AMERICAN EQUITY TRUST INC, S-11/A, 1996-05-15

AMERICAN EQUITY TRUST INC
S-11/A, 1996-05-15
REAL ESTATE INVESTMENT TRUSTS

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<PAGE>

As filed with the Securities and Exchange Commission on May 15, 1996

Registration No. 33-98766
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 4
TO
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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

AMERICAN EQUITY TRUST INC.
A Real Estate Investment Trust
(Exact name of registrant as specified in governing instruments)
2221 Rosecrans Avenue, Suite 110
El Segundo, California 90245
(Address of principal executive offices)

Arthur P. Herring
American Equity Trust Inc.
2221 Rosecrans Avenue, Suite 110
El Segundo, California 90245
310-536-0926
(Name, address and telephone number of agent for service)

Copies to
David R. Decker, Esq. Dennis Doucette, Esq.
Thelen, Marrin, Johnson & Bridges Luce, Forward, Hamilton & Scripps
333 South Grand Avenue, 34th Floor 600 W. Broadway, 26th Floor
Los Angeles, California 90071 San Diego, California 92101
213-229-2062 619-699-2517

===============================================================================

<PAGE>

SUBJECT TO COMPLETION, DATED MAY 15, 1996

AMERICAN EQUITY TRUST INC.
A Real Estate Investment Trust Offering

A Minimum of $15,000,000 in Minimum of $2,006,400 in
Units or Common Stock ("Shares") Shares of 8% Convertible
($14.00 per Unit or $7.00 per Preferred Stock ($13.20 per
Share)(Minimum Purchase--50 share--no minimum purchase)
Units or 100 Shares)

American Equity Trust Inc. (the "Company") is a corporation which intends
to qualify as a real estate investment trust ("REIT") under federal tax laws and
will be self-administered. Generally, the Company expects to conduct its
operations through American Equity Trust Operating Partnership, L.P. (the
"Operating Partnership") although it is not required to do so. This Prospectus
describes two investment opportunities: (i) an investment in Units (each Unit
consisting of two shares of Common Stock and one detachable Series "A" Warrant)
or shares of Common Stock of the Company. The Company may sell as much as
$35,000,000 in Units and Shares; and (ii) an investment in shares of the
Company's 8% Convertible Preferred Stock ("8% Preferred"). The Company plans to
sell the 8% Preferred principally to institutional and other accredited
investors, but there is no requirement that it do so. Prior to this offering,
there has been no public market for the Shares or 8% Preferred.

No Units or Shares will be issued pursuant to this Offering unless at least
$15,000,000 is invested in the Company (representing 2,142,858 Shares) by at
least 400 investors purchasing Units or Shares ("Minimum Common Offering"). No
8% Preferred will be issued until $15,000,000 of Units or Shares are purchased
and at least $2,006,400 is invested by at least 100 investors purchasing 8%
Preferred ("Minimum Preferred Offering"). The maximum value of securities that
can be sold in the offering is $50,000,004, consisting of $35,000,000 of Units
and Shares and $15,000,004 of 8% Preferred Stock (the "Maximum Combined
Offering"). See "Terms of the Offering." Upon completion by the Company of the
8% Preferred Offering, the Company will have a minimum of 152,000 and a maximum
of 1,136,364 shares of its 8% Preferred outstanding, each share of which is
convertible into two fully-registered, freely tradable shares of the Company's
Common Stock at $6.60 per share. 8% Preferred is entitled to one vote for each
share of Common Stock into which it is convertible and cumulative Distributions
with a limit of $1.30 per share per annum, and may not be converted into Common
Stock until at least 90 days after the Final Closing and then only for a period
ending 60 months thereafter. See "Description of Securities--General--8%
Convertible Preferred Stock."

In order to maintain its qualification as a REIT, the Company Charter
contains limits on the aggregate value (as determined by market prices) of
shares of Common Stock and 8% Preferred which may be owned by investors. See
"Description of Securities--Restriction on Ownership."

The Company intends to use investors' money together with borrowed
funds to purchase real estate properties ("Properties"). Between approximately
78% in the Minimum Common Offering and 86% in the Maximum Combined Offering of
the total amount of the money raised in the Offering is expected to purchase
Properties, and the balance is expected to be used for working capital, fees and
expenses.

PURCHASING THE COMPANY'S UNITS, SHARES AND 8% PREFERRED INVOLVES
CERTAIN RISKS. (SEE PAGES 11 THROUGH 19.) INVESTORS SHOULD BE AWARE THAT:

. If the Company raises only $15,000,000, it will have little
diversification, and an underperforming property will have a greater
negative affect on the company.
. In the case of the Minimum Common Offering, the Company's Properties
will be geographically concentrated in the Phoenix, Arizona,
metropolitan area, and the results to be achieved by such Properties
will be particularly sensitive to the general economic climate in such
area.
(Continued on following page)
SEE THE "RISK FACTORS" SECTION OF THIS PROSPECTUS FOR A COMPLETE DISCUSSION
OF THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE COMPANY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PRICE SELLING PROCEEDS TO
TO PUBLIC COMMISSION(2) COMPANY(3)(4)
=====================================================================================
<S> <C> <C> <C>
Per Unit(1) $ 14.00 $ 1.05 $ 12.95
- -------------------------------------------------------------------------------------
Per Share $ 7.00 $ .53 $ 6.47
- -------------------------------------------------------------------------------------
Total Minimum Common Offering $15,000,000 $1,125,000 $13,875,000
- -------------------------------------------------------------------------------------
Total Maximum Common Offering(4) $35,000,000 $2,625,000 $32,375,000
- -------------------------------------------------------------------------------------
Per Share of 8% Preferred $ 13.20 $ .66 $ 12.54
- -------------------------------------------------------------------------------------
Total Minimum Preferred Offering(5) $ 2,006,400 $ 100,320 $ 1,906,080
- -------------------------------------------------------------------------------------
Total Maximum Preferred Offering(5) $15,000,004 $ 750,000 $14,250,004
- -------------------------------------------------------------------------------------
Total Combined Maximum Offering $50,000,004 $3,375,000 $46,625,004
=====================================================================================
(footnotes on following page)
</TABLE>

The date of this Prospectus is _____________________, 1996
BROOKSTREET SECURITIES CORPORATION
<PAGE>

(Continued from outside front cover page)

. The Company will use leverage to acquire its Properties, which would
obligate the Company to service indebtedness regardless of income
generated by the Properties. Failure to service debt could cause a
lender to foreclose on the Property causing a loss of investment. The
Company's organization documents contain no limit on the amount of
debt the Company may incur. However, the Company does not intend to
incur debt in excess of 50% of the gross asset value of its
Properties.
. One Property to be acquired by the Company has experienced losses in
the past (an aggregate deficit of $2,736,000 resulting from such
losses over the past three calendar years) and could continue to
incur losses.
. There is a potential for a reduction in the Company's cash flow and
its rate of distributions to shareholders if a tenant becomes subject
to bankruptcy proceedings or otherwise fails to fulfill its monetary
obligations to the Company.
. There will be immediate and substantial dilution to the purchasers of
the common stock in the Offering (estimated at $1.51 in a Minimum
Common Offering and $1.02 in a Maximum Common Offering.

. The Company intends to list its Common Stock and 8% Preferred on the
and trading is expected to commence on that
-----------------------
exchange after the Final Closing which could occur as long as six
months after Initial Closing, thereby delaying an investor's ability
to liquidate its shares. A possibility exists that such trading may
not materialize; in such case, investors would be able to resell
their securities, if at all, only at a significant discount.
. If the Company fails to qualify as a REIT, it will be taxed as a
regular corporation. If the Operating Partnership fails to qualify
for taxation as a partnership, it will be treated as an association
taxable as a corporation. Either event would reduce the amount
available for distribution to shareholders.

Footnotes for table at bottom of outside front cover page

(1) A Unit consists of two shares of Common Stock and one detachable
Series "A" Warrant to purchase one share of Common Stock for $7.00.
The Series "A" Warrants are immediately exercisable by the holders
thereof for one freely-trading Share.
(2) The sales commission is 7.5% for the Units and Shares and five
percent for the 8% Preferred. If the Minimum Common Offering is
successfully completed, the Company will pay certain fees and
expenses reimbursements to the Sales Agent and Soliciting Dealers in
addition to the Selling Commission. See "The Offering" section of
this Prospectus for a complete description of the amount and terms of
such fees and expenses reimbursements.

(3) Proceeds calculated before deducting certain Organization and
Offering Expenses (excluding selling commissions) payable by the
Company, which expenses are estimated to be $900,000 in a Minimum
Common Offering $930,000 in a Minimum Combined Offering, $1,120,000
in a Maximum Common Offering and $1,570,000 in a Maximum Combined
Offering. See "The Offering."
(4) The Company has registered an additional 750,000 Shares solely for
the purpose of covering overallotments of Shares, if any. In the
foregoing table, the amount shown assumes that no overallotments will
occur. If the additional overallotment Shares were sold, the price of
the Shares to the public would be $40,250,000; the underwriting
discounts would be $3,018,750; and the Proceeds to the Issuer or
other persons would be $37,231,250 or a total of $51,481,254 when
combined with a sale of all the 8% Preferred.
(5) The Company will require that there be at least 100 holders of 8%
Preferred, and the Ownership Limit of 9.8% will also apply.

The money accepted by the Sales Agent and Soliciting Dealers from the
sale of Units, Shares and 8% Preferred will be promptly deposited into an
interest bearing escrow account at Trust Company of America. The interest earned
in this account will be paid to investors. Except as provided in "Terms of the
Offering," an Initial Closing will occur shortly after $15,000,000 of Units and
Shares are sold. Investors will become shareholders when their funds are
transferred from the escrow account to the Company's account. Within 180 days
after the Initial Closing, the Offering will be terminated. If the Company does
not raise $15,000,000 through the sale of Units and Shares before
, 1996 (180 days from the date hereof), investors' funds in the
- ----------------
escrow account (including funds deposited for sales of Units, Shares and 8%
Preferred) will be returned promptly and the Company will stop selling Units,
Shares and 8% Preferred. Assuming that the Initial Closing occurs on the 179th
day after the date of this Prospectus, the last possible termination date for
the Offering will be , 1997. See "Terms of the Offering" and "The
---------------
Offering Escrow Arrangements."

UNTIL ,1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE
---------------
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>

TABLE OF CONTENTS

PROSPECTUS SUMMARY....................................................... 1
The Company............................................................ 1
Risk Factors........................................................... 1
Conflicts of Interest.................................................. 3
Formation Transactions................................................. 3
The Operating Partnership.............................................. 6
Terms of the Offering.................................................. 6
Estimated Use of Proceeds.............................................. 6
Management............................................................. 6
Investment Objectives and Policies..................................... 7
Description of Properties.............................................. 7
Tax Status............................................................. 8
Description of Shares and 8% Preferred................................. 8
The Offering........................................................... 10
Glossary............................................................... 10
Summary Financial Information.......................................... 11
RISK FACTORS............................................................. 12
Real Estate Investment Risks........................................... 12
Amount Available for Investment Limits Diversification.............. 12
Geographic Concentration............................................ 12
Historical Operating Losses of Prior Ownership Group................ 12
Risks Associated with Borrowing..................................... 13
Dependence on Tenants............................................... 13
Bankruptcy of Tenants............................................... 13
Delay in Investment in Real Estate.................................. 13
Competition for Investments......................................... 14
Potential Environmental Liabilities................................. 14
Risk of Providing Financing to Purchasers of Company's Properties... 14
Risk of Incurring Uninsured Losses.................................. 15
Casualty-Related or Condemnation-Related Lease Terminations......... 15
Other Real Estate Investment Risks.................................. 15
General Investment Risks............................................... 15
Immediate and Substantial Dilution.................................. 15
Risk of Investment of Proceeds of the Offering...................... 15
Risk of Inadequate Financing........................................ 16
Lack of Operating History........................................... 16
Reliance on Management.............................................. 16
Ownership Limit..................................................... 16
Potential Securities Act Liability.................................. 17
Market Price of Shares May Not Reflect Property Values.............. 17
Delay in Trading.................................................... 17
Requirement of Supermajority Shareholders Votes..................... 17
Limited Liability of Officers and Directors......................... 17
Effect of Shares Available for Future Sale.......................... 17
Benefits to Officers and Directors.................................. 18
</TABLE>
i
<PAGE>

<TABLE>
<S> <C>
Tax Risks................................................................ 18
Failure to Qualify as a REIT or Partnership for Tax Purposes........ 18
Failure to Comply with Anti-Abuse Regulations....................... 19
Adverse Effect of REIT Minimum Distribution Requirements............ 19
Changes in Tax Laws................................................. 19
Other Investment Risks................................................. 19
Maryland Law Limitations on Acquisitions and Changes in Control..... 19
Changes in Investment and Financing Policies........................ 20
Risk of Insufficient Working Capital................................ 20
Investments in Interest Sensitive Investments....................... 21
Investment by Pension or Profit Sharing Trusts, Keoghs or IRAs...... 21
Investment Company Act of 1940...................................... 21
THE COMPANY.............................................................. 21
General................................................................ 21
Growth Strategy........................................................ 22
Acquisition Strategy................................................... 22
TERMS OF THE OFFERING.................................................... 23
ESTIMATED USE OF PROCEEDS................................................ 24
DISTRIBUTION POLICY...................................................... 26
CAPITALIZATION........................................................... 27
DILUTION................................................................. 27
SELECTED FINANCIAL INFORMATION........................................... 29
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................. 31
Overview............................................................... 31
Results of Operations Proposed Acquisitions........................... 31
Results of Operations Prior Ownership Group........................... 32
Liquidity and Capital Resources........................................ 32
Inflation.............................................................. 34
CONFLICTS OF INTEREST.................................................... 35
MANAGEMENT............................................................... 35
Executive Officers and Directors....................................... 36
Committees of the Board of Directors................................... 38
Directors and Executive Officers Compensation and Incentives........... 38
Limitation of Liability and Indemnification............................ 39
Stock Incentive Plan................................................... 40
401(k) Plan............................................................ 41
Employment Agreements.................................................. 41
PRINCIPAL SHAREHOLDERS................................................... 42
Principal Shareholders................................................. 42
Director and Officer Stock Ownership................................... 43
INVESTMENT OBJECTIVES AND POLICIES....................................... 43
Investment Objectives.................................................. 43
Investment Limitations................................................. 46
Change in Investment Objectives and Limitations........................ 46
Leasing and Property Management........................................ 47
Financing Strategy/Leverage............................................ 47
</TABLE>
ii
<PAGE>

<TABLE>
<S> <C>
OPERATING PARTNERSHIP AGREEMENT.......................................... 48
Management............................................................. 48
Transferability of OP Units............................................ 48
Capital Contributions.................................................. 48
Redemption Rights...................................................... 49
Registration Rights.................................................... 50
Operations............................................................. 50
Distributions.......................................................... 50
Allocations............................................................ 51
Term................................................................... 51
Tax Matters............................................................ 51
DESCRIPTION OF PROPERTIES................................................ 51
Properties............................................................. 52
Acquisitions........................................................... 52
Competition............................................................ 53
Property Descriptions.................................................. 53
DESCRIPTION OF SECURITIES................................................ 58
General................................................................ 58
Restriction on Ownership............................................... 61
Distributions.......................................................... 63
Repurchase of Shares................................................... 63
Transfer Agent......................................................... 63
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER
AND BY-LAWS............................................................ 64
Classification of the Board of Directors............................... 64
Removal of Directors................................................... 64
Business Combinations.................................................. 64
Control Share Acquisitions............................................. 65
Amendment to the Company's Charter..................................... 65
Shareholder Meetings and Action By Written Consent..................... 66
Limitation of Liability and Indemnification............................ 66
Anti-Takeover Effect of Certain Provisions of Maryland Law and
of the Company's Articles of Incorporation and By-Laws............... 66
SHARES AVAILABLE FOR FUTURE SALE......................................... 67
FEDERAL INCOME TAX CONSIDERATIONS........................................ 68
Summary of Tax Opinions................................................ 68
Federal Income Taxation of the Company................................. 69
Requirements for Qualification......................................... 69
Failure to Qualify..................................................... 73
Taxation of U.S. Shareholders.......................................... 74
Special Tax Considerations for Foreign Shareholders.................... 76
Information Reporting Requirements and Backup Withholding Tax.......... 77
Anti-Abuse Regulations................................................. 78
Tax Aspects of the Operating Partnership............................... 78
State and Local Tax.................................................... 81
ERISA CONSIDERATIONS..................................................... 82
Special Investment Considerations for Employee Benefit Plans, Tax-
Qualified Retirement Plans and IRAs.................................. 82
Status of the Company under ERISA...................................... 83
</TABLE>
iii
<PAGE>

<TABLE>
<S> <C>
THE OFFERING.............................................................. 84
Offering of Common Stock................................................ 84
8% Preferred Offering................................................... 85
Escrow Arrangements..................................................... 86
REPORTS TO SHAREHOLDERS................................................... 87
LEGAL OPINIONS............................................................ 87
EXPERTS................................................................... 87
SALES LITERATURE.......................................................... 88
FURTHER INFORMATION....................................................... 88
GLOSSARY.................................................................. 89
FINANCIAL STATEMENTS...................................................... F-1
</TABLE>
iv
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus. The more detailed information
following this summary is set forth in the same order as the topics appearing in
this summary. Investors are encouraged to read this Prospectus for a complete
explanation of an investment in the Company. See "Glossary" for the definition
of certain capitalized terms used in this Prospectus.

THE COMPANY

The Company has been formed to operate as a real estate investment trust
under the Internal Revenue Code of 1986, as amended (the "Code") and will be
self-administered. The Company proposes to acquire a diversified portfolio of
garden-style apartments and suburban commercial and retail income properties in
the Western United States. The Properties will be leased to a variety of
residential, retail and commercial tenants. The Company will contribute all of
the net proceeds from the Offering to American Equity Trust Operating
Partnership, L.P., a Delaware limited partnership, in which the Company is the
sole general partner (the "Operating Partnership"), and will own an initial 99%
interest in the Operating Partnership. Until other limited partners are admitted
to the Operating Partnership, the remaining one percent will be held by Arthur
P. Herring and Dois Brock. See "Management--Executive Officers and Directors."
Upon the admission of other limited partners, Messrs. Herring and Brock will
resign as limited partners. See "Operating Partnership Agreement--Capital
Contribution." The Operating Partnership will acquire certain of the properties
described under "Description of Properties" either directly or by forming new
limited partnerships with the existing owners.

The Company, subject to the discretion of the Board of Directors, intends
to make regular quarterly distributions commencing with the first full calendar
quarter after the Initial Closing. Such distributions will likely be partially a
return of capital. The Company must pay out 95% of REIT Taxable Income to
qualify as a real estate investment trust for income tax purposes. See
"Distribution Policy" and "Federal Income Tax Considerations--Federal Income
Taxation of the Company."

RISK FACTORS

An investment in the Company has many risks. The "Risk Factors" section of
this Prospectus contains a detailed discussion of the most important risks. The
risk factors are organized into Real Estate Investment Risks (the risks of the
types of investments in real estate that the Company will make), Corporate
Investment Risks (the risks related to an investment in a corporation), Tax
Risks (the risks arising from the real estate investment trust tax laws as they
apply to the Company) and Other Investment Risks. Please refer to the "Risks
Factors" section for a discussion of the following risks:

Real Estate Investment Risk

. Assuming a Minimum Common Offering, the Company will only be able to
purchase four Properties (all apartment buildings), the effect of
which would be to limit significantly or eliminate the advantages
associated with diversification. An underperforming property will,
accordingly, have a material adverse impact on the Company's results
of operations.

. Assuming a Minimum Common Offering, three of four of the Company's
investments in real estate will be geographically concentrated in the
Phoenix, Arizona, metropolitan area. Such market has experienced a
recession over the past several years. The consequences of such
geographical concentration is that the Properties will be particularly
sensitive to the economic condition in such area.

1
<PAGE>

. Some of the acquisitions of Properties will be made by borrowing a
portion of the purchase price. The Company's organizational documents
contain no limits on the amount of debt it may incur. While the
Company does not intend to incur debt in excess of 50% of the gross
assets value of its Properties, there is no limit on borrowings on
individual Properties. The use of leverage presents an element of risk
in the event that cash flow is insufficient to meet debt obligations.
Failure to service debt on a Property could result in foreclosure by
the lender, causing a loss of investment in the Property. In addition,
lenders may seek to impose restrictions on future borrowings,
distributions and operating policies.

. One of the Properties to be acquired by the Company has experienced
historical operating losses (an accumulated deficit of $2,736,000
resulting from such losses over the past three calendar years). Such
Property may continue to do so. In such case, the Company may not be
able to service its debt or Distributions might be reduced.

. The financial failure of a tenant could result in the termination of
its lease which, in turn, might cause a reduction in the cash flow of
the Company and/or decrease the value of the Property in question.
Likewise, the financial failure of a tenant could cause such tenant to
become the subject of bankruptcy proceedings which, in turn, could
result in a termination of the lease (causing a reduction in cash flow
of the Company and the value of the Property) or could adversely
affect the lease relationship by potentially capping the Company's
recovery of any claims against the bankrupt tenant.

. In addition to the foregoing risks, there is a variety of other risks
associated with investment in real estate generally, which could
affect property values. Such risks include competition, general
economic conditions, governmental regulations, availability of
insurance and others. A return on an investment in the Company will
depend, in part, on how quickly the Company is able to locate and
acquire suitable Properties.

General Investment Risks

. Immediate dilution of $1.51 per Share in a Minimum Common Offering and
$1.02 per Share in a Maximum Common Offering, in the net tangible book
value of the Company's Common Stock will be experienced by purchasers
of Shares.

. The Company's ability to achieve its stated investment objectives and
to make Distributions depends on the performance of management in the
acquisition and oversight of investments for the Company. The
Investors will have no opportunity to evaluate the transaction terms
or other relevant economic or financial data concerning investments to
be made by the Company. There can be no assurance that income-
producing properties will be available on economically attractive
terms.

. The potential profitability of the Company could be affected by the
amount of funds from the Offering at its disposal. The investment of a
smaller sum of money will result in the acquisition of fewer
Properties and, accordingly, less diversification of the real estate
portfolio. Lack of diversification will increase the potential adverse
affect on the Company of a single underperforming investment.

. Historically, shares of real estate companies have traded at a
discount to their proportionate interest in the appraised value of the
underlying assets.

2
<PAGE>

. The Company has no operating history. Investors will be relying
entirely on the ability of the officers and directors of the Company.
While management is experienced in investment and management of real
estate, it has no experience in the operation of a real estate
investment trust. Management decisions, therefore, could affect the
value of the assets.

. The Articles of Incorporation of the Company restrict ownership of
more than 9.8% of the value of the Company's outstanding equity shares
by one person. Additionally, to protect the Company's qualification as
a REIT, an ownership limit was placed on the purchasers of 8%
Preferred so that no person could Beneficially Own 8% Preferred and
other equity securities of the Company in excess of five percent of
the value of the Company's outstanding equity shares. Value is
determined by market prices. Such restrictions may discourage a change
of control.

. The Company has potential rescission liability for the sale of
approximately $56,000 principal amount of its 10% Convertible
Promissory Notes, due October 1, 1996, Series B which were sold
without an exemption from registration under the Securities Act.

. The Company intends to list its Common Stock and 8% Preferred on the
and trading on that exchange is expected to
---------------------
commence after the Final Closing which could occur as long as six
months after the Initial Closing, thereby delaying an investor's
ability to liquidate its shares. A possibility exists that no trading
will materialize in which case an investor may be able to resell the
securities, if at all, only at a significant discount.

Tax Risks

. If it fails to qualify as a REIT, the Company will be taxed as a
corporation and would not be allowed a deduction for distributions to
shareholders which would adversely affect cash flow available for
Distributions.

. If the Operating Partnership were not deemed to be a partnership for
tax purposes, it would be taxed as a corporation and the Company could
cease to qualify as a REIT as a result thereof which, in each case,
would adversely affect cash flow available for Distributions to
shareholders.

CONFLICTS OF INTEREST

Arthur P. Herring, the Chief Executive Officer of the Company, has been
engaged in the acquisition, financing and management of real estate properties
for the last 24 years through various corporate and other private entities, in
one of which he will continue to retain an interest. In the future, neither Mr.
Herring nor any of the principal officers of the Company may acquire an interest
in properties or develop or manage properties which meet the investment
parameters of the Company without the consent of the Board of Directors,
including a majority of the Independent Directors, of the Company. The "Conflict
of Interests" section of this Prospectus more fully describes potential
conflicts of interest and the manner in which such conflicts will be managed.

FORMATION TRANSACTIONS

The principal transactions in connection with the formation of the Company
and the Operating Partnership and the acquisition of the Properties
(collectively, the "Formation Transactions") have been and will be, as follows:

. In 1993, American Equity Trust Funding, Inc., California corporation
("Funding Co."), was organized to explore the formation of a REIT and
to raise funds to finance the formation of the Company and the
Company's public offering of equity securities. In October 1995, when
Funding Co. had a total of 86 shareholders, the shareholders of
Funding Co. (other than management of the Company) exchanged their
shares for an aggregate 114,286 shares of the

3
<PAGE>

Company's Common Stock, 151,500 shares of the Company's 1995
Convertible Preferred Stock and 182,133 Series "D" Warrants. At the
same time, members of management of the Company plus a principal
shareholder of the Company exchanged their shares for an aggregate
870,000 shares of the Company's 1995 Convertible Preferred Stock and
281,000 Series "D" Warrants. The allocation of such securities is as
follows:

Number and Class of Security Allocated to
---------------------------- ------------
1995 Convertible Series "D"
Common Stock Preferred Stock Warrants
------------ --------------- ----------
<S> <C> <C> <C>
114,286 151,500 182,133 Shareholders in Funding
Co. not affiliated
with the Company
-0- 95,000(1) 45,000(2) Dois Brock (President
of the Company
-0- 360,000(1) 107,500(2) The Danube Rousse Inc.,
an affiliate of Arthur
P. Herring (Chairman of
the Board, Chief
Executive Officer and
Chief Financial
Officer of the Company)
-0- 360,000(1) 107,500(2) Regent IV Trust, a
principal shareholder
of the Company
-0- 25,000(1) -0- Jacob Segal (Vice
President of the
Company)
-0- 30,000(1) 10,000(2) Gerald S. Weisstein
(Director of the
Company)
</TABLE>
- ---------------
(1) The economic value of such shares in excess of the amount
contributed for shares in Funding Co. was negligible. However,
each of such shares have equal voting power with shares of
Company Common Stock.
(2) The Series "D" Warrants had no economic value at the time of
issuance for Funding Co. shares. See "Description of Securities
General Series "D" Warrants" for restrictions of the
exercisability of such Warrants. If exercisable, the exercise
price is $3.50 per share, half of the per share offering price of
Shares in this Prospectus.

. In October 1995, the Company formed the Operating Partnership with
Messrs. Herring and Brock acting as initial limited partners. Messrs.
Herring and Brock will resign as limited partners upon admission of
additional limited partners to the Operating Partnership.

. The Company will raise a minimum of $15,000,000 from sale of Units or
Shares. It may also raise a minimum of $2,006,400 from sale of 8%
Preferred. The net proceeds from such sales will be contributed
directly to the Operating Partnership and used to acquire Properties.
See "Terms of the Offering." Upon completion of such transactions,
the Company will have an initial 99% general partnership interest in
the Operating Partnership.

4
<PAGE>

. Essentially, simultaneously with the Initial Closing, the Operating
Partnership will acquire certain Properties. See "Description of
Properties." None of the Company's officers or directors are
affiliated with the sellers of the Properties. The purchase price for
each of the Properties was determined by arm's-length negotiation
between the Company and the sellers of such Properties. No appraisals
were obtained for acquisition purposes as the Company has determined
the value of the Properties is adequately reflected by their
acquisition costs. This determination was made by comparing the
overall income capitalization rates, values per square foot, and/or
values per unit to comparable sales and listings in the applicable
marketplaces. See "--Description of Properties" for information about
sellers' book values for these Properties.

. The Company will enter into employment agreements with Mr. Herring
and Mr. Brock. Each will be for a five-year term subject to automatic
one-year extensions unless terminated. The annual base compensation
for Messrs. Herring and Brock is $100,000 and $72,000, respectively.
Performance bonuses based on REIT industry standards will be
considered by the Compensation Committee. Each will have certain
"piggyback" registration rights, and each will be entitled to
significant severance payments in the event of a change of control of
the Company. See "Management--Employment Agreements" and "Risk
Factors--General Investment Risks--Benefits to Officers and
Directors." Upon completion of the Initial Closing, the Company
expects to have eight full-time employees.

The following diagram shows the beneficial ownership of the Company and the
Operating Partnership upon completion of the formation of the Company and the
Operating Partnership and assumes completion of the Minimum Common Offering:

-------------------------------------------------
American Equity Trust Inc.
(the "Company")
. 84.4% owned by public shareholders
. 15.6% owned by Management(1)
-------------------------------------------------

-------------------------------------------------
American Equity Trust Operating Partnership, L.P.
(the "Operating Partnership")
. 99% owned by the Company, the sole
general partner of the Operating
Partnership
. 1% owned initially by OP Limited
Partners who are members of management
-------------------------------------------------

----------------------------------------
Four Properties(3)(4)(5)
100%
----------------------------------------

(1) Includes holdings of 1995 Convertible Preferred Stock which has voting
rights. Excludes potential increase in ownership through exercise of
options and warrants not presently exercisable.
(2) No interests in the Operating Partnership (the "OP Units") are
expected to be exchanged for Properties immediately after either the
Initial or the Final Closing. Messrs. Herring and Brock, in the
aggregate, hold a one percent interest in the Operating Partnership
for the sole purpose of forming it and having it available for future
property acquisitions using OP Units. Upon the admission of additional
OP Limited Partners, Messrs. Herring and Brock will withdraw from the
Operating Partnership in exchange for a return of their nominal
capital contributions.
(3) Sandpainter Apartments, Northwest Garden Apartments, Orangewood Place
Apartments and Arrow Village Apartments. Assumes completion of a
Minimum Common Offering.

5
<PAGE>

(4) If an aggregate of $35,000,000 of Units, Shares and 8% Preferred is
sold in this Offering, two additional Properties will be acquired
(Hewlett-Packard Building and Westwood Self-Storage/Sportmart
Building) by forming two new limited partnerships with the respective
sellers. See "Description of Properties."
(5) If more than an aggregate of $35,000,000 of Units, Shares and 8%
Preferred is sold in this Offering, the excess will be used to reduce
debt on the Properties and to acquire one or more additional
properties of the nature described in "Investment Objectives and
Policies."

THE OPERATING PARTNERSHIP

The Company will contribute the net proceeds of the Offering to the
Operating Partnership in exchange for an approximately initial 99% general
partnership interest. The Operating Partnership was formed under Delaware law
in October 1995. The Operating Partnership will own and lease the Properties
directly or through limited partnerships, except to the extent the Company
decides to hold a property directly. Pursuant to the Agreement of Limited
Partnership of the Operating Partnership (the "Operating Partnership
Agreement"), the Company is the sole general partner, and, as such, will have
responsibility and discretion for the management and control of the Operating
Partnership and its assets. The Operating Partnership's limited partners (the
"OP Limited Partners"), in their capacity as OP Limited Partners, will have no
authority to transact business for, or participate in, the management or
decision-making of the Operating Partnership, except as may be required by
applicable law. See "Operating Partnership Agreement."

TERMS OF THE OFFERING

The Company is offering its Units, Shares and 8% Preferred on a "best
efforts" basis, which means that no one is guaranteeing how much capital will be
raised. No Units or Shares will be issued pursuant to this Offering unless at
least $15,000,000 of Units or Shares is purchased by more than 400 investors.
The Company may sell as much as $35,000,000 in Units and Shares, subject to the
Sales Agent's overallotment option to sell up to an additional 750,000 Shares.
In addition, the Company may sell a minimum of $2,006,400, and as much as
$15,000,004, of 8% Preferred. No sales of 8% Preferred will occur unless the
Minimum Common Offering is achieved and at least 100 Persons have purchased the
8% Preferred.

ESTIMATED USE OF PROCEEDS

The money raised in this offering will be combined with borrowed funds to
purchase real estate and to pay all of the Company's expenses. Depending on the
size of the Offering, between approximately 78% and 86% of the money raised in
the Offering is expected to be invested in real estate and the balance will be
used as working capital, to pay acquisition fees and expenses and to pay
expenses and fees of the Offering. A detailed breakdown of the Company's
estimates of the use of the capital raised in the Offering is provided in the
"Estimated Use of Proceeds" section of this Prospectus.

MANAGEMENT

The Board will oversee the management of the Company. The Board consists
of five directors, three of whom are not employees of the Company. The
directors were elected to staggered three year terms by the shareholders.

For the background of the individuals responsible for the management of the
Company, please see the "Management" section of this Prospectus.

The Company has offices at 2221 Rosecrans Avenue, Suite 110, El Segundo,
California 90245, telephone: 310-536-0926 and telecopier: 310-643-8353.

6
<PAGE>

INVESTMENT OBJECTIVES AND POLICIES

The Company's investment objectives are:

. To pay predictable quarterly Distributions which grow as a result of
increases in property cash flows and capital gains from sale of
properties.

. To purchase a portfolio of income-producing residential, retail and
commercial real estate that will increase in value.

. To increase the Company's equity in its real estate by making regular
mortgage principal payments.

The Company will try to achieve these objectives by purchasing a
diversified portfolio of garden-style apartments and suburban commercial and
retail income properties in the Western United States. The Properties will be
leased to a variety of residential, retail and commercial tenants. The amount
of money raised by the Company in the Offering and borrowed from lenders will
affect the number of Properties the Company will be able to purchase. The more
Properties the Company purchases, the more diversified it will be and the less
it will be affected by any single Property that does not perform as expected.

While the Company intends to hold each Property it acquires for an extended
period of time, circumstances may require the early sale of a certain Property.
It may also elect to refinance one or more of its Properties. The Company may
reinvest all or a portion of the proceeds of the sales or refinancing of
Properties.

The Company's investment objectives can be changed by the Board of
Directors without the approval of the shareholders. While the Company intends
to achieve its objectives by purchasing a diversified portfolio of income
producing properties (see "Description of Properties"), the Company's investment
policies may vary as new investment techniques evolve. The techniques used by
the Company to achieve its objectives may be changed by the Board (including a
majority of the Independent Directors) without the approval of the shareholders.
Any such change may affect the types of non-real estate short term investments
in which the Company invests during the interim periods in which capital is not
fully invested in Properties.

DESCRIPTION OF PROPERTIES

The Company has contracts to purchase interests in six Properties. The
table set forth below identifies such Properties in their anticipated order of
acquisition, their respective use, their respective purchase prices and their
respective sellers' book value. If a Minimum Common Offering, or a Minimum
Combined Offering, is completed, Management expects to acquire only the first
four of such Properties. There can be no assurance that the purchase of all of
such Properties will occur.

Properties in the Expected Order in
Which Purchases Will be Made (1)(2) Purchase Sellers' Book
Use Price(3) Value(4)
----------------------------------- --- ----- -------------
<S> <C> <C> <C>
A. Sandpainter Apartments 116 unit garden-style apartments $ 2,200,000 $ 1,667,144
2225 West Indian School Road
Phoenix, Arizona

B. Northwest Garden Apartments 198 unit garden-style apartments $ 6,950,000 $ 3,118,666
9350 North 67th Avenue
Peoria, Arizona
</TABLE>

7
<PAGE>

<TABLE>
<S> <C> <C> <C>
C. Orangewood Place Apartments 84 unit garden-style apartments $ 1,800,000 $ 1,182,869
7328 North 27th Avenue
Phoenix, Arizona

D. Arrow Village Apartments 82 unit garden-style apartments $ 3,250,000 $ 2,209,379
186615 Arrow Highway
Azusa, California

E. Westwood Self-Storage 36,000 square foot retail use and $12,900,000 $ 9,688,890
and Sportmart Building 104,000 square foot self storage
1901 Sepulveda Boulevard
Los Angeles, California

F. Hewlett-Packard Building 87,665 square foot Class A, eight $16,000,000 $13,767,124
5805 Sepulveda Boulevard story office building
Van Nuys, California
</TABLE>
- -----------------
(1) While management expects to acquire the Properties in this order,
circumstances may change requiring rearrangement of the acquisition
order.
(2) Please refer to "Description of Properties" for a more detailed
description of such Properties' use and price.
(3) The purchase price for each Property was determined through arm's-
length bargaining with unaffiliated sellers. In conducting such
negotiations, the Company's management had access to per unit or per
square foot prices (as applicable), and capitalization rates for
comparable buildings. Management believes the per unit or per square
foot sales price or capitalization rate support the purchase prices.
No independent appraisals were obtained.
(4) These amounts represent sellers' book value for the Properties at
December 31, 1995, net of depreciation, and are based on information
received from sellers by the Company.

