Securities, the Trustee may designate any Person as a Permitted Transferee, provided, however, that (1) the Permitted Transferee so designated purchases the Excess Securities for valuable consideration (whether in a public or private sale), at a price as set forth in Section 7.4(e)(vii) and (2) the Permitted Transferee so designated may acquire such Excess Securities without such acquisition resulting in a transfer to a Beneficial Trust and

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the redesignation of such Securities so acquired as Excess Securities under Section 7.4(e)(i). Upon the designation by the Trustee of a Permitted Transferee in accordance with the provisions of Section 7.4(e)(v), the Trustee of a Beneficial Trust shall (w) cause to be transferred to the Permitted Transferee that number of Excess Securities acquired by the Permitted Transferee, (x) cause to be recorded on the books of the Company that the Permitted Transferee is the holder of record of such number of Securities, (y) cause the Excess Securities to be canceled, and (z) distribute to the Charitable Beneficiary any and all amounts held with respect to the Excess Securities after making that payment to the Purported Record Transferee pursuant to Section 7.4(e)(vi).

(vi) Any Purported Record Transferee shall be entitled (following discovery of the Excess Securities and subsequent designation of the Permitted Transferee in accordance with Section 7.4(e)(v)) to receive from the Trustee upon the sale or other disposition of such Excess Securities the lesser of (1) in the case of (A) a purported transfer in which the Purported Record Transferee (or Purported Beneficial Transferee, if applicable) gave value for Securities and which transfer resulted in the transfer of Excess Securities to the Beneficial Trust, the price per share, if any, such Purported Record Transferee (or Purported Beneficial Transferee, if applicable) paid for the Securities, or (B) a transfer in which the Purported Record Transferee (or Purported Beneficial Transferee, if applicable) did not give value for such Securities (e.g., if the Securities were received through a gift or devise) and which transfer resulted in the transfer of Excess Securities to the Beneficial Trust, the price per share equal to the Market Price on the date of such transfer, and (2) the price per share received by the Trustee of the Beneficial Trust from the sale or other disposition of such Excess Securities in accordance with Section 7.4(e)(v) or (vii). Any amounts received by the Trustee for such Excess Securities and in excess of such amounts to be paid the Purported Record Transferee pursuant to Section 7.4(e)(vi) shall be distributed to the Charitable Beneficiary in accordance with the provisions of Section
7.4(e)(v). Each Charitable Beneficiary and Purported Record Transferee (and Purported Beneficial Transferee, if different) waives any and all claims that each may have against the Trustee and the Beneficial Trust arising out of the disposition of the Excess Securities, except for claims arising out of the gross negligence or willful misconduct of, or any failure to make payments in accordance with this Section 7.4(e) by such Trustee or the Company.

(vii) Excess Securities shall be deemed to have been offered for sale to the Company, or its designee, at a price per share equal to the lesser of (1) the price per share in the transaction that created such Excess Securities (or, in the case of devise or gift, the Market Price at the time of such devise or gift) and (2) the Market Price on the date the Company, or its designee, accepts such offer. The Company shall have the right to accept such offer for a period of 90 days after the later of (y) the date of the transfer which resulted in such Excess Securities and (z) the date the Company determines in good faith that a transfer resulting in Excess Securities has occurred, if the Company does not receive a notice of such transfer pursuant to Section 7.4(e)(v).

(f) Any sale, transfer, gift, assignment, devise or other disposition of Shares (for purposes of this Section 7.4(f), a "transfer") that, if effective, would result in (i) the Shares of the Company being owned by less than 100 persons (determined without reference to any rules of attribution) shall be void ab initio as to the Shares which would otherwise be beneficially owned

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by the transferee, (ii) the Company being "closely held" within the meaning of
Section 856(h) of the Code, shall be void ab initio as to the transfer of the Shares that would cause the Company to be "closely held" within the meaning of
Section 856(h) of the Code, (iii) the Company owning, directly or indirectly, 10% or more of the ownership interest in any tenant or subtenant of the Company's Properties within the meaning of Section 856(d)(2)(B) of the Code and the Treasury Regulations thereunder, shall be void ab initio, or (iv) the disqualification of the Company as a REIT shall be void ab initio as to the transfer of the Shares that would cause the Company to be disqualified as a REIT, and, in the case of each of clauses (i), (ii), (iii) and (iv) of this
Section 7.4(f), the intended transferee shall acquire no rights in such Shares, except as may be provided by Section 7.4(e) above.

(g) If any of the restrictions on transfer set forth in this Section 7.4 are determined to be void, invalid or unenforceable by virtue of any legal decision, statute, rule or regulation, then the intended transferee of any Excess Securities may be deemed, at the option of the Company, to have acted as an agent on behalf of the Company in acquiring the Excess Securities and to hold the Excess Securities on behalf of the Company.

(h) The Percentage Limit and the Ownership Limit shall not apply to Securities which the Trust Managers in their sole discretion may exempt from the Percentage Limit and the Ownership Limit (i) prior to the qualification of the Company to be taxed as a REIT under the Code or (ii) while owned by a Person who has provided the Company with evidence and assurances acceptable to the Trust Managers that the qualification of the Company as a REIT would not be jeopardized thereby. Until revoked as provided by this Section 7.4(h), the Percentage Limit and Ownership Limit shall not apply to the Advisor and its Affiliates provided the Advisor provides assurances to the Trust Managers that the qualification of the Company as a REIT would not be jeopardized thereby. The Trust Managers, in their sole discretion, may at any time revoke any exception pursuant to this Section 7.4(h) in the case of any Person, and upon such revocation, the provisions of Section 7.4(b) shall immediately become applicable to such Person and all Securities which such Person may own. A decision to exempt or refuse to exempt from the Percentage Limit the ownership of certain designated Securities, or to revoke an exemption previously granted, shall be made by the Trust Managers in their sole discretion, based on any reason whatsoever, including, but not limited to, the preservation of the Trust's qualification as a REIT.

(i) Subject to the provisions of the first sentence of Section 7.4(c), nothing herein contained shall limit the ability of the Company to impose or to seek judicial or other imposition of additional restrictions if deemed necessary or advisable to protect the Company and the interests of its security holders by preservation of the Trust's status as a qualified REIT under the Code.

(j) All Persons who own 5% or more of the outstanding Shares during any taxable year of the Company shall file with the Company an affidavit setting forth the number of Shares during such taxable year owned directly (held of record by such Person or by a nominee or nominees of such Person) and constructively owned (within the meaning of Section 544 of the Code or for purposes of Rule 13(d) of the Securities Exchange Act of 1934) by the Person filing the affidavit. The affidavit to be filed with the Company shall set forth all the information required to be reported in returns of shareholders under
Section 1.857-9 of the Treasury Regulations or similar provisions of any successor Treasury Regulations and in reports to be filed under Section 13(d) of the Securities Exchange Act of 1934. The affidavit or an

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amendment to a previously filed affidavit shall be filed with the Company annually within 60 days after the close of the Trust's taxable year. A Person shall have satisfied the requirements of this Section 7.4(j) if the Person furnishes to the Company the information in such Person's possession after such Person has made a good faith effort to determine the Shares it owns and to acquire the information required by Section 1.857-9 of the Treasury Regulations or similar provisions of any successor regulation.

SECTION 7.5 Severability. If any provision of this Article VII or any application of any such provision is determined to be void, invalid or unenforceable by any court having jurisdiction over the issue, the validity and enforceability of the remaining provisions of this Article VII shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court.

SECTION 7.6 Repurchase of Shares. The Trust Managers may establish, from time to time, a program or programs by which the Company voluntarily repurchases Shares from its Shareholders, provided, however, that such repurchase does not impair the capital or operations of the Company. The Sponsor, Advisor, Trust Managers or any Affiliates thereof may not receive any fees on the repurchase of Shares by the Company.

SECTION 7.7 Distribution Reinvestment Plans. The Trust Managers may establish, from time to time, a Distribution reinvestment plan or plans. Pursuant to such reinvestment plan, all material information regarding the Distribution to the Shareholders and the effect of reinvesting such distribution, including the tax consequences thereof, shall be provided to the Shareholders at least annually, and each Shareholder participating in such reinvestment plan shall have a reasonable opportunity to withdraw from the reinvestment plan at least annually after receipt of the information required by this Section 7.7.

ARTICLE VIII

SHAREHOLDERS

SECTION 8.1 Meetings of Shareholders. There shall be an annual meeting of the Shareholders, to be held at such time and place as shall be determined by or in the manner prescribed in the Bylaws, at which the Trust Managers shall be elected and any other proper business may be conducted. The annual meeting will be held on a date which is a reasonable period of time following the distribution of the Company's annual report to Shareholders but not less than 30 days after delivery of such report. The Trust Managers shall take reasonable steps to insure that the annual meeting is held. Trust Managers shall be elected (without the concurrence by the Trust Managers) by the affirmative vote of the holders of not less than a majority of the Shares present in person or by proxy at an annual meeting at which a quorum is present. A quorum shall be 50% of the then outstanding Shares. Special meetings of Shareholders may be called in the manner provided in the Bylaws, including by the president or by a majority of the Trust Managers, and shall be called by an officer of the Company upon written request of Shareholders holding in the aggregate not less than 10% of the outstanding Shares entitled to be cast on any issue proposed to be considered at any such special meeting. Upon receipt of a written request, either in person or by mail, stating the purpose(s) of the meeting, the Company shall provide all Shareholders within ten days after receipt of said request, written notice, either in person or by mail, of a meeting and the purpose of such meeting to be held on a date not less

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than 15 nor more than 60 days after the distribution of such notice, at a time and place specified in the request, or if none is specified, at a time and place convenient to the Shareholders. If there are no Trust Managers, the officers of the Company shall promptly call a special meeting of the Shareholders entitled to vote for the election of successor Trust Managers. Any meeting may be adjourned and reconvened as the Trust Managers determine or as provided by the Bylaws.

SECTION 8.2 Voting Rights of Shareholders. Subject to the provisions of any class or series of Shares then outstanding and the mandatory provisions of any applicable laws or regulations, the Shareholders shall be entitled to vote only on the following matters; (a) election or removal of Trust Managers, without the necessity for concurrence by the Trust Managers, as provided in Sections 2.1, 8.1 and 10.1 of this Declaration of Trust; (b) amendment of this Declaration of Trust, without the necessity for concurrence by the Trust Managers, as provided in Section 10.1 hereof; (c) termination of the Company, without the necessity for concurrence by the Trust Managers, as provided in
Section 11.2 hereof; (d) reorganization of the Company as provided in Section 10.2 hereof; (e) merger, consolidation or sale or other disposition of all or substantially all of the Company Property, as provided in Section 10.3 hereof; and (f) termination of the Company's status as a real estate investment trust under the REIT Provisions, as provided in Section 3.2(b) hereof. The Shareholders may terminate the status of the Company as a REIT under the Code by a vote of a majority of the Shares outstanding and entitled to vote. Except with respect to the foregoing matters, no action taken by the Shareholders at any meeting shall in any way bind the Trust Managers.

SECTION 8.3 Voting Limitations on Shares Held by the Advisor, Trust Managers and Affiliates. With respect to Shares owned by the Advisor, the Trust Managers, or any of their Affiliates, neither the Advisor, the Trust Managers, nor any of their Affiliates may vote or consent on matters submitted to the Shareholders regarding the removal of the Advisor, Trust Managers or any of their Affiliates or any transaction between the Company and any of them. In determining the requisite percentage in interest of Shares necessary to approve a matter on which the Advisor, Trust Managers and any of their Affiliates may not vote or consent, any Shares owned by any of them shall not be included.

SECTION 8.4 Right of Inspection. Any Shareholder and any designated representative thereof shall be permitted access to all records of the Company at all reasonable times, and may inspect and copy any of them for a reasonable charge. Inspection of the Company books and records by the office or agency administering the securities laws of a jurisdiction shall be provided upon reasonable notice and during normal business hours.

SECTION 8.5 Access to Shareholder List.

(a) An alphabetical list of the names, addresses and telephone numbers of the Shareholders of the Company, along with the number of Shares held by each of them (the "Shareholder List"), shall be maintained as part of the books and records of the Company and shall be available for inspection by any Shareholder or the Shareholder's designated agent at the home office of the Company upon the request of the Shareholder. The Shareholder List shall be updated at least quarterly to reflect changes in the information contained therein. A copy of such list shall be mailed to any Shareholder so requesting within ten days of the request. The copy of the Shareholder List shall be printed in alphabetical order, on white paper, and in a readily readable type size (in no event smaller than 10-point type). The Company may impose a reasonable charge for expenses incurred in reproduction pursuant to the Shareholder request. A

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Shareholder may request a copy of the Shareholder List in connection with matters relating to Shareholders' voting rights, and the exercise of Shareholder rights under federal proxy laws.

(b) If the Advisor or Trust Managers neglect or refuse to exhibit, produce or mail a copy of the Shareholder List as requested, the Advisor and the Trust Managers shall be liable to any Shareholder requesting the list for the costs, including attorneys' fees, incurred by that Shareholder for compelling the production of the Shareholder List, and for actual damages suffered by any Shareholder by reason of such refusal or neglect. It shall be a defense that the actual purpose and reason for the requests for inspection or for a copy of the Shareholder List is to secure such list of Shareholders or other information for the purpose of selling such list or copies thereof, or of using the same for a commercial purpose other than in the interest of the applicant as a Shareholder relative to the affairs of the Company. The Company may require the Shareholder requesting the Shareholder List to represent that the list is not requested for a commercial purpose unrelated to the Shareholder's interest in the Company. The remedies provided hereunder to Shareholders requesting copies of the Shareholder List are in addition, to and shall not in any way limit, other remedies available to Shareholders under federal law, or the laws of any state.

SECTION 8.6 Reports. The Trust Managers, including the Independent Trust Managers, shall take reasonable steps to insure that the Company shall cause to be prepared and mailed or delivered to each Shareholder as of a record date after the end of the fiscal year and each holder of other publicly-held securities of the Company within 120 days after the end of the fiscal year to which it relates an annual report for each fiscal year ending after the initial public offering of its securities which shall include: (i) financial statements prepared in accordance with generally accepted accounting principles which are audited and reported on by independent certified public accountants; (ii) the ratio of the costs of raising capital during the period to the capital raised;
(iii) the aggregate amount of advisory fees and the aggregate amount of other fees paid to the Advisor and any Affiliate of the Advisor by the Company and including fees or charges paid to the Advisor and any Affiliate of the Advisor by third parties doing business with the Company; (iv) the Operating Expenses of the Company, stated as a percentage of Average Invested Assets and as a percentage of its Net Income; (v) a report from the Independent Trust Managers that the policies being followed by the Company are in the best interests of its Shareholders and the basis for such determination; (vi) separately stated, full disclosure of all material terms, factors, and circumstances surrounding any and all transactions involving the Company, Trust Managers, Advisors, Sponsors and any Affiliate thereof occurring in the year for which the annual report is made, and the Independent Trust Managers shall be specifically charged with a duty to examine and comment in the report on the fairness of such transactions; and
(vii) Distributions to the Shareholders for the period, identifying the source of such Distributions, and if such information is not available at the time of the distribution, a written explanation of the relevant circumstances will accompany the Distributions (with the statement as to the source of Distributions to be sent to Shareholders not later than 60 days after the end of the fiscal year in which the distribution was made).

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ARTICLE IX

LIABILITY OF SHAREHOLDERS, TRUST MANAGERS, ADVISORS AND
AFFILIATES; INDEMNIFICATION

SECTION 9.1 Limitation of Shareholder Liability. No Shareholder shall be liable for any debt, claim, demand, judgment or obligation of any kind of, against or with respect to the Company by reason of his being a Shareholder, nor shall any Shareholder be subject to any personal liability whatsoever, in tort, contract or otherwise, to any Person in connection with the Company Property or the affairs of the Company by reason of his being a Shareholder. When the Board feels its is necessary or appropriate, the Company shall include a clause in its contracts which provides that Shareholders shall not be personally liable for obligations entered into on behalf of the Company.

SECTION 9.2 Limitation of Liability and Indemnification.

(a) In this Section 9.2:

(i) "Indemnitee" means (1) any present or former Trust Manager or officer of the Company, (2) any person who while serving in any of the capacities referred to in clause (1) hereof served at the Company's request as a trust manager, director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another real estate investment trust or foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise and (3) any person nominated or designated by (or pursuant to authority granted by) the Trust Managers or any committee thereof to serve in any of the capacities referred to in clauses (1) or (2) hereof.

(ii) "Official Capacity" means (1) when used with respect to a Trust Manager, the office of Trust Manager of the Company and (2) when used with respect to a person other than a Trust Manager, the elective or appointive office of the Company held by such person or the employment or agency relationship undertaken by such person on behalf of the Company or Operating Partnership, but in each case does not include service for any other real estate investment trust or foreign or domestic corporation or any partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise.

(iii) "Proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding, and any inquiry or investigation that could lead to such an action, suit or proceeding.

(b) The Company shall indemnify every Indemnitee against all judgments, penalties (including excise and similar taxes), fines, amounts paid in settlement and reasonable expenses actually incurred by the Indemnitee in connection with any Proceeding in which he or she was, is or is threatened to be named defendant or respondent, or in which he or she was or is a witness without being named a defendant or respondent, by reason, in whole or in part, of his or her serving or having served, or having been nominated or designated to serve, in any of the capacities referred to in Section 9.2(a)(i), to the fullest extent that indemnification is permitted by the Texas REIT Act as the same exists or may hereafter be amended (but, in the case of any such

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amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than the law permitted the Company to provide prior to such amendment) or any other applicable laws presently or hereinafter in effect, provided,

(i) that the Indemnity determined, in good faith, that the course of conduct which caused the loss or liability was in the best interests of the Company, and

(ii) the Company shall not indemnify or hold harmless the Indemnitee if: (1) in the case that the Indemnitee is a Trust Manager (other than an Independent Trust Manager) or an Advisor, the loss or liability was the result of negligence or misconduct by the Indemnitee, or (2) in the case that the Indemnitee is an Independent Trust Manager, the loss or liability was the result of gross negligence or willful misconduct by the Indemnitee.

The Company shall not provide indemnification for any loss, liability or expense arising from or out of an alleged violation of federal or state securities laws by such party unless at least one of the following conditions are met:

(X) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the Indemnitee,

(Y) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the Indemnitee; or

(Z) 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 securities of the Company were offered or sold as to indemnification for violations of securities laws.

Any indemnification of expenses or agreement to hold harmless may be paid only out of the Net Assets of the Company and no portion may be recoverable from the Shareholders. An Indemnitee shall be deemed to have been found liable in respect of any claim, issue or matter only after the Indemnitee shall have been so adjudged by a court of competent jurisdiction after exhaustion of all appeals therefrom. Reasonable expenses shall include, without limitation, all court costs and all fees and disbursements of attorneys for the Indemnitee.

(c) Reasonable expenses (including court costs and attorneys' fees) incurred by an Indemnitee who was or is a witness or was, is or is threatened to be made a named defendant or respondent in a Proceeding, shall be paid or reimbursed by the Company at reasonable intervals in advance of the final disposition of such Proceeding after receipt by the Company of a written undertaking by or on behalf of such Indemnitee to repay the amount paid or reimbursed by the Company, together with the applicable legal rate of interest, if it shall ultimately be determined that he or she is not entitled to be indemnified by the Company as authorized in this Section 9.2. Such written undertaking shall be an unlimited obligation of the Indemnitee but need not be secured and it may be accepted without reference to financial ability to make repayment. Notwithstanding any other provision of this Section 9.2, the Company may pay or reimburse expenses incurred by an Indemnitee in connection with his or her appearance as a witness or other participation in a Proceeding at a time when he or she is not named a defendant or

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respondent in the Proceeding. The Company may only pay or reimburse expenses and other costs for Indemnitees in the event (i) the applicable Proceeding relates to acts or omissions with respect to the performance of duties or services on behalf of the Company and (ii) the Proceeding was initiated by a third party who is not a shareholder of the Company or, if by a shareholder of the Company acting in his or her capacity as such, a court of competent jurisdiction approves such advancement or payment.

(d) The indemnification provided by this Section 9.2 shall (i) not be deemed exclusive of, or to preclude, any other rights to which those seeking indemnification may at any time be entitled under the Company's Bylaws, any law, agreement or vote of Shareholders or disinterested Trust Managers, or otherwise, or under any policy or policies of insurance purchased and maintained by the Company on behalf of any Indemnitee, both as to action in his or her Official Capacity and as to action in any other capacity, (ii) continue as to a person who has ceased to be in the capacity by reason of which he or she was an Indemnitee with respect to matters arising during the period he or she was in such capacity, and (iii) inure to the benefit of the heirs, executors and administrators of such a person.

(e) The provisions of this Section 9.2 are for the benefit of, and may be enforced by, each Indemnitee the same as if set forth in their entirety in a written instrument duly executed and delivered by the Company and such Indemnitee. The provisions of this Section 9.2 constitute a continuing offer to all present and future Indemnitees. The Company, by its adoption of this Declaration of Trust, (i) acknowledges and agrees that each Indemnitee of the Company has relied upon and will continue to rely upon the provisions of this
Section 9.2 in becoming and serving in any of the capacities referred to in paragraph (a)(i) of this Section 9.2, (ii) waives reliance upon, and all notice of acceptance of, such provisions by such Indemnitees and (iii) acknowledges and agrees that no present or future Indemnitee shall be prejudiced in his or her right to enforce the provisions of this Section 9.2 in accordance with their terms by any act or failure to act on the part of the Company.

(f) No amendment, modification or repeal of this Section 9.2 or any provision of this Section 9.2 shall in any manner terminate, reduce or impair the right of any past, present or future Indemnitees to be indemnified by the Company, nor the obligation of the Company to indemnify any such Indemnitees, under and in accordance with the provisions of this Section 9.2 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may be asserted.

(g) The indemnification provided by this Section 9.2 shall be subject to all valid and applicable laws and, in the event this Section 9.2 or any of the provisions hereof or the indemnification contemplated hereby are found to be inconsistent with or contrary to any such laws, such laws shall be deemed to control and this Section 9.2 shall be regarded as modified accordingly, and, as so modified, to continue in full force and effect.

SECTION 9.3 Limitation of Liability; Express Exculpatory Clauses in Instruments.

(a) No Trust Manager or officer of the Company shall be liable to the Company for any act, omission, loss, damage, or expense arising from the performance of his or her duties under the Company save only for his or her own willful misfeasance or willful malfeasance or gross negligence. In discharging their duties to the Company, Trust Managers and officers of the

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Company shall be entitled to rely upon experts and other matters as provided in the Texas REIT Act and the Company's Bylaws.

(b) In addition to, and in no respect whatsoever in limitation of, paragraph (a) of this Section 9.3, the liability of each Trust Manager for monetary damages shall be eliminated to the fullest extent permitted under the laws of the State of Texas, as the same exist or may be hereafter amended (but, in the case of any such amendment, only to the extent that such amendment permits broader elimination or limitation of liability of a Trust Manager than said law permitted prior to such amendment), and no Trust Manager shall be liable to the Company or its Shareholders for monetary damages except to the extent, and only to the extent, such elimination or limitation of liability is expressly prohibited under the laws of the State of Texas, as the same exist or may be hereafter amended (but, in the case of any such amendment, only to the extent that such amendment permits broader elimination or limitation of liability of a Trust Manager than said law permitted prior to such amendment). If after the date hereof the laws of the State of Texas are amended to authorize broader elimination or limitation of liability of a Trust Manager, upon the effective date of such amendment the liability of a Trust Manager shall without further act also be eliminated and limited to such broader extent to the fullest extent not prohibited by the laws of the State of Texas as so amended. This
Section 9.3 shall be deemed to be a contract with each Trust Manager who serves as such at any time while such provisions are in effect, and each such Trust Manager shall be deemed to be serving as such in reliance on the provisions of this Section 9.3. No repeal or amendment of this Declaration of Trust shall adversely affect any right or any elimination or limitation of liability of a Trust Manager existing at the time of the repeal or amendment.

(c) Neither the Shareholders nor the Trust Managers, officers, employees or agents of the Company shall be liable under any written instrument creating an obligation of the Company by reason of their being Shareholders, Trust Managers, officers, employees or agents of the Company, and all Persons shall look solely to the Company Property for the payment of any claim under or for the performance of that instrument. The omission of the foregoing exculpatory language from any instrument shall not affect the validity or enforceability of such instrument and shall not render any Shareholder, Trust Manager, officer, employee or agent liable thereunder to any third party, nor shall the Trust Managers or any officer, employee or agent of the Company be liable to anyone as a result of such omission.

ARTICLE X

AMENDMENT; REORGANIZATION; MERGER, ETC.

SECTION 10.1 Amendment.

(a) Subject to the Texas REIT Act and Section 10.1(c), this Declaration of Trust may be amended, without the necessity for concurrence by the Trust Managers, by the affirmative vote of the holders of not less than a majority of the Shares then outstanding and entitled to vote thereon, except that:

(i) Section 10.1 and Section 10.2 hereof may not be amended (or any other provision of this Declaration of Trust be amended or any provision of this Declaration of Trust be added that would have the effect of amending such sections) except by the

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affirmative vote of Shareholders holding at least 80% of outstanding Shares entitled to vote thereon;

(ii) Section 2.1 (insofar as the same relates solely to the designation of the number and removal of Trust Managers) may not be amended or repealed (or provisions approved that are inconsistent therewith) except by the affirmative vote of Shareholders holding at least 80% of outstanding Shares entitled to vote thereon;

(iii) Section 7.4 (relating to the Share ownership requirements) may not be amended or repealed (or provisions approved that are inconsistent therewith) except by the affirmative vote of Shareholders holding at least 80% of outstanding Shares entitled to vote thereon; and

(iv) no term or provision of the Declaration of Trust may be added, amended or repealed in any respect that would, in the determination of the Trust Managers, cause the Company not to qualify as REIT under the Code.

(b) The Trust Managers, by a majority vote, may amend provisions of this Declaration of Trust from time to time as necessary to enable the Company to qualify as a REIT under the REIT Provisions. With the exception of the foregoing, the Trust Managers may not amend this Declaration of Trust.

(c) No amendment to this Declaration of Trust may reduce amounts payable upon the liquidation of the Company or eliminate voting of any outstanding class of Shares of the Company unless approved by the affirmative vote of the holders of not less than 67% of the Shares then outstanding and entitled to vote thereon.

SECTION 10.2 Reorganization. Subject to the provisions of any class or series of Shares at the time outstanding, the Trust Managers shall have the power (i) to cause the organization of a Person to take over the Company Property and to carry on the affairs of the Company, or (ii) merge the Company into, or sell, convey and transfer the Company Property to, any such Person in exchange for securities thereof or beneficial interests therein, and the assumption by the transferee of the liabilities of the Company, and upon the occurrence of (i) or (ii) above terminate the Company and deliver such securities or beneficial interests ratably among the Shareholders according to the respective rights of the class or series of Shares held by them provided, however, that any such action shall have been approved, at a meeting of the Shareholders called for that purpose, by the affirmative vote of the holders of not less than a majority of the Shares then outstanding and entitled to vote thereon.

SECTION 10.3 Merger, Consolidation or Sale of Company Property.

(a) Subject to the provisions of any class or series of Shares at the time outstanding, the Trust Managers shall have the power to

(i) merge the Company into another entity,

(ii) consolidate the Company with one or more other entities into a new entity;

(iii) sell or otherwise dispose of all or substantially all of the Company Property; or

(iv) dissolve or liquidate the Company;

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provided, however, that such action shall have been approved, at a meeting of the Shareholders called for that purpose, by the affirmative vote of the holders of not less than a majority of the Shares then outstanding and entitled to vote thereon. Any such transaction involving an Affiliate of the Company or the Advisor also must be approved by a majority of the Trust Managers (including a majority of the Independent Trust Managers) not otherwise interested in such transaction as fair and reasonable to the Company and on terms and conditions not less favorable to the Company than those available from unaffiliated third parties.

(b) In connection with any proposed Roll-Up Transaction, an appraisal of all Properties shall be obtained from an Independent Expert. The Properties shall be appraised on a consistent basis, and the appraisal shall be based on the evaluation of all relevant information and shall indicate the value of the Properties as of a date immediately prior to the announcement of the proposed Roll-Up Transaction. The appraisal shall assume an orderly liquidation of Properties over a 12-month period. The terms of the engagement of the Independent Expert shall clearly state that the engagement is for the benefit of the Company and the Shareholders. A summary of the appraisal, indicating all material assumptions underlying the appraisal, shall be included in a report to Shareholders in connection with a proposed Roll-Up Transaction. In connection with a proposed Roll-Up Transaction, the Person sponsoring the Roll-Up Transaction shall offer to Shareholders who vote against the proposed Roll-Up Transaction the choice of:

(i) accepting the securities of a Roll-Up Entity offered in the proposed Roll-Up Transaction; or

(ii) one of the following:

(1) remaining as Shareholders of the Company and preserving their interests therein on the same terms and conditions as existed previously; or

(2) receiving cash in an amount equal to the Shareholder's pro rata share of the appraised value of the Net Assets of the Company.

(c) The Company is prohibited from participating in any proposed Roll-Up Transaction:

(i) which would result in the Shareholders having democracy rights in a Roll-Up Entity that are less than the rights provided for in Sections 8.1, 8.2, 8.4, and 9.1 of this Declaration of Trust;

(ii) which includes provisions that would operate as a material impediment to, or frustration of, the accumulation of shares by any purchaser of the securities of the Roll-Up Entity (except to the minimum extent necessary to preserve the tax status of the Roll-Up Entity), or which would limit the ability of an investor to exercise the voting rights of its Securities of the Roll-Up Entity on the basis of the number of Shares held by that investor;

(iii) in which investor's rights to access of records of the Roll-Up Entity will be less than those described in Sections 8.5 and 8.6 hereof; or

(iv) in which any of the costs of the Roll-Up Transaction would be borne by the Company if the Roll-Up Transaction is not approved by the Shareholders.

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ARTICLE XI

DURATION OF COMPANY

The Company shall continue perpetually unless dissolved pursuant to the provisions contained herein or pursuant to any applicable provision of the Texas REIT Act. The Company may be terminated at any time, without the necessity for concurrence by the Board of Trust Managers, by the vote or written consent of a majority of the outstanding Shares.

ARTICLE XII

MISCELLANEOUS

SECTION 12.1 Governing Law. These Articles of Incorporation are executed by the undersigned Trust Managers and delivered in the State of Texas with reference to the laws thereof, and the rights of all parties and the validity, construction and effect of every provision hereof shall be subject to and construed according to the laws of the State of Texas without regard to conflicts of laws provisions thereof.

SECTION 12.2 Provisions in Conflict with Law or Regulations.

If any provision of this Declaration of Trust or any application of any provision is determined to be invalid by any federal or state court having jurisdiction over the issue, the validity of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. In lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as a part of this Declaration of Trust, a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible, and the parties hereto request the court or any arbitrator to whom disputes relating to this Declaration of Trust are submitted to reform the otherwise illegal, invalid or unenforceable provision in accordance with this Section 12.2.

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EXHIBIT 3.2

BYLAWS

OF

HARTMAN COMMERCIAL PROPERTIES REIT


INDEX

ARTICLE I.  Offices............................................................1
         Section 1.1       Principal Office....................................1
         Section 1.2       Other Offices.......................................1

ARTICLE II.  Meetings of Shareholders..........................................1
         Section 2.1       Place of Meetings...................................1
         Section 2.2       Annual Meeting......................................1
         Section 2.3       Special Meetings....................................1
         Section 2.4       Notice of Meetings..................................1
         Section 2.5       Business at Annual Meeting..........................2
         Section 2.6       Voting Lists........................................3
         Section 2.7       Quorum..............................................3
         Section 2.8       Organization........................................4
         Section 2.9       Proxies.............................................4
         Section 2.10      Voting of Shares....................................5
         Section 2.11      Voting of Shares by Certain Holders.................5
         Section 2.12      Election of Trust Managers..........................6
         Section 2.13      Telephone Meetings..................................6
         Section 2.14      Action Without Meeting..............................6
         Section 2.15      Inspectors and Voting Procedures....................6

ARTICLE III.  Trust Managers...................................................7
         Section 3.1       Powers and Responsibilities.........................7
         Section 3.2       Number and Qualification............................7
         Section 3.3       Election and Term of Office.........................7
         Section 3.4       Nomination of Trust Managers........................7
         Section 3.5       Resignation.........................................9
         Section 3.6       Removal.............................................9
         Section 3.7       Vacancies...........................................9
         Section 3.8       Bond Not Required, Time Commitment..................9
         Section 3.9       Compensation.......................................10
         Section 3.10      Execution of Documents.............................10

ARTICLE IV.  Meetings of the Trust Managers...................................10
         Section 4.1       Place of Meetings..................................10
         Section 4.2       Annual Meeting.....................................10
         Section 4.3       Regular Meetings...................................10
         Section 4.4       Special Meetings...................................10
         Section 4.5       Quorum and Action..................................10

                                        i

         Section 4.6       Presumption of Assent to Action....................11
         Section 4.7       Telephone Meetings.................................11
         Section 4.8       Action Without Meeting.............................11
         Section 4.9       Minutes............................................11
         Section 4.10      Interest of Trust Managers.........................11
         Section 4.11      Right of Trust Managers and Officers to Own
                           Shares or Other Property and to Engage in Other
                           Business...........................................11
         Section 4.12      Transactions and Contracts Between Trust
                           Managers and the Trust.............................12
         Section 4.13      Persons Dealing with Trust Managers or Officers....12
         Section 4.14      Reliance ..........................................13
         Section 4.15      Liability of Trust Managers........................13

ARTICLE V.  Committees of the Trust Managers..................................13
         Section 5.1       Membership and Authorities.........................13
         Section 5.2       Minutes and Rules of Procedure.....................15
         Section 5.3       Vacancies..........................................15
         Section 5.4       Telephone Meetings.................................15
         Section 5.5       Action Without Meeting.............................15

ARTICLE VI.  Officers ........................................................15
         Section 6.1       Number ............................................15
         Section 6.2       Election, Term of Office and Qualification.........15
         Section 6.3       Subordinate Officers...............................15
         Section 6.4       Resignation........................................16
         Section 6.5       Removal ...........................................16
         Section 6.6       Vacancies..........................................16
         Section 6.7       The Chairman of the Board..........................16
         Section 6.8       The President......................................16
         Section 6.9       The Vice Presidents................................17
         Section 6.10      The Secretary......................................17
         Section 6.11      Assistant Secretaries..............................17
         Section 6.12      The Treasurer......................................17
         Section 6.13      Assistant Treasurers...............................18
         Section 6.14      Treasurer's Bond...................................18
         Section 6.15      Salaries ..........................................18
         Section 6.16      Execution of Documents.............................18

ARTICLE VII.  Trust Shares....................................................18
         Section 7.1       Share Certificates.................................18
         Section 7.2       Lost or Destroyed Certificates.....................19
         Section 7.3       Transfer of Shares.................................19
         Section 7.4       Ownership of Shares................................19
         Section 7.5       Closing of Transfer Books..........................19

                                       ii

         Section 7.6       Dividends..........................................20
         Section 7.7       Reserves ..........................................20

ARTICLE VIII.  Indemnification................................................20
         Section 8.1       General ...........................................20
         Section 8.2       Insurance..........................................21

ARTICLE IX.  General Provisions...............................................21
         Section 9.1       General Policies...................................21
         Section 9.2       Limited Liability of Shareholders..................21
         Section 9.3       Waiver of Notice...................................21
         Section 9.4       Seal...............................................21
         Section 9.5       Fiscal Year........................................22
         Section 9.6       Checks, Notes, etc.................................22
         Section 9.7       Examination of Books and Records...................22
         Section 9.8       Voting of Voting Securities Held by the Trust......22
         Section 9.9       Number, Gender, Etc................................22

ARTICLE X.  Amendments .......................................................22
         Section 10.1      Amendment of Bylaws................................22

ARTICLE XI.  Subject to All Laws..............................................23
         Section 11.1      Subject to All Laws................................23

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HARTMAN COMMERCIAL PROPERTIES REIT

BYLAWS

ARTICLE I.

OFFICES

Section 1.1 PRINCIPAL OFFICE. The principal office of the Trust shall be in the City of Houston, Texas, or at such other location as the Trust Managers may from time to time determine.

Section 1.2 Other Offices. The Trust may also have offices at such other places, both within and without the State of Texas, as the Trust Managers may from time to time determine or the business of the Trust may require.

ARTICLE II.

MEETINGS OF SHAREHOLDERS

Section 2.1 PLACE OF MEETINGS. The Trust Managers may designate any place, either within or without the State of Texas, as the place of meeting for any annual meeting or for any special meeting called by the Trust Managers. A waiver of notice signed by all shareholders entitled to vote at a meeting may designate any place, either within or without the State of Texas, as the place for the holding of such meeting. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the principal office of the Trust.

Section 2.2 ANNUAL MEETING. The annual meeting of shareholders shall be held at such time, on such day and at such place as may be designated by the Trust Managers. At the annual meeting, the Shareholders shall, subject to
Section 2.5 and Section 3.3 of these Bylaws, elect Trust Managers and transact such other business as may properly be brought before the meeting. Failure to hold the annual meeting at the designated time shall not cause the dissolution of the Trust.

Section 2.3 SPECIAL MEETINGS. Special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by law or by the Declaration of Trust, may be called by the Trust Managers, any officer of the Trust or the holders of at least five percent of all of the shares entitled to vote at the meetings. Business transacted at all special meetings shall be confined to the purpose or purposes stated in the notice of special meeting.

Section 2.4 NOTICE OF MEETINGS. Written or printed notice of all meetings of shareholders stating the place, day and hour thereof, and in the case of a special meeting the purpose or

1

purposes for which the meeting is called, shall be personally delivered or mailed, not less than 10 days nor more than 60 days prior to the date of the meeting, to the shareholders of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States Mail addressed to the shareholder at his or her address as it appears on the share transfer books of the Trust and the postage shall be prepaid. Personal delivery of any such notice to any officer of a corporation or association, or to any member of a partnership, shall constitute delivery of such notice to such corporation, association or partnership.

Section 2.5 BUSINESS AT ANNUAL MEETING. No business may be transacted at an annual meeting of shareholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Trust Managers (or any duly authorized committee thereof),
(b) otherwise properly brought before the annual meeting by or at the direction of the Trust Managers (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by any shareholder of the Trust (i) who is a shareholder of record on the date of the giving of the notice provided for in this Section 2.5 and on the record date for the determination of shareholders entitled to vote at such annual meeting, and (ii) who complies with the notice procedures set forth in this Section 2.5.

In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, such shareholder must have given timely notice thereof in proper written form to the Secretary of the Trust. To be timely, a shareholder's notice to the Secretary must be delivered to or mailed and received at the principal office of the Trust not less than 60 days nor more than 90 days prior to the date of the applicable annual meeting of shareholders, provided, however, that in the event that less than 70 days notice or prior public disclosure of the date of the meeting be given or made, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the applicable annual meeting was mailed or such public disclosure of the date of such annual meeting was made, whichever first occurs. For purposes of this Section 2.5, the date of a public disclosure shall include, but not be limited to, the date on which such disclosure is made in a press release reported by the Dow Jones News Services, the Associated Press or any comparable news service or in a document publicly filed by the Trust with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) (or the rules and regulations promulgated thereunder) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").

To be in proper written form, a shareholder's notice to the Secretary must set forth as to each matter such shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such shareholder, (iii) the number of shares of the Trust that are owned beneficially or of record by such shareholder, (iv) a description of all arrangements or understandings between such shareholder and any other person or persons (including their names) in connection with the proposal of such business by such shareholder and any material interest of such shareholder in such business, and (v) a

2

representation that such shareholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting.

No business shall be conducted at the annual meeting of shareholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 2.5; provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 2.5 shall be deemed to preclude discussion by any shareholder of any such business. If the presiding officer of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the presiding officer shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted at such meeting.

Section 2.6 VOTING LISTS. The officer or agent having charge of the share transfer books for shares of the Trust shall make available for inspection by shareholders, at least 10 days before each meeting of the shareholders, a complete list of shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of each and the number of shares held by each. The list shall be kept on file at the registered office of the Trust and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder for the duration of the meeting. The original share transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. Failure to comply with this Section 2.6 with respect to any meeting of shareholders shall not affect the validity of any action taken at such meeting.

Section 2.7 QUORUM. The holders of a majority of the shares entitled to vote, present in person or represented by proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business, except as otherwise provided by law or by the Declaration of Trust. If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote at such meeting, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time without notice other than announcement at the meeting until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally convened. The shareholders present at a duly organized meeting at which a quorum was present may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum present, provided that there remain at such meeting the holder or holders of at least one-third of the shares issued and outstanding and entitled to vote thereat, present in person or represented in the manner specified above. A holder of a share shall be treated as being present at a meeting if the holder of such share is (i) present in person at the meeting, or
(ii) represented at the meeting by a valid proxy, whether the instrument granting such proxy is

3

marked as casting a vote or abstaining, is left blank or does not empower such proxy to vote with respect to some or all matters to be voted upon at the meeting.

Section 2.8 ORGANIZATION. (a) The Chairman of the Board, if one shall be elected, shall preside at all meetings of the shareholders. In the absence of the Chairman of the Board or should one not be elected, the following officers shall preside in order of priority: President, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Vice President-Legal, or Secretary. If no such officer is available, the meeting shall be adjourned until such an officer is available to preside over the meeting. The presiding officer shall set the agenda for the meeting, shall conduct all aspects of the meeting and shall establish and interpret the rules of order for the conduct of the meeting.

(b) The Secretary of the Trust shall act as secretary at all meetings of the shareholders. In his or her absence, an Assistant Secretary shall so act and in the absence of all of these officers, the presiding officer may appoint any person to act as secretary of the meeting.

Section 2.9 PROXIES. (a) At any meeting of the shareholders, every shareholder entitled to vote at such meeting shall be entitled to vote in person or by proxy executed in writing by such shareholder or by his or her duly authorized attorney-in-fact. Proxies shall be filed with the Secretary or Trust Managers immediately after the meeting has been called to order.

(b) No proxy shall be valid after 11 months from the date of its execution unless such proxy otherwise provides.

(c) A proxy shall be revocable unless the proxy form conspicuously states that the proxy is irrevocable and the proxy is coupled with an interest. A proxy which is revocable as aforesaid may be revoked at any time by filing with the Secretary an instrument revoking it or a duly executed proxy bearing a later date. Any revocable proxy which is not so revoked shall, subject to paragraph (b) above, continue in full force and effect. Proxies coupled with an interest include the appointment as proxy of:

(i) a pledgee;

(ii) a person who purchased or agreed to purchase, or owns or holds an option to purchase, the shares;

(iii) a creditor of the Trust who extended the Trust credit under terms requiring the appointment;

(iv) an employee of the Trust whose employment contract requires the appointment; or

4

(v) a party to a voting agreement created under Subsection (B) of Section 13.20 of the Texas REIT Act.

(d) In the event that any instrument in writing shall designate two or more persons to act as proxies, a majority of such persons present at the meeting or, if only one shall be present, then that one, shall have and may exercise all of the powers conferred by such written instrument upon all the persons so designated unless the instrument shall otherwise provide.

Section 2.10 VOTING OF SHARES. Except as otherwise provided by law, the Declaration of Trust or these Bylaws, each shareholder shall be entitled at each meeting of shareholders to one vote on each matter submitted to a vote at such meeting for each share having voting rights registered in his or her name on the books of the Trust at the time of the closing of the share transfer books (or at the record date) for such meeting. When a quorum is present at any meeting (and notwithstanding the subsequent withdrawal of enough shareholders to leave less than a quorum present) in accordance with Section 2.7 of these Bylaws, the votes of holders of a majority of the shares entitled to vote, present in person or represented by proxy, shall decide any matter submitted to such meeting, unless the matter is one upon which by law or by express provision of the Declaration of Trust or these Bylaws the vote of a greater number is required, in which case the vote of such greater number shall govern and control the decision of such matter. In determining the number of shares entitled to vote, shares abstaining from voting or not voted on a matter (including elections) will not be treated as entitled to vote. The provisions of this Section 2.10 will govern with respect to all votes of shareholders except as otherwise provided for in these Bylaws or the Declaration of Trust or by some specific statutory provision superseding the provisions contained in these Bylaws or the Declaration of Trust.

Section 2.11 VOTING OF SHARES BY CERTAIN HOLDERS. (a) Shares standing in the name of another business organization may be voted by such officer, agent or proxy as the organizational documents of such organization may authorize or, in the absence of such authorization, as may be determined by the governing body of such organization.

(b) Shares held by an administrator, executor, guardian or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name so long as such shares forming a part of an estate are in the possession and form a part of the estate being served by him or her. Shares standing in the name of a trustee may be voted by him or her, either in person or by proxy, but no trustee shall be entitled to vote shares held by him or her without a transfer of such shares into his or her name as trustee.

(c) Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver, without the transfer thereof into his or her name if authority to do so is contained in an appropriate order of the court by which such receiver was appointed.

5

(d) A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred.

Section 2.12 ELECTION OF TRUST MANAGERS. At each election for Trust Managers, each shareholder entitled to vote at such election shall, unless otherwise provided by the Declaration of Trust or by applicable law, have the right to vote the number of shares owned by such shareholder for as many persons as there are to be elected and for whose election he or she has a right to vote. Unless otherwise provided by the Declaration of Trust, no shareholder shall have the right or be permitted to cumulate votes on any basis.

Section 2.13 TELEPHONE MEETINGS. Shareholders may participate in and hold a meeting of the shareholders by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this
Section shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.

Section 2.14 ACTION WITHOUT MEETING. Any action required by law, the Declaration of Trust or these Bylaws to be taken at a meeting of the shareholders (or any action which may be taken at a meeting of the shareholders) may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a unanimous vote of the shareholders.

Section 2.15 INSPECTORS AND VOTING PROCEDURES. (a) The Trust may, in advance of any meeting of shareholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Trust may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of shareholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability.

(b) The inspectors shall (i) ascertain the number of shares outstanding and the voting power of each, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and
(v) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist them in the performance of their duties.

6

(c) The date and time of the opening and closing of the polls for each matter upon which the shareholders will vote at a meeting shall be announced at the meeting. No ballots, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless a court of appropriate jurisdiction, upon application by a shareholder, determines otherwise.

(d) In determining the validity and counting of proxies and ballots, the inspectors may examine and consider such records or factors as allowed by the Texas Real Estate Investment Trust Act (the "Texas REIT Act").

ARTICLE III.

TRUST MANAGERS

Section 3.1 POWERS AND RESPONSIBILITIES. The business and affairs of the Trust shall be managed under the direction of its Trust Managers who may exercise all such powers of the Trust and do all such lawful acts and things as are not by statute, the Declaration of Trust or these Bylaws directed or required to be exercised or done by the shareholders. The enumeration of any specific power or authority herein shall not be construed as limiting the aforesaid powers or the general powers or authority or any other specified power or authority conferred herein upon the Trust Managers.

Section 3.2 NUMBER AND QUALIFICATION. There shall at all times be no less than three nor more than ten Trust Managers who, subject to Section 3.3 below, shall be elected annually by the shareholders. Subject to any limitations specified by law or in the Declaration of Trust, the number of Trust Managers may be fixed from time to time by resolution adopted by a majority of the Trust Managers. No decrease in the number of Trust Managers shall have the effect of shortening the term of any incumbent Trust Manager. Trust Managers need not be shareholders or residents of the State of Texas.

Section 3.3 ELECTION AND TERM OF OFFICE. Trust Managers shall be elected at the annual meeting of the shareholders (except as provided in Section 3.7) by the affirmative vote of the holders of a majority of the shares of the Trust present in person or represented by proxy at such meeting; provided, however, that any Trust Manager that has been previously elected as a Trust Manager by the shareholders who is not re-elected by such majority vote at a subsequent annual meeting shall nevertheless remain in office until his or her successor is elected and qualified. Each Trust Manager shall hold office until his or her successor is elected and qualified, or until his or her death, resignation or removal in the manner provided in these Bylaws.

Section 3.4 NOMINATION OF TRUST MANAGERS. Only persons who are nominated in accordance with the following procedures shall be eligible for election as Trust Managers of the Trust. Nominations of persons for election as Trust Managers may be made at any annual meeting of shareholders (a) by or at the direction of the Trust Managers (or any duly authorized

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committee thereof) or (b) by any shareholder of the Trust (i) who is a shareholder of record on the date of the giving of the notice provided for in this Section 3.4 and on the record date for the determination of shareholders entitled to vote at such annual meeting, and (ii) who complies with the notice procedures set forth in this Section 3.4.

In addition to any other applicable requirements, for a nomination to be made by a shareholder, such shareholder must have given timely notice thereof in proper written form to the Secretary of the Trust. To be timely, a shareholder's notice to the Secretary must be delivered to or mailed and received at the principal offices of the Trust not less than 60 days nor more than 90 days prior to the date of the applicable annual meeting of shareholders; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the applicable annual meeting was mailed or such public disclosure of the date of such annual meeting was made, whichever first occurs. For purposes of this Section 3.4, the date of a public disclosure shall include, but not be limited to, the date on which such disclosure is made in a press release reported by the Dow Jones News Services, the Associated Press or any comparable national news service or in a document publicly filed by the Trust with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) (or the rules and regulations promulgated thereunder) of the Exchange Act.

To be in proper written form, a shareholder's notice to the Secretary must set forth (a) as to each person whom the shareholder proposes to nominate for election as a Trust Manager (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the number of shares of the Trust that are owned beneficially or of record by the person, and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitation of proxies for election of Trust Managers pursuant to Section 14 of the Exchange Act, and (b) as to the shareholder giving the notice (i) the name and record address of such shareholder, (ii) the number of shares of the Trust that are owned beneficially or of record by such shareholder, (iii) a description of all arrangements or understandings between such shareholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such shareholders, (iv) a representation that such shareholder intends to appear in person or by proxy at the meeting to nominate the persons named in the notice, and (v) any other information relating to such shareholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of Trust Managers pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a Trust Manager if elected.

No person shall be eligible for election as a Trust Manager of the Trust unless nominated in accordance with the procedures set forth in this Section
3.4. If the presiding officer of the

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meeting determines that a nomination was not made in accordance with the foregoing procedures, the presiding officer shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded.

Section 3.5 RESIGNATION. Any Trust Manager may resign at any time by giving written notice to the remaining Trust Managers. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. A Trust Manager judged incompetent or for whom a guardian or conservator has been appointed, shall be deemed to have resigned as of the date of such adjudication or appointment.

Section 3.6 REMOVAL. Trust Manager may be removed at any time with or without cause by the vote of holders of shares representing two-thirds of the total votes authorized to be cast by shares then outstanding and entitled to vote thereon. Upon the resignation or removal of any Trust Manager, or if the Trust Manager otherwise ceases to be a Trust Manager, he or she shall execute and deliver such documents as the remaining Trust Managers shall require for the conveyance of any Trust property held in his or her name, shall account to the remaining Trust Managers as they require for all property which such person holds as Trust Manager and shall thereupon be discharged as Trust Manager. Upon the incapacity or death of any Trust Manager, his or her legal representative shall perform the acts set forth in the preceding sentence and the discharge mentioned therein shall run to such legal representative and to the incapacitated Trust Manager or the estate of the deceased Trust Manager, as the case may be.

Section 3.7 VACANCIES. If there is an increase in the number of Trust Managers or if any or all of the Trust Managers cease to be Trust Managers hereunder, for any reason, such event shall not terminate the Trust or affect its continuity. Until vacancies are filled, the remaining Trust Manager or Trust Managers may exercise the powers of the Trust Managers hereunder. Vacancies may be filled by successor Trust Managers either appointed by a majority of the remaining Trust Managers (or by the sole remaining Trust Manager, if applicable) or by the affirmative vote of the holders of a majority of the shares of the Trust present in person or represented by proxy at an annual or special meeting of the shareholders. Any Trust Manager elected to fill a vacancy shall hold office until the next annual meeting for the election of Trust Managers. The election of a successor Trust Manager shall be considered an amendment to the Declaration of Trust.

Section 3.8 BOND NOT REQUIRED, TIME COMMITMENT. Unless otherwise required by law, no Trust Manager shall be required to give bond, surety or security in any jurisdiction for the performance of his or her duties or obligations to the Trust. No Trust Manager shall be required to devote his or her entire time to the business and affairs of the Trust.

Section 3.9 COMPENSATION. Trust Managers may receive compensation for their services to the Trust as may be determined from time to time by the Trust Managers. The Trust Managers may delegate to any committee the power to fix from time to time the compensation of

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Trust Managers. Officers of the Trust who also serve as Trust Managers shall not receive compensation for their service as Trust Managers.

Section 3.10 EXECUTION OF DOCUMENTS. Each Trust Manager and any one of them is authorized to execute on behalf of the Trust any document or instrument of any nature whatsoever, provided that the execution by the Trust of any such document or instrument shall have been previously authorized by such action of the Trust Managers as may be required by statute, the Declaration of Trust or these Bylaws.

ARTICLE IV.

MEETINGS OF THE TRUST MANAGERS

Section 4.1 PLACE OF MEETINGS. The Trust Managers of the Trust may hold their meetings, both regular and special, either within or without the State of Texas.

Section 4.2 ANNUAL MEETING. The annual meeting of the Trust Managers shall be held immediately following the adjournment of the annual meeting of the shareholders and no notice of such meeting shall be necessary to the Trust Managers in order to legally constitute the meeting, provided a quorum shall be present, or they may meet at such time and place as shall be fixed by the consent in writing of all of the Trust Managers.

Section 4.3 REGULAR MEETINGS. Regular meetings of the Trust Managers, in addition to the annual meetings referred to in Section 4.2, may be held without notice at such time and place as shall from time to time be determined by the Trust Managers.

Section 4.4 SPECIAL MEETINGS. Special meetings of the Trust Managers may be called by the Chairman of the Board, if one shall be elected, or by the President, if a Chairman of the Board is not elected, on three business day's notice (oral or written) to each Trust Manager. Special meetings shall be called by the Chairman of the Board (if one shall be elected), the President or the Secretary on like notice on the written request of any Trust Manager. Neither the purpose of, nor the business to be transacted at, any special meeting of the Trust Managers need be specified in the notice or waiver of notice of such meeting. Attendance of a Trust Manager at a meeting shall constitute a waiver of notice of such meeting except where a Trust Manager attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the grounds that the meeting is not lawfully called or convened.

Section 4.5 QUORUM AND ACTION. At all meetings of the Trust Managers, the presence of a majority of the Trust Managers shall be necessary and sufficient to constitute a quorum for the transaction of business. The act of a majority of the Trust Managers at any meeting at which a quorum is present shall be the act of the Trust Managers unless the act of a greater number is required by law, the Declaration of Trust or these Bylaws. If a quorum shall not be present at

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any meeting of Trust Managers, the Trust Managers present may adjourn the meeting from time to time without notice other than announcement at the meeting until a quorum shall be present.

Section 4.6 PRESUMPTION OF ASSENT TO ACTION. A Trust Manager who is present at a meeting of the Trust Managers at which action on any Trust matter is taken shall be presumed to have assented to the action taken unless his or her dissent shall be entered in the minutes of the meeting or unless such Trust Manager (i) files a written dissent to such action with the Secretary of the meeting before the adjournment thereof or (ii) forwards such dissent by registered mail to the Secretary of the Trust immediately after the adjournment of the meeting. Such right to dissent shall not apply to a Trust Manager who voted in favor of such action.

Section 4.7 TELEPHONE MEETINGS. Trust Managers may participate in and hold a meeting of the Trust Managers by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this Section 4.7 shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.

Section 4.8 ACTION WITHOUT MEETING. Any action required or permitted to be taken at a meeting of the Trust Managers may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the Trust Managers, and such consent shall have the same force and effect as a unanimous vote at a meeting.

Section 4.9 MINUTES. The Trust Managers shall keep regular minutes of their proceedings. The minutes shall be placed in the minute book of the Trust.

Section 4.10 INTEREST OF TRUST MANAGERS. With respect to the actions of the Trust Managers, Trust Managers who have any direct or indirect interest in connection with any matter being acted upon may be counted for all quorum purposes under this Article IV.

Section 4.11 RIGHT OF TRUST MANAGERS AND OFFICERS TO OWN SHARES OR OTHER PROPERTY AND TO ENGAGE IN OTHER BUSINESS. Any Trust Manager or officer of the Trust may acquire, own, hold and dispose of shares of the Trust for his or her individual account, and may exercise all rights of a shareholder to the same extent and in the same manner as if he or she were not a Trust Manager or officer of the Trust. Except as provided specifically to the contrary in a written agreement with the Trust, any Trust Manager or officer of the Trust may, in a capacity other than that of Trust Manager or officer of the Trust, have business interests and engage in business activities similar to or in addition to those relating to the Trust, which interests and activities may be similar to and competitive with those of the Trust and may include the acquisition, syndication, holding, management, development, operation or disposition, for his or her own account or for the account of others, of interests in mortgages, interests in real property, or interests in entities engaged in the real estate business. Except as provided specifically to the contrary in a written agreement with the Trust, each Trust Manager and officer of the Trust shall

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be free of any obligation to present to the Trust any investment opportunity which comes to him or her in any capacity other than solely as Trust Manager or agent of the Trust, even if such opportunity is of a character which, if presented to the Trust, could be exploited by the Trust. Subject to the provisions of Article III hereof, any Trust Manager or officer of the Trust may be a trustee, officer, director, shareholder, partner, member, advisor or employee of, or otherwise have a direct or indirect interest in any person who may be engaged to render advice or services to the Trust, and may receive compensation from such person as well as compensation as Trust Manager or officer or otherwise hereunder.

Section 4.12 TRANSACTIONS AND CONTRACTS BETWEEN TRUST MANAGERS AND THE TRUST. Subject to the limitations set forth in the Declaration of Trust, no contract or transaction between the Trust and one or more of its Trust Managers or officers, or between the Trust and any other real estate investment trust, partnership, association or other organization in which one or more of the Trust Managers or officers are trust managers, directors or officers, or have a financial interest, shall be void or voidable solely for this reason, solely because the Trust Manager or officer is present at or participates in the meeting of the Trust Manager or committee thereof which authorizes the contract or transaction, or solely because his, her, or their votes are counted for such purpose, if:

(a) 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 Trust Managers or the committee, and the Trust Managers or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested Trust Managers, even though the disinterested Trust Managers constitute less than a quorum; or

(b) 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

(c) The contract or transaction is fair to the Trust as of the time it is authorized, approved or ratified by the Trust Managers, a committee thereof, or the shareholders.

Section 4.13 PERSONS DEALING WITH TRUST MANAGERS OR OFFICERS. Any act of the Trust Managers or officers of the Trust purporting to be done in their capacity as such shall, as to any person dealing with such Trust Managers or officers, conclusively be deemed to be within the purposes of the Trust and within the powers of the Trust Managers or officers. No person dealing with the Trust Managers or any of them or with the officers of the Trust or any of them, shall be bound to see to the application of any funds or property passing into their hands or control. The receipt of the Trust Managers or any of the officers of the Trust of money or other consideration shall be binding upon the Trust.

Section 4.14 Reliance. Trust Managers and officers of the Trust shall not be liable for any claims or damages that may result from their acts in the discharge of any duty imposed or

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power conferred upon them by the Trust, if, in the exercise of ordinary care, they acted in good faith and in reliance upon the written opinion of an attorney for the Trust. In discharging their duties, Trust Managers and officers of the Trust, when acting in good faith and exercising ordinary care, may rely upon financial statements of the Trust, stated in a written report by an independent certified public accountant, to fairly present the financial position of the Trust. The Trust Managers and officers of the Trust may rely upon any instrument or other document reasonably believed by them to be genuine.

Section 4.15 LIABILITY OF TRUST MANAGERS. No Trust Manager of the Trust shall be liable to the Trust for any act, omission, loss, damage or expense arising from the performance of his or her duty under the Trust, except to the extent specifically required by law, the Declaration of Trust or these Bylaws.

ARTICLE V.

COMMITTEES OF THE TRUST MANAGERS

Section 5.1 MEMBERSHIP AND AUTHORITIES. The Trust Managers, by resolution adopted by a majority of the Trust Managers, may designate from among its members one or more committees, each of which shall be comprised of one or more of its members, and may designate one or more of its members as alternate members of any committee, who may, subject to any limitations imposed by the Trust Managers, replace absent or disqualified members at any meeting of that committee. Any such committee, to the extent provided in such resolution or in the Declaration of Trust or these Bylaws, shall have and may exercise all of the authority of the Trust Managers, subject to the limitations set forth in paragraphs (b) and (c) of this Section 5.1.

(b) No committee of the Trust Managers shall have the authority of the Trust Managers in reference to:

(ii) amending the Declaration of Trust, except that a committee may, to the extent provided in the resolution designating that committee or in the Declaration of Trust or these Bylaws, exercise the authority of the Trust Managers to classify or reclassify shares in accordance with Section 3.30 of the Texas REIT Act;

(iii) proposing a reduction of the stated capital of the Trust;

(iv) approving a plan of merger or share exchange of the Trust;

(v) recommending to the shareholders the sale, lease or exchange of all or substantially all of the property or assets of the Trust otherwise than in the usual and regular course of its business;

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(vi) recommending to the shareholders a voluntary dissolution of the Trust or a revocation thereof;

(vii) amending, altering or repealing these Bylaws or adopting new Bylaws of the Trust;

(viii) filling vacancies in the Trust Managers;

(ix) filling vacancies in or designating alternate members of any such committee;

(x) filling any Trust Manager vacancy occurring because of an increase in the number of Trust Managers;

(xi) electing or removing officers of the Trust or members or alternate members of any such committee;

(xii) fixing the compensation of any member or alternate members of such committee; or

(xiii) altering or repealing any resolution of the Trust Managers that by its terms provides that it shall not be so amendable or repealable.

(c) Unless the resolution designating a particular committee, the Declaration of Trust or these Bylaws expressly so provide, no committee of the Trust Managers shall have the authority to authorize a distribution or to authorize the issuance of shares of the Trust.

(d) The designation of a committee of the Trust Managers and the delegation thereto of authority shall not operate to relieve the Trust Managers, or any member thereof, of any responsibility imposed by law. A majority of the number of members of any such committee shall constitute a quorum for the transaction of business unless a greater number is required by a resolution adopted by the Trust Managers. The act of the majority of the members of a committee present at any meeting at which a quorum is present shall be the act of the committee, unless the act of a greater number is required by a resolution adopted by the Trust Managers. Each such committee may elect a chairman and appoint such subcommittees and assistants as it may deem necessary. Any member of any such committee elected or appointed by the Trust Managers may be removed by the Trust Managers whenever in its judgment the best interests of the Trust will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of a member of a committee shall not of itself create contract rights.

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Section 5.2 MINUTES AND RULES OF PROCEDURE. Each committee designated by the Trust Managers shall keep regular minutes of its proceedings and report the same to the Trust Managers when required. Subject to the provisions of these Bylaws, the members of any committee may fix such committee's own rules of procedure.

Section 5.3 VACANCIES. The Trust Managers shall have the power at any time to fill vacancies in, to change the membership of, or to dissolve, any committee.

Section 5.4 TELEPHONE MEETINGS. Members of any committee designated by the Trust Managers may participate in or hold a meeting by use of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this Section 5.4 shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called or convened.

Section 5.5 ACTION WITHOUT MEETING. Any action required or permitted to be taken at a meeting of any committee designated by the Trust Managers may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the members of the committee, and such consent shall have the same force and effect as a unanimous vote at a meeting.

ARTICLE VI.

OFFICERS

Section 6.1 NUMBER. The officers of the Trust shall include a President and a Secretary. The Trust Managers may also elect a Chairman of the Board, one or more Vice Presidents, a Treasurer, one or more Assistant Secretaries and one or more Assistant Treasurers. One person may hold any two or more of these offices.

Section 6.2 ELECTION, TERM OF OFFICE AND QUALIFICATION. The Trust Managers shall elect officers, none of whom need be a Trust Manager, except for the Chairman of the Board, if one shall be elected, at any time and from time to time as they deem necessary. Each officer so elected shall hold office until his or her successor shall have been duly elected and qualified or until his or her death, resignation or removal in the manner hereinafter provided.

Section 6.3 SUBORDINATE OFFICERS. The Trust Managers may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms, have such authority and perform such duties as the Trust Managers may from time to time determine. The Trust Managers may delegate to any committee or officer the power to appoint any such subordinate officer or agent. No subordinate officer appointed by any committee or superior

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officer as aforesaid shall be considered as an officer of the Trust, the officers of the Trust being limited to the officers elected or appointed as such by the Trust Managers.

Section 6.4 RESIGNATION. Any officer may resign at any time by giving written notice thereof to the Trust Managers or to the President or Secretary of the Trust. Any such resignation shall take effect at the time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

Section 6.5 REMOVAL. Any officer elected or appointed by the Trust Managers may be removed by the Trust Managers, whenever in their judgment the best interests of the Trust will be served thereby, by majority vote of the Trust Managers. Any other officer may be removed at any time with or without cause by the Trust Managers or by any committee or superior officer upon whom such power of removal may be conferred by the Trust Managers. The removal of any officer shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create any contract rights.

Section 6.6 VACANCIES. A vacancy in any office shall be filled for the unexpired portion of the term by the Trust Managers, but in case of a vacancy occurring in an office filled by a committee or superior officer in accordance with the provisions of Section 6.3, such vacancy may be filled by such committee or superior officer.

Section 6.7 THE CHAIRMAN OF THE BOARD. The Chairman of the Board, if one shall be elected, shall be the chief executive officer of the Trust, shall preside at all meetings of the shareholders and Trust Managers, shall be ex officio a member of all standing committees, shall have general and active management of the business of the Trust, shall have the general supervision and direction of all other officers of the Trust with full power to see that their duties are properly performed and shall see that all orders and resolutions of the Trust Managers are carried into effect. He or she may sign, with any other proper officer, certificates for shares of the Trust and any deeds, bonds, mortgages, contracts and other documents which the Trust Managers have authorized to be executed, except where required by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Trust Managers or these Bylaws, to some other officer or agent of the Trust. In addition, the Chairman of the Board shall perform whatever duties and shall exercise all powers that are given to him or her by the Trust Managers.

Section 6.8 THE PRESIDENT. If a Chairman of the Board is not elected, the President shall be the chief executive officer of the Trust and shall have the powers and duties of the Chairman of the Board as set forth in Section 6.7. In the absence of the Chairman of the Board, if one shall be elected, the President shall preside at all meetings of the shareholders and Trust Managers. He or she may sign, with any other proper officer, certificates for shares of the Trust and any deeds, bonds, mortgages, contracts and other documents which the Trust Managers have authorized to be executed, except where required by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Trust

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Managers or these Bylaws to some other officer or agent of the Trust. In addition, the President shall perform whatever duties and shall exercise whatever powers given to him or her by the Trust Managers or by the Chairman of the Board, if one shall be elected.

Section 6.9 THE VICE PRESIDENTS. The Vice Presidents shall perform such duties as are given to them by these Bylaws and as may from time to time be assigned to them by the Trust Managers, by the Chairman of the Board, if one shall be elected, or by the President, if a Chairman of the Board is not elected. Any Vice President may sign, with any other proper officer, certificates for shares of the Trust. At the request of the President, or in his or her absence or disability, the Vice President designated by the President (or in the absence of such designation, the senior Vice President), shall perform the duties and exercise the powers of the President.

Section 6.10 THE SECRETARY. The Secretary, when available, shall attend all meetings of the Trust Managers and all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose and shall perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Trust Managers as required by law or these Bylaws, be custodian of the Trust records and have general charge of the share books of the Trust and shall perform such other duties as may be prescribed by the Trust Managers, by the Chairman of the Board, if one shall be elected, or by the President, if a Chairman of the Board is not elected, under whose supervision he or she shall be. The Secretary may sign, with any other proper officer, certificates for shares of the Trust and shall keep in safe custody the seal of the Corporation, and, when authorized by the Trust Managers, affix the same to any instrument requiring it and, when so affixed, it shall be attested by his or her signature or by the signature of the Treasurer or an Assistant Secretary.

Section 6.11 ASSISTANT SECRETARIES. The Assistant Secretaries shall perform such duties as are given to them by these Bylaws or as may from time to time be assigned to them by the Trust Managers or by the Secretary. At the request of the Secretary, or in his or her absence or disability, the Assistant Secretary designated by the Secretary (or in the absence of such designation the senior Assistant Secretary), shall perform the duties and exercise the powers of the Secretary.

Section 6.12 THE TREASURER. The Treasurer shall (i) have the custody and be responsible for all Trust funds and securities, (ii) keep full and accurate accounts of receipts and disbursements in books belonging to the Trust, (iii) deposit all monies and other valuable effects in the name and to the credit of the Trust in such depositories as may be designated by the Trust Managers, (iv) disburse the funds of the Trust as may be ordered by the Trust Managers, taking proper vouchers for such disbursements, and (v) render to the Chairman of the Board, if one shall be elected, the President and the Trust Managers, at the regular meetings of the Trust Managers, or whenever they may require it, an account of all his or her transactions as Treasurer and of the

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financial condition of the Trust. The Treasurer may sign, with any other proper officer, certificates for shares of the Trust.

Section 6.13 ASSISTANT TREASURERS. The Assistant Treasurers shall perform such duties as are given to them by these Bylaws or as may from time to time be assigned to them by the Trust Managers or by the Treasurer. At the request of the Treasurer, or in his or her absence or disability, the Assistant Treasurer designated by the Treasurer (or in the absence of such designation, the senior Assistant Treasurer), shall perform the duties and exercise the powers of the Treasurer.

Section 6.14 TREASURER'S BOND. If required by the Trust Managers, the Treasurer and any Assistant Treasurer shall give the Trust a bond in such sum and with such surety or sureties as shall be satisfactory to the Trust Managers for the faithful performance of the duties of such office and for the restoration to the Trust, in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession or under his or her control belonging to the Trust.

Section 6.15 SALARIES. The salary or other compensation of officers shall be fixed from time to time by the Trust Managers. The Trust Managers may delegate to any committee or officer the power to fix from time to time the salary or other compensation of subordinate officers and agents appointed in accordance with the provisions of Section 6.3.

Section 6.16 EXECUTION OF DOCUMENTS. Each officer of the Trust is authorized to execute on behalf of the Trust any document or instrument of any nature whatsoever, provided that the execution by the Trust of any such document or instrument shall have been previously authorized by such action of the Trust Managers as may be required by statute, the Declaration of Trust or these Bylaws.

ARTICLE VII.

TRUST SHARES

Section 7.1 SHARE CERTIFICATES. (a) The certificates representing shares of beneficial interests of the Trust shall be in such form, as required by and not inconsistent with the Texas REIT Act and applicable law, and the Declaration of Trust, as shall be approved by the Trust Managers. The certificates shall be signed by the Chairman of the Board, if one shall be elected, the President or a Vice President and a Secretary or Assistant Secretary, or such other or additional officers as may be prescribed from time to time by the Trust Managers. The signatures of such officer or officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar, either of which is other than the Trust itself or an employee of the Trust. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such

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certificate is issued, it may be issued with the same effect as if he or she were such officer at the date of its issuance.

(b) In the event the Trust has limited or denied the preemptive right of shareholders, there shall be set forth on the face or back of the certificates, which the Trust shall issue to represent beneficial interests, such legends or statements, if any, as shall be required by applicable law or the Declaration of Trust or as may be approved by the Trust Managers.

(c) All certificates shall be consecutively numbered and the name of the person owning the shares represented thereby, with the number of such shares and the date of issue, shall be entered on the Trust's books.

(d) All certificates surrendered to the Trust shall be canceled, and, except as provided in Section 7.2 with respect to lost, destroyed or mutilated certificates, no new certificate shall be issued until the former certificate for the same number of shares has been surrendered and canceled.

Section 7.2 LOST OR DESTROYED CERTIFICATES. The Trust Managers may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Trust alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. In authorizing such issue of a new certificate or certificates, the Trust Managers may, in their discretion and as a condition precedent to the issue thereof, require the owner of such lost or destroyed certificate or certificates, or his or her legal representative, to advertise the same in such manner as the Trust Managers shall require and/or indemnify the Trust as the Trust Managers may prescribe.

Section 7.3 TRANSFER OF SHARES. Subject to any restrictions upony transfer, upon surrender to the Trust or the transfer agent of the Trust of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer and satisfaction of the Trust that the requested transfer complies with the provisions of applicable state and federal laws and regulations, the Declaration of Trust and any agreements to which the Trust is a party, the Trust shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.

Section 7.4 OWNERSHIP OF SHARES. The Trust shall be entitled to treat and recognize the holder of record of any share or shares as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Texas.

Section 7.5 CLOSING OF TRANSFER BOOKs. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive a distribution by the Trust (other than a distribution involving a purchase or

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redemption by the Trust of its own shares) or a share dividend, or in order to make a determination of shareholders for any other proper purpose, the Trust Managers may provide that the share transfer books shall be closed for a stated period but not to exceed, in any case, 60 days. If the share transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least 10 days immediately preceding such meeting. In lieu of closing the share transfer books, the Trust Managers may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than 60 days and, in case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action requiring such determination of shareholders is to be taken, and the determination of shareholders on such record date shall apply with respect to the particular action requiring the same notwithstanding any transfer of shares on the books of the Trust after such record date.

Section 7.6 DIVIDENDS. The Trust Managers may, from time to time, declare, and the Trust may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by the Declaration of Trust and by law, such dividends to be paid in cash, in property or in shares of beneficial interests of the Trust, except no dividends shall be paid if (i) after giving effect to the distribution, the Trust would be insolvent, or (ii) the distribution exceeds the surplus of the Trust.

Section 7.7 RESERVES. By resolution the Trust Managers may create such reserve or reserves of the Trust as the Trust Managers from time to time, in their absolute discretion, determine to be proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Trust, or for such other purpose as the Trust Managers shall determine to be beneficial to the interest of the Trust. The Trust Managers may modify or abolish any such reserve in the manner in which it was created.

ARTICLE VIII.

INDEMNIFICATION

Section 8.1 GENERAL. Each person who at any time shall serve, or shall have served, as a Trust Manager, officer, employee or agent of the Trust, or any person who, while a director, officer, employee or agent of the Trust, is or was serving at its request as a trust manager, director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic real estate investment trust, corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, shall be entitled to indemnification and the advancement of expenses from the Trust as, and to the fullest extent, permitted by Section 9.20 of the Texas REIT Act or any successor statutory provision, and the Declaration of Trust, as each may from time to time be amended. The foregoing right of indemnification and to the advancement of expenses shall not be deemed exclusive of any other rights to which those to be indemnified may be entitled as a matter of law or under any agreement, vote of shareholders or disinterested Trust Managers, or other arrangement.

20

Section 8.2 INSURANCE. The Trust may purchase and maintain insurance or another arrangement on behalf of any person who is or was a Trust Manager, officer, employee or agent of the Trust or who is or was serving at the request of the Trust as a trust manager, director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic real estate investment trust, corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or any other enterprise against any liability asserted against him or her and incurred by him or her in such capacity or arising out of his or her status as such a person, whether or not the Trust would have the power to indemnify him or her against that liability under this Article VIII or the Texas REIT Act.

ARTICLE IX.

GENERAL PROVISIONS

Section 9.1 GENERAL POLICIES. The Trust intends to make investments that are consistent with the applicable requirements of the Internal Revenue Code of 1986, as amended, and the Texas REIT Act, as amended, and related regulations with respect to the composition of the Trust's investments and the derivation of its income.

Section 9.2 LIMITED LIABILITY OF SHAREHOLDERS. A shareholder shall not be personally or individually liable in any manner whatsoever for any debt, act, omission or obligation incurred by the Trust or the Trust Managers. A shareholder shall be under no obligation to the Trust or to its creditors with respect to such shares other than the obligation to pay to the Trust the full amount of the consideration for which such shares were issued or to be issued. Upon the payment of such consideration, such shares shall be fully paid and non-assessable by the Trust.

Section 9.3 WAIVER OF NOTICE. (a) Whenever, under the provisions of applicable law or of the Declaration of Trust or of these Bylaws, any notice is required to be given to any shareholder or Trust Manager, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice.

(b) Attendance of a Trust Manager at a meeting shall constitute a waiver of notice of such meeting except where a Trust Manager attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the grounds that the meeting is not lawfully called or convened.

Section 9.4 SEAL. If one be adopted, the Trust seal shall have inscribed thereon the name of the Trust and shall be in such form as may be approved by the Trust Managers. Said seal shall be kept in the custody of the Secretary and may be used by causing it or a facsimile of it to be impressed or affixed or in any manner reproduced.

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Section 9.5 FISCAL YEAR. The fiscal year of the Trust shall be fixed by resolution of the Trust Managers.

Section 9.6 CHECKS, NOTES, ETC. All checks or demands for money and notes of the Trust shall be signed by such officer or officers, or such other person, or persons as the Trust Managers may from time to time designate. The Trust Managers may authorize any officer or officers, or such other person or persons, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Trust, and such authority may be general or confined to specific instances.

Section 9.7 EXAMINATION OF BOOKS AND RECORDS. The Trust Managers shall determine from time to time whether, and if allowed, when and under what conditions and regulations the accounts and books of the Trust (except such as may by statute be specifically opened to inspection) or any of them shall be open to inspection by the shareholders, and the shareholders' rights in this respect are and shall be restricted and limited accordingly.

Section 9.8 VOTING OF VOTING SECURITIES HELD BY THE TRUST. Unless otherwise ordered by the Trust Managers, the President, acting on behalf of the Trust, shall have full power and authority to attend, to act and to vote at any meeting of holders of voting securities of any person in which the Trust may hold voting securities. At any such meeting, the President shall possess and may exercise any and all of the rights and powers incident to the ownership of such voting securities which, as the owner thereof, the Trust might have possessed and exercised, if present. The Trust Managers by resolution from time to time may confer like powers upon any other person or persons.

Section 9.9 NUMBER, GENDER, ETC. When required by the context, whenever the singular number is used in these Bylaws, when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders. The term "person," as used herein and as the context requires, shall mean and include individuals, corporations, limited partnerships, general partnerships, joint stock companies or associations, joint ventures, associations, limited liability companies, companies, trusts, banks, trust companies, land trusts, business trusts, or other entities and governments and agencies and political subdivisions thereof.

ARTICLE X.

AMENDMENTS

Section 10.1 AMENDMENT OF BYLAWS. Except as otherwise provided by the Texas REIT Act or the Declaration of Trust, the power to alter, amend or repeal these Bylaws or to adopt new Bylaws shall be vested in the Trust Managers and (to the extent not inconsistent with the Texas REIT Act and the Declaration of Trust and specified in the notice of the meeting) the shareholders. Such action to amend the Bylaws may be taken (i) with respect to all Bylaw provisions, by the affirmative vote of a majority of the Trust Managers, or (ii)(a) with respect to

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Section 2.5, Section 3.3, Section 3.4, Section 3.6, Section 3.7 or Article IX of these Bylaws, by the affirmative vote of the holders of two-thirds of the Trust's outstanding shares, or (b) with respect to all other Bylaws, by the affirmative vote of the holders of a majority of the Trust's outstanding shares.

ARTICLE XI.

SUBJECT TO ALL LAWS

Section 11.1 SUBJECT TO ALL LAWS. The provisions of these Bylaws shall be subject to all valid and applicable laws, including, without limitation, the Texas REIT Act as now or hereafter amended, and in the event that any of the provisions of these Bylaws are found to be inconsistent with or contrary to any such valid laws, the latter shall be deemed to control and these Bylaws shall be deemed modified accordingly, and, as so modified, shall continue in full force and effect.

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EXHIBIT 4.1

NUMBER SHARES
040

HARTMAN COMMERCIAL PROPERTIES REIT

A Texas Real Estate Investment Trust

This Certifies that _________________________________ is the registered holder of ____________ Common Shares of Beneficial Interest of the fully paid and non-assessable shares of the Capital Stock of HARTMAN COMMERCIAL PROPERTIES REIT transferable only on the books of the Trust by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed.

In Witness Whereof, the said Trust has caused this Certificate to be signed by its duly authorized officers and and its Corporate Seal to be hereunto affixed this _______ day of __________, A.D., _______.


President Secretary

EXHIBIT 10.1

AGREEMENT OF LIMITED PARTNERSHIP

of

HARTMAN REIT OPERATING PARTNERSHIP, L.P.


TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

Article 1.     Partnership.................................................... 1
        1.1    Creation of Partnership: Partnership Interests................. 1
        1.2    Name........................................................... 1

Article 2.     Definitions.................................................... 2

Article 3.     Capitalization................................................. 9
        3.1    Prior Capital.................................................. 9
        3.2    Issuance and Redemption of Units............................... 9
        3.3    Additional Funds...............................................17
        3.4    Capital Accounts...............................................18
        3.5    Interest on and Return of Capital..............................19
        3.6    Negative Capital Accounts......................................19
        3.7    Limit on Contributions and Obligations of Partners.............19
        3.8    Redemption and Repurchase of Units.............................19

Article 4.     Principal Office...............................................20

Article 5.     Purposes and Powers of Partnership.............................20
        5.1    Purposes of the Partnership....................................20
        5.2    Powers.........................................................21
        5.3    REIT Requirements..............................................21

Article 6.     Term...........................................................21

Article 7.     Allocations....................................................22
        7.1    Profits........................................................22
        7.2    Losses.........................................................22
        7.3    Special Allocations............................................22
        7.4    Curative Allocations...........................................24
        7.5    Tax Allocations: Code Section 704(c)...........................25

                                        i

Article 8.     Cash Available for Distribution................................25
        8.1    Operating Cash Flow............................................25
        8.2    Capital Cash Flow..............................................26
        8.3    Consent to Allocations and Distributions.......................27
        8.4    Right to Limit Distributions...................................27

Article 9.     Management of Partnership......................................27
        9.1    General Partner................................................27
        9.2    Limitations on Power and Authority of Partners.................29
        9.3    Limited Partners...............................................29
        9.4    Liability of General Partner...................................29
        9.5    Indemnity......................................................29
        9.6    Other Activities of Partners and Agreements with Related
               Parties........................................................30
        9.7    Other Matters Concerning the General Partner...................30
        9.8    Partner Exculpation............................................31
        9.9    General Partner Expenses and Liabilities.......................32

Article 10.    Banking........................................................32

Article 11.    Accounting.....................................................32
        11.1   Fiscal Year....................................................32
        11.2   Books of Account...............................................32
        11.3   Method of Accounting...........................................32
        11.4   Section 754 Election...........................................33
        11.5   Tax Matters Partner............................................33
        11.6   Administrative Adjustments.....................................33

Article 12.    Transfers of Partnership Interests.............................33

Article 13.    Admission of New Partners......................................37

Article 14.    Termination, Liquidation and Dissolution of Partnership........37
        14.1   Termination Events.............................................37
        14.2   Method of Liquidation..........................................37
        14.3   Date of Termination............................................38
        14.4   Reconstitution Upon Bankruptcy.................................39
        14.5   Death, Legal Incompetency, Etc. of a Limited Partner...........39

Article 15.    Power of Attorney..............................................40

Article 16.    Amendment of Agreement.........................................40

                                       ii

Article 17.    Miscellaneous..................................................41
        17.1   Notices........................................................41
        17.2   Modifications..................................................42
        17.3   Successors and Assigns.........................................42
        17.4   Duplicate Originals............................................42
        17.5   Construction...................................................42
        17.6   Governing Law..................................................42
        17.7   Other Instruments..............................................42
        17.8   General Partner with Interest as Limited Partner...............43
        17.9   Legal Construction.............................................43
        17.10  Gender.........................................................43
        17.11  Prior Agreements Superseded....................................43
        17.12  No Third Party Beneficiary.....................................43
        17.13  Purchase for Investment........................................43
        17.14  Waiver.........................................................43
        17.15  Counterparts...................................................44

Schedule A - Partners, Capital Accounts and Partnership Interests

iii

AGREEMENT OF LIMITED PARTNERSHIP

of

HARTMAN REIT OPERATING PARTNERSHIP, L.P.

THIS AGREEMENT OF LIMITED PARTNERSHIP (this "Agreement") has been executed and delivered as of the 31st day of December, 1998, by Hartman Commercial Properties REIT, a Texas real estate investment trust (the "General Partner" or the "Company"), and those persons and entities identified as "Limited Partners" in Schedule A (the "Limited Partners"), (the General Partner and each Limited Partner being a "Partner" and collectively, the "Partners").

RECITALS

WHEREAS, the Partners deem it to be in their best interest to form the Partnership in accordance with the Delaware Revised Uniform Limited Partnership Act as amended (the "Act") and this Agreement.