The Company is currently evaluating other potential property acquisitions.
Prior to the Initial or Final Closing, when it appears likely that the Company
will purchase one or more additional Properties, a description of such
Properties will be made available to all potential investors in a document
called a supplement. Investors should not assume that transactions described in
a supplement will necessarily be completed. It is possible that after the
supplement is distributed, the Company or seller will decide not to complete the
sale.

TAX STATUS

The Company will elect to be taxed as a REIT under Sections 856 through 860
of the Code, commencing with its taxable year ending December 31, 1996. If the
Company qualifies for taxation as a REIT, then under current federal income tax
laws, the Company generally will not be taxed at the corporate level to the
extent it currently distributes at least 95% of its net taxable income to its
shareholders. Even if the Company qualifies for taxation as a REIT, the Company
may be subject to certain federal, state and local taxes on its income and
property and to federal income and excise tax on its undistributed income.
Thelen, Marrin, Johnson & Bridges, tax counsel to the Company, will provide an
opinion addressing (i) the correctness and completeness of the description of
the tax consequences material to the purchase, ownership and disposition of the
Common Stock; (ii) the classification of the Operating Partnership as a
partnership for federal income tax purposes and (iii) the organization and
proposed method of operation of the Company to enable it to qualify as a REIT
under the Code.

DESCRIPTION OF SHARES AND 8% PREFERRED

General

A shareholder's investment will be recorded on the books of the Company.
Certificates representing the securities offered hereby will be issued to
investors as soon as practical. A shareholder wishing to transfer his or her
Shares and 8% Preferred will be required to send the applicable certificate with
the transfer request to the

8
<PAGE>

Company's transfer agent. The Company will provide the required form upon
request. The Company expects to make Distributions quarterly beginning after the
first full quarter of the Company's operations as a REIT. The Board will
determine the amount of the Distributions paid by the Company.

Shareholder Voting Rights and Limitations

A meeting of shareholders will be held each year for the election of
directors whose term has expired. Other business matters may be presented at the
annual meeting or at special shareholder meetings. Shareholders are entitled to
one vote for each share of Common Stock owned on all matters that must be voted
on by shareholders, including the election of directors. In addition to voting
rights accorded to the Common Stock, each share of 8% Preferred and 1995
Convertible Preferred Stock is entitled to one vote for each share of Common
Stock into which it is convertible, disregarding fractional shares. Shareholders
who are in the minority on questions presented for shareholder vote will be
bound by the decision of the applicable majority on the question voted upon.

Shareholder approval is required under Maryland law and the Company's
Charter and bylaws (the "Organizational Documents") for certain types of
transactions and corporate action, including mergers, share exchanges, asset
sales, amendments to the Articles of Incorporation and dissolution. Because the
Company's Charter does not provide otherwise, a two-thirds vote of the Company's
shareholders is required to approve such actions. Shareholders objecting to the
terms of a merger, sale or other disposition of substantially all of Company's
assets have the right to petition a court for the appraisal and payment of the
fair value of their Shares in certain instances.

Liquidation Preference; Distributions; Convertibility of 8% Preferred

Upon liquidation of the Company, holders of outstanding 8% Preferred will
be entitled to receive $13.20 per share, plus any accrued but unpaid
Distributions, before any liquidating distributions are paid to other
shareholders. Each share of 8% Preferred is entitled to receive cumulative
Distributions equal to the greater of eight percent of the preferred liquidation
amount or the per share combined Distributions paid on two shares of the Common
Stock, with a maximum of $1.30 per share. Distributions accrue from the date of
issuance of 8% Preferred. For a period of 60 months commencing 90 days after the
Final Closing, at the option of the holder, each share of 8% Preferred is
convertible into two shares of Common Stock, subject to normal anti-dilution
adjustments.

Limitation on Share Ownership

The Charter of the Company restricts ownership by one Person of more than
9.8% of the value of the outstanding equity securities. Value will be determined
by market price. In addition, no Person may, directly or indirectly, acquire
Beneficial Ownership of a number of shares of 8% Preferred that, when added to
other equity shares of the Company Beneficially Owned by such Person, would
exceed five percent of the value of the outstanding equity shares of the
Company. See "Description of Shares--Restriction on Ownership." These
restrictions are designed to facilitate compliance with certain share
accumulation restrictions imposed on REITs by Code.

For a more complete description of the securities offered hereby, including
certain limitations on the ownership such securities, please refer to the
"Description of Securities" section of this Prospectus.

9
<PAGE>

THE OFFERING

Shares of Common Stock Minimum 2,142,858(1)
Offered by the Company Maximum 5,000,000(1)

Shares of Common Stock Minimum 2,417,572(2)
Outstanding after the Offering Maximum 5,274,714(2)
Symbol
-----------

Shares of 8% Preferred Minimum 152,000(3)
Offered by the Company Maximum 1,136,364
Symbol
-----------
- ---------------
(1) Assumes no sales of any of the Company's Shares available pursuant to
the Sales Agent's overallotment option. In no event will there be
fewer than 2,142,858 shares of Common Stock sold in the form of Units
or Shares prior to the Initial Closing.
(2) Includes Shares to be sold in this Offering and 274,714 shares of
Common Stock presently outstanding. Excludes an aggregate of up to
1,071,429 Shares for a Minimum Common Offering and 1,750,000 Shares in
a Maximum Common Offering issuable at any time following the Initial
Closing to holders of Series "A" Warrants, upon exercise of such
warrants at the holders' option. Also excludes 185,000 Shares issuable
upon exercise of options to be issued pursuant to the Company's 1995
Stock Incentive Plan and upon exercise of certain warrants and
conversion of certain 1995 Convertible Preferred Stock. See
"Description of Securities."

(3) No sales will be completed until the Company has sold enough Units and
Shares to reach the Minimum Common Offering. There must be a minimum
of 100 subscribers, totaling at least $2,006,400 of 8% Preferred,
before any 8% Preferred will be issued. See "Terms of the Offering."

The section of this Prospectus called "The Offering" describes the
manner in which the Company will sell its Units, Shares and 8% Preferred and the
fees and expenses the Company will pay in connection with the Offering.

GLOSSARY

Words in this Prospectus that are capitalized are defined in the
"Glossary" section. In order to make this Prospectus easier to read, a
simplified definition of certain capitalized words has been provided. These
simplified definitions do not convey all of the intricacies of the defined word
and investors are encouraged to refer to the "Glossary" section for the complete
definition.

10
<PAGE>

SUMMARY FINANCIAL INFORMATION

The following pro forma summary financial information should be read
in conjunction with all of the financial statements and notes thereto included
in this Prospectus. The pro forma information assumes the completion of a
Minimum Common Offering, a Minimum Combined Offering, a Maximum Common Offering
and a Maximum Combined Offering and the use of the net proceeds therefrom.
Management considers funds from operations to be an appropriate measure of the
performance of an equity REIT. However, other REITs may not utilize the NAREIT
definition in the presentation of information entitled "Funds from Operations."
Funds from operations should not be viewed as an alternative to net income as a
measure of performance or to cash flow as a measure of liquidity.

Year Ended
December 31, 1995
--------------------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
Minimum Minimum Maximum Maximum
Common Combined Common Combined
Offering Offering Offering Offering
---------- ----------- ---------- ---------
(in thousands except per share)
<S> <C> <C> <C> <C>
OPERATING DATA:
Rental revenues.............................. $ 2,478 $ 2,478 $ 6,164 $ 6,164
Income before minority interest.............. 79 273 1,180 1,731
Net income................................... 79 273 1,124 1,676
Net income attributable to common shares..... 79 112 1,124 476
Net income (loss) per common share(1)........ 0.02 0.03 0.17 0.07
Average number of shares outstanding(1)...... 3,753 3,753 6,609 6,609
Ratio of earnings to fixed charges and
preferred dividends......................... 1.41 1.70 3.04 1.40

BALANCE SHEET DATA:
Real estate after accumulated depreciation... $ 14,320 $ 14,320 $ 41,783 $ 41,783
Total assets................................. 16,341 15,71 42,967 48,305
Total debt................................... 2,500 - 8,462 -
Stockholders' equity......................... 13,343 15,213 31,623 45,423

OTHER DATA:
Pro forma Funds from Operations(2):
Income before minority interest............. 79 274 1,180 1,731
Depreciation................................ 534 534 1,565 1,565
Minority interest share..................... - - (55) (55)
-------- -------- -------- --------
Pro forma Funds from operations............ 613 807 2,690 3,241
Cash flows from operating activities......... 862 1,055 3,117 3,668
Cash flows from investing activities(3).... (12,224) (12,224) (23,346) (23,346)
Cash flows from financing activities(4)...... 13,529 12,770 23,700 27,979
At end of period:
Commercial Properties....................... - - 2 2
Apartment Properties........................ 4 4 4 4
</TABLE>
- --------------------

(1) Assumes 3,752,822 (Minimum Common Offering) and 6,609,964 (Maximum
Common Offerings) weighted average number of shares of Common Stock
outstanding including the dilutive effect of 463,133 Series "D"
Warrants and 72,500 Series "E" Warrants plus the dilutive effects of
the 1995 Preferred Convertible shares and both series of the 10%
Convertible Notes. Net income (loss) per common share also assumes
that annual preferred dividends of $1,200,000 (Maximum Combined
Offering ) will be paid.

(2) "Funds from Operations" as defined by the National Association of Real
Estate Investment Trusts ("NAREIT") equals net income or (loss)
excluding gains or (losses) from debt restructuring and sales of
property, plus depreciation and amortization and after adjustments for
unconsolidated partnerships and

11
<PAGE>

(3) Represents historical improvements and additions to properties which
are assumed to equal estimated improvements and acquisitions of the
Properties in the amounts of $11,820,000 (Minimum Offerings) and
$22,938,139 (Maximum Offerings).

(4) Includes (i) net proceeds from the Offerings of $12,975,006 (Minimum
Common Offering), $14,845,006 (Minimum Combined Offering), $31,255,000
(Maximum Common Offering) and $45,055,004 (Maximum Combined Offering),
(ii) repayment of mortgage notes from proceeds of the Offerings of
$2,500,000 (Minimum Combined Offering), $8,000,000 (Maximum Common
Offering) and $16,461,861 (Maximum Combined Offering) and
(iii) dividends on preferred stock of $160,512 (Minimum Combined
Offering) and $1,200,000 (Maximum Combined Offering).

RISK FACTORS

An investment in the Company involves various risk factors including
risk factors related to investing in real estate, risk factors related to
investing in a corporation, tax risks and other general investment risks. In
addition to the factors set forth elsewhere herein, prospective investors should
consider the following:

REAL ESTATE INVESTMENT RISKS

AMOUNT AVAILABLE FOR INVESTMENT LIMITS DIVERSIFICATION (ONLY A LIMITED
NUMBER OF PROPERTIES MAY BE ACQUIRED). If only $15,000,000 is raised in the
Offering by the Company, four Properties would be able to be acquired. All four
of such Properties are apartment buildings. A Property which did not perform
well would have a disproportionately greater impact on the profits or losses of
the Company than if more Properties were purchased. Thus, underperformance of a
Property would adversely affect the operations of the Company.

GEOGRAPHIC CONCENTRATION (PERFORMANCE SENSITIVE TO ECONOMIC FACTORS IN
THE AREA). In a Minimum Common Offering, three of the four initially selected
Properties are located in the Phoenix, Arizona, metropolitan area and in a
Maximum Common Offering, three of the six initially selected Properties are
expected to be located in each of the Los Angeles, California, and Phoenix,
Arizona, metropolitan areas. The performance of the Company will be influenced
by economic developments in both of such market areas. Over the past few years,
the economic trend for real estate in the Los Angeles area has been recessionary
in nature. Over the same period, the economic trends for real estate in Phoenix,
Arizona have been recovering from a severe past real estate recession. The
results of economic recession include general increases in vacancies and general
decreases in rents received from residential, retail and commercial lessees. The
effect on the Company of such geographic concentration is to make the
performance of the Company extremely sensitive to economic conditions in the
market areas in which the Company will purchase its properties. Two of the
Phoenix, Arizona, Properties are located within a five-mile radius and could be
viewed to be competitive with each other, although management does not believe
there is direct competition to a significant degree.

HISTORICAL OPERATING LOSSES OF PRIOR OWNERSHIP GROUP (OPERATING LOSSES
FOR ONE PROPERTY COULD CONTINUE). Prior owners of the Hewlett-Packard Building
experienced historical operating losses based on existing levels of operating
expenses and debt of approximately $536,000, approximately $709,000 and
approximately $519,000, respectively, for the years ended December 31, 1995,
1994 and 1993. The accumulated deficit attributable to such operating losses is
$2,736,000. See "Prior Ownership Group Combined Statements of Operations" in the
Financial Statements section of this Prospectus. There can be no assurance that
the Company's proposed methods of operation for this Property will be successful
in eliminating such operating losses in the

12
<PAGE>

future. As a result of the small number of Properties to be acquired by the
Company, continuing operating losses by this Property could have a material
adverse impact on the Company's overall profitability.

RISKS ASSOCIATED WITH BORROWING (LEVERAGE REQUIRES COMPANY TO SERVICE
DEBT REGARDLESS OF REVENUE GENERATED). Some of the acquisitions of Properties
will be made by assuming existing mortgage debt or borrowing a portion of the
purchase price thereof and securing the loan with a mortgage on such Property.
The Company's organizational documents contain no limit on the amount of debt it
may incur. While the Company does not intend to incur debt in excess of 50% of
the gross asset value of its Properties, there is no limit on borrowings on
individual Properties. Although the use of leverage may increase the Company's
rate of return on its investments and allow the Company to make more investments
than it otherwise could, it presents an element of risk in the event that the
cash flow from lease payments on its Properties is insufficient to meet its debt
payment obligations. Certain loans may not be fully paid by the time the leases
(not including renewal periods) on applicable Properties expire. If a tenant
does not renew its lease with respect to any Property, the Company may not have
sufficient cash flow to make the required debt payments with respect to such
Property unless it is able to re-lease such Property. If the Company does not
make its debt payments as required, a lender could foreclose on the Property or
Properties securing such debt, and the Company could lose part or all of its
investment in such Properties.

Lenders to the Company may seek to impose restrictions on future
borrowings, distributions and operating policies of the Company. It is not
possible to ascertain in advance what restrictions may be imposed. As of the
date of this Prospectus, the Company had not created or assumed any indebtedness
for borrowed money. See "Investment Objectives and Policies--Financing
Strategy/Leverage."

DEPENDENCE ON TENANTS (DEFAULTS BY LESSEES AFFECT CASH FLOW). In
leases, the financial failure of a tenant could result in the termination of its
lease which, in turn, might cause a reduction of the cash flow of the Company
and/or decrease the value of the Property leased to such tenant. If a tenant
defaults on its lease payments, the Company would lose the net cash flow from
such tenant, but might be able to use cash generated from other Properties to
meet the mortgage payments, if any, on such Property in order to prevent a
foreclosure. If a lease is terminated, there can be no assurance that the
Company will be able to lease the Property (or portion thereof) for the rent
previously received or sell the Property without incurring a loss. The Company
could also experience delays in enforcing its rights against tenants.

BANKRUPTCY OF TENANTS (BANKRUPTCIES COULD AFFECT COMPANY'S RECOVERY OF
RENTAL PAYMENTS). The financial failure of a tenant could cause the tenant to
become the subject of bankruptcy proceedings. Under bankruptcy law, a tenant has
the option of continuing or terminating any unexpired lease. If the tenant
continues its lease, the tenant must cure all defaults under the lease and
provide the Company with adequate assurance of its future performance under the
lease. If the tenant terminates the lease, the Company's claim for breach of the
lease (absent collateral securing the claim) would be treated as a general
unsecured claim. The amount of the claim would be capped at the amount owed for
unpaid pre-petition lease payments unrelated to the termination, plus the
greater of one year's lease payments or 15% of the remaining lease payments
payable under the lease (but not to exceed the amount of three years' lease
payments).

DELAY IN INVESTMENT IN REAL ESTATE (RATE OF RETURN ON AN INVESTMENT
DEPENDS ON TYPE AND TIMING OF INVESTMENT OF PROCEEDS AND QUALITY OF INCOME
STREAM). The return on an investment in the Company will depend, in part, on how
quickly the Company is able to complete purchases of identified Properties and
locate additional suitable properties. The Company's acquisition of a proposed
Property could be delayed by an inability to obtain financing as a result of
either the unattractiveness of financial or other terms of such financing or the
lack of lenders providing financing on any terms. There can be no assurance that
the Company's capital will be fully committed to property investments in a
timely manner. See "Federal Income Tax Considerations--Requirements for
Qualification as a REIT." Furthermore, a return on investment also depends on
the dependability of the income stream generated by a Property which the Company
purchases. Prior to acquiring properties, the Company's capital will be invested
generally in U.S. government securities, certificates of deposit from financial
institutions having a net worth of at least $100,000,000 or other short-term
investments that are easily convertible into cash

13
<PAGE>

("Permitted Temporary Investments"). See "Investment Objectives and Policies."
The rate of return on Permitted Temporary Investments may be less than the
returns from investments in Properties. Furthermore, prior to the acquisition of
Properties, the Company may not be able to qualify as a REIT and may not be
entitled to depreciation and other deductions.

COMPETITION FOR INVESTMENTS (COMPETITION COULD AFFECT PRICE OF
PROPERTIES AND AMOUNT OF RENTS RECEIVED, AND, CONSEQUENTLY, AMOUNT OF RETURN).
In connection with the making of investments, the Company may experience
significant competition from banks, insurance companies, savings and loan
associations, mortgage bankers, pension funds, limited partnerships, other REITs
and other entities with objectives similar to those of the Company and which may
have greater financial resources or experience. An increase in the availability
of funds for real estate investment may increase competition in the making of
investments and may reduce the yields available to the Company. Competition for
investments could reduce the return which the Company might otherwise be able to
obtain.

POTENTIAL ENVIRONMENTAL LIABILITIES (SIGNIFICANT EXPENSES COULD BE
INCURRED IF ENVIRONMENTAL PROBLEMS ARISE). Under various federal and state
environmental laws, current or former owners of real estate may be required to
investigate and clean up hazardous or toxic substances at such property, or may
be held liable to governmental entities or to third parties for property damage
and for investigation and clean up costs incurred by such parties in connection
with the contamination. Such laws typically impose clean-up responsibility and
liability without regard to the liability under such laws whether the owner knew
of or caused the presence of the contamination, and has been interpreted to be
joint and several unless the harm is divisible and there is a reasonable basis
for allocation of responsibility. The Company will generally seek to include a
provision in its leases providing that the tenant is responsible for all
environmental liabilities and for compliance with environmental regulation. Such
a provision, however, does not eliminate the Company's statutory liability or
preclude claims against the Company by governmental authorities or persons who
are not parties to the lease. The Company's leases may also provide a basis for
the Company to recover from the tenant damages or costs for which the Company
has been found liable. The cost of an investigation and clean up of site
contaminated can be substantial, and the fact that the property is or has been
contaminated even if remediated, may adversely affect the value of the property
and the owner's ability to sell or lease the property or to borrow using the
property as collateral. In addition, some environmental laws create a lien on
the contaminated site in favor of the government for damages and cost that it
incurs in connection with the contamination, and certain state and environmental
laws provide that such lien has priority over all other encumbrances on the
property or that a lien can be imposed on any other property owned by the liable
party. Finally, the owner of a site may be subject to common law claims by third
parties based on damages and costs resulting from the environmental
contamination emanating from the site.

Other federal, state and local laws and regulations govern the removal
or encapsulation of asbestos-containing material when such material is in poor
condition in the event of building, remodeling, renovation or demolition. Still
other federal, state and local statutes and regulations may require the removal
or upgrade of underground storage tanks that are out of service or are out of
compliance. In addition, federal, state and local laws, regulations and
ordinances may impose prohibitions, limitations and operational standards on, or
require permits and approvals in connection with, the discharge of waste,
wastewater and other water pollutants, the emission of air pollutants, the
operation of air polluting equipment, the generation and management of materials
classified as hazardous waste and workplace health and safety. Noncompliance
with environmental or health and safety requirements may also result in the need
to cease or alter operations at a property, which could effect the financial
health of a tenant and its ability to make lease payments. Furthermore, if there
is a violation of such a requirement in connection with the tenant's operations,
it is possible that the Company, as the owner of the property, could be held
accountable by governmental authorities for such violation and could be required
to correct the violation.

RISK OF PROVIDING FINANCING TO PURCHASERS OF COMPANY'S PROPERTIES
(THIS PRACTICE COULD DELAY CASH RECEIPTS). The Company may find it necessary or
desirable to provide financing to purchasers of Properties it wishes to sell.
This financing may cause any proceeds from the sale of Properties to be delayed
beyond the time of the disposition of Properties and until such time as any
loans are repaid or sold. The Company may find it

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<PAGE>

necessary to provide financing in circumstances where lenders are not willing to
make loans secured by commercial real estate or may find it desirable where a
purchaser is willing to pay a higher price for the Property than it would
without the financing.

RISK OF INCURRING UNINSURED LOSSES (ABSENCE OF INSURANCE MAY RESULT IN
LOSS OF INVESTMENT CAPITAL). The Company typically will require tenants to
maintain liability and casualty insurance of the kind that is customarily
obtained for similar properties. However, certain disaster-type insurance
(covering events of a catastrophic nature, such as earthquakes) may not be
available or may only be available at rates that are prohibitive. Three of the
Properties which the Company may purchase are located in the Los Angeles,
California, metropolitan area and one of them is located in an area near the
site of the 1994 Northridge earthquake. Earthquake insurance is not available
with respect to these Properties. In the event that an uninsured disaster should
occur, or in the event a commercial tenant does not maintain the required
insurance and a loss occurs, the Company could suffer a loss of the capital
invested in, as well as anticipated profits from, the damaged or destroyed
Property. If the loss involves a liability claim, the loss may extend to the
other assets of the Company or the subsidiary that owns the Property affected by
the loss.

CASUALTY-RELATED OR CONDEMNATION-RELATED LEASE TERMINATIONS (AMOUNTS
RECEIVED COULD BE LESS THAN FAIR MARKET VALUE OR ANTICIPATED REVENUES). The
leases of Properties may permit the tenant to terminate its lease in the event
of a substantial casualty or a taking by eminent domain of a substantial portion
of a Property. Should these events occur, the Company generally will be
compensated by insurance proceeds in the case of insured casualties or a
condemnation award in the case of a taking by eminent domain. There can be no
assurance that any such insurance proceeds or condemnation award will equal the
value of the Property or the Company's investment in the Property. Any such
lease termination could adversely affect the Company's cash flow and the
diversification of its net lease investments.

OTHER REAL ESTATE INVESTMENT RISKS (ADDITIONAL FACTORS COULD ADVERSELY
AFFECT THE COMPANY'S OPERATIONS AND RATE OF RETURN ON INVESTMENT). In addition
to the foregoing specific real estate investment risks, there are numerous other
risks which could affect the Company's performance. The yields available from
equity investments in real estate depend on the amount of income and capital
appreciation generated by the related properties. If the Properties do not
generate sufficient income to meet operating expenses, including debt service,
lease payments, capital expenditures and tenant improvements, the Company's
income and ability to make Distributions to its shareholders will be adversely
affected. Income from the Properties may be adversely affected by the general
economic climate, local conditions, such as oversupply of space or reduction in
demand for rental space in the area, the attractiveness of the Properties to
tenants, competition from other available space, the ability of the Company to
provide adequate maintenance, insurance and increased operating costs (including
real estate taxes). Income from properties in general and real estate values are
also affected by such factors as applicable laws, including tax laws, interest
rate levels and the availability of financing. In addition, real estate
investments are relatively illiquid and, therefore, would tend to limit the
ability of the Company to vary its portfolio promptly in response to changes in
economic or other conditions.

GENERAL INVESTMENT RISKS

IMMEDIATE AND SUBSTANTIAL DILUTION (INVESTORS WILL EXPERIENCE
DILUTION). Investors are subject to immediate and substantial dilution estimated
to be $1.51 per share in a Minimum Common Offering and $1.02 per share in a
Maximum Common Offering. See "Dilution."

RISK OF INVESTMENT OF PROCEEDS OF THE OFFERING (INVESTORS MUST RELY
SOLELY ON JUDGMENT OF MANAGEMENT IN MANAGING THE COMPANY). The Company's ability
to achieve its stated investment objectives and to pay Distributions depends
upon the performance of management in the acquisition of investments for the
Company. In general, shareholders will have no opportunity to evaluate the
transaction terms and other relevant economic or financial data concerning
investments to be made by the Company. There can be no assurance that desirable
income-producing properties will be available on economically attractive terms.
In addition, the profitability of the Company could be affected by the amount of
available funds. The Offering will be closed with

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<PAGE>

Gross Offering Proceeds of not less than $15,000,000 nor more than $50,000,004
(assuming no exercise of the overallotment option). A smaller amount of Gross
Offering Proceeds may result in the acquisition of fewer properties and less
diversification of the Company's real estate portfolio, thereby increasing the
potential impact of any investment which performs below expectations.

RISK OF INADEQUATE FINANCING (WOULD DIRECTLY AFFECT DIVERSIFICATION
GOALS). The Offering will be closed with Gross Offering Proceeds of not less
than $15,000,000 nor more than $50,000,004 (assuming no exercise of the
overallotment option). The potential profitability of the Company could be
affected by the amount of funds from the Offering at its disposal. Furthermore,
there can be no assurance that the Company will be able to achieve its leverage
objective of borrowing no more than approximately 50% of the aggregate gross
asset value of all Properties purchased. The Company may be unable to obtain
mortgage financing on commercially attractive terms because of the decreased
number of commercial banks and others making mortgage loans secured by
commercial and residential real property of the type in which the Company
intends to invest. There can be no assurance that lending sources will continue
to make loans on commercially attractive terms. If the Company is unable to
attain its leverage objective because financing is difficult or costly to
obtain, the Company may be limited to investing in fewer Properties.

LACK OF OPERATING HISTORY (THE SUCCESS OF THE COMPANY IS DEPENDENT ON
MANAGEMENT'S ABILITY). The Company has no operating history. Except for the
Properties the Company indicates it intends to acquire and describes in this
Prospectus or in a supplement to this Prospectus, purchasers of Shares will not
have an opportunity to evaluate the terms of the transaction or the relevant
economic or financial data affecting the investments to be acquired by the
Company. Moreover, the ability of the Company to accomplish its stated
investment objectives and the timing of the receipt by shareholders of
Distributions are dependent upon the success and timing of management's
acquisition of investments for the Company. There can be no assurance that any
Properties will increase in value, or that income-producing properties will be
available or can be acquired on economically attractive terms.

RELIANCE ON MANAGEMENT (GENERALLY INVESTORS WILL HAVE NO RIGHT TO
PARTICIPATE IN COMPANY MANAGEMENT). Investors will be relying entirely on the
management ability of the officers and directors of the Company. Shareholders
have no right or power to take part in the management of the Company except
through the exercise of their shareholder voting rights. Thus, no prospective
investor should purchase any of the Shares offered hereby unless the prospective
investor is willing to entrust all aspects of the management of the Company to
the officers and directors of the Company. See "Management" for a discussion of
the experience of the directors and officers in real estate investments.

OWNERSHIP LIMIT (LIMIT CHANGES OF CONTROL AND TENDER OFFERS). In order
to maintain its qualification as a REIT, not more than 50% in value of the
outstanding shares of the Company may be owned, directly or indirectly, by five
or fewer individuals (as defined in the Code to include certain entities). Value
will be determined by market price. To insure that the Company will not fail to
qualify as a REIT under this test, the Company's Charter and By-Laws authorizes
the directors to take such action as may be required to preserve the
qualification of the Company and to limit any person to direct or indirect
ownership of 9.8% of the value of the outstanding equity shares. In addition, no
Person may, directly or indirectly, acquire Beneficial Ownership of a number of
shares of 8% Preferred that, when added to other equity shares of the Company
Beneficially Owned by such Person, would exceed five percent of the value of the
outstanding equity shares of the Company. However, market factors could create a
disparity in the values between Common Stock and preferred stock, which, in an
extreme situation, could result in an inadvertent violation of the Ownership
Limit by an existing shareholder. For example, were the market price of the
Common Stock to decline disproportionately to the 8% Preferred, the value of the
8% Preferred held by any one Person would increase in relationship to the total
market value of the equity securities of the Company. A similar result would
occur if the 8% Preferred traded at a premium in relationship to the Common
Stock. If not prevented by shareholder or Company action, such could cause the
Company to lose its REIT status for income tax purposes. The ownership limits
may discourage a change of control of the Company and may also (a) deter tender
offers for the shares, which offers may be attractive to the shareholders, or
(b) limit the opportunity for shareholders to receive a premium for their shares
that might otherwise exist if an investor

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<PAGE>

attempted to assemble a block of shares in excess of the applicable ownership
limitations in number or value of the outstanding shares or otherwise to effect
a change of control of the Company. See "Description of Securities Restriction
on Ownership."

POTENTIAL SECURITIES ACT LIABILITY (COMPANY MAY BE OBLIGATED TO REPAY
AMOUNT INVESTED PRIOR TO DUE DATE). An aggregate of $56,281.50 principal amount
of the Company's 10% Convertible Promissory Notes due October 1, 1996 , Series
B, were sold without an exemption from registration under the Securities Act of
1933, as amended (the "Act"). The statute of limitations for such sales
contained in the Act has not run. As a result, the Company could be liable for
rescission claimed by the holders of such Notes in the amount of $56,281.50 plus
interest.

MARKET PRICE OF SHARES MAY NOT REFLECT PROPERTY VALUES. There is no
established market for the Company's Shares and the 8% Preferred. While the
Company will list the Shares and the 8% Preferred for trading on the
, there can be no assurance that the price a shareholder would
- ------------------
receive in a sale on the will be representative of the value
--------------------
of the Properties owned by the Company or that it will equal or exceed the
amount a shareholder paid for the Shares or the 8% Preferred. Historically,
shares of real estate companies have traded at a discount to their proportionate
interest in the value of the issuer's underlying assets.

DELAY IN TRADING (PRICE AND LIQUIDITY OF SHARES COULD BE ADVERSELY
EFFECTED). The Company intends to list its Common Stock and 8% Preferred on
the and trading on the is
---------------- --------------------------
expected to commence immediately after the Final Closing which could occur as
long as six months after the Initial Closing. Accordingly, an investor's ability
to transfer his or her shares could be delayed until such time or transfers
prior to such time could result in a discount of the sales price. Also, a
possibility exists that trading on a public market may not materialize. In such
case, an investor may be able to resell the securities, if at all, only at a
significant discount.

REQUIREMENT OF SUPERMAJORITY SHAREHOLDERS VOTES (34% OF VOTES CAN
BLOCK WILL OF MAJORITY). Under Maryland law, since the Charter does not provide
otherwise, approval by a two-thirds vote of all the votes entitled to be cast on
the matter is required to accomplish major structural changes in the Company,
including mergers, share exchanges, sales of substantially all assets of the
Company, amendments to the Charter and dissolution. All actions taken, if
approved by the holders of the requisite number of Shares, would be binding on
all shareholders. Certain of these provisions may discourage or make it more
difficult for a Person to acquire control of the Company or to effect a change
in the operation of the Company. The Board has the power to cause the issuance
of additional Shares and preferred stock without obtaining shareholder approval.

LIMITED LIABILITY OF OFFICERS AND DIRECTORS (SHAREHOLDERS' REMEDIES
AGAINST MANAGEMENT AND DIRECTORS ARE LIMITED). The Charter provides that a
director's liability to the Company for monetary damages will be limited. In
addition, the Company is obligated under the Bylaws to indemnify its directors
and officers and may indemnity its employees and other agents against certain
liabilities incurred in connection with their service in such capacities. The
Company will execute indemnification agreements with each director which will
indemnity the directors against any such liabilities they incur. Each of these
measures could reduce the legal remedies available to the Company and the
shareholders against such individuals. See "Management Limitation of Liability
and Indemnification."

EFFECT OF SHARES AVAILABLE FOR FUTURE SALE (FUTURE SALES COULD AFFECT
VALUE OF OUTSTANDING SECURITIES). Sales of a substantial number of shares of
Common Stock, or the perception that such sales could occur, could adversely
affect prevailing market prices for Shares. Subject to the attainment of a
variety of exercise or conversion criteria, assuming a sale of all of the Units,
Shares and 8% Preferred offered hereby, after the Final Closing, the Company may
issue an aggregate of up to approximately 5,637,368 additional shares of Common
Stock (subject to the Ownership Limit). No prediction can be made as to whether
such additional Shares will be issued or as to the effect, if any, that future
sales of Shares, or the availability of Shares for future sale, will have on the
market price prevailing from time to time. See "Shares Available for Future
Sale."

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<PAGE>

BENEFITS TO OFFICERS AND DIRECTORS. Officers and directors of the
Company will be entitled to receive options to purchase an aggregate of 185,000
Shares at $7 per Share at the time of the Final Closing as described under the
caption "Management--Directors and Executive Officers Compensation and
Incentives." Further, officers and directors may purchase Units or Shares in
this Offering net of selling commissions, which right, if exercised, would
result in an approximately eight percent saving to such officers and directors
on the cost of such securities. Similarly, such persons could purchase 8%
Preferred net of commissions, amounting to an approximately five percent
savings. See "The Offering." (At present, no officers or directors have
expressed an intent to purchase any of such securities.) In addition, subsequent
to the Initial Closing, the Chairman of the Board and the President will be
employed under employment agreements which provide for, among other things,
salaries of $100,000 and $72,000, respectively, potential bonus compensation
(which cannot be estimated at this time), "piggyback" registration rights for
all Shares held by such officer (which would save them the costs of registering
their Shares for resale which costs could be substantial), certain salary and
benefit continuation for up to six months in the event of disability, and
compensation generally equal to 2.99 times the officer's average salary and
bonus over the prior five years under certain circumstances if there is a change
of control of the Company. See "Management--Employment Agreements."

TAX RISKS

FAILURE TO QUALIFY AS A REIT OR PARTNERSHIP FOR TAX PURPOSES
(FAVORABLE PASS-THROUGH FEATURES OF AN INVESTMENT WOULD BE ELIMINATED). The
Company intends to operate so as to qualify as a REIT under the Code. Although
the Company believes that it will be so organized and will operate in such a
manner, no assurance can be given that the Company will qualify or remain
qualified as a REIT. Qualification as a REIT involves the application of highly
technical and complex Code provisions for which there are only limited judicial
or administrative interpretations. The complexity of these provisions and of the
applicable income tax regulations that have been promulgated under the Code (the
"Treasury Regulations") is greater in the case of a REIT that holds its assets
in partnership form. The determination of various factual matters and
circumstances not entirely within the Company's control may affect its ability
to qualify as a REIT. In addition, no assurance can be given that legislation,
new regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification or that future economic,
market, legal, tax or other considerations may cause the Board to revoke the
REIT election. See "Federal Income Tax Considerations." The Company is relying
on the opinion of Thelen, Marrin, Johnson & Bridges, tax counsel to the Company,
regarding various issues affecting the Company's ability to qualify, and retain
qualification, as a REIT. Such legal opinions are not binding on the Internal
Revenue Service (the "IRS"). If the Company were to fail to qualify as a REIT in
any taxable year, the Company would not be allowed a deduction for Distributions
to shareholders in computing taxable income and would be subject to federal
income tax on its taxable income at regular corporate rates. This additional tax
liability would reduce the amounts available for distribution by the Company to
shareholders. The Company would also be disqualified from treatment as a REIT
for four taxable years following the year such qualification was lost. See
"Federal Income Tax Considerations."

The Operating Partnership will receive an opinion of Thelen, Marrin,
Johnson & Bridges, tax counsel to the Company, stating that the Operating
Partnership will be treated as a partnership for federal income tax purposes. If
the IRS were to challenge successfully the tax status of the Operating
Partnership as a partnership for federal income tax purposes, the Operating
Partnership would be treated as an association taxable as a corporation. The
Operating Partnership could also be taxable as a corporation if it were
determined to be a "publicly traded partnership" under the Code. In either such
event, the character of the Company's assets and items of gross income would
change and preclude the Company from satisfying the asset tests and possibly the
income tests (imposed by the Code as discussed below) and, in turn, would
prevent the Company from qualifying as a REIT. See "Federal Income Tax
Considerations--Taxation of the Company--Requirements for Qualification." In
addition, the imposition of a corporate tax on the Operating Partnership would
reduce the amount of funds from operations available for distribution to the
Company and its shareholders. See "Federal Income Tax Considerations--Tax
Aspects of the Operating Partnership."

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<PAGE>

FAILURE TO COMPLY WITH ANTI-ABUSE REGULATIONS (FAVORABLE PASS-THROUGH
FEATURES OF INVESTMENT WOULD BE ELIMINATED). The United States Treasury
Department issued regulations at the end of 1994 which authorize the IRS, in
certain "abusive" transactions involving partnerships, to disregard the form of
the transaction and recast it for federal tax purposes as the IRS deems
appropriate (the "Anti-Abuse Regulations"). The IRS could invoke the Anti-Abuse
Regulations if the Operating Partnership is deemed to have been formed or
utilized in connection with a transaction (or series of related transactions)
with a principal purpose of substantially reducing the present value of the
partners' aggregate federal tax liability in a manner inconsistent with the
intent of the partnership provisions of the Code. See "Federal Income Tax
Considerations--Anti-Abuse Regulations."