THEREFORE, in consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Partners agree as follows:

Article 1. Partnership.

1.1 Creation of Partnership: Partnership Interests. The General Partner and the Limited Partners hereby organize, create and form a partnership as a Delaware limited partnership according to all of the terms and provisions of this Agreement and otherwise in accordance with the Act. The General Partner is the sole general partner and the Limited Partners are the sole limited partners of the Partnership. All Partnership profits, losses, and distributive shares of tax items accruing prior to the date of this Agreement shall be allocated in accordance with, and the respective rights and obligations of the Partners with respect to the period prior to the date of this Agreement shall be governed by the Prior Partnership Agreement. No Partner has any interest in any Partnership property and the interest of all Partners in the Partnership are, for all purposes, personal property.

1.2 Name. The Partnership name shall be "Hartman REIT Operating Partnership, L.P.," but the General Partner may from time to time change the name of the Partnership or may adopt such trade or fictitious names as it may determine.


Article 2. Definitions.

1.1 As used in this Agreement, the following terms shall have the meanings set forth respectively after each:

"Act" shall mean the Delaware Revised Uniform Limited Partnership Act, as amended from time to time, and any successor statute.

"Adjusted Capital Account" shall mean, at any time, the then balance in the Capital Account of a Partner, after giving effect to the following adjustments:

(i) add to such Capital Account any amounts that such Partner is deemed obligated to restore as described in the penultimate sentences of Regulations Section 1.704-2(g)(1) and Regulations Section 1.704-2(i)(5), or any successor provisions; and

(ii) subtract from such Capital Account the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6).

"Adjusted Capital Account Deficit" shall mean, with respect to any Partner, the deficit balance, if any, in that Partner's Adjusted Capital Account.

"Agreement" shall mean this Agreement of Limited Partnership, as it may be amended from time to time.

"Bankruptcy" of a Partner shall mean (a) the filing by a Partner of a voluntary petition seeking liquidation, reorganization, arrangement or readjustment, in any form, of its debts under Title 11 of the United States Code (or corresponding provisions of future laws) or any other federal or state insolvency law, or a Partner's filing an answer consenting to or acquiescing in any such petition, (b) the making by a Partner of any assignment for the benefit of its creditors or the admission by a Partner in writing of its inability to pay its debts as they mature, or (c) the expiration of sixty (60) days after the filing of any involuntary petition under Title 11 of the United States Code (or corresponding provisions of future laws), seeking liquidation, reorganization, arrangement or readjustment of its debts under any other Federal or state insolvency law, provided that the same shall not have been vacated, set aside or stayed within such 60-day period.

"Business Day" means any day other than Saturday or Sunday during which national banks located in Houston, Texas are customarily open for business.

"Capital Account" shall mean the capital account maintained by the Partnership for each Partner as described in Section 3.4 below. The Capital Account balance of each Partner who is a

2

Partner as of the effective date of this Agreement shall be set forth opposite such Partner's name on Schedule A hereto.

"Capital Cash Flow" shall have the meaning provided in Section 8.2 below.

"Capital Cash Flow Preference Units" shall have the meaning set forth in
Section 8.2.

"Capital Contribution" shall mean, when used in respect of a Partner, if applicable, the initial capital contribution of such Partner as set forth in
Section 3.1 below, and any other amounts of money or the fair market value of other property contributed by such Partner to the capital of the Partnership with respect to the Partner's interest in the Partnership, including the Capital Contribution made by any predecessor holder of the Partnership Interest of such Partner.

"Cash Amount" means an amount of cash equal to the value of the REIT Shares Amount based upon the Market Price on the date of receipt by the General Partner of a Notice of Redemption.

"Code" shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time, and any successor statute.

"Common Share" means a common share of beneficial interest in the Company.

"Company" means Hartman Commercial Properties REIT, a Texas real estate investment trust and the General Partner of the Partnership.

"Contributing Partner" shall have the meaning provided in clause (v) of
Section 3.2(B) below.

"Declaration of Trust" shall mean the Declaration of Trust of the Company, as amended.

"Depreciation" shall mean for any fiscal year or portion thereof, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such period for Federal income tax purposes, except that if the Gross Asset Value of an asset differs from its adjusted basis for Federal income tax purposes at the beginning of such period, Depreciation shall be an amount that bears the same relationship to such beginning Gross Asset Value as the depreciation, amortization or cost recovery deduction in such period for Federal income tax purposes bears to the beginning adjusted tax basis; provided, however, that if the adjusted basis for Federal income tax purposes of an asset at the beginning of such period is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the General Partner.

"Determination Date" shall have the meaning set forth in Section 3.2(B) or, as applicable, Section 3.2(C) (wherein it is described as the "Specified Redemption Date").

3

"Exchange Date" shall have the meaning provided in Section 3.2(G).

"FPAA" shall have the meaning provided in Section 11.6.

"General Partner" means Hartman Commercial Properties REIT, a Texas real estate investment trust sometimes also referred to in this Agreement as the "Company".

"Gross Asset Value" means, with respect to any Partnership asset, the asset's adjusted basis for Federal income tax purposes, except as follows:

(i) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as determined by the General Partner;

(ii) The Gross Asset Value of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by the General Partner, as of the following times: (a) the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership property as consideration for an interest in the Partnership; and (c) the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses (a) and (b) above shall be made only if the General Partner reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership;

(iii) The Gross Asset Value of any Partnership asset distributed to any Partner shall be adjusted to equal the gross fair market value of such asset on the date of distribution as determined by the General Partner; and

(iv) The Gross Asset Value of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section
743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and paragraph (vi) of the definition of Profits and Losses and Section 7.3(G) below; provided, however, that Gross Asset Value shall not be adjusted pursuant to this paragraph (iv) to the extent the General Partner determines that an adjustment pursuant to paragraph (ii) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (iv).

If the Gross Asset Value of an asset has been determined or adjusted pursuant to paragraphs (i), (ii) or (iv) above, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses.

4

"IRS" shall have the meaning set forth in Section 11.6.

"Issuance Date" means with respect to OP Units owned by a Partner, the date upon which such OP Units are issued to such Partner (and with respect to Preference Units, shall have the meaning set forth in the applicable Preference Unit Term Sheet).

"Limited Partner" shall mean any Person (i) whose name is set forth as a Limited Partner on Schedule A attached hereto or who has become a Limited Partner pursuant to the terms and conditions of this Agreement, and (ii) who holds a partnership interest. "Limited Partners" means all such persons.

"Majority-in-Interest of the Limited Partners" shall mean, as of any given time, Limited Partners who own more than fifty percent (50%) of the Percentage Interests in the Partnership held by Limited Partners.

"Market Price" means, with respect to any Specified Redemption Date: (a) the last reported sales price per share of the Common Shares at the close of trading (whether or not the last reported sale occurred on such date) as reported in the Wall Street Journal on the first Business Day of the calendar quarter immediately preceding the date of receipt by the General Partner of the Notice of Redemption, or (b) if the Common Shares are not traded on a national exchange, the fair market value of the Common Shares as determined by a third party appraiser chosen by the General Partner on the first Business Day of the calendar quarter immediately preceding the date of receipt by the General Partner of the Notice of Redemption.

"Nonrecourse Deductions" has the meaning set forth in Regulations
Section 1.704-2(c).

"Nonrecourse Liability" has the meaning set forth in Regulations Section 1.752-1(a)(2).

"Notice of Redemption" means a written notice delivered by a Redeeming Partner to the Partnership (with a copy to the General Partner) under Section 3.2(C), pursuant to which the Redeeming Partner exercises the Redemption Right with respect to all or a portion of its OP Units in accordance with the provisions of Section 3.2(C).

"Operating Cash Flow" shall have the meaning provided in Section 8.1.

"OP Units" are units of Partnership Interest more particularly described in Section 3.2.

"OP Unit Value" shall mean, as of any given time, the number of OP Units into which a Preference Unit is convertible (whether or not the conversion can then be effected), or the value of the Preference Unit expressed in OP Units if the Preference Unit is not convertible into OP Units, as provided for in the applicable Preference Unit Term Sheet or Other Securities Term Sheet.

5

"Other Securities" shall have the meaning set forth in clause (iv) of
Section 3.2(B).

"Other Securities Term Sheet" shall have the meaning provided in clause
(f) of Section 3.2(B).

"Partner Nonrecourse Debt" has the meaning set forth in Regulations
Section 1.704-2(b)(4).

"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in Regulations Section 1.704-2(i).

"Partner Nonrecourse Deductions" has the meaning set forth in Regulations Section 1.704-2(i).

"Partners" shall mean, collectively, the General Partner and the Limited Partners, or any additional or successor partners of the Partnership admitted to the Partnership in accordance with the terms of this Agreement. References to a Partner shall be to any one of the Partners.

"Partnership Interest" shall mean the ownership interest of a Partner in the Partnership at any particular time, including the right of such Partner to any and all benefits to which such Partner may be entitled as provided in this Agreement, and to the extent not inconsistent with this Agreement, under the Act, together with the obligations of such Partner to comply with all of the terms and provisions of this Agreement and the Act.

"Partnership Minimum Gain" has the meaning set forth in Regulations Sections 1.704-2(b)(2) and 1.704-2(d).

"Percentage Interest" shall mean, as to each Partner, the quotient (expressed as a percentage) arrived at by dividing (i) the sum of the OP Unit Value of any Preference Units held by that Partner and the number of OP Units held by that Partner, by (ii) the sum of the OP Unit Value of all Preference Units issued and outstanding at the time and the total number of OP Units issued and outstanding at the time. The respective Percentage Interests of the Partners as of the date of this Agreement are set forth in Schedule A attached to this Agreement.

"Person" means any individual, partnership, corporation, trust, limited liability company or other entity.

"Preference Units" are units of Partnership Interest more particularly described in Section 3.2(A).

"Preference Unit Term Sheet" shall have the meaning provided in clause
(e) of Section 3.2(B).

6

"Private Transfer" shall mean:

(i) transfers in which the basis of the Partnership Interest in the hands of the transferee is determined, in whole or in part, by reference to its basis in the hands of the transferor or is determined under Code Section 732;

(ii) transfers at death, including transfers from an estate or testamentary trust;

(iii) transfers between members of a family;

(iv) transfers involving the issuance of interests by (or on behalf of) the Partnership in exchange for cash, property, or services;

(v) transfers involving distributions from a qualified retirement plan or an individual retirement account;

(vi) the transfer by a Partner and any related persons (within the meaning of Code Section 267(b) or 707(b)(1)) in one or more transactions during any 30 calendar day period of Partnership Interests representing in the aggregate more than 2 percent of the total interests in Partnership capital or profits;

(vii) transfers by one or more Partners of interest representing in the aggregate 50 percent or more of the total interest in Partnership capital and profits in one transaction or a series of related transactions; and

(viii) transfers not recognized by the Partnership.

"Profits" and "Losses" shall mean for each fiscal year or portion thereof, an amount equal to the Partnership's items of taxable income or loss for such year or period, determined by the General Partner in accordance with Code Section 703(a) with the following adjustments:

(i) any income which is exempt from Federal income tax and not otherwise taken into account in computing Profits or Losses shall be added to taxable income or loss;

(ii) any expenditures of the Partnership described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures under Regulations Section 1.704-1(b)(2)(iv)(i) and not otherwise taken into account in computing Profits or Losses, will be subtracted from taxable income or loss;

(iii) in the event that the Gross Asset Value of any Partnership asset is adjusted pursuant to the definition of Gross Asset Value contained in this Article 2, the amount of

7

such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Profits and Losses;

(iv) gain or loss resulting from any disposition of Partnership assets with respect to which gain or loss is recognized for Federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value;

(v) in lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period;

(vi) to the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in complete liquidation of a Partner's Partnership Interest, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for purposes of computing Profits or Losses; and

(vii) any items specially allocated pursuant to Section 7.3 or
Section 7.4 shall not be considered in determining Profits or Losses.

"Recapitalization" shall have the meaning provided in Section 3.2(F).

"Record Date" shall have the meaning provided in Section 9.1.

"Redeeming Partner" shall have the meaning provided in Section 3.2(C).

"Redemption Amount" means either the Cash Amount or the REIT Shares Amount as determined pursuant to Section 3.2 hereof.

"Redemption Right" shall have the meaning provided in Section 3.2(C).

"Regulations" shall mean the Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).

"REIT" shall have the meaning provided in Section 5.3.

"REIT Requirements" shall have the meaning provided in Section 5.3.

8

"REIT Shares Amount" means a number of Common Shares equal to the number of OP Units offered for redemption by a Redeeming Partner, as adjusted pursuant to Sections 3.2(F) and (G).

"Residual Operating Cash Flow Preference Units" shall have the meaning provided in Section 8.1.

"Rights" shall have the meaning provided in Section 3.2(G).

"Specified Redemption Date" means with respect to a Redeeming Partner, the date that is ten Business Days after receipt by the General Partner of the Notice of Redemption from such Partner.

"TMP" shall have the meaning provided in Section 11.5.

"Transfer" shall have the meaning provided in Section 12(B).

"Transferee" shall have the meaning provided in Section 12(B).

"Units" has the meaning set forth in Section 3.2(A).

Article 3. Capitalization.

3.1 Prior Capital. As of the effective date hereof, the General Partner will contribute $1,000 to the Partnership and the Limited Partners will make contributions of cash and/or property to the Partnership, and the amount of such cash contributions and the Gross Asset Value of such in-kind Capital Contributions are reflected in the Capital Account balance of each such Partner as set forth opposite such Partner's name on the attached Schedule A under the heading "Agreed Capital Account".

3.2 Issuance and Redemption of Units.

A. The interest of a Partner in the Partnership is referred to as being evidenced by one or more "Units." Units may be either "OP Units" or "Preference Units":

(ii) An "OP Unit" is a unit of Partnership Interest that, as more particularly provided for below in Section 3.2(C), may be redeemed for the Redemption Amount.

(ii) A "Preference Unit" is a unit of Partnership Interest having such rights, preferences and other privileges, variations and designations as may be determined by the General Partner in its sole and absolute discretion (but not in

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violation of the provisions of Section 3.2(B) or the terms of any other Preference Unit(s) Term Sheets). There may be more than one series or class of Preference Units having differing terms and conditions, but all Preference Units within a given series or class shall have the same rights, preferences and other privileges, variations and designations. With respect to each series or class of Preference Units, the General Partner may also, in its discretion, determine and fix, among other terms and conditions, any of the following: (a) the series to which such Preference Units shall belong, (b) the distribution rate therefor, (c) the price at and the terms and conditions on which such Preference Units may be redeemed, (d) the amount payable in respect of such Preference Units in the event of involuntary or voluntary liquidation, (e) the terms and conditions on which such Preference Units may be converted and the securities into which such Preference Units may be converted (and/or the valuation of such Preference Units as measured in OP Units), if such Preference Units are issued with the privilege of conversion, and (f) the number of such Preference Units to be issued as a part of such series. Once determined and fixed as herein provided, however, the terms and conditions of a particular series or class of Preference Units may not be changed without the written consent of the holders of at least 67% of the Preference Units within the class or series (or such greater percentage as may be provided for in the applicable Preference Unit Term Sheet or Other Securities Term Sheet, as the case may be).

The aggregate total of all Units outstanding as of the date of this Agreement is 1,604,737 (assuming full conversion of all outstanding Preference Units into OP Units). As of the date of this Agreement, each Partner is deemed to hold Units as shown on Schedule A.

A. From time to time hereafter, subject to and in accordance with the provisions of this Section 3.2(B), the General Partner shall cause the Partnership to issue additional Units as follows:

(iii) OP Units to the Company upon the issuance by the Company of additional Common Shares (other than in exchange for OP Units) and the contribution of the net proceeds thereof as a Capital Contribution to the Partnership as provided for in
Section 3.3(B) below, it being understood, however, that the Company may issue Common Shares in connection with share option plans, dividend reinvestment plans, restricted share plans or other benefit or compensation plans (for example, shares issued in lieu of fees or compensation) without receiving any proceeds and that the issuance of such Common Shares shall nonetheless entitle the Company to receive additional OP Units pursuant to this clause (i);

(iv) OP Units to Partners (including itself) that hold Preference Units that are convertible into OP Units, upon the exercise of such conversion in

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accordance with the terms and conditions of the Preference Unit Term Sheet or Other Securities Term Sheet applicable thereto;

(v) OP Units to Partners holding OP Units (including itself) if and to the extent of each such Partner's participation in any reinvestment program contemplated by
Section 3.3(C) below;

(vi) Preference Units to the Company upon the issuance by the Company of securities other than Common Shares whether debt or equity securities ("Other Securities") and the contribution of the net proceeds thereof as a Capital Contribution to the Partnership as provided for in Section 3.3(B) below; and

(vii) in all other cases, OP Units and/or Preference Units, as determined by the General Partner, in its discretion, to existing or newly-admitted Partners (including itself), in exchange for the contribution by a Partner (the "Contributing Partner") of Capital Contributions to the Partnership.

Issuance of OP Units as aforesaid shall be in accordance with the following:

(a) the number of OP Units issued to the Company under clause (i) of this Section 3.2(B) shall be equal to the number of Common Shares issued;

(b) the number of OP Units issued to a Partner under clause
(ii) of this Section 3.2(B) shall be as provided for in the Preference Unit Term Sheet or the Other Securities Term Sheet pursuant to which the Preference Units being converted exist;

(c) the number of OP Units issued to a Limited Partner under clause (iii) of this Section 3.2(B) shall be as provided for in the applicable reinvestment program; and

(d) the number of OP Units issued to a Contributing Partner under clause (v) of this Section 3.2(B) shall be equal to the quotient (rounded to the nearest whole number) arrived at by dividing (x) the initial Gross Asset Value of the property contributed as additional Capital Contributions (net of any debt to which such property is subject or assumed by the Partnership in connection with such contribution) by
(y) the Market Price (as hereinafter defined).

For purposes of this Section 3.2(B) only, the "Determination Date" shall mean the trading date, preceding the issuance of the OP Units, selected by the General Partner, in its discretion, based on the particular facts and circumstances surrounding the proposed issuance of the OP Units in question.

Issuance of Preference Units as aforesaid shall be in accordance with the following:

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(e) Preference Units issued pursuant to clause (v) of this
Section 3.2(B) shall have the terms and conditions specified in an agreement (a "Preference Unit Term Sheet") executed by and between the Partnership (at the direction or in the discretion of the General Partner) and the Contributing Partner. The number of Preference Units issued to a Contributing Partner under clause (v) of this Section 3.2(B) shall be equal to the quotient (rounded to the nearest whole number) arrived at by dividing (x) the Initial Gross Asset Value of the property contributed as additional capital contributions (net of any debt to which such property is subject or assumed by the Partnership in connection with such contribution) by (y) an amount provided for in the Preference Unit Term Sheet; and

(f) Preference Units issued pursuant to clause (iv) of this
Section 3.2(B) shall have economic terms substantially identical to those of the applicable Other Securities and such other terms and conditions, all of which are specified in an agreement (an "Other Securities Term Sheet") executed between the Partnership and the Company and such Other Securities Term Sheet shall thereupon be a part of this Agreement.

Units may also be issued to some or all of the Partners holding Preference Units if and to the extent of such Partner's participation in any reinvestment program contemplated by Section 3.3(C). Upon the issuance of additional OP Units and/or Preference Units in accordance with the provisions of this Section 3.2(B), each recipient of such Units shall either execute this Agreement or a joinder to this Agreement (which joinder, as to Preference Units, may be a part of any applicable Preference Unit Term Sheet or Other Securities Term Sheet) and, as applicable, the Percentage Interest of all of the Partners shall thereupon be appropriately adjusted by the General Partner.

A. Subject to the provisions of Sections 3.2(D) and (F), on or after the later of (i) the date which is one year after the Issuance Date or (ii) upon the completion of an initial public offering of the Common Shares of the Company pursuant to a registration statement filed with the Securities and Exchange Commission, each Limited Partner shall have the right (the "Redemption Right") to require the Partnership to redeem on a Specified Redemption Date all or a portion of the OP Units held by such Limited Partner at a redemption price equal to and in the form of the Redemption Amount. The Redemption Right shall be exercised pursuant to a Notice of Redemption delivered to the Partnership (with a copy to the General Partner) by the Limited Partner who is exercising the Redemption Right (the "Redeeming Partner"); provided, however, that the Partnership shall not be obligated to satisfy such Redemption Right if the Company and/or the General Partner elects to purchase the OP Units subject to the Notice of Redemption pursuant to Section 3.2(E). Notwithstanding the foregoing provisions of this Section 3.2(C), the Company and the General Partner agree to use their best efforts to cause the closing of the acquisition of redeemed OP Units hereunder to occur as quickly as reasonably possible. The Redeeming Partner shall have no right, with respect to any

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OP Units so redeemed, to receive any distribution paid with respect to OP Units if the Record Date for such distribution is on or after the Specified Redemption Date. The foregoing Redemption Right is intended to comply with the requirements of Regulations Section 1.7704-1(f) and shall be construed and administered in accordance therewith. The General Partner may modify the Redemption Right from time to time in its discretion to ensure that the terms of the Redemption Right comply and continue to comply with such requirements.

B. In addition to other restrictions set forth on the Redemption Rights in any other provision of this Agreement, the following restrictions apply to Redemption Rights:

(i) Notwithstanding any other provision of this Article 3, a Limited Partner shall be entitled to exercise the Redemption Right only if (x) the redemption or purchase of the Limited Partner's OP Units would constitute a Private Transfer or (y) the number of OP Units to be purchased or redeemed, when aggregated with other Transfers of OP Units within the same taxable year of the Partnership (but not including Private Transfers), would constitute a Percentage Interest of ten percent (10%) or less.

(ii) The General Partner may establish such policies and procedures as it may deem necessary or desirable in its discretion to administer the 10% Percentage Interest limit set forth in subparagraph (i) above, including without limitation imposing further limitations on the number of OP Units with respect to which the Redemption Right may be exercised during any period of time shorter than a calendar year and establishing procedures to allocate the ability to exercise the Redemption Right among the Limited Partners.

(iii) The restrictions set forth in clauses (i) and
(ii) above shall continue in effect until such time as the Partnership is no longer potentially subject to classification as a publicly traded partnership, as defined in Code Section 7704, in the absence of such restrictions, as determined by the General Partner in its discretion. The restrictions set forth in clauses (i) and (ii) above, together with the restrictions on the Transfer of Partnership Interests set forth in Section
12(B), are intended to limit transfers of interests in the Partnership in such a manner as to permit the Partnership to qualify for the safe harbors from treatment as a publicly traded partnership set forth in Treasury Regulations Sections 1.7704-1(d), (e), (f) and (j) and shall be construed and administered in accordance therewith. The General Partner may modify the restrictions set forth in clauses (i) and (ii) above, and the provisions of Section 12(B), from time to time in its discretion to ensure that the Partnership complies and continues to comply with the Code and Regulations requirements described above.

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(iv) A Limited Partner shall not be entitled to exercise either a Redemption Right or any right to convert a Preference Unit into an OP Unit if such exercise would (a) result in the total Common Shares and any other ownership or beneficial interests in the Company being owned by fewer than one hundred persons within the meaning of Code Section
856(a)(5); (b) result in such Limited Partner or any other person owning, directly or constructively under Code Section
856(d)(5), in excess of 9.8% of the total Common Shares (and any other ownership or beneficial interests) in the Company; (c) cause more than 50% of the value of the Company's Common Shares (and any other ownership or beneficial interests) to be held by 5 or fewer individuals and certain organizations under Code
Section 856(h) and 542(a)(2); (d) cause the Company to own, directly or constructively, 10% or more of the ownership interests of any person that is a tenant with respect to any real property owned or constructively owned by the Company (so as to prevent the application of Code Section 856(d)(2)); or (e) cause the acquisition of Common Shares (and any other ownership or beneficial interests) in the Company by such Limited Partner to be "integrated" with any other distribution of interests in the Company for purposes of complying with the registration provisions of the Securities Act of 1933. The General Partner may modify the restrictions set forth in this Section 3.2(D)(iv) from time to time in its discretion to ensure that the Partnership complies and continues to comply with Code Section
856. The General Partner may, in its sole discretion, waive the restrictions on redemption set forth in this Section 3.2(D)(iv); provided, however, that in the event a restriction is waived, the redeeming partner shall be paid the Cash Amount.

(v) A Limited Partner shall not be entitled to exercise a Redemption Right if it prejudices or affects the continuity of the Partnership for purposes of Code Section 708. Prior to any such redemption, the General Partner may require an opinion of counsel satisfactory to the General Partner to the effect that such redemption will not cause adverse tax consequences to the nonredeeming Partners, and such Limited Partner exercising the Redemption Right shall be responsible for paying said counsel's fee for his opinion.

C. Notwithstanding the provisions of Section 3.2(C), a Limited Partner that exercises the Redemption Right shall be deemed to have offered to sell the OP Units described in the Notice of Redemption to the General Partner and the Company, and either of the General Partner or the Company (or both or any designee thereof) may, in their sole and absolute discretion, elect to purchase directly and acquire such OP Units by paying to the Redeeming Partner either the Cash Amount, or, the REIT Shares Amount, as elected by the General Partner or the Company or any designee thereof (each in its sole and absolute discretion), on the Specified Redemption Date, whereupon the General Partner and/or the Company or any designee thereof shall acquire the OP Units offered for redemption by the Redeeming Partner and shall be treated for all purposes of this

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Agreement as the owner of such OP Units. If the General Partner and/or the Company or any designee thereof shall elect to exercise their right to purchase OP Units under this Section 3.2(E) with respect to a Notice of Redemption, they shall so notify the Redeeming Partner within five Business Days after the receipt by the General Partner of such Notice of Redemption. Unless the General Partner and/or the Company or any designee thereof (each in its sole and absolute discretion) shall exercise its right to purchase OP Units from the Redeeming Partner pursuant to this Section 3.2(E), neither the General Partner nor the Company or any designee thereof shall have any obligation to the Redeeming Partner or the Partnership with respect to such Redeeming Partner's exercise of such Redemption Right. In the event that the General Partner or the Company or any designee thereof shall exercise its right to purchase OP Units with respect to the exercise of a Redemption Right in the manner described in the first sentence of this
Section 3.2(E), the Partnership shall have no obligation to pay any amount to the Redeeming Partner with respect to such Redeeming Partner's exercise of such Redemption, and each of the Redeeming Partner, the Partnership, and the General Partner or the Company or any designee thereof, as the case may be, shall treat the transaction between the General Partner or the Company or any designee thereof, as the case may be, and the Redeeming Partner for federal income tax purposes as a sale of the Redeeming Partner's OP Units to the General Partner or the Company or any designee thereof. Each Redeeming Partner agrees to execute such documents as the General Partner may reasonably require in connection with the issuance of Common Shares upon exercise of the Redemption Right.

D. The Company shall at all times reserve and keep available out of its authorized but unissued Common Shares, solely for the purpose of effecting the exchange of OP Units for Common Shares, such number of Common Shares as shall from time to time be sufficient to effect the redemption of all outstanding OP Units not owned by the Company, and any Preference Units not owned by the Company that are convertible into OP Units (whether or not the conversion can then be effected). No Limited Partner shall, by virtue of being the holder of one or more OP Units and/or Preference Units be deemed to be a shareholder of or have any other interest in the Company. In the event of any change in the outstanding Common Shares of the Company or its successor by reason of any share dividend, split, recapitalization, merger, consolidation, combination, exchange of shares or other similar corporate change other than the issuance of Rights, as further described in Section 3.2(G) (a "Recapitalization"), the number of OP Units held by each Partner shall be adjusted upward or downward to equal such number of Common Shares of the Company (or as applicable, the Common Shares or equivalent class of securities of the successor thereto) as would have been held by the Partner immediately following the Recapitalization if such Partner had held a number of Common Shares equal to such number of OP Units immediately prior to such Recapitalization. In the event the Company or the General Partner or any designee thereof acquires OP Units pursuant to such Section 3.2(E), the General Partner shall record the transfer on the books of the Partnership so that the Company or the General Partner or any designee thereof, as

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applicable, is thereupon the owner and holder of such OP Units. As is more particularly described in Section 3.2(D)(iv), notwithstanding any other provisions of this Section 3.2, a Limited Partner shall not have the right to exercise a Redemption Right if, upon payment of the REIT Shares Amount to such Limited Partner, (i) the Company would, as a result thereof, no longer qualify (or it would be reasonably possible in the judgement of the General Partner that the Company no longer would qualify) as a real estate investment trust under the Code; or (ii) the payment of such REIT Shares Amount to the Limited Partner would constitute or be reasonably possible in the judgment of the General Partner to constitute a violation of applicable federal or state securities laws or would violate any applicable provisions of the organizational documents of the Company (including without limitation any restrictions on ownership of securities of the Company set forth in the Declaration of Trust or Bylaws of the Company). In either such event, to the extent the consequences described in (i) or (ii) could be eliminated by reasonable action of the General Partner or the Company without any material detriment to the General Partner or the Company and at the expense of such Limited Partner(s) requesting such exchange, the Company or the General Partner shall take all such reasonable action to effect the exchange of OP Units for Common Shares by such Limited Partner(s) as herein provided.

E. In the event that a Redeeming Partner exercises the Redemption Right, and the Company or the General Partner or any designee thereof elects to make the payment of the REIT Shares Amount to the Redeeming Partner referenced in accordance with the first sentence of
Section 3.2(E), and in the event that the Company issues to all of its holders of Common Shares as of a certain record date rights, options, warrants or convertible or exchangeable securities entitling such shareholders to subscribe for or purchase Common Shares or any other securities or property (collectively, "Rights"), with the record date for such Rights issuance falling within the period starting on the date that the Company receives the Redemption Notice from the Redeeming Partner and ending on the day immediately preceding the date upon which the Company, the General Partner or their designee delivers the Common Shares to the Redeeming Partner in exchange for such Redeeming Partner's OP Units (the date upon which such exchange occurs being referred to herein as the "Exchange Date"), which Rights will not be distributed before the Exchange Date, then the amount payable by the Company, the General Partner or their designee to the Redeeming Partner in exchange for its OP Units under this Section 3.2 shall also include such Rights that the Redeeming Partner would have received if it had been the owner of the Common Shares to be delivered by the Company to the Redeeming Partner prior to the record date for the issuance of the Rights (as the same may be expressed for any purpose hereunder in a number of OP Units or Common Shares as determined by the General Partner).

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1.1 Additional Funds.

A. No Partner shall be assessed or, except as otherwise provided in this Agreement, required to contribute additional funds or other property to the Partnership. Any additional funds or other property required by the Partnership, as determined by the General Partner in its sole discretion, may, at the option of the General Partner and without an obligation to do so (except as provided for in
Section 3.3(B) below), be contributed by the General Partner or any other Partner (provided such other Partner is willing to do so and the General Partner consents thereto, each in its sole and absolute discretion) as additional Capital Contributions. If and as the General Partner or any other Partner makes additional Capital Contributions to the Partnership, each such Partner shall receive additional OP Units and/or Preference Units as provided for in Section 3.2(B) above. The General Partner shall also have the right (but not the obligation) to raise any additional funds required for the Partnership in accordance with the provisions of Section 9.7(E) below and/or by causing the Partnership to borrow the necessary funds from third parties on such terms and conditions as the General Partner shall deem appropriate in its sole discretion. If the General Partner elects to cause the Partnership to borrow the additional funds, or if the Partnership issues a guaranty, indemnity or similar undertaking in connection with the indebtedness of the Company as aforesaid, in any such case one or more of the Partnership's assets may be encumbered to secure the loan or undertaking. Except as provided for in Section 3.3(C) below, no Limited Partner shall have the right to make additional Capital Contributions to the Partnership without the prior written consent of the General Partner.

B. Except for (i) the capitalization of any wholly-owned entity of the General Partner which is the general partner of a partnership having the Partnership as a limited partner, (ii) the net proceeds generated by the issuance of Other Securities that evidence debt (and are not equity securities) that are loaned by the Company to the Partnership, and (iii) where the Company determines that the net proceeds generated by the issuance of Common Shares or Other Securities (whether for debt or equity) are retained by the Company for a valid business reason consistent with the purposes of the Partnership and such retention does not materially adversely affect the Limited Partners, the net proceeds of any and all funds raised by or through the Company through the issuance of Common Shares or Other Securities shall be contributed to the Partnership as additional Capital Contributions, and in such event the Company shall be issued additional Units pursuant to
Section 3.2(B) above.

C. If the General Partner creates and administers a reinvestment program in substantial conformance with a dividend reinvestment program which may be available from time to time to holders of the Common Shares, each Limited Partner holding OP Units shall have the right to reinvest any or all cash distributions payable to it from time to time pursuant to this Agreement (subject to the restrictions described in Article 12), by having some or all (as the Limited Partner elects) of such distributions contributed to the

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Partnership as additional Capital Contributions, and in such event the Partnership shall issue to each such Limited Partner additional OP Units pursuant to clause (iii) of Section 3.2(B) above, or the General Partner, in its sole discretion, may elect to cause distributions with respect to which a Limited Partner has elected reinvestment to be contributed to the Company in exchange for the issuance of Common Shares. At the option of the General Partner, such a program may also be made available with respect to Preference Units.

1.2 Capital Accounts. A separate capital account ("Capital Account") shall be maintained for each Partner.

A. To each Partner's Capital Account there shall be added such Partner's Capital Contributions, such Partner's distributive share of Profits and any items in the nature of income or gain which are specially allocated pursuant to Section 7.3, Section 7.4 or Section 14.2(C) hereof, and the amount of any Partnership liabilities assumed by such Partner or which are secured by any Partnership property distributed to such Partner.

B. From each Partner's Capital Account there shall be subtracted the amount of cash and the Gross Asset Value of any Partnership property distributed to such Partner pursuant to any provision of this Agreement, such Partner's distributive share of losses and any items in the nature of expenses or losses which are specially allocated pursuant to Section 7.3, Section 7.4 or Section 14.2(C) hereof, and the amount of any liabilities of such Partner assumed by the Partnership or which are secured by any property contributed by such Partner to the Partnership.

C. In the event all or a portion of a Partnership Interest is transferred in accordance with the terms of this Agreement (including a transfer of OP Units in exchange for Common Shares, pursuant to
Section 3.2(E)), the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Partnership Interest.

D. In determining the amount of any liability for purposes of Sections 3.4(A) and 3.4(B) above, there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations.

E. This Section 3.4 and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Partnership, or the Partners) are computed in order to comply with such Regulations, the General Partner may make such

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modification, provided that it is not likely to have a material effect on the amounts distributed to any Partner pursuant to Section 14.2 upon the liquidation of the Partnership. The General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership's balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1(b)(2)(iv)(g), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b).

1.3 Interest on and Return of Capital.

A. No Partner shall be entitled to any interest on its Capital Account or on its Capital Contributions to the Partnership.

B. Except as expressly provided for in this Agreement, no Partner shall have the right to demand or to receive the return of all or any part of its Capital Contributions to the Partnership and there shall be no priority of one Partner over another Partner as to the return of capital contributions or withdrawals or distributions of profits and losses. No Partner shall have the right to demand or receive property other than cash in return for the contributions of such Partner to the Partnership.

1.4 Negative Capital Accounts. Subject to the provisions of any guarantee or other written agreement between a Partner and the Partnership, no Partner shall be required to pay to the Partnership any deficit or negative balance which may exist in its Capital Account.

1.5 Limit on Contributions and Obligations of Partners. Except as provided in Sections 3.1, 3.2 and 3.3 (or the provisions of any guarantee or other written agreement between a Partner and the Partnership), no Partner shall be required to make any additional advances or contributions to or on behalf of the Partnership or to endorse any obligations of the Partnership.

1.6 Redemption and Repurchase of Units. Notwithstanding any other provision of this Agreement which may be contrary to this Section 3.8, in the event of the proposed repurchase or redemption for cash by the Company of (i) Common Shares or (ii) Other Securities with respect to which the Company had previously issued Preference Units pursuant to Section 3.2(B)(iv) of this Agreement, then, in such event, the Partnership shall provide cash to the Company concurrently with such repurchase or redemption or for such purpose equal to the proposed repurchase or redemption price, and one OP Unit owned by the General Partner (or, in the case of redemption or repurchase by the Company of Other Securities contemplated by clause (ii) above, one Preference Unit owned by the General Partner which had been issued with respect to such Other Securities) shall be canceled with respect to each Common Share (or share of Other Securities) so repurchased or redeemed.

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Article 1. Principal Office. The principal office of the Partnership shall be located at 1450 W. Sam Houston Parkway, Suite 100, Houston, Texas 77043, or at such other place as the General Partner may designate after giving written notice of such designation to the other Partners.

Article 2. Purposes and Powers of Partnership.

2.1 Purposes of the Partnership. The purposes of the Partnership shall be to acquire, purchase, own, operate, manage, develop, redevelop, invest in, finance, refinance, sell, lease and otherwise deal with commercial properties and assets related thereto, and interests therein, whether directly or indirectly, alone or in association with others. The purposes of the Partnership include, but are not limited to:

(a) acquiring, developing, operating, leasing and managing commercial properties and conducting any other lawful business relating thereto;

(i) financing, mortgaging, exchanging, selling, encumbering or otherwise disposing of all or any part of a commercial property or any interest therein;

(ii) constructing, reconstructing, altering, modifying and subtracting from or adding to a commercial property or any part thereof;

(iii) organizing and holding interests in corporations, partnerships, limited liability companies and other entities owning or otherwise having an interest in, whether directly or indirectly, one or more commercial properties; and

(iv) in general, the making of any investments or expenditures, the borrowing and lending of money and the taking of any and all actions which are incidental or related to any of the purposes recited above.

It is agreed that each of the foregoing is an ordinary part of the Partnership's business and affairs. Property may be acquired subject to, or by assuming, the liens, encumbrances, and other title exceptions which affect such Property. The Partnership may also be a partner (general or limited), in partnerships (general or limited), a venturer in joint ventures, a shareholder in corporations, a member in limited liability companies or an investor in any other type of business entity created to accomplish all or any of the foregoing.

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2.2 Powers. The Partnership purposes may be accomplished by taking any action which is not prohibited under the Act and which is related to the acquisition, ownership, development, improvement, operation, management, financing, leasing, exchanging, selling or otherwise encumbering or disposing of all or any portion of the assets of the Partnership, or any interest therein.

2.3 REIT Requirements. Each Limited Partner understands and acknowledges that the General Partner intends at some point in the future to elected to be treated as a real estate investment trust ("REIT") under Code
Section 856. Each Limited Partner further understands and acknowledges that, if a REIT election is made by the General Partner, in order to maintain its status as a REIT, the General Partner must comply with numerous and complex rules and regulations set forth in the Code and the Regulations, many of which are applied on a quarterly and/or annual basis (the "REIT Requirements"), and that the management and operation of the Partnership will have a material effect on the ability of the General Partner to continue to maintain its status as a REIT. Accordingly, notwithstanding any other provision of this Agreement or any non-mandatory provision of the Act, the Partnership shall not take any action which (or fail to take any action, the omission of which) (i) could adversely affect the ability of the General Partner to qualify or continue to qualify as a REIT, (ii) could subject the General Partner to any additional taxes under Code
Section 857 or Code Section 4981 or other potentially adverse consequences under the Code, or (iii) otherwise could cause the General Partner to violate the REIT Requirements, specifically including, but not limited to, restrictions on Redemption Rights in Section 3.2(D)(iv). In addition, notwithstanding any other provision of this Agreement or any non-mandatory provision of the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the General Partner's business judgement that such action or omission is necessary or advisable in order (i) to protect the ability of the General Partner to continue to qualify as a REIT or (ii) to avoid the General Partner incurring any taxes under Code Section 857 or Code Section 4981, is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners.

Article 3. Term. The term of the Partnership shall continue until the Partnership is terminated upon the occurrence of an event described in Section 14.1 below.

Article 4. Allocations.

4.1 Profits.

A. After giving effect to the allocations set forth in Sections 7.3, 7.4 and 14.2(C), Profits for any fiscal year shall be allocated (i) first to the General Partner until the cumulative Profits allocated to the General Partner under this Section 7.1(A)(i) equal the cumulative Losses allocated to the General Partner under Section 7.2(B), and (ii) second among the Partners in proportion to their respective Percentage Interests.

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B. In the event that the Partnership issues additional Units to the General Partner or any Limited Partner pursuant to Section 3.2 hereof, the General Partner shall make such revisions to this
Section 7.1 as it determines are necessary to reflect the terms of the issuance of such additional Units, including, but not limited to, making special allocations of Profits and Losses and other Partnership items to certain classes of Units.

4.2 Losses.

A. After giving effect to the special allocations set forth in Sections 7.3, 7.4, and 14.2(C), Losses for any fiscal year shall be allocated among the Partners in proportion to their respective Percentage Interests.

B. The Losses allocated pursuant to Section 7.2(A) above shall not exceed the maximum amount of Losses that can be so allocated without causing any Limited Partner to have an Adjusted Capital Account Deficit at the end of any fiscal year. All Losses in excess of the limitations set forth in this Section 7.2(B) shall be allocated to the General Partner.

C. In the event that the Partnership issues additional Units to the General Partner or any Limited Partner pursuant to Section 3.2 hereof, the General Partner shall make such revisions to this
Section 7.2 as it determines are necessary to reflect the terms of the issuance of such additional Units, including, but not limited to, making special allocations of Profits and Losses and other Partnership items to certain classes of Units.

4.3 Special Allocations. The following special allocations shall be made in the following order:

A. Minimum Gain Chargeback. Except as otherwise provided in Regulations Section 1.704-2(f), and notwithstanding any other provision of this Article 7, if there is a net decrease in Partnership Minimum Gain during any fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such fiscal year (and, if necessary, subsequent fiscal years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, determined in accordance with Regulations Section 1.704-2(g). The items to be so allocated shall be determined in accordance with Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section 7.3(A) is intended to comply with the minimum gain chargeback requirement in Regulations
Section 1.704-2(f) and shall be interpreted consistently therewith.

B. Partner Minimum Gain Chargeback. Except as otherwise provided in Regulations Section 1.704-2(i)(4), and notwithstanding any other provision of this Article 7, if there is a net decrease in Partner Nonrecourse Debt Minimum Gain attributable to a Partner Nonrecourse Debt during any Partnership fiscal year, each Partner who has a share of the Partner Nonrecourse Debt Minimum Gain attributable to

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such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specially allocated items of Partnership income and gain for such fiscal year (and, if necessary, subsequent fiscal years) in an amount equal to such Partner's share of the net decrease in Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). The items to be so allocated shall be determined in accordance with Regulations Sections 1.704-2(i)(4) and 1.704-2(i)(2). This Section 7.3(B) is intended to comply with the minimum gain chargeback requirement in Regulations Section 1.704-2(i)(4) and shall be interpreted consistently therewith.

C. Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations, or distributions described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership income and gain shall be specially allocated to each such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Partner as quickly as possible, provided that an allocation pursuant to this Section 7.3(C) shall be made only if and to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in this Article 7 have been tentatively made, as if this Section 7.3(C) were not in this Agreement.

D. Gross Income Allocation. In the event any Partner has a deficit Capital Account at the end of any Partnership fiscal year which is in excess of the sum of (i) the amount such Partner is obligated to restore pursuant to any provision of this Agreement, and (ii) the amount such Partner is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Partner shall be specially allocated items of Partnership income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 7.3 (D) shall be made only if and to the extent that such Partner would have a deficit Capital Account after all other allocations provided for in this Article 7 have been made as if Section 7.3(C) hereof and this Section 7.3(D) were not in the Agreement.

E. Preferential Gross Income Allocations. If and to the extent Partners receive distributions from the Partnership (other than distributions pursuant to Section 14.2(C) in final liquidation of the Partnership), each such Partner shall be allocated an equal amount of Partnership gross income prior to any allocations of Profit and Loss pursuant to Sections 7.1 and 7.2 above. For purposes of this Section 7.3(E), any payment with respect to a Preference Unit that, under the applicable Preference Unit Term Sheet or Other Securities Term Sheet, as the case may be, constitutes a payment in redemption of such Preference Unit (and a return of the Partner's Capital Contribution with respect to such Preference Unit) shall not result in a special allocation of gross income to the Partner receiving such payments under this Section 7.3(E), except to the extent such payment is specifically attributable to accrued and unpaid preferred distributions with

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respect to such Preference Unit provided for in such Preference Unit Term Sheet or Other Securities Term Sheet.

F. Nonrecourse Deductions. Nonrecourse Deductions for any fiscal year shall be allocated among the Partners in accordance with their respective Percentage Interests.

G. Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any fiscal year shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable, in accordance with Regulations Section 1.704-2(i)(1).

H. Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations
Section 1.704-1(b)(2)(iv)(m)(2) or Regulations Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as the result of a distribution to a Partner in complete liquidation of its interest in the Partnership, the amount of such adjustment to Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specifically allocated to the Partners in accordance with their respective Percentage Interests in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or the Partner to whom such distribution was made in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies.

4.4 Curative Allocations. The allocations set forth in Sections 7.2(B), 7.3(A), 7.3(B), 7.3(C), 7.3(D), 7.3(F), 7.3(G), and 7.3(H) above (the "Regulatory Allocations") are intended to comply with certain requirements of the Regulations under Code Section 704(b) and Code Section 514(c)(9)(E). It is the intent of the Partners that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Partnership income, gain, loss, or deduction pursuant to this Section 7.4. Therefore, notwithstanding any other provision of this Article 7 (other than the Regulatory Allocations), the General Partner shall make such offsetting special allocations of Partnership income, gain, loss, or deduction in whatever manner it determines appropriate so that, after such offsetting allocations are made, each Partner's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Partner would have had if the Regulatory Allocations were not part of the Agreement and all Partnership items were allocated pursuant to Section 7.1(A)(ii) and 7.2(A) (subject, however, to Section 7.3(E) above). In exercising its discretion under this Section 7.4, the General Partner shall take into account future Regulatory Allocations under Section 7.3(A) and 7.3(B) that, although not yet made, are likely to offset other Regulatory Allocations previously made under Sections 7.3(F) and 7.3(G).

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4.5 Tax Allocations: Code Section 704(c).

A. Income, gain, loss, and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for Federal income tax purposes and its initial Gross Asset Value in accordance with any permissible method or methods under Code
Section 704(c) and the Regulations thereunder.

B. In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to the definition of "Gross Asset Value" contained in Article 2 above, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for Federal income tax purposes and its Gross Asset Value in the same manner or manners permitted under Code Section 704(c) and the Regulations thereunder.

C. Any elections or other decisions relating to such allocations shall be made by the General Partner using any permissible manner under the Code or the Regulations that the General Partner may elect in its sole discretion. Allocations pursuant to this Section 7.5 are solely for purposes of Federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Partner's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision in this Agreement.

Article 5. Cash Available for Distribution.

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5.1 Operating Cash Flow. As used in this Agreement, "Operating Cash Flow" shall mean and be defined as all cash receipts of the Partnership from whatever source (but excluding Capital Cash Flow and excluding the proceeds of any Capital Contributions to the Partnership) during the period in question in excess of all items of Partnership expense (other than non-cash expenses such as depreciation) and other cash needs of the Partnership, including, without limitation, amounts paid by the Partnership as principal on debts and advances, during such period, capital expenditures and any reserves (as determined by the General Partner) established or increased during such period. In the discretion of the General Partner, reserves may include cash held for future acquisitions. Operating Cash Flow shall be distributed to or for the benefit of the Partners of record as of the applicable Record Date not less frequently than annually, and shall be distributed, first to those Partners holding Preference Units to the extent of the respective priorities (if any) established by the applicable Preference Unit Term Sheets and Other Securities Term Sheets; and then the balance pro rata among the Partners holding OP Units and the Partners holding Preference Units which, based on the provision of the applicable Preference Unit Term Sheets and Other Securities Term Sheets, entitle such Partners to participate in such distributions on a pari passu basis with the holders of OP Units (the "Residual Operating Cash Flow Preference Units"), to each Partner based on the quotient (expressed as a percentage) arrived at by dividing (i) the sum of the OP Unit Value of any Residual Operating Cash Flow Preference Units held by that Partner and the number of OP Units held by that Partner by (ii) the sum of the OP Unit Value of all Residual Operating Cash Flow Preference Units issued and outstanding at the time and the total number of OP Units issued and outstanding at the time.

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5.2 Capital Cash Flow. As used in this Agreement, "Capital Cash Flow" shall mean and be defined as collectively (a) gross proceeds realized in connection with the sale of any assets of the Partnership, (b) gross financing or refinancing proceeds, (c) gross condemnation proceeds (excluding condemnation proceeds applied to restoration of remaining property) and (d) gross insurance proceeds (excluding rental insurance proceeds or insurance proceeds applied to restoration of property), less (a) closing costs, (b) the cost to discharge any Partnership financing encumbering or otherwise associated with the asset(s) in question, (c) the establishment of reserves (as determined by the General Partner, and which may include cash held for future acquisitions), and (d) other expenses of the Partnership then due and owing. Subject to Section 14.2 below, if applicable, Capital Cash Flow shall be distributed to or for the benefit of the Partners of record as of the applicable Record Date not less frequently than annually and shall be distributed: first to the Partners holding Preference Units to the extent of the respective priorities (if any) established by the applicable Preference Unit Term Sheets and Other Securities Term Sheets; and then the balance pro rata among those Partners holding OP Units and those Partners holding Preference Units which, based on the provisions of the applicable Preference Unit Term Sheets and Other Securities Term Sheets, entitle such Partners to participate in such distributions on a pari passu basis with the holders of OP Units (the "Capital Cash Flow Preference Units"), to each Partner based on the quotient (expressed as a percentage) arrived at by dividing
(i) the sum of the OP Unit Value of any Capital Cash Flow Preference Units held by that Partner and the number of OP Units held by that Partner by (ii) the sum of the OP Unit Value of all Capital Cash Flow Preference Units issued and outstanding at the time and the total number of OP Units issued and outstanding at the time. Notwithstanding the foregoing, the General Partner reserves the right to pro-rate distributions of Capital Cash Flow to incoming Limited Partners who were admitted during the applicable period (but excluding any incoming Partners who received Units from an existing Limited Partner) and who held Units as of the applicable Record Date but held such Units for less than the entire period with respect to which the Capital Cash Flow distribution is to be paid, based on the number of days such Units were outstanding during the applicable period, or any other method of pro-ration deemed equitable by the General Partner and, in such event, the amount of the distribution payable to all other Partners shall be adjusted accordingly.

5.3 Consent to Allocations and Distributions. Each of the Partners hereby consents to the allocations and distributions provided for in this Agreement.

5.4 Right to Limit Distributions. The right of any Partner to receive distributions of any nature pursuant to the terms of this Agreement shall be subject to the terms of any agreement between such Partner and the Partnership limiting, restricting or providing rights of set-off with respect to such distributions.

Article 6. Management of Partnership.

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6.1 General Partner. The General Partner shall be the sole manager of the Partnership business, and shall have the right and power to make all decisions and take any and every action with respect to the property, the business and affairs of the Partnership and shall have all the rights, power and authority generally conferred by law, or necessary, advisable or consistent with accomplishing the purposes of the Partnership. All such decisions or actions made or taken by the General Partner hereunder shall be binding upon all of the Partners and the Partnership. The powers of the General Partner to manage the Partnership business shall include, without limitation, the power and authority to, directly or indirectly:

(i) operate any business normal or customary for the owner of or investor in commercial property of the type held by the Partnership;

(ii) perform any and all acts necessary or appropriate to the operation of the Partnership's assets, including, but not limited to, preparing, negotiating, executing and delivering leases and rental agreements with regard to real and personal property owned by the Partnership, preparing applications for rezoning, preparing objections to rezoning of other property and establishing bank accounts in the name of the Partnership;

(iii) improve, renovate and/or perform construction activities with regard to the properties owned by the Partnership and to retain such contractors, subcontractors and other persons or entities as may be required in connection with such activities;

(iv) procure and maintain such insurance as may be available in such amounts and covering such risks as are deemed appropriate by the General Partner;

(v) take and hold all real, personal and mixed property of the Partnership in the name of the Partnership or in the name of a nominee;

(vi) negotiate, execute and deliver agreements on behalf of and in the name of the Partnership;

(vii) borrow money (whether on a secured or unsecured basis), finance and refinance the assets of the Partnership or any part thereof or interest therein, and in connection therewith, issue notes, bonds, securities and other undertakings and evidences of indebtedness and documents related thereto (including, without limitation, guaranties, indemnities and similar undertakings to support loans obtained or debt securities issued by the Company);

(viii) coordinate all accounting and clerical functions of the Partnership and employ such accountants, lawyers, property managers, leasing

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agents and other management or service personnel as may from time to time be required to carry on the business of the Partnership;

(ix) acquire any assets, and encumber, sell, assign, transfer, ground lease or otherwise dispose of any or all of the assets of the Partnership, or any part thereof or interest therein including, without limitation, by way of any Unit dividend, split, recapitalization, merger, consolidation, combination, exchange of Units or other similar Partnership organizational change;

(x) organize one or more partnerships, corporations, limited liability companies or other business entities which are controlled, directly or indirectly, by the Partnership and make any capital contributions (in cash or in kind) required pursuant to the organizational documents or subscription agreements relating to any such partnerships, corporations, limited liability companies or other business entities; and

(xi) establish the date (the "Record Date") for the purpose of making any proper determination in connection with, but not limited to, the following matters: (a) which Partners are entitled to receive distributions, (b) consent to any matter for which the consent of Partners is permitted or required under any provision hereof, or (c) otherwise when Partners are allocated rights hereunder.

6.2 Limitations on Power and Authority of Partners. Notwithstanding the powers of the General Partner set forth in Section 9.1 above, the General Partner shall not have the right or power to do any of the following unless any such action is approved by a Majority-in-Interest of the Limited Partners:

(a) do any act in contravention of this Agreement, or any amendment hereto;

(b) do any act which would make it impossible to carry on the ordinary business of the Partnership, except to the extent that such act is specifically permitted by the terms hereof (it being understood and agreed that a sale of any or all of the assets of the Partnership, for example, would be an ordinary part of the Partnership's business and affairs and is specifically permitted hereby); or

(c) confess a judgment against the Partnership.

6.3 Limited Partners. The Limited Partners shall have no right or authority to act for or to bind the Partnership and no Limited Partner (other than the General Partner if the General Partner is also a Limited Partner) shall participate in the conduct or control of the Partnership's affairs or business.

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6.4 Liability of General Partner. The General Partner shall not be liable or accountable, in damages or otherwise, to the Partnership or to any other Partner for any error of judgment or for any mistakes of fact or law or for anything which it may do or refrain from doing hereafter in connection with the business and affairs of the Partnership except (i) in the case of fraud, willful misconduct (such as an intentional breach of fiduciary duty or an intentional breach of this Agreement) or gross negligence, and (ii) for other breaches of this Agreement, but the liability of the General Partner under this clause (ii) shall be limited to its interest in the Partnership as more particularly provided for in Section 9.8. The General Partner shall not have any personal liability for the return of any Limited Partner's Capital Contributions.

6.5 Indemnity. The Partnership shall indemnify and shall hold the General Partner (and the trustees, trust managers, officers and directors thereof) harmless from any liability, loss, cost or damage, including without limitation reasonable legal fees and court costs, incurred by it by reason of anything it may do or refrain from doing hereafter for and on behalf of the Partnership or in connection with its business or affairs; provided, however, that the Partnership shall not be required to indemnify the General Partner (or any officer, trustee, trust manager or director thereof) for any liability, loss, cost or damage which it might incur as a result of its fraud, willful misconduct or gross negligence in the performance of its duties hereunder. In addition, the General Partner shall be entitled to reimbursement from the Partnership for any amounts paid by it in satisfaction of indemnification obligations owed by the General Partner to present or former officers, trustees, managers or directors of the General Partner or its predecessors, as provided for in or pursuant to the Declaration of Trust and Bylaws of the General Partner. The right of indemnification set forth in this Section 9.5 shall be in addition to any rights to which the person or entity seeking indemnification may otherwise be entitled and shall inure to the benefit of the successors and assigns of any such person or entity. No Partner shall be personally liable with respect to any claim for indemnification pursuant to this Section 9.5, but such claim shall be satisfied solely out of assets of the Partnership.

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6.6 Other Activities of Partners and Agreements with Related Parties. The General Partner shall devote its full-time efforts in furtherance of the Partnership business, it being expressly understood that, except for (i) the Company's ownership of any wholly-owned subsidiary or other entity of the Company which is a partner of a partnership having the Partnership as a partner,
(ii) issuance of debt or equity securities or other borrowing where the net proceeds thereof are loaned or contributed to the Partnership, (iii) activities incidental to the Company's status and existence as a real estate investment trust, and (iv) activities substantially similar to those conducted by the Partnership, the General Partner shall conduct all of its activities exclusively through the Partnership and shall not conduct or engage in any way in any other material business activities. Except as may otherwise be agreed to in writing, each Limited Partner, and its affiliates, shall be free to engage in, to conduct or to participate in any business or activity whatsoever, including, without limitation, the acquisition, development, management and exploitation of real and personal property (other than property of the Partnership), without any accountability, liability or obligation whatsoever to the Partnership or to any other Partner, even if such business or activity competes with or is enhanced by the business of the Partnership. The General Partner, in the exercise of its power and authority under this Agreement, may contract and otherwise deal with or otherwise obligate the Partnership to entities in which the General Partner or any one or more of the managers, trustees, officers, directors or shareholders of the General Partner may have an ownership or other financial interest, whether direct or indirect.

6.7 Other Matters Concerning the General Partner.

A. The General Partner shall be protected in relying, acting or refraining from acting on any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it to be genuine and to have been executed or presented by the proper party or parties.

B. The General Partner may exercise any of the powers granted or perform any of the duties imposed by this Agreement either directly or through agents. The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants selected by it, each of whom may serve as consultants for the Partnership. An opinion by any consultant on a matter which the General Partner believes to be within its professional or expert competence shall be full and complete protection as to any action taken or omitted by the General Partner based on the opinion and actions taken or omitted in accordance therewith. The General Partner shall not be responsible for the misconduct, negligence, acts or omissions of any consultant or contractor of the Partnership or of the General Partner, and shall assume no obligation other than to use due care in the selection of all consultants and contractors.

C. No mortgagee, grantee, creditor or any other person dealing with the Partnership shall be required to investigate the authority of the General Partner or secure

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the approval of or confirmation by any Limited Partner of any act of the General Partner in connection with the conduct of any ordinary or extraordinary Partnership business.

D. The General Partner may retain such persons or entities as it shall determine (including the General Partner or any entity in which the General Partner shall have an interest or with which it is affiliated) to provide services to or on behalf of the Partnership. The General Partner shall be entitled to reimbursement from the Partnership for its out-of-pocket expenses (including, without limitation, amounts paid or payable to the General Partner or any entity in which the General Partner shall have an interest or with which it is affiliated) incurred in connection with Partnership business. Such expenses shall be deemed to include without limitation those expenses required in connection with the administration of the Partnership such as the maintenance of Partnership books and records, management of the Partnership property and assets and preparation of information respecting the Partnership needed by the Partners in the preparation of their individual tax returns.

E. The General Partner may loan to the Partnership the net proceeds of loans obtained or debt securities issued by the Company so long as the terms of such loan to the Partnership are substantially equivalent to the corresponding loan obtained or debt securities issued by the Company.

6.8 Partner Exculpation. Except for fraud, willful misconduct and gross negligence, no Partner shall have any personal liability whatsoever, whether to the Partnership or to any other Partner, for the debts or liabilities of the Partnership or its obligations hereunder, and the full recourse of any Partner shall be limited to the interest of that Partner in the Partnership. To the fullest extent permitted by law, no trustee, manager, officer, director or shareholder of the General Partner shall be liable to the Partnership for money damages except for (i) active and deliberate dishonesty established by a final judgment, order or decree of a court of competent jurisdiction or (ii) actual receipt of an improper benefit or profit in money, property or services. Without limitation of the foregoing, and except for fraud, willful misconduct and gross negligence, no property or assets of any Partner, other than its interest in the Partnership, shall be subject to levy, execution or other enforcement procedures for the satisfaction of any judgment (or other judicial process) in favor of any other Partners and arising out of, or in connection with, this Agreement. This Agreement is executed by the trustees, managers, trust managers, members, officers or partners of each Partner solely as trustees, managers, trust managers, members, officers or partners of the same and not in their own individual capacities. No advisor, trustee, manager, trust manager, member, director, officer, partner, employee, beneficiary, shareholder, participant or agent of any Partner (or of any partner of a Partner) shall be personally liable in any matter or to any extent under or in connection with this Agreement, and the Partnership, each Partner and their respective successors and assigns shall look solely to the interest of the other Partner in the Partnership for the payment of any claim or for any performance hereunder.

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6.9 General Partner Expenses and Liabilities. All costs and expenses incurred by the Company in connection with its activities as the General Partner hereunder, all costs and expenses incurred by the Company in connection with its continued existence, qualification as a real estate investment trust under the Code and otherwise, and all other liabilities incurred or suffered by the General Partner in connection with the pursuit of its business and affairs as contemplated hereunder and in connection herewith, shall be paid (or reimbursed to the Company, if paid by the Company) by the Partnership unless and to the extent that any such costs were paid by the Company in connection with the issuance of additional shares of beneficial interest of the Company as contemplated by Section 3.3(B) above.

Article 7. Banking. The funds of the Partnership shall be kept in accounts designated by the General Partner and all withdrawals therefrom shall be made on such signature or signatures as shall be designated by the General Partner.

Article 8. Accounting.

8.1 Fiscal Year. The fiscal year and taxable year of the Partnership (the "fiscal year") shall end on the last day of December of each year, unless another fiscal year end is selected by the General Partner.

8.2 Books of Account. The Partnership books of account shall be maintained at the principal office designated in Article 4 or at such other locations and by such person or persons as may be designated by the General Partner. The Partnership shall pay the expense of maintaining its books of account. Each Partner shall have, during reasonable business hours and upon reasonable prior notice, access to the books of the Partnership and in addition, at its expense, shall have the right to copy such books. The General Partner, at the expense of the Partnership, shall cause to be prepared and distributed to the Partners annual financial data sufficient to reflect the status and operations of the Partnership and its assets and to enable each Partner to file its federal income tax return.

8.3 Method of Accounting. The Partnership books of account shall be maintained and kept, and its income, gains, losses and deductions shall be accounted for, in accordance with generally accepted accounting principles consistently applied, or such other method of accounting as may be adopted hereafter by the General Partner. All elections and options available to the Partnership for Federal or state income tax purposes shall be taken or rejected by the Partnership in the sole discretion of the General Partner.

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8.4 Section 754 Election. In case of a distribution of property made in the manner provided in Code Section 734 (or any similar provision enacted in lieu thereof), or in the case of a transfer of any interest in the Partnership permitted by this Agreement made in the manner provided in Code Section 743 (or any similar provision enacted in lieu thereof), the General Partner, on behalf of the Partnership, will file an election under Code Section 754 (or any similar provision enacted in lieu thereof) in accordance with the procedures set forth in the applicable Regulations.

8.5 Tax Matters Partner. The General Partner is hereby designated the Tax Matters Partner (hereinafter referred to as the "TMP") of the Partnership and shall have all rights and obligations of the TMP under the Code. The Partnership shall reimburse the TMP for any and all out-of-pocket costs and expenses (including attorneys' and accountants' fees) incurred or sustained by it in its capacity as TMP. The Partnership shall indemnify, defend and hold the TMP harmless from and against any loss, liability, damage, cost or expense (including attorneys' and accountants' fees) sustained or incurred as a result of any act or decision concerning the Partnership tax matters and within the scope of its responsibility as TMP.

8.6 Administrative Adjustments. If the TMP receives notice of a Final Partnership Administrative Adjustment (the "FPAA") or if a request for an administrative adjustment made by the TMP is not allowed by the United States Internal Revenue Service (the "IRS") and the IRS does not notify the TMP of the beginning of an administrative proceeding with respect to the Partnership's taxable year to which such request relates (or if the IRS so notifies the TMP but fails to mail a timely notice of an FPAA), the TMP may, but shall not be obligated to, petition a court for readjustment of partnership items. In the case of notice of an FPAA, if the TMP determines that the United States District Court or Claims Court is the most appropriate forum for such a petition, the TMP shall notify each person who was a Partner at any time during the Partnership's taxable year to which the IRS notice relates of the approximate amount by which its tax liability would be increased (based on such assumptions as the TMP may make) if the treatment of partnership items on its return was made consistent with the treatment of partnership items on the Partnership's return, as adjusted by the FPAA. Unless each such person deposits with the TMP, for deposit with IRS, the approximate amount of its increased tax liability, together with a written agreement to make additional deposits if required to satisfy the jurisdictional requirements of the court, within thirty days after the TMP's notice to such person, the TMP shall not file a petition in such court. Instead, the TMP may, but shall not be obligated to, file a petition in the United States Tax Court.

Article 9. Transfers of Partnership Interests.

A. General Partner. The General Partner may not transfer its interest in the Partnership without the consent of a Majority-in-Interest of the Limited Partners unless (i) the transfer of such interest is to an affiliate of the General Partner, or (ii) the transfer of such interest is pursuant to or in connection with a Recapitalization and either (a) the Recapitalization has been approved by the consent of a Majority-in-Interest of the

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Limited Partners, or (b) an appropriate adjustment to the number of OP Units held by each Partner has been made in accordance with Section 3.2(F).

B. Limited Partner.

(ii) No Limited Partner or substituted Limited Partner shall, without the prior written consent of the General Partner (which consent may be given or withheld in the sole discretion of the General Partner), sell, assign, distribute or otherwise transfer (a "Transfer") all or any part of his interest in the Partnership, except (w) by operation of law, testamentary disposition, gift (outright or in trust) or by sale, in each case to or for the benefit of his parent(s), spouse or descendants, (x) pledges or other collateral transfers effected by a Limited Partner to secure the repayment of a loan or other obligation; provided however, that each such pledgee shall agree in writing, concurrent with such pledge or other collateral transfer, to (i) subordinate its rights with respect to the pledged interest to any and all rights granted by the pledging Limited Partner to the Partnership, whether or not such rights constitute perfected security interests in favor of the Partnership, including, without limitation, any rights to withhold, restrict or offset distributions in respect of such pledged interest under the terms of any agreement between the Partnership and the pledging Limited Partner, and (ii) to defer the exercise of its rights as a secured creditor to realize upon the collateral in the case of an event of default until the expiration of any applicable "lock-up" period under the terms of any agreement between the Partnership and the pledging Limited Partner, (y) the exchange of OP Units for Common Shares, pursuant to Section 3.2(C) above, and (z) the distribution of OP Units or Preference Units by a Limited Partner to any of its direct or indirect constituent partners or owners. Notwithstanding the foregoing, each such transfer shall be subject to compliance with restrictions on transferability contained in the Declaration of Trust and Bylaws of the Company and/or any applicable agreement executed by the transferor as well as compliance with applicable Federal and state securities laws and no transfer by a Limited Partner of OP Units or Preference Units may be made if such transfer would result in the Partnership being treated as an association taxable as a corporation or if such transfer is effectuated through an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Code
Section 7704; the General Partner reserves the right to require an opinion of counsel regarding such matters in form and substance reasonably acceptable to the General Partner as a condition to any such Transfer. Neither the conversion of a Preference Unit into one or more OP Units nor the redemption of an OP Unit in accordance with Section 3.2 constitutes a Transfer. A Limited Partner shall notify the General Partner of any Transfer of beneficial interest or other interest which occurs without a transfer of record ownership, as well as any pledge or other collateral transfer. No part of the interest of a Limited Partner shall be subject to the claims of any creditor, any

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spouse for alimony or support, or to legal process, and may not be voluntarily or involuntarily alienated or encumbered except as may be specifically provided for in this Agreement. A Limited Partner shall not be permitted to retire or withdraw from the Partnership except as expressly permitted by this Agreement.

(iii) An assignee, legatee, distributee or other transferee (whether by conveyance, operation of law or otherwise) (including any pledgee upon realization of its rights as a secured creditor) (a "Transferee") of all or any portion of a Limited Partner's interest in the Partnership shall be entitled to receive Profits, Losses and distributions hereunder attributable to such interest acquired by reason of such Transfer, from and after the effective date of the Transfer of such interest; provided, however, anything in this Agreement to the contrary notwithstanding, (a) except as provided in Section 12(B)(i) no Transfer by a Limited Partner shall be effective until such Transfer has been consented to by the General Partner; (b) without the prior written consent of the General Partner, no Transferee shall be considered a substituted Limited Partner except as provided in Section 12(B)(i)(y) and (z) and, in any event, until such Transferee shall have agreed to be bound by the terms of this Agreement and shall have executed a counterpart hereof; (c) the Partnership and the General Partner shall be entitled to treat the transferor of such interest as the absolute owner thereof in all respects, and shall incur no liability for the allocation of Profits and Losses or distributions which are made to such transferor until such time as the written instrument of Transfer has been received by the General Partner and the "effective date" of the Transfer has passed, and (d) the General Partner shall have the right to require any such transferor to exchange the OP Units to which such interest relates for Common Shares or cash, pursuant to
Section 3.2(C) above. The "effective date" of any transfer shall be the last day of the month set forth on the written instrument of Transfer or such other date consented to in writing by the General Partner as the "effective date."

(iii) Notwithstanding any other provision of this Agreement, no Limited Partner may effect a Transfer of its Partnership Interest, in whole or in part, unless (a) the Transfer is a Private Transfer, or (b) the Transfer satisfies both of the following tests, (x) when aggregated with other Transfers of Partnership Interests within the same taxable year of the Partnership (but not including Private Transfers or Transfers pursuant to exercises of the Redemption Right), the Transfer would constitute a Percentage Interest of two percent (2%) or less, and (y) when aggregated with other Transfers and redemptions of Partnership Interests within the same taxable year of the Partnership (but not including Private Transfers), the Transfer would constitute a Percentage Interest of ten percent (10%) or less. The General Partner may establish such policies and procedures as it may deem necessary or desirable in its sole discretion to administer the 2% and 10% Percentage Interest limits set forth in the foregoing sentence in the manner

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described in Section 3.2(D)(iii). Solely for purposes of this
Section 12(B)(a)(iii), the term "Transfer" shall not include (except as provided in the following clause) the mere pledge, hypothecation or grant of a security interest in a Partnership Interest, but shall include any transfer of a Partnership Interest within the meaning of Treasury Regulations Section 1.7704-1(a)(3) (other than transfers that have not been recognized by the Partnership). The restrictions set forth in this Section 12(B)(a)(iii) shall continue in effect until such time as the Partnership is no longer potentially subject to classification as a publicly traded partnership, as defined in
Section 7704 of the Code, as determined by the General Partner in its sole discretion.

(iv) Notwithstanding anything to the contrary contained in this Section 12(B), (a) in the event that a Limited Partner pursuant to the dissolution and liquidation of such Limited Partner distributes all or any portion of its interest in the Partnership, the partners, shareholders or members (as the case may be) in such Limited Partner receiving such interest shall become substituted Limited Partners, and shall (upon agreeing to be bound by the terms of this Agreement and executing a counterpart hereof and/or any Preference Unit Term Sheet or Other Securities Term Sheet) succeed to the rights, interests and obligations of such Limited Partner in the Partnership, in proportion to their respective interests in such Limited Partner, and (b) no Transfer shall be effective to the extent that such Transfer would, in the opinion of the General Partner (y) by treating the interest in the Partnership so transferred as if it had been exchanged for Common Shares in accordance with Section 3.2(C) above, violate the limitations on ownership of Common Shares contained in the Declaration of Trust and/or Bylaws of the Company, or (z) violate any State or Federal securities laws.

A. Admission Adjustments. The General Partner shall, when necessary, cause this Agreement to be amended from time to time (and shall cause Schedule A to be revised), to reflect the admission or withdrawal of Partners, and the issuance, conversion and redemption of any Preference Units and/or OP Units (including the corresponding adjustment to Percentage Interests).

B. Transfers to Lenders. Notwithstanding any other provision of this Agreement to the contrary, no transfer of any Units may be made to a lender to the Partnership or any person who is related (within the meaning of Regulation Section 1.752-4(b)) to any lender to the Partnership whose loan constitutes a Nonrecourse Liability, without the consent of the General Partner, which consent may be given or withheld by the General Partner in its sole and absolute discretion, provided that as a condition to such consent being granted the lender will be required to enter into an arrangement with the Partnership and the General Partner to exchange or redeem for the Cash Amount or the REIT Shares Amount any Units in which a security interest is held

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simultaneously with the time at which such lender would be deemed to be a partner in the Partnership for purposes of allocating liabilities to such lender under Code Section 752.

E. Transfers Causing a Technical Termination of the Partnership. Notwithstanding any other provision of this Agreement to the contrary, a Limited Partner shall not be entitled to Transfer its Partnership Interest, in whole or in part, if such Transfer prejudices or affects the continuity of the Partnership for purposes of Code Section 708. Prior to any such Transfer, the General Partner may require an opinion of counsel satisfactory to the General Partner to the effect that such Transfer will not cause adverse tax consequences to the nontransferring Partners, and such Limited Partner attempting to Transfer the Partnership Interest shall be responsible for paying said counsel's fee for his opinion.

Article 10. Admission of New Partners. The General Partner shall admit to the Partnership as limited partners those persons and entities who are not already Partners and who receive OP Units and/or Preference Units in accordance with the provisions of this Agreement.

Article 11. Termination, Liquidation and Dissolution of Partnership.

11.1 Termination Events. The Partnership shall be dissolved and its affairs wound up in the manner hereinafter provided upon the earliest to occur of the following events:

A. December 31, 2046; or

B. the sale of all or substantially all of the assets of the Partnership;

C. the agreement of those Partners holding at least sixty-seven percent (67%) of the Percentage Interests of all of the Partners, determining that the Partnership should be dissolved; or

D. subject to Section 14.4 below, the entry of a final judgment, order or decree of a court of competent jurisdiction adjudicating as bankrupt either the Partnership or the General Partner, and the expiration without appeal of the period, if any, allowed by applicable law to appeal therefrom.

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11.2 Method of Liquidation. Upon the happening of any of the events specified in Section 14.1 above, the General Partner (or if there be no General Partner, a liquidating trustee selected by a Majority-in-Interest of the Limited Partners) shall immediately commence to wind up the Partnership's affairs and shall liquidate the assets of the Partnership as promptly as possible, unless the General Partner, or the liquidating trustee, shall determine that an immediate sale of Partnership assets would cause undue loss to the Partnership, in which event the liquidation may be deferred for a reasonable time. The Partners shall continue to share Operating Cash Flow, Capital Cash Flow, Profits and Losses during the period of liquidation in the same proportions as before dissolution (subject to Section 14.2(C) below). The proceeds from liquidation of the Partnership, including repayment of any debts of Partners to the Partnership, shall be applied in the following order:

A. Debts of the Partnership, including repayments of principal and interest on loans and advances made by the General Partner pursuant to Sections 3.3 and/or 9.7 above; then

B. To the establishment of any reserves deemed necessary or appropriate by the General Partner, or by the person(s) winding up the affairs of the Partnership in the event there is no remaining General Partner of the Partnership, for any contingent or unforeseen liabilities or obligations of the Partnership. Such reserves established hereunder shall be held for the purpose of paying any such contingent or unforeseen liabilities or obligations and, at the expiration of such period as the General Partner, or such person(s) deems advisable, the balance of such reserves shall be distributed in the manner provided hereinafter in this Section 14.2 as though such reserves had been distributed contemporaneously with the other funds distributed hereunder; and then

C. To the Partners in accordance with their respective Capital Account balances, after giving effect to all contributions, distributions and allocations for all periods. In connection therewith, income, gain and loss of the Partnership (and to the extent necessary to achieve the purposes hereof, items of gross income and deduction) with respect to the sale or other disposition of all or substantially all of the Partnership's assets and/or the Partnership's operations in connection therewith (whether or not attributable to the taxable year in which the distribution pursuant to this Section 14.2(C) is to be made or a preceding taxable year) shall be allocated among the Partners so that each Partner's Capital Account shall equal, after taking into account the prior balance (positive or negative) in such Partner's Capital Account and the effect of such allocation, the amount that such Partner would be entitled to receive if the Partnership were to make a distribution to the Partners pursuant to the provisions of Section 8.2 hereof in an amount equal to the remaining liquidation proceeds to be distributed under this Section 14.2(C).

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11.3 Date of Termination. The Partnership shall be terminated when all notes received in connection with such disposition have been paid and all of the cash or property available for application and distribution under Section 14.2 above (including reserves) shall have been applied and distributed in accordance therewith.

11.4 Reconstitution Upon Bankruptcy.

A. Notwithstanding any dissolution of the Partnership under
Section 14.1(D) above, if the Partnership is reconstituted as set forth in this Section 14.4, then the business of the Partnership shall be continued with the Partnership's property and the Partnership's assets shall not be liquidated.

B. If the Partnership is dissolved by reason of the bankruptcy of the General Partner, a successor general partner may be admitted within 90 days after the dissolution, effective as of the date of dissolution, as the General Partner hereunder, with the written consent of a Majority-in-Interest of the Limited Partners. Upon the admission of such successor general partner, without any further consent or approval of any other Partner, the Partnership shall be reconstituted as a successor limited partnership.

C. If the Partnership is dissolved by reason of the bankruptcy of the Partnership in a proceeding for the reorganization (and not the liquidation) of the Partnership, then, with the consent of the Company and a Majority-in-Interest of the Limited Partners, the Partnership may be reconstituted within 90 days after dissolution, effective as of the date of dissolution, whereupon the Partnership shall be reconstituted as a successor limited partnership.

D. The successor limited partnership reconstituted in accordance with the foregoing provisions of this Section 14.4 shall continue the business of the Partnership with the Partnership's property. The Percentage Interests of the Partners in the successor limited partnership shall be in proportion to their respective Percentage Interests in the dissolved Partnership. Such successor limited partnership shall be governed by the terms and provisions of this Agreement and references in this Agreement to the Partnership or to the Partners or their rights and obligations shall be understood to comprehend such successor limited partnership and the Partners thereof and their rights and obligations.

11.5 Death, Legal Incompetency, Etc. of a Limited Partner. The death, legal incompetency, insolvency, dissolution or bankruptcy of a Limited Partner shall not dissolve or terminate the Partnership. Upon the death or incapacity of an individual Limited Partner, such individual Limited Partner's interest in the Partnership shall be transferred either by will, the laws of intestacy or otherwise to the legal representative or successor of such individual Limited Partner.

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Article 12. Power of Attorney. Each Limited Partner hereby irrevocably constitutes and appoints the General Partner, with full power of substitution, its true and lawful attorney, for it and in its name, place and stead and for its use and benefit, to sign, swear to, acknowledge, file and record:

(i) this Agreement, and subject to Article 16 below, amendments to this Agreement;

(ii) any certificates, instruments and documents (including assumed and fictitious name certificates) as may be required by, or may be appropriate under, the laws of the State of Delaware, the State of Texas or any other State or jurisdiction in which the Partnership is doing or intends to do business, in order to discharge the purposes of the Partnership or otherwise in connection with the use of the name or names used by the Partnership;

(iii) any other instrument which may be required to be filed or recorded by the Partnership on behalf of the Partners under the laws of any State or by any governmental agency in order for the Partnership to conduct its business;

(iv) any documents which may be required to effect the continuation of the Partnership, the admission of a substitute or additional Partner, the dissolution and termination of the Partnership or the amendment and restatement of Schedule A, provided such continuation, admission, dissolution and termination or amendment and restatement of Schedule A, is not in violation of any provision of this Agreement; and

(v) any documents which may be required or desirable to have the General Partner appointed, and act as, the TMP.

The foregoing grant of authority is a special power of attorney coupled with an interest, is irrevocable and shall survive the death or incapacity of any individual Limited Partner, and shall survive the delivery of any assignment by a Limited Partner of the whole or any portion of his interest in the Partnership.

Article 13. Amendment of Agreement.

A. Each Limited Partner, by his execution of or joinder in this Agreement, hereby irrevocably appoints the General Partner with power of substitution, as his true and lawful attorney coupled with an interest, in his name, place and stead to amend this Agreement in any respect other than:

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(ii) to enlarge the obligation of any Partner to make contributions to the capital of the Partnership; or

(iii) except as otherwise provided for in this Agreement or as required by law, to modify the allocation of Profits or Losses or distributions among the Partners as provided for in Articles 7 and 8 above, respectively; or

(iv) to amend Articles 1 or 12 or Section 9.2; or

(v) to amend this Article 16.

A. With respect to amendments regarding Sections 16(A)(ii) or 16(A)(iii), this Agreement may be amended with the written consent of the Company and those Limited Partners holding not less than 67% of the aggregate of Percentage Interests held by all Limited Partners. Notwithstanding the foregoing, the terms and conditions of a particular series of Preference Units may not be changed without the written consent of the holders of at least 67% of the Preference Units within the class or series (or such greater percentage as may be provided for in the applicable Preference Unit Term Sheet or Other Securities Term Sheet, as the case may be).

B. With respect to amendments regarding Section 16(A)(i), this Agreement may be amended only with the written consent of the General Partner and any Partner adversely affected by such amendment. With respect to amendments regarding Section 16(A)(iv) this Agreement may be amended only with the written consent of all Partners.

In the event this Agreement shall be amended pursuant to this Article 16, the General Partner shall cause this Agreement to be amended to reflect the amendment.

Article 14. Miscellaneous.

14.1 Notices. Any notice, election or other communication provided for or required by this Agreement shall be in writing and shall be deemed to have been given when delivered by hand or by telecopy or other facsimile transmission, the first business day after sent by overnight courier (such as Federal Express), or on the second business day after deposit in the United States Mail, certified or registered, return receipt requested, postage prepaid, properly addressed to the Partner to whom such notice is intended to be given at the address for the Partner set forth on Schedule A of this Agreement, or at such other address as such person may have previously furnished in writing to the Partnership and each Partner with copies to the General Partner at:

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1450 W. Sam Houston Parkway Houston, Texas 77043 Attention: Allen R. Hartman

14.2 Modifications. Except as otherwise provided in this Agreement, no change or modification of this Agreement, nor any waiver of any term or condition in the future, shall be valid or binding upon a Partner unless such change or modification shall be in writing and signed by such Partner.

14.3 Successors and Assigns. Any person acquiring or claiming an interest in the Partnership, in any manner whatsoever, shall be subject to and bound by all of the terms, conditions and obligations of this Agreement to which his predecessor-in-interest was subject or bound, without regard to whether such a person has executed a counterpart hereof or any other document contemplated hereby. No person, including the legal representative, heir or legatee of a deceased Partner, shall have any rights or obligations greater than those set forth in this Agreement, and no person shall acquire an interest in the Partnership or become a Partner thereof except as expressly permitted by and pursuant to the terms of this Agreement. Subject to the foregoing, and the provisions of Article 12 above, this Agreement shall be binding upon and inure to the benefit of the Partners and their respective successors, assigns, heirs, legal representatives, executors and administrators.

14.4 Duplicate Originals. For the convenience of the Partners, any number of counterparts hereof may be executed, and each such counterpart shall be deemed to be an original instrument, and all of which taken together shall constitute one agreement.

14.5 Construction. The titles of the Articles, Sections and subsections herein have been inserted as a matter of convenience of reference only and shall not control or affect the meaning or construction of any terms or provisions herein.

14.6 Governing Law. This Agreement shall be governed by the laws of the State of Delaware. Except to the extent the Act is inconsistent with the provisions of this Agreement, the provisions of such Act shall apply to the Partnership.

14.7 Other Instruments. The parties hereto covenant and agree that they will execute such other and further instruments and documents as, in opinion of the General Partner, are or may become necessary or desirable to effectuate and carry out the Partnership as provided for by this Agreement.

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14.8 General Partner with Interest as Limited Partner. If the General Partner ever has an interest as a Limited Partner in the Partnership, the General Partner shall, with respect to such interest, enjoy all of the rights and be subject to all of the obligations and duties of a Limited Partner.

14.9 Legal Construction. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.

14.10 Gender. Whenever the context shall so require, all words herein in any gender shall be deemed to include the masculine, feminine or neuter gender, all singular words shall include the plural, and all plural words shall include the singular.

14.11 Prior Agreements Superseded. This Agreement supersedes any prior understandings or written or oral agreements among the Partners, or any of them, respecting the within subject matter and contains the entire understanding amongst the Partners with respect thereto.

14.12 No Third Party Beneficiary. The terms and provisions of this Agreement are for the exclusive use and benefit of General Partner and the Limited Partners and shall not inure to the benefit of any other person or entity.