ADVERSE EFFECT OF REIT MINIMUM DISTRIBUTION REQUIREMENTS (COMPANY
UNABLE TO ACCUMULATE CAPITAL INTERNALLY). In order to qualify as a REIT, the
Company generally will be required each year to distribute to its shareholders
at least 95% of its net taxable income (excluding any net capital gain). In
addition, the Company will be subject to a four percent nondeductible excise tax
on the amount, if any, by which certain distributions paid by it with respect to
any calendar year are less than the sum of (i) 85% of its ordinary income, (ii)
95% of its capital gains net income for that year and (iii) 100% of its
undistributed taxable income from prior years. The Company intends to make
distributions to its shareholders to comply with the 95% distribution
requirement and to avoid the nondeductible excise tax. Differences in timing
between the recognition of taxable income and the receipt of cash available for
distribution could require the Company directly or through the Operating
Partnership, to borrow funds to meet the 95% distribution requirement and to
avoid the nondeductible excise tax. The requirement to distribute a substantial
portion of the Company's net taxable income could cause the Company to
distribute the amounts that would otherwise be spent on future acquisitions,
unanticipated capital expenditures or repayment of debt, which would require the
Company to borrow or sell assets to fund the costs of such items.

Distributions by the Operating Partnership will be determined by the
Company's Board, in the Company's capacity as the general partner of the
Operating Partnership, and will be dependent on a number of factors, including
the amount of the Operating Partnership's distributable cash, the Operating
Partnership's financial condition, any decision by the Board to reinvest funds
rather than to distribute such funds, the Partnership's capital expenditures,
the annual distribution requirements under the REIT provisions of the Code and
such other factors as the Board deems relevant. See "Federal Income Tax
Considerations--Federal Income Taxation of the Company."

CHANGES IN TAX LAWS (CHANGES COULD AFFECT A RETURN ON AN INVESTMENT).
The discussions of the federal income tax aspects of the Offering are based on
current law, including the Code, the Treasury Regulations issued thereunder,
certain administrative interpretations thereof and court decisions.
Consequently, future events (including those arising from legislative and
administrative proposals that are or in the future may be under consideration)
that modify or otherwise affect those provisions may result in treatment for
federal income tax purposes of the Company and the shareholders that is
materially and adversely different from that described in this Prospectus, both
for taxable years arising before and after such events. There is no assurance
that future legislation and administrative interpretations will not be
retroactive in effect.

OTHER INVESTMENT RISKS

MARYLAND LAW LIMITATIONS ON ACQUISITIONS AND CHANGES IN CONTROL (LEGAL
LIMITATIONS COULD AFFECT MANAGEMENT CHANGES). Certain provisions of the Maryland
General Corporation Law (the "MGCL") which are adopted in the Company's Charter
and By-Laws could have the effect of delaying, deferring or preventing a change
in control of the Company or the removal of existing management and, as a
result, could prevent the shareholders of the Company from being paid a premium
for their shares of Common Stock over then prevailing market prices. These
provisions are described briefly below. In addition, there are statutory
provisions limiting the voting rights of "control shares" and restricting
certain types of business combinations. See "Certain Provisions of Maryland Law
and of the Company's Charter and By-Laws."

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<PAGE>

Staggered Board. The MGCL permits and the charter provides that the
Board of Directors of the Company will have three classes of directors with
staggered terms of service of three-year terms. The staggered terms for
directors may affect the shareholders' ability to change control of the Company
even where a change in control is in the interest of the shareholders. Because
of the staggered terms, a complete change of the composition of the present
Board of Directors could not occur prior to 1998. A majority of the Independent
Directors must approve all matters voted on by the Board of Directors.

Preferred Stock. The MGCL permits and the charter provides that the
Board of Directors may issue up to 21,515,000 shares of preferred stock and to
establish the preferences and rights (including the right to vote and the right
to convert into Shares) of any shares issued. See "Description of Securities."
The power to issue preferred stock could have the effect of delaying or
preventing a change in control of the Company even where a change in control is
in the shareholders' interest. See "Description of Securities--8% Convertible
Preferred Stock" and "1995--Convertible Preferred Stock" for information about
the issuance of such classes of preferred stock.

Control Shares. The MGCL provides certain restrictions upon the voting
rights of "control shares" in a Maryland corporation. "Control shares" are
voting shares of stock which, if aggregated with all other shares of stock
previously acquired by the holder thereof, would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of power: (i) one-fifth or more but less than one-third, (ii) one-third or more
but less than a majority, or (iii) a majority or more of all voting power. The
MGCL provides that "control shares" have no voting rights except to the extent
approved by an affirmative vote of two-thirds of the outstanding shares entitled
to vote on the matter, excluding shares held by the acquiror of the control
shares and the officers and directors of the Company who are also employees of
the Company, subject to certain limitations. A "control share acquisition" means
the acquisition of control shares, subject to certain exceptions. See "Certain
Provisions of Maryland Law and the Company's Charter and By-Laws--Control Share
Acquisitions."

Ability to Effect Business Combinations Limited. Under the MGCL,
certain Business Combinations (as defined) between a Maryland corporation and
any person who is the beneficial owner of ten percent or more of the voting
power of the corporation's shares or who is an affiliate or associate of the
corporation and owned ten percent or more of the voting power of the
corporation's shares at any time during the prior two years (an "Interested
Shareholder"), or an affiliate of an Interested Shareholder, are prohibited for
five years after the most recent date on which the Interested Shareholder became
an Interested Shareholder. Thereafter, any such Business Combination must be
approved by the affirmative vote of at least (i) 80% of the votes entitled to be
cast by holders of outstanding voting shares of the Company and (ii) 66-2/3% of
the votes entitled to be cast by holders of outstanding voting shares held by
persons other than the Interested Shareholder with whom the Business Combination
is to be effected, subject to certain exceptions. See "Certain Provisions of
Maryland Law and the Company's Charter and By-Laws--Business Combinations."

CHANGES IN INVESTMENT AND FINANCING POLICIES (INVESTORS MUST RELY ON
POLICIES ADOPTED BY DIRECTORS WHICH MAY BE CHANGED FROM TIME TO TIME). The Board
of Directors determines the Company's and the Operating Partnership's investment
and financing policies and policies with respect to certain other activities,
including the growth, capitalization, distributions and operating policies of
the Company and the Operating Partnership. Although the Board of Directors has
no present intention to amend or revise these policies, the Board of Directors
(including a majority of Independent Directors) may do so at any time without a
vote of the Company's shareholders. See Investment Objectives and Policies--
Changes in Investment Objectives and Limitations."

RISK OF INSUFFICIENT WORKING CAPITAL (INADEQUATE CAPITAL COULD AFFECT
THE COMPANY'S ABILITY TO CONDUCT BUSINESS AS CONTEMPLATED). There can be no
assurance that the Company will have sufficient working capital. A deficiency of
working capital might be caused by a decrease in gross revenues, by an increase
in expenses, by an uninsured casualty to a Property or by other unanticipated
events. There is no assurance that the Company will be able to borrow money for
working capital purposes. Loan covenants and other restrictions included in the
Company's financing agreement relating to the acquisition of Properties may
restrict the Company's ability to borrow for such purposes or its ability to
draw funds from working capital reserves.

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<PAGE>

INVESTMENTS IN INTEREST SENSITIVE INVESTMENTS (TIMING OF SALE OF
ASSETS COULD AFFECT RETURN). The Company will invest Offering proceeds in
Permitted Temporary Investments for a period of up to one year pending the
investment of such proceeds in real estate and in assets other than real estate
which generate qualifying REIT income. These investments are interest rate
sensitive financial instruments and their value generally will decrease if
market interest rates increase. Thus, if the Company sells its interest in such
securities when interest rates are higher than at the time when the securities
initially were acquired, the Company would likely receive less in such a sale
than the amount it initially paid.

INVESTMENT BY PENSION OR PROFIT SHARING TRUSTS, KEOGHS OR IRAS (DOES
INVESTMENT COMPLY WITH ERISA OR CODE, OR PRODUCE UBTI?). In considering an
investment in the Company of the assets of a pension, profit sharing, 401(k),
Keogh or other retirement plan or IRA ("Benefit Plans"), a fiduciary with
respect to such a Benefit Plan should consider, among other things, (i) whether
the investment is consistent with applicable provisions of ERISA or the Code and
(ii) whether the investment will produce unrelated business taxable income, as
defined in Section 512 of the Code ("UBTI"), to the Benefit Plan. See "Federal
Income Tax Considerations--Treatment of Tax-Exempt Shareholders" and "ERISA
Considerations."

INVESTMENT COMPANY ACT OF 1940 (CERTAIN INVESTMENT PRACTICES MAY BE
UNAVAILABLE). The Board of Directors intends to conduct the operation of the
Company so that it will not be subject to regulation under the Investment
Company Act of 1940. As a result, the Company may have to forego certain
investments which could produce a more favorable return to the Company. If the
Company fails to qualify for an exemption from registration as an investment
company, it will be subject to numerous restrictions under the Investment
Company Act of 1940. A failure to qualify for an exemption under the Investment
Company Act of 1940 could have a material adverse effect on the shareholders.

THE COMPANY

GENERAL

The Company was formed in 1994 to operate as a real estate investment
trust under the Code and will be self-administered. The Company proposes to
acquire a diversified portfolio of garden-style apartments and suburban
commercial and retail income properties in the Western United States. The
Properties will be leased to a variety of residential, retail and commercial
tenants. The Company and its corporate predecessors or affiliates entered into
certain transactions described sequentially below to accomplish such goal.

Ramapo Development, Inc., a Colorado corporation ("Ramapo") was formed
in January 1989 and sold shares of its common stock pursuant to a registration
statement on Form S-18 in May 1989. In 1990, its name was changed to Insight
Environmental Corporation ("IEC"). No material operations were ever conducted by
Ramapo or IEC. Its shares were never listed on a national securities exchange,
nor, to the knowledge of the Company's management, were IEC's shares ever traded
in any organized broker-dealer network.

In 1993, American Equity Trust Funding, Inc. ("Funding Co.") was
formed by Arthur P. Herring and Regent IV Trust to explore opportunities for the
formation of a REIT and to raise "seed capital" to organize the REIT and fund a
material portion of the cost of offering the REIT's shares to the public.
$400,000 was raised by Funding Co. for these purposes through September 30,
1995. In 1994, Arthur P. Herring transferred all of his interest in Funding Co.
to The Danube Rousse, Inc., an affiliate of Arthur P. Herring.

In 1994, The Danube Rousse, Inc. (controlled by an affiliate of Arthur
P. Herring) and Regent IV Trust paid an aggregate of $35,000 to acquire
(i) approximately 37% of the outstanding voting stock of IEC, and (ii) a proxy
to vote an additional 43% of IEC's outstanding vote stock, with the intent to
convert IEC into a REIT. Such proxy has expired. There is no affiliation between
Regent IV Trust and The Danube Rousse Inc. or directors, officers or other
affiliates of the Company. None of the beneficiaries of Regent IV Trust are, or
are expected to be,

21
<PAGE>

involved in management of the Company. Regent IV Trust presently owns
approximately 12.26% of the Company's outstanding Common Stock. See "Principal
Shareholders."

The Company was formed in 1994 as a wholly-owned subsidiary of IEC for
the purpose of reincorporating IEC in Maryland. IEC was a "shell corporation"
with no business operations, and a de minimis amount of assets. IEC was
reincorporated in Maryland by merging itself into the Company in late 1994. The
Company's Charter authorizes it to operate as a REIT under the Code. In October
1995, the shareholders, other than the founders, of Funding Co. exchanged their
Funding Co. shares for 114,286 shares of Common Stock, plus 57,133 Series "D"
Warrants, in the Company. At the same time, each of the founders of Funding Co.
(The Danube Rousse, Inc., as successor to Arthur P. Herring, and Regent IV
Trust) exchanged their shares in Funding Co. for 360,000 shares of the Company's
1995 Convertible Preferred Stock, plus 107,500 Series "D" Warrants (for an
aggregate of 720,000 shares of 1995 Convertible Preferred Stock and 215,000
Series "D" Warrants). See "Principal Shareholders." In October 1995, Funding Co.
was merged into the Company.

The Company will acquire its Initial Properties from Persons who are
not affiliated with the Company or any of its predecessors, or any of their
respective officers, directors or affiliates. The Company will contribute all of
the net proceeds from the Offering to the Operating Partnership in exchange for
an initial 99% general partnership interest in the Operating Partnership and the
Operating Partnership will acquire the Initial Properties. Three of the initial
Properties are located in the Los Angeles, California metropolitan area. The
other three are located in the Phoenix, Arizona, metropolitan area. The Company
will be the sole general partner of the Operating Partnership. The Initial
Properties will be leased to a variety of tenants. See "Description of
Properties," for the specific terms and conditions of the purchase of the
Initial Properties.

The Company, subject to the approval of the Board of Directors,
initially intends to pay regular quarterly Distributions, beginning with the
first full calendar quarter after the Initial Closing.

Management of the Company has been in the business of operating and
financing income-producing real estate for many years. Mr. Herring and Dois
Brock have agreed to devote substantially all of their time to the business of
the Company. Upon completion of the Initial Closing, the Company expects to have
eight full-time employees: four officers and four administrative and accounting
employees.

GROWTH STRATEGY

The Company's growth strategy is to enhance shareholder value by
increasing cash flow through the acquisition of additional Properties located
primarily in the western United States that meet the Company's investment
criteria and the participation in any increased revenue from the Properties
purchased at the Initial or Final Closing. Management of the Company will
utilize its years of experience, knowledge and affiliations in the real estate
industry to implement the growth strategy of the Company.

ACQUISITION STRATEGY

To enable the Company to implement its acquisition strategy, the
Company will rely on the real estate management and financing experience of Mr.
Herring and Mr. Brock. This experience will be utilized to identify existing
properties that meet the Company's investment criteria. The Company intends to
focus on opportunities available in the western United States and will place
particular emphasis on properties in areas with strong, or improving economic
conditions. The Company believes that a number of existing properties that meet
its investment criteria are available at attractive prices because of the
adverse impact of high leverage and the over-building on the profitability and
operations of many properties, the difficulties of many property operators to
obtain funds to pay for capital improvements necessary to maintain their
properties and the effects of the recent economic recession. It is possible that
the Company will need to issue additional equity shares either for cash or for
property to accomplish acquisitions of properties after the Closing. The Company
expects to make additional property acquisitions through the Operating
Partnership, although the Board, including a majority of the Independent
Directors, will consider whether to make property acquisitions directly if such
direct acquisition is deemed to be in the best interests of the Company and the
Operating Partnership.

22
<PAGE>

TERMS OF THE OFFERING

The Company is offering the following shares of its capital stock
pursuant to this Prospectus: (i) a minimum of 2,142,858 shares of Common Stock
in the form of Units or Shares; (ii) a maximum of 5,000,000 Shares in the form
of 1,750,000 Units plus 1,500,000 Shares; (iii) a minimum of 152,000 shares of
8% Preferred and (iv) a maximum of 1,136,364 shares of 8% Preferred. The 8%
Preferred will be sold primarily, but not exclusively, to institutional and
accredited investors. The price of each Unit is $14.00, each Share is $7.00 and
each share of 8% Preferred is $13.20 (which prices have been determined
arbitrarily), subject to certain discounts.

The Units, Shares and 8% Preferred are being offered on a "best
efforts" basis which means that no one is guaranteeing the amount of capital
that will be raised. Units and Shares are being offered by the Sales Agent and
soliciting Dealer and the 8% Preferred is being offered by broker-dealers, all
on a "best-efforts" basis. Investors are required to purchase a minimum of 50
Units, or 100 Shares, unless otherwise agreed by the Company. There is no
minimum number of shares of 8% Preferred which must be purchased by an
individual investor. See "The Offering." Payment in full is due on transmittal
of an order by an investor or by such investor's authorized representative.
Payments will be deposited promptly in an interest bearing escrow account
maintained with Trust Company of America (the "Escrow Agent") until such funds
are released as described below. Such funds will be held in trust for the
benefit of investors to be used for the purposes set forth in this Prospectus.
Orders must be accepted or rejected by the Company within ten days of their
receipt. An investor whose order for Units, Shares or 8% Preferred has been
accepted by the Company has no right to withdraw his investment. See "The
Offering." The acceptance of orders by the Company imposes no obligation on the
Company to issue Shares or 8% Preferred unless there is an Initial Closing and,
in the case of 8% Preferred, a minimum of 152,000 shares have been subscribed
for. The Sales Agent and the Soliciting Dealers and broker-dealers may not
complete a sale of Units, Shares or 8% Preferred to an investor until at least
five business days after the date the investor receives a copy of this
Prospectus. Each investor will be sent a confirmation of his or her purchase.

The Initial Closing will occur after the Minimum Common Offering is
achieved and must occur within 180 days of the date of this Prospectus. The
Final Closing shall occur no more than 180 days after the Minimum Common
Offering is achieved. Assuming that the Initial Closing occurs on the 179th day
after the date of this Prospectus, the last possible termination date for the
Offering will be , 1997. After the Final Closing, the Shares will
---------------
commence trading on the . Investors will receive the
---------------------
proportionate share of interest earned on their funds for the period such funds
are held in escrow. All such interest earned on the escrowed funds will be paid
to shareholders within 15 days of each issuance of Units, Shares or 8%
Preferred.

The Offering will terminate at the time all Units, Shares and 8%
Preferred being offered are sold, unless sooner terminated by the Company, but
in no case later than one year from the date of this Prospectus. If, as of 180
days from the date of this Prospectus, the Minimum Common Offering is not
achieved, the Company will cancel all existing orders and, promptly after such
cancellation, all funds submitted on account of such orders will be released
from escrow and returned to each investor together with all interest earned
thereon. See "The Offering--Escrow Arrangements."

[Remainder of page intentionally left blank]

23
<PAGE>

ESTIMATED USE OF PROCEEDS

The following table presents information about how the money raised in
the Offering will be used. Information is provided assuming the Minimum Common
Offering, Maximum Common Offering or Maximum Combined Offering is achieved. Many
of the numbers in the table are estimates because all expenses cannot be
determined precisely at this time. The actual use of the capital raised by the
Company is likely to be different than the figures presented in the table. The
Company expects that between approximately 78% in the Minimum Common Offering
and 86% in the Maximum Combined Offering of the money invested by new
Shareholders will be used to buy real estate, while the remaining proceeds will
be used for working capital and to pay expenses and fees.

<TABLE>

MINIMUM COMMON OFFERING MINIMUM COMBINED OFFERING
----------------------- -------------------------
SALE OF 2,142,858 SHARES
OF COMMON STOCK PLUS 152,000 SHARES
SALE OF SALE OF UP TO 2,142,858 SHARES(1) OF 8% PREFERRED
---------------------------------------- ---------------
Percent of Percent of
Amount Public Offering Amount Public Offering
(000s omitted) Proceeds (000s omitted) Proceeds
------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Gross Offering Proceeds $ 15,000 (3) 100.00% $ 17,000 100.00%
--------- --------- ========= --------
Public Offering Expenses:
Selling Discounts and
Commissions(4)(5) 1,125 7.50 1,225 7.21
Other Organizational Expenses
and Offering Expenses(6)(7) 900 6.00 930 5.47
--------- --------- --------- ---------
Amount Available to Invest $ 12,975 86.50% $14,845 87.32%
========= ========= ========= =========
Prepaid Items and Fees
Related to Purchase of
Real Estate(8) 303 2.02 303 1.78

Working Capital Reserve(9) 673 4.49 673 3.96
========= ========= ========= =========
Public Offering Proceeds
Available for Investment $ 11,999 79.99% $ 13,869 81.58%
========= ========= ========= =========

Acquisition Fees (included
in purchase price)(10) 249 (11) 1.66 276 (11) 1.62
--------- --------- ========= =========

Amount Available for
Investment in Real Estate(12) $ 11,750 78.33% $ 13,593 79.96%
========= ========= ========= =========

MAXIMUM COMMON OFFERING MAXIMUM COMBINED OFFERING
----------------------- -------------------------
SALE OF 5,000,000 SHARES
OF COMMON STOCK PLUS 1,136,364 SHARES
SALE OF 5,000,000 SHARES(1) OF 8% PREFERRED(2)
---------------------------------------- ------------------
Percent of Percent of
Amount Public Offering Amount Public Offering
(000s omitted) Proceeds (000s omitted) Proceeds
------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Gross Offering Proceeds $ 35,000 (3) 100.00% $ 50,000 100.00%
--------- --------- ========= --------
Public Offering Expenses:
Selling Discounts and
Commissions(4)(5) 2,625 7.50 3,375 6.75
Other Organizational Expenses
and Offering Expenses(6)(7) 1,120 3.20 1,570 3.14
--------- --------- --------- ---------
Amount Available to Invest $ 31,255 89.30% $ 45,055 90.11%
========= ========= ========= =========
Prepaid Items and Fees
Related to Purchase of
Real Estate(8) 333 0.95 333 0.67

Working Capital Reserve(9) 247 0.78 1,000 2.00
========= ========= ========= =========
Public Offering Proceeds
Available for Investment $ 30,648 87.57% $ 43,722 84.44%
========= ========= ========= =========
Acquisition Fees (included
in purchase price)(10) 598 (11) 1.71 872 (11) 1.74
--------- --------- ========= =========

Amount Available for
Investment in Real Estate(12) $ 30,050 85.86% $ 42,850 85.70%
========= ========= ========= =========
</TABLE>

24
<PAGE>

- ---------------
(1) When an aggregate of $15,000,000 is raised from the sale of Units and
Shares, the Minimum Common Offering will be completed and Units or
Shares will be issued to investors.
(2) At least 152,000 shares of 8% Preferred must be sold to at least 100
Persons, although no shares of 8% Preferred will be issued until there
has been an Initial Closing.
(3) Assumes none of the 8% convertible Preferred is sold.
(4) If the Minimum Common Offering is successfully completed, the Company
will pay a selling commission of $.98 per Unit sold and $0.49 per
Share (except that no commission will be paid with respect to any
Shares sold to the officers and directors of the Company or the
Soliciting Dealers or any of their employees for their own accounts).
Also, a dealer manager fee is payable to the Sales Agent in the amount
of one-half of one percent of the gross proceeds from this Offering.

(5) If a Minimum Preferred Offering is successfully completed, the Company
will pay a selling commission of $0.66 per share of 8% Preferred
(except that no commission will be paid with respect to any shares of
8% Preferred sold to the officers and directors of the Company).
(6) With respect to the offering of Units and Shares, Other Organization
and Offering Expenses represent certain expenses incurred in
connection with the formation, qualification and registration of the
Company and in marketing and distributing the Shares under applicable
federal and state law, and any other expenses actually incurred and
directly related to the offering and sale of the Units and Shares,
except selling commissions. Such other expenses include (i) a
financial advisory fee of one percent of the gross proceeds from this
Offering payable to a consultant, Strategic Planning Consultants,
Inc., (ii) a non-accountable expense allowance payable to the Sales
Agent in an amount equal to one percent of the Gross Offering
Proceeds, (iii) an expense reimbursement of up to one-half of one
percent payable to the Sales Agent or Soliciting Dealers for bona fide
due diligence expenses, and (iv) a wholesaling fee payable to an
independent wholesaler of one-half of one percent. See "The Offering."
Some of the expenses ($400,000) were previously paid by Funding Co.
and are reflected on the books of the Company as a result of the
merger. See "The Offering" for a complete description of the fees and
expense reimbursements payable to the Sales Agent and the Soliciting
Dealers. See "The Offering."
(7) With respect to shares of the 8% Preferred, Other Organization and
Offering Expenses represent certain expenses incurred in connection
with the marketing and distribution of such shares under applicable
federal and state law, and any other expenses actually incurred and
directly related to the offering and sale of such shares, except
selling commissions. Such other expenses include (i) a financial
advisory fee of one and one-half percent of the gross proceeds from
the offering of the shares of 8% Preferred payable to a consultant,
Strategic Planning Consultants, Inc. See "The Offering."
(8) Includes prepaid interest, points, loan commitment fees and legal and
other costs of acquisition. All such items shall be capitalized.
(9) In the event any overallotment options are exercised with respect to
the offering of Shares, the net proceeds derived therefrom will be
used by the Company for additional working capital, including
potential future acquisitions of properties not yet identified. In the
event of a Maximum Combined Offering, the net proceeds derived
therefrom will be used principally for acquisition of properties not
yet identified.
(10) Acquisition Fees is defined as the total of all fees and commissions
paid by any person to any person, not affiliated with the Company, in
connection with the selection, financing and purchase of any property
by the Company or the Operating Partnership, whether designated as
real estate commissions, acquisition fees, finders' fees, selection
fees, non-recurring management fees, consulting fees or any other
similar fees or commission howsoever designated and howsoever treated
for tax or accounting purposes. None of such amounts are payable to
any member of management or any affiliate of management. Although it
is assumed that all the foregoing fees will be paid by the sellers of
Properties, sellers generally fix the selling price at a level
sufficient to cover the cost of any Acquisition Fee so that, in
effect, the Company, as purchaser, will bear such Fee as part of the
purchase price.
(11) The Acquisition Fees reflected are calculated as if the Company were
to utilize the maximum amount of leverage (50%) that is permitted,
assuming similar types of properties to the Properties were acquired
under similar terms. The amount of Acquisition Fees based on the
Company's planned use of leverage as described under "Description of
Properties" would be $66,000 in the case of a Minimum Common

25
<PAGE>

Offering (0.44%), $66,000 in a Minimum Combined Offering (0.39%),
$499,000 in the case of a Maximum Common Offering (1.43%), and
$499,000 in a Maximum Combined Offering (1.00%).

(12) In a Minimum Common Offering of $15,000,000, or in a Minimum Combined
Offering of $17,006,400, approximately $11,700,000 will be used to
fund the acquisition of four Properties which have a total purchase
price of $14,200,000 utilizing mortgage financing of approximately
$2,500,000. See table in "Prospectus Summary -- Description of
Properties" above for information about the order in which such
Properties will be acquired. In a Maximum Common Offering of
$35,000,000, approximately $30,050,000 will be used to fund the
acquisition of the first four Properties, supplemented by next closing
the two commercial and retail Properties (Hewlett-Packard Building and
Westwood Self-Storage/Sportmart Building) for a combined purchase
price of $43,100,000 utilizing an aggregate of approximately
$8,500,000 of mortgage debt and partnership units valued at
approximately $3,890,000. The table below sets forth the combined
proceeds of this Offering required to accomplish each of these
purchases according to their proposed terms of acquisition.

<TABLE>
<CAPTION>
Combined Offering
Proceeds Required to
Property Purchase Price Close Purchase
-------- -------------- --------------
<S> <C> <C>
Sandpainter Apartments $ 1,800,000
Northwest Garden Apartments 6,950,000
Orangewood Place Apartments 2,200,000
Arrow Village Apartments 3,250,000 $15,000,000
Westwood/Sportmart Building 12,900,000 18,000,000
Hewlett-Packard Building 16,000,000 26,000,000
</TABLE>

DISTRIBUTION POLICY

The Company intends to make regular quarterly Distributions to holders
of Common Stock commencing with the first full calendar quarter after the
Initial Closing. While distributions are made in the discretion of the Board of
Directors, to qualify for taxation as a REIT, the Company is generally required
to make distributions to its shareholders in an amount at least equal to (a) the
sum of (i) 95% of the Company's REIT Taxable Income and (ii) 95% of the net
income, if any, from foreclosure property in excess of the special tax on income
from foreclosure property minus (b) the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its
federal income tax return for such year and if paid on or before the first
regular distribution after such declaration. See "Federal Income Tax
Considerations -- Annual Distribution Requirements." The Company's ability to
make distributions will be substantially dependent on the receipt of
distributions from the Operating Partnership. The Company intends to cause the
Operating Partnership to distribute to its partners the Operating Partnership's
available cash which available cash will be determined in the discretion of the
Company as general partner of the Operating Partnership. Initially, the
Operating Partnership's principal source of revenue will be payments of rents
from the tenants of the Properties. Each OP Unit outstanding is entitled to
receive the same cash Distribution as is made to each outstanding share of
Common Stock. Holders of OP Units will be entitled to participate in
distributions pro rata with holders of the Common Stock.

26
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company
reflecting the pro forma combined capitalization of the Company and reflecting
the acquisitions of Properties as of December 31, 1995 after giving effect to
the completion of a Minimum Common Offering.

December 31, 1995
---------------------------
Pro Forma
Minimum
Historical Common
---------- -----------
<S> <C> <C>

DEBT:
Mortgage notes payable................ $ - $ 2,500,000
-------- -----------
MINORITY INTEREST....................... - -
-----------

STOCKHOLDERS' EQUITY:
Common Stock(1)....................... 2,747 24,176
8% Convertible Preferred Stock(2)..... - -
1995 Convertible Preferred Stock(2)... 10,210 10,210
Additional paid-in capital............ 420,155 13,373,732
Accumulated earnings (deficit)........ (64,795) (64,795)
-------- -----------
Total stockholders' equity..... 368,317 13,343,323
-------- -----------
Total capitalization.................... $368,317 $15,843,323(3)
======== ===========
</TABLE>
- ----------------
(1) Reflects sale of Units and Shares offered hereby. Assumes none of the
Unit price was allocated to the Series "A" Warrants.
(2) At the Final Closing of this Offering, the Company expects to have two
series of preferred stock outstanding: 8% Convertible Preferred Stock
and 1995 Convertible Preferred Stock. The 8% Convertible Preferred
Stock is being offered to institutional and other accredited investors
concurrently with this Offering. Up to 1,136,364 shares of 8%
Convertible Preferred Stock are being offered at $13.20 per share
($15,000,004 in the aggregate). The shares of 1995 Convertible
Preferred Stock are held primarily by members of management. See
"Principal Shareholders" and "Description of Securities -- 1995
Convertible Preferred Stock."
(3) Assumes that no Series "A" Warrants, Series "D" Warrants or Series "E"
Warrants are exercised, nor the 10% Convertible Notes are converted
(See "Description of Securities -- 10% Convertible Notes due October
1, 1996," "-- 10% Convertible Notes due October 1, 1996, Series B,
"-- Series "A" Warrants, "-- Series "D" Warrants" and "-- Series
"E" Warrants").

DILUTION

As of December 31, 1995 on a pro forma combined basis the net tangible
deficiency of the Company was $(478,257) or $(1.74) per share of Common Stock.
After giving effect to the completion of a Minimum Common Offering, a Maximum
Common Offering and receipt and application of the net proceeds therefrom (after
deducting underwriting commissions and discounts and estimated offering
expenses), the adjusted pro forma tangible assets of the Company as of December
31, 1995 would have exceeded its total pro forma liabilities by $13,273,369
($5.49 per Share) for a Minimum Common Offering and $31,553,363 ($5.98 per
Share) for a Maximum Common Offering representing an immediate increase in net
tangible book value of $7.23 per Share for a Minimum Common Offering and $7.72
per Share for a Maximum Common Offering to existing shareholders and an
immediate dilution of $1.51 per Share for a Minimum Common Offering and $1.02
per Share for a Maximum Common Offering to new investors purchasing shares in
the Offering. Pro forma net tangible book value per share

27
<PAGE>

represents the amount of the Company's total pro forma tangible assets less its
total pro forma liabilities, divided by the total number of shares of Common
Stock outstanding. The following table illustrates this per share dilution that
would have occurred if the offering had been consummated as of December 31,
1995:

Minimum Maximum
Common Common
Offering Offering
--------- ---------
<S> <C> <C>

Initial public offering price per Share....................................... $ 7.00(1) $7.00(1)
------- -------
Pro forma net tangible book value per Share before the Offering............... (1.74) (1.74)
Increase in net tangible book value per Share attributable to price paid by
new investors in the Offering................................................ 7.23 7.72
------- -------
Pro forma net tangible book value per Share after Offering(1)................. 5.49 5.98
------- -------

Dilution in net tangible book value per Share to new investors
in the Offering(2)........................................................... $ 1.51 $ 1.02
======= =======
</TABLE>
- ----------------
(1) Assumes no value assigned to the Series "A" Warrants which are part of
the Units. If all Series "A" Warrants were exercised, new investors
would experience dilution in net tangible book value per share of
$1.05 for a Minimum Common Offering and $0.75 for a Maximum Common
Offering.

The following tables set forth as of December 31, 1995, with respect
to the existing Shareholders and the new investors, a comparison of the number
and percentage of Shares purchased and cash or other consideration paid and the
average price per share. The calculations are based on the public offering price
of $7.00 per Share, before deduction of underwriting discounts and commissions
and estimated offering expenses payable by the Company and do not reflect the
sale of Common Stock in the event the Sales Agent's overallotment option is
exercised. Further, it assumes no separate value is assigned to the Series "A"
Warrants which are part of the Units.

Minimum Common Offering
-----------------------
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price per Share
-------------------- ----------------------- -----------------------

Number Percent Number Percent
--------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Existing Shareholders 274,714 11% $ 464,795 3% $1.69
Shares outstanding(1)
New Investors 2,142,858 89% 15,000,006 97% 7.00
--------- --- ----------- --- -----
Total 2,417,572 100% $15,464,801 100% $6.40
========= === =========== === =====
</TABLE>

Maximum Common Offering
-----------------------
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price per Share
-------------------- ----------------------- -----------------------
Number Percent Number Percent
--------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>

Existing Shareholders 274,714 5% $ 464,795 1% $1.69
Shares outstanding(1)
New Investors 5,000,000 95% 35,000,000 99% 7.00
--------- --- ----------- --- -----
Total 5,274,714 100% $35,464,795 100% $6.72
========= === =========== === =====
</TABLE>
- ----------------
(1) Includes shares outstanding as of December 31, 1995.

28
<PAGE>

The foregoing table does not give effect to the possible exercise of
warrants outstanding at December 31, 1995 to purchase an aggregate of 535,633
shares of Common Stock at a weighted average exercise price of $3.64 per share
nor does the table give effect to the possible exercise of convertible notes
payable as of December 31, 1995 into 57,507 shares of Common Stock at an
exercise price of $4.50. If all such warrants were exercised in full and notes
converted in full, the percentage of the total consideration paid by existing
shareholders and new investors would be 15% and 85% in a Minimum Common
Offering, and seven percent and 93% in a Maximum Common Offering, respectively,
and the average price per Share paid by existing shareholders and new investors
would be $2.74 and $7.00 in a Minimum Common Offering and $2.74 and $7.00 in a
Maximum Common Offering, respectively.

SELECTED FINANCIAL INFORMATION

The following table sets forth selected financial information on a pro
forma basis for the Company for the year ended December 31, 1995 and on an
historical basis for the Prior Ownership Group ("POG"), and for each of the
years in the three year period ended December 31, 1995. The combined historical
operating data of POG for the years ended December 31, 1993, 1994 and 1995 have
been derived from the historical combined financial statements audited by BDO
Seidman, LLP, independent accountants, whose report with respect thereto is
included elsewhere in this Prospectus.

Management considers funds from operations to be an appropriate
measure of the performance of an equity REIT. Funds from operations should not
be considered as an alternative to net income as an indication of the Company's
performance or to cash flow as a measure of liquidity.

The pro forma financial information is presented as if (i) the Company
had owned the Properties at the beginning of the pro forma periods; (ii) the
Company qualified as a REIT, distributed all of its taxable income and,
therefore incurred no tax expense during the year, (iii) 5,000,000 (2,142,858 in
a Minimum Common Offering) shares of Common Stock were sold in the Offerings at
the initial public offering price of $7.00 per share; (iv) 1,136,364 shares of
8% Convertible Preferred were sold in the Maximum Combined Offering at the
offering price of $13.20 per share; and (v) the net proceeds of the Minimum
Common Offering and the Maximum Common Offering and the Maximum Combined
Offering were applied as described in the "Estimated Use of Proceeds" as of the
beginning of the periods presented for the operating data and as of December 31,
1995 for the balance sheet data.

The following selected financial information should be read in
conjunction with the discussion set forth in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and all of the
financial statements included elsewhere in this Prospectus. The pro forma
financial information is not necessarily indicative of what the actual financial
position and results of operations of the Company would have been as of and for
the periods indicated, nor does it purport to represent the future financial
position and results of operations for future periods.

29
<PAGE>

Year Ended December 31,
-----------------------------------------------------------------------------
Company POG
Pro Forma Historical(1)
--------- ------------------------------
1995 1995 1994 1993
--------- -------- -------- --------
(In thousands except per share)
Minimum Minimum Maximum Maximum
Common Combined Common Combined
Offering Offering Offering Offering
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental Revenues........................... $ 2,478 $ 2,478 $ 6,164 $ 6,164 $ 3,686 $ 3,633 $ 3,547

Income (loss) from
continuing operations.................... 79 273 1,180 1,731 (43) (176) (74)
Net income (loss)......................... 79 273 1,124 1,676 (43) (176) (74)
Dividends on preferred shares............. - 161 - 1,200 - - -
Net income (loss attributable to
common shares)........................... 79 112 1,124 476 (43) (176) (74)
Net income (loss) per
common share(2).......................... 0.02 0.03 0.17 0.07 - -
Average number of shares outstanding...... 3,753 3,753 6,609 6,609 - - -
Ratio of earnings to fixed charges and
preferred dividends(4)................... 1.41 1.70 3.04 1.40 - - -

BALANCE SHEET DATA:
Real estate after
accumulated depreciation................. 14,320 14,320 41,783 41,783 23,456 24,458 25,462
Total assets.............................. 16,341 15,711 42,967 48,305 23,985 24,912 26,081
Total debt................................ 2,500 - 8,462 - 19,514 19,906 20,242
Stockholders'/partners equity............. 13,343 15,213 31,623 45,423 4,043 4,701 5,489

OTHER DATA:
Pro forma Funds from Operations(3):
Income (loss) before minority
interest................................. 79 273 1,180 1,731 (43) (176) (74)
Depreciation.............................. 534 534 1,565 1,565 1,068 1,068 947
Minority interest share................... - - -(55) (55) - - -
----- ----- ----- ------ ----- ----- -----
Pro forma Funds from Operations........... 613 807 2,690 3,241 1,025 892 873
Cash flows from operating activities...... 862 1,055 3,117 3,668 1,148 900 705
Cash flows from investing activities(5)... (12,224) (12,224) (23,346) (23,346)
Cash flows from financing activities(6)... 12,529 12,770 23,700 27,979 (1,007) (948) 947
At end of period:
Commercial Properties.................... - - 2 2 2 2 2
Apartment Properties..................... 4 4 4 4 - - -
</TABLE>
- ----------------
(1) Reflects the Company's income (loss) before minority interest of the
Prior Ownership Group's predecessors.

(2) Assumes 3,752,822 (Minimum Offerings) and 6,609,964 (Maximum
Offerings) weighted average number of shares of Common Stock
outstanding including the dilutive effect of 463,133 Series "D"
Warrants and 72,500 Series "E" Warrants plus the dilutive effects of
the 1995 Preferred Convertible shares and the `10% Convertible Notes.
Net income (loss) per common share also assumes that annual preferred
dividends of $161,000 (Minimum Combined Offering) and $1,200,000
(Maximum Combined Offering) will be paid.
(3) "Funds from Operations" as defined by the National Association of Real
Estate Investment Trusts ("NAREIT") equals net income or (loss)
excluding gains or (losses) from debt restructuring and sales of
property, plus depreciation and amortization and after adjustments for
unconsolidated partnerships and

30
<PAGE>

joint ventures. Management considers Funds from Operations to be an
appropriate measure of the performance of an equity REIT. However,
other REITs may not utilize the NAREIT definition in the presentation
of information entitled "Funds from Operations." Funds from Operations
should not be considered as an alternative to net income (determined
in accordance with generally accepted accounting principles) as an
indication of the Company's financial performance or to cash flows
from operating activities (determined in accordance with generally
accepted accounting principles) as a measure of liquidity.
(4) For purposes of computing the ratio of earnings to combined fixed
charges and preferred dividends, "earnings" consist of earnings before
income taxes, extraordinary items and fixed charges. "Fixed charges
and preferred dividends" consist of interest on all indebtedness and
preferred dividends. Earnings on the POG properties were insufficient
to cover fixed charges and preferred dividends by $43,000, $176,000
and $74,000 for the years ended December 31, 1995, 1994 and 1993.

(5) Represents historical improvements and additions to properties which
are assumed to equal estimated improvements and acquisitions of the
Properties in the amounts of $11,820,000 (Minimum Offerings) and
$22,938,139 (Maximum Offerings).

(6) Includes (i) net proceeds from the Offerings of $12,975,006 (Minimum
Common Offering), $14,845,006 (Minimum Combined Offering), $31,255,000
(Maximum Common Offering) and $45,055,004 (Maximum Combined Offering),
(ii) repayment of mortgage notes from proceeds of the Offerings of
$2,500,000 (Minimum Combined Offering), $8,000,000 (Maximum Common
Offering) and $16,461,861 (Maximum Combined Offering) and (iii)
dividends on preferred stock of $160,512 (Minimum Combined Offering)
and $1,200,000 (Maximum Combined Offering).

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

The following discussion should be read in conjunction with the
"Selected Financial Information" as well as the financial statements listed in
the index on page F-1. The minimum offerings include the following Properties,
referred to as the Proposed Acquisitions: The Arrow Village Apartments, Azusa,
California, the Northwest Garden Apartments, Peoria, Arizona, the Orangewood
Place Apartments, Phoenix, Arizona, and the Sandpainter Apartments, Phoenix,
Arizona. The Maximum Common Offering and the Maximum Combined Offering include
the Proposed Acquisitions, as well as the following properties referred to as
the Prior Ownership Group ("POG"): the Hewlett-Packard Building, Van Nuys,
California, and the Westwood Self-Storage/Sportmart Building, Los Angeles,
California.

RESULTS OF OPERATIONS - PROPOSED ACQUISITIONS

For the year ended December 31, 1995, revenues in excess of expenses
were $1,178,899 compared to $854,190 for the prior year. The change results from
the following factors: an increase in rental revenues of $587,396 offset by
increases in operating expenses of $233,252 and management fees of $29,435.

Rental revenues increased in 1995 by $587,396 (33%) primarily
attributable to an increase in rental revenues of $416,818 from the Arrow
Village Apartments due to the completion of the renovation of the property in
May 1995. In addition, rental revenues increased by $129,338 from Northwest
Garden Apartments and by $41,240 from the other two properties. These increases
are due primarily to increases in average rents.

Property operating expenses increased by $233,252 (27%). The increase
was primarily attributable to an increase of $244,050 incurred by Arrow Village
Apartments after the renovation. The remaining three properties' operating
expenses were relatively the same in both periods.

31
<PAGE>

Management fees increased by $29,435 (40%), principally due to the
increases in rental revenues described above. Property management fees are a
function of the revenue generated by the property.

RESULTS OF OPERATIONS -- PRIOR OWNERSHIP GROUP

Comparison of Year Ended December 31, 1995 to 1994
For the year ended December 31, 1995, the net loss amounted to $43,417
compared to a net loss of $176,303 for the year ended December 31, 1994. The
change results primarily from the following factors: an increase in rental
revenues of $52,694, a decrease in property operating expenses of $133,700, and
an increase in interest expense of $53,508.

Rental revenues increased in 1995 by $52,694 or one percent. The
increase was primarily attributable to the effect of minor increases during 1995
in the rents allowable under lease agreements currently in effect for several
tenants of the Hewlett-Packard Building.

Property operating expenses (including management fees and
depreciation and amortization) decreased $133,700 or twelve percent in 1995 as
compared to 1994. The decrease was primarily a result of a reduction of repair
expenses associated with the 1994 Los Angeles earthquake of $82,040, a decrease
in property taxes of $36,968 caused by a reassessment of the Westwood Self-
Storage/Sportmart Building, and decreases in other operating expenses
aggregating $14,784 consisting primarily of workers compensation insurance,
cleaning contract, security services and payroll taxes.

Interest expense increased by $53,508 or three percent in 1995 as a
result of the increase in interest rates for the variable rate debt which was
partially offset by lower average outstanding debt during the period compared to
the prior year.

Comparison of Year Ended December 31, 1994 to 1993
For the year ended December 31, 1994 the net loss amounted to $176,303
compared to a net loss of $74,328 for the year ended December 31, 1993. The
change results primarily from the following factors: an increase in rental
revenues of $86,193, an increase in property operating expenses of $145,469 and
an increase in interest expense of $42,699.

Rental revenues increased in 1994 by $86,193 or two percent. The
increase was primarily attributable to the effect of a 4% increase in average
occupancy of the Hewlett-Packard Building during the period as compared to the
same period of the prior year.

Property operating expenses increased $145,469 or seven percent in
1994 as compared to 1993. The property operating expense increase is primarily
due to a $31,250 decrease in management fees, caused by the two commercial
buildings changing management companies during 1994, and a $25,991 decrease in
other property operating expenses, primarily maintenance expenses which has been
offset by $82,040 in repair expenses made during 1994 necessitated by the Los
Angeles earthquake. Depreciation and amortization expense increased by $120,670
primarily due to the amortization of tenant improvements and leasing commissions
associated with the increased occupancy in the Hewlett-Packard Building.

Interest expense increased by $42,699 or two percent as a result of
the increase in interest rates for variable rate debt which was partially offset
by lower average outstanding debt during the period compared to the prior year.

LIQUIDITY AND CAPITAL RESOURCES

MINIMUM OFFERINGS. If the Minimum Common Offering is completed, the
Company expects to acquire the Proposed Acquisition properties for an
approximate purchase price of $14.3 million, which will include mortgage debt of
approximately $2.5 million, and have cash and cash equivalents remaining of
approximately

32
<PAGE>

$2,000,000. In the case of a Minimum Common Offering, the Company expects to
acquire the Proposed Acquisition Properties without any mortgage debt and have
cash and cash equivalents of approximately $1,321,000. Mortgage debt, upon
completion of the Minimum Common Offering and related transactions, will consist
of:

. $2.5 million mortgage bearing interest at a fixed rate of 7.875% per
annum. The loan from the Federal National Mortgage Association
("FannyMae") was closed in April 1996 and has monthly installments
based on a 25-year amortization of $18,706 through April 2003, at
which time all outstanding principal and interest would be due. The
mortgage is secured by the Arrow Village Apartments.

Historical cash flows from operations on the Proposed Acquisition
properties increased from $394,573 for the year ended December 31, 1994 to
$543,183 for the year ended December 31, 1995. The increase is principally due
to increases in average rents.

Historical cash flows used in investing activities were $246,140 for
the year ended December 31, 1994 and $301,642 for the year ended December 31,
1995. These outflows are principally due to the renovation of Arrow Village
Apartments which occurred during the period from September 1994 through May
1995.

Historical cash flows used in financing activities decreased from
$355,341 for the year ended December 31, 1994 to $277,664 for the year ended
December 31, 1995. The principal differences between the two years are an
increase in distributions of $209,803 during 1995, mortgage proceeds on Arrow
Village Apartments of $200,000 during 1995.

MAXIMUM OFFERINGS. Upon the completion of the Maximum Common Offering
and related transactions and use of proceeds, the Company expects to have
acquired the Proposed Acquisition properties and the POG properties for an
approximate purchase price of $43.1 million which will include mortgage debt of
approximately $8.5 million, and have cash and cash equivalents remaining of
approximately $273,900. Mortgage debt, upon the completion of the Maximum Common
Offering and related transactions, will consist of:

. $5.96 million mortgage bearing interest at 2.5% above the Federal Home
Loan Bank's 11th District Cost of Funds (7.73% at December 31, 1995).
Principal and interest is payable monthly in installments necessary to
fully amortize the then outstanding principal balance at the current
interest rate by February 28, 2022. The mortgage, currently held by
Topa Savings Bank, Los Angeles, California, is secured by the Westwood
Self-Storage/Sportmart Building.

If the Maximum Combined Offering is completed, the Company expects to
acquire real estate properties for an approximate purchase price of $43.1
million. The mortgage debt, if any, will be adjusted by management as considered
advantageous to the Company. As a result, there may be no indebtedness or as
much as 50% indebtedness as shown in "Estimated Use of Proceeds."

Cash flows from operations on the POG properties increased each year
between 1993 and 1995, starting at $705,273 during 1993, and increasing to
$900,264 during 1994 and $1,147,669 during 1995. This increase in cash flows
from operations is due to the increase in revenues from the Hewlett-Packard
Building due to it becoming fully occupied during 1993, the increase in other
assets during 1993 due to the payment of lease commissions in association with
the lease-up of the Hewlett-Packard Building and the continued reduction of
property operating expenses, except for earthquake repair related expenses of
$82,040 during 1994, secured by the owner of the POG properties.

33
<PAGE>

Cash used in investing activities was $1,559,647 for the year ended
December 31, 1993, but there was essentially no activity for the years ended
December 31, 1994 and 1995. The large investing outflows in 1993 were for tenant
improvements incurred during the lease-up of the Hewlett-Packard Building during
1993.

Cash flows from financing activities of the POG properties were
inflows during 1993 of $946,840, while during 1994 and 1995 total outflows were
$947,621 and $1,006,576. Cash flows from financing activities during 1993 were
due to increases in the mortgage balance of the Hewlett-Packard Building of
approximately $1,197,000 to finance tenant improvements and lease commissions
paid, as described above, which was partially offset by distributions to the
owner and the reduction of the mortgage of the Westwood Self-Storage/Sportmart
Building. Net cash used in financing activities of $947,621 and $1,006,576
during 1994 and 1995 consisted of reductions of the mortgages on both of the POG
properties totaling $336,378 and $391,934 during 1994 and 1995 and distributions
to the owner of the Westwood Self-Storage/Sportmart Building of $611,243 and
$614,642 during 1994 and 1995.

The Company anticipates that distributions will be paid from net cash
available for distribution, which is expected to exceed net income. The Company
intends to pay distributions quarterly. The Company is required to distribute at
least 95% of its REIT Taxable Income annually. A portion of the distributions
will represent a return of capital. See "Federal Income Tax Considerations --
Requirements for Qualification -- Annual Distribution Requirements." Amounts
accumulated for distribution will be invested by the Company primarily in short-
term investments.

Based on the current condition of the Properties proposed to be
acquired by the Company, no material capital commitments, such as renovations or
planned improvements, have been identified by the Company.

The Company expects to meet its short-term liquidity requirements
generally through its initial working capital and net cash provided by
operations. The Company believes that the above short-term liquidity sources
will be adequate to satisfy the cash requirements of the Company for the 12
months following the completion of the Offering.

The Company expects to meet certain long-term liquidity requirements,
such as scheduled debt maturities, primarily through net cash flow and the
refinancing of certain long-term debt.

INFLATION

In the last three years, inflation has not had a significant impact on
the Properties because of the relatively low inflation rate. Generally, the
residential properties have been able to pass on increases in costs and
operating expenses resulting from inflation to their residents, who generally
lease apartment units for initial periods of one year or less, generally with
increases upon renewal.

Substantially all of the commercial tenants' leases contain provisions
designed to protect the property from the effects of inflation. Such provisions
include clauses enabling the property to receive percentage rentals based on
tenants' gross sales, which generally increase as prices rise, and/or escalation
clauses, which generally increase rental rates during the terms of the leases.
Such escalation clauses are often related to increases in the consumer price
index. In addition, many of the leases are for terms less than ten years which
may enable the property to replace existing leases with new leases at higher
base and/or percentage rentals if rents of the existing leases are below the
then existing market rate. Most of the commercial leases also require the
tenants to pay either their pro rata share of operating expenses or their pro
rata share of the excess operating expenses over predetermined fixed cost levels
or base year costs. Such operating costs include common area maintenance, real
estate taxes and insurance, thereby reducing the property's exposure to
increases in costs and operating expenses resulting from inflation.

34
<PAGE>

CONFLICTS OF INTEREST

Arthur P. Herring, Chief Executive Officer of the Company and Chairman
of the Board of Directors of the Company, has been engaged in the acquisition,
financing and management of real estate properties for the last 24 years through
various corporate and private entities. The only real estate project in which
Mr. Herring is currently involved is a mobile home park in Pacifica, California,
of which he is a general partner. To the extent Mr. Herring is required to
devote time to such project, a conflict of interest may arise as to the time
necessary to manage the affairs of the Company.

In the future, neither Mr. Herring nor any of the principal officers
of the Company may acquire an interest in properties or develop or manage
properties which meet the investment parameters of the Company without the
consent of the Board of Directors of the Company. Any consent of the Board of
Directors required in order to permit such transactions would require the
approval of the Board of Directors excluding those directors proposed to be
engaged in such transactions, but including a majority of the Independent
Directors.

The vote of a majority of the Independent Directors, as well as the
vote of a majority of the Board of Directors, will be required for the approval
of all actions taken by the Board (regardless of whether such actions involve
conflict); members of the Board having conflicting interests will be required to
dispose of such interests or refrain from participating in any decisions
regarding such interests.

The Company intends to closely control its costs by contracting for
certain services where feasible and desirable. At the time of the acquisition of
the Initial Properties, all of such Properties will continue to be managed by
the professionals which were managing the Properties prior to acquisition.
However, in the future, where the Company determines it is desirable to contract
for other outside property management services or make changes therein, it will
consider retaining T.K.L. Partnership, a property management Company, so long as
their services are competitive in cost and quality with services available from
wholly unrelated entities. Kelly Loegering and Thomas J. Loegering, Jr. are
beneficiaries of Regent IV Trust which is one of the principal shareholders of
the Company (see "Principal Shareholders"), and co-owners of T.K.L. Partnership.

MANAGEMENT

The Company will operate under the direction of the Board, the members
of which are accountable to the Company and its shareholders as fiduciaries. The
Board will be responsible for the management and control of the affairs of the
Company; however, the executive officers of the Company will manage the
Company's day-to-day affairs and the acquisition and disposition of investments,
subject to the Board's supervision. The Company currently has five directors; it
must have at least three and may have no more than nine directors. As a matter
of policy, the Company will maintain a majority of the Board who are Independent
Directors; that is, persons who are not employed by or otherwise affiliated with
the Company prior to becoming directors. A majority of such Independent
Directors must approve all decisions of the Board of Directors. The Board is
divided into three classes serving staggered three year terms. See "Certain
Provisions of Maryland Law and the Company's Charter and By-Laws --
Classification of the Board of Directors."

Any director may resign at any time and may be removed with or without
cause by the shareholders upon the affirmative vote of two-thirds of all the
votes entitled to be cast for the election of directors at a special meeting
called for the purpose of such proposed removal. The notice of such meeting
shall indicate that the purpose, or one of the purposes, of such meeting is to
determine if a director shall be removed. A vacancy created by death,
resignation or removal of a director may be filled by a vote of a majority of
the remaining directors. Each director will be bound by the Company's Charter
and By-Laws.

35
<PAGE>

The directors are not required to devote all of their time to the
Company and are only required to devote such of their time to the affairs of the
Company as their duties require. The directors will meet quarterly or more
frequently if necessary. It is not expected that the directors will be required
to devote a substantial portion of their time to discharge their duties as
directors. Consequently, in the exercise of their fiduciary responsibilities,
the directors will be relying heavily on the executive officers of the Company.
The Board is empowered to fix the compensation of all officers that it selects
and may pay directors such compensation for special services performed by them
as it deems reasonable. Initially, the Company does not intend to pay to
Independent Directors any fee; however, such fee may be instituted in the
future. The Company will not pay any director compensation to the officers of
the Company who also serve as directors.

The general investment and borrowing policies of the Company are set
forth in this Prospectus. The directors shall establish further written policies
on investments and borrowings and shall monitor the administrative procedures,
investment operations and performance of the Company to assure that such
policies are in the best interest of the shareholders and are fulfilled. Until
modified by the directors, the Company shall follow the policies on investments
and borrowings set forth in this Prospectus.

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the company are as follows:

Name Age Position Term Expires
---- --- -------- ------------
<S> <C> <C> <C>
Arthur P. Herring 53 Chairman of the Board, Chief Executive 1996
Officer and Chief Financial Officer

Dois Brock 46 Director, President, Controller and Secretary 1997

Gerald S. Weisstein 56 Director 1998

Charles B. Allen 55 Director 1998

Mark Ross 41 Director 1997

Jacob Segal 48 Vice President - Portfolio Administration
</TABLE>

The following is a biographical summary of the experience of the
directors and executive officers of the Company.

ARTHUR P. HERRING - 53, Chairman of the Board, Chief Executive Officer
and Chief Financial Officer of the Company. Mr. Herring joined the Company at
its inception in 1994. Since 1985, Mr. Herring has been the Managing General
Partner of The L&H Group of Companies, a real estate operating and investment
company. From 1983 to 1984, Mr. Herring was a founding officer, executive vice
president, chief lending officer and a member of the board of directors of
Olympic National Bank, Los Angeles, California. From 1976 to 1983, Mr. Herring
was a senior vice president and senior loan and credit officer for Republic
Bank, Torrance, California. He was vice president, commercial lending, of Union
Bank, Los Angeles, California, from 1969 to 1976. Mr. Herring received his
bachelor's degree from Boston College and a master's degree in Business
Administration from the University of Southern California.

DOIS BROCK - 46, President, Controller and Secretary of the Company.
Mr. Brock joined the Company at its inception in 1994. From March 1989 to the
present, Mr. Brock has been self-employed as a financial consultant doing
business as Realtech, Seattle, Washington. Prior to that, Mr. Brock was senior
vice president of Bel-Air Savings and Loan Association, Los Angeles, California,
from 1985 to 1989. From 1983 to 1985, Mr. Brock was president of Olympic
National Mortgage Corporation, a subsidiary of Olympic National Bancorp, Los
Angeles, California. From 1981 to 1983, Mr. Brock was the sole proprietor of
Pacific Bank Services, a consulting firm in Costa Mesa, California. From 1978 to
1981, Mr. Brock was vice president and a principal of Western Associated Lending
Services, Santa Ana, California. Mr. Brock is a licensed real estate salesperson
in the States of California

36
<PAGE>

and Washington and a licensed general contractor. He also has been a member of
the Federal Home Loan Mortgage Corporation Advisory Board. He has lectured
extensively in the area of zoning and land use. Mr. Brock received a B.S. degree
in Business from California State University at Long Beach in 1974.

GERALD S. WEISSTEIN - 56. Mr. Weisstein became a director of the
Company in 1994. Since 1993, Mr. Weisstein has been a principal of Center
Financial Advisors. In 1990 Mr. Weisstein founded W. S. Weisstein & Associates,
a firm in Los Angeles engaged in investment banking and financial and real
estate consulting activities. Prior to that, from 1985 to 1990, Mr. Weisstein
was President, Chief Executive Officer and a director of the Bank of Los Angeles
and its parent holding corporation, BKLA BANCORP. From 1982 to 1985, Mr.
Weisstein was President, Chief Executive Officer and a director of Olympic
National Bank, Los Angeles, California. Prior to that for more than ten years
Mr. Weisstein served in various Vice Presidential capacities with several banks,
including Imperial Bank, Union Bank and Security Pacific National Bank in Los
Angeles, California. Mr. Weisstein has been a member of the board of directors
of the Los Angeles Business Council since 1976 and was the chairman in 1985. Mr.
Weisstein is active in numerous charitable and philanthropic activities and has
received several honors, including Man of the Year for the San Fernando Valley
Boys and Girls Club and the Spirit of Life Award from the City of Hope. Mr.
Weisstein has been a member of the United Jewish Welfare Fund, a director of the
Institute of Cancer and Blood Research, a director of St. Vincent Foundation of
St. Vincent's Hospital of Los Angeles and a member of the Chancellors Associates
of the University of California at Los Angeles. Mr. Weisstein received a B.S.
degree from the University of California, Los Angeles in 1962, attended graduate
school at Dartmouth College and received a law degree from Southwestern School
of Law in 1970. Mr. Weisstein has lectured extensively in the area of banking
regulation and financing.

CHARLES B. ALLEN - 55. Mr. Allen became a director of the Company in
1995. Mr. Allen is the President of Monterey Consulting Associates, Inc.,
Watsonville, California, which he founded in 1993. This company is engaged in
the development of the Science, Technology, Education and Policy Center at Fort
Ord, California. The company works as Governmental Relations, Economic and
Business Development liaison with the California State Legislature and county
and local government agencies for the University of California, Santa Cruz.
Since 1982, Mr. Allen has also been the President of both Heritage Development
Corporation and Landmark Estate Company, Inc., Watsonville, California. As
president of both companies, he has served several state and local government
agencies by negotiating and coordinating major agency land acquisition projects.
He also directed the land development activities for five major private land
development projects within the Monterey Bay region of California and provided
general real estate brokerage and property management for clients within
Monterey and Santa Cruz Counties. Mr. Allen has been heavily involved in
community and charitable activities in the Monterey Bay area. Mr. Allen received
his bachelor's degree from California State Polytechnic University, San Luis
Obispo, California, and an associate of arts from Hartnell College, Salinas,
California.

MARK ROSS - 41. Mr. Ross became a director of the Company in 1995.
Since 1989, Mr. Ross has been President of Auerbach Financial Equities, Inc. and
Auerbach Financial, Inc. Prior to that, starting in 1987, he was Director of
Business Development and later Vice President of Marketing and Acquisition of
Auerbach Leasing and Management Company. His current responsibilities include
supervision of all acquisitions, financing requirements, dispositions, and asset
management for the Auerbach real estate portfolio. He oversees real estate
mortgage brokerage, equity placement, and third party buyer and seller
representation. Prior to joining Auerbach, in 1981, Mr. Ross founded and was
President of R&R Organization, Inc., a property management service concern
specializing in apartments located in the Los Angeles basin. Mr. Ross is a
member of the National Association of Realtors and The International Council of
Shopping Centers. His community activities include service on the Boards of
Directors of Jewish Family Services of Santa Monica and the University of
Judaism in Los Angeles. Mr. Ross graduated in 1976 from Loyola University of Los
Angeles with a Bachelor of Arts degree in Economics, as well as Communication
Arts.

JACOB SEGAL - 48, Vice President - Portfolio Administration. Mr. Segal
joined the Company in 1994. From 1990 to the present Mr. Segal, who is a real
estate broker, has been independently employed as a real estate and real estate
finance consultant in both advisory, instructional and brokerage capacities. For
the period 1988 to 1989 he was Senior Vice President, Acquisition of JDS Capital
Corporation, a company formed to acquire and

37
<PAGE>

operate income properties. From January 1987 to October 1987, Mr. Segal was Vice
President, Acquisition of William Walters Co., advisor for REIT of California,
an equity real estate investment trust. From 1985 to 1986, he was Senior Vice
President, Director of Acquisitions for Oak Capital Corporation, a syndicator of
apartment properties. From 1983 to 1985, Mr. Segal was Vice President of Gehr
Corporation, a real estate investment affiliate of Gehr Industries, Inc., a wire
and cable manufacturer and distributor. From 1979 to 1982, he was Acquisition
Manager for Calmark Properties, a syndicator and developer of income properties.
Mr. Segal's responsibilities in his prior positions were to identify and
research real estate markets and properties, analyze, negotiate for and acquire
income producing properties. Mr. Segal has an MBA from the UCLA Graduate School
of Management and is a member of the American Management Association and Town
Hall of California.

COMMITTEES OF THE BOARD OF DIRECTORS

Executive Committee. Promptly following the Initial Closing of the
Offering, the Board of Directors will establish an executive committee (the
"Executive Committee") which will be granted the authority to acquire and
dispose of real property and the power to authorize, on behalf of the full Board
of Directors, the execution of certain contracts and agreement. The Company
expects that the Executive Committee will consist of the Chairman of the Board
of Directors, the President and two Independent Directors.

Audit Committee. Promptly following the Initial Closing of the
Offering, the Board of Directors will establish an audit committee that will
consist of not less than two Independent Directors (the "Audit Committee"). The
Audit Committee will be established to make recommendations concerning the
engagement of independent auditors, review with the independent auditors the
plans and result of the audit engagement, approve professional services provided
by the independent auditors, review the independence of the independent
auditors, consider the range of audit and non-audit fees and review the adequacy
of the Company's internal accounting controls.

Compensation Committee. Promptly following the Initial Closing of the
Offering, the Board of Directors will establish a compensation committee (the
"Compensation Committee") to determine compensation, including awards under the
Company's Stock Incentive Plan, for the Company's executive officers. The
Company expects that the Compensation Committee will consist of not less than
two Independent Directors.

Nominating Committee. Promptly following the Initial Closing of the
Offering, the Board of Directors will establish a nominating committee (the
"Nominating Committee") to nominate persons to serve on the Company's Board of
Directors as vacancies arise. The Nominating Committee shall consist of three
directors, at least two of whom must be Independent Directors.

DIRECTORS AND EXECUTIVE OFFICERS COMPENSATION AND INCENTIVES

The Company will compensate designated key managers of the Company
with cash compensation and certain incentives including stock option and bonus
plans. The below table sets forth the estimated annual base salary to be paid to
the Chief Executive Officer, President and Vice President, as well as the stock
options for the officers and directors.

<TABLE>
<CAPTION>
Annual Common Stock
Name Position Salary Options(1)
---- -------- ------ -------
<S> <C> <C> <C>
Arthur P. Herring Chairman, CEO and CFO $100,000(2) 60,000
Dois Brock President, Controller and Secretary $ 72,000(2) 50,000
Gerald S. Weisstein Director -- 15,000
Charles B. Allen Director -- 15,000
Mark Ross Director -- 15,000
Jacob Segal Vice President $ 48,000 30,000
</TABLE>

38
<PAGE>

- ----------------
(1) To be issued upon Final Closing of the Offering. These options are
nonqualified stock options. They have a ten year term; vest 25% per
year commencing one year after date of grant; and are exercisable at
$7.00 per share.
(2) Employment Agreements for Messrs. Herring and Brock contain provisions
for bonus payments based on performance criteria customary in the REIT
industry, as determined by the Compensation Committee. No such bonuses
are presently planned.

LIMITATION OF LIABILITY AND INDEMNIFICATION

The Company's Charter limits the liability of the Company's directors
and officers to the Company and its shareholders for money damages to the
fullest extent permitted from time to time by Maryland law. Maryland law
presently permits the liability of directors and officers to a corporation or
its shareholders for money damages to be limited, except (i) to the extent that
it is proved that the director or officer actually received an improper benefit
or profit, or (ii) to the extent that a judgment or other final adjudication is
entered in a proceeding based on a finding that the director's or officer's
action, or failure to act, was the result of active and deliberate dishonesty
and was material to the cause of action, as adjudicated in the proceeding. This
provision does not limit the ability of the Company or its shareholders to
obtain other relief, such as an injunction or rescission.

The Company's By-Laws require the Company to indemnify its directors,
officers and certain other parties to the fullest extent permitted from time to
time by Maryland law. The Company's Charter and By-Laws also permit the Company
to indemnify its directors who have served another corporation or enterprise in
various capacities at the request of the Company. The MGCL presently permits a
corporation to indemnify its directors, officers and certain other parties
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service to or at the request of the Company,
unless it is established that: (i) the act or omission of the indemnified party
was material to the matter giving rise to the proceeding and was committed in
bad faith or was the result of active and deliberate dishonesty; (ii) the
indemnified party actually received an improper personal benefit; or (iii) in
the case of any criminal proceeding, the indemnified party had reasonable cause
to believe that the act or omission was unlawful. Indemnification may be made
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by the director or officer in connection with the proceeding;
provided, however, that if the proceeding is one by or in the right of the
Company, indemnification may not be made with respect to any proceeding in which
the director or officer has been adjudged to be liable to the Company. In
addition, a director or officer may not be indemnified with respect to any
proceeding charging improper personal benefit to the director or officer in
which the director or officer was adjudged to be liable on the basis that the
personal benefit was improperly received. The termination of any proceeding by
conviction, or upon a plea of nolo contendere or its equivalent, or an entry of
any order of probation prior to judgment, creates a rebuttable presumption that
the director or officer did not meet the requisite standard of conduct required
for indemnification to be permitted. Indemnification under the provisions of the
MGCL is not deemed exclusive to any other rights, by indemnification or
otherwise, to which an officer or director may be entitled under the Company's
Charter or By-Laws, or under resolutions of shareholders or directors, contract
or otherwise.

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

Prior to the Initial Closing of the Offering, the Company will obtain
a directors and officers liability insurance policy. The directors and officers
liability insurance insures (i) the directors and officers of the Company from
any claim arising out of an alleged wrongful act by such persons while acting as
directors and officers of the Company and (ii) the Company to the extent that it
has indemnified the directors and officers for such loss.

39
<PAGE>

STOCK INCENTIVE PLAN

The Company has established a stock incentive plan (the "Stock
Incentive Plan") to enable executive officers, key employees and directors of
the Company and the Operating Partnership to participate in the ownership of the
Company. The Stock Incentive Plan is designed to attract and retain executive
officers, other key employees and directors of the Company and the Operating
Partnership and to provide incentives to such persons to maximize the Company's
cash flow available for distribution. The Stock Incentive Plan provides for the
award to such executive officers and employees of the Company and the Operating
Partnership (subject to the Ownership Limit) of stock-based compensation
alternatives such as nonqualified stock options and incentive stock options and
provides for the grant to Independent Directors (subject to the Ownership Limit)
of nonqualified stock options on a formula basis.

The Stock Incentive Plan will be administered by the Compensation
Committee, which is authorized to select from among the eligible employees of
the Company and the Operating Partnership the individuals to whom options are to
be granted and to determine the number of shares to be subject thereto and the
terms and conditions thereof. The Compensation Committee is also authorized to
adopt, amend and rescind rules relating to the administration of the Stock
Incentive Plan. Nonqualified stock options shall be granted to Independent
Directors in accordance with the formula set forth in the Stock Incentive Plan.

The Stock Incentive Plan was approved by the Company's shareholders at
a meeting held on August 14, 1995. The following awards may be made under the
Plan:

Nonqualified stock options will provide for the right to purchase
Common Stock at a specified price which may be less than fair market value on
the date of grant (but not less than par value), and usually will become
exercisable in installments after the grant date. Nonqualified stock options may
be granted for any reasonable term.

Incentive stock options, if granted, will be designed to comply with
the provisions of the Code and will be subject to restrictions contained in the
Code, including exercise prices equal to at least 100% of fair market value of
Common Stock on the grant date and a ten year restriction on their term, but may
be subsequently modified to disqualify them from treatment as an incentive stock
option.

Promptly after the Final Closing of the Offering, the Company expects
to issue to certain officers, directors and key employees of the Company and the
Operating Partnership options to purchase, subject to the Ownership Limit, an
aggregate of 185,000 shares of Common Stock pursuant to the Stock Incentive
Plan. The term of each of such option will be ten years from the date of grant.
Commencing one year from the Final Closing, each such option vests 25% per year
over four years and is exercisable at a price per share equal to the public
offering price per Share in the Offering. The expected allocations of the
options to such persons is as presented above in the "Directors and Executive
Officers Compensation and Incentives."

500,000 shares of Common Stock, subject to adjustment, will be
reserved for issuance under the Stock Incentive Plan. There is no limit on the
number of awards that may be granted to any one individual (other than an
Independent Directors who annually receive a fixed number of options
automatically) so long as the aggregate fair market value (determined at the
time of grant) of shares with respect to which an incentive stock option is
first exercisable by an optionee during any calendar year cannot exceed
$100,000, the grant does not violate the Ownership Limit or cause the Company to
fail to qualify as a REIT for federal income tax purposes. See "Description of
Securities -- Restrictions on Ownership."

Federal Income Taxes. If the option has no readily ascertainable fair
market value, no income is recognized by a participant at the time an option is
granted. If the option is an incentive stock option ("ISO"), no income will be
recognized upon the participant's exercise of the option. Income is recognized
by a participant when he or she disposes of shares acquired under an ISO. The
exercise of a nonqualified stock option ("NQSO")

40
<PAGE>

generally is a taxable event that requires the participant to recognize, as
ordinary income, the difference between the shares' fair market value on the
exercise date and the option price.

The employer (either the Company or its affiliate) will be entitled to
claim a federal income tax deduction on account of the exercise of a NQSO. The
amount of the deduction is equal to the ordinary income recognized by the
participant. The employer will not be entitled to a federal income tax deduction
on account of the grant or the exercise of an ISO. The employer may claim a
federal income tax deduction on account of certain dispositions of Common Stock
acquired upon the exercise of an ISO.

401(K) PLAN

The Company intends to establish a qualified retirement plan, with a
salary deferral feature designed to qualify under Section 401 of the Code (the
"401(k) Plan"). The 401(k) Plan will permit the employees of the Company and the
Operating Partnership to defer a portion of their compensation in accordance
with the provisions of Section 401(k) of the Code. The 401(k) Plan will allow
participants to defer up to 15% of their eligible compensation on a pre-tax
basis subject to certain maximum amounts. Matching contributions may be made in
amounts and at times determined by the Company. Amounts contributed by the
Company and the Operating Partnership for a participant will vest over a period
of years to be determined and will be held in trust until distributed pursuant
to the terms of the 401(k) Plan.

Employees of the Company and the Operating Partnership will be
eligible to participate in the 401(k) Plan if they meet certain requirements
concerning minimum age and period of credited service. All contributions to the
401(k) Plan will be invested in accordance with participant elections among
certain investment options. Distributions from participant accounts will not be
permitted before age 59 1/2, except in the event of death, disability, certain
financial hardships or termination of employment.