14.13 Purchase for Investment. Each Partner represents, warrants and agrees that it has acquired and will hold its interest in the Partnership for its own account for investment only and not for the purpose of, or with a view toward, the resale or distribution of all or any part thereof, nor with a view toward selling or otherwise distributing such interest or any part thereof at any particular time or under any predetermined circumstances. Each Partner further represents and warrants that it is a sophisticated investor, able and accustomed to handling sophisticated financial matters for itself, particularly real estate investments, and that it has a sufficiently high net worth that it does not anticipate a need for the funds it has invested in the Partnership in what it understands to be a highly speculative and illiquid investment.

14.14 Waiver. No consent or waiver, express or implied, by any Partner to or of any breach or default by any other Partner in the performance by such other Partner of its obligations hereunder shall be deemed or construed to be a consent to or waiver of any other breach or default in the performance by such other Partner of the same or any other obligations of such Partner hereunder. Failure on the part of any Partner to complain of any act or failure to act on the part of any other Partner or to declare any other Partner in default, irrespective of how long such failure continues, shall not constitute a waiver by such Partner of its rights hereunder.

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14.15 Counterparts. This Agreement may be executed in one or more counterparts, which when taken together, shall constitute but one original.

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IN WITNESS WHEREOF, this Agreement has been executed and sworn to as of the day and year first above written by the General Partner and the undersigned Limited Partners.

GENERAL PARTNER:

HARTMAN COMMERCIAL PROPERTIES REIT,
a Texas Real Estate Investment Trust

By: /s/ Allen R. Hartman
   ---------------------------------
Name: Allen R. Hartman
Title: President

LIMITED PARTNERS:

Attached

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SCHEDULE A

Partners, Capital Accounts and Partnership Interests

                                                          AGREED
                                             PREFERENCE   CAPITAL   PERCENTAGE
   NAME AND ADDRESS OF PARTNERS   OP UNITS     UNITS      ACCOUNT    INTEREST
   ----------------------------   --------   ----------   -------   ----------

General Partner:

Limited Partners:

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EXHIBIT 10.2

PROPERTY AND PARTNERSHIP MANAGEMENT AGREEMENT

THIS PROPERTY MANAGEMENT AGREEMENT is entered into effective as of the 28th day of January, 1999, by and between HARTMAN REIT OPERATING PARTNERSHIP, L.P., a Delaware limited partnership (hereinafter called "Owner"), and HARTMAN MANAGEMENT, INC., (hereinafter called "Manager"),

WITNESSETH

WHEREAS, Owner is the owner of the properties described in Schedule A attached hereto (collectively, the "Properties"); and

WHEREAS, Owner wishes to obtain the benefits of Manager's expertise in the field of real estate management by relinquishing to Manager control in the operation, direction, management and supervision of the Properties, subject to the terms and provisions of this Agreement, and Manager for a fee agrees to assume said control and discretion in the operation, direction, management and supervision of the Properties on behalf of Owner.

NOW, THEREFORE, in consideration of the mutual covenants herein contained and of other good and valuable consideration, the parties hereto agree as follows:

ARTICLE 1

APPOINTMENT

Owner contracts with Manager to manage, operate, direct and supervise the Properties, as well as all other properties acquired by Owner from time to time, on behalf of Owner and to provide services as required under this Agreement.


ARTICLE 2

TERM

Subject to and upon the terms and conditions set forth in this Agreement (including without limitation Article 12), the term of this Agreement shall commence on February 1, 1999, and shall automatically renew for successive one year terms unless terminated in writing by either party at least thirty (30) days prior to the expiration of a previous term.

ARTICLE 3

RELATIONSHIP

Manager shall at all times be the independent contractor of Owner and not the employee or agent of Owner. Manager shall have no right or power to contract with third parties for, on behalf of, or in the name of Owner or otherwise to bind Owner. Except as expressly provided herein to the contrary, Owner agrees to be responsible for and shall reimburse Manager for all costs, expenses and disbursements reasonably and properly incurred by Manager in accordance with the provisions of this Agreement in providing management and operational services hereunder, such as, but not limited to, contracts for cleaning services, contracts for landscaping or maintenance services and orders for supplies and equipment, and Owner agrees to indemnify and hold Manager harmless from and against the same. Owner agrees to name Manager as an additional insured on all comprehensive general liability insurance maintained by Owner and relating to the Properties, and Owner shall pay the cost of any comprehensive general liability insurance policy maintained by Manager and relating to the Properties, but only to the extent that such is reasonable, is not duplicate of insurance maintained by Owner (but only if such insurance of Owner names Manager as an additional insured), and is approved by Owner.

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ARTICLE 4

ASSIGNABILITY

Manager shall not assign this Agreement or any rights hereunder, nor shall Manager delegate its duties hereunder, without the prior written consent of Owner; provided, however, Manager may assign this Agreement and delegate its duties to any entity which succeeds to all or substantially all of the assets of Manager and/or to any entity which is owned or controlled by Allen R. Hartman, and Manager may delegate certain of its duties to its employees, agents and contractors as contemplated by the provisions of this Agreement.

ARTICLE 5

SERVICES OF MANAGER

5.1 Manager shall manage, operate and maintain the Properties in a manner normally associated with the management and operation of properties that are similar in size, scope and use as the Properties. Manager shall at all times deal with third parties (whether or not affiliated with Manager) at arms' length and in Owner's interest at all times.

5.2 Manager shall have in its employ at all times a sufficient number of capable employees to enable it to properly, adequately, safely and economically manage, operate and maintain the Properties. All matters pertaining to the employment, supervision, compensation, promotion and discharge of such employees are the responsibility of Manager. Manager is in all respects the employer of such employees, but Owner may require that any particular employee or employees be removed from duty with respect to the Properties, if Owner reasonably deems such employee or employees to be incompetent, careless, insubordinate or otherwise objectionable. Manager shall fully comply with all applicable laws and regulations

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having to do with workman's compensation, social security, unemployment insurance, hours of labor, wages, working conditions, and other employer-employee related subjects. All employees engaged by Manager shall be the employees of Manager and not of Owner.

5.3 Manager shall prepare and submit to Owner a proposed operating budget for the Properties for the management and operation of the Properties for the forthcoming calendar year (or in the case of the first calendar year in which the term hereof commences, the remainder of such year if it is not a full calendar year). The first such budget shall be submitted to Owner within thirty
(30) days after the commencement of the term of this Agreement and in the future a subsequent proposed budget shall be delivered to Owner no later than November 1 of each calendar year. By November 1 of each calendar year, Manager will submit to Owner a summary of the actual (through September 30) and projected (for the full year) results of management and operation of the Properties for such calendar year. Owner will consider the proposed budgets and then will consult with Manager within thirty (30) days after they are submitted in order to agree on an "Approved Operating Budget". Manager shall have the right from time to time during each calendar year to submit revised budgets to Owner, and Owner shall endeavor to approve the same or revisions thereto as Owner and Manager may deem proper and as promptly as practicable.

Manager agrees to use diligence and to employ all reasonable efforts to ensure that the actual costs (net of amounts, if any, recovered from third parties) of maintaining and operating the Properties shall not exceed the approved budget pertaining thereto.

5.4 Manager shall use diligent efforts to collect all rents (including billings resulting from tenant participation in operating expenses, taxes and common area maintenance

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charges) and other charges which may become due at any time from any tenant or from others for services provided in connection with or for the use of the Properties or any portion thereof. Manager shall identify any amounts due to Owner from miscellaneous services provided to tenants or the public including, but not limited to, parking income, tenant storage, and retail income. All monies so collected shall be deposited in the Receipts Account. Manager cannot and may not terminate any lease, lock out a tenant, institute a suit for rent or for use and occupancy, or institute proceedings for recovery of possession of any properties, without the prior written approval of Owner. In connection with such suits or proceedings only legal counsel designated by Owner shall be retained. The estimated costs of legal services to be incurred in bringing such approved suit or proceeding shall be submitted to Owner for its approval. Manager shall not write off any rental income of more than $1,000 for any single tenant without the prior written approval of Owner.

5.5 Manager shall act as leasing manager for the Properties and be responsible for the leasing activities of the Properties, including the development of a marketing program and leasing guidelines (including rental rates, lease terms, and similar items). It is understood that a marketing program and leasing guidelines will be submitted to Owner prior to November 1 of each year, and Owner shall endeavor to approve a marketing program and leasing guidelines within thirty (30) days after a submission is made by Manager. Once the marketing program and leasing guidelines are approved by Owner, Manager may act without further approvals as long as Manager acts within the approved guidelines of the marketing program and leasing guidelines. It is understood that Owner is the only signatory authority for the execution of all lease and related

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leasing documents and Manager shall not represent to the contrary to prospective tenants and other parties.

5.6 Manager shall institute and supervise all ordinary and extraordinary repairs, decorations and alterations, including the administration of a preventative maintenance program for all mechanical, electrical and plumbing systems and equipment, provided that such (unless the same relate to emergencies) are included in an Approved Operating Budget.

5.7 Manager shall institute and supervise all operational activities of the Properties (such as the following, but not limited to this listing):

(a) Supervision of the cleaning;

(b) Supervision of the security on behalf of Owner;

(c) Supervision of any landscaping;

(d) Supervision of the window washing;

(e) Responsibility for and supervision of the central plant and other H.V.A.C. equipment;

(f) Responsibility for and supervision of a preventative maintenance program;

(g) Responsibility for and supervision for any necessary repairs to the Properties;

(h) Supervision for the maintenance of the elevators serving the Properties;

(i) Responsibility for making arrangements for and administering account for utilities; and

(j) Any other activity expedient to the normal operation of properties similar to the Properties.

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As used herein, "supervise" and "supervision" shall also include responsibility for the particular task to the extent the Owner so directs and provides the funds therefor.

5.8 Manager shall obtain and verify bills for real estate and personal property taxes, improvement assessments and other like charges which are or may become liens against any portion of the Properties and recommend payment or appeal as its best judgment may decide. If and when received by Manager, Manager shall forward such bills to Owner in such time to permit Owner to avoid penalty for late payment or to permit Owner to take advantage of discounts and upon the written direction of Owner, Manager shall pay such bills from the Disbursement Account. Manager shall not make any payments on account of any ground lease, mortgage, deed of trust or other security instrument, if any, affecting any Properties unless such payments are included in the Approved Operating Budget.

5.9 Manager shall operate the Properties in compliance with any ground lease, space lease, mortgage, deed of trust or other security instruments affecting the Properties and of which Manager has knowledge, but Manager shall not be required to make any payment or incur any liability on account thereof.

5.10 Manager shall pay all leasing and operating expenses from the account for authorized expenditures.

5.11 Manager shall prepare or cause to be prepared all payrolls and maintain comprehensive payroll records.

5.12 Manager shall handle all banking matters related to its contractual responsibility.

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5.13 Manager shall conduct, from time to time as Manager deems necessary or as Owner requests, inspections of the Properties and provide Owner with a written report on its findings to the extent requested by Owner.

5.14 Manager shall, on behalf of Owner, maintain complete and identifiable records and files on all matters pertaining to the Properties, including, without limitation, all revenues and expenditures, service contracts and leases, all of which records and files shall be the property of Owner.

5.15 Manager shall have competent personnel available at all times for emergencies.

5.16 Manager shall administer a tenant relations program which maintains a high visibility of management presence and service to tenants.

5.17 Manager shall be available for communications with Owner and will keep Owner advised of items affecting the Properties.

5.18 (a) Manager, in the conduct of its responsibilities to Owner, shall maintain adequate and separate books and records for the Properties in accordance with acceptable accounting standards for a modified cash basis accounting method, which shall be supported by sufficient documentation to ascertain that said entries are properly and accurately recorded, which books and records shall be the property of Owner. However, any computer software or other systems of Manager which are used to generate or keep such books and records shall remain the property of Manager. Such books and records shall include all information necessary to calculate and to audit amounts contained therein and shall otherwise comply with the requirements of the documents referred to in Section 5.9 hereof. Such books and records

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shall be maintained by Manager at the Properties or at such other location as may be mutually agreed upon in writing. Manager shall utilize procedures to attempt to ensure such control over accounting and financial transactions as is reasonably required to protect Owner's assets from theft, error or fraudulent activity.

5.18 (b) Manager shall maintain records of, and furnish customary (as requested) reports summarizing, all transactions occurring from the first day of the prior calendar quarter to the last day of the prior calendar quarter. These reports are to be received by Owner no later than thirty (30) calendar days after the end of the above described accounting period (or sooner if necessary for Owner or any partner of Owner to comply with governmental requirements of which Manager is given reasonable advance notice) and must report financial details which Owner may request. Reports on vacancies and other matters pertaining to the management, operation, and maintenance of the Properties will be provided on an annual basis. The reports shall include a comparison of quarterly and year-to-date actual income and expense with the Approved Operating Budget for the Properties.

5.18 (c) As additional support to the quarterly financial statement, Manager shall provide, upon Owner's request, copies of the following:

(i) All bank statements, bank deposit slips and bank reconciliations;

(ii) Detailed cash receipts and disbursements records;

(iii) Detailed trial balance;

(iv) Paid invoices;

(e) Summaries of adjusting journal entries; and

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(f) Supporting documentation for payroll, payroll taxes and employee benefits.

5.18 (d) All financial statements and reports required by Owner will be prepared on an accrual basis in accordance with acceptable accounting standards for a modified cash basis accounting method.

5.18 (e) Manager shall maintain necessary liaison with Owner's accountant.

5.19 Manager shall use its reasonable efforts to assure full compliance with Federal, State and Municipal laws, ordinances, regulations and orders relative to the leasing, use, operation, repair and maintenance of the Properties and with the rules, regulations or orders of the local Board of Fire Underwriters or other similar body. Manager shall promptly remedy any violation of any such law, ordinance, rules, regulation or order which comes to its attention, all at Owner's expense. Expenses incurred in remedying violations may be paid by Manager provided such expenses do not exceed $1,000 in any one instance. When more than such amount is required or if the violation is one for which the Property's title holder might be subject to penalty, Manager shall notify Owner by the end of the next business day to assure that prompt arrangements may be made to remedy the violation.

5.20 Notwithstanding anything contained herein to the contrary, in case of emergency, Manager may make expenditures for repairs and other items which exceed approved budgets or prior approvals from Owner without prior written approval if in the reasonable judgment of Manager it is necessary to prevent damage or injury. Owner must be informed of any such expenditures before the end of the next business day.

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5.21 Partnership and Company Management. Manager shall perform the following administrative services for Owner:

(a) Forwarding to the partners of Owner, within a reasonable time after receipt thereof, all statements, reports and other information to be sent to them pursuant to the Limited Partnership Agreement of Owner (the "Limited Partnership Agreement") or as required by law; and

(b) Forwarding to the partners of Owner, within a reasonable time after receipt thereof, checks of Owner, payable to the order of the partners of Owner representing cash distributions to be made pursuant to the Limited Partnership Agreement. All statements, reports, other information and checks that are to be forwarded to the partners of Owner, as aforesaid, shall be deemed to have been so forwarded when the same are deposited in the United States mail addressed to the addresses set forth in the Owner's records, or at such other addresses of which Manager has been notified in writing.

ARTICLE 6

MANAGEMENT AUTHORITY

6.1 Manager's authority is expressly limited to the provisions provided herein or as may be amended in writing from time to time by Owner and mutually agreed to and accepted by Manager in writing.

6.2 The Approved Operating Budget shall constitute an authorization for Manager to expend money to operate and manage the Properties and Manager may do so without further approval as long as Manager does not exceed the total budgeted amount for all budget

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categories. Whenever the total budgeted amount is (or appears likely to be) exceeded, a cumulative budget variance and a revised operating budget shall be presented to Owner for its consideration. Except as expressly permitted in this Agreement, Manager may not act outside of the Approved Operating Budget until the revised budget is approved in writing by Owner, which approval Owner will endeavor to give in a timely manner. Once approved, Manager's authority with the revised or any additionally revised budgets is the same as that authorized for the original budget.

6.3 Any capital expenditures must be specifically authorized by Owner. With respect to the purchase and installation of capital items, Manager shall recommend that Owner purchase these items when Manager believes such purchase to be necessary or desirable. Owner may arrange to purchase and install the same itself or may authorize Manager to do so subject to prescribed supervision and specification requirements and conditions. Unless Owner specifically waives such requirements, either by memorandum or as an amendment to the contract, all new or replacement capital items exceeding Fifteen Thousand and No/100 Dollars ($15,000.00) shall be awarded on the basis of competitive bidding, solicited in the following manner:

(a) A minimum of two written bids will be obtained for each purchase in excess of $15,000. A minimum of three written bids will be obtained for each purchase in excess of $25,000;

(b) Each bid will be solicited in a form prescribed by Owner so that uniformity will exist in the bid quotes;

(c) Manager shall provide Owner with all bid responses accompanied by Manager's recommendations as to the most acceptable bid. If Manager advises acceptance

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of other than the lowest bidder, Manager shall adequately support, in writing, its recommendations; and

(d) Owner shall be free to accept or reject any and all bids. Owner will communicate to Manager in writing its acceptance or rejection of bids. Owner may pay for capital expenses from its own resources or may authorize payment by Manager out of an appropriate account.

6.4 Manager shall not enter into any contract with a party affiliated with or related to Manager for cleaning, maintaining, repairing or servicing the Properties or any of the constituent parts of the Properties without the prior written consent of Owner. As a condition to obtaining such consent, Manager shall supply Owner with a copy of the proposed contract and shall state to Owner the affiliation or relationship between Manager (or other person or persons in control of Manager) and the party proposed to supply such goods or services, or both. Prior to entering into any such contract, whether or not with an affiliated or related party, Manager shall submit a proposal to Owner and Owner may veto the same if Owner reasonably deems it to be unnecessary, wasteful or inappropriate. Any such contract will include prudent cancellation rights.

6.5 All leases and related lease documents, all contracts and all purchases, and all legal documentation related thereto, are to be in the name of Owner in the form prescribed by Owner and shall be executed by Owner, with the exception of contracts permitted under Section 6.4 hereof and of purchase orders related to the purchase of items within approved budgets, which may be executed by Manager. Owner expressly withholds from Manager any power or authority to make any structural change in the building or to make any other major alterations or

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additions in or to the building or equipment therein, or to incur any expense chargeable to Owner other than expenses related to exercising the express powers herein vested in Manager, without the prior written direction of Owner.

ARTICLE 7

INSURANCE

7.1 Manager will upon written request, obtain in Owner's name and at Owner's expense and keep in force, in an amount requested by Owner, insurance against physical damage (e.g. fire and extended coverage endorsement, boiler and machinery, etc.) and against liability for loss, damage or injury to property or persons which might arise out of the occupancy, management, operation or maintenance of the Properties covered by this Agreement. Manager will be covered as an additional insured in all liability insurance maintained by Owner with respect to the Properties. Owner shall save Manager harmless from any liability on account of loss, damage or injury actually insured against by Owner provided Manager:

(a) notifies Owner within twenty-four (24) hours after Manager receives notice of any such loss, damage or injury;

(b) takes no action (such as admission of liability), and omits no actions, which might bar Owner from obtaining any protection afforded by any policy Owner may hold or which might prejudice Owner in its defense to a claim based on such loss, damage or injury; and

(c) agrees that Owner shall have the exclusive right, at its option, to conduct the defense to any claim, demand or suit within limits prescribed by the policy or policies of insurance.

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Nothing herein shall be construed as indemnifying Manager against any intentional tort of Manager or his employees or agents or to indemnify Manager against any act or omission for which insurance protection is not available; neither is the foregoing intended to affect the general requirement of this Agreement that the Properties shall be managed, operated and maintained in a safe condition and in a proper and careful manner.

7.2 Manager shall furnish whatever information is requested by Owner for the purpose of establishing the placement of insurance coverages and shall aid and cooperate in every reasonable way with respect to such insurance and any loss thereunder. Owner shall include in its hazard policy covering the Properties and the personal property, fixtures and equipment located thereon, and Manager shall include in any fire policies for its furniture, furnishings or fixtures situated in the Properties, appropriate clauses pursuant to which the respective insurance carriers shall waive all rights of subrogation (and Owner and Manager hereby waive all claims against the other) with respect to losses arising from causes insured against under such policies, even if caused by the negligence of a party, its agents or employees.

ARTICLE 8

OWNER'S RIGHT TO AUDIT

8.1 Owner reserves the right for Owner's employees or others appointed by Owner, to conduct examinations, during normal business hours upon written notice, of the books and records maintained for Owner by Manager no matter where the books and records are located. Owner also reserves the right to perform any and all additional audit tests relating to Manager's activities, either at the Properties or at any office of Manager, provided such audit tests are related to those activities performed by Manager for Owner.

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8.2 Should Owner's employees or appointees discover either weaknesses in internal control or errors in record keeping, Manager shall correct such discrepancies either upon discovery or within a reasonable period of time thereafter. Manager shall inform Owner in writing of the action taken to correct such audit discrepancies. Any and all such audits conducted either by Owner's employees or appointees will be at the sole expense of Owner, unless such audits indicate fraud or gross neglect.

ARTICLE 9

BANK ACCOUNTS

9.1 Manager shall deposit all rents and other funds collected from the operation of the Properties, including any and all advance funds, in a bank account designated by Owner (the "Receipt Accounts") for the Properties in the name of Owner. The bank shall be informed in writing that the funds are held in trust for Owner and of the designated representatives of Manager that Owner has approved as having access to such accounts. If requested by Owner, Manager shall establish a second account (the "Disbursement Account"). It established, Manager shall pay the operating expenses of the Properties and any other payments relative to the Properties as required by the terms of this Agreement (including Manager's fee under Article 20 hereof) out of the Disbursement Account. Money shall be transferred from the Receipts Account to the Disbursement Account as deemed necessary by Manager.

9.2 Manager shall, on behalf of Owner, maintain detailed records of all security deposits and such records will be open for inspection by Owner's employees or appointees.

9.3 Owner may direct the Manager to change a depository bank or the depository arrangements.

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9.4 Through the use of signature cards, authorized representatives of Owner shall be permitted access to any and all funds in the bank account described in Section 9.1. However, Owner and Owner's representative may not draw against said bank accounts without written communication to Manager. Manager's authority, and the authority of any designated representative of Manager, to draw against such accounts may be terminated at any time by Owner upon written notice to Manager.

9.5 All bank records pertaining to Owner's accounts shall be the property of Owner.

ARTICLE 10

PAYMENT OF EXPENSES

10.1 The following costs (except as excluded by Section 10.3) are to be paid directly (unless disbursed under Section 10.2) from an appropriate account described in Section 9.1:

(a) Costs of the gross salary and compensation or pro rata share thereof, to include, payroll taxes, insurance, workmen's compensation and other benefits, of on-site manager and approved staff, to the extent included in an approved budget; and

(b) Any and all costs necessary to the management, operation and maintenance of the Properties which are covered within the approved budgetary guidelines as outlined in Articles 5 and 6 or which may exceed approved budgetary guidelines but which result from emergencies, and also including any items listed in Section 10.2.

10.2 The following costs (except as excluded under Section 10.3), to the extent included in approved budgets, are to be reimbursed to Manager by Owner or paid directly by

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Manager from the Disbursement Account upon submittal by Manager to Owner of a regular billing accompanied by documentation which reasonably supports said billing.

(a) General accounting and reporting services which are considered to be within the reasonable scope of the Manager's responsibility to Owner consistent with the applicable budget;

(b) Cost of forms, papers, ledgers, and other supplies and equipment used in the on-site Manager's office;

(c) The cost of insurance permitted or required to be maintained by Manager pursuant to the provisions of this Agreement;

(d) Cost of all bonuses paid to on-site employees;

(e) Costs to correct any violation of federal, state and municipal laws, ordinances, regulations and orders relative to the leasing, use, repair and maintenance of the Properties, or relative to the rules, regulations or orders of the local board of fire underwriters or other similar body, provided that such cost is not a result of the gross negligence or willful misconduct of Manager or its agents or employees;

(f) Actual costs of making all repairs, decorations and alterations to the Properties;

(g) Costs incurred by Manager in connection with all service agreements entered into by Manager in accordance with authorizations in this Agreement or approved by Owner;

(h) Costs of collection of delinquent rentals;

(i) Costs of printed forms and supplies required for use at the Properties;

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(j) Costs of capital expenditures;

(k) Costs of printed checks for each bank account required by Owner;

(l) Costs of adding machines, personal computers, and other equipment of such type used for managing the Properties;

(m) Leasing commissions payable to third parties;

(n) Costs of Owner approved advertising, business expenses, professional dues, professional development, employee relocation expenses and travel for on-site supervision;

(o) Legal fees of attorneys, provided such attorneys have been approved by Owner in writing in advance of retention;

(p) Costs of outside audits as required by leases and other outside audits as may be requested by Owner in writing;

(q) Costs of a management office, including necessary furnishings and equipment, as provided for in Section 10.4 hereof;

(r) All other costs and expenses reasonably incurred by Manager in performing its duties hereunder;

(s) A reasonable charge for the services rendered by Manager's home office groups; and

(t) All other costs and expenses for which Owner is obligated to reimburse Manager as provided for in this Agreement.

10.3 The following expenses or costs incurred by or on behalf of Manager shall be at the sole cost and expense of Manager and shall not be reimbursed by Owner:

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(a) Costs of gross salary and wages, payroll taxes, insurance, worker's compensation, and other benefits of Manager's executive personnel; provided, however, a pro-rata portion of said costs and expenses and the costs of travel related thereto for Manager's supervisory personnel will be allocated to the Properties, based upon the amount of time spent by such personnel in supervising the Properties compared to supervising other properties;

(b) All costs incurred as a result of Manager's breach of this Agreement, or in connection with Manager's gross negligence or willful misconduct; and

(c) To the extent only that the same are not passed through to and paid by the tenants of the Properties as additional rental, costs of forms, papers, ledgers, and other supplies and equipment used in Manager's general accounting office, costs of electronic data processing equipment, or a pro-rata charge thereon, located at Manager's general accounting office, costs of electronic data processing, or any pro-rata charge thereof, for data processing provided by computer service companies to Manager's home office or general accounting office, or any other item of Manager's overhead at its home office or general accounting office.

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ARTICLE 11

INSUFFICIENT INCOME

11.1 If at any time the gross income (or cash in the Receipts Account and the Disbursement Account) from the Properties shall not be sufficient to pay the bills and charges which may be incurred with respect to the Properties, or if such gross income is insufficient to pay the combined sum of both bills and charges, Manager shall not be obligated to pay said expenses and charges from its own account. Manager shall notify Owner immediately upon first projection or awareness of a cash shortage or pending cash shortage and Owner and Manager shall jointly determine payment priority. After Manager has paid, to the extent of available gross income, all bills and charges based upon the ordered priorities set jointly by Owner and Manager, Manager shall submit to Owner a statement of all remaining unpaid bills. Owner shall thereafter and without undue delay provide sufficient monies to pay any unpaid expenses properly payable by Owner.

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ARTICLE 12

TERMINATION

12.1 Owner may terminate this Agreement upon thirty (30) days advance notice to Manager in the event Owner sells the Properties to a third party which is unaffiliated with Owner in a bona fide transaction. Upon such termination, Owner shall pay to Manager a sum equal to the average annual Management Fee that was paid to Manager in the two calendar years preceding such sale (or, if less than two prior calendar years exist, then the average for such calendar years that do exist, or if no full calendar year exists, then such termination payment shall be the average monthly management fee since the commencement of this Agreement multiplied time twelve).

12.2 If Manager shall fail to perform its duties under this Agreement, and if such failure shall continue for thirty (30) days after written notice from Owner, then Owner, in addition to the other remedies it may have at law or in equity, shall have the right to terminate this Agreement.

12.3 Upon termination of this Agreement for any reason, Manager shall deliver to Owner the following with respect to the Properties:

(a) A final accounting, reflecting the balance of income and expenses, as of the date of termination, to be delivered within thirty (30) days after such termination;

(b) Any balance or monies of Owner or tenant security deposits, or both, including, without limitation, all funds in any bank accounts under Article 9 hereof, held by Manager to be delivered immediately upon such termination or withdrawal;

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(c) All records, contracts, leases, receipts for deposits, unpaid bills, other papers or documents, supplies, files, keys, and equipment, which pertain to the Properties to be delivered immediately to Owner at the Properties upon such termination; and

(d) All service contracts in the name of Manager pertaining to the Properties shall be assigned to, and assumed by Owner.

12.4 Manager shall deliver to Owner upon receipt any monies to which Owner is entitled that Manager receives after the termination of this Agreement.

ARTICLE 13

CONSTRUCTION MANAGEMENT SERVICES

13.1 Owner may, if it elects, engage Manager as construction manager with respect to the construction of all leasehold improvements within the Properties and with respect thereto Manager shall:

(a) Evaluate and report the existing conditions of the base building;

(b) Prepare preliminary budgets and schedules;

(c) Review and assist in the coordination of leasehold improvements design drawings;

(d) Conduct pre-bid and construction progress meetings;

(e) Evaluate bids and make recommendations of the award of contracts;

(f) Evaluate ongoing schedules and the quality of workmanship and adherence of work to contract documents, specifications and drawings;

(g) Evaluate and verify accuracy of monthly construction draw requests;

(h) Assist architect in reviewing shop drawings;

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(i) Direct architect/engineers to create punch list; and

(j) Coordinate with building management the use of the service elevator, the need for temporary utilities and loading docks.

13.2 Manager shall be reimbursed for all out-of-pocket direct expenses incurred and paid to a third party while performing the responsibilities listed in this Article 13.

ARTICLE 14

COOPERATION

Should any claims, demands, suits or other legal proceedings be made or instituted by any person against Owner or title holder of the Properties which arise out of any of the matters relating to this Agreement, Manager shall promptly give Owner all pertinent information and reasonable assistance in the defense or other disposition thereof, at the sole expense of Owner.

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ARTICLE 15

MANAGER'S LIABILITY

15.1 Manager shall not, in the performance of this Agreement, be liable to Owner or to any other person for any act or omission (negligent, tortious or otherwise) of any agent or employee of Owner or Manager, unless the same results from gross negligence or willful misconduct of the Manager or its officers, employees, or agents acting within the scope of their office, employment or agency, or the breach of this Agreement by Manager, and Owner agrees to indemnify and hold harmless Manager and its officers, agents and employees from and against any and all causes of action, claims, losses, costs, expenses, liabilities, damages or injuries (including legal fees and disbursements) that Manager, and its officers, agents and employees may directly or indirectly sustain, suffer or incur on account of any such act or omission of any agent or employee of Owner or Manager, unless the same results from gross negligence or willful misconduct of the Manager or its officers, employees, or agents, acting within the scope of their office, employment or agency, or the breach of this Agreement by Manager.

15.2 Notwithstanding any other provisions of this Agreement, in no event shall Owner make any claim against Manager, or its affiliates or subsidiaries, on account of any good faith interpretation by Manager of the provisions of this Agreement (even if such interpretation is later determined to be a breach of this Agreement) or any alleged errors in judgment made in good faith and in accordance with this Agreement in connection with the operation of the Properties hereunder by Manager or the performance of any advisory or technical services provided by or arranged by the Manager.

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15.3 Owner shall not object to any expenditures made by Manager in good faith in the course of its management of the Properties or in settlement of any claim arising out of the operation of the Properties unless such expenditure is specifically prohibited by this Agreement. Subject to Section 5.20 hereof, all expenditures in excess of approved budget amounts are specifically prohibited, without limitation on other expenditures that may also be so prohibited.

ARTICLE 16

REPRESENTATION

Owner hereby represents that in entering into this Agreement Owner has not relied on any projection of earnings, statements as to the possibility of future success or other similar matter which may be prepared by Manager and understands that no guaranty is made or implied by Manager as to the future financial success of the Properties.

ARTICLE 17

CONSENT

Except as otherwise expressly provided herein, whenever in this Agreement the consent or approval of Manager or Owner is required, such consent or approval shall not be unreasonably withheld or unduly delayed. Such consent shall also be in writing only and shall be duly executed by an authorized officer or agent for the party granting such consent or approval.

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ARTICLE 18

SUBSIDIARIES AND AFFILIATES

Any contract or lease with respect to the Properties between Manager and any persons, corporation or other entity controlled by, under common control with or controlling Manager shall be subject to the prior written approval of Owner, and at Owner's sole discretion such approval may be withheld.

ARTICLE 19

NOTICES

Any notice provided for in or permitted under this Agreement shall be made in writing and may be given or served by (i) delivering the same in person to the party to be notified, or (ii) depositing the same in the United States mail, postage prepaid, registered or certified with return receipt requested, and addressed to the party to be notified at the address herein specified. If notice is deposited in the United States mail pursuant to (ii) of this Article 19, it will be effective from and after the date of receipt or delivery thereof is refused. Notice given in any other manner shall be effective only if and when received by the party to be notified. For the purpose of notice, the address of the parties shall be, until changed as hereinafter provided for, as follows:

if to Owner:

Hartman Commercial Properties REIT
1450 West Sam Houston Parkway, Suite 100
Houston, Texas 77043

Attn: President

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if to Manager:

1450 West Sam Houston Parkway, Suite 100
Houston, Texas 77043

Attn: President

The parties shall have the right from time to time and at any time to change their respective addresses and each shall have the right to specify as its address any other address by at least fifteen (15) days' written notice to the other party. Each party shall have the right from time to time to specify additional parties to whom notice hereunder must be given by delivering to the other party fifteen (15) days' written notice thereof setting forth the address of such additional party or parties; provided, however, that neither party shall have the right to designate more than six (6) such additional parties. Notice required to be delivered hereunder to either party shall not be deemed to be effective until the additional parties, if any, designated by such party have been given notice in a manner deemed effective pursuant to the terms of this Article 19.

ARTICLE 20

COMPENSATION

In addition to the sums Owner is obligated to pay Manager as described in this Agreement, each calendar year Manager shall receive remuneration for its services in managing and leasing the Properties as follows:

(a) A management fee (the "Management Fee") amounting to five percent (5%) of the Effective Gross Revenues for the Properties, including but not limited to revenues arising from rentals for such year payable by tenants who lease space in the Properties, parking revenues, and all other revenues of whatever nature. The term "Effective Gross Revenues" shall mean all payments actually collected from tenants and occupants of the Properties, exclusive of

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(a) security and deposits (unless and until such deposits have been applied to the payment of current or past due rent) and (b) payments received from tenants in reimbursement of expenses of repairing damage caused by tenants. The Management Fee shall be payable monthly based on interim results and projections with annual reconciliations;

(b) For the leasing services described in Section 5.5, following sums (the "Leasing Fees"):

(1) For any lease which is executed, (a) during the term of this Agreement (i.e., prior to the termination of this Agreement), whether or not Manager has any involvement in the same, a fee equal to six percent (6%) of the Effective Gross Revenues which are payable pursuant to or on account of the applicable documents (the foregoing are herein called the "Original Leasing Fees"); and (b) within one hundred eighty (180) days after the termination of this Agreement and with respect to which Manager has had active involvement, the applicable fee described in clause (a) above.

(2) For any lease extension, renewal, expansion or other similar right whereby a tenant extends its lease or leases additional space, (a) during the term of this Agreement (i.e., prior to the termination of this Agreement), whether or not Manager has any involvement in the same, a fee equal to four percent (4%) of the Effective Gross Revenues which are payable pursuant to or on account of the applicable documents, and (b) within one hundred eighty
(180) days after the termination of this Agreement and with respect to which Manager has had active involvement, the applicable fee described in clause (a) above.

The foregoing fees shall be payable in full upon the date the applicable document is executed;

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(c) Owner will pay Manager a partnership management fee of one percent (1%) of the Effective Gross Revenues from the Properties for managing the day-to-day affairs of Owner, and providing the administrative services described in Section 5.21. Such fee shall be payable monthly within ten (10) days after the end of each calendar month, based upon the Effective Gross Revenues during such calendar month. Owner will pay Manager a fee for undertaking construction projects and making other repairs and improvements to the Properties. The fee will be equal to the sum that would be charged by a qualified third party contractor for similar services but will not exceed twenty-five percent (25%) of the total cost of the improvements under any circumstances. The construction fee due Manager will be payable when the improvements are completed. The timing and amount of such fee will be determined mutually by Owner and Manager; and

(d) Upon submission of the financial statements as required by Article 5, Manager shall submit to Owner Manager's calculation of all fees, which fees shall be retained by Manager as described in Section 5.18(c) hereof.

ARTICLE 21

MISCELLANEOUS

21.1 The pronouns used in this Agreement referring to Manager or Owner shall be understood and construed to apply whether Manager or Owner be an individual, co-partnership, corporation or an individual or individuals doing business under a firm or trade name, and the masculine and neuter pronouns shall each include the other and may be used interchangeably with the same meaning.

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21.2 Except as otherwise herein provided, any and all amendments, additions or deletions of this Agreement shall be null and void unless approved by the parties in writing.

21.3 All headings herein are inserted only for convenience and ease of reference and are not to be considered in the construction or interpretation of any provision of this Agreement.

21.4 The waiver of any of the terms and conditions of this Agreement on any occasion or occasions shall not be deemed as waiver of such terms and conditions on any future occasion. No waiver shall be implied by any isolated or repeated action or non-action. To be effective, any waiver must be in writing executed by the party to be bound thereby.

21.5 This Agreement shall be binding upon and inure to the benefit of Owner, its successors and/or assigns, and shall be binding upon and inure to the benefit of Manager, and its successors.

21.6 This Agreement shall be construed, interpreted and applied in accordance with and shall be governed by, the laws applicable to the State of Texas.

21.7 Owner represents that it is the fee owner of the Properties and of the improvements and appurtenances and equipment installed therein, except such equipment as may be leased or acquired by Owner on a hire-purchase basis or as may be owned, leased or installed by tenants or other third parties.

21.8 Nothing contained in this Agreement shall be construed so as to prohibit Manager from owning, operating, managing or investing in any real estate development. Additionally, Manager may engage in or possess an interest in other ventures of any nature and

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description independently or with others and Owner shall have no rights with respect thereto by virtue of this Agreement.

21.9 Notwithstanding anything else herein to the contrary, in performing its services hereunder, Manager shall not violate the terms of the partnership agreement of Owner or of any ground lease, tenant lease, mortgage, deed of trust, easement or other instrument or agreement binding on or affecting the Properties of which Manager has knowledge.

21.10 Pursuant to Section 5.03 of the Rehabilitation Act of 1973, as amended, as implemented by 41 C.F.R. 60-401, Section 4.02 of the Vietnam Era Adjustment Assistance Act of 1964, as implemented by 41 C.F.R. 60-250, and Executive Order 11246, as amended by Executive Order 11875, Manager agrees not to discriminate against any employee or applicant for employment because of said individual's race, religion, sex, national origin, physical or mental handicap or status as a disabled veteran of the Vietnam Era, in regard to any position for which the employee or applicant is otherwise qualified.

21.11 Notwithstanding any provision hereof to the contrary, in no circumstances shall a shareholder, limited partner, director, officer, employee or agent ("Special Party") of a party hereto or of a Special Party of a party hereto be personally liable for any of the obligations of such party hereto under this Agreement except to the extent, if any, provided in any separate agreement now or hereafter executed and delivered by such Special Party nor shall any Special Party of a party hereto be liable to the other party hereto (the other party herein agreeing to indemnify such Special Party from and against any such liability) for any act or omission, negligent, tortious or otherwise, of such Special Party unless the same results from

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willful misconduct or gross negligence of, or (if such Special Party becomes a party hereto) a breach of this Agreement by, such Special Party.

21.12 This Agreement may be executed in several counterparts, each of which shall be an original of this Agreement but all of which, taken together, shall constitute one and the same agreement.

21.13 The rights and obligations of Manager and Owner shall survive a termination of this Agreement.

IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written.

HARTMAN REIT OPERATING PARTNERSHIP, L.P.

By: Hartman Commercial Properties REIT
Its: General Partner

By: /s/ Allen R. Hartman
   --------------------------------
Name:  Allen R. Hartman
Title: President

HARTMAN MANAGEMENT, INC.

By: /s/ Allen R. Hartman
   --------------------------------
Name:  Allen R. Hartman
Title: President

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EXHIBIT 10.3

CERTIFICATE OF FORMATION

OF

HARTMAN REIT OPERATING PARTNERSHIP II GP, LLC

1. The name of the limited liability company is Hartman REIT Operating Partnership II GP, LLC.

2. The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, County of New Castle. The name of the limited liability company's registered agent for service of process in the State of Delaware at such address is The Corporation Trust Company.

IN WITNESS WHEREOF, the undersigned has executed this Certificate of Formation of Hartman REIT Operating Partnership II GP, LLC this 7th day of November 2002.

/s/ Allen R. Hartman
------------------------
Allen R. Hartman
Authorized Person


EXHIBIT 10.4

LIMITED LIABILITY COMPANY AGREEMENT
OF
HARTMAN REIT OPERATING PARTNERSHIP II GP, LLC

This Limited Liability Company Agreement (together with the schedules attached hereto, this "Agreement") of Hartman REIT Operating Partnership II GP, LLC (the "LLC"), is entered into by Hartman REIT Operating Partnership, L.P., ("Hartman REIT"), as the sole equity member of the Company, and Domenic A. Borriello, as the Independent Director (as defined on Schedule A hereto). Capitalized terms used and not otherwise defined herein have the meanings set forth on Schedule A hereto.

WHEREAS, Hartman REIT desires to form a limited liability company pursuant to the Delaware Limited Liability Company Act, 6 Del. C. Section 8-101, et seq., as amended from time to time (the "Act"), by filing a Certificate of Formation of the Company with the office of the Secretary of State of the State of Delaware and entering into this Agreement.

NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), and intending to be legally bound, the parties hereto hereby agree as follows:

Section 1. Name.

The name of the limited liability company formed hereby is Hartman REIT Operating Partnership II GP, LLC.

Section 2. Principal Business Office.

The principal business office of the Company shall be located at such location as may hereafter be determined by the Board of Directors.

Section 3. Registered Office.

The address of the registered office of the Company in the State of Delaware is c/o The Cor0poration Trust Company, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801.

Section 4. Registered Agent.

The name and address of the registered agent of the Company for service of process on the Company in the State of Delaware is The Corporation Trust Company, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801.

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Section 5. Members.

(a) The mailing address of the Member is set forth on Schedule B attached hereto. The Member was admitted to the Company as a member of the Company upon its execution of a counterpart signature page to this Agreement.

(b) Subject to Section 9(j), the Member may act by written consent.