EMPLOYMENT AGREEMENTS

Effective as of the Initial Closing, the Company will enter into
employment agreements with Messrs. Herring and Brock for a term of five years
subject to automatic one year extensions unless terminated. The agreements will
provide for annual compensation in the amounts set forth under "Executive
Compensation" above and will contain provisions for bonus consideration based on
performance standards consistent with those established in the REIT industry for
senior executives of REITs of a size similar to the Company. Bonus payments
under the employment agreements will be determined by the Compensation Committee
and at their discretion may be paid in cash; deferred for future payment; paid
in unregistered Common Stock of the Company; paid through additional grant of
options or some combination of the above. In addition, each agreement includes
provisions restricting the officers from competing with the Company during the
term of such employment; granting the officers certain "piggyback" registration
rights for their securities in the Company; providing for salary and benefit
continuance for six months if the officer is permanently disabled; and providing
for a severance payment in the amount of 2.99 times the officer's average salary
and bonus over the past five years (or such shorter time as the officer was
employed), payable in 36 equal monthly installments, in the event of a change of
control of the Company resulting in the officer's demotion or reduction in his
compensation or responsibilities within two years of the change of control
event. Change of control is generally defined to include a consolidation in the
hands of one Person of 30% or more of the voting securities of the Company, a
business combination after which the existing shareholders of the Company hold
less than 51% of the voting securities of the resulting entity, or a change in
membership of the Board of Directors resulting in 50% or more of the Board of
Directors not being nominated by management.

41
<PAGE>

PRINCIPAL SHAREHOLDERS

The following tables set forth information as of the date hereof as to
each person or entity who owns of record or is known by the Company to own
beneficially five percent or more of the Company's outstanding voting securities
and information as to the securities ownership of management. All stock
ownership shown below is direct unless otherwise indicated.

PRINCIPAL SHAREHOLDERS

<TABLE>
<CAPTION>
1995
Convertible
Common Preferred Percent of All
Name Stock Stock(1) Voting Shares Outstanding, Assuming
---- ------ ----- ------------------------------------
Minimum Minimum Maximum Maximum
Common Combined Common Combined
Offering Offering Offering Offering
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Arthur P. Herring(3) 33,678(3) 360,000 11.45% 10.52% 6.25% 4.59%
2221 Rosecrans Avenue
Suite 110
El Segundo, CA 90245

Elizabeth W. Herring(2) 33,678(3) 360,000 11.45% 10.52% 6.25% 4.59%
215 John Street
Manhattan Beach, CA 90266

The Danube Rousse Inc.(2) 33,678(3) 360,000 11.45% 10.52% 6.25% 4.59%
215 John Street
Manhattan Beach, CA 90266

Michelle Loegering, as Trustee(4) 33,678(3) 360,000 11.45% 10.52% 6.25% 4.59%
Regent IV Trust
19800 Hawthorne Boulevard
No. 258-306
Torrance, CA 90503
</TABLE>
- ----------------
(1) See "Description of Securities -- 1995 Convertible Preferred Stock"
for details on restrictions on conversion of this stock.

(2) Elizabeth W. Herring is the sole owner of The Danube Rousse Inc., and
by virtue of such ownership has voting and investment control of the
Company's Common Stock owned by The Danube Rousse Inc. Arthur P.
Herring is the spouse of Elizabeth W. Herring. Mr. Herring has advised
the Company that he disclaims any pecuniary beneficial interest of the
Company's stock owned by The Danube Rousse Inc.

(3) Represents approximately 12.26% of the 274,714 shares of Company
Common Stock presently outstanding.

(4) Michelle Loegering, as Trustee of Regent IV Trust, has voting and
investing control of the Company's stock owned by Regent IV Trust. Ms.
Loegering is otherwise not affiliated with the Company. The
beneficiaries of Regent IV Trust are Michelle Loegering, Kelly
Loegering and Thomas J. Loegering, Jr., none of whom are affiliated
with the Company.

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<PAGE>

DIRECTOR AND OFFICER STOCK OWNERSHIP

Percent 1995 Convertible Percent Percent Common Percent
Common of Preferred of Series "D" of Stock of
Name/Position Stock(4) Class Stock(1)(2)(4) Class Warrants(1) Class Options(3) Class
------------- -------- -------- ----------------- -------- ------------ -------- ---------- --------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles B. Allen, Director -- 15,000 8.1%
Dois Brock, President 95,000 9.3% 45,000 9.7% 50,000 27.0%
Arthur P. Herring(4) 33,678 12.3% 360,000 35.2% 107,500 23.2% 60,000 32.4%
Mark Ross, Director -- 15,000 8.1%
Jacob Segal, 25,000 2.4% 30,000 16.2%
Vice President
Gerald S. Weisstein, 30,000 3.0% 10,000 2.2% 15,000 8.1%
Director
Directors and Officers
as a group(5) 33,678 12.3% 510,000 50.0% 162,500 35.1% 185,000 100.0%

======= ======= ======= ==== ======= ==== ======= =====
</TABLE>
- ----------------
(1) See "Description of Securities" for information about these
securities. None of the warrants may be exercised presently. The
warrants set forth opposite Messrs. Brock and Herring's names are not
exercisable, by agreement, until six months after the end of the
Company's first fiscal year wherein its audited consolidated financial
statements reflect an Adjusted Equity value of $25,000,000 or more
plus Funds from Operations of $2,500,000 or more. The warrants set
forth opposite Mr. Weisstein's name are not exercisable, by their
terms, for a 35-month period commencing at the end of the 13th month
after the Final Closing of the Offering.
(2) Except as set forth in note 4 below, the named holder has exclusive
voting and investment control over such securities.
(3) None of such options is exercisable until one year from the Final
Closing.
(4) Mr. Herring's spouse, Elizabeth W. Herring, controls voting and
investment of all assets of The Danube Rousse Inc. which holds the
shares of Common Stock, 1995 Convertible Preferred Stock and Series
"D" Warrants set forth opposite Mr. Herring's name.
(5) The percentage of all voting securities of the Company (Common Stock
and 1995 Convertible Preferred Stock) owned by all officers and
directors of the Company as a group is 15.8%.

INVESTMENT OBJECTIVES AND POLICIES

INVESTMENT OBJECTIVES

The Company's investment objective is to pay to its shareholders
predictable quarterly Distributions which grows as a result of increases in cash
flow and capital gains from the sale of properties. The Company will seek to
realize its objective through its acquisition of ownership interests in the
Properties and selective acquisitions of other properties in the future which
can be acquired on favorable terms and yields. The yields from the diversified
portfolio of residential income and commercial income properties will be
maximized through a balance of Distribution payments, reinvested capital,
Property loan financing and active management of the Company's Properties.

The Company intends to achieve these objectives by purchasing a
diversified portfolio of garden-style apartments and suburban commercial and
retail income properties in the Western United States. The Properties will be
leased to a variety of residential, retail and commercial tenants. The amount of
money raised by the Company in the Offering and borrowed from lenders will
affect the number of Properties the Company will be able to purchase. The more
Properties the Company purchases, the more diversified it will be and the less
it will be affected by any single Property that does not perform as expected.

43
<PAGE>

The Company expects to acquire additional properties through the
Operating Partnership, although it is not required to do so. The Board will
consider causing the Company, at any time, to make investments directly without
the involvement of the Operating Partnership if such direct investment is deemed
to be in the best interests of the Company and the Operating Partnership. The
Company will seek to utilize numerous property acquisition and financing
strategies to realize its objective. Favorable acquisitions will be accomplished
by using tax deferred exchanges, stock for equity swaps, partial acquisitions
and joint venture arrangements.

The Company may purchase or lease properties for long-term investment,
expand and improve the Properties to be acquired or sell such Properties, in
whole or in part, when circumstances warrant. Where the Company participates
with other entities in property ownership, through joint ventures or other types
of co-ownership, these investments may be subject to existing mortgage financing
and other indebtedness which may have priority over the equity interest of the
Company.

While the Company emphasizes equity real estate investments, it may,
in its discretion, invest in mortgages, stock or other REITs and other real
estate interests, subject to limitations on a REIT under the Code. See "Federal
Income Tax Considerations -- Requirements for Qualification." Such mortgage
investments may include participating or convertible mortgages. However, the
Company has no plans to invest in such assets at this time.

The Company's investment objectives and techniques may be changed by
the board (including a majority of the Independent Directors) without the
approval of the shareholders. While the Company intends to achieve its objective
by purchasing a diversified portfolio of income producing properties (see
"Description of Properties"), the Company's investment policies may vary as new
investment opportunities and techniques evolve. Any such change may affect the
types of non-real estate short-term investments in which the Company invests
during the interim periods in which capital is not fully invested in Properties.
As the general partner of the Operating Partnership, the Company will also
determine the investment policies of the Operating Partnership.

There are no limitations on the percentage of the Company's assets
that may be invested in any one property or venture. The Board of Directors may
establish limitations as it deems appropriate from time to time. No limitations
have been set on the number of properties in which the Company will seek to
invest or in the concentration of investments in any one geographic region.

Acquisition Plan

To insure the highest quality property purchases the Company has
adopted an acquisition plan. The Company's plan is to seek high quality
properties in areas with a large and diverse employment base, and then provide
solutions for certain types of financial problems. These problems include:

. Sellers that need exchanges to defer capital gains tax

. Owners that have over-financed their property and impaired their cash
flow

. Partnership owners that wish to sell out but find little market for
their partnership interests

. Excellent properties that require capital for clearly established
demands for expansion

. Owners that seek to improve the security and cash flow of their
property by replacing debt with equity

The Company will not buy troubled properties and seek to make them
good. The plan is to attract the best real estate opportunities by providing
financial solutions that benefit the Company and the owner/seller.

Target Properties

Management believes that, in today's real estate market, many of
properties are over burdened with debt as a result of the severity of the
economic recession. The debt, placed on the properties in prior years, is now
inconsistent with reduced cash flows being received by the properties. Owners
are faced with the current lessened

44
<PAGE>

ability to service existing debt and lessened property value. Their attempts to
rely on traditional lenders to assist in refinancing is proving to be illusory.
The assets with which the Company will build its portfolio will be residential
income properties as well as selected income-producing commercial properties
often with debt which is "obsolete" in today's market or which possess
unsatisfactory terms or features. It is intended that such loans will be recast
through negotiations with both seller and lender, resulting in the retirement or
restructuring of the debt. The Company, therefore, will concentrate on the
solution to property financing problems, not the solution of property
performance problems.

Apartment projects consisting of 50-200 units for middle to upper
income tenants located in the economic markets of the Western United States,
with a major emphasis on the broad markets available in California, together
with certain retail and commercial properties including commercial retail
shopping centers and suburban office buildings, will be the core of the
Company's asset base. Purchase prices for properties are expected to be between
$1,000,000 - $16,000,000. All properties must be performing in that they have a
verifiable record of stable income that has been actually received at the levels
used to qualify the property for purchase. This income should equal or be very
similar to the average income received over the past 12 months. Income that will
be considered is income actually received, not that which is scheduled. All
expenses of the projects must be stable and verifiable. Underwriting criteria to
be used by the Company will not be entirely based on the seller's actual
expenses. Additional allowances for deferred maintenance, future maintenance,
property taxes and replacement reserves will be included at the time of purchase
and in revenue/expense models used in managing the portfolio. The decision-
making focus will be on cash-on-cash returns, current yield, price per unit, and
percentage of replacement cost.

In selecting properties in which to make investments, the Company will
consider the extent to which a particular property may generate depreciation.
Depreciation deductions may reduce taxable income generated by the Company which
may enable the Company to pay Distributions which are partially free from
current taxation. The Company will depreciate its real properties for tax
purposes on a straight-line basis over a 27.5 year period for residential rental
properties and a 39 year period for commercial properties, except where the Code
requires a different depreciation period, as it may with respect to property
leased to governments and to foreign lessees. See "Federal Income Tax
Considerations."

Investments in Loans

The Company has no current plans to make Loans, although it is not
prohibited from doing so. The Company would attempt to structure any Loan in a
manner which would provide an economic return similar to that which the Company
could expect in an acquisition transaction. The Board, including a majority of
Independent Directors, must approve any transaction structured as a Loan. Some
Loans may, in addition to providing a base rate of interest, be combined with
provisions permitting the Company to participate in the economic benefits of any
increase in gross revenues of the real property securing repayment of the Loan.
See "Federal Income Tax Considerations -- Requirements for Qualification as a
REIT." If Loans are made, they are not currently expected to comprise a
significant portion of the Company's portfolio.

Other Investments

There can be no assurance as to when the Company's capital may be
fully invested in Properties. See "Federal Income Tax Considerations --
Requirements for Qualification as a REIT." Pending such investment, the balance
of the proceeds of the Offering will be invested in Permitted Temporary
Investments, which are defined to mean short-term U.S. Government securities,
bank certificates of deposit and other short-term liquid investments. To
maintain its REIT status, the Company also may invest in securities that qualify
as "real estate assets" and produce qualifying income under the REIT Provisions
of the Code. The Company expects that such securities will consist primarily of
shares issued by other REITs and mortgage-backed securities guaranteed by GNMA,
FNMA or FHLMC. If all the proceeds derived from the Offering are not invested or
committed to be invested by the Company prior to the expiration of the later of
24 months after the date of this Prospectus or one year after the termination of
the Offering, then the proceeds not so invested or committed will, promptly
after the expiration of such period, be distributed pro rata to the shareholders
as a return of capital without any deductions for

45
<PAGE>

Organizational and Offering Expenses or Acquisition Fees or Expenses. For the
purpose of the foregoing provision, funds will be deemed to have been committed
to investment within such period and will not be returned to shareholders to the
extent written agreements in principle have been executed at any time prior to
the expiration of such period, regardless of whether such investments are
consummated, and also to the extent any funds have been reserved to make
contingent payments in connection with any Property, regardless of whether any
such payments are made.

If at any time the character of the Company's investments would cause
the Company to be deemed an "investment company" for purposes of the Investment
Company Act of 1940, the Company shall take such action as is necessary in order
to ensure that the Company is not deemed to be such an "investment company." The
Company will continually review its investment activity to attempt to ensure
that it does not come within the application of the Investment Company Act of
1940. Among other things, it will attempt to monitor the proportion of its
portfolio which is placed in various investments so that the Company does not
come within the definition of an investment company under such Act.

The Company's working capital and other reserves will be invested in
Permitted Temporary Investments. The Company will evaluate such factors as the
relative risks and rate of return, the Company's cash needs and other
appropriate considerations when making short-term investments on behalf of the
Company. The rate of return of Permitted Temporary Investments may be less than
or greater than would be obtainable from real estate investments.

INVESTMENT LIMITATIONS

In general, the Company will not:

. invest in commodities or commodity futures contracts, such limitation
not being applicable to futures contracts when used solely for the
purpose of hedging in connection with the Company's ordinary business
of investment in real estate and mortgages,

. make investments in Unimproved Real Property or indebtedness secured
by a deed of trust or mortgage loans on Unimproved Real Property.
"Unimproved Real Property" means property which has the following
three characteristics: (i) an equity interest in property which was
not acquired for the purpose of producing rental or other operating
income, (ii) no development or construction is in process on such
property, and (iii) no development or construction on such property is
planned in good faith to commence on such property within one year,

. issue debt securities in the absence of adequate cash flow to cover
debt service,

. engage in trading, as compared with investment activities,

. invest more than five percent of the value of its assets in the
securities of any one issuer,

. invest in securities representing more than ten percent of the
outstanding voting securities of any one issuer,

. lend money to or lease Property to or from Affiliates of the Company
without the approval of a majority of the Independent Directors.

CHANGE IN INVESTMENT OBJECTIVES AND LIMITATIONS

The Independent Directors will review the Company's investment
policies at least annually to determine that the policies being followed by the
Company are in the best interest of the shareholders. Each such determination
and the basis therefor shall be set forth in the minutes of the Company. The
methods of

46
<PAGE>

implementing the Company's investment policies also may vary as new investment
techniques are developed. The methods of implementing the investment objectives
and policies of the Company, except as otherwise provided in the Organizational
Documents, may be altered by a majority of the directors (including a majority
of the Independent Directors) without the approval of the shareholders.

LEASING AND PROPERTY MANAGEMENT

The Company believes in an aggressive leasing and property management
strategy conducted by professionals with extensive experience, knowledge of
local markets and an established track record with prospective residential or
commercial tenants. All of the Company's leasing and property management
activities will be conducted in-house or by engaging independent in-place
property managers. As necessary, the Company will engage independent property
managers. The Company's overall property management and leasing strategy is
designed to keep the occupancy of its Properties as high as possible at rental
rates within the average range of rates for similar properties in the vicinity.
The Company will attempt to minimize operating expenses in management, leasing,
marketing, finance and other activities for all of the Properties through use of
its experienced personnel and certain economies of scale available to it.

FINANCING STRATEGY/LEVERAGE

While one of the Company's investment objectives will be
diversification, the number of different properties the Company can acquire will
be affected by the amount of funds available to it. Since the Company may have a
minimum of $15,000,000 and a maximum of $50,000,004 in Gross Offering Proceeds,
the full extent of the Company's actual operations cannot be determined at this
time. The Company's goal, subject to the availability of mortgage financing, is
to borrow not more than 50% of the gross asset value of all of its properties as
determined by management, but there is no limit on borrowings on individual
Properties. Gross asset value of the Properties will be calculated by totaling
lenders' appraised values for Properties being financed with (i) in the case of
unleveraged Property, such Property's undepreciated acquisition cost, if the
acquisition occurred within six months of the applicable determination date, or
the value of the Property as determined by an independent appraiser within 90
days of the applicable determination date, or (ii) in the case of leveraged
Property, the lenders' appraised value if such appraisal is dated within six
months of the applicable determination date, or the value of the Property as
determined by an independent appraiser within 90 days of the applicable
determination date.. Gross asset value of Company Properties will be determined
prior to each acquisition of a Property which involves mortgage financing and
prior to the refinancing of any Property.

It is expected that, by operating on a leveraged basis, the Company
will have more funds available and, therefore, will make more investments than
would otherwise be possible, resulting in a more diversified portfolio. Although
the Company's liability for repayment of indebtedness is expected to be limited
to the value of the Property securing such liability and the rents or profits
derived therefrom, leveraging increases risks to the Company because mortgage
principal and interest payments, as well as other fixed charges, must be paid in
order to prevent foreclosure on such Property by mortgagees regardless of the
generation of income by Properties. See "Risk Factors Risks Associated with
Borrowing." To the extent that the Company does not obtain mortgage loans on its
Properties, its ability to acquire additional Properties will be restricted.

In addition to mortgage financing, the Company may seek financing
(subject to the foregoing 50% debt-to-equity limitation) in the form of debt
securities. The Company will determine its financing opportunities in light of
the then current economic conditions, relative costs of debt and equity capital,
market values of properties, growth and acquisition opportunities and other
factors. If the Board determines that additional funding is desirable, the
Company may raise such funds through the issuance of equity securities or debt
securities or other methods as appropriate.

It is anticipated that certain borrowings will be made through the
Operating Partnership, although the Company may also incur indebtedness that may
be reloaned to the Operating Partnership on the same terms and conditions as are
applicable to the Company's borrowing of such funds. See "Operating Partnership
Agreement."

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Indebtedness through the Operating Partnership may be in the form of purchase
money obligations, public or privately placed debt instruments, financing from
institutional lenders, and may be unsecured or secured as appropriate.

The Board also has the authority to cause the Operating Partnership to
issue additional OP Units in any manner as it deems appropriate, including in
exchange for property. See "Operating Partnership Agreement Capital
Contributions."

OPERATING PARTNERSHIP AGREEMENT

The following summary of the Operating Partnership Agreement,
including the descriptions of certain provisions set forth elsewhere in this
Prospectus, is qualified in its entirety by reference to the Operating
Partnership Agreement, which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.

MANAGEMENT

The Operating Partnership will be organized as a Delaware limited
partnership pursuant to the terms of the Operating Partnership Agreement.
Generally, pursuant to the Operating Partnership Agreement, the Company as the
sole general partner of the Operating Partnership will have full, exclusive and
complete responsibility and discretion in the management and control of the
Operating Partnership, including the ability to cause the Operating Partnership
to (i) enter into certain major transactions including acquisitions,
dispositions and refinancings, (ii) change the Operating Partnership's line of
business and distribution policies, (iii) sell some or all of the Operating
Partnership's assets, (iv) otherwise dispose of some or all of the Operating
Partnership's assets in a merger or other reorganization, or (v) dissolve.

Except as required by applicable law, the OP Limited Partners will
have no authority to transact business for, or participate in, the management of
the Operating Partnership; however, the consent of a majority of the outstanding
percentage interests of the OP Limited Partners (unless the Company owns more
than 50%, directly or indirectly, of the equity of such OP Limited Partner) will
be required with respect to certain extraordinary actions involving the
Operating Partnership including (i) the amendment, modification or termination
of the Operating Partnership Agreement other than to reflect permitted transfers
of interests in the Operating Partnership and certain other events, (ii) a
general assignment for the benefit of creditors or the appointment of a
custodian, receiver or trustee for any of the assets of the Operating
Partnership, (iii) the institution of any proceeding for bankruptcy of the
Operating Partnership, (iv) the transfer of any general partner interests in the
Operating Partnership, including through any merger, consolidation or
liquidation of the Company and (v) the admission of any additional or substitute
general partner in the Operating Partnership.

TRANSFERABILITY OF OP UNITS

With certain limited exceptions, the OP Limited Partners may not
transfer their interests in the Operating Partnership, in whole or in part,
without the written consent of the Company, which the Company may withhold in
its sole discretion. The Company may not consent to any transfer that would
cause the Operating Partnership to be treated as a corporation or a publicly
traded partnership for federal income tax purposes.

CAPITAL CONTRIBUTIONS

The Company will contribute as its initial capital contributions to
the Operating Partnership any Properties acquired with the net proceeds of the
Offering and any cash remaining from the net proceeds following acquisition of
such properties in exchange for an approximately initial 99% general partner
interest. Until other limited partners are admitted to the Operating
Partnership, the remaining one percent is held by Arthur P. Herring

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and Dois Brock. See "Management -- Executive Officers and Directors." Upon the
admission of other limited partners, Messrs. Herring and Brock will resign as
limited partners. (See "Operating Partnership Agreement -- Capital
Contributions." The Company will be deemed to have made a capital contribution
to the Operating Partnership in the amount of the gross proceeds of the Offering
and the Operating Partnership will be deemed simultaneously to have paid the
underwriter's discount and other expenses paid or incurred in connection with
the Offering. The value of each OP Limited Partner's capital contribution shall
equal its pro rata share of the value of the interests received by the Operating
Partnership. The Operating Partnership Agreement provides that, in connection
with any proper Operating Partnership purpose, the Company may borrow funds from
a financial institution or other lender and lend such funds to the Operating
Partnership on the same terms and conditions as are applicable to the Company's
borrowing of such funds. Moreover, the Company is authorized to cause the
Operating Partnership to issue Operating Partnership interests to the Company,
the OP Limited Partners or any other party as an additional OP Limited Partner
for less than fair market value if the Company has concluded in good faith that
such issuance is in the best interests of the Company and the Operating
Partnership. Under the Operating Partnership Agreement, the Company generally is
obligated to contribute the proceeds of a share offering as additional capital
to the Operating Partnership; however, the Company may elect to use such
proceeds to acquire assets directly rather than through the Operating
Partnership if such direct acquisition is determined by a majority of the
Independent Directors to be in the best interests of the Operating Partnership
and the Company. The Company will be deemed to have made a capital contribution
to the Operating Partnership in the amount of the gross proceeds of such share
offering and the Operating Partnership will be deemed simultaneously to have
paid any associated fees and expenses incurred in connection with such share
offering. Upon contribution of the proceeds of a share offering, the number of
the Company's OP Units in the Operating Partnership shall be increased by the
number of Company shares issued in the share offering (taking into account any
adjustment in the "conversion factor," a multiplier intended to adjust for the
occurrence of share splits, mergers, consolidations or similar pro rata share
transactions which otherwise would have the effect of diluting the ownership
interests of the OP Limited Partners or the shareholders of the Company), and
the Company's percentage interest in the Operating Partnership will be increased
on a proportionate basis based upon the number of such additional OP Units. The
percentage interests of the OP Limited Partners will be decreased on a
proportionate basis, based on the number of their OP Units, in the event of
additional capital contributions by the Company or any other party. In addition,
if the Company or any other party contributes additional capital to the
Operating Partnership, the Company may elect to revalue the assets of the
Operating Partnership under appropriate circumstances to their fair market
values (as determined by the Company). In such event, the capital accounts of
the partners will be adjusted to reflect the manner in which the unrealized gain
or loss inherent in such property (that has not been reflected in the capital
accounts previously) would be allocated among the partners under the terms of
the Operating Partnership Agreement if there were a taxable disposition of such
property for such fair market value on the date of the revaluation.

REDEMPTION RIGHTS

Pursuant to the Operating Partnership Agreement, the OP Limited
Partners will receive the redemption rights, which will enable them to cause the
Operating Partnership to redeem their interests in the Operating Partnership.
The redemption price is the product (rounded down to the nearest whole number)
of (i) the value of the whole number of shares of Common Stock equal to the
number of OP Units offered for redemption, and (ii) the Conversion Factor which
is currently 1 for 1. At the election of the Company, the Company may purchase
the OP Units for either cash or the whole number of shares of Common Stock
described above.

The redemption price will be paid in cash in the event that the
issuance of shares of Common Stock to the redeeming OP Limited Partner would
(i) result in any person owning, directly or indirectly, shares of Common Stock
in excess of the Ownership Limit, (ii) result in the Common Stock of the Company
being owned by fewer than 100 persons (determined without reference to any rules
of attribution), (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code, (iv) cause the Company to own, actually
or constructively, ten percent or more of the ownership interests in a tenant of
the Company's or the Operating Partnership's real property, within the meaning
of Section 856(d)(2)(B) of the Code, or (v) cause the acquisition of shares of
Common Stock by such redeeming OP Limited Partner to be "integrated" with any
other distribution of

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shares of capital stock for purposes of complying with the Securities Act.
Subject to limitations described in the Operating Partnership Agreement
regarding compliance with applicable securities laws, antitrust laws and general
transfer restrictions affecting the tax status of the Operating Partnership, the
redemption rights may be exercised by an OP Limited Partner at any time after 18
months following the date on admission of such OP Limited Partner to the
Operating Partnership, provided that, not more than two redemptions of any
single OP Limited Partner may occur during each calendar year and each OP
Limited Partner may not exercise the redemption right for less than 500 OP
Units, or if such OP Limited Partner holds less than 500 OP Units, all of the OP
Units held by such OP Limited Partner.

REGISTRATION RIGHTS

The Company has agreed to file, immediately prior to 18 months
following admission of the first additional OP Limited Partner to the Operating
Partnership, a registration statement with the Commission for the purpose of
registering the sale of shares of Common Stock issuable to future holders of OP
Units upon redemption thereof. The Company will use its best efforts to have the
registration statement declared effective and to keep it effective for a period
of two years. Upon effectiveness of such registration statement, those persons
who receive shares of Common Stock upon redemption of OP Units may sell such
shares in the secondary market without being subject to the volume limitations
or other requirements of Rule 144. The Company (on behalf of the Operating
Partnership) will bear expenses incident to such registration requirements,
except that such expenses shall not include any underwriting discounts or
commissions, Commission or state securities registration fees, transfer taxes or
certain other fees or taxes relating to such shares.

OPERATIONS

The Operating Partnership Agreement requires that the Operating
Partnership be operated in a manner that will enable the Company to satisfy the
requirements for being classified as a REIT, to avoid any federal income or
excise tax liability imposed by the Code, and to ensure that the Operating
Partnership will not be classified as a "publicly traded partnership" for
purposes of Section 7704 of the Code.

In addition to the administrative and operating costs and expenses
incurred by the Operating Partnership, the Operating Partnership will pay all
administrative costs and expenses (the "Company Expenses") of the Company except
those attributable to properties owned by the Company directly, and the Company
Expenses will be treated as expenses of the Operating Partnership. The Company
Expenses generally will include (i) all expenses relating to the formation and
continuity of existence of the Company, (ii) all expenses relating to the public
offering and registration of securities of the Company, (iii) all expenses
associated with the preparation and filing of any periodic reports by the
Company under federal, state or local laws or regulations, (iv) all expenses
associated with compliance by the Company with laws, rules and regulations
promulgated by any regulatory body and (v) all other operating or administrative
costs of the Company incurred in the ordinary course of its business on behalf
of the Operating Partnership. The Company Expenses, however, will not include
any administrative and operating costs and expenses incurred by the Company that
are attributable to properties owned by the Company directly. The Company
currently does not have any such properties, but may acquire such properties in
the future.

DISTRIBUTIONS

The Operating Partnership Agreement provides that the Operating
Partnership will distribute cash from operations (including net sale or
refinancing proceeds, but excluding net proceeds from the sale of the Operating
Partnership's property in connection with the liquidation of the Operating
Partnership) on a quarterly (or, at the election of the Company, more frequent)
basis, in amounts determined by the Company in its sole discretion, to the
partners in accordance with their percentage interests in the Operating
Partnership. Upon liquidation of the Operating Partnership, after payment of, or
adequate provision for, debts and obligations of the Operating Partnership,
including any partner loans, any remaining assets of the Operating Partnership
will be distributed to all partners with positive capital accounts in accordance
with their respective positive capital account balances. No Partner in the
Operating Partnership, including the Company, has an obligation to restore a
negative balance in such Partner's capital account following a liquidation of
the Operating Partnership.

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ALLOCATIONS

Income, gain and loss of the Operating Partnership for each taxable
year generally will be allocated among the partners in accordance with their
respective interests in the Operating Partnership, subject to compliance with
the provisions of Code Section 704(b) and 704(c) and Treasury Regulations
promulgated thereunder.

TERM

The Operating Partnership will continue until December 31, 2094, or
until sooner dissolved upon (i) the bankruptcy (as defined in the Operating
Partnership Agreement), dissolution or withdrawal of the Company (unless the
remaining Partners elect, pursuant to the voting requirements in the Operating
Partnership Agreement, to continue the Operating Partnership), (ii) the sale or
other disposition of all or substantially all of the assets of the Operating
Partnership, (iii) the redemption of all limited partnership interests in the
Operating Partnership (other than those held by the Company, if any), (iv) the
election by the General Partner, or (v) the entry of a decree of judicial
dissolution.

TAX MATTERS

Pursuant to the Operating Partnership Agreement, the Company will be
the tax matters partner of the Operating Partnership and, as such, will have
authority to handle tax audits and to make tax elections under the Code on
behalf of the Operating Partnership.

DESCRIPTION OF PROPERTIES

Although the Company has not yet purchased any Properties, it has
agreements to purchase interests in six Properties subject to the completion of
a Minimum Common Offering or Maximum Common Offering. See "Property
Descriptions" below for detailed descriptions of each of the Properties' uses,
financing and operating histories. In the event of a Minimum Common Offering,
four of the Properties will be acquired. Management proposes to acquire such
properties in the following order: Sandpainter Apartments, Northwest Garden
Apartments, Orangewood Place Apartments and Arrow Village Apartments. In a
Maximum Common Offering, in addition to those properties, management proposes to
acquire two additional properties in the following order: Westwood Self-
Storage/Sportmart Building and Hewlett-Packard Building. While management
expects to acquire the Properties in this order, circumstances may change
requiring rearrangement of the acquisition order. In a Maximum Combined
Offering, management would pay down debt on any Properties already owned and use
the balance to acquire one or more additional properties which meet the criteria
set forth above in "Investment Objectives and Policies."

Management is presently evaluating various potential property
acquisitions and is engaging in discussions with sellers regarding the purchase
of properties for the Company. During the continuation of the Offering, and at
such time during the negotiations of a potential property acquisition when
management believes a reasonable probability exists that such property will be
acquired by the Company, this Prospectus will be supplemented to disclose such
potential property acquisition. This generally will occur upon the signing of a
legally binding purchase agreement or after the execution of a letter of intent
to purchase a property and the obtaining of a commitment for financing, but may
occur before or after such events depending on the particular circumstances
surrounding each potential acquisition. Any such supplement to this Prospectus
will set forth available data with respect to the acquisition including the
proposed terms of the purchase, a description of the property to be acquired,
and other information considered appropriate for an understanding of the
transaction. Further data will be made available after any acquisition has been
consummated during the Offering also by means of a supplement to this
Prospectus. See "Reports to Shareholders" for a description of other reports to
shareholders which will describe property acquisitions.

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IT SHOULD BE UNDERSTOOD THAT THE INITIAL DISCLOSURE IN THIS PROSPECTUS
OR A SUPPLEMENT OF ANY POTENTIAL ACQUISITION CANNOT BE RELIED UPON AS AN
ASSURANCE THAT THE COMPANY ULTIMATELY WILL CONSUMMATE SUCH POTENTIAL ACQUISITION
OR THAT THE INFORMATION PROVIDED CONCERNING THE POTENTIAL ACQUISITION WILL NOT
CHANGE BETWEEN THE DATE OF THIS PROSPECTUS OR SUCH SUPPLEMENT AND ACTUAL
PURCHASE.

If only the Minimum Common Offering or the Minimum Combined Offering
is completed, four apartment complexes (Sandpainter Apartments, Northwest Garden
Apartments, Orangewood Place Apartments and Arrow Village Apartments) described
below will be purchased.

The Company expects that the Properties, or partnership interests
relating to certain Properties, will generally be acquired through the Operating
Partnership, but the Board may cause the Company to acquire Property or such a
partnership interest directly if such direct acquisition is determined by the
Board to be in the best interests of the Company and the Operating Partnership.
See "Operating Partnership."

PROPERTIES

The Properties consist of four garden style apartment complexes
consisting of an aggregate of 480 units and two commercial/retail properties
totaling 176,065 leasable square feet. All of the properties are being acquired
from unaffiliated sellers in transactions whose prices and terms have been
determined by arm's-length negotiations. In conducting such negotiations, the
Company's management had access to per unit or per square foot prices (as
applicable) and discounted cash flow sales prices for comparable buildings.
Management believes the per unit or per square foot sales prices and
capitalization rates of comparable buildings support the purchase prices. No
appraisals were obtained. Of the six properties, three are located in the Los
Angeles, California, metropolitan area and three are located in the Phoenix,
Arizona, metropolitan area. The Properties will be managed by the Company by
retaining in-place management services subject to short-term renewable
contracts.

ACQUISITIONS

Each of the Properties will be acquired by the Company according to
the terms of separate purchase agreements.

Minimum Common Offering/Minimum Combined Offering. The aggregate
purchase price for the four Properties to be acquired under a Minimum Common
Offering or Minimum Combined Offering (Sandpainter Apartments, Northwest Garden
Apartments, Orangewood Place Apartments and Arrow Village Apartments) will be
approximately $14,200,000, payable by the Company as follows: (i) approximately
$11,700,000 in cash and (ii) $2.5 million mortgage bearing interest at a fixed
rate of 7.875% per annum. The loan from the Federal National Mortgage
Association ("FannyMae") was closed in April 1996 and has monthly installments
based on a 25-year amortization of $18,706 through April 2003, at which time all
outstanding principal and interest would be due. The mortgage is secured by the
Arrow Village Apartments.

Maximum Common Offering. In a Maximum Common Offering, the four
Properties described above in Minimum Common Offering will be acquired together
with the at least two additional Properties (Westwood Self-Storage/Sportmart
Building and Hewlett-Packard Building). These additional Properties will bring
the total aggregate purchase price for the six Properties to $43,100,000 payable
by the Company as follows: (i) approximately $30,050,000 in cash;
(ii) approximately $3,800,000 in retained partnership interests; and
(iii) taking title to three Properties (Arrow Village Apartments, Hewlett-
Packard Building and Westwood Self-Storage/Sportmart Building) subject to
approximately $8,500,000 in new and existing mortgage debt. The debt secured by
the Arrow Village Apartments is as described above for the Minimum Common
Offering. The debt on the Westwood Self-Storage/Sportmart Building currently is
an assumable loan with Topa Savings Bank that will be assumed with a balance of
approximately $5,960,000 and is payable in monthly installments to fully
amortize the balance by the year 2022. The interest rate is adjustable at 2.5%
over the Federal Home Loan Bank 11th District cost of funds index.

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COMPETITION

All of the apartments, retail and commercial properties are located in
developed residential and commercial areas. There are generally numerous other
apartment, retail and commercial properties within a five-mile radius of the
Properties. The amount of rentable space in the area could have a material
affect on the Company's ability to rent space and the rents charged in the
apartments, as well as the retail and commercial properties. In addition, the
Company will be competing with others who may have greater resources and
experience than the Company and its officers and directors for tenants.

PROPERTY DESCRIPTIONS

The following is a description of each of the properties and the terms
of purchase:

Sandpainter Apartments, 2225 West Indian School Road, Phoenix,
Arizona, is a 116-unit garden style apartment complex built in 1979 on five
landscaped acres and consisting of eight frame and stucco buildings with full
on-site amenities including a swimming pool and laundry facilities. Most units
are subject to semi-annual leases which expire at various times throughout the
year. The property is located within the Phoenix I-17 commercial corridor where
the commute to downtown is under ten minutes and neighborhood community and
shopping is immediately convenient. Major employers within a three-mile radius
of the property include Phoenix Baptist Hospital, Grand Canyon University, Park
Central Mall, Phoenix College, and Encanto Park. Competition in the area for
tenants is strong between the many apartments within a five-mile radius,
including Orangewood Place Apartments, although given their separation, and the
number of apartment projects in the area, management believes the likelihood of
direct competition with Orangewood Place Apartments is minimal. The number of
rentable units in the area could have a material effect on the Company's ability
to rent units and the rental rates received. The seller of this property
represents occupancy for the past five years to be as follows: 95% (1991), 92%
(1992), 92% (1993), 94% (1994) and 95% (1995). Although it is not possible to
reconstruct or verify the occupants of each unit for each month of the periods
indicated above, the Company's investigations support the accuracy of seller's
representations. The effective annual rental rate per unit for each of the past
five years is approximately $3,497 (1991), $3,202 (1992), $3,226 (1993), $3,675
(1994) and $3,790 (1995).

The purchase price is $2,200,000 where the Company will purchase the
Property for cash. The seller's book value of the Property at December 31, 1995
was $1,667,144, net of depreciation. In the opinion of management, this Property
will be adequately covered by insurance at acquisition. The Property is to be
held as an income investment and title will be held in fee by the Operating
Partnership. The depreciation tax basis will equal the purchase price less the
portion of the purchase price allocated to the land and will be depreciated by
the straight-line depreciation method over 28.5 years. The annual realty tax is
$13,072.42.

Northwest Garden Apartments, 9350 North 67th Avenue, Peoria, Arizona,
is a 198-unit garden style apartment complex located in a northwest suburb of
Phoenix, Arizona, in an established residential and commercial area convenient
to shopping, employment, and community centers. Northwest Garden Apartments is
in Peoria on the border with Glendale, two cities in the Northwest Region of
Maricopa County.

Glendale and Peoria are near the I-17 industrial corridor, which has a
concentration of high technology firms in the Northwest Region. Northwest Garden
Apartments is within one mile of the North Grand employment center, an area
containing light industry and professional office space. The City of Peoria
possesses a major portion of the available commercial and industrial zoned
property in metro Phoenix. Peoria markets itself aggressively to companies
looking for a progressive city with an educated labor force, low priced housing,
and access to the growing Phoenix Metro area.

The property was built in 1984 and has been refurbished and maintained
in good condition. Competition for tenants is strong among the many surrounding
apartment complexes within a five-mile radius. The number of rentable units in
the area could have a material effect on the Company's ability to rent units and
the rental rate received. Most units are subject to annual leases which expire
at various times throughout the year. The seller of this property represents
occupancy for the past five years to be as follows: 94% (1991), 93% (1992), 94%
(1993),

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95% (1994) and 96% (1995). Although it is not possible to reconstruct or verify
the occupants of each unit for each month of the periods indicated above, the
Company's investigations support the accuracy of seller's representation. The
effective annual rental rate per unit for each of the past five years is
approximately $4,157 (1991), $4,253 (1992), $4,350 (1993), $5,000 (1994) and
$5,540 (1995).

The purchase price is $6,950,000 cash. The seller's book value of the
Property at December 31, 1995 was $3,118,666, net of depreciation. In the
opinion of management this Property will be adequately covered by insurance at
the Closing. The Property is to be held as an income investment and title will
be held in fee by the Operating Partnership. The depreciation tax basis will
equal the purchase price less the portion of the purchase price allocated to the
land and will be depreciated by the straight-line depreciation method over 28.5
years. The annual realty tax is $48,662.86.

Orangewood Place Apartments, 7328 North 27th Avenue, Phoenix, Arizona,
is an 84-unit garden style apartment complex located in an established
residential and commercial area convenient to shopping, employment, and
community centers. The property was built in 1984 and has been refurbished and
well-maintained. Most units are subject to semi-annual leases which expire at
various times throughout the year. Competition for tenants is strong among the
many surrounding apartment complexes within a five-mile radius, including
Sandpainter Apartments, although given their separation, and the number of
apartments projects in the area, management believes the likelihood of direct
competition with Sandpainter Apartments is minimal. The number of rentable units
in the area could have an adverse affect on the Company's ability to rent units
and the rental rate received. The seller of this property represents occupancy
for the past five years to be as follows: 89% (1991), 92% (1992), 92% (1993),
95% (1994) and 96% (1995). Although it is not possible to reconstruct or verify
the occupants of each unit for each month of the periods indicated above, the
Company's investigations support the accuracy of seller's representations. The
effective annual rental rate per unit for each of the past five years is
approximately $2,467 (1991), $2,984 (1992), $3,000 (1993), $3,750 (1994) and
$3,990 (1995).

Orangewood Place Apartments is strategically located within the
Interstate 17 commercial corridor; I-17 being the most heavily traveled portion
of the entire Metropolitan Phoenix freeway system. The property is located just
one mile west of the freeway on 27th Avenue. The commute time to midtown or
downtown Phoenix from Orangewood Place Apartments is less than fifteen minutes.
The residents have a similar short drive north to Phoenix's largest regional
shopping center, Metro Center, and its neighboring business and research and
development parks. Major employers within a three-mile radius of Orangewood
Place Apartments are Phoenix Baptist Hospital, Grand Canyon University, Metro
Center Mall and Chistown Shopping Center.

The purchase price is $1,800,000 and the Company intends to purchase
the property for cash. The seller's book value of the Property at December 31,
1995 was $1,182,869, net of depreciation. In the opinion of management, this
Property will be adequately covered by insurance at acquisition. The Property is
to be held as an income investment and title will be held in fee by the
Operating Partnership. The depreciation tax basis will equal the purchase price
less the portion of the purchase price allocated to the land and will be
depreciated by the straight-line depreciation method over 28.5 years. The annual
realty tax is $17,475.38.

Arrow Village Apartments, 186615 Arrow Highway, Azusa, California, is
an 82-unit garden style apartment complex located in an established residential
area in close proximity to employment, shopping, and community centers.
Competition for tenants is strong from numerous surrounding apartments complexes
in the neighborhood. The subject Property will compete with tenant amenities and
property management responsiveness. The depreciation tax basis will equal the
purchase price less the portion of the purchase price allocated to the land and
will be depreciated by the straight-line depreciation method over 18.5 years.
Most units are subject to annual leases which expire at various times throughout
the year. The property was built in 1977 and refurbished in 1995 by the Sellers
after purchasing it from a bank which had acquired it in foreclosure. When
acquired by the Seller, the property was in a state of disrepair and, through
neglect, most of the tenant base had left. After refurbishing the property which
was completed in Summer 1995, the seller re-rented all the units at an average
effective rental per unit of approximately $6,700 per year, which is slightly
below the surrounding market for comparable properties. No records of occupancy
are available to the Company for years prior to 1993 when it was foreclosed upon
by a bank. Based on financial data available from seller, the Company estimates
that occupancy rates for the

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Property were 64% in 1993 and 66% in 1994. In 1995, occupancy went down to 59%
during the construction/rehabilitation period and climbed to 99% in October
after completion of rehabilitation where it remained until the end of the year.
The effective rent per unit for 1995 is $6,456. In determining the purchase
price for the Property, the Company assumed a vacancy allowance of six percent.
The average 1995 annual market rental rate per unit for comparable properties
was $7,236, $7,260 and $6,510, respectively, for three similar properties
located in the area.

The purchase price is $3,250,000 consisting of $750,000 cash and
$2,500,000 of mortgage debt. The seller's book value of the Property at December
31, 1995 was $2,209,379, net of depreciation. Arrow Village Apartments closed in
April 1996 a $2,500,000 mortgage bearing interest at the rate of 7.875% per
annum. The loan is from the Federal National Mortgage Association ("FannyMae")
and has monthly installments based on a 25-year amortization of $18,706 through
April 2003, at which time all outstanding principal and interest would be due.
In the opinion of management, this Property will be adequately covered by
insurance at acquisition, except that earthquake insurance is not available from
any source. This Property is to be held as in income investment and title will
be held in fee by the Operating Partnership. The annual realty tax rate is
approximately 1.25% of the purchase price or $40,625.

Westwood Self-Storage/Sportmart Building, 1901 Sepulveda Boulevard,
Los Angeles, California, is a 104,000 square foot, three-story over parking
building built in 1987. The present use for this building is to provide a large
single tenant retail location on its ground floor supported with ample parking.
The second and third floors of this building are configured and operated as a
retail self-storage targeted toward both individuals and businesses. The Company
intends to continue this use as it holds the Property as an income investment
property. The ground floor is leased by Sportmart, Inc., an Illinois based
national sporting goods discount retail distributor. Sportmart, Inc. leases the
entire 31,600 square foot ground floor (32.7% of the total square feet) and is
the only tenant to lease in excess of ten percent of the total leasable square
footage. The Sportmart lease expires in January 1998 and contains two options to
extend this lease for a period of ten years each. Currently, the total rent per
annum from this lease is $506,872 on a full service basis where Sportmart, Inc.
reimburses the owner for one-third of the building operating expenses. This
reimbursement equals approximately $44,450 per annum. The second and third
floors of the building are operated as a self-storage facility containing 802
individual storage units and which is effectively 100% occupied with a waiting
list. The 64,934 leasable square feet on the two floors represents 67.3% of the
total square footage of the building. Each storage unit lessee executes a
separate lease. These leases are for varying lengths of time, but generally for
periods of time of one year or less. The total rent received from these leases
equals a combined total of approximately $900,000 per annum. The occupancy
reports for the last five years by seller of the Property is as follows: 84%
(1991), 88% (1992), 98% (1993), 97% (1994) and 99% (1995). The Company's
investigations support the accuracy of seller's reports. The effective annual
rental price per square foot for each of the last five years is $12.99 (1991),
$13.66 (1992), $15.12 (1993), $15.05 (1994) and $15.45 (1995). There were no
free rent periods or give-backs.

The following table sets forth as of December 31, 1995 tenant lease
expirations for the next ten years of the Property assuming no tenants exercise
renewable options:

<TABLE>
<CAPTION>
Percent of Total
Annual Average Base Rent Lease Rentable
Lease Number of Minimum Rent Per Square Foot Square Feet
Expiration Leases Lease Rentable Under Expiring Under Expiring Represented by
Year Expiring Square Feet Leases Lease Expiring Leases
- ---------- --------- ----------- -------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
1995 - - - -
1996 802 64,934 900,000 13.86 67.3
1997 - - - - -
1998 1 31,600 506,872 16.04 32.7
1999 - - - - -
2000 - - - - -
2001 - - - - -
</TABLE>
55
<PAGE>

<TABLE>

The building location is in the suburban West Los Angeles area of the
City of Los Angeles in a mixed residential and commercial area on a major north-
south artery. The self-storage building draws on both commercial business users
as well as individuals. The building has good visibility and freeway access.

Competition for tenants, either retail or self-storage lessees, is
strong in this highly urbanized environment. The focus of the building is on the
middle to upper income market where there are relatively few other retail or
self-storage locations as large and accessible. Notwithstanding, within a five-
mile radius there are many competitors with comparable facilities which may have
resources greater than that of the Company.

The Property will be acquired by the Operating Partnership which will
form a new limited partnership ("AMREIT No. 1901") with the Property's current
owner which will manage the self-storage portion of the business. The purchase
price for the property is $12,900,000. The seller's book value of the Property
at December 31, 1995 was $9,688,890, net of depreciation. The Operating
Partnership will contribute $4,648,100 to AMREIT No. 1901 for a 67% interest in
AMREIT No. 1901, and the seller will contribute the property for a 33% interest
(with an agreed value of $2,290,000). AMREIT No. 1901 will assume existing
mortgage debt on the property of $7,450,000, and $1,448,139 of the cash
contributed by the Operating Partnership will be used to pay down existing
mortgage debt. This loan, with the reduced principal balance of approximately
$5,961,861, will be assumed at an interest rate which floats at 2.5% over the
11th District Federal Home Loan Bank rate which is, when combined with the 2.5%
margin, presently 7.731%. The scheduled loan maturity is February 2007 and
contains no prepayment penalty. The principal balance due at maturity, assuming
the presently prevailing interest rate of 7.31% over the remaining loan term,
would be approximately $3,857,458. The Company intends to replace this financing
with fixed rate financing in the future.

The Operating Partnership will receive a priority 10.5% return from
cash flow from operations on funds invested in AMREIT No. 1901. The seller will
receive an eight percent preferred return on its equity from cash flow from
operations after the Operating Partnership's priority return. Remaining cash
flow from operations will be divided 50/50. Proceeds from sale or refinancing of
the Property will be distributed (i) first, to pay debts of AMREIT No. 1901,
(ii) next, to provide a preferential return to the Operating Partnership on
certain portions of its net capital contributions prior to distributions to all
partners, (iii) next, distributions will be made to all partners on a pro rata
basis until the partners' net capital accounts are returned in full, (iv) next,
any unpaid preferred returns will be paid to the partners, and (v) any balance
will be distributed 50% to the seller, provided that if the seller's net capital
contribution falls below ten percent of its original capital contribution (i.e.,
below $229,000), such balance will be distributed to the partners pro rata in
accordance with the balance of their respective net capital contributions.

As a part of the transaction, the Company has granted to the seller a
redemption right wherein, assuming the preferred return requirements are being
met by the cash flow from operations of the Property, the seller may require the
Company to redeem all or a portion of seller's partnership interest in AMREIT
No. 1901 for cash, or, in an amount equal to seller's net capital contribution
to AMREIT No. 1901. In the opinion of management, this Property will be
adequately covered by insurance at acquisition, except that earthquake insurance
is not presently available from any source. The depreciation tax basis will
equal the purchase price less the portion of the purchase price allocable to the
land and depreciation will be over a 28.5 year life in a straight-line method.
The realty tax rate will be approximately 1.2% of the purchase price, or
$154,000.

Hewlett-Packard Building, 5805 Sepulveda Boulevard, Van Nuys,
California, is a Class A, eight-story, suburban office building containing
85,750 rental square feet which was built in 1990 and which is fully leased. The
present use for this building is to provide modern office space for corporate
offices for businesses and professionals. The Company intends to continue this
use as it holds the Property as an income investment property. The three
principal tenants of this building, each of which occupy in excess of ten
percent of the rental square footage and which collectively account for 83.3% of
the total rental square footage are (i) Hewlett-Packard

56
<PAGE>

Company whose lease is for 39,000 square feet (45.4% of the total rentable
square footage). Hewlett-Packard Company is a national manufacturer and
distributor of electronics and computer hardware and software for both retail
consumers and industrial consumers. The lease with Hewlett-Packard Company
expires on January 31, 2003 and requires a two year notice to vacate. There are
two options to extend this lease for successive five-year periods. Presently,
the total rent per annum from this lease is $832,372; (ii) FHP, Inc., whose
lease is for 17,276 square feet (20.2% of the total rental square footage). FHP
is a national health maintenance organization headquartered in California. This
lease expires April 12, 1997 and requires no less than a six month notice to
vacate. There is one option to renew for a period of 5 years. Presently, the
total rent per annum from this lease is $373,152; and (iii) Industrial Bank
whose lease is for 18,143 square feet (21.2% of the total rentable square
footage). Industrial Bank is a California commercial bank specializing in
providing banking and financial services to both retail customers and small-to-
medium sized businesses in the San Fernando Valley and the Greater Los Angeles
Area. This lease expires November 13, 1998. There are four options to extend
this lease for successive five-year periods. Presently, the total rent per annum
from this lease is $485,931. The Property location is in suburban Los Angeles
with excellent freeway visibility and vehicle access. The building began leasing
in 1990 and has had the following levels of occupancy in the last five years:
34% (1991), 53% (1992), 100% (1993), 100% (1994) and 100% (1995). Effective
annual rental rates per square foot for the last five years were: $26.66 (1991),
$24.77 (1992), $23.19 (1993), $22.83 (1994) and $22.85 (1995). There were no
free rent periods or give-backs. Competition for tenants in the area for Class A
office space is very keen. The Property is located in a market where it is
designed to attract both local and regional tenants. While the Property is
presently fully leased should one of the three major tenants vacate the amount
of comparable rentable space in the area could have a materially adverse effect
on the Company's ability to rent the vacated space at the present rental rates
in a timely manner. Competitors in the market for tenants have greater resources
in some cases.

The following table set forth as of December 31, 1995 tenant lease
expirations for the next ten years of the Property assuming no tenants exercise
renewable options:

<TABLE>
<CAPTION>
Percent of Total
Annual Average Base Rent Lease Rentable
Lease Number of Minimum Rent Per Square Foot Square Feet
Expiration Leases Lease Rentable Under Expiring Under Expiring Represented by
Year Expiring Square Feet Leases Lease Expiring Leases
- ---------- --------- -------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>

1995 - - - -
1996 1 2,492 65,789 27.72 2.9
1997 2 24,563 460,596 23.02 28.6
1998 1 18,143 485,931 29.28 21.2
1999 - 1,546 16,536 23.57 1.8
2000 - - - - -
2001 - - - - -
2002 - - - - -
2003 1 39,000 832,372 21.36 45.51
2004 - - - - -
</TABLE>

The Property will be acquired by the Operating Partnership which will
form a new limited partnership ("AMREIT No. 5805") with the Property's current
owner where the Operating Partnership will be the sole general partner and title
will be held in the name of AMREIT No. 5805. The purchase price for the property
is $16,000,000. The seller's book value of the Property at December 31, 1995 was
$13,767,124, net of depreciation. The Operating Partnership will contribute
$6,400,000 to AMREIT No. 5805 for an 80% interest in AMREIT No. 5805, and the
seller will contribute the property for a 20% interest (with an agreed value of
$1,600,000). AMREIT No. 5805 will assume existing mortgage debt on the property
of approximately $10,720,000, and $2,720,000 of the cash contributed by the
Operating Partnership will be used to pay down existing mortgage debt to
approximately $8,000,000. (In a Maximum Common Offering, existing mortgage debt
will be paid in full.) This $8,000,000 loan will be assumed at a rate of
interest of nine percent payable interest only until the scheduled maturity of
December 29, 1998 when the principal balance is due. There is no prepayment
penalty. The Company

57
<PAGE>

will seek to immediately refinance this loan upon acquisition at more favorable
terms and rate. The Operating Partnership will receive a priority 10.5% return
from cash flow from operations on funds invested in AMREIT No. 5805. The seller
will receive an eight percent preferred return on its equity from cash flow from
operations after the Operating Partnership's priority return. Remaining cash
flow from operations will be divided 50/50. Proceeds from sale or refinancing of
the Property will be distributed (i) first, to pay debts of AMREIT No. 5805,
(ii) next, to provide a preferential return to the Operating Partnership on
certain portions of its net capital contributions prior to distributions to all
partners, (iii) next, distributions will be made to all partners on a pro rata
basis until the partners' net capital accounts are returned in full, (iv) next,
any unpaid preferred returns will be paid to the partners, and (v) any balance
will be distributed 50% to the Operating Partnership and 50% to the seller,
provided that if the seller's net capital contribution falls below ten percent
of its original capital contribution (i.e., below $160,000), such balance will
be distributed to the partners pro rata in accordance with the balance of their
respective net capital contributions.

The purchase agreement contains a $500,000 reserve for seismic
inspection/repair of the entire building. The building is located in the San
Fernando Valley section of Los Angeles which was near the site of the January
1994 Northridge earthquake. The building inspections conducted as a part of the
Company's due diligence reveal no material damage to the building. As a part of
the Company's purchase agreement, the seller (i) has warranted to the Company
that no additional seismic repair is necessary and (ii) has subordinated his
$1,600,000 equity to any repair work which is found to be required. In the
opinion of management, this Property will be adequately covered by insurance at
acquisition, except that earthquake insurance is not presently available from
any source. The depreciation tax basis will equal the purchase price less the
portion of the purchase price allocated to the land and will be depreciated over
a 28.5 years life on a straight-line method. The realty tax rate will be
approximately 1.2% of the purchase price or $192,000.

DESCRIPTION OF SECURITIES

The following description of the Shares and other capital stock of the
Company does not purport to be complete but contains a summary of portions of
the Company's Charter and is qualified in its entirety by reference to the
Company's Charter.

GENERAL

The total number of shares of stock which the Company has authority to
issue is 56,515,000 shares, of which 35,000,000 are shares of Common Stock,
$0.01 par value per share ("Common Stock"), and 21,515,000 are shares of
Preferred Stock, $0.01 par value per share ("Preferred Stock"). The Board of
Directors is authorized to provide for the issuance of shares of Preferred Stock
in one or more series, to establish the number of shares in each series and to
fix the designation, powers, preferences and the rights of such series and the
qualifications, limitations or restrictions thereof. All shares are subject to
the Ownership Limit. In addition, no Person may, directly or indirectly, acquire
Beneficial Ownership of a number of shares of 8% Preferred that, when added to
other equity shares of the Company Beneficially Owned by such Person, would
exceed five percent of the value of the outstanding equity shares of the
Company.

Common Stock. All shares of Common Stock offered hereby will be duly
authorized, fully paid and nonassessable. Subject to the preferential rights of
any other shares or series of shares of preferred stock and to the provisions of
the Company's Charter regarding the consequences of actually or constructively
owning shares of Common Stock in violation of the Ownership Limit (as discussed
below), holders of Common Stock will be entitled to receive Distributions on
such Common Stock if, as and when authorized and declared by the Board of

58
<PAGE>

Directors of the Company out of assets legally available therefor and to share
ratably in the assets of the Company legally available for distribution to its
shareholders in the event of its liquidation, dissolution or winding-up after
payment of, or adequate provision for, all known debts and liabilities of the
Company. The Company intends to pay quarterly Distributions, beginning with a
Distribution for the first full calendar quarter ending after the Initial
Closing. See "Distribution Policy."

Subject to the provisions of the Company's Charter regarding the
consequences of actually or constructively owning shares of Common Stock in
violation of the Ownership Limit and to the matters discussed below under
"Certain Provisions of Maryland Law and of the Company's Charter and By-Laws--
Control Share Acquisition," each outstanding share of Common Stock entitled the
holder to one vote on all matters submitted to a vote of shareholders, including
the election of directors, and, except as otherwise required by law or except as
provided with respect to any other class or series of shares of stock, the
holders of such shares of Common Stock will possess the exclusive voting power.
There is no cumulative voting in the election of directors, which means that the
holders of a majority of the outstanding shares of Common Stock can elect all of
the directors then standing for election and the holders of the remaining
shares, if any, will not be able to elect any directors. Holders of Common Stock
have no conversion, sinking fund, redemption rights or any preemptive rights to
subscribe for any securities of the Company.

Subject to the provisions of the Company's Charter regarding the
consequences of actually or constructively owning shares of Common Stock in
violation of the Ownership Limit, all shares of Common Stock will have equal
Distribution, liquidation and other rights, and will have no preference,
appraisal or exchange rights.

8% Convertible Preferred Stock. The Board of Directors has authorized
the issuance of up to 1,500,000 shares of 8% Convertible Preferred Stock and
1,136,364 of such shares are being offered for sale in this Offering at $13.20
per share. The 8% Preferred Stock is entitled to a $13.20 liquidation
preference. The 8% Preferred Stock is entitled to receive, out of funds legally
available therefor, cumulative Distributions at the annual rate equal to the
greater of eight percent of the preferred liquidation amount per share, or twice
the per share amount paid as Distributions on the Common Stock, with a maximum
of $1.30 per share. Such amount is payable in each year when and as declared by
the Board of Directors. Such amounts are cumulative. Each share of 8% Preferred
Stock is entitled to one vote for each share of Common Stock into which it is
convertible, disregarding fractional shares, and Common Stock and 8% Preferred
Stock vote together, with the 1995 Preferred Stock, as a single class on all
matters coming before the shareholders for approval; provided, however, that
without the approval of at least a majority of the outstanding shares of 8%
Preferred Stock, the Company may not (i) amend the Articles of Incorporation or
Articles Supplementary to alter or change any rights, preferences or privileges
of 8% Preferred Stock so as materially and adversely to affect the 8% Preferred
Stock; (ii) increase or decrease the authorized number of shares of 8% Preferred
Stock or effect a stock split or reverse stock split of the 8% Preferred Stock;
(iii) authorize another class or series of shares senior to the 8% Preferred
Stock with respect to distribution of assets on liquidation, it being understood
that the Board of Directors of the Company may authorize another class or series
of preferred shares in parity with the 8% Preferred Stock with respect to
distributions, including liquidating distributions; (iv) so long as
Distributions to holders of 8% Preferred Stock are not current, purchase, redeem
or otherwise acquire any Common Stock, directly or indirectly, except the
purchase of Common Stock from an employee or consultant of the Company;
(v) merge or consolidate with or into any other corporation or sell all or
substantially all of its assets to any other corporation, except any such
transaction not requiring approval of the Common Stock; or (vi) voluntarily
elect to wind up and dissolve. For a period of 60 months commencing 90 days
after the Final Closing, at the option of the holder, each share of 8% Preferred
Stock is convertible into two shares of Common Stock, such conversion ratio
being subject to normal anti-dilution adjustments.

1995 Convertible Preferred Stock. The Board of Directors has
authorized the issuance of up to 1,100,000 shares of 1995 Convertible Preferred
Stock and has issued 1,021,500 shares of 1995 Convertible Preferred Stock. See
"Capitalization." The 1995 Convertible Preferred Stock is entitled to no
Distributions and is entitled to one vote per share for each share of Common
Stock into which it is convertible, disregarding fractional shares, and Common
Stock and 1995 Convertible Preferred Stock will vote together, with the 8%
Preferred Stock, as a single

59
<PAGE>

class on all matters coming before the shareholders for approval although,
without the approval of at least a majority of the outstanding shares of 1995
Convertible Preferred Stock, the Company may not undertake any of the actions
described in clauses (i) through (vi) in the above description of 8% Preferred
Stock. On liquidation, each share of 1995 Convertible Preferred Stock is
entitled to a $0.01 liquidation preference (the "Preferred Liquidation Amount"),
subject to adjustment in the event of adjustments in the conversion price. For a
period ending on October 31, 2005, at the option of the holders, each share of
1995 Convertible Preferred Stock is convertible into one share of Common Stock,
at the Preferred Liquidation Amount, provided, however, that no such conversion
may occur until six months after the end of the Company's first fiscal year
wherein its audited consolidated financial statements reflect total equity of
$25,000,000 or more (with cumulative depreciation recorded in such consolidated
financial statements since the acquisition of applicable properties added back
and as adjusted for the difference, if any, between the agreed value of acquired
property and the value of such property recorded by the Company in such
consolidated financial statements) ("Adjusted Equity Value") plus Funds from
Operations of $2,500,000 or more. The term "Funds from Operations" means net
income of the Company as determined in accordance with generally accepted
accounting principles, excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation, and after adjustments for unconsolidated
partnerships and joint ventures. The conversion price is subject to normal anti-
dilution adjustments. In addition, by contract with the Company, holders of
385,000 shares of 1995 Convertible Preferred Stock (including 25,000 held by
Dois Brock, President of the Company, 150,000 held by The Danube Rousse Inc. (a
principal shareholder) and 150,000 held by Regent IV Trust (a principal
shareholder), and the balance held by three other Persons who are neither part
of management or principal shareholders) have agreed not to convert those shares
into Common Stock of the Company until six months after the end of the Company's
first fiscal year wherein the Company's Adjusted Equity Value is $40,000,000 or
more, and its Funds from Operations are $4,000,000 or more. Furthermore, by
contract with the Company, holders of 391,500 shares of 1995 Convertible
Preferred Stock (including 50,000 held by Dois Brock, 25,000 held by Jacob
Segal, Vice President of the Company, 30,000 held by Gerald Weisstein, a
director of the Company, 115,000 held by The Danube Rousse Inc., 115,000 held by
Regent IV Trust, and the balance held by three other Persons who are neither
part of management or principal shareholders) will not be permitted to convert
those shares to Common Stock until six months after the end of the Company's
first fiscal year wherein the Company's Adjusted Equity Value is $70,000,000 or
more, and its Funds from Operations are $7,000,000 or more.

Preferred Stock. In addition to the 8% Convertible Preferred Stock and
the 1995 Convertible Preferred Stock, the preferred stock may be issued from
time to time in one or more series as authorized by the Board of Directors.
Prior to issuance of shares of each series, the Board of Directors by resolution
shall designate that series to distinguish it from all other series and classes
of stock of the Company, shall specify the number of shares to be included in
the series and shall set the terms, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption. Subject to the express
terms of any other series of preferred stock outstanding at the time and
notwithstanding any other provision of the Articles of Incorporation, the Board
of Directors may increase or decrease the number of shares of, or alter the
designation or classify or reclassify, any unissued shares of any series of
preferred stock by setting or changing, in any one or more respects, from time
to time before issuing the shares, and the terms, preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of redemption of the shares
of any series of preferred stock.

10% Convertible Notes Due October 1, 1996. The Company has issued in
October 1995 an aggregate of $202,500 of 10% Convertible Notes due October 1,
1996 ("10% Notes"). These Notes bear interest at ten percent per annum, payable
on maturity of the Note. Such Notes are convertible into unregistered shares of
Common Stock of the Company at a conversion price of $4.50 per share. Such
conversion may take place on the earlier of 90 days after the Final Closing or
September 30, 1996, at the option of the holder. They are redeemable by the
Company on or before September 30, 1996.

10% Convertible Notes Due October 1, 1996, Series B. The Company has
issued in November and December 1995 an aggregate of $56,281.50 aggregate
principal amount of 10% Convertible Notes due October 1, 1996, Series B ("Series
B Notes"). See "Risk Factors -- General Investment Risks -- Potential
Securities Act Liability." The Series B Notes bear interest at ten percent per
annum, payable on maturity of the Notes. They are

60
<PAGE>

convertible into unregistered shares of Common Stock of the Company at a
conversion price of $4.50 per share. Such conversion may take place on the
earlier of 90 days from the Final Closing or September 30, 1996, at the option
of the holder. They are redeemable by the Company on or before September 30,
1996. The Series B Notes were sold without an exemption from registration under
the Securities Act. Accordingly, any Series B Noteholder desiring to rescind its
purchase of Series B Notes may require the Company to refund its purchase price
plus interest from the date of purchase to the date of rescission payment.

10% Notes, due April 15, 1997. The Company has issued an aggregate of
$245,555.55 of 10% Notes, due April 15, 1997. The Notes were sold at a ten
percent discount and bear interest at ten percent per annum, payable at
maturity. The Notes are not convertible into any equity securities of the
Company and are redeemable by the Company at any time.

Series "A" Warrants. The Series "A" Warrants will be issued as part of
the Units. They will have a three year life, are immediately exercisable, and
will allow the holder to purchase one share of Common Stock for $7.00. These
warrants are detachable from the Units immediately on issuance and contain
appropriate anti-dilution clauses and will be fully transferable from the date
of the close of the Offering. The Common Stock issued upon exercise of these
warrants has been registered under the Securities Act and will be freely
tradable. The Company does not intend to list the Series "A" Warrants on any
market or exchange.

Series "D" Warrants. The Company has authorized and has issued 463,133
Series "D" Warrants. Such warrants permit the purchase of one share of Common
Stock at $3.50 per share subject to normal anti-dilution provisions and are non-
transferable. In general, they are exercisable for a 35-month period commencing
at the end of the 13th month after the Final Closing of the Offering. 57,133 of
such warrants have been issued to former shareholders of Funding Co. on the
basis of one warrant for each two shares of Funding Co. exchanged into Company
Common Stock. 406,000 of such warrants have been issued in combination with
1,021,500 shares of 1995 Convertible Preferred Stock to various parties as
consideration for accepting a substantially subordinate position to the public
shareholders of the Company, including certain former shareholders of Funding
Co. who are members of management, in the form of 1995 Convertible Preferred
Stock. See "Principal Shareholders -- Director and Officer Stock Ownership.
Holders of 336,000 of such warrants have agreed with the Company that they will
not exercise their rights to purchase Common Stock pursuant to the warrant until
six months after the end of the Company's first fiscal year wherein its audited
consolidated financial statements reflect an Adjusted Equity Value of
$25,000,000 or more plus Funds from Operations of $2,500,000 or more. Transfers
of the Series "D" Warrants will be subject to Rule 144 promulgated under the
Securities Act ("Rule 144"). Such warrants may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including exemptions contained in Rule 144. All Series "D" Warrants
expire 48 months after the Final Closing of the Offering. In the future, Common
Stock issued upon exercise of these warrants will be registered for resale under
the Securities Act.

Series "E" Warrants. As compensation to Brookstreet Securities
Corporation for assisting the Company in selling $202,500 of 10% Notes, the
Company has issued in October 1995 72,500 Series "E" Warrants. These Warrants
may not be exercised until 90 days after the date of the Final Closing. They
will have a two year life commencing on the date of the Final Closing and will
allow the holder to purchase one share of Common Stock for $4.50 per share.
Transfers of the Series "E" Warrants will be subject to Rule 144. Such warrants
may not be sold in the absence of registration under the Securities Act unless
an exemption from registration is available, including exemptions contained in
Rule 144. In the future, the Common Stock issued upon exercise of these warrants
will be registered for resale under the Securities Act.

RESTRICTION ON OWNERSHIP

In order for the Company to qualify as a REIT, not more than 50% in
value of its outstanding shares may be owned by any five or fewer individuals
(including certain tax-exempt entities) during the last half of each taxable
year of the Company, and the outstanding shares must be owned by 100 or more
Persons independent of the Company and each other during at least 335 days of a
12 month taxable year or during a proportionate part of a

61
<PAGE>

shorter taxable year for which an election to be treated as a REIT is made. For
purposes of the "five or fewer test," a holder of a warrant, option to acquire
Equity Stock, or certain convertible securities of the Company, is deemed to own
the shares for which he has an option to purchase or a conversion right and the
multiple classes of Shares may raise special valuation issues. The Company,
therefore, may prohibit certain acquisitions and transfers of Shares so as to
facilitate the Company's continued qualification as a REIT under the Code.
However, there can be no assurance that such prohibition will be effective.

In order to assist the Board in preserving the Company's status as a
REIT, the Charter contains a basic Ownership Limit which prohibits any Person or
group of Persons from acquiring, directly or indirectly, Beneficial Ownership of
more that9.8% in value of the outstanding equity shares of the Company. Value
will be determined by market prices. Shares owned by a Person or a group of
Persons in excess of the Ownership Limit are deemed "Excess Shares." Shares
owned by a Person who individually owns of record less than 9.8% of outstanding
equity shares may nevertheless be Excess Shares if such Person is deemed part of
a group for purposes of this restriction. In addition, in order to protect the
integrity of the Ownership Limit set forth in the Company's Charter, no Person
may, directly or indirectly, acquire or hold, beneficial ownership of a number
of shares of 8% Preferred that, when added to other equity shares of the Company
beneficially owned by such Person, would exceed five percent of the value of the
outstanding equity shares of the Company. The Board of Directors will cause the
shareholdings of Persons owning 8% Preferred to be regularly monitored in order
to assist in the prevention of an inadvertent violation of the five percent
restriction.

As noted by tax counsel to the Company in its opinion, these ownership
restrictions do not mathematically assure compliance with the ownership
requirements for qualified REIT status of the Company. See "Federal Income Tax
Considerations -- Summary of Tax Opinions." For example, if five individuals
each purchased Common Stock with a value representing 9.8% of the total
outstanding equity shares of the Company, their aggregate 49% ownership interest
by value at the time of purchase could theoretically increase over time to over
50% of the value of the Company if the value of the Common Stock were to
increase relative to the value of the 8% Preferred. However, due to the
liquidation preference and other features of the 8% Preferred, the Company
believes it is extremely unlikely that such a relative market value fluctuation
would occur. Because it is more likely that the value of the 8% Preferred could
increase relative to the value of the Common Stock, the additional five percent
ownership restriction has been imposed with respect to holders of the 8%
Preferred (including holders of both Common Stock and 8% Preferred) to assure
compliance with the REIT ownership requirements.

In addition to the right to prevent a transfer of 8% Preferred or
other equity shares of the Company, the Company has the right, by written
notice, to require a beneficial owner of this Company's shares to sell to the
Company that number of shares of 8% Preferred necessary to prevent such Person
from exceeding the five percent restriction. The purchase price for such shares
is a cash amount equal to the aggregate market value of such shares on the date
that the Company sends notice that it is exercising its right to purchase 8%
Preferred from such Person in order to protect the five percent restriction.
Subject to applicable law, the purchase right granted to the Company may be
assigned by the Company to any Person which would not be in violation of the
five percent restriction.

The Charter stipulates that any purported issuance or transfer of
shares shall be invalid with respect to those shares that result in the
transferee-shareholder owning equity shares in excess of the Ownership Limit. If
the transferee-shareholder acquires Excess Shares, such Person is considered to
have acted as an agent for the Company and holds such Excess Shares on behalf of
the ultimate shareholder.