(c) Notwithstanding any provision in this Agreement to the contrary, upon the occurrence of any event that causes the Member to cease to be a member of the Company (other than (i) upon an assignment by the Member of all of its limited liability company interest in the Company and the admission of the transferee pursuant to Sections 21 and 23, or (ii) the resignation of the Member and the admission of an additional member of the Company pursuant to Sections 22 and 23), (a) the Person acting as an Independent Director pursuant to Section 10 shall, without any action of any Person and simultaneously with the Member ceasing to be a member of the Company, automatically be admitted to the Company as a Special Member and shall continue the Company without dissolution, and (b) the personal representative of such Member is hereby authorized to, and shall, to the fullest extent permitted by law, within 90 days after the occurrence of the event that terminated the continued membership of such Member in the Company, appoint a Person as a substitute Member. No Special Member may resign from the Company or transfer its rights as Special Member unless (i) a successor Special Member has been admitted to the Company as Special Member by executing a counterpart to this Agreement, and (ii) such successor has also accepted its appointment as the Independent Director pursuant to Section 10; provided, however, the Special Members shall automatically cease to be members of the Company upon the admission to the Company of a substitute Member but shall not thereby cease to be an Independent Director. Each Special Member shall be a member of the Company that has no interest in the profits, losses and capital of the Company and has no right to receive any distributions of Company assets. Pursuant to Section 18-301 of the Act, a Special Member shall not be required to make any capital contributions to the Company and shall not receive a limited liability company interest in the Company. A Special Member, in its capacity as Special Member, may not bind the Company. Except as required by any mandatory provision of the Act, each Special Member, in its capacity as Special Member, shall have no right to vote on, approve or otherwise consent to any action by, or matter relating to, the Company, including, without limitation, the merger, consolidation or conversion of the Company. In order to implement the future, contingent admission to the Company of each Special Member, the Person acting as an Independent Director pursuant to Section 10 shall execute a counterpart to this Agreement. Prior to its admission to the Company as Special Member, the Person acting as an Independent Director pursuant to Section 10 shall not be a member of the Company.

Section 6. Certificates.

Allen R. Hartman is hereby designated as an "authorized person" within the meaning of the Act, and is hereby authorized and directed to execute, deliver and file the Certificate of Formation of the Company with the Secretary of State of the State of

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Delaware. Upon the filing of the Certificate of Formation with the Secretary of State of the State of Delaware, his powers as an "authorized person" shall cease, and the Member, each Director and each Officer shall be designated "authorized person" and shall continue as the designated "authorized person" within the meaning of the Act. The Member, any Director or any Officer, as an authorized person, within the meaning of the Act, shall execute, deliver and file, or cause the execution, delivery and filing of, all certificates (and any amendments and/or restatements thereof) required or permitted by the Act to be filed in with the Secretary of State of the State of Delaware. The Member, any Director or any Officer shall execute, deliver and file, or cause the execution, delivery and filing of any certificates (and any amendments and/or restatements thereof) necessary for the Company to qualify to do business in any other jurisdiction in which the Company may wish to conduct business.

The existence of the Company as a separate legal entity shall continue until cancellation of the Certificate of Formation as provided in the Act. Upon the cancellation of the Certificate of Formation in accordance with the Act, this Agreement and the Company shall terminate.

Section 7. Purposes. The purpose to be conducted or promoted by the Company is to engage in the following activities:

(a) (i) to act as the sole general partner of Hartman REIT Operating Partnership II, LP., a Texas limited partnership (the "Partnership"), and in such capacity cause the Partnership to: (A) acquire from various entities those certain tracts or parcels of land more particularly described in Schedule A of that certain Commitment of Title Insurance issued by Houston Title Company under GF Number 02010048, (the "Property"), and (B) own, hold, sell, assign, transfer, operate, lease, mortgage, pledge and otherwise deal with the Property; and (ii) to engage in any lawful act or activity and to exercise any powers permitted to limited liability companies organized under the laws of the State of Delaware that are related or incidental to and necessary, convenient or advisable for the accomplishment of the above-mentioned purposes.

(b) The Company, and the Member, or any Director or Officer on behalf of the Company, may cause the Company in its own capacity and, in its capacity as general partner of the Partnership, cause the Partnership, as the case may be, to enter into and perform the Basic Documents to which it is a party and all documents, agreements, certificates, or financing statements contemplated thereby or related thereto, all without any further act, vote or approval of any Member, Director, Officer or other Person notwithstanding any other provision of this Agreement. The foregoing authorization shall not be deemed a restriction on the powers of the Member or any Director or Officer to enter into other agreements on behalf of the Company in accordance with this Agreement.

Section 8. Powers.

Subject to Section 9(j), the Company, and the Board of Directors and the Officers of the Company on behalf of the Company, (i) shall have and exercise all powers

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necessary, convenient or incidental to accomplish its purposes as set forth in
Section 7 and (ii) shall have and exercise all of the powers and rights conferred upon limited liability companies formed pursuant to the Act.

Section 9. Management.

(a) Board of Directors. Subject to Section 9(j), the business and affairs of the Company shall be managed by or under the direction of a Board of one or more Directors designated by the Member. Subject to Section 10, the Member may determine at any time in its sole and absolute discretion the number of Directors to constitute the Board. The authorized number of Directors may be increased or decreased by the Member at any time in its sole and absolute discretion, upon notice to all Directors, and subject in all cases to Section
10. The initial number of Directors shall be three, one of which shall be the Independent Director pursuant to Section 10. Each Director elected, designated or appointed by the Member shall hold office until a successor is elected and qualified or until such Director's earlier death, resignation, expulsion or removal. Each Director shall execute and deliver the Management Agreement. Directors need not be a Member. The initial Directors designated by the Member are listed on Schedule D hereto.

(b) Powers. Subject to Section 9(j), the Board of Directors shall have the power to do any and all acts necessary, convenient or incidental to or for the furtherance of the purposes described herein, including all powers, statutory or otherwise. Subject to Section 7, the Board of Directors has the authority to bind the Company.

(c) Meeting of the Board of Directors. The Board of Directors of the Company may hold meetings, both regular and special, within or outside the State of Delaware. Regular meetings of the Board may be held without notice at such time and at such place as shall from time to time be determined by the Board. Special meetings of the Board may be called by the President on not less than one day's notice to each Director by telephone, facsimile, mail, telegram or any other means of communication, and special meetings shall be called by the President or Secretary in like manner and with like notice upon the written request of anyone or more of the Directors.

(d) Quorum: Acts of the Board. At all meetings of the Board, a majority of the Directors shall constitute a quorum for the transaction of business and, except as otherwise provided in any other provision of this Agreement, the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board. If a quorum shall not be present at any meeting of the Board, the Directors present at such meeting may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting and without prior notice if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee, as the case may be.

(e) Electronic Communications. Members of the Board, or any committee designated by the Board, may participate in meetings of the Board, or any committee, by

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means of telephone conference or similar communications equipment that allows all Persons participating in the meeting to hear each other, and such participation in a meeting shall constitute presence in Person at the meeting. If all the participants are participating by telephone conference or similar communications equipment, the meeting shall be deemed to be held at the principal place of business of the Company.

(f) Committees of Directors.

(i) The Board may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the Directors of the Company. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee.

(ii) In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member.

(iii) Any such committee, to the extent provided in the resolution of the Board, and subject to, in all cases, Sections 9(j) and 10, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Company. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board. Each committee shall keep regular minutes of its meetings and report the same to the Board when required.

(g) Compensation of Directors: Expenses. The Board shall have the authority to fix the compensation of Directors. The Directors may be paid their expenses, if any, of attendance at meetings of the Board, which may be a fixed sum for attendance at each meeting of the Board or a stated salary as Director. No such payment shall preclude any Director from serving the Company in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.

(h) Removal of Directors. Unless otherwise restricted by law and subject to
Section 10, any Director or the entire Board of Directors may be removed or expelled, with or without cause, at any time by the Member, and any vacancy caused by any such removal or expulsion may be filled by action of the Member.

(i) Directors as Agents. To the extent of their powers set forth in this Agreement and subject to Section 9(j), the Directors are agents of the Company for the purpose of the Company's business, and the actions of the Directors taken in accordance with such

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powers set forth in this Agreement shall bind the Company. Notwithstanding the last sentence of Section 18-402 of the Act, except as provided in this Agreement or in a resolution of the Directors, a Director may not bind the Company.

(j) Limitations on the Company's Activities.

(i) This Section 9(j) is being adopted in order to comply with certain provisions required in order to qualify the Company as a "special purpose" entity.

(ii) The Member shall not, so long as any Obligation is outstanding, amend, alter, change or repeal the definition of "Independent Director" or Sections 5(c) 7, 8, 9, 10, 16, 20, 21, 22, 23, 24, 25, 26 or 31 or Schedule A of this Agreement without the unanimous written consent of the Board (including the Independent Director) and the Lender. Subject to this Section 9(j), the Member reserves the right to amend, alter, change or repeal any provisions contained in this Agreement in accordance with Section 31.

(iii) Notwithstanding any other provision of this Agreement and any provision of law that otherwise so empowers the Company, the Member, the Board, any Officer or any other Person, neither the Member nor the Board nor any Officer nor any other Person shall be authorized or empowered, nor shall they permit the Company, without the prior unanimous written consent of the Member and the Board (including the Independent Director), to take any Material Action, provided, however, that, so long as any Obligation is outstanding, the Board may not vote on, or authorize the taking of, any Material Action, unless there is at least one Independent Director then serving in such capacity.

(iv) The Board and the Member shall cause the Company to do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises. The Board also shall cause the Company to:

(A) maintain its own accounts, books and records separate from any other Person;

(B) at all times hold itself out and identify itself as a separate and distinct entity under its own name and not as a division or part of any other Person and correct any misunderstanding as to its separateness or distinction from any other Person;

(C) have a Board of Directors separate from that of the Member and any other Person;

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(D) file its own tax returns, if any, as may be required under applicable law, to the extent (1) not part of a consolidated group filing a consolidated return or returns or (2) not treated as a division for tax purposes of another taxpayer, and pay any taxes so required to be paid under applicable law;

(E) except as contemplated by the Basic Documents, not commingle its assets or funds with those of any other Person;

(F) conduct its business in its own name and strictly comply with all organizational formalities to maintain its separate existence;

(G) maintain financial statements, accounting records and other entity documents separate from any other Person;

(H) pay its own liabilities only out of its own funds and assets;

(I) not enter into or be a party to, any transactions with its members, managers or its Affiliates except in the ordinary course of its business and on terms which are intrinsically fair and not less favorable to it than would be obtained in a comparable arm's length transaction with an unrelated third party;

(J) pay the salaries of its own employees from its own funds;

(K) not assume or guarantee or become obligated for the debts of any other Person or hold out its credit or assets as being available to satisfy the obligations of others, except as expressly permitted by the Basic Documents;

(L) allocate fairly and reasonably any overhead for shared expenses, including, without limitation, shared office space;

(M) use separate stationery, invoices and checks;

(N) except as contemplated by the Basic Documents, not pledge its assets for the benefit of any other Person;

(O) correct any known misunderstanding regarding its separate identity;

(P) maintain adequate capital in light of its contemplated business operations;

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(Q) observe all Delaware limited liability company formalities;

(R) not acquire any securities of the Member;

(S) cause the Directors, Officers, agents and other representatives of the Company to act at all times with respect to the Company consistently and in furtherance of the foregoing;

(T) maintain its books, records, resolutions and agreements as official records;

(U) hold all its assets in its own name;

(V) not acquire obligations or securities of its members or managers;

(W) not make any loans to any Person;

(X) not identify any of its members or managers or any Affiliates of any of them as a division or part of it;

(Y) maintain an arm's length relationship with its Affiliates;

(Z) at all times cause the Partnership to comply with each of the covenants, terms and provisions contained in Section 4.3(a) of the Deed of Trust; and

(AA) comply with each of the covenants, terms and provisions contained in Section 4.3(a) of the Deed of Trust as if such representation, warranty or covenant was made directly by the Company.

Failure of the Company, or the Member or Board on behalf of the Company, to comply with any of the foregoing covenants or any other covenants contained in this Agreement shall not affect the status of the Company as a separate legal entity or the limited liability of the Member, the Special Members or the Directors.

(v) So long as any Obligation is outstanding, the Board shall not cause or permit the Company to:

(A) except as contemplated by the Basic Documents, guarantee any obligation of any Person, including any Affiliate;

(B) engage, directly or indirectly, in any business other than the actions required or permitted to be performed under Section 7, the Basic Documents or this Section 9(j);

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(C) incur, create or assume any indebtedness other than as expressly permitted under the Basic Documents;

(D) make or permit to remain outstanding any loan or advance to, or own or acquire any stock or securities of, any Person, except that the Company may invest in those investments permitted under the Basic Documents and may make any loan or advance required or expressly permitted to be made pursuant to any provisions of the Basic Documents and permit the same to remain outstanding in accordance with such provisions;

(E) merge into or consolidate with any Person or, to the fullest extent permitted by law, dissolve, terminate or liquidate in whole or in part, transfer or otherwise dispose of all or substantially all of its assets or change its legal structure, without in each case the Lender's consent;

(F) other than the Partnership, form, acquire or hold any subsidiary (whether corporate, partnership, limited liability company or other), or make any other investment in any Person, without the Lender's consent;

(G) acquire or own any material assets other than its interest in the Partnership and such incidental personal property as may be necessary for its operation as general partner of the Partnership;

(H) fail to preserve its existence as an limited liability company duly formed, validly existing and in good standing un the laws of Delaware;

(I) without the prior written consent of the Lender, amend, modify, terminate or fail to comply with provisions of this Agreement or the Certificate of Formation, as the same may be further amended or supplemented, if such amendment, modification, termination or failure to comply would adversely affect the ability of the Company (or the Partnership) to perform its obligations hereunder, or under the Basic Documents;

Section 10. Independent Director.

As long as any Obligation is outstanding, the Member shall cause the Company at all times to have at least one Independent Director who will be appointed by the Member. To the fullest extent permitted by law, including
Section 18-1101(c) of the Act, the Independent Director shall consider only the interests of the Company, including its respective creditors, in acting or otherwise voting on the matters referred to in Section

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9(j)(iii). The Independent Director may resign upon notice to the Board and the Member and may be removed, with or without cause, at any time by the Member; provided, however, that for so long as any Obligation is outstanding, no resignation or removal of the Independent Director, and no appointment of a successor Independent Director, shall be effective until such successor (i) shall have accepted his appointment as the Independent Director by a written instrument, which may be a counterpart signature page to the Management Agreement, and (ii) shall have executed a counterpart to this Agreement as required by Section 5(c). In the event of a vacancy in the position of Independent Director, the Member shall, as soon as practicable, appoint a successor Independent Director. All right, power and authority of the Independent Director shall be limited to the extent necessary to exercise those rights and perform those duties specifically set forth in this Agreement. Except as provided in the second sentence of this Section 10, in exercising his rights and performing his duties under this Agreement, any Independent Director shall have a fiduciary duty of loyalty and care similar to that of a director of a business corporation organized under the General Corporation Law of the State of Delaware. The Independent Director shall not at any time serve as trustee in bankruptcy for any Affiliate of the Company.

Section 11. Officers.

(a) Officers. The initial Officers of the Company shall be designated by the Member. The additional or successor Officers of the Company shall be chosen by the Board and may consist of a President, a Secretary and a Treasurer. The Board of Directors may also choose one or more Vice Presidents, Assistant Secretaries and Assistant Treasurers. Any number of offices may be held by the same person. The Board may appoint such other Officers and agents as it shall deem necessary or advisable who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. The salaries of all Officers and agents of the Company shall be fixed by or in the manner prescribed by the Board. The Officers of the Company shall hold office until their successors are chosen and qualified. Any Officer may be removed at any time, with or without cause, by the affirmative vote of a majority of the Board. Any vacancy occurring in any office of the Company shall be filled by the Board. The initial Officers of the Company designated by the Member are listed on Schedule E hereto.

(b) President. The President shall be the chief executive officer of the Company, shall preside at all meetings of the Board, shall be responsible for the general and active management of the business of the Company and shall see that all orders and resolutions of the Board are carried into effect. The President or any other Officer authorized by the President or the Board shall execute all bonds, mortgages and other contracts, except: (i) where required or permitted by law or this Agreement to be otherwise signed and executed, including Section 7(b); (ii) where signing and execution thereof shall be expressly delegated by the Board to some other Officer or agent of the Company, and (iii) as otherwise permitted in Section 11(c).

(c) Vice President. In the absence of the President or in the event of the President's inability to act, the Vice President, if any (or in the event there be more than

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one Vice President, the Vice Presidents in the order designated by the Directors, or in the absence of any designation, then in the order of their election), shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Vice Presidents, if any, shall perform such other duties and have such other powers as the Board may from time to time prescribe.

(d) Secretary and Assistant Secretary. The Secretary shall be responsible for filing legal documents and maintaining records for the Company. The Secretary shall attend all meetings of the Board and record all the proceedings of the meetings of the Company and of the Board in a book to be kept for that purpose and shall perform like duties for the standing committees when required. The Secretary shall give, or shall cause to be given, notice of all meetings of the Member, if any, and special meetings of the Board, and shall perform such other duties as may be prescribed by the Board or the President, under whose supervision the Secretary shall serve. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board (or if there be no such determination, then in order of their election), shall, in the absence of the Secretary or in the event of the Secretary's inability to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board may from time to time prescribe.

(e) Treasurer and Assistant Treasurer. The Treasurer shall have the custody of the Company funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Company and shall deposit all moneys and other valuable effects in the name and to the credit of the Company in such depositories as may be designated by the Board. The Treasurer shall disburse the funds of the Company as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the President and to the Board, at its regular meetings or when the Board so requires, an account of all of the Treasurer's transactions and of the financial condition of the Company. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board (or if there be no such determination, then in the order of their election), shall, in the absence of the Treasurer or in the event of the Treasurer's inability to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board may from time to time prescribe.

(f) Officers as Agents. The Officers, to the extent of their powers set forth in this Agreement or otherwise vested in them by action of the Board not inconsistent with this Agreement, are agents of the Company for the purpose of the Company's business and, subject to Section 9(j), the actions of the Officers taken in accordance with such powers shall bind the Company.

(g) Duties of Board and Officers. Except to the extent otherwise modified herein, each Director and Officer shall have a fiduciary duty of loyalty and care similar to that of directors and officers of business corporations organized under the General Corporation Law of the State of Delaware.

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Section 12. Limited Liability.

Except as otherwise expressly provided by the Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be the debts, obligations and liabilities solely of the Company, and neither the Member nor the Special Members nor any Director shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Member, Special Member or Director of the Company.

Section 13. Capital Contributions.

The Member has contributed to the Company property of an agreed value as listed on Schedule B attached hereto. In accordance with Section 5(c), the Special Members shall not be required to make any capital contributions to the Company.

Section 14. Additional Contributions.

The Member is not required to make any additional capital contribution to the Company. However, the Member may make additional capital contributions to the Company at any time upon the written consent of such Member. To the extent that the Member makes an additional capital contribution to the Company, the Member shall revise Schedule B of this Agreement. The provisions of this Agreement, including this Section 14, are intended to benefit the Member and the Special Members and, to the fullest extent permitted by law, shall not be construed as conferring any benefit upon any creditor of the Company (and no such creditor of the Company shall be a third-party beneficiary of this Agreement) and the Member and the Special Members shall not have any duty or obligation to any creditor of the Company to make any contribution to the Company or to issue any call for capital pursuant to this Agreement.

Section 15. Allocation of Profits and Losses.

The Company's profits and losses shall be allocated to the Member.

Section 16. Distributions.

Distributions shall be made to the Member at the times and in the aggregate amounts determined by the Board. Notwithstanding any provision to the contrary contained in this Agreement, the Company shall not be required to make a distribution to the Member on account of its interest in the Company if such distribution would violate the Act or any other applicable law or any Basic Document.

Section 17. Books and Records.

The Board shall keep or cause to be kept complete and accurate books of account and records with respect to the Company's business. The books of the Company shall at all times be maintained by the Board. The Member and its duly authorized representatives shall have the right to examine the Company books, records and documents during normal business hours. The Company, and the Board on behalf of the

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Company, shall not have the right to keep confidential :trom the Member any information that the Board would otherwise be permitted to keep confidential from the Member pursuant to Section 18-305(c) of the Act. The Company's books of account shall be kept using the method of accounting determined by the Member. The Company's independent auditor, if any, shall be an independent public accounting firm selected by the Member.

Section 18. Reports.

The Board shall, after the end of each fiscal year, use reasonable efforts to cause the Company's independent accountants, if any, to prepare and transmit to the Member as promptly as possible any such tax information as may be reasonably necessary to enable the Member to prepare its federal, state and local income tax returns relating to such fiscal year.

Section 19. Other Business.

The Member, the Special Members and any Officer, Director, employee or agent of the Company and any Affiliate of the Member or the Special Members may engage in or possess an interest in other business ventures (unconnected with the Company) of every kind and description, independently or with others. The Company shall not have any rights in or to such independent ventures or the income or profits therefrom by virtue of this Agreement.

Section 20. Exculpation and Indemnification.

(a) Neither the Member nor the Special Members nor any Officer, Director, employee or agent of the Company nor any employee, representative, agent or Affiliate of the Member or the Special Members (collectively, the "Covered Persons") shall be liable to the Company or any other Person who is bound by this Agreement for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Covered Person in good faith on behalf of the Company and in a manner reasonably believed to be within the scope of the authority conferred on such Covered Person by this Agreement, except that a Covered Person shall be liable for any such loss, damage or claim incurred by reason of such Covered Person's gross negligence or willful misconduct.

(b) To the fullest extent permitted by applicable law, a Covered Person shall be entitled to indemnification from the Company for any loss, damage or claim incurred by such Covered Person by reason of any act or omission performed or omitted by such Covered Person in good faith on behalf of the Company and in a manner reasonably believed to be within the scope of the authority conferred on such Covered Person by this Agreement, except that no Covered Person shall be entitled to be indemnified in respect of any loss, damage or claim incurred by such Covered Person by reason of such Covered Person's gross negligence or willful misconduct with respect to such acts or omissions; provided, however, that any indemnity under this Section 20 by the Company shall be provided out of and to the extent of Company assets only, and the Member and the Special Members shall not have personal liability on account thereof; and provided

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further, that so long as any Obligation is outstanding, no indemnity payment from funds of the Company (as distinct from funds from other sources, such as insurance) of any indemnity under this Section 20 shall be payable from amounts allocable to any other Person pursuant to the Basic Documents.

(c) To the fullest extent permitted by applicable law, expenses (including reasonable legal fees) incurred by a Covered Person defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Covered Person to repay such amount if it shall be determined that the Covered Person is not entitled to be indemnified as authorized in this Section 20.

(d) A Covered Person shall be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company by any Person as to matters the Covered Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Company, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, or any other facts pertinent to the existence and amount of assets from which distributions to the Member might properly be paid.

(e) To the extent that, at law or in equity, a Covered Person has duties (including fiduciary duties) and liabilities relating thereto to the Company or to any other Covered Person, a Covered Person acting under this Agreement shall not be liable to the Company or to any other Covered Person who is bound by this Agreement for its good faith reliance on the provisions of this Agreement or any approval or authorization granted by the Company or any other Covered Person. The provisions of this Agreement, to the extent that they restrict the duties and liabilities of a Covered Person otherwise existing at law or in equity, are agreed by the Member and the Special Members to replace such other duties and liabilities of such Covered Person.

(f) The foregoing provisions of this Section 20 shall survive any termination of this Agreement.

Section 21. Assignments.

The Member may assign in whole or in part its limited liability company interest in the Company. Subject to Section 23, if the Member transfers all of its limited liability company interest in the Company pursuant to this
Section 21, the transferee shall be admitted to the Company as a member of the Company upon its execution of an instrument signifying its agreement to be bound by the terms and conditions of this Agreement, which instrument may be a counterpart signature page to this Agreement. Such admission shall be deemed effective immediately prior to the transfer and, immediately following such admission, the transferor Member shall cease to be a member of the Company. Notwithstanding anything in this Agreement to the contrary, any successor to the Member by merger or consolidation in compliance with the Basic

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Documents shall, without further act, be the Member hereunder, and such merger or consolidation shall not constitute an assignment for purposes of this Agreement and the Company shall continue without dissolution.

Section 22. Resignation.

So long as any Obligation is outstanding, the Member may not resign, except as permitted under the Basic Documents and if the Rating Agency Condition is satisfied. If the Member is permitted to resign pursuant to this
Section 22, an additional member of the Company shall be admitted to the Company, subject to Section 23, upon its execution of an instrument signifying its agreement to be bound by the terms and conditions of this Agreement, which instrument may be a counterpart signature page to this Agreement. Such admission shall be deemed effective immediately prior to the resignation and, immediately following such admission, the resigning Member shall cease to be a member of the Company.

Section 23. Admission of Additional Members.

One or more additional members of the Company may be admitted to the Company with the written consent of the Member; provided, however, that, notwithstanding the foregoing, so long as any Obligation remains outstanding, except as expressly provided by this Agreement, no additional Member may be admitted to the Company other than pursuant to Sections 5(c) or 24 unless the Rating Agency Condition is satisfied.

Section 24. Dissolution.

(a) The Company shall be dissolved, and its affairs shall be wound up upon the first to occur of the following: (i) the termination of the legal existence of the last remaining Member of the Company or the occurrence of any other event which terminates the continued membership of the last remaining Member of the Company in the Company unless the Company is continued without dissolution in a manner permitted by this Agreement or the Act or (ii) the entry of a decree of judicial dissolution under Section 18-802 of the Act. Upon the occurrence of any event that causes the last remaining Member of the Company to cease to be a member of the Company, to the fullest extent permitted by law, the personal representative of such Member is hereby authorized to, and shall, within 90 days after the occurrence of the event that terminated the continued membership of such Member in the Company, agree in writing (i) to continue the Company and
(ii) to the admission of the personal representative or its nominee or designee, as the case may be, as a substitute Member of the Company, effective as of the occurrence of the event that terminated the continued membership of the last remaining Member of the Company in the Company.

(b) Notwithstanding any other provision of this Agreement, the Bankruptcy of the Member or the Special Member shall not cause the Member or the Special Member, respectively, to cease to be a member of the Company and upon the occurrence of such an event, the Company shall continue without dissolution.

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(c) In the event of dissolution, the Company shall conduct only such activities as are necessary to wind up its affairs (including the sale of the assets of the Company in an orderly manner), and the assets of the Company shall be applied in the manner, and in the order of priority, set forth in Section 18-804 of the Act.

(d) The Company shall terminate when (i) all of the assets of the Company, after payment of or due provision for all debts, liabilities and obligations of the Company, shall have been distributed to the Member in the manner provided for in this Agreement and (ii) the Certificate of Formation shall have been canceled in the manner required by the Act.

Section 25. Waiver of Partition; Nature of Interest.

Except as otherwise expressly provided in this Agreement, to the fullest extent permitted by law, each of the Member and the Special Member hereby irrevocably waives any right or power that such Person might have to cause the Company or any of its assets to be partitioned, to cause the appointment of a receiver for all or any portion of the assets of the Company, to compel any sale of all or any portion of the assets of the Company pursuant to any applicable law or to file a complaint or to institute any proceeding at law or in equity to cause the dissolution, liquidation, winding up or termination of the Company. The Member shall not have any interest in any specific assets of the Company, and the Member shall not have the status of a creditor with respect to any distribution pursuant to Section 16 hereof. The interest of the Member in the Company is personal property.

Section 26. Benefits of Agreement;_ No Third-Party Rights.

None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditor of the Company or by any creditor of the Member or the Special Member. Nothing in this Agreement shall be deemed to create any right in any Person (other than Covered Persons) not a party hereto, and this Agreement shall not be construed in any respect to be a contract in whole or in part for the benefit of any third Person (except as provided in
Section 29).

Section 27. Severability of Provisions.

Each provision of this Agreement shall be considered severable and if for any reason any provision or provisions herein are determined to be invalid, unenforceable or illegal under any existing or future law, such invalidity, unenforceability or illegality shall not impair the operation of or affect those portions of this Agreement which are valid, enforceable and legal.

Section 28. Entire Agreement.

This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof.

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Section 29. Binding Agreement.

Notwithstanding any other provision of this Agreement, the Member agrees that this Agreement, including, without limitation, Sections 7, 8, 9, 10, 20, 21, 22, 23, 24, 26, 29 and n, constitutes a legal, valid and binding agreement of the Member, and is enforceable against the Member by the Independent Director, in accordance with its terms. In addition, the Independent Director shall be an intended beneficiary of this Agreement.

Section 30. Governing Law.

This Agreement shall be governed by and construed under the laws of the State of Delaware (without regard to conflict of laws principles), all rights and remedies being governed by said laws.

Section 31. Amendments.

Subject to Section 9(i), this Agreement may be modified, altered, supplemented or amended pursuant to a written agreement executed and delivered by the Member. Notwithstanding anything to the contrary in this Agreement, so long as any Obligation is outstanding, this Agreement may not be modified, altered, supplemented or amended unless the Rating Agency Condition is satisfied except: (i) to cure any ambiguity or (ii) to convert or supplement any provision in a manner consistent with the intent of this Agreement and the other Basic Documents.

Section 32. Counterparts.

This Agreement may be executed in any number of counterparts, each of which shall be deemed an original of this Agreement and all of which together shall constitute one and the same instrument.

Section 33. Notices.

Any notices required to be delivered hereunder shall be in writing and personally delivered, mailed or sent by telecopy, electronic mail or other similar form of rapid transmission, and shall be deemed to have been duly given upon receipt (a) in the case of the Company, to the Company at its address in Section 2, (b) in the case of the Member, to the Member at its address as listed on Schedule B attached hereto and (c) in the case of either of the foregoing, at such other address as may be designated by written notice to the other party.

Section 34. Effectiveness.

Pursuant to Section 18-201 (d) of the Act, this Agreement shall be effective as of the time of the filing of the Certificate of Formation with the Office of the Delaware Secretary of State on November 12, 2002.

[SIGNATURE PAGE FOLLOWS]

17

IN WITNESS WHEREOF, the undersigned, intending to be legally bound hereby, has duly executed this Limited Liability Company Agreement as of the 26th day of November, 2002.

MEMBER:

HARTMAN REIT OPERATING PARTNERSHIP, L.P.

By: Hartman Commercial Properties REIT, its
general partner

By:   /s/ Allen R. Hartman
      ------------------------------------
Name:     Allen R. Hartman
Title:    President

INDEPENDENT DIRECTOR:

/s/  Domenic A. Borriello
-----------------------------------
Name:  Domenic A. Borriello

S-1

SCHEDULE A

Definitions

A. Definitions

When used in this Agreement, the following terms not otherwise defined herein have the following meanings:

"Act" has the meaning set forth in the preamble to this Agreement.

"Affiliate" means, with respect to any Person, any other Person directly or indirectly Controlling or Controlled by or under direct or indirect common Control with such Person.

"Agreement" means this Limited Liability Company Agreement of the Company, together with the schedules attached hereto, as amended, restated or supplemented or otherwise modified from time to time.

"Bankruptcy" means, with respect to any Person, if (A) such Person (i) makes an assignment for the benefit of creditors, (ii) files a voluntary petition in bankruptcy, (iii) is adjudged a bankrupt or insolvent, or has entered against it an order for relief, in any bankruptcy or insolvency proceedings, (iv) files a petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, liquidation or similar relief under any statute, law or regulation, (v) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against it in any proceeding of this nature, or (vi) seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator of the Person or of all or any substantial part of its properties, or (B) (i) 120 days after the commencement of any proceeding against the Person seeking reorganization, arrangement, composition, readjustment, liquidation or similar relief under any statute, law or regulation, the proceeding has not been dismissed, or (ii) within 90 days after the appointment without such Person's consent or acquiescence of a trustee, receiver or liquidator of such Person or of all or any substantial part of its properties, the appointment is not vacated or stayed, or within 90 days after the expiration of any such stay, the appointment is not vacated. The foregoing definition of "Bankruptcy" is intended to replace and shall supersede and replace the definition of "Bankruptcy" set forth in Sections 18-101(1) and 18-304 of the Act.

"Basic Documents" means the Agreement of Limited Partnership of the Partnership, the Deed of Trust, Promissory Note, Financing Statement, Assignment of Licenses, Permits and Contracts, Borrower's Certification, Required Repair Reserve Agreement, Guaranty of Recourse Obligations, Assignment of Leases and Rents, Environmental Indemnity Agreement, Assignment of Management Agreement and Subordination of Management Fees, Replacement Reserve Agreement, Tenant Improvement and Leasing Commission Reserve Agreement, Asbestos Containing Materials Acknowledgement, Side Letter Regarding Reporting Requirements (as to the First Loan), Future Funding Agreement, Promissory Note, Second Deed of Trust and Security Agreement, Financing Statement, Assignment of Leases and Rents,

A-1

Environmental Indemnity Agreement, Assignment of Management Agreement and Subordination of Management Fees, Assignment of Licenses, Permits and Contracts, Required Repair Reserve Agreement, Tenant Improvement and Leasing Commission Reserve Agreement, Asbestos Containing Materials Acknowledgement, Borrower's Certification, Lease Certification (as to Second Loan) and all documents and certificates contemplated thereby or delivered in connection therewith.

"Board" or "Board of Directors" means the Board of Directors of the Company.

"Certificate of Formation" means the Certificate of Formation of the Company filed with the Secretary of State of the State of Delaware on November -, 2002, as amended or amended and restated from time to time.

"Company" means Hartman REIT Operating Partnership II GP, LLC, a Delaware limited liability company.

"Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities or general partnership or managing member interests, by contract or otherwise.
"Controlling" and "Controlled" shall have correlative meanings. Without limiting the generality of the foregoing, a Person shall be deemed to Control any other Person in which it owns, directly or indirectly, a majority of the ownership interests.

"Covered Persons" has the meaning set forth in Section 20(a).

"Deed of Trust" has the meaning set forth in the Loan Documents.

"Directors" means the Persons elected/appointed to the Board of Directors from time to time in accordance with this Agreement, including the Independent Director, in his capacity as a manager of the Company. A Director is hereby designated as a "manager" of the Company within the meaning of Section 18-101(10) of the Act.

"Independent Director" means a natural person who, for the five-year period prior to his appointment as Independent Director has not been, and during the continuation of his service as Independent Director is not: (i) an employee, director, stockholder, partner, member, manager or officer of the Company, the Partnership or any of their respective Affiliates, partners, members, stockholders or subsidiaries (other than his service as an Independent Director of the Company); (ii) a customer or supplier of the Company, the Partnership or any of their respective Affiliates, partners, members, stockholders or subsidiaries; (iii) a Person controlling or under common control with any such employee, director, stockholder, partner, member, manager, officer, customer, supplier of the Company, the Partnership or their respective Affiliates or (iv) any member of the immediate family of a person described in
(i), (ii) or (iii).

"Lender" means GMAC Commercial Mortgage Corporation, and its successors and assigns to its interests under the Loan Documents.

A-2

"Loan Documents" means the documents, instruments and agreements executed in connection with the financing transaction between the Partnership and the Lender on or about November 19, 2002, and secured by the Property.

"Management Agreement" means the management agreement substantially in the form attached hereto as Schedule C. The Management Agreement shall be deemed incorporated into, and a part of, this Agreement.

"Material Action" means to consolidate or merge the Company with or into any Person, or sell all or substantially all of the assets of the Company, or to institute proceedings to have the Company be adjudicated bankrupt or insolvent, or consent to the institution of bankruptcy or insolvency proceedings against the Company or file a petition seeking, or consent to, reorganization or relief with respect to the Company under any applicable federal or state law relating to bankruptcy, or consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or a substantial part of its property, or make any assignment for the benefit of creditors of the Company, or admit in writing the Company's inability to pay its debts generally as they become due, or take action in furtherance of any such action, or, to the fullest extent permitted by law, dissolve or liquidate the Company.

"Member" means Hartman REIT Operating Partnership LP., as the initial member of the Company, and includes any Person admitted as an additional member of the Company or a substitute member of the Company pursuant to the provisions of this Agreement, each in its capacity as a member of the Company; provided, however, the term "Member" shall not include the Special Members.

"Obligations" means the indebtedness, liabilities and obligations of the Company under or in connection with the Basic Documents as of any date of determination.

"Officer" means an officer of the Company described in Section 11.

"Officer's Certificate" means a certificate signed by any Officer of the Company who is authorized to act for the Company in matters relating to the Company.

"Person" means any individual, corporation, partnership, joint venture, limited liability company, limited liability partnership, association, joint stock company, trust, unincorporated organization, or other organization, whether or not a legal entity, and any governmental authority.

"Rating Agency" has the meaning assigned to that term in the Basic Documents.

"Rating Agency Condition" means (i) with respect to any action taken at any time before the loan evidenced and secured by the Basic Documents has been sold or assigned to a securitization trust, that the lender thereunder has consented in writing to such action, and (ii) with respect to any action taken at any time after such loan has been sold or assigned to a securitization trust, that each Rating Agency shall have been given

A-3

ten days prior notice thereof and that each of the Rating Agencies shall have notified the Company in writing that such action will not result in a reduction or withdrawal of the then current rating by such Rating Agency of any of securities issued by such securitization trust.

"Special Member" means, upon such Person's admission to the Company as a member of the Company pursuant to Section 5(c), a Person acting as an Independent Director, in such Person's capacity as a member of the Company. A Special Member shall only have the rights and duties expressly set forth in this Agreement.

B. Rules of Construction

Definitions in this Agreement apply equally to both the singular and plural forms of the defined terms. The words "include" and "including" shall be deemed to be followed by the phrase "without limitation." The terms "herein," "hereof' and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Section, paragraph or subdivision. The Section titles appear as a matter of convenience only and shall not affect the interpretation of this Agreement. All Section, paragraph, clause, Exhibit or Schedule references not attributed to a particular document shall be references to such parts of this Agreement.

A-4

SCHEDULE B

Member

                                                  Agreed Value of           Limited Liability
Name                         Mailing Address      Capital Contribution      Company Interest
----------------------       ---------------      --------------------      -----------------
Hartman REIT Operating
 Partnership, L.P.                                $  100                    100%

B-1

SCHEDULE C

Management Agreement

November ____, 2002

Hartman REIT Operating Partnership II GP, LLC 1450 West Sam Houston Parkway North, Suite 100 Houston, Texas 77043

Re: Management Agreement -- Hartman REIT Operating Partnership II GP, LLC

Ladies and Gentlemen:

For good and valuable consideration, each of the undersigned Persons, who have been designated as directors of Hartman REIT Operating Partnership II GP, LLC, a Delaware limited liability company (the "Company"), in accordance with the Limited Liability Company Agreement of the Company, dated as of November __,2002, as it may be amended or restated from time to time (the "LLC Agreement"), hereby agree as follows:

1. Each of the undersigned accepts such Person's rights and authority as a Director under the LLC Agreement and agrees to perform and discharge such Person's duties and obligations as a Director under the LLC Agreement, and further agrees that such rights, authorities, duties and obligations under the LLC Agreement shall continue until such Person's successor as a Director is designated or until such Person's resignation or removal as a Director in accordance with the LLC Agreement. Each of the undersigned agrees and acknowledges that it has been designated as a "manager" of the Company within the meaning of the Delaware Limited Liability Company Act.

2. So long as any Obligation is outstanding, each of the undersigned agrees, solely in its capacity as a creditor of the Company on account of any indemnification or other payment owing to the undersigned by the Company, not to acquiesce, petition or otherwise invoke or cause the Company to invoke the process of any court or governmental authority for the purpose of commencing or sustaining an involuntary case against the Company under any federal or state bankruptcy, insolvency or similar law or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Company or any substantial part of the property of the Company, or, to the fullest extent permitted by law, ordering the winding up or liquidation of the affairs of the Company.

3. THIS MANAGEMENT AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, AND ALL RIGHTS AND REMEDIES SHALL BE GOVERNED BY SUCH LAWS WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.

C-1

Initially capitalized terms used and not otherwise defined herein have the meanings set forth in the LLC Agreement.

This Management Agreement may be executed in any number of counterparts, each of which shall be deemed an original of this Management Agreement and all of which together shall constitute one and the same instrument.

[SIGNATURE PAGE FOLLOWS]

C-2

IN WITNESS WHEREOF, the undersigned have executed this Management Agreement as of the day and year first above written.

/s/ Allen R. Hartman
------------------------------
Allen R. Hartman


/s/ Robert W. Engel
------------------------------
Robert W. Engel


/s/  Domenic A. Borriello
------------------------------
Domenic A. Borriello

C-3

SCHEDULE D

DIRECTORS

1. Allen R. Hartman

2. Robert W. Engel

3. Domenic A. Borriello

D-1

                                   SCHEDULE E

OFFICERS                                           TITLE
----------------                                   -----------------------

Allen R. Hartman                                   President

Bob Engel                                          Treasurer and Secretary

E-1

EXHIBIT 10.5

Corporations Section Gwyn Shea P.O.Box 13697 Secretary of State Austin, Texas 78711-3697

[LOGO OF THE STATE OF TEXAS]

OFFICE OF THE SECRETARY OF STATE

The undersigned, as Secretary of State of Texas, does hereby certify that the document, Certificate of Limited Partnership for Hartman Reit Operating Partnership II, L.P. (filing number: 800144629), a Domestic Limited Partnership (LP), was filed in this office on November 19, 2002.

It is further certified that the entity status in Texas is active.

In testimony whereof, I have hereunto signed my name officially and caused to be impressed hereon the Seal of State at my office in Austin, Texas on November 22, 2002.

[SEAL OF THE STATE OF TEXAS]

/s/ Gwyn Shea

    Gwyn Shea
    Secretary of State

Come visit us on the internet at http://www.sos.state.tx.us/ PHONE(512) 463-5555 FAX(512) 463-5709 TTY7-I-1 Prepared by: SOS-WEB


HARTMAN REIT OPERATING PARTNERSHIP II, L.P.

CERTIFICATE OF LIMITED PARTNERSHIP

[SEAL]

The undersigned, desiring to form a limited partnership under the provisions of the Texas Revised Limited Partnership Act, certify as follows:

1. The name of the partnership is Hartman REIT Operating Partnership II, L.P.

2. The address of the partnership's registered office is 1450 W. Sam Houston Parkway N., Suite 100, Houston, Texas 77043. The name of the partnership's registered agent for service of process in Allen R. Hartman. The address of the agent is 1450 W. Sam Houston Parkway N., Suite 100, Houston, Texas 77043.