The Ownership Limit does not apply to offerors which, in accordance
with applicable federal and state securities laws, make a cash tender offer,
where at least 85% of the outstanding shares (not including shares or
subsequently issued securities convertible into common stock which are held by
the tender offeror and/or any "affiliates" or "associates" thereof within the
meaning of the Exchange Act) are duly tendered and accepted pursuant to the cash
tender offer. The Ownership Limit also does not apply to the underwriter in a
public offering of the Shares. The Ownership Limit does not apply to a Person or
Persons which the directors so exempt from the Ownership Limit upon appropriate
assurances that the Company's qualification as a REIT is not jeopardized.

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All Persons who own five percent or more of the outstanding shares (or
one percent or more if the Company has more than 200 but fewer than 2,000
shareholders) during any taxable year will be asked by the Company to deliver a
statement or affidavit setting forth the number of shares of all classes
beneficially owned, directly or indirectly, by such Persons.

DISTRIBUTIONS

The Company intends after the Initial Closing to declare Distributions
on a quarterly basis. It is anticipated that the declaration of Distributions
will commence at the end of the first full calendar quarter after the Initial
Closing. Distributions will be paid to investors who are shareholders as of the
record date selected by the directors. Distributions will be paid on a quarterly
basis regardless of the frequency with which such Distributions are declared.
The Company is required to distribute annually its Distributable REIT Taxable
Income to comply with the REIT Provisions. Generally, income distributed as
Distributions will not be taxable to the Company under federal income tax laws
unless the Company fails to comply with the REIT Provisions.

Distributions will be paid at the discretion of the directors, in
accordance with the earnings, cash flow and general financial condition of the
Company. The directors' discretion will be directed, in substantial part, by
their obligation to cause the Company to comply with the REIT Provisions.
Because the Company may receive income from interest or rents at various times
during its fiscal year, Distributions may not reflect income earned by the
Company in that particular period but may be made in anticipation of cash flow
which the Company expects to receive during a later quarter and may be made in
advance of actual receipt in an attempt to make distributions relatively
uniform. The Company can borrow to make distributions if the borrowing is
necessary to maintain the Company's REIT status or if the borrowing is part of a
liquidation strategy to partially or completely liquidate investments in
Properties by borrowing against those Properties.

The Company is not prohibited from distributing its own securities in
lieu of making cash distributions to shareholders, provided that such securities
distributed to shareholders are registered under the Securities Act and approved
for listing by the securities exchange on which the Company's other shares are
traded. Shareholders who receive marketable securities in lieu of cash
distributions may incur transaction expenses in liquidating such securities.

REPURCHASE OF SHARES

The Company has the authority to redeem Excess Shares immediately upon
becoming aware of existence of such Excess Shares or after giving the Person in
whose hands such shares are Excess Shares 30 days to the transfer such Excess
Shares to a Person whose ownership of such shares would not exceed the Ownership
Limit and, therefore, would no longer be considered Excess Shares. The price
paid upon redemption by the Company shall be the lesser of the price paid for
such Excess Shares by the shareholder in whose possession the redeemed shares
were formerly Excess Shares or the fair market value of the Excess Shares. The
Company may purchase Excess Shares or otherwise repurchase shares if such
repurchase does not impair the capital or operations of the Company.

TRANSFER AGENT

The transfer agent and registrar for the Shares will be Gemisys
Corporation. The transfer agent's address is 7103 South Revere Parkway,
Englewood, Colorado 80112, and its phone number is (303) 705-6000.

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CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BY-LAWS

The following paragraphs summarize certain provisions of Maryland law
and the Company's Charter and By-Laws. The summary does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Company's Charter and By-Laws, copies of which are exhibits to the Registration
Statement of which this Prospectus is a part.

CLASSIFICATION OF THE BOARD OF DIRECTORS

The Company's Charter provides that the number of directors of the
Company shall be established by the By-Laws but shall not be less than three nor
more than nine. The present Board has five members. Any vacancy on the Board of
Directors will be filled, at any regular meeting or at any special meeting
called for that purpose, by a majority of the remaining directors, except that a
vacancy resulting from an increase in the number of directors will be filled by
a majority of the entire board of directors. The Charter provides for a
staggered Board of Directors consisting of three classes as nearly equal in size
as practicable. One class will hold office initially for a term expiring at the
annual meeting of shareholders to be held in 1996, another class will hold
office initially for a term expiring at the annual meeting of shareholders to be
held in 1997 and another class will hold office initially for a term expiring at
the annual meeting of shareholders to be held in 1998. As the term of each class
expires, directors in that class will be elected for a term of three years and
until their successors are duly elected and qualify. The Company believes that
classification of the Board of Directors will help to assure the continuity and
stability of the Company's business strategies and policies as determined by the
Board of Directors.

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

REMOVAL OF DIRECTORS

The Company's Charter provides that a director may be removed with or
without cause by the affirmative vote of at least two-thirds of the votes
entitled to be cast in the election of directors. This provision, when coupled
with the provision in the By-Laws authorizing the Board of Directors to fill
vacant directorships, could preclude shareholders from removing incumbent
directors except upon the existence of a substantial affirmative vote and by
filling the vacancies created by such removal with their own nominees upon the
affirmative vote of a majority of the votes entitled to be cast in the election
of directors.

BUSINESS COMBINATIONS

Under the MGCL, certain "Business Combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns ten percent or more of the
voting power of the corporation's shares or an affiliate of the corporation who,
at any time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the then
outstanding voting stock of the corporation (an "Interested Shareholder") or an
affiliate of an Interested Shareholder are prohibited for five years after the
most recent date on which the Interested Shareholder became an Interested
Shareholder. Thereafter, any such Business Combination must be recommended by
the Board of Directors of such corporation and approved by the affirmative vote
of at least (i) 80% of the votes entitled to be cast by holders of outstanding

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voting shares of the corporation and (ii) 66-2/3% of the votes entitled to be
cast by holders of outstanding voting shares of the corporation other than
shares held by the Interested Shareholder with whom the Business Combination is
to be effected, unless, among other things, the corporation's shareholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Shareholder for its shares. These provisions of Maryland law do not
apply, however, to Business Combinations that are approved or exempted by the
Board of Directors of the corporation prior to the time that the Interested
Shareholder becomes an Interested Shareholder. A Maryland corporation may adopt
an amendment to its Charter or by-laws electing not to be subject to the special
voting requirements of the foregoing legislation (i.e., the Business Combination
Statute). The Company has not adopted such an amendment to its Charter.

CONTROL SHARE ACQUISITIONS

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

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

If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the corporation
may redeem any or all of the control shares (except those for which voting
rights have previously been approved) for fair value determined, without regard
to the absence of voting rights for control shares, as of the date of the last
control share acquisition or of any meeting of shareholders at which the voting
rights of such shares are considered and not approved. If voting rights for
control shares are approved at a shareholders meeting and the acquiror becomes
entitled to vote a majority or more of the shares entitled to vote, all other
shareholders may exercise appraisal rights. The fair value of the shares are
determined for purposes of such appraisal rights may not be less than the
highest price per share paid in the control share acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of dissenters'
rights do not apply in the context of a control share acquisition.

The control share acquisition statute does not apply to shares
acquired in a merger, consolidation or share exchange if the corporation is a
party to the transaction, or to acquisitions approved or exempted by the
Articles of Incorporation or By-Laws of the corporation.

AMENDMENT TO THE COMPANY'S CHARTER

The Company's Charter, including its provisions on classification of
the Board of Directors and removal of directors, may be amended only by the
affirmative vote of the holders of at least 66-2/3% of the capital stock
entitled to vote.

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SHAREHOLDER MEETINGS AND ACTION BY WRITTEN CONSENT

In order for shareholders to call special meetings, the By-Laws
require the written request of holders of shares entitled to cast not less than
25% of all votes entitled to be cast at such meeting. Such provisions do not,
however, affect the ability of shareholders to submit a proposal to the vote of
all shareholders of the Company in accordance with the By-Laws, which provide
for the additional notice requirements for shareholder nominations and proposals
at the annual meetings of shareholders.

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

LIMITATION OF LIABILITY AND INDEMNIFICATION

The Company's Charter and By-Laws limit the liability of the Company's
directors and officers to the Company and its shareholders to the fullest extent
permitted from time to time by Maryland law. Maryland law presently permits the
liability of directors and officers to a corporation or its shareholders for
money damages to be limited, except (i) to the extent that it is proved that the
director or officer actually received an improper benefit or profit, or (ii) to
the extent that a judgment or other final adjudication is entered in a
proceeding based on a finding that the director's or officer's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action, as adjudicated in the proceeding. This
provision does not limit the ability of the Company or its shareholders to
obtain other relief, such as an injunction or rescission.

The Company's By-Laws require the Company to indemnify its directors,
officers and certain other parties to the fullest extent permitted from time to
time by Maryland law. The Company's Charter and By-Laws also permit the Company
to indemnify its directors who have served another corporation or enterprise in
various capacities at the request of the Company. The MGCL presently permits a
corporation to indemnity its directors, officers and certain other parties
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service to or at the request of the Company,
unless it is established that: (i) the act or omission of the indemnified party
was material to the matter giving rise to the proceeding and was committed in
bad faith or was the result of active and deliberate dishonesty; (ii) the
indemnified party actually received an improper personal benefit ; or (iii) in
the case of any criminal proceeding, the indemnified party had reasonable cause
to believe that the act or omission was unlawful. Indemnification may be made
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by the director or officer in connection with the proceeding;
provided, however, that if the proceeding is one by or in the right of the
Company, indemnification may not be made with respect to any proceeding in which
the director or officer has been adjudged to be liable to the Company. In
addition, a director or officer may not be indemnified with respect to any
proceeding charging improper personal benefit to the director or officer in
which the director or officer was adjudged to be liable on the basis that the
personal benefit was improperly received. The termination of any proceeding by
conviction, or upon a plea of nolo contendere or its equivalent, or an entry of
any order of probation prior to judgment, creates a rebuttable presumption that
the director or officer did not meet the requisite standard of conduct required
for indemnification to be permitted. Indemnification under the provisions of the
MGCL is not deemed exclusive to any other rights, by indemnification or
otherwise, to which an officer or director may be entitled under the Company's
Charter or By-Laws, or under resolutions of shareholders or directors, contract
or otherwise.

ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S
ARTICLES OF INCORPORATION AND BY-LAWS

The provisions in the Charter regarding the Ownership Limit and the
classification of the Board of Directors, the business combination provisions of
the MGCL, the control shares acquisition provisions of the MGCL, and the advance
notice provisions of the By-Laws could have the effect of delaying, deferring,
discouraging or preventing a transaction or a change of control of the Company
in which holders of some, or a

<PAGE>

majority of the capital stock of the Company, might receive a premium for their
shares over the then prevailing market price or which such holders might believe
to be otherwise in their best interest.

SHARES AVAILABLE FOR FUTURE SALE

Upon the completion of a Minimum Common Offering and a Maximum Common
Offering, the Company will have outstanding 2,417,572 shares and 5,274,714
shares, respectively, of its Common Stock. Upon the completion of a Minimum
Preferred Offering, there will be 152,000 shares of 8% Preferred outstanding,
and the maximum number of shares of 8% Preferred which may be sold is 1,136,364
shares. The shares of Common Stock issued in the Offering will be freely
tradable by persons other than "affiliates" of the Company without restriction
under the Securities Act, subject to the limitations on ownership set forth in
the Charter. See "Description of Securities -- Restriction on Ownership." In
addition to the shares of Common Stock and 8% Preferred issued in the Offering,
assuming a Maximum Combined Offering, and subject to reaching a variety of
exercise or conversion criteria, the Company may issue an aggregate of up to
5,637,368 additional shares of Common Stock (subject to the Ownership Limit),
when the 8% Preferred, the 1995 Preferred Stock, Series "A," "D" and "E"
Warrants and the 10% Notes and Series "B" Notes are converted into Common Stock
or exercised. See "Description of Securities."

The shares of Common Stock owned by "affiliates" of the Company will
be subject to Rule 144 and may not be sold in the absence of registration under
the Securities Act unless an exemption from registration is available, including
exemptions contained in Rule 144. Shares issued upon conversion of 8%
Convertible Preferred Stock and the 10% Convertible Notes will be registered
under the Securities Act by the Company, as will Shares issued upon redemption
of the above-mentioned limited partnership interests.

Pursuant to the Operating Partnership Agreement, the OP Limited
Partners will receive the Redemption Rights, which will enable them to cause the
Operating Partnership to redeem their OP Units in exchange for either shares of
Common Stock on a one-for-one basis (subject to certain anti-dilution
adjustments) or for cash under certain circumstances or at the election of the
Company. The Redemption Rights may be exercised, in whole or in part, by an OP
Limited Partner at any time after 18 months following admission of such OP
Limited Partner to the Operating Partnership, in whole or in part. Shares of
Common Stock issued to holders of OP Units upon exercise of the Redemption
Rights will be registered under the Securities Act.

In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of restricted shares from the
Company or any "affiliate" of the Company, as that term is defined under the
Securities Act, the acquiror or subsequent holder thereof is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of one percent of the then outstanding Common Stock or the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. If three years have elapsed since the date of
acquisition of restricted shares from the Company or from any "affiliate" of the
Company, and the acquiror or subsequent holder thereof is deemed not to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, such person would be entitled to sell such shares in the public market
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.

The Company intends to list the Shares and the 8% Preferred on the
Stock Exchange and trading on that exchange is expected to
- ------------
commence promptly following the Final Closing of the Offering. No prediction can
be made as to the effect, if any, that future sales of shares, or the
availability of shares for future sale, will have on the market price prevailing
from time to time. Sales of substantial amounts of Common Stock or the
perception that such sales could occur, could adversely affect prevailing market
prices of the Common Stock.

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For a description of certain restrictions on transfers of shares held
by certain shareholders of the Company, see "Underwriting" and "Description of
Securities -- Restriction on Ownership."

FEDERAL INCOME TAX CONSIDERATIONS

The following is a general summary of all material federal income tax
considerations associated with an investment in the Units, Common Stock or the
8% Preferred that are material to a prospective holder thereof. Thelen, Marrin,
Johnson & Bridges, which has acted as tax counsel to the Company in connection
with the formation of the Company, the Operating Partnership and the Company's
election to be taxed as a REIT, has reviewed the following discussion and is of
the opinion that it fairly summarizes the federal income tax considerations that
are likely to be material to a holder of Common Stock or 8% Preferred. The
following discussion is not exhaustive of all possible tax considerations.
Moreover, this summary does not deal with all tax aspects that might be relevant
to a particular prospective shareholder in light of his personal circumstances;
nor does it deal with particular types of shareholders that are subject to
special treatment under the Code, such as insurance companies, financial
institutions and broker-dealers. The Common Stock and 8% Preferred are sometimes
collectively referred to in this Section as "Equity Stock." The Code provisions
governing the federal income tax treatment of REITs are highly technical and
complex, and this summary is qualified in its entirety by the applicable Code
provisions, rules and regulations promulgated thereunder, and the administrative
and judicial interpretations thereof. The following discussion and the opinions
of Thelen, Marrin, Johnson & Bridges are based on current law.

EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS OWN TAX ADVISOR
WITH RESPECT TO SUCH PURCHASER'S SPECIFIC FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSEQUENCES OF THE PURCHASE, HOLDING AND SALE OF STOCK IN THE
COMPANY.

SUMMARY OF TAX OPINIONS

Thelen, Marrin, Johnson & Bridges will provide the Company with an
opinion letter addressing all material federal tax consequences material to the
purchase, ownership and disposition of the Common Stock, or 8% Preferred. The
specific opinions that Thelen, Marrin, Johnson & Bridges will provide are:

(1) The description of law and legal conclusions herein under the
heading "Federal Income Tax Considerations," are correct in all material
respects, and the discussion fairly summarizes the federal income tax
considerations that are material to a holder of Units, Common Stock or 8%
Preferred.

(2) The Operating Partnership will be treated as a partnership for
federal income tax purposes and not as an association taxable as a corporation.

(3) The Company will be organized in conformity with the requirements
for qualification as a REIT under the Code, and the Company's proposed method of
operation will enable it to meet the requirements for qualification and taxation
as a REIT under the Code. However, counsel notes that, due to possible
fluctuation between the relative market values of different classes of the
Company's equity shares, the Charter restrictions relating to the Ownership
Limits of any Person do not mathematically assure that there will be compliance
with the statutory ownership requirements governing REIT status. See
"Description of Securities-Restriction on Ownership."

The opinions to be rendered by counsel are based on the Code and
Treasury Regulations thereunder currently in effect, current administrative
interpretations and positions of the IRS, and existing court decisions. No
assurance can be provided that such opinions (which do not bind the IRS or the
courts) will not be challenged by the IRS or will be sustained by a court if so
challenged. In addition, no assurance can be given that future legislation,
Treasury Regulations, administrative interpretations and court decisions will
not significantly change

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the law or the conclusions reached by counsel. Any such change could apply
retroactively to transactions preceding the date of change. In rendering its
opinions, counsel will be relying on certain representations of the Company and
the Operating Partnership. To the extent any representations upon which counsel
is relying in rendering its opinion are incorrect, counsel's opinion as to the
tax consequences could be altered. Qualification as a REIT depends upon the
Company's ability to meet the various requirements imposed under the Code
through actual operating results and ownership requirements, as discussed below.
Thelen, Marrin, Johnson & Bridges will not review these operating results or
compliance with ownership requirements, and no assurance can be given that
actual operating results, or ownership of Equity Stock, will meet these
requirements. Counsel has not rendered any opinions as to the tax consequences
of an investment in or the taxation of the Company or the Operating Partnership
except as specifically stated herein.

FEDERAL INCOME TAXATION OF THE COMPANY

The Company intends to make an election to be taxed as a REIT and
operate so as to meet the requirements under the Code for qualification as a
REIT, commencing with its taxable year ending December 31, 1996. No assurance
can be given, however, that such requirements will be met. If the Company
qualifies for taxation as a REIT, it generally will not be subject to federal
corporate income taxes on that portion of its net income that is currently
distributed to shareholders. The REIT provisions of the Code generally allow a
REIT to deduct such distributions paid to its shareholders. This deduction for
distributions paid to shareholders substantially eliminates the federal "double
taxation" on earnings (i.e., taxation, once at the corporate level and once
again at the shareholder level) that usually results from investments in a
corporation.

Even if the Company qualifies for taxation as a REIT, however, the
Company will be subject to federal income tax, as set forth below. First, the
Company will be taxed at regular corporate rates on its undistributed REIT
taxable income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" as a
consequence of its items of tax preference. Third, if the Company has net income
from the sale or other disposition of "Foreclosure Property" that is held
primarily for sale to customers in the ordinary course of business or other non-
qualifying income from Foreclosure Property, it will be subject to tax at the
highest corporate rate on such income. Fourth, if the Company has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property other than Foreclosure Property held primarily for sale
to customers in the ordinary course of business), such income will be subject to
a 100% tax. Fifth, if the Company should fail to satisfy either the 75% or 95%
gross income test (discussed below) but has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the net income attributable to the greater of
the amount by which the Company fails the 75% or 95% test, multiplied by a
fraction intended to reflect the Company's profitability. Sixth, if the Company
fails to distribute during such year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year and (iii) any undistributed taxable income from prior periods, the
Company will be subject to a four percent excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, if the
Company should acquire any asset from a C corporation (i.e., a corporation
generally subject to full corporate-level tax) in a carryover basis transaction
(a basis determined by reference to the C corporation's basis) and the Company
subsequently recognizes gain on the disposition of such asset during the ten
year period (the "Recognition Period") beginning on the date on which the asset
was acquired by the Company, then, to the extent of the excess of (a) the fair
market value of the asset as of the beginning of the applicable Recognition
Period over (b) the Company's adjusted basis in such asset as of the beginning
of such Recognition Period (the "Built-In Gain"), such gain will be subject to
tax at the highest regular corporate rate, pursuant to guidelines issued by the
IRS (the "Built-in Gain Rules") in IRS Notice 88-19, assuming the Company would
make the election pursuant to such Notice if it were to make any such
acquisition.

REQUIREMENTS FOR QUALIFICATION

To qualify as a REIT, the Company must elect to be so treated and must
meet the requirements, discussed below, relating to the Company's organization,
sources of income, nature of assets and distributions of income to shareholders
under Section 856 through 860 of the Code ("REIT Requirements").

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Organizational Requirements. The Code defines a REIT as a corporation,
trust or association: (i) that is managed by one or more trustees or directors,
(ii) the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest, (iii) that would be taxable as
a domestic corporation but for the REIT Requirements, (iv) that is neither a
financial institution nor an insurance company subject to certain provisions of
the Code, (v) the beneficial ownership of which is held by 100 or more persons,
and (vi) during the last half of each taxable year not more than 50% in value of
the outstanding shares of which is owned, directly or indirectly, through the
application of certain attribution rules, by five or fewer individuals (as
defined in the Code to include certain entities). In addition, certain other
tests, below, regarding the nature of its income and assets also must be
satisfied. The Code provides that conditions (i) through (iv), inclusive, must
be met during the entire taxable year and that condition (v) must be met during
at least 335 days of a taxable year of twelve months, or during a proportionate
part of a taxable year of less than 12 months. Conditions (v) and (vi) (the "100
stockholder" and "five or fewer" requirements) does not apply until after the
first taxable year for which an election is made to be taxed as a REIT. For
purposes of conditions (v) and (vi), pension funds and certain other tax-exempt
entities are treated as individuals, subject to a "look-through" exception in
the case of condition (vi).

Prior to consummation of the Offering, the Company did not satisfy
conditions (v) and (vi) above. The Company's issuance of Equity Stock in
connection with the Offering will satisfy the 100 stockholder and five or fewer
requirements. The Company's Charter currently includes certain restrictions
regarding transfer of its Equity Stock, and provisions to monitor the holdings
of shareholders, which are intended (among other things) to assist the Company
in continuing to satisfy conditions (v) and (vi) above. However, due to possible
market value appreciation of the 8% Preferred relative to the Common Stock, the
Charter restrictions do not mathematically assure that there will be compliance
with the statutory ownership requirements governing REIT status.

In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company will have a calendar year taxable
year.

If a REIT owns a "Qualified REIT Subsidiary," the Code provides that
the Qualified REIT Subsidiary is disregarded for federal income tax purposes,
and all assets, liabilities, and items of income, deduction and credit of the
Qualified REIT Subsidiary are treated as assets, liabilities and such items of
the REIT itself. A Qualified REIT Subsidiary is a corporation, all of the shares
of capital stock of which have been owned by the REIT from the commencement of
such corporation's existence. The Company currently does not have any Qualified
REIT Subsidiaries.

In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership shall retain the same character in
the hands of the REIT for purposes of Section 856 of the Code, including
satisfying the gross income tests and asset tests. Thus, the Company's
proportionate share of the assets, liabilities and items of income of the
Operating Partnership will be treated as assets, liabilities and items of income
of the Company for purposes of applying the requirements described herein.

Income Tests. To maintain qualification as a REIT, three gross income
requirements must be satisfied annually.

. First, at least 75% of the Company's gross income, excluding gross
income from certain dispositions of property held primarily for sale
to customers in the ordinary course of a trade or business
("prohibited transactions"), for each taxable year must be derived
directly or indirectly from investments relating to real property or
mortgages on real property (including "rents from real property" and,
in certain circumstances, interest) or from certain types of temporary
investments.

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. Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be
derived from such real property investments and from dividends,
interest and gain from the sale or disposition of stock or securities
or from any combination of the foregoing.

. Third, short-term gain from the sale or other disposition of stock or
securities, gain from prohibited transactions and gain from the sale
or other disposition of real property held for less than four years
(apart from involuntary conversions and sales of foreclosure property)
must represent less than 30% of the Company's gross income (including
gross income from prohibited transactions) for each taxable year.

Rents received or deemed to be received by the Company will qualify as
"rents from real property in satisfying the gross income requirements for a REIT
described above only if several conditions are met.

. First, the amount of rent generally must not be based in whole or in
part on the income or profits of any person (except that any amount
received or accrued shall not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage
of percentages of receipts or sales).

. Second, the Code provides that rents received from a tenant will not
qualify as "rents from real property" in satisfying the gross income
tests if the REIT, or an owner of ten percent or more of the REIT,
directly or constructively owns ten percent or more of such tenant (a
"Related Party Tenant").

. Third, if rent attributable to personal property, leased in connection
with a lease of real property, is greater than 15% of the total rent
received under the lease, then the portion of rent attributable to the
personal property will not qualify as "rents from real property."

. Finally, for rents to qualify as "rents from real property" the REIT
must not operate or manage the property or furnish or render services
to tenants of such property, other than through an "independent
contractor" who is adequately compensated and from whom the REIT does
not derive any income; provided, however, that a REIT may provide
services with respect to its properties and the income will qualify as
"rents from real property" if the services are "usually or customarily
rendered" in connection with the rental of room or other space for
occupancy only and are not otherwise considered "rendered to the
occupant."

The Company does not anticipate charging rent that is based in whole
or in part on the income or profits of any person. With the exception of certain
so-called "furnished" apartments, the Company will not derive rent attributable
to personal property leased in connection with real property that exceeds 15% of
the total rents. The Company does not anticipate receiving rent from Related
Party Tenants.

The Company will provide certain services with respect to the
properties it owns directly or through the Operating Partnership or other
partnerships. The Company believes that the services that will be provided by it
directly are usually or customarily rendered in connection with the rental of
space for occupancy only and are not otherwise rendered to particular tenants
and therefore that the provision of such services will not cause rents received
with respect to such properties to fail to qualify as rents from real property.
Services with respect to such properties that may not be provided by the Company
directly will be performed by independent contractors.

The Operating Partnership may, however, receive fees in consideration
of the performance of property management services with respect to certain
properties not owned entirely by the Operating Partnership. A portion of such
fees (corresponding to that portion of a property owned by a third party) will
not qualify under the 75% or 95% gross income test. The Operating Partnership
also may receive certain other types of income with respect to the properties it
owns that will not qualify for the 75% or 95% gross income test. The Company
believes, however,

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that the aggregate amount of such fees and other non-qualifying income in any
taxable year will not cause the Company to exceed the limits on non-qualifying
income under the 75% and 95% gross income tests.

If the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
that year if it is eligible for relief under certain provisions of the Code.
These relief provisions will be generally available if (i) the Company's failure
to meet these tests was due to reasonable cause and not due to willful neglect,
(ii) the Company attaches a schedule of the sources of its income to its federal
income tax return and (iii) any incorrect information on the schedule is not due
to fraud with intent to evade tax. It is not possible, however, to state
whether, in all circumstances, the Company would be entitled to the benefit of
these relief provisions. For example, if the Company fails to satisfy the gross
income tests because non-qualifying income that the Company intentionally incurs
exceeds the limits on such income, the IRS could conclude that the Company's
failure to satisfy the tests was not due to reasonable cause. As discussed
above, even if these relief provisions apply, a tax would be imposed with
respect to the excess net income. See "--Federal Income Taxation of the
Company." No similar mitigation provision provides relief if the Company fails
the 30% income test, and in such case, the Company will cease to qualify as a
REIT. See "Risk Factors -- Adverse Consequences of Failure to Qualify as a REIT;
Other Tax Liabilities."

Asset Tests. At the close of each quarter of its taxable year, the
Company also must satisfy three tests relating to the nature and diversification
of its assets.

. First, at least 75% of the value of the Company's total assets must be
represented by real estate assets, cash, cash items (including certain
receivables) and government securities.

. Second, no more than 25% of the value of the Company's total assets
may be represented by securities other than those in the 75% asset
class.

. Third, of the investments included in the 25% asset class, the value
of any one issuer's securities owned by the Company may not exceed
five percent of the value of the Company's total assets, and the
Company may not own more than ten percent of any one issuer's
outstanding voting securities.

The 5% test must generally be met for any quarter in which the Company
acquires securities of an issuer. Although the Company plans to take steps to
ensure that it satisfies the 5% value test for any quarter with respect to which
retesting is to occur, there can be no assurance that such steps will always be
successful.

If the Company should fail to satisfy the asset requirements at the
end of a calendar quarter, such a failure would not cause it to lose its REIT
status if (i) it satisfied all of the asset tests at the close of the preceding
calendar quarter and (ii) the discrepancy between the value of the Company's
assets and the asset requirements either did not exist immediately after the
acquisition of any particular assets or was not wholly or partly caused by such
an acquisition (i.e., the discrepancy arose from changes in the market values of
its assets). If the condition described in clause (ii) of the preceding sentence
is not satisfied, the Company still could avoid disqualification by eliminating
any discrepancy within 30 days after the close of the quarter in which such
discrepancy arose. The Company intends to maintain adequate records of the value
of its assets to facilitate compliance with the asset tests and to take such
other actions within 30 days after the close of any quarter as may be required
to cure any noncompliance.

Annual Distribution Requirements. To qualify as a REIT, the Company is
required to make distributions (other than capital gain distributions) to its
shareholders in an amount at least equal to (a) the sum of (i) 95% of the
Company's REIT Taxable Income (computed without regard to the dividends-paid
deduction and the Company's net capital gain) and (ii) 95% of the net income, if
any, from foreclosure property in excess of the special tax on income from
foreclosure property, minus (b) the sum of certain items of noncash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before the Company timely files its federal
income tax return for such year and if paid on or before the first regular

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distribution after such declaration. To the extent that the Company does not
distribute all of its net capital gain or distributes less than 100% (but at
least 95%) of its REIT Taxable Income as adjusted, it will be subject to tax
thereon at regular ordinary or capital gains corporate tax rates. Furthermore,
if the Company should fail to distribute during each calendar year at least the
sum of (a) 85% of its REIT ordinary income for that year, (b) 95% of its REIT
Capital gain net income for that year and (c) any undistributed taxable income
from prior periods, the Company would be subject to a four percent excise tax on
the excess of such required distribution over the amounts actually distributed.
In addition, during its Recognition Period, if the Company disposes of any asset
subject to the Built-In Gain Rules, the Company will be required, pursuant to
guidance issued by the IRS, to distribute at least 95% of the Built-In Gain
(after tax), if any, recognized on the disposition of the asset.

The Company intends to make timely distributions sufficient to satisfy
the annual distribution requirements.

It is expected that the Company's REIT taxable income will be less
than its cash flow due to the allowance of depreciation and other noncash
charges in computing REIT taxable income. Accordingly, the Company anticipates
that it will generally have sufficient cash or liquid assets to enable it to
satisfy the 95% distribution requirement. It is possible, however, that the
Company, from time to time, may not have sufficient cash or other liquid assets
to meet the 95% distribution requirement or to distribute such greater amount as
may be necessary to avoid income and excise taxation, due to timing differences
between (1) the actual receipt of income and actual payment of deductible
expenses and (ii) the inclusion of such income and deduction of such expenses in
arriving at taxable income of the Company, or if the amount of nondeductible
expenses such as principal amortization or capital expenditures exceed the
amount of noncash deductions. In the event that such timing differences occur,
the Company may find it necessary to arrange for borrowings if possible, pay
taxable stock dividends in order to meet the distribution requirements.

Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the Company
may be able to avoid being taxed on amounts distributed as deficiency dividends.
The Company will, however, be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.

Recordkeeping Requirement. Pursuant to applicable Treasury
Regulations, in order to qualify as a REIT, the Company must maintain certain
records and request on an annual basis certain information from its shareholders
designed to disclose the actual ownership of its outstanding shares. The Company
intends to comply with such requirements, and counsel's opinion as to the
Company's status as a REIT assumes that the Company will at all times comply
with such requirements. Counsel will not, however, monitor such compliance by
the Company.

Earnings and Profits. Prior to this offering, Insight Environmental
Corporation ("IEC") was merged into the Company. Under recent final Treasury
Regulations, earnings and profits of a non-REIT predecessor corporation may
adversely affect the ability of a corporation to be eligible to be taxed as a
REIT. Accordingly, the Company would fail to be eligible to be taxed as a REIT
if IEC had current or accumulated earnings and profits. The Company has
represented that IEC had no earnings and profits for federal income tax
purposes. In rendering its opinion regarding the eligibility of the Company to
qualify as a REIT, Thelen, Marrin, Johnson & Bridges is relying on such
representations.

FAILURE TO QUALIFY

If the Company fails to qualify for taxation as a REIT in any taxable
year and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which the
Company falls to qualify will not be deductible by the Company nor will they be
required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be dividends,
taxable as ordinary income, and subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends-

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received deduction. Unless the Company is entitled to relief under specific
statutory provisions, the Company also will be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances the Company
would be entitled to such statutory relief. For example, if the Company fails to
satisfy the gross income tests because non-qualifying income that the Company
intentionally incurs exceeds the limit on such income, the IRS could conclude
that the Company's failure to satisfy the tests was not due to reasonable cause.
See "Risk Factors -- Adverse Consequences of Failure to Qualify as a REIT; Other
Tax Liabilities."

TAXATION OF U.S. SHAREHOLDERS

As used herein, the term "U.S. Shareholder" means a holder of Equity
Stock that (for United States federal income tax purposes) is (a) a citizen or
resident of the United States, (b) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof or (c) an estate or trust, the income of which is
subject to United States federal income taxation regardless of its source. For
any taxable year for which the Company qualifies for taxation as a REIT, amounts
distributed to taxable U.S. Shareholders will be taxed as set forth below.

Distributions Generally. Distributions to U.S. Shareholders, other
than capital gain dividends discussed below, will constitute dividends up to the
amount of the Company's current and accumulated earnings and profits and will be
taxable to the shareholders as ordinary income. These distributions are not
eligible for the dividends-received deduction for corporations. To the extent
that the Company makes a distribution in excess of its current and accumulated
earnings and profits, the distribution will be treated first as a tax-free
return of capital, reducing the tax basis in the U.S. Shareholder's shares, and
the distribution in excess of a U.S. Shareholder's tax basis in its Equity Stock
will be taxable as gain realized from the sale of its Equity Stock.
Distributions declared by the Company in October, November or December of any
year payable to a shareholder of record on a specified date in any such month
shall be treated as both paid by the Company and received by the shareholder on
December 31 of that year, provided that the dividend is actually paid by the
Company during January of the following calendar year. Shareholders may not
include in their own federal income tax returns any tax losses of the Company.

Any "deficiency dividend" will be treated as an ordinary or capital
gain dividend, as the case may be, regardless of the Company's earnings and
profits. As a result, shareholders may be required to treat certain
distributions that would otherwise result in a tax-free return of capital as
taxable dividends.

Capital Gain Distributions. Distributions to U.S. Shareholders that
are properly designated by the Company as capital gain dividends will be treated
as long-term capital gains (to the extent they do not exceed the Company's
actual net capital gain) for the taxable year without regard to the period for
which the shareholder has held his stock. However, corporate shareholders may be
required to treat a portion of certain capital gain dividends as ordinary
income. Capital gain dividends are not eligible for the dividends-received
deduction for corporations.

Passive Activity Loss and Investment Interest Limitations.
Distributions from the Company and gain from the disposition of Equity Stock
will not be treated as passive activity income, and therefore shareholders may
not be able to apply any "passive losses" against such income. Distributions
from the Company (to the extent they do not constitute a return of capital) will
generally be treated as investment income for purposes of the investment income
limitation; under recently enacted legislation, net capital gain from the
disposition of Equity Stock generally will be excluded from investment income.

Certain Dispositions of Stock. In general, any gain or loss realized
upon a taxable disposition of the Equity Stock by a shareholder who is not a
dealer in securities will be treated as long-term capital gain or loss if the
shares of Equity Stock have been held for more than one year and otherwise as
short-term capital gain or loss. Losses incurred on the sale or exchange of
Equity Stock held for less than six months (after applying certain holding
period rules) will be deemed long-term capital loss to the extent of any capital
gain dividends received by the selling shareholder from those shares.

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Capital Gains and Losses. A capital asset generally must be held for
more than one year in order for gain or loss derived from its sale or exchange
to be treated as long-term capital gain or loss. The Omnibus Budget
Reconciliation Act of 1993 increased the highest marginal individual income tax
rate to 39.6%, but generally did not change the tax rate on net capital gains
applicable to individuals. Thus the tax rate differential between capital gain
and ordinary income for individuals may be significant. In addition, the
characterization of income as capital or ordinary may affect the deductibility
of capital losses. Capital losses not offset by capital gains may be deducted
against and individual's ordinary income only up to a maximum annual deduction
of $3,000. Unused capital losses may be carried forward. All net capital gain of
a corporate taxpayer is subject to tax at ordinary corporate rates. A corporate
taxpayer can deduct capital losses only to the extent of capital gains, with
unused losses being carried back three years and forward five years. The issue
price of the Units will be allocated between the Series "A" Warrants and the
Common Stock. No gain or loss will be recognized upon the exercise of a Series
"A" Warrant (except to the extent of cash received in lieu of fractional shares,
if any). Capital gain or loss will be recognized upon the later sale or exchange
or the Warrants or the shares acquired by the exercise of the Warrants.

Purchase of 8% Preferred by the Company. While the 8% Preferred is
generally not redeemable, the Company does have the right to purchase 8%
Preferred from a holder if ownership by the holder could violate ownership
limitations imposed by the Company's Charter designed to protect the REIT status
of the Company. The treatment to be accorded to any purchase by the Company (as
distinguished from a sale, exchange or other disposition) of 8% Preferred can
only be determined on the basis of particular facts as to each holder at the
time of the purchase. In general, a holder of 8% Preferred will recognize
capital gain or loss measured by the difference between the amount received by
the holder of 8% Preferred upon the sale and such holder's adjusted tax basis in
the 8% Preferred purchased (provided the 8% Preferred is held as a capital
asset), if such purchase (i) results in a "complete termination" of the holder's
stock interest in all classes of stock of the Company under Section 302(b)(3) of
the Code, (ii) is "substantially disproportionate" with respect to the holder's
interest in the Company under Section 302(b)(2) of the Code, or (iii) is "not
essentially equivalent to a dividend" with respect to the holder under Section
302(b)(1) of the Code. In applying these tests, there must be taken into account
not only any 8% Preferred owned by the holder, but also such holder's ownership
of Common Stock, other series of preferred shares and any options (including
stock purchase rights) to acquire any of the foregoing. The holder must also
take into account any such securities (including options) which are considered
to be owned by such holder by reason of constructive ownership rules set forth
in Section 318 and 302(c) of the Code.

A "substantially disproportionate" reduction in the interest of a
holder will have occurred if, as a result of the purchase, (1) the holder's
ownership of all of the outstanding voting stock of the Company is reduced
immediately after the purchase to less than 80% of the holder's percentage
interest in such stock immediately before the redemption; (2) the holder's
percentage ownership of the Common Stock after and before the purchase meets the
same 80% requirement, and (3) the holder owns, immediately after the purchase,
less than 50% of the total combined voting power of all classes of stock
entitled to vote. Based upon current law, it is possible that purchase of 8%
Preferred from a holder would be considered "not essentially equivalent to a
dividend." However, whether a distribution is "not essentially equivalent to a
dividend" depends on all of the facts and circumstances. The application of
these tests to a purchase of 8% Preferred is unclear, and a holder intending to
rely on any of these tests at the time such a purchase occurs should consult his
own tax advisor to determine their application to its particular situation.

If the purchase does not meet any of the tests under Section 302 of
the Code, then the purchase proceeds received from the 8% Preferred will be
treated as a distribution on 8% Preferred. If the purchase is taxed as a
dividend, the holder's adjusted tax basis in the 8% Preferred will be
transferred to any other stock holdings of the holder in the Company.

Treatment of Tax-Exempt Shareholders. Tax-exempt entities ("Exempt
Organizations"), including individual retirement accounts and pension and profit
sharing trusts described in Section 401(a) of the Code and exempt from tax under
Section 501(a) of the Code ("Qualified Trusts") generally are exempt from
federal income taxation; however, they are taxable on their "unrelated business
taxable income" ("UBTI"). Distributions from the Company to an Exempt
Organization generally will not constitute UBTI, but there are three exceptions
to that general rule. First, if an Exempt Organization has borrowed to acquire
or carry its Equity Stock, a portion of its

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income from the Company will constitute UBTI pursuant to the "debt-financed
property" rules. Second, social clubs, voluntary employees' beneficiary
associations, supplemental unemployment benefit trust and qualified group legal
services plans that are exempt from taxation under Code sections 501(c)(7), (9),
(17) and (20), respectively, are subject to different UBTI rules, which
generally will require them to characterize distributions from the Company as
UBTI. Third, Qualified Trusts that hold more than ten percent (by value) of the
interests in the Company will be required to treat a certain percentage of the
Company's distributions as UBTI if (i) the Company would not qualify as a REIT
for federal income tax purposes but for the application of a "look-through"
exception to the five or fewer requirement applicable to shares held by
Qualified Trusts and (ii) the Company is "predominantly held" by Qualified
Trusts. The Company will be considered predominantly held by Qualified Trusts if
either (i) a single Qualified Trust holds more than 25% by value of the
interests in the Company or (ii) one or more Qualified Trusts, each owning more
than ten percent by value of the interests in the Company, hold in the aggregate
more than 50% of the interests in the Company. The percentage of any Company
distribution treated as UBTI is equal to the ratio of (a) the UBTI earned by the
Company (treating the Company as if it were a Qualified Trust and therefore
subject to tax on UBTI) to (b) the total gross income (less certain associated
expenses) of the Company. A de minimis exception applies where the ratio set
forth in the preceding sentence is less than five percent for any year.

SPECIAL TAX CONSIDERATIONS FOR FOREIGN SHAREHOLDERS

The rules governing United States income taxation of non-resident
alien individuals, foreign corporations, foreign partnerships and foreign trusts
and estates (collectively, "Non-U.S. Shareholders") are complex, and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE EQUITY STOCK, INCLUDING ANY REPORTING REQUIREMENTS.

Distributions to Non-U.S. Shareholders that are not attributable to
gain from sales or exchanges by the Company of U.S. real property interests and
are not designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Equity Stock is treated as
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade or
business, the Non-U.S. Shareholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. Shareholders are taxed with
respect to such distributions (and also may be subject to the 30% branch profits
tax in the case of a Non-U.S. Shareholder that is a foreign corporation). The
Company expects to withhold U.S. income tax at the rate of 30% on the gross
amount of any such distributions made to a Non-U.S. Shareholder unless (i) a
lower treaty rate applies and any required form evidencing eligibility for that
reduced rate is filed with the Company or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with the Company claiming that the distribution is effectively
connected income. Distributions in excess of current and accumulated earnings
and profits of the Company will not be taxable to a shareholder to the extent
that such distributions do not exceed the adjusted basis of the Non-U.S.
Shareholder's Equity Stock, but rather will reduce the adjusted basis of such
shares. To the extent that distributions in excess of current and accumulated
earnings and profits exceed the adjusted basis of a Non-U.S. Shareholder's
Equity Stock, such distributions 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, her or its Common Stock, as described below. Because it
generally cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of current and accumulated earnings and
profits, the entire amount of any distribution normally will be subject to
withholding at the same rate as a dividend. However, amounts so withheld are
refundable to the extent it is determined subsequently that such distribution
was, in fact, in excess of current and accumulated earnings and profits of the
Company.

For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions attributable to gain from sales of U.S. real property
interests are taxed to a Non-U.S. Shareholder as if

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such gain were effectively connected with a U.S. business. Non-U.S. Shareholders
thus would be taxed at the normal capital gain rates applicable to U.S.
Shareholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals).
Distributions subject to FIRPTA also may be subject to a 30% branch profits tax
in the hands of a foreign corporate shareholder not entitled to treaty relief or
exemption. The Company is required by currently applicable Treasury Regulations
to withhold 34% of any distribution that is designated by the Company as a
capital gains dividend. However, because the Omnibus Budget Reconciliation Act
of 1993 provides for an increase in the rate of withholding for distributions
made by certain domestic partnerships, trust and estates to 35%, it is likely
that the Treasury Regulations will be amended to impose a similar withholding
rate on REIT capital gain dividends. The amount withheld is creditable against
the Non-U.S. Shareholder's FIRPTA tax liability.

Gain recognized by a Non-U.S. Shareholder upon a sale of his, her or
its Equity Stock generally will not be taxed under FIRPTA if the Company is a
"domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. It is currently anticipated that
the Company will be a "domestically controlled REIT" and, therefore, the sale of
the Equity Stock will not be subject to taxation under FIRPTA. However, because
the Equity Stock will be publicly traded, no assurance can be given that the
Company will continue to be a "domestically controlled REIT." Furthermore, gain
not subject to FIRPTA will be taxable to a Non-U.S. Shareholder if (i)
investment in the Equity Stock is effectively connected with the Non-U.S.
Shareholder's U.S. trade or business, in which case the Non-U.S. Shareholder
will be subject to the same treatment as U.S. Shareholders with respect to such
gain, or (ii) the Non-U.S. Shareholder is a nonresident alien individual who was
present in the United States for 183 days or more during the taxable year and
certain other conditions apply, in which case the nonresident alien individual
will be subject to a U.S. tax on the individual's capital gains including by way
of withholding by the Company. If the gain on the sale of the shares of Equity
Stock were to be subject to taxation under FIRPTA, the Non-U.S. Shareholder
would be subject to the same treatment as U.S. Shareholders with respect to such
gain (subject to applicable alternative minimum tax, a special alternative
minimum tax in the case of nonresident alien individuals and the possible
application of the 30% branch profits tax in the case of foreign corporations).

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX

Under certain circumstances, U.S. Shareholders may be subject to
backup withholding at a rate of 31% on payments made with respect to, or cash
proceeds of a sale or exchange of, Equity Stock. Backup withholding will apply
only if the holder (i) fails to furnish his or her taxpayer identification
number ("TIN") (which, for an individual, would be his or her Social Security
Number), (ii) furnishes an incorrect TIN, (iii) is notified by the IRS that he
or she has failed properly to report payments of interest and dividends or is
otherwise subject to backup withholding or (iv) under certain circumstances,
fails to certify, under penalties of perjury, that he or she has furnished a
correct TIN and (a) that he or she has not been notified by the IRS that he or
she is subject to backup withholding for failure to report interest and dividend
payments or (b) that he or she has been notified by the IRS that he or she is no
longer subject to backup withholding. Backup withholding will not apply with
respect to payments made to certain exempt recipients, such as corporations and
tax-exempt organizations.

U.S. Shareholders should consult their own tax advisors regarding
their qualifications for exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a U.S.
Shareholder will be allowed as a credit against the U.S. Shareholder's United
States federal income tax liability and may entitle the U.S. Shareholder to a
refund, provided that the required information is furnished to the IRS.

Additional issues may arise pertaining to information reporting and
backup withholding for Non-U.S. Shareholders. Non-U.S. Shareholders should
consult their tax advisors with regard to U.S. information reporting and backup
withholding.

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ANTI-ABUSE REGULATIONS

The United States Treasury Department issued Treasury Regulations at
the end of 1994 which authorize the IRS, in certain "abusive" transactions
involving partnerships, to disregard the form of the transaction and recast it
for federal tax purposes as the IRS deems appropriate (the "Anti-Abuse
Regulations"). The Anti-Abuse Regulations would apply where a partnership is
formed or utilized in connection with a transaction (or series of related
transactions) with a principal purpose of substantially reducing the present
value of the partners' aggregate federal tax liability in a manner inconsistent
with the intent of the partnership provisions of the Code. Prior to the issuance
of the Anti-Abuse Regulations, officials at the IRS and the Treasury Department
stated publicly that the Anti-Abuse Regulations are not intended to affect a
corporation, such as the Company, that owns an interest in a partnership and is
seeking to qualify as a REIT.

The Anti-Abuse Regulations contain a number of examples demonstrating
the application of the Anti-Abuse Regulations to certain fact patterns. However,
the Anti-Abuse Regulations caution that each outcome in the examples is unique
to the facts and circumstances of a particular example, and that the addition or
deletion of any fact or circumstance could alter its outcome. In one of the
examples, a corporation that elects to be treated as a REIT contributes
substantially all of the proceeds from a public offering to a partnership in
exchange for a general partner interest. The limited partners of the partnership
contribute real property assets to the partnership, subject to liabilities that
exceed their respective aggregate bases in such property. In addition, some of
the limited partners have the right, beginning two years after the formation of
the partnership, to require the redemption of their limited partnership
interests in exchange for cash or REIT stock (at the REIT's option) equal to the
fair market value of their respective interests in the partnership at the time
of the redemption. The example concludes that the use of the partnership is not
inconsistent with the intent of the partnership provisions of the Code and,
thus, cannot be recast by the IRS. In support of this conclusion, the example
notes that the REIT may make other real estate investments and other business
decisions, including the decision to raise additional capital for these
purposes. Thelen, Marrin, Johnson & Bridges believes that the facts of this
example do not materially differ from the facts regarding the relationship
between the Company and the Operating Partnership as described herein. Based on
the foregoing, Thelen, Marrin, Johnson & Bridges is of the view that the Anti-
Abuse Regulations should not have any adverse impact on the Company's ability to
qualify as a REIT or the treatment of the Operating Partnership as a
partnership. However, because the Anti-Abuse Regulations are extremely broad in
scope and would be applied based on an analysis of all of the facts and
circumstances, counsel can give no assurance that the IRS will not attempt to
distinguish the facts of the example and the facts regarding the relationship
between the Company and the Operating Partnership, and apply the Anti-Abuse
Regulations to the Company.

TAX ASPECTS OF THE OPERATING PARTNERSHIP

The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Operating
Partnership. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.

Classification as a Partnership

The Company will be entitled to include in its income its distributive
share of the Operating Partnership's income and to deduct its distributive share
of the Operating Partnership's losses only if the Operating Partnership is
classified for federal income tax purposes as a partnership rather than an
association taxable as a corporation. An organization formed as a partnership
will be treated as a partnership, rather than as a corporation, for federal
income tax purposes only if it has no more than two of the four corporate
characteristics that the Treasury Regulations use to distinguish a partnership
from a corporation for tax purposes. Those four characteristics are continuity
of life, centralization of management, limited liability, and free
transferability of interests.

The Operating Partnership has not requested a ruling from the IRS that
it will be classified as a partnership for federal income tax purposes. Instead,
at the Initial Closing, Thelen, Marrin, Johnson & Bridges will deliver its
opinion that, based on the provisions of the Operating Partnership Agreement,
certain factual assumptions, and certain representations described in the
opinion, the Operating Partnership will not possess more

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than two corporate characteristics and thus will be treated for federal income
tax purposes as a partnership and not as an association taxable as a
corporation. Unlike a tax ruling, an opinion of counsel is not binding upon the
IRS, and no assurance can be given that the IRS will not challenge the status of
the Operating Partnership as a partnership for federal income tax purposes. If
such challenge were sustained by a court, the Operating Partnership would be
treated as a corporation for federal income tax purposes, as described below. In
addition, the opinion of Thelen, Marrin, Johnson & Bridges is based on existing
law, which is to a great extent the result of administrative and judicial
interpretation. No assurance can be given that administrative or judicial
changes would not modify the conclusions expressed in the opinion.

With regard to the opinion that the Operating Partnership will be
treated as a partnership for federal income tax purposes, Section 7704 of the
Code generally provides that a "publicly traded partnership" will be taxed as a
corporation. Section 7704(b) defines a "publicly traded partnership" as any
partnership whose interests are traded on an established securities market or
are readily tradable on a "secondary market" (or the substantial equivalent
thereof). Treasury Regulations providing further clarification of the meaning of
the term "publicly traded partnership" were issued on December 4, 1995. These
regulations provide limited safe harbors from the definition of a "publicly
traded partnership." Pursuant to one of those safe harbors ("Private Placement
Safe Harbor"), interests in a partnership will not be treated as readily
tradable on a secondary market or the substantial equivalent thereof if (i) all
of the partnership interests are issued in a transaction (or transactions) that
is not required to be registered under the Securities Act and (ii) the
partnership does not have more than 100 partners at any time during the taxable
year of the partnership. For purposes of the 100-partner limitation, a person
owning an interest in a partnership, limited liability company, grantor trust,
or S corporation ("flow-through entity") that owns an interest in the
partnership, directly or indirectly through other flow-through entities, will be
treated as a partner in the partnership only if, among other things, a principal
purpose of the use of the tiered arrangement is to permit the partnership to
satisfy the 100-partner limitation in the Private Placement Safe Harbor.

Since the General Partner has represented that (i) the offering of OP
Units will not be registered under the Securities Act, (ii) the Operating
Partnership at no time will have more than 100 partners (taking into account as
a partner, unless otherwise advised by tax counsel, any person which indirectly
owns an interest in the Operating Partnership through a flow-through entity only
if such flow-through entity was formed either (A) less than two years prior to
its direct or indirect acquisition of an interest in the Operating Partnership,
or (B) prior to such period and has not conducted an active business for the
two-year period ending on such acquisition date), and (iii) the OP Units will
not be traded on an established securities market, we are of the opinion that
the Operating Partnership will not be treated as a publicly traded partnership.

If for any reason the Operating Partnership was taxable as a
corporation, rather than as a partnership, for federal income tax purposes, the
Company would not be able to satisfy the income and asset requirements for REIT
status. Thus the Company would be subject to tax as a regular corporation and
would not receive a deduction for dividends paid to its shareholders. See
"Federal Income Tax Considerations -- Requirements for Qualification Income --
tests" and "Requirements for Qualification -- Asset Tests." In addition, any
change in the Operating Partnership's status for tax purposes might be treated
as a taxable event, in which case the Company might incur a tax liability
without any related cash distribution. Further, items of income and deduction of
the Operating Partnership would not pass through to its partners, and its
partners would be treated as shareholders for tax purposes. Consequently, 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.

Income Taxation of the Operating Partnership and Its Partners

Partners, Not the Operating Partnership, Subject to Tax. A partnership
is not a taxable entity for federal income tax purposes. Rather, the Company
will be required to take into account its allocable share of the Operating
Partnership's income, gains, losses, deductions, and credits for any taxable
year of the Operating Partnership ending within or with the taxable year of the
Company, without regard to whether the Company has received or will receive any
distribution from the Operating Partnership.

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Partnership Allocations. Although a partnership agreement generally
will determine the allocation of income and losses among partners, such
allocations will be disregarded for tax purposes under Section 704(b) of the
Code if they do not comply with the provisions of Section 704(b) of the Code and
the Treasury Regulations promulgated thereunder. If an allocation is not
recognized for federal income tax purposes, the item subject to the allocation
will be reallocated in accordance with the partners' interests in the
partnership, which will be determined by taking into account all of the facts
and circumstances relating to the economic arrangement of the partners with
respect to such item. Thelen, Marrin, Johnson & Bridges is of the opinion that
the Operating Partnership's allocations of taxable income and loss comply with
the requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.

Tax Allocations With Respect to Contributed Properties and Revalued
Operating Partnership Assets. Pursuant to Section 704(c) of the Code, income,
gain, loss, and deduction attributable to appreciated or depreciated property
that is contributed to a partnership in exchange for an interest in the
partnership must be allocated for federal income tax purposes in a manner such
that the contributor is charged with, or benefits from, the unrealized gain or
unrealized loss associated with the property at the time of the contribution.
The amount of such unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of the contributed property at the time
of contribution and the adjusted tax basis of such property at the time of
contribution ("Book-Tax Differences"). Treasury Regulations require partnerships
to use a "reasonable method" for allocating items affected by Section 704(c) of
the Code and outlining certain reasonable allocation methods of accounting for
Book-Tax Differences. When the values of a partnership's assets are adjusted,
Book-Tax Differences also arise, and similar rules in accounting for such Book-
Tax Differences apply.

In general, depreciation of amortization deductions of the Operating
Partnership will be allocated among the partners in accordance with their
percentage interests in the Operating Partnership, except to the extent that the
Operating Partnership is required under Section 704(c) and Treasury Regulations
thereunder to use a method for allocating tax depreciation deductions
attributable to contributed properties and revalued Operating Partnership assets
that generally results in the Company receiving a disproportionately large share
of such deductions in the case of contributed properties. In addition, gain on
sale of any contributed property will generally be specially allocated to the OP
Limited Partners to the extent of any "built-in" gain with respect to such
property for federal income tax purposes. Under the Operating Partnership
Agreement, the Company has the discretion to choose allocation methods under
Section 704(c) of the Code and Treasury Regulations thereunder for eliminating
Book-Tax Differences.

Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in the Operating Partnership generally will be equal to
(i) the amount of cash and the basis of any other property contributed to the
Operating Partnership by the Company, (ii) increased by (A) its allocable share
of the Operating Partnership's income and (B) its allocable share of
indebtedness of the Operating Partnership, and (iii) reduced, but not below
zero, by (A) the Company's allocable share of the Operating Partnership's loss
and (B) the amount of cash distributed to the Company (including deemed
distributions as a result of reductions in the Company's allocable share of
indebtedness of the Operating Partnership).

If the allocation of the Company's distributive share of the Operating
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Operating Partnership below zero, the recognition of
such loss will be deferred until such time as the recognition of such loss would
not reduce the Company's adjusted tax basis below zero. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's share of
the indebtedness of the Operating Partnership (such decrease being considered a
constructive cash distribution to the Company), would reduce the Company's
adjusted tax basis below zero, such distributions (including such constructive
distributions) would constitute taxable income to the Company. Such
distributions and constructive distributions normally would be characterized as
capital gain, and, if the Company's partnership interest in the Operating
Partnership has been held for longer than the long-term capital gain holding
period (currently one year), the distributions and constructive distributions
would constitute long-term capital gain.

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Depreciation Deductions Available to the Operating Partnership.
Immediately after the Closing, the Company will make a cash contribution and
contributions of properties to the Operating Partnership in exchange for a
partnership interest in the Operating Partnership. The Operating Partnership
then will purchase for cash (or cash plus assumption of debts) certain
properties. To that extent, the Operating Partnership's initial basis in such
properties for federal income tax purposes generally will be equal to the
purchase price paid by the Operating Partnership. To the extent that the
Operating Partnership acquires properties in exchange for limited partnership
interests in the Operating Partnership, the Operating Partnership's initial
basis in each such property for federal income tax purposes should be the same
as the transferor's basis in that property on the date of acquisition. Although
the law is not entirely clear, the Operating Partnership intends to depreciate
such depreciable property for federal income tax purposes over the same
remaining useful lives and under the same methods used by the transferors. The
Operating Partnership's tax depreciation deductions will be allocated among the
partners in accordance with their percentage interests in the Operating
Partnership (except to the extent that the Operating Partnership is required
under Section 704(c) of the Code to use a method for allocating depreciation
deductions attributable to the contributed properties that results in the
Company receiving a disproportionately large share of such deductions).

Sale of Operating Partnership's Property. Generally, any taxable gain
realized by the Operating Partnership on the sale of property by the Operating
Partnership held for more than one year will be long-term capital gain, except
for any portion of such gain that is treated as depreciation or cost recovery
recapture. Any taxable gain recognized by the Operating Partnership on the
disposition of the contributed properties will be allocated first to the OP
Limited Partners under Section 704(c) of the Code to the extent of their "built-
in gain" on those properties for federal income tax purposes. The OP limited
partners' "built-in gain" on the contributed properties sold will equal the
excess of the OP Limited Partners' proportionate share of the book value of
those properties over the OP Limited Partners' tax basis allocable to those
contributed properties at the time of the sale. Any remaining taxable gain
recognized by the Operating Partnership on the disposition of the contributed
properties and any taxable gain recognized by the Operating Partnership on the
disposition of the other properties, will be allocated among the partners in
accordance with their percentage interests in the Operating Partnership. The
Board of Directors has adopted a policy that any decision to sell contributed
properties will be made by a majority of the Independent Directors.

The Company's share of any gain realized by the Operating Partnership
on the sale of any property held by the Operating Partnership as inventory or
other property held primarily for sale to customers in the ordinary course of
the Operating Partnership's trade or business will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. See "Federal
Income Tax Consideration -- Requirements for Qualification -- Income Tests."
Such prohibited transaction income also may have an adverse effect upon the
Company's ability to satisfy the income tests for REIT status. See "Federal
Income Tax Considerations -- Requirements For Qualification -- Income Tests"
above. The Company, however, does not presently intend to allow the Operating
Partnership to acquire or hold any property that represents inventory or other
property held primarily for sale to customers in the ordinary course of the
Company's or the Operating Partnership's trade or business.

STATE AND LOCAL TAX

The Company and its shareholders may be subject to state and local tax
in various states and localities, including those in which it or they transact
business, own property, or reside. The tax treatment of the Company and the
shareholders in such jurisdictions may differ from the federal income tax
treatment described above. CONSEQUENTLY, PROSPECTIVE SHAREHOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN
INVESTMENT IN THE EQUITY STOCK OF THE COMPANY.

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ERISA CONSIDERATIONS

The following is a summary of material considerations arising under
the Employee Retirement Income Security Act of 1974 ("ERISA") and the prohibited
transactions provisions of Section 4975 of the Code that may be relevant to a
prospective purchaser of Common Stock. This discussion does not purport to deal
with all aspects of ERISA or Section 4975 of the Code that may be relevant to
particular shareholders in light of their particular circumstances. The
statements in this discussion are based on current provisions of ERISA and the
Code, existing and currently proposed regulations thereunder, and administrative
rulings and reported judicial decisions with respect thereto. No opinion of
counsel has been sought regarding the ERISA Considerations. No assurance can be
given that future (and perhaps adverse or retroactive) legislative, judicial, or
administrative changes will not affect the accuracy of any statements in this
Prospectus.

A FIDUCIARY MAKING THE DECISION TO INVEST IN COMMON STOCK OR 8%
PREFERRED ON BEHALF OF A PROSPECTIVE PURCHASER WHICH IS AN EMPLOYEE BENEFIT
PLAN, A TAX-QUALIFIED RETIREMENT PLAN, OR AN IRA IS ADVISED TO CONSULT WITH HIS
OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA,
SECTION 4975 OF THE CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP,
OR SALE OF COMMON OR 8% PREFERRED STOCK BY SUCH PLAN OR IRA.

SPECIAL INVESTMENT CONSIDERATIONS FOR EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED
RETIREMENT PLANS AND IRAS

Each fiduciary of a pension, profit-sharing, or other employee benefit
plan subject to Title I of ERISA (an "ERISA Plan") should carefully consider
whether an investment in the Common Stock or 8% Preferred (collectively, "Equity
Stock") is consistent with his fiduciary responsibilities under ERISA. In
particular, the fiduciary requirements of Part 4 of Subtitle B of Title I of
ERISA require an ERISA Plan's investments to be (i) for the exclusive purpose of
providing benefits to the participants and beneficiaries of the ERISA Plan, (ii)
prudent, (iii) diversified in order to reduce the risk of large losses, unless
it is clearly prudent for investments not to be diversified, and (iv) in
accordance with the documents and instruments governing the ERISA Plan. In
determining whether an investment in the Equity Stock is prudent for purposes of
ERISA, the appropriate fiduciary of an ERISA Plan should consider all of the
facts and circumstances, including (among other things) whether the investment
is reasonably designed, as a part of the ERISA Plan's portfolio for which the
fiduciary has investment responsibility, to meet the objectives of the ERISA
Plan, taking into consideration the risk of loss and opportunity for gain (or
other return) from the investment, the diversification, cash flow, and funding
requirements of the ERISA Plan, and the liquidity and current return of the
ERISA Plan's portfolio. A fiduciary should also take into account the nature of
the Company's business, the length of the Company's operating history and the
possibility of unrelated business income.

The fiduciary of an individual retirement account which is not
contributed to or sponsored by an employer or employee association (an "IRA") or
of a retirement plan not subject to Title I of ERISA because it does not cover
common law employees (a "Keogh Plan") or because it is a governmental or church
plan (together with IRAs and Keogh Plans, collectively, referred to as "Non-
ERISA Plans") should consider that a Non-ERISA Plan may only make investments
that are authorized by the appropriate governing documents or applicable state
law.

A fiduciary of ERISA Plans or the person making the investment
decision for an IRA or a Keogh Plan should also consider the application of the
prohibited transaction provisions of ERISA and Section 4975 of the Code, which
generally prohibit direct or indirect transactions between such plans and
certain parties (called "parties in interest" or "disqualified persons") that
have certain relations to the plan. A "disqualified person" (other than a
fiduciary acting only as such) with respect to a plan which is subject to
Section 4975 of the Code who participates in a prohibited transaction with such
plan could be subject to (i) an initial five percent excise tax on the amount
involved in the prohibited transaction and (ii) an excise tax equal to 100% of
the amount involved if the prohibited transaction is not corrected within a
specified time. If the disqualified person who engages in the transaction is the
individual on behalf of whom an IRA is established (or his beneficiary), the IRA
may lose its tax-exempt status and its assets may be deemed to have been
distributed to such individual in a taxable distribution on

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account of the prohibited transaction (in which case the excise tax under
Section 4975 is not applicable). In addition, a fiduciary who causes an ERISA
Plan to engage in a transaction that the fiduciary knows or should know is a
prohibited transaction may be liable to the ERISA Plan for any loss the ERISA
Plan incurs as a result of the transaction or for any profits earned by the
fiduciary in the transaction and may be subject to other relief (including a 20%
penalty). There are a number of statutory and administrative exemptions to the
prohibited transaction rules which, if certain conditions are satisfied, permit
certain transactions (which might otherwise be prohibited) between ERISA Plans,
Keogh Plans or IRAs and parties in interest or disqualified persons.

STATUS OF THE COMPANY UNDER ERISA

This section discusses certain principles that apply in determining
whether the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and the Code apply to an entity because one or more
investors in the entity's equity interests is an ERISA Plan or a Non-ERISA Plan
subject to Section 4975 of the Code. This section also identifies considerations
that would be relevant in the unlikely event that the ERISA fiduciary
requirements were applicable to the Company's operation.

In certain circumstances, where equity interests in an entity are
owned by one or more ERISA Plans or Non-ERISA Plans, the investing plans will,
for purposes of ERISA and Section 4975, be considered to own not only the equity
interest in the entity, but a proportionate interest in the underlying assets of
the entity. In that case, as described below, ERISA's fiduciary requirements and
the excise tax under Section 4975 of the Code would be relevant to the
operations of the entity. As described below, the Company does not believe that
its assets will be considered assets of investing plans for these purposes, and
intends to conduct its operations without regard to such requirements.

The U.S. Department of Labor ("DOL"), which has certain administrative
responsibility with respect to ERISA Plans and Non-ERISA Plans, has issued a
regulation defining the term "plan assets" (the "DOL Regulation"). The DOL
Regulation generally provides that when an ERISA Plan or Non-ERISA Plan acquires
a security that is an equity interest in an entity and that security is neither
a "publicly-offered security" nor a security issued by an investment company
registered under the Investment Company Act of 1940, the ERISA Plan's or Non-
ERISA Plan's assets include both the equity interest and an undivided interest
in each of the underlying assets of the entity, unless it is established either
that the entity is an "operating company" or that equity participation in the
entity by benefit plan investors is not significant. The Company believes that
its shares of common stock are publicly-offered securities within the meaning of
the DOL Regulation.

The DOL Regulation defines a publicly-offered security as a security
that is "widely held," "freely transferable," and either part of a class of
securities registered under the Securities Exchange Act of 1934, or sold to the
plan as part of an offering to the public pursuant to an effective registration
statement under the Securities Act (provided the class of securities of which
such security is part is registered under the Securities Exchange Act of 1934
within 120 days after the end of the fiscal year of the issuer during which the
offering occurred).

The DOL Regulation provides that a security is "widely held" only if
it is part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the initial public offering as a result of events beyond the
issuer's control. The Company expects the Equity Stock to be "widely held" upon
completion of the Offering.

The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulation further provides that where
a security is part of an offering in which the minimum investment is $10,000 or
less (as is the case with this Offering), certain restrictions ordinarily will
not, alone or in combination, affect a finding that such securities are freely
transferable. The restrictions on transfer enumerated in the DOL Regulation as
ordinarily not affecting that finding include: (i) any restriction on, or
prohibition against, any transfer or assignment that would result in a
termination or reclassification of the Company for federal or state tax
purposes, or that would otherwise violate any state or federal law or court
order, (ii) any requirement that advance notice of a transfer or assignment be
given to

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the Company, (iii) any requirement that either the transferor or transferee, or
both, execute documentation setting forth representations as to compliance with
any restrictions on transfer that are among those enumerated in the final DOL
Regulation as not affecting free transferability, (iv) any administrative
procedure that establishes an effective date, or an event (such as completion of
the Offering) prior to which a transfer or assignment will not be effective, and
(v) any limitation or restriction on transfer or assignment that is not imposed
by the issuer or a person acting on behalf of the issuer. The Company believes
that the restrictions imposed under the Articles of Incorporation on the
transfer of Equity Stock are limited to restrictions on transfer which, under
the DOL Regulation ordinarily do not affect a finding of free transferability,
and are unlikely to result in the failure of the Equity Stock to be considered
"freely transferable" for purposes of the DOL Regulation. In addition, the
Company is not aware of any other facts or circumstances limiting the
transferability of the Equity Stock that are not included among those enumerated
as not affecting their free transferability under the DOL Regulation, and the
Company does not expect or intend to impose in the future (or to permit any
person to impose on its behalf) any limitations or restrictions on transfer that
would not be among the enumerated permissible limitations or restrictions. The
DOL Regulation only establishes a presumption in favor of a finding of free
transferability, and no assurance can be given that the DOL, the Treasury
Department or a court will not reach a contrary conclusion.

Assuming that the Equity Stock will be "widely held" and that no other
facts and circumstances exist that restrict transferability of the Equity Stock,
the Company believes that the Equity Stock should be treated as "publicly-
offered securities" within the meaning of the DOL Regulation and, accordingly,
that the underlying assets of the Company should not be considered to be assets
of any ERISA Plan or Non-ERISA Plan investing in Common Stock.

If the assets of the Company were deemed to be "plan assets" under
ERISA and Section 4975 of the Code, (i) the prudence standards and other
provisions of Part 4 of Subtitle B of Title I of ERISA would be applicable to
any transactions involving the Company's assets, (ii) persons who exercise any
discretionary authority or control over the Company's assets, or who provide
investment advice for a fee to the Company, would (for purposes of the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code) be fiduciaries
of each ERISA Plan or Non-ERISA Plan that acquires Equity Stock, (iii)
transactions involving the Company's assets undertaken at the direction or
pursuant to the advice of such fiduciaries might violate their fiduciary
responsibilities under ERISA, especially with regard to conflicts of interest,
(iv) a fiduciary exercising his investment discretion over the assets of the
ERISA Plan to cause it to acquire or hold the Equity Stock could be liable under
Part 4 of Subtitle B of Title I of ERISA for transactions entered into by the
Company that do not conform to ERISA standards of prudence and fiduciary duty,
(v) certain transactions that the Company might enter into in the ordinary
course of its business and operations might constitute "prohibited transactions"
under ERISA and the Code, and (vi) fiduciaries of ERISA Plans may violate
ERISA's prohibition against the improper delegation of control or responsibility
for "plan assets" and may be liable for breaches of ERISA's fiduciary duties
committed by co-fiduciaries.

THE OFFERING

OFFERING OF COMMON STOCK

Subject to the conditions set forth in this Prospectus and in
accordance with the terms and conditions of the Sales Agency Agreement, the
Company is concurrently offering to the public through the Sales Agent and
Soliciting Dealers, on a best efforts basis, up to 1,750,000 Units, each Unit
consisting of two immediately separable shares of Common Stock and one
detachable Series "A" Warrant, at $14.00 per Unit, plus 1,500,000 additional
shares of Common Stock at $7.00 per Share. Each Series "A" Warrant permits the
holder to purchase one additional Share for $7.00 per Share. Shares purchasable
upon exercise of the Series "A" Warrants will be registered under the Securities
Act. See "Terms of the Offering."

The Sales Agent will receive a selling commission in an amount equal
to $0.98 per Unit or $0.49 per Share, whether sold directly by it or by one of,
the Soliciting Dealers, all of whom must be members in good standing of the
NASD. The Sales Agent may, in turn, reallow up to the full amount of such
selling commissions to

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Soliciting Dealers for Shares they sell. The Sales Agent will also receive a
managing dealer's fee of one-half of one percent of the gross proceeds from the
sale of Units and Shares by the Company whether effected through the Sales Agent
or Soliciting Dealers. The Sales Agent will also be entitled to reimbursement
for actual and bona fide due diligence expenses incurred by it up to one-half of
one percent of the gross proceeds from the sale of Units and Shares. The Company
has agreed to indemnify the Sales Agent and Soliciting Dealers against certain
liabilities, including liabilities under the Securities Act.

The Sales Agent will receive a non-accountable expense allowance of
one percent of the gross proceeds from the sale of Units and Shares and may, in
turn, reallow the full amount of such allowance to Soliciting Dealers for their
marketing efforts with respect to Units and Shares sold by them.

All entities performing wholesaling activities will be required to be
properly licensed to engage in the securities business. These services will
include developing and preparing sales material, conducting broker/dealer
seminars, holding informational meetings and providing information and answering
any questions concerning the offering of Units and Shares. The Company will pay
the wholesaling entity a commission equal to one-half of one percent of the
gross proceeds from the sale of Units and Shares. The wholesaling entity will
pay its own expenses.

In addition to the foregoing selling commissions and expenses, a
consultant, Strategic Planning Consultants, Inc., will receive a financial
advisory fee equal to one percent of the gross proceeds from the sale of Units
and Shares. Strategic Planning Consultants, Inc. is not affiliated with any
director, officer or principal shareholder of the Company. The consultant is
providing on-going advice to the Company on financial matters. Such advice
pertains to capital structure, the amount, type and terms of securities to be
issued by the Company and the financial analysis of those structures and the
consequent impact on the future funding requirements of the Company. The
consultant also provides comparative information about other equity real estate
investment trusts.

In no event shall the total underwriting compensation to be paid to
the Sales Agent and Soliciting Dealers from any source in connection with the
offering of Units and Shares, including selling commissions, certain expense
reimbursements and payments to the Sales Agent