3. The address of the principal office where records are required to be kept or made available is 1450 W. Sam Houston Parkway N., Suite 100, Houston, Texas 77043.

4. The name, mailing address, and street address of the business or residence of each general partner are as follows:

        Name                                     Mailing and Business Address
---------------------------------------------    ----------------------------

Hartman REIT Operating Partnership II GP, LLC    1450 W. Sam Houston Pkwy, N.
                                                 Suite 100
                                                 Houston, Texas 77043

        5.      The certificate of limited partnership shall be effective on
November 18, 2002.

EXECUTED on this the 18 day of November, 2002.

General Partner:

HARTMAN REIT OPERATING PARTNERSHIP II GP, LLC,
a Delaware limited liability company

By: /s/ Allen R. Hartman
   ------------------------------------
Name: Allen R. Hartman
Title: Manager


EXHIBIT 10.6

AGREEMENT OF LIMITED PARTNERSHIP

OF

HARTMAN REIT OPERATING PARTNERSHIP II, L.P.

Dated November _______, 2002


PARTNERSHIP INTERESTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY JURISDICTION. NO PARTNERSHIP INTEREST MAY BE SOLD OR OFFERED FOR SALE (WITHIN THE MEANING OF ANY SECURITIES LAW) UNLESS A REGISTRATION STATEMENT UNDER ALL APPLICABLE SECURITIES LAWS WITH RESPECT TO THE INTEREST IS THEN IN EFFECT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS IS THEN APPLICABLE TO THE INTEREST. A PARTNERSHIP INTEREST ALSO MAY NOT BE TRANSFERRED OR ENCUMBERED UNLESS THE PROVISIONS OF ARTICLE VIII OF THIS AGREEMENT ARE SATISFIED.


1

AGREEMENT OF

LIMITED PARTNERSHIP

OF

HARTMAN REIT OPERATING PARTNERSHIP II, L.P.

A Texas Limited Partnership


TABLE OF CONTENTS

                                                                                    PAGE

                                                                                    ----
ARTICLE I. ...........................................................................1
GENERAL PROVISIONS....................................................................1
  1.1      Formation..................................................................1
  1.2      Name.......................................................................1
  1.3      Purpose....................................................................1
  1.4      Assumed Business Name......................................................2
  1.5      Certificate and Other Instruments..........................................2
  1.6      Principal Place of Business and Office of the Partnership..................3
  1.7      Term.......................................................................3
  1.8      General Partner............................................................3
  1.9      Agent for Service of Process...............................................3
  1.10     Aggregate Deductions.......................................................3
  1.11     Status of Creditor.........................................................3
ARTICLE II. ..........................................................................3
DEFINITIONS...........................................................................3
  2.1      Act........................................................................4
  2.2      Affiliates.................................................................4
  2.3      Assignee...................................................................4
  2.4      Capital Account............................................................4
  2.5      Capital Contribution.......................................................4
  2.6      Certificate................................................................4
  2.7      Code.......................................................................4
  2.8      Conversion.................................................................4
  2.9      Debt.......................................................................4

Page i

  2.10     Distributable Cash.........................................................4
  2.11     Eighty Percent in Interest.................................................5
  2.12     General Partner............................................................5
  2.13     Limited Partners...........................................................5
  2.14     Loan Documents.............................................................5
  2.15     Manager....................................................................5
  2.16     Majority Vote..............................................................5
  2.17     Net Profits................................................................5
  2.18     1933 Act...................................................................5
  2.19     Noteholder.................................................................5
  2.20     Note.......................................................................5
  2.21     Organization Expenses......................................................5
  2.22     Ownership Interest.........................................................6
  2.23     Partners...................................................................6
  2.24     Partnership................................................................6
  2.25     Partnership Properties or Property.........................................6
  2.26     Permitted Expenses.........................................................6
  2.27     Profits or Losses..........................................................6
  2.28     Treasury Regulations or Treasury Regulation................................6
ARTICLE III. .........................................................................7
CAPITAL CONTRIBUTIONS AND RELATED MATTERS.............................................7
  3.1      Initial Contributions......................................................7
  3.2      Assessments or Additional Contributions....................................7
  3.3      No Withdrawal of Capital Contributions.....................................8
  3.4      No Priority................................................................8
  3.5      Temporary Investment of Partnership Capital................................8
  3.6      Capital Account; Unreturned Capital Contributions Account..................8
ARTICLE IV. ..........................................................................9
ALLOCATION OF DISTRIBUTIONS, PROFITS, GAIN LOSSES, AND OTHER ITEMS AMONG
THE PARTNERS..........................................................................9
  4.1      Allocation of Profits or Losses from Operations............................9
  4.2      Allocation Among Partners Subsequent to Assignment.........................9
  4.3      Capital Account Balance....................................................9
  4.4      Distribution of Partnership Funds.........................................10
  4.5      Gain or Loss from a Disposition of Assets.................................10
  4.6      Recapture of Cost Recovery Deductions.....................................10
  4.7      Qualified Income Offset Provision.........................................10
  4.8      Special Allocations: Election Requiring Adjustment to Basis...............10
  4.9      Order of Applications.....................................................10
  4.10     Foreign Tax Withholdings..................................................11
ARTICLE V. ..........................................................................11
MANAGEMENT OF THE PARTNERSHIP........................................................11
  5.1      The Management Powers of the General Partner..............................11
  5.2      Restrictions on Powers of the General Partner.............................11

Page ii

  5.3      The Limited Partners Have No Management Powers............................12
  5.4      The General Partner's Duty to Devote Time.................................12
  5.5      General Partner May Engage in Other Activities............................12
  5.6      Dealing with the Partnership..............................................13
  5.7      Indemnity.................................................................13
  5.8      Further Consent of the Limited Partners Not Required......................14
  5.9      Fiduciary Duty of the General Partner.....................................14
  5.10     Reserves..................................................................14
  5.11     Independent Director......................................................14
ARTICLE VI. .........................................................................15
COMPENSATION TO THE GENERAL PARTNER OR AFFILIATES....................................15
ARTICLE VII. ........................................................................16
BOOKS, RECORDS, AND REPORTS..........................................................16
  7.1      Books and Records.........................................................16
  7.2      Fiscal Year...............................................................16
  7.3      Annual Reports............................................................16
  7.4      Interim Reports...........................................................17
  7.5      Preparation and Filing of Income Tax Returns and Other Writings...........17
  7.6      Filings With Regulatory Agencies..........................................17
  7.7      Tax Matters Partner.......................................................17
ARTICLE VIII. .......................................................................18
ASSIGNMENT OR SALE OF INTERESTS IN THE PARTNERSHIP...................................18
  8.1      Assignment of the Interest in the Partnership of the General Partner......18
  8.2      Assignment or Sale of Limited Partners' Interests.........................18
  8.3      No Assignment Allowed Under Certain Circumstances.........................20
  8.4      Substituted Limited Partners..............................................20
  8.5      Death, Insanity or Incompetency of a Limited Partner......................21
  8.6      Bankruptcy, Creditor Alienation or Divorce................................21
ARTICLE IX. .........................................................................22
DISSOLUTION AND TERMINATION OF THE PARTNERSHIP.......................................22
  9.1      Dissolution...............................................................22
  9.2      Liquidation...............................................................22
  9.3      Distribution in Kind......................................................23
  9.4      Termination...............................................................24
ARTICLE X. ..........................................................................24
TERMINATION OF A GENERAL PARTNER.....................................................24
  10.1     Death, Legal Incapacity, Dissolution, Withdrawal, Removal or Bankruptcy ..24
  10.2     Removal of a General Partner..............................................24
  10.3     Continuing Interest of Terminated General Partner.........................24
  10.4     Termination of Executory Contracts with General Partner or Affiliates.....24
  10.5     Reports After Removal.....................................................25
ARTICLE XI ..........................................................................25
MEETINGS AND VOTING RIGHTS...........................................................25
  11.1     Notice of Meetings........................................................25

Page iii

  11.2     One Vote Per One Percent of Ownership Interest............................25
  11.3     Voting Rights of the Limited Partners.....................................25
ARTICLE XII. ........................................................................26
PARTNERSHIP EXPENSES.................................................................26
  12.1     Reimbursement to General Partners.........................................26
  12.2     Direct Payment of Partnership Expenses....................................26
  12.3     Payment of Expenses of the Partnership....................................26
ARTICLE XIII. .......................................................................28
AMENDMENTS OF PARTNERSHIP DOCUMENTS..................................................28
  13.1     Amendments in General.....................................................28
  13.2     Amendments Requiring Greater than a Majority Vote:........................28
  13.3     Amendments Without Consent of Limited Partners............................28
  13.4     Amendments Needing Consent of Affected Partners...........................28
  13.5     Amendments After Change of Law............................................28
ARTICLE XIV. ........................................................................29
BORROWINGS...........................................................................29
  14.1     Loans by the General Partner to Partnership...............................29
  14.2     Loans by the Partnership to the General Partner or Others.................29
ARTICLE XV. .........................................................................29
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PARTNERS............................29
  15.1     General Partner...........................................................29
  15.2     Indemnification by the General Partner....................................30
  15.3     Separateness Covenants....................................................30
ARTICLE XVI. ........................................................................32
MISCELLANEOUS PROVISIONS.............................................................32
  16.1     Notices...................................................................32
  16.2     Article and Section Headings..............................................32
  16.3     Construction..............................................................32
  16.4     Severability..............................................................32
  16.5     Governing Law.............................................................33
  16.6     Counterparts..............................................................33
  16.7     Entire Agreement..........................................................33
  16.8     Amended Certificates of Limited Partnership...............................33
  16.9     Power of Attorney to the General Partner..................................34
  16.10      Further Assurances......................................................35
  16.11      Successors and Assigns..................................................35
  16.12      Waiver of Action for Paition............................................35
  16.13      Attorneys' Fees.........................................................35
  16.14      Creditors...............................................................35
  16.15      Remedies................................................................35
  16.16      Authority...............................................................36
  16.17      Tax Elections...........................................................36
  16.18      Arbitratior ............................................................36

Page iv

EXHIBITS

EXHIBIT A...........Description of Property to be Acquired

EXHIBIT B...........The Name, Address, and Capital Contributions of Each Partner

Page v

Agreement of Limited Partnership (this "Agreement") is entered into as of the date set forth on the cover page to this Agreement among the persons executing this Agreement. Defined terms in this Agreement have the meanings assigned to them in Article II.

ARTICLE I.

GENERAL PROVISIONS

1.1 Formation: The Partners form a limited partnership under the Act, effective as of the date listed on the cover page of this Agreement.

1.2 Name: The name of the Partnership shall be Hartman REIT Operating Partnership II, L.P.

1.3 Purpose: SUBJECT TO THE LIMITATIONS SET FORTH IN THIS AGREEMENT, the purpose of the Partnership is to acquire from various entities those certain tracts or parcels of land more particularly described on Exhibit A (the "Property"); to engage in any activity, to enter into, perform and carry out any agreement, undertaking, contract, lease, indenture, mortgage, deed of trust, assignment, assignment of lease, security agreement, or financing statement of any kind, and to borrow money and issue evidences of indebtedness, whether or not secured by liens, in connection with the foregoing purpose; to engage in and conduct such other activities directly related to the foregoing purpose as may be necessary, advisable, or appropriate, in the reasonable opinion of the General Partner of the Partnership to further the foregoing purpose; and to exercise any powers permitted under the laws of the State of Texas which are incidental to the foregoing or necessary or appropriate to accomplish the foregoing. The Partnership shall not engage in any business or activity other than as permitted in this Section 1.3. The Partnership shall not incur debt other than the Note defined below and debt incurred in connection with ordinary operating expenses. The Partnership shall not acquire, own, hold, operate, maintain, lease, manage, mortgage, assign, pledge, finance or dispose of any property (other than the Property). The Partnership shall not commingle its assets with those of any other person. The Partnership shall maintain its financial and accounting books and records separate from those of any other entity or person. The Partnership shall pay from its assets all obligations and indebtedness of any kind incurred by the Company, and shall not pay from its assets any obligations or indebtedness of any other entity or person. The Company shall be, and at all times will hold itself out to the public as, a legal entity separate and distinct from any other entity (including any Affiliate of the Partnership), and shall conduct business in its own name and shall maintain and utilize separate checks and invoices. The Partnership has done or caused to be done all things necessary to observe organizational formalities and preserve its existence. The Partnership has not made and will not make any loans or advances to or acquire obligations or securities of any third party (including any Affiliate of the Company). Any financial transactions between the Partnership and any of its Affiliates shall be governed by policies and procedures established by majority vote of the Partnership's partners and shall be intrinsically fair and substantially similar to those that would be available on an arm's-length basis with third parties other than an Affairs of the Partnership. The Partnership's general partner shall maintain

Page 1

appropriate minutes or other records including, without limitation, written consents of all appropriate actions, and shall conduct meetings if deemed necessary to approve any Partnership action. The Partnership shall operate its business generally so as to not be substantively consolidated with any of its Affiliates. The term "Affiliates" shall mean, with respect to any entity, any other entity controlling or controlled by or under common control with such entity, and "control" means the power to direct the management and policies of such entity, directly or indirectly, whether through the ownership or voting securities, by contract, or otherwise.

So long as the Note (defined below) remains issued, outstanding and unpaid, the prior written consent of the Noteholder (defined below) shall be required in order for the Partnership to: (a) file or consent to the filing of any bankruptcy, insolvency or reorganization case or proceeding, institute any proceedings under any applicable insolvency law or otherwise seek any relief under any laws relating to the relief from debts or the protection of debtors generally; (b) seek or consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator, custodian, or any similar official for the Partnership or a substantial portion of its assets; (c) make any assignment of the benefit of the Company's creditors; (d) take any action in furtherance of any of the foregoing; (e) dissolve, liquidate or terminate the existence of the Company; or (f) amend the provisions specified in this Section 1.3.

1.4 Exclusive Use Restriction. Hartman REIT Operating Partnership II, L.P. will be a party to that certain Lease dated November 2, 2001 with Walgreen Co. (the "Lease"} which provides in Article 8 thereof that, 12097 Veterans Memorial Associates, LP may not own or control, directly or indirectly, any real property within 500 feet of any boundary of the Property which property is used in the operation of a business in competition with Walgreen Co. (the foregoing restriction is herein referred to as the "Exclusive Use Restriction "). Each of the current Owners, and each future Owner by its acceptance of an ownership or equity interest in 12097 Veterans Memorial Associates, LP, agrees that it shall not, and shall not cause or permit 12097 Veterans Memorial Associates, LP, to violate the Exclusive Use Restriction, Article 8 of the Lease or any other restriction or covenant set forth in the Lease which binds, affects or makes reference to the activities of any owner or holder of an ownership or equity interest in 12097 Veterans Memorial Associates, LP.

1.5 Assumed Business Name: The General Partner is authorized to execute, file, and cause to be published with the proper authorities in each jurisdiction in which the Partnership conducts business, such certificates or documents as required by the fictitious business statement act or similar statute in effect as to each jurisdiction.

1.6 Certificate and Other Instruments: As soon after the execution of this Agreement as is practicable, the General Partner shall execute and file a Certificate in accordance with the Act, and shall execute such other documents and instruments and shall take all such other actions as may be deemed by the General Partner as necessary and appropriate to effect and permit the Partnership to transact business under the laws of the State of Texas. The General Partner shall from time to time take appropriate action, including the preparation and filing of such amendments to the Certificate and other certificates as may be required under the [ILLEGIBLE]

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enable the Partnership to do business in the State of Texas. The Limited Partners shall execute such documents and instruments and take such other action as may be necessary to enable the General Partner to fulfill its responsibilities under this Section. The Power of Attorney granted in Section 16.9 may be exercised by the General Partner to accomplish the foregoing.

1.7 Principal Place of Business and Office of the Partnership: The principal place of business and office to the Partnership shall be located at 1450 W. Sam Houston Parkway N., Suite 100, Houston, Texas 77043, or such other place or places in Harris County, Texas as the General Partner may from time to time designate by notice to the Limited Partners. In addition, the Partnership may maintain such other offices as the General Partner deems advisable.

1.8 Term: The Partnership shall continue in full force and effect until ninety-nine (99) years from the effective date of the formation of the Partnership, unless sooner dissolved and liquidated pursuant to the provisions of Article IX hereof.

1.9 General Partner: The name and place of business of the General Partner (whether one or more) are as follows:

Hartman REIT Operating Partnership II GP, LLC 1450 W. Sam Houston Parkway N., Suite 100 Houston, Texas 77043

1.10 Agent for Service of Process. The Partnership's agent for service of process in the state of Texas, and the address of such agent, is Allen R. Hartman, 1450 W. Sam Houston Parkway N., Suite 100, Houston, Texas 77043.

1.11 Aggregate Deductions. Notwithstanding the provisions of Section 7.5(a) hereof, the General Partner shall use reasonable efforts to manage the Partnership in such a manner that the aggregate deductions to be claimed by the Partners as their distributive shares of Losses, if any, for the first two (2) years of the operation of the Partnership will in no event exceed the total amount of equity capital invested by the Partners in the Partnership.

1.12 Status of Creditor. No creditor who makes a non-recourse loan to the Partnership shall have or acquire, at any time as a result of making the loan, any direct or indirect interest in the profits, capital or property of the Partnership other than as a secured creditor.

ARTICLE II.

DEFINITIONS

Unless otherwise expressly provided herein or unless the context otherwise requires, the terms with initial capital letters in the Partnership Agreement shall be defined as follows:

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2.1 "Act" shall mean the Texas Revised Limited Partnership Act, as amended from time to time.

2.2 "Affiliates" shall refer to: (a) any person directly or indirectly controlling, controlled by or under common control with another person, (b) any person owning or controlling ten percent (10%) or more of the outstanding voting securities of such other person, (c) any officer, director or partner of such person, and (d) if such other person is an officer, director or partner, any company for which such person acts in such capacity.

2.3 "Assignee" shall mean a person who has acquired a beneficial interest in an Ownership Interest from a third party but who is not a substituted Limited Partner.

2.4 "Capital Account" means, with respect to each Partner, the sum of
(i) such Partner's Initial Capital Contribution, plus (ii) any other additional capital contributions made by such Partner to the Partnership.

2.5 "Capital Contribution" shall mean the total amount of money, property or services both actually or deemed contributed to the Partnership by all the Partners or any class of Partners or any one Partner, as the case may be (or the predecessor holders of the interests of such Partner or Partners).

2.6 "Certificate" means the Certificate of Limited Partnership as a Limited Partnership, and as last amended, as filed in accordance with the Texas Revised Limited Partnership Act, as hereafter amended (the "Act").

2.7 "Code" means the Internal Revenue Code of 1986, as amended.

2.8 "Conversion" means that all Limited Partners have received cash distributions equal to one hundred percent (100%) of their Capital Contributions.

2.9 "Debt" means: (i) that certain Senior Secured Note in the principal amount not to exceed $34,440,000.00 executed by the Partnership which is secured by a certain Mortgage, Security Agreement and Assignment of Lease and Rents covering the Property, and (ii) that certain Promissory Note (Second Note) in the principal amount not to exceed $385,000.00 executed by the Partnership which is secured by a certain Second Loan Mortgage, Security Agreement and Assignment of Lease and Rents covering the Property.

2.10 "Distributable Cash" shall mean all cash of the Partnership, excluding such working capital or reserves or other amounts as the General Partner reasonably determines to be necessary or appropriate for the proper operation of the Partnership business and its winding up and liquidation which working capital and reserves shall include but not be limited to payment and reservation of amounts sufficient to pay for the payments set forth in Articles VI and XII herein.

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2.11 "Eighty Percent in Interest" shall mean any combination of Limited Partners having rights in the aggregate to eighty percent (80%) or more of the ownership of the Partnership.

2.12 "General Partner" shall mean Hartman REIT Operating Partnership II GP, LLC, a Delaware limited liability company, plus any other person or persons who may become a substitute or additional General Partner or Partners and who are elected or admitted hereto as a General Partner pursuant to the terms hereof. The term "General Partner" or "General Partners", as the case may be, as used in this Agreement shall include the singular and plural as the context of the provision requires and shall include each and every General Partner hereof unless otherwise specified.

2.13 "Limited Partners" shall refer to those persons listed on Exhibit B who are admitted to the Partnership as Limited Partners or substituted Limited Partners. Reference to a "Limited Partner" shall be to any one of the Limited Partners.

2.14 "Loan Documents" shall have the meaning ascribed to such term in
Section 15.3(o) of this Agreement.

2.15 "Manager" shall mean the General Partner.

2.16 "Majority Vote" shall mean the vote of Limited Partners who own more than fifty percent (50%) of the Partnership. Each Limited Partner shall have a number of votes equal to his Ownership Interest, except that no Limited Partner shall have voting rights in the event that he is in default of his required capital contributions.

2.17 "Net Profits" shall mean the Distributable Cash of the Partnership after return of 100% of the cost of the initial Capital Contribution of the Partners and after deduction, at any time a calculation is made, of all of its Organizational Expenses.

2.18 "1933 Act" shall mean the Securities Act of 1933, as amended.

2.19 "Noteholder" means the current lawful owner and holder of the Note.

2.20 "Note" means: (i) that certain Senior Secured Note in the principal amount not to exceed $34,440,000.00 executed by the Partnership which is secured by a certain Mortgage, Security Agreement and Assignment of Lease and Rents covering the Property, and (ii) that certain Promissory Note (Second Note) in the principal amount not to exceed $385,000.00 executed by the Partnership which is secured by a certain Second Loan Mortgage, Security Agreement and Assignment of Lease and Rents covering the Property.

2.21 "Organization Expenses" shall mean those expenses incurred in connection with the formation of the Partnership, including such expenses as accounting and legal fees and filing fees with applicable regulatory authorities.

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2.22 "Ownership Interest" shall mean the percent of ownership that each Partner owns in the Partnership.

2.23 "Partners" shall refer collectively to the General Partner, the Limited Partners, and reference to a "Partner" shall be to any one of the Partners.

2.24 "Partnership" shall refer to the limited partnership created under this Agreement.

2.25 "Partnership Properties" or "Property" shall refer to the property described and further defined in Section 1.3.

2.26 "Permitted Expenses". Any and all expenses incurred by the Partnership in connection with the acquisition, operation and maintenance of the Property as such expenses are more particularly described in Article XII herein, including but not limited to expenses incurred or required for developer contributions, payments relating to construction of utilities, legal and accounting matters, maintenance, taxes, insurance and management fees.

2.27 "Profits or Losses" shall mean for each fiscal year or other period, an amount equal to the Partnership's taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments:

(a) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this Section 2.22 shall be added to such taxable income or loss;

(b) Any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treasury Regulation section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this Section 2.22, shall be subtracted from such taxable income or loss; and

(c) Notwithstanding any other provision of this Section 2.26, any items which are specially allocated pursuant to Section 4.7 hereof shall not be taken into account in computing Profits or Losses.

2.28 "Treasury Regulations or Treasury Regulation" shall mean the Income Tax Regulations promulgated by the United States Department of Treasury, as amended.

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ARTICLE III.

CAPITAL CONTRIBUTIONS AND RELATED MATTERS

3.1 Initial Contributions: The capital to be contributed initially to the Partnership by the General Partners and all the Limited Partners shall be cash. The initial capital to be contributed by each of the General and Limited Partners shall be the sum set opposite his name on Exhibit B attached hereto. Each partners shall be personally liable to the Partnership to contribute to the capital of the Partnership the full amount of his initial capital contribution.

3.2 Assessments or Additional Contributions:

The General Partner at its option may, from time to time, call for assessments or additional contributions to cover Permitted Expenses. All calls for additional capital contributions or assessments shall be paid in the same proportion as the initial capital contributions, which are set forth on Exhibit B which is attached hereto and incorporated herein for all purposes.

(a) Each Partner shall promptly pay his/her proportionate share of the additional capital contribution upon receipt of a written request from the General Partner for same, but in no event shall such additional capital contribution be paid later than thirty (30) days from the receipt of such written request.

(b) If any Partner fails to pay his/her proportionate share of any required additional capital contribution within the thirty (30) day time period provided hereinabove, then such non-contributing Partner ("Defaulting Partner") shall be in default of his/her obligations pursuant to this Section 3.2. The General Partner shall notify the Defaulting Partner of such default in writing. Upon such notice to the Defaulting Partner, the other Partners ("Non-Defaulting Partners") who are not in default hereunder, or such of them as elect to do so, shall have the right but not the obligation to pay the Defaulting Partners' share of any required additional capital contribution and upon such payment the following shall occur:

(i) The Non-Defaulting Partners paying the obligation of the Defaulting Partners shall be subrogated to all liens and rights securing the payment of the additional capital contribution required by the Non-Defaulting Partner;

(ii) The Non-Defaulting Partners paying the obligations of the Defaulting Partner shall have an express contract lien, which is hereby granted by the Defaulting Partner, against the interest of the Defaulting Partner in the Partnership, which lien may be foreclosed upon in any manner provided by law for the foreclosure of contract lien;

(iii) In addition to the foregoing remedies, the Defaulting Partner shall be obligated to assign and convey his/her interest in the Partnership to the Non-Defaulting Partners who pay the additional capital contribution of the Defaulting

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Partner. The conveyance shall be by special warranty deed and appropriate special warranty bill of sale which conveyancing requirements shall be specifically enforceable in any court of competent jurisdiction. Notwithstanding the foregoing provision, each Partner, by virtue of the execution hereof, hereby grants an irrevocable power of attorney to the General Partner, coupled with an interest which power of attorney shall become effective upon the default by any Partner as provided in this Section 3.2 and which General Power of Attorney is more particularly described in Section 16.9 herein. The General Partner shall accordingly, be appointed the attorney-in-fact for the Defaulting Partner and shall have the express right and authority to assign and convey the Defaulting Partner's interest to the Non-Defaulting Partners acquiring same. The Non-Defaulting Partners shall additionally, acquire any and all other rights of the Defaulting Partner and the Defaulting Partner shall thereafter forfeit all rights, title and interest in the Partnership so conveyed. The Non-Defaulting Partners acquiring such Defaulting Partner's interest shall thereafter have all rights, title and interest to the Defaulting Partner's Partnership Interest in proportion to the amounts paid by the Non-Defaulting Partners and all capital accounts shall be adjusted accordingly.

3.3 No Withdrawal of Capital Contributions: Except upon dissolution and liquidation of the Partnership, no Limited Partner shall have the right to withdraw his Capital Contribution.

3.4 No Priority: No Limited Partner shall have priority over any other Limited Partner as to return of Capital Contributions, allocations of income, gain, losses, credits, deductions, or as to distributions of Distributable Cash.

3.5 Temporary Investment of Partnership Capital: Partnership funds shall be held by the General Partner as fiduciary for the exclusive use of the Partnership and may be temporarily invested in (a) obligations with a maturity of one (1) year or less that are issued by the United States or its agencies,
(b) interest bearing bank accounts, or (c) money market funds. Interest thereon shall inure to the benefit of the Partnership.

3.6 Capital Account; Unreturned Capital Contributions Account. An individual Capital Account shall be established, determined and maintained for each Partner in accordance with Treasury Regulation section 1.704-1(b)(2)(iv). Except as otherwise provided in Treasury Regulation 1.704-1(b)(2)(iv), each Partner's Capital Account (i) shall be credited with the cash and fair market value of property contributed to the Partnership by such Partner (net of liabilities encumbering such contributed property that the Partnership is considered to assume or take subject to under Code Section 752) and with such Partner's allocation of Partnership income and gain (or item thereof), including income and gain exempt from tax and gain described in section 1.704-1(b)(2)(iv)(g) of the Treasury Regulations, but excluding income and gain described in section 1.704-1(b)(4)(i) of the Treasury Regulations, and (ii) shall be debited with the cash and the fair market value of property distributed by the Partnership to such Partner (net of liabilities encumbering such contributed property that such Partner is considered to assume or take subject under Code Section for such

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Partner's allocation of Partnership loss and deduction described in section 1.704-l(b)(2)(iv)(g) of the Treasury Regulations, but excluding loss or deduction described in section 1.704-l(b)(4)(i) or 1.704-l(b)(4)(iii) of the Treasury Regulations, and such Partner's distributive share of expenditures of the Partnership described in Code Section 705(a)(2)(B) (which shares shall be determined in accordance with such Partner's Ownership Interest). Each Partner shall have a single Capital Account that reflects all Ownership Interest, regardless of the class of interests owned by such Partner, the status of such Partner as either a General Partner or Limited Partner, or the time or manner in which each of such interests were acquired. A credit balance in a Partner's Capital Account shall constitute a liability of the Partnership to that Partner. A debit balance in a Limited Partner's Capital Account shall not constitute an obligation of that Limited Partner to the Partnership. A debit balance in a General Partner's Capital Account, whether occasioned by drawings in excess of the General Partner's Capital Account or the General Partner's share of Profits, or by Losses in excess of the General Partner's Capital Contributions and share of Profits, shall constitute an obligation of the General Partner to the Partnership, and the General Partner shall be required to make a cash contribution (hereinafter designated "Deficit Capital Account Contribution") of the Partnership within sixty (60) days after a "liquidation" of the Partnership, as the term "liquidation" is defined in Treasury Regulation Section 1.7041-(b)(2)(ii)(g). A General Partner's Deficit Capital Account Contribution shall be equal to the difference between (i) the negative balance of the General Partner's Capital Account and (ii) zero. A Deficit Capital Account Contribution by the General Partner shall not affect an increase in the General Partner's Partnership Interest.

ARTICLE IV.

ALLOCATION OF DISTRIBUTIONS, PROFITS, GAIN
LOSSES, AND OTHER ITEMS AMONG THE PARTNERS

4.1 Allocation of Profits or Losses from Operations. Profits or Losses for each fiscal period of the Partnership shall be allocated among the Partners in the proportion that the Capital Contribution of each Partner bears to the Capital Contributions of all Partners. Notwithstanding the foregoing, there shall in any event be allocated to the General Partner at least one percent (1%) of each item of Partnership income, gain, loss, deduction or credit from operations of the Partnership for each fiscal year. All allocations from disposition of assets shall be as set forth in Paragraph 4.5 below.

4.2 Allocation Among Partners Subsequent to Assignment. The Profits or Losses of the Partnership attributable to any interest in the Partnership acquired by reason of an assignment from a Partner shall be allocated between the assignor and assignee based upon the length of time in any fiscal period of the Partnership, as measured by the effective date of the assignment (determined as specified in Section 8.2), during which the interest in the Partnership so assigned was owned by each of them.

4.3 Capital Account Balance. A capital account shall be maintained for each Partner and each Partner's capital account shall be credited with (i) his Capital Contribution and (ii) his allocable share of Partnership income or gains and shall be debited with this allocable share of

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Partnership deductions or losses and (ii) the amount of any distributions to him. No Partner with a negative balance in such Partner's capital account shall have any obligation to the Partnership or the other Partners to restore said negative balance, and such deficit in the capital account of any Partner shall not constitute an obligation of such Partner to the Partnership or the other Partners.

4.4 Distribution of Partnership Funds. Distributable Cash shall be distributed within thirty (30) days after the beginning of each calendar quarter to the Partners in proportion to their ownership interest in the Partnership. In the event of liquidation pursuant to Section 9.2 hereof, liquidation proceeds shall be distributed in accordance with the Partners' positive capital account balances.

4.5 Gain or Loss from a Disposition of Assets. Gain or loss arising from the sale or other disposition of Partnership assets shall be allocated to the Partners in proportion to their ownership interest in the Partnership. Loss shall be allocated to the Partners in proportion to their ownership interest in the Partnership.

4.6 Recapture of Cost Recovery Deductions. Any recapture of cost recovery deductions shall be allocated to the Limited Partners and to the General Partner, to the extent that cost recovery deductions were allocated to each, but in no event to any Partner in excess of the total gain otherwise allocable to such Partners.

4.7 Qualified Income Offset Provision. In the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulation section 1.704-l(b)(2)(ii)(d)(4), 1.704-l(b)(2)(ii)(d)(5), or 1.704-l(b)(2)(ii)(d)(6), items of Partnership income and gain shall be specially allocated to such Partners in an amount and manner sufficient to eliminate the deficit balances in their Capital Accounts created by such adjustments, allocations or distributions as quickly as possible. Any special allocations of items or income or gain pursuant to this Section 4.7 shall be taken into account in computing subsequent allocations of Profits pursuant to this Article IV, so that the net amount of any items so allocated and the Profits, Losses and all other items allocated to each Partner pursuant to this Article IV shall, to the extent possible, be equal to the net amount that would have been allocated to each such Partner pursuant to the provisions of this Article IV if such unexpected adjustments, allocations or distributions had not occurred.

4.8 Special Allocations: Election Requiring Adjustment to Basis. To the extent an adjustment to the adjusted tax basis of any Partnership Asset pursuant to Code Section 734(b) or Code Section 743(b) is required [pursuant to Treasury Regulation Section 1.704-17(b)(2)(iv)(m)] to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of such Partnership Asset) or loss (if such adjustment decreases such basis) and such gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Treasury Regulation Section.

4.9 Order of Applications. In making the distributions provided for in Sections.4.4 and 9.2 and in making the tax allocations provided for in this Article [ILLIGIBLE] such provisions shall be

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applied in the following order of priority (from first to last): (i) Section 4.3 to the extent of deficit capital accounts, (ii) Section 4.7, (iii) Section 4.4,
(iv) Section 4.5, (v) Section 4.6, and (vi) Section 9.2. These provisions shall be applied as if all distributions and allocations were made at the end of the Partnership's taxable year. Where any provisions depends on the Capital Account of any Partner, that Capital Account shall be determined after the operation of all provisions in the foregoing listing that precede such provision, with respect to the applicable year.

4.10 Foreign Tax Withholdings. Unless a Partner provides the General Partner with satisfactory evidence that the General Partner is not required to deduct and withhold tax, pursuant to Code Sections 1441 through and including 1446 (and all other applicable withholding provisions of the Code), together with any Treasury Regulations promulgated thereunder, from any distributions to which such Partner is entitled, the General Partner is authorized and empowered to deduct and withhold tax from all distributions to which Code Sections 1441 through and including 1446 (and all other applicable withholding provisions of the Code) apply. The General Partner is further authorized and empowered to remit such withheld amounts to the Internal Revenue Service in accordance with said provisions of the Code.

ARTICLE V.

MANAGEMENT OF THE PARTNERSHIP

5.1 The Management Powers of the General Partner: The Partnership shall be managed by the General Partner. The General Partner shall have the full, exclusive and absolute right, power and authority to manage and control the Partnership and the property, assets and business thereof. The General Partner shall have all of the rights, powers and authority conferred upon it by law or under other provisions of this Agreement, subject to the restrictions specifically contained in this Agreement.

5.2 Restrictions on Powers of the General Partner: Neither the General Partner nor any Affiliate thereof shall have the authority to:

(a) Enter into contracts with the General Partner or its Affiliates which would bind the Partnership after the expulsion, adjudication or bankruptcy or insolvency of the General Partner, or to continue the business with Partnership assets after the occurrence of such event;

(b) Alter the purpose of the Partnership as set forth in Section 1.3 above.

(c) Receive from the Partnership a rebate or give up or participate in any reciprocal business arrangements which could enable it or an Affiliate to do so;

(d) Cause the Partnership to purchase real property from, sell real property to, or enter into real property exchange agreements or leases (either as lessor or lessee) with the General Partner or its Affiliates:

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(e) Do any act in contravention of any separate certificate or agreement of limited partnership or of this Agreement or which would make it impossible to carry on the ordinary business of the Partnership;

(f) Confess a judgment against the Partnership;

(g) Possess any Partnership property or assign the rights of the Partnership in specific Partnership property for other than a Partnership purpose;

(h) Admit a person as a General Partner except with the consent of the Limited Partners as provided for in this Partnership Agreement.

(i) Receive any insurance brokerage fee or write any insurance policy covering the Partnership-or any of the Property;

(j) Borrow money from the Partnership.

(k) For so long as a mortgage lien exists against the Property the Partnership shall only incur indebtedness in an amount necessary to acquire, operate and maintain the Property. For so long as any mortgage lien exists on any of the Property the Partnership shall not incur, assume, or guaranty any other indebtedness. The Partnership shall not consolidate or merge with or into any other entity or convey or transfer its property and assets substantially as an entirety to any entity. For so long as a mortgage 1ien exists on any of the Property, the Partnership will not voluntarily commence a case with respect to itself, as debtor, under the Federal Bankruptcy Code or any similar federal or state statute. For so long as a mortgage lien exists on any of the Property, no material amendment to this Partnership Agreement may be made without first obtaining approval of the mortgagee holding a first mortgage on any of the Property.

5.3 The Limited Partners Have No Management Powers: The Limited Partners shall have no voice or participation in the management of the Partnership business, and no power to bind the Partnership or to act on behalf of the Partnership in any manner whatsoever, except by specifically authorized voting rights contained in this Agreement.

5.4 The General Partner's Duty to Devote Time: The General Partner shall devote such time and attention to the business of the Partnership as it shall determine, in the exercise of its reasonable judgment, to be necessary for the conduct of the Partnership business.

5.5 General Partner May Engage in Other Activities: The General Partner shall have the right to engage in any other business (including, but not limited to, acting as a partner in other partnerships formed for the purpose of investing in real estate) and to compete, directly or indirectly, with the business of the Partnership, and neither the Partnership nor any Partners shall have any rights or claims as a result of such activities; and the Partners hereby waive any and all rights and claims which they may otherwise have against the General Partner as a result of such [ILLEGIBLE]

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5.6 Dealing with the Partnership: Subject to Section 5.2, the General Partner and any Affiliates thereof shall have the right to contract or otherwise deal with the Partnership for the sale, management, or lease of property, the rendition of services and other purposes, and to receive payments and fees from the Partnership in connection therewith as the General Partner shall determine, provided that such payments or fees, are comparable to the payments or fees that would be paid to unrelated persons providing the same property, goods or services to the Partnership, and provided that such agreements are terminable upon thirty (30) days' notice.

5.7 Indemnity:

(a) General. To the extent not inconsistent with applicable law, the Partnership, its receiver or its trustee, shall indemnify the General Partner or its employees, agents, affiliates, officers, directors, or assigns, against and save them harmless from any claim, demand, judgment, or liability, and against and from any loss, cost or expense (including, but not limited to, attorneys' fees and court costs, which may be paid by the Partnership as incurred), which may be made or imposed upon such person by reason of any (1) act performed for or on behalf of the Partnership or in furtherance of the Partnership business,
(2) inaction on the part of such persons, or (3) liabilities arising under federal and state securities laws to the extent permitted by law, so long as the General Partner has determined, in good faith, that such course of conduct was in the best interests of the Partnership and said conduct did not constitute gross negligence or gross misconduct.

(b) Liability for Acts or Omissions. To the extent not inconsistent with applicable law, no General Partner, nor any officer, director, employee, agent, affiliate or assignee thereof, shall be liable, responsible or accountable in damages or otherwise to the Partnership or any Partner for any action taken or failure to act on behalf of the Partnership within the scope of the authority conferred on the General Partner by this agreement or by law; so long as the General Partner has determined, in good faith, that such course of conduct was in the best interests of the Partnership and said conduct did not constitute gross negligence or gross misconduct.

(c) Indemnity Limitation. Notwithstanding the foregoing Section 5.7(a) and 5.7(b), none of the parties named therein shall be indemnified from any liability, loss or damage incurred by them in connection with (i) any claim or settlement involving allegations that the securities laws were violated by any of them unless they are successful in defending such action and such indemnification is specifically approved by a court of law or (ii) any liability for fraud, bad faith or gross negligence.

(d) Indemnity Subordination. The indemnification set forth in this
Section 5.7 shall be fully subordinated to any obligations respecting the Property and shall not constitute a claim against the Partnership in the event that cash flow is insufficient to pay such obligations.

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5.8 Further Consent of the Limited Partners Not Required:

(a) The Limited Partners hereby expressly acknowledge and agree that by the execution of this Agreement by their Attorney-in-Fact or personally, they have given their consent to all of the rights, powers and authority of the General Partner under this Agreement, to the free and unrestricted exercise thereof and to the doing of any act that the General Partner has the right, power or authority to do under this Agreement, including, but not limited to, the exercise by the General Partner of its rights, powers and authority to dissolve the Partnership, and to sell or otherwise dispose of all or any part of, or any interest in, the Property.

(b) Notwithstanding anything contained in this section to the contrary, to the extent that any of the provisions of this section are inconsistent with the voting rights of the Limited Partners under the provisions of Section 11.3 hereof, the provisions of Section 11.3 hereof shall govern and control.

5.9 Fiduciary Duty of the General Partner: The General Partner shall have fiduciary responsibility for the safekeeping and use of all funds, property and assets of the Partnership, whether or not in its immediate possession or control, and it shall not employ, or permit another to employ, such funds, property or assets in any manner except for the benefit of the Partnership.

5.10 Reserves: The Partnership shall maintain reasonable reserves for normal repairs, replacements, working capital, and contingencies which may be increased or decreased as reasonably determined by the General Partner.

5.11 Independent Director:

(a) For so long as there remains any obligation by the Partnership to Noteholder under the Note, Second Note and/or Loan Documents, the General Partner shall be a Delaware limited liability company whose sole asset is its interest in the Partnership and the General Partner will at all times comply, and will cause the Partnership to comply, with each of the covenants, terms and provisions contained in Section 15.3 of this Agreement as if such representations, warranties or covenants were made directly by the General Partner. The General Partner shall be the sole manager of the Partnership. The General Partner shall at all times maintain one Independent Director ("Independent Director") reasonably satisfactory to Noteholder who shall not have been at the time of such individual's initial appointment and may not have been at any time during the preceding 5 years, and shall not be at any time while serving as Director of the General Partner: (i) a shareholder of, or an officer, director, partner, manager, or employee of the Partnership or the General Partner or any of their respective shareholders, partners, members, subsidiaries or affiliates; (ii) a customer of, or supplier to the Partnership or the General Partner or any of their respective shareholders, partners, members, subsidiaries or affiliates; (iii) a person or other entity controlling or under common control with any shareholder, officer, director, partner, member, employee, supplier or customer; or (iv) a member of the immediate family of any such shareholder, officer, director, partner, member, [ILLIGIBLE] used herein the term "control" means the possession directly

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or indirectly, of the power to direct or cause the direction of the management and policy of a person or entity, whether through ownership of voting securities, by contract or otherwise.

(b) Without the consent of the Independent Director, the Partnership shall not: (i) engage in any business activity other than as set forth in
Section 15.3 hereof and the General Partnership shall engage solely in such business activities set forth in Section 15.3 hereof; (ii) dissolve or liquidate, in whole or in part; (iii) consolidate or merge with or into any other entity or conveyor transfer or lease the Partnership property and assets substantially as an entirety to any entity, and each subject also to the provisions of the Note, Second Note and Loan Documents; (iv) institute proceedings to be adjudicated, bankrupt or insolvent, or consent to the institution or bankruptcy or insolvency proceedings against the Partnership, or file a petition seeking or consenting to reorganization or relief under any applicable federal or state laws relating to bankruptcy or consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Partnership or a substantial part of property of the Partnership, or make any assignment for the benefit of creditors, or admit in writing the Partnership's inability to pay partnership debts generally as they become due or take partnership action in furtherance of any such action; or (v) amend any provisions of this Agreement relating to matters set forth in this
Section 5.11 or Section 15.3 of this Agreement.

ARTICLE VI.

COMPENSATION TO THE GENERAL PARTNER OR AFFILIATES

The General Partner and any Affiliates thereof shall have the right to act as the manager of the Property for the purpose of the general management of the Property, including, but not limited to, the maintenance and leasing thereof, and shall be entitled to receive payments and fees from the Partnership in connection therewith as the General Partner shall determine, provided that such payments or fees are comparable to the payments or fees that would be paid to unrelated persons providing the same property, goods or services to the Partnership, and provided that such agreement shall be terminable upon thirty
(30) days' notice.

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ARTICLE VII.

BOOKS, RECORDS, AND REPORTS

7.1 Books and Records: All books, records and accounts of the Partnership shall be kept at its principal office, or such other office as the General Partner may designate in writing for such purpose, and all Partners and their representatives shall at all reasonable times have access to such records for the purpose of inspecting or copying them. In addition, the General Partner shall maintain at the Partnership's principal office (i) a current list of the full names and last known business addresses of all Partners, separately identifying in alphabetical order of the General Partner and the Limited Partners; (ii) a copy of the certificate of limited partnership and all certificates of amendment thereto, together with executed copies of any powers of attorney pursuant to which any certificate of limited partnership was executed; (iii) copies of the Partnership's federal, state and local income tax returns and reports, if any, for the three (3) most recent years; and (iv) a copy of this Partnership Agreement, together with any amendments thereto, and copies of any financial statements of the Partnership for the three (3) most recent years.

7.2 Fiscal Year: The end of the fiscal year of the Partnership shall be December 31.

7.3 Annual Reports: Within one hundred twenty (120) days after the end of each fiscal year of the Partnership, the General Partner shall cause to be delivered to each person who was a Limited Partner at any time during the fiscal year, an annual report containing the following:

(a) Financial statements of the Partnership, including, without limitation, a balance sheet as of the end of the Partnership's fiscal year and statements of income, Partners' equity and changes in financial position, for such fiscal year, which shall be prepared in accordance with generally accepted accounting principles consistently applied and shall be accompanied by a report containing an opinion of a firm of independent certified public accountants designated by the General Partner;

(b) A general description of the activities of the Partnership during the period covered by the report; and

(c) A report of any material transactions between the Partnership and the General Partner or any of its Affiliates, including fees or compensation paid by the Partnership and the services performed by the General Partner or any such Affiliate for such fees or compensation.

In the determination of the profits (and losses) of the Partnership to be reflected by its books and records, the certified public accountants so designated by the General Partner shall be governed by the provisions of this Agreement. In any circumstances when no provision may be applicable under the Code and regulations to the determination of any item, the accountants shall act in their discretion in such manner as may most consistently with prior practices properly reflect that

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item. If required by governmental agency or by principles of accounting, the accountants may cause adjustments to be made to the statements of the Partnership for financial reporting purposes.

7.4 Interim Reports: The General Partner shall cause to be furnished to each Limited Partner periodic reports as deemed advisable by the General Partner and describing operations during the preceding semi-annual period, each of which reports may be unaudited. Each report shall also contain a description of any material event regarding the business of the Partnership during the period covered by the report.

7.5 Preparation and Filing of Income Tax Returns and Other Writings. The General Partner shall cause the preparation and timely filing of all Partnership tax returns and shall timely file all other writings required by any governmental authority having jurisdiction to require such filing. In addition, the General Partner shall do the following on behalf of the Partnership:

(a) The Partnership shall make those elections available to the Partnership which will accelerate deductions and defer income recognition to the extent the General Partner determines that such elections are in the best interests of the Partnership.

(b) Upon the transfer of a Partner's Partnership Interest (in compliance with the provisions of this Partnership Agreement) or upon distribution of any of the Partnership Assets to any Partner, the Partner who is a party to such transfer or distribution may request that the Partnership make an election in accordance with applicable Treasury Regulations to cause the basis of the Partnership Assets to be adjusted for federal income tax purposes as provided by Code Sections 734 and 743, respectively. Such election shall be made only with the approval of the General Partner and the Majority Approval of the Limited Partners.

(c) The Partnership shall elect (i) to deduct expenses incurred in organizing the Partnership ratably over a sixty (60) month period as provided in Code Section 709 and (ii) to deduct qualified start-up expenditures over a sixty
(60) month period as provided in Code Section 195.

(d) No election shall be made by the Partnership or any Partner to be excluded from the application of any of the provisions of Subchapter K, Chapter 1 of Subtitle A of the Code, or any similar provisions of any applicable state tax laws.

7.6 Filings With Regulatory Agencies: The General Partner, at Partnership expense, shall cause to be prepared and timely filed with appropriate federal and state regulatory and administrative bodies, all reports required to be filed with such entities under the current applicable laws, rules and regulations. Any Limited Partner shall be provided with a copy of such report upon request and without expense to him.

7.7 Tax Matters Partner. In the event of an audit of the federal income tax return of the Partnership by the Internal Revenue Service, and pursuant to Code Section 6231 and related Code sections, the Partners hereby designate the General Partner as the tax matters partner of the Partnership (hereinafter designated "TMP". The TMP shall be specifically authorized by the

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Partners to (i) engage attorneys and/or accountants to represent the Partnership in connection with such audit and any subsequent actions relating thereto, (ii) to negotiate and enter into an agreement with the Internal Revenue Service which shall be binding on all the Partners, (iii) to seek administrative and judicial review of any administrative adjustments of Partnership items made by the Internal Revenue Service, and (iv) to take such other actions which relate to the tax audit of the Partnership. The TMP shall inform the Partners of all administrative and judicial proceedings which may arise with respect to the Partnership's tax returns. The TMP shall provide each Partner with any adjustments proposed by the Internal Revenue Service. In the event a Partner other than the TMP receives a notice of a proposed adjustment from the Internal Revenue Service, such Partner shall, immediately upon receipt thereof, provide such notice to the TMP so that the TMP shall exercise ordinary business judgment in carrying out the duties and responsibilities designated above, and unless gross negligence, fraud, deceit or willful misconduct shall be involved, the TMP shall not be liable or obligated to the Partners for any mistake of fact or judgment made by the TMP in carrying out such duties and responsibilities which result in any loss to the Partners. The TMP shall, within ninety (90) days after the issuance of a final partnership administrative adjustment, file a petition for readjustment refund or redetermination of assessment in a court selected by the TMP if the filing of such a suit is approved by Majority Approval of the Limited Partners and if funds to prosecute the suit are available or are made available. The General Partner shall have not obligation to provide funds to defend any Partnership tax position. All expenses incurred by the Partnership in connection with any such audit or lawsuit shall be borne by the Partnership as an expense of operations if Partnership funds are used to pay such expenses. None of the provisions of this Section 7.7 is intended to authorize the TMP to take any action which is left to the determination of an individual Partner under Code sections 6222 through 6232.

ARTICLE VIII.

ASSIGNMENT OR SALE OF INTERESTS IN THE PARTNERSHIP

8.1 Assignment of the Interest in the Partnership of the General Partner: The General Partner shall have the free and unrestricted right to assign all of its interest in the proceeds of and distributions from the Partnership, or any part thereof. Said assignee, however, shall not become a General Partner without the consent of the General Partner and a Majority Vote.

8.2 Assignment or Sale of Limited Partners' Interests:

(a) Subject to the provisions of this Section 8.2, and Sections 8.3 and 8.4 hereof, a Limited Partner may assign or sell his/her interest in the Partnership; however, such assignment or sale shall not confer upon the Assignee or Purchaser any right to become a Substituted Limited Partner.

(b) Any assignment must be by a written instrument, the terms of which are not in contravention of any of the provisions of this Agreement and no Partner may sell or dispose his/her interest in the Partnership except in strict accordance with the terms of this Agreement. Should any

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Partner desire to sell or otherwise dispose of his Ownership Interest, he or she shall first deliver to each of the other Partners a written notice, which shall:

(i) State his/her intention to sell or dispose of his/her interest or designated portion thereof;

(ii) State the price and terms of the best bonafide offer he/she has received for the purchase of such interest or portion thereof, and the name and address of the offeror(s) making such offer; and

(iii) Offer to sell such interest or portion thereof to such of the other Partners as are not then in default under this Agreement, on the same terms and condition, at any time within thirty (30) days after delivery of such written offer to such other Partners.

At any time during the thirty (30) day period after the delivery of such notice, the other Partners who are not in default hereunder shall have the prior right and option in proportion to their respective ownership interests hereunder, to purchase a11 of the undivided interest, or designated portion thereof, of the selling Partner, on the terms and at the price set forth in the offer. If more than one Partner elects to purchase the interest, then all of those Partners making such election shall purchase equal proportions of the interest offered for sale. If this option is not exercised by any such other Partners, the selling Partner, at any time within thirty (30) days after the thirty (30) day option period, may sell his/her undivided interest, or designated portion thereof, to the offeror(s) named in the offer, on the terms and at the price stated in such offer, provided that the named offeror(s), upon purchase of such undivided interest shall assume all (or the proportionate part) of the obligations of the selling Partner hereunder. If the sale is not consummated within such thirty (30) day period, the notice given to the other Partners shall be deemed to have expired, and a new notice and option shall be required before any sale or disposition is made of the undivided interest of the selling Partner.

(c) An Assignee or transferee shall be entitled to receive distributions of cash or other property from the Partnership attributable to the Limited Partner's interest acquired by reason of such assignment or transfer from and after the effective date of the assignment or transfer of such interest to him; provided, however, that anything herein to the contrary notwithstanding, the Partnership and General Partner shall be entitled to treat the assignor or transferor of such interest as the absolute owner thereof in all respects, and shall incur no liability for allocations of income, gain, losses, credits, deductions, or distributions which are made in good faith to such assignor or transferor until such time as the written instrument of assignment or transfer has been received by the Partnership and the effective date of assignment or transfer has passed.

(d) The effective date of an assignment or transfer of a Limited Partner's interest (of which assignment or transfer the Partnership has actual notice) shall be no later than the last day of the calendar month following receipt of notice of assignment and required documentation.

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8.3 No Assignment Allowed Under Certain Circumstances: Anything herein contained to the contrary notwithstanding, no Limited Partner shall have the right to assign his interest in the Partnership, or any portion thereof, if:

(a) the General Partner has not given its prior written consent;

(b) if the transfer would result in a termination of the Partnership pursuant to Section 708 of the Code or adversely affect the classification of the Partnership as a partnership for tax purposes, or violate any applicable provision of federal or state securities laws or cause the original offering of any Ownership Interest in the Partnership to violate any applicable provision of federal or state securities laws; and

(c) The Limited Partner requesting the assignment shall bear all expenses and costs incurred by the Partnership in effecting the assignment, including, but not limited to, tax preparation of allocations and any legal or other costs.

8.4 Substituted Limited Partners:

(a) The assignee of a Limited Partner shall not become a substituted Limited Partner ("Substituted Limited Partner") in respect thereof unless the General Partner gives its express written consent to such substitution (which consent may be withheld in its absolute discretion) and receives such instruments and documents, and a reasonable transfer fee, as the General Partner shall require.

(b) The assignor Limited Partner shall cease to be, and the assignee shall become, a Limited Partner, as to the Limited Partnership interest so assigned, as of the date on which the assignee has satisfied the requirements set forth above and as of the date of effectiveness, and thereafter the assignor Limited Partner shall have no further rights or obligations with respect to the Partnership.

(c). The General Partner is hereby authorized to do all things necessary to effect the admission of any such Substituted Limited Partner, including, but not limited to, the filing of an amended certificate of limited partnership, and each Limited Partner hereby agrees (and each Substituted Limited Partner, upon the execution of the instruments referred to in Section 8.4(a) hereof, shall be deemed to have agreed) that he shall, at the request of the General Partner, execute and deliver any such amended certificate of limited partnership.

(d) Unless and until any Assignee, transferee, heir or legatee becomes a Substituted Limited Partner, his status and rights shall be limited to the rights of an Assignee of a limited partnership interest. An Assignee who does not become a Substituted Limited Partner shall have not right to inspect the Partnership's books or to vote on any of the matters on which a Limited Partner would be entitled to vote. An Assignee who does not become a Substituted Limited Partner shall be only entitled to receive the allocation of income, gain, losses, credits, deductions, and [ILLEGIBLE] otherwise be entitled under this Agreement.

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(e) The General Partner shall cause the Partnership Agreement or any separate certificate of limited partnership to be amended to reflect the substitution of Limited Partners at least once each calendar quarter.

(f) Any person admitted to the Partnership as a Substituted Limited Partner shall be subject to and bound by all the provisions of this Agreement as if originally a party to this Agreement.

8.5 Death, Insanity or Incompetency of a Limited Partner: The death, insanity, incompetency or bankruptcy of a Limited Partner shall not dissolve the Partnership. In such event, the executors or administrators of the estate of the deceased Limited Partner, the legal representative of the estate of the insane or incompetent Limited Partner or the successors in interest to the bankrupt Limited Partner shall, for the purpose of settling the estate, have all of the rights of such Limited Partner, including the same rights, subject to the same limitations, that such Limited Partner would have had under the provisions of this Article to assign his interest in the Partnership and to provide in the instrument of assignment that the assignee, if the General Partner so consents in writing and if the other requirements set forth in this Article are satisfied, may become a Substituted Limited Partner, in accordance with the procedures set forth in this Article. The estate of the deceased, insane, incompetent or bankrupt Limited Partner shall nevertheless continue to be liable for all of his obligations as a Limited Partner.

8.6 Bankruptcy, Creditor Alienation or Divorce:

(a) In the event that any Partner shall be declared a "Debtor" pursuant to any provision under the United States Bankruptcy Code, as amended, or in the event that any Partner's undivided interest shall become subject to the rights of third party creditors, or to the claims of any person who is not a Partner hereunder, including any interest passing to a non-Partner spouse of a Partner pursuant to the terms of a divorce decree or property settlement agreement, such events hereinafter collectively referred to as "Event of Loss", then, in such Event of Loss, that portion of the Partner's undivided interest that shall be affected by the Event of Loss (hereinafter called "Affected Interest") shall, at the option of each of the remaining Partners, be purchased by those remaining Partners selecting to participate therein in proportion to their respective ownership interests, at a price equal to the fair market value of such Affected Interest as agreed upon by the parties thereto, or in the event no agreement can be reached, as hereinafter set forth.

(b) Upon the occurrence of an Event of Loss, the Partner owning the Affected Interest shall immediately notify the General Partner of the Event of Loss and the amount of the Affected Interest. The General Partner shall, in turn, notify such of the remaining non-defaulting Partners of the same. Any remaining Partners desiring to participate in the purchase of the Affected Interest shall notify the Partner of the Affected Interest, or his/her agent, successor, or assigns, within fifteen (15) days after receipt of notice from the General Partner of their election to purchase the Affected Interest. If the Partner owning the Affected Interest, or his/her agent, successor or assign and the participating Partners agree upon the terms and [ILLEGIBLE]

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purchase and sale shall occur within thirty (30) days thereafter. If the foregoing parties are unable to agree upon the terms and price, then the participating Partners shall thereafter, at their own expense, have a period of thirty (30) days within which to appoint a qualified real estate appraiser to value the Affected Interest. Upon receipt of the notice from the participating remaining Partners, Partners owning the Affected Interest, or his/her agent, successor, or assign, shall likewise appoint a qualified real estate appraiser to value the Affected Interest within thirty (30) days after receipt of such notice. In the event that the Partner of the Affected Interest, or his/her agent, successor, or assign shall fail to appoint an appraiser within the time specified, those participating Partners desiring to purchase the Affected Interest shall appoint a second appraiser. Upon the appointment of the two (2) appraisers, a third qualified real estate appraiser shall be appointed by the first two appraisers, and the Affected Interest shall be appraised at the cash value determined by a majority of the appointed appraisers. Once the price of the Affected Interest is determined by the appraisers, those participating Partners shall have a period of thirty (30) days thereafter within which to purchase the Affected Interest at the price determined by such appraisal which shall be payable in cash. The rights of the Partners electing to purchase the Affected Interest hereunder may be specifically enforced. As used herein, qualified appraiser shall mean a real estate appraiser having a minimum of five
(5) years experience in appraising commercial real estate in the market area in which the Property is located.

ARTICLE IX.

DISSOLUTION AND TERMINATION OF THE PARTNERSHIP

9.1 Dissolution: The Partnership shall be dissolved and terminated upon the earlier to occur of the following:

(a) The expulsion, adjudication of bankruptcy, insolvency or dissolution and liquidation of the General Partner if a Majority Vote of the Limited Partners fail to continue the Partnership as provided in Section 10.1;

(b) A vote of eighty percent (80%) in interest in favor of dissolution and termination of the Partnership;

(c) The expiration of the term of the Partnership;

(d) The sale or other disposition of all or substantially all of the assets of the Partnership.

9.2 Liquidation:

(a) In the event of dissolution as provided in Section 9.1 above, and there has been no election to continue the Partnership as provided for in this Agreement, the assets of the Partnership shall be liquidated, subject to the provisions in Section 9.3, paid and distributed as follows provided that the Partners of liquidating agent shall determine, by appraisal or other reasonable means the fair market value of any properties distributed in kind to the Partners, and the

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Partner's capital account shall first be debited or credited as if such properties had been sold at such fair market value:

(i) All of the Partnership's debts and liabilities to persons other than Partners shall be paid and discharged, but excluding secured creditors whose obligations will be assumed or otherwise transferred on the liquidation of Partnership assets, with any reserve deemed necessary by the General Partner for the payment of such debts being set aside;

(ii) All of the Partnership's debts and liabilities to Partners shall be paid and discharged;

(iii) To the Partners in accordance with Section 4.4(d) hereof; and

(iv) The balance of the assets of the Partnership shall be distributed to the Partners in accordance with Section 4.5. hereof.

(b) Upon dissolution, each Limited Partner shall look solely to the assets of the Partnership for the return of his Capital Contribution, and shall be entitled only to a distribution of Partnership property and assets in return thereof, unless otherwise allowed by the General Partner. If the Partnership property remaining after the payment or discharge of the debts and liabilities of the Partnership is insufficient to return the Capital Contribution of each Limited Partner, such Limited Partner shall have no recourse against the General Partner or any other Limited Partner. The winding up of the affairs of the Partnership and the distribution of its assets shall be conducted exclusively by the General Partner, who is hereby authorized to do any and all acts and things authorized by law for these purposes, including, without limitation, selling any Partnership assets the General Partner deems necessary or appropriate to sell. In the event of dissolution, death, or bankruptcy of the General Partner or removal of the General Partner by the Limited Partners, as provided herein, and there is a failure to appoint a new General Partner, the winding up of the affairs of the Partnership and the distribution of its assets shall be conducted by such person(s) or entity(ies) as may be selected by Majority Vote. In such event said person(s) or entity(ies) is (are) hereby authorized to do any and all acts and things authorized by law for these purposes.

9.3 Distribution in Kind: If the General Partner or other liquidator determines that a portion of the Partnership's assets should be distributed in kind to the Partners, it shall obtain an independent appraisal of the fair market value of each such asset as of a date reasonably close to the date of liquidation. Any unrealized appreciation or depreciation with respect to any asset to be distributed in kind shall be allocated among the Partners in accordance with the provisions of Article IV hereof and, assuming that the assets were sold for the appraised value, shall be taken into consideration in determining the balance in the Partners' capital accounts as of the date of final liquidation. Distribution of any such assets in kind to a Partner shall be considered a distribution of an amount equal to the asset's fair market value for purposes of Section 9.2.

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9.4 Termination: Upon the completion of the distribution of Partnership assets as provided in Section 9.2 and/or 9.3, the Partnership shall be terminated, and the General Partner or other person acting as liquidator (or the Partners, if necessary) shall cause the certificate of limited partnership of the Partnership to be canceled and shall take such other actions as may be necessary to terminate the Partnership.

9.5 Dissolution Limitation: Subject to applicable law, dissolution of the Partnership shall not occur so long as the Partnership remains mortgagor of the Property.

ARTICLE X.

TERMINATION OF A GENERAL PARTNER

10.1 Death, Legal Incapacity, Dissolution, Withdrawal, Removal or Bankruptcy: Not less than ninety (90) days prior to dissolving or withdrawing from the Partnership, any departing General Partner shall give written notice of his intentions to all Limited Partners. The legal incapacity, dissolution, withdrawal, removal or bankruptcy of the General Partner shall dissolve the Partnership and the Partnership shall be liquidated, unless by Majority Vote of the Limited Partners one or more new General Partners is elected in place thereof to continue the Partnership business.

10.2 Removal of a General Partner: The Limited Partners, upon a vote of eighty percent (80%) in interest may remove the General Partner. Written notice of such determination setting forth the effective date of such removal shall be served upon the General Partner so removed, and as of the effective date, shall terminate all of such person's rights and powers as a General Partner or its affiliate's right to be compensated under Article VI and except for the General Partner's rights under Section 10.3 below.

10.3 Continuing Interest of Terminated General Partner: In the event of the death, legal incapacity, dissolution, withdrawal, removal pursuant to the terms herein, or bankruptcy of a General Partner and if the Partnership is not continued, then the Partnership shall be liquidated and terminated and the Partnership's assets distributed in accordance with Article IX. Upon the retirement, death, legal incapacity, dissolution, withdrawal, removal pursuant to the terms herein, or bankruptcy of a General Partner if the Partnership is continued, then such General Partner or his or its successor-in-interest shall thereupon become, and hold his interest in the Partnership as a Limited Partner of the Partnership without voting rights (provided, however, he shall nevertheless be allocated the same share of the income, gain, losses, credits, deductions, and Distributions of the Partnership, and shall nevertheless be entitled to receive the same payments from the Partnership, as he would have been allocated and entitled to receive had he continued to be a General Partner with respect to his interest in the Partnership.

10.4 Termination of Executory Contracts with General Partner or Affiliates: Upon removal or withdrawal of a General Partner pursuant to the terms herein, all executory contracts between the Partnership and the terminating General Partner or any Affiliates thereof may be terminated by the Partnership effective upon thirty (30) days prior written notice of such termination

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to the party so terminated. The terminating General Partner or any Affiliate thereof may also terminate and cancel any such executory contract effective upon thirty (30) days prior written notice of such termination and cancellation given to the new General Partner, if any, or the Partnership.

10.5 Reports After Removal: Within ninety (90) days after the Limited Partners have voted to remove a General Partner, pursuant to the terms herein, the General Partner shall have prepared, at Partnership expense, audited financial statements (balance sheet, statement of income or loss, statement of Partners' equity, and statement of changes in financial position) prepared in accordance with generally accepted accounting principles by an independent accounting firm, and shall cause such statements to be mailed to the Limited Partners as soon as possible after receipt thereof.

ARTICLE XI.

MEETINGS AND VOTING RIGHTS

11.1 Notice of Meetings: The General Partner may at any time call a meeting or a vote of the Limited Partners. In addition, the General Partner shall call for a meeting or vote and give written notice thereof within ten (10) days following receipt of written request therefor of Limited Partners holding more than twenty-five percent (25%) of the Ownership Interest. In accordance with Section 16.1(a), the General Partner shall give notice of any such meeting or vote to all Partners of record as of the date of mailing and to the most recent addresses shown on the records of the Partnership, which notice shall include the purpose or requested purpose of such meeting or vote. Any such meeting or vote shall be held not less than fifteen (15) nor more than sixty
(60) days following mailing of the notice. Notice given in the foregoing manner shall be deemed complete forty-eight (48) hours after its deposit by the General Partner in any regular U.S. Postal Service depository. All expenses of the meeting or vote and of notice thereof shall be borne by the Partnership.

11.2 One Vote Per One Percent of Ownership Interest: A Limited Partner shall be entitled to cast one(1) vote for each percentage of interest in the Partnership which he owns: (a) at a meeting, in person, by written proxy or by a signed writing directing the manner in which he desires that his vote be case, which writing must be received by the General Partner prior to such meeting; or
(b) without a meeting, by a signed writing directing the manner in which he desires that his vote be cast, which writing must be received by the General Partner prior to the date upon which the votes of Limited Partners are to be counted. Only the votes of Limited Partners of record as of the date of such meeting or vote shall be counted. The laws of Texas pertaining to the validity and use of corporate proxies shall govern the validity and use of proxies given by Limited Partners.

11.3 Voting Rights of the Limited Partners:

(a) The Limited Partners shall have the right, by a vote of Eighty Percent (80%) in interest to effect the following:

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(i) Removal of the General Partner as provided in Section 10.2; and

(ii) Termination and dissolution of the Partnership;

(b) Limited Partners shall have the right, by Majority Vote, to effect the following:

(i) Election of a successor General Partner;

(ii) Amendment of this Agreement, except as provided for in Article XIII, "Amendments of Partnership Documents"; and

(iii) Sale of all or substantially all of the Partnership Property.

11.4 Consents: Any action which may be taken by Partners at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by the owners of the Ownership Interest having not less than the minimum interests that would be necessary to authorized or take that action at a meeting. Any such consent may be signed in counterpart.

ARTICLE XII.

PARTNERSHIP EXPENSES

12.1 Reimbursement to General Partners: The Partnership shall reimburse the General Partner for the actual cost of acquiring maintaining and leasing the Property incurred and paid by it.

12.2 Direct Payment of Partnership Expenses: All of the Partnership expenses shall be billed directly to and paid by the Partnership. In the event that the General Partner advances funds to the Partnership to pay operating expenses or directly pays such expenses, he shall be fully reimbursed by the Partnership.

12.3 Payment of Expenses of the Partnership: The Partnership will pay the following expenses:

(a) Organization Expenses;

(b) Expenses of the Property, which may include, but are not limited to: (1) all costs of personnel employed by the Partnership, including persons who may also be employees of the General Partner, only to the extent that such employees may provide services not included within any property management fee received by the General Partner or an Affiliate and which would not normally be included within a comparable fee charged by an independent, unaffiliated property management company (including the fees set forth in Article VI hereof);
(2) all operational costs of the Property, including taxes, utilities, insurance, cost of maintenance and repair mortgage

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payments, and all costs of borrowed money, taxes, and assessments on the Property and other taxes applicable to the Partnership; (3) legal, accounting, brokerage, and other fees including auditing expenses of the Property conducted on the Property and not within the scope of Partnership administration expenses as set forth below; (4) fees and expenses paid to contractors, lenders, mortgage bankers, brokers and servicers, leasing agents, consultants, on-site managers, real estate brokers, insurance brokers, and other agents (including the fees set forth in Article VI hereof); (5) expenses in connection with the acquisition and disposition of the Property (including appraisers' fees, legal and accounting fees, and engineering fees), and expenses in connection with the disposition, replacement, alteration, repair, remodeling, refurbishment, leasing and operation of the Property (including the costs and expenses of foreclosures, legal and accounting fees, insurance premiums, real estate brokerage and leasing commissions, and or maintenance connected with the Property);

(d) Expenses of Partnership Administration, including all accounting, documentation, professional, and reporting expenses of the Partnership, which may include, but are not limited to: (1) preparation and documentation of Partnership bookkeeping, accounting, and audits; (2) preparation and projections, and working capital requirements; (3) preparation and documentation of Partnership state and federal tax returns; (4) printing, engraving, and other expenses and taxes incurred in connection with the issuance, distribution, transfer, registration, and recording of documents evidencing ownership of an interest in the Partnership or in connection with the business of the Partnership; (5) expenses of insurance as required in connection with the business of the Partnership; (6) expenses in connection with Distributions made by the Partnership to, and communications, bookkeeping and clerical work necessary in maintaining relations with, Limited Partners; (7) expenses in connection with preparing and mailing reports required to be furnished to Limited Partners for investor, tax reporting, or other purposes, or expenses associated with furnishing reports to Limited Partners which the General Partner deems to be in the best interests of the Partnership; (8) expenses of revising, amending, converting, modifying, or terminating the Partnership; (9) costs incurred in connection with any litigation in which the Partnership is involved as well as any examination, investigation, or other proceedings conducted by any regulatory agency of the Partnership, including legal and accounting fees incurred in connection therewith; (10) costs of any computer equipment or services used for or by the Partnership; (11) costs of any accounting, statistical, or bookkeeping equipment necessary for the maintenance of the books and records of the Partnership; (12) the costs of preparation and dissemination of informational material and documentation relating to potential sale, refinancing, or other disposition of the Property; (13) supervision and expenses of professionals employed by the Partnership in connection with any of the foregoing, including attorneys, accountants, and appraisers, and (14) other Partnership administration expenses;

(e) Other expenses necessary or advisable for the operation of the business of the Partnership.

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ARTICLE XIII.

AMENDMENTS OF PARTNERSHIP DOCUMENTS

13.1 Amendments in General: Except as otherwise provided in this Agreement, this Agreement may be amended with the consent of the General Partner and by a Majority Vote of the Limited Partners.

13.2 Amendments Requiring Greater than a Majority Vote: Any provision of this Agreement that requires the consent of greater than a Majority Vote may be amended only by whatever vote of the Partners is necessary under the provision proposed to be amended.

13.3 Amendments Without Consent of Limited Partners: In addition to any amendments otherwise authorized herein, amendments may be made to this Agreement from time to time by the General Partner, without the consent of any of the Limited Partners: (a) to add to the representations, duties or obligations of the General Partner or to surrender any right or power granted to the General Partner herein, for the benefit of the Limited Partners; (b) to correct any error or resolve any ambiguity in or inconsistency among any of the provisions hereof, or to make any other provisions with respect to matters or questions arising under this Agreement; (c) to delete or add any provision of this Agreement required to b so deleted or added by any federal or state securities commission, or similar governmental authority for the benefit or protection of the Limited Partners; (d) to add to or change the name of the Partnership, if such addition or change is necessary to protect the limited liability of the Limited Partners or to comply with applicable federal or state law or the rules or regulations of any governmental agency; (e) to amend this Agreement and any separate certificate of limited partnership to admit additional limited partners pursuant to Article III or to delete the Original Limited Partner from the Partnership.

13.4 Amendments Needing Consent of Affected Partners: Notwithstanding any other provision of this Agreement, without the consent of the Partner or Partners to be adversely affected by any amendment to this Agreement, this Agreement may not be amended to (a) convert a Limited Partner's interest to a General Partner's interest, (b) modify the limited liability of a Limited Partner, (c) alter the interest of a Partner in income, gain, losses, deductions, credits, and Distributable Cash, (d) increase, add or alter any obligation of any Partner, or (e) alter any provisions of Articles IV, VI, X, and this Section 13.4.

13.5 Amendments After Change of Law: This Agreement and any other Partnership documents may be amended and refiled, if necessary, by the General Partner without the consent of the Limited Partners if there occurs any change (including adoption of a new limited partnership law for the State of Texas that permits or requires an amendment of this Agreement under the Act or of any other Partnership document under applicable law, so long as no Partner is adversely affected [or consent is given by such Partner]).

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ARTICLE XIV.

BORROWINGS

14.1 Loans by the General Partner to Partnership: The General Partner may, in its discretion, advance monies to the Partnership for use in its operations. The aggregate amount of such advances shall be an obligation of the Partnership to the General Partner in accordance with the terms of the advances out of Partnership funds with interest at the prime lending rate or at the highest rate permitted by the applicable usury law, whichever is less. Such advances shall be deemed a loan by the General Partner to the Partnership and shall not be deemed a capital contribution.

14.2 Loans by the Partnership to the General Partner or Others: The Partnership shall not make any loans to the General Partner or to any other person.

ARTICLE XV.

REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PARTNERS

15.1 General Partner: The General Partner warrants, represents and covenants to the Limited Partners as follows:

(a) The General Partner (and its signatory to this Agreement) has all authority required to enter into this Agreement and have obtained all requisite covenant and approvals and, when executed by the General Partner's signatory, this Agreement will be binding on the General Partner subject only to the Limited Partners' due execution (personally or by Attorney-in-Fact) of the Agreement.

(b) The General Partner covenants and agrees, for the benefit of the Limited Partners, that throughout the term of this Agreement it will at all times use its best efforts, acting as a fiduciary on behalf of the Limited Partners, to: (i) perform or cause to be performed its obligations under this Agreement and all other agreements and documents executed in furtherance or in connection with this Agreement and (ii) do or cause to be done all things necessary or proper within its power or control to protect the rights of the Limited Partners.

(c) The Partnership has, or shall acquire, good title to the real and personal property constituting the Property and the Partnership has obtained an adequate policy of title insurance regarding the Property.

(d) The General Partner has and will maintain a net worth sufficient to meet the existing requirements of applicable regulations, rulings and policies of the Internal Revenue Service in order that the Partnership be in a position to be classified as a partnership for Federal income tax purposes.

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15.2 Indemnification by the General Partner: The General Partner agrees to indemnify, hold harmless and defend the Partnership against any and all loss, damage, liability or expense arising directly from or as a result of the General Partner's gross negligence, gross misconduct, breach of fiduciary duty, or breach of a term, representation, condition or covenant of this Agreement.

15.3 Separateness Covenants. For so long as any mortgage lien exists on any of the Property, in order to preserve and ensure its separate and distinct identity, in addition to the other provisions set forth in this Partnership Agreement, the Partnership shall conduct its affairs in accordance with the following provisions:

(a) It shall not engage in any business or activity other than the ownership, operation and maintenance of the Property, and activities incidental thereto;

(b) It shall not acquire or own any material assets other than (A) the Property, and (B) such incidental Personal Property as may be necessary for the operation of the Property;

(c) It shall not merge into or consolidate with any person or entity or dissolve, terminate or liquidate in whole or in part, transfer or otherwise dispose of all or substantially all of its assets or change its legal structure, without in each case Lender's consent;

(d) It shall not fail to preserve its existence as an entity duly organized, validly existing and in good standing (if applicable) under the laws of the jurisdiction of its organization or formation, or without the prior written consent of Lender, amend, modify, terminate or fail to comply with this Agreement, Articles or Certificate of Incorporation, Operating Agreement or similar organizational documents, as the case may be, as same may be further amended or supplemented, if such amendment, modification, termination or failure to comply would adversely affect the ability of the Partnership to perform its obligations hereunder, under the Note or under the Loan Documents;

(e) It shall not own any subsidiary or make any investment in, any person or entity without the consent of Lender;

(f) It will maintain its accounts, books and records separate from any other person or entity;

(g) It will maintain its books, records, resolutions and agreements as official records;

(h) It will not commingle its funds or assets with those of any other entity;

(i) It will hold its assets in its own name:

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j) It will conduct its business in its name;

(k) It will maintain its financial statements, accounting records and other entity documents separate from any other person or entity;

(1) It will pay its own liabilities out of its own funds and assets;

(m) It will observe all partnership, corporate or limited liability company formalities as applicable;

(n) It will maintain an arms-length relationship with its affiliates;

(o) It will have no indebtedness other than the Note and, together with the other documents, instruments and agreements executed in connection therewith, the "Loan Documents"), and unsecured trade payables in the ordinary course of business relating to the ownership and operation of the Property which
(1) do not exceed, at anytime, a maximum amount of one percent (1%) of the original principal amount of the Note and (2) are paid within thirty (30) days of the date incurred;

(p) It will not assume or guarantee or become obligated for the debts of any other entity or hold out its credit as being available to satisfy the obligations of any other entity except for the Indebtedness;

(q) It will not acquire obligations or securities of its partners, members or shareholders;

(r) It will allocate fairly and reasonably shared expenses, including, without limitation, shared office space and uses separate stationery, invoices and checks;

(s) Except pursuant hereto and pursuant to the Loan Documents, it has not and will not pledge its assets for the benefit of any other person or entity;

(t) It will hold itself out and identify itself as a separate and distinct entity under its own name and not as a division or part of any other person or entity, and will not fail to correct any misunderstanding as to its separateness or distinction from any of its affiliates;

(u) It will not make loans to any person or entity;

(v) It will not identify its partners, members or shareholders, or any affiliates of any of them as a division or part of it;

(w) It will not enter into or be a party to, any transaction with its partners, members, shareholders or its affiliates except in the ordinary course of its business and on terms which are intrinsically fair and are not less favorable to it than would be obtained in a comparable arms-length transaction with an unrelated third party;

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(x) It will pay the salaries of its own employees from its own funds; and

(y) It will maintain adequate capital in light of its contemplated business operations.

ARTICLE XVI.

MISCELLANEOUS PROVISIONS

16.1 Notices.

(a) Any written notice, offer, demand or communication required or permitted to be given by any provision of this Agreement shall be deemed to have been sufficiently given for all purposes if delivered personally to the party to whom the same is directed or if sent by certified mail, return receipt requested, addressed (1) if to the General Partner, to the principal place of business and office of the Partnership specified in this Agreement and (2) if to a Limited Partner, to such Limited Partner's address as set forth on Exhibit B attached hereto.

(b) Any such notice that is sent by certified mail, return receipt requested, shall be deemed to be given two (2) days after the date on which the same is mailed.

(c) The General Partner may change its address for purposes of this Agreement by giving written notice of such change to the Limited Partners, and any Limited Partner may change his address for purposes of this Agreement by giving written notice of such change to the General Partner, in the manner hereinbefore provided for the giving of notices.

16.2 Article and Section Headings: The Article and Section headings in this Agreement are inserted for convenience and identification only and are in no way intended to define or limit the scope, extent or intent of this Agreement or any of the provisions hereof.

16.3 Construction: Whenever the singular number is used herein, the same shall include the plural; and the neuter, masculine and feminine genders shall include each other. If any language is stricken or deleted from this Agreement, such language shall be deemed never to have appeared herein and no other implication shall be drawn therefrom.

16.4 Severability: If any covenant, condition, term or provision of this Agreement is illegal, or if the application thereof to any person or in any circumstance shall to any extent be judicially determined to be invalid or unenforceable, the remainder of this Agreement, or the application of such covenant, condition, term or provision to person or in circumstances other than those to which it is held invalid or unenforceable, shall not be affected thereby, and each covenant, condition, term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law.

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16.5 Governing Law: This Agreement shall be construed and enforced in accordance with, and governed by Texas law.

16.6 Counterparts: This Agreement may be executed in one or more counterparts, each of which shall, for all purposes, be deemed an original and all of such counterparts, taken together, shall constitute one and the same Agreement.

16.7 Entire Agreement: This Agreement constitutes the entire agreement of the parties. All prior agreements among the parties, whether written or oral, are merged herein and shall be of no force or effect. This Agreement cannot be changed, modified or discharged orally but only by an agreement in writing. There are no representations, warranties, or agreements other than those set forth in this Agreement.

16.8 Amended Certificates of Limited Partnership: The Limited Partners hereby agree to execute an amended certificate of limited partnership whenever the execution of an amended certificate of limited partnership is requested by the General Partner, and they agree to execute such other instruments and documents, and to perform such other acts, as may be required to comply with the Act for the valid formation and existence of the Partnership, as a limited partnership thereunder, whenever the execution or performance thereof shall be requested by the General Partner, all within ten (10) days after the request by the General Partner. In the event that any of the provisions of any amended Certificate of Limited Partnership shall be inconsistent with any of the provisions of this Agreement (if they are different documents), the provisions of this Agreement shall govern and control as among the parties.

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16.9 Power of Attorney to the General Partner:

(a) Each Limited Partner hereby makes, constitutes, and appoints the General Partner and any person designated by its, with full substitution, his agent and attorney-in-fact in his name, place and stead, to make, execute, swear to and acknowledge, amend, file, record and deliver the following documents and nay other documents deemed by the General Partner necessary for the business of the Partnership: (1) any certificate of limited partnership, or amendments thereto, required or permitted to be filed on behalf of the Partnership, and any and all certificates as necessary to qualify or continue the Partnership as a limited partnership or partnership wherein the Limited Partners thereof have limited liability in the states where the Partnership may be doing business, and all instruments which effect a change or modification of the Partnership in accordance with this Agreement; (2) the Limited Partnership Agreement and any amendments thereto in accordance with this Agreement; (3) any and all financing statements and other evidences of security interests deemed necessary by the General Partner to perfect any lien of the Partnership against the interest of a Limited Partner in the Partnership; (4) any other instrument which is now or which may hereafter be required or advisable to be filed for or on behalf of the Partnership; (5) any document which may be required to effect the continuation of the Partnership, the admission of an additional or Substituted Limited Partner, or the dissolution and termination of the Partnership (provided such continuation, admission or dissolution and termination is in accordance with the terms of this Agreement), or to reflect any reductions in amount of contributions of Partners; and (6) any document necessary to carry out the remedies for default provided in this Agreement; in each case having the power to execute such instruments on his behalf, whether the undersigned approved of such action or not.

(b) This Power of Attorney is a special Power of Attorney coupled with an interest, and shall not be revoked and shall survive the assignment, delivery, or transfer by the undersigned of all or part of his interest in the Partnership and, being coupled with an interest, shall survive the death or disability or cessation of the existence as a legal entity of the undersigned; except that where the assignee has been approved by said attorney, as General Partner of the Partnership, for admission to the Partnership as a Substituted Limited Partner, this Power of Attorney shall survive the delivery of such assignment for the sole purpose of enabling said attorney to execute, acknowledge and file any instrument necessary to effectuate said substitution.

(c) Each Limited Partner hereby gives and grants to his said attorney full power and authority to do and perform each and every act and thing whatsoever requisite, necessary or appropriate to be done in or in connection with this Power of Attorney as fully to all intents and purposes as he might or could do if personally present, hereby ratifying all that his said attorney shall lawfully do or cause to be done by virtue of this Power of Attorney.

(d) The existence of this Power of Attorney shall not preclude execution of any such instrument by the undersigned individually on any such matter. A person dealing with the Partnership may conclusively presume and rely on the fact that any such instrument executed by such agent and Attorney-in-Fact is authorized, regular and binding without further inquiry. (a)

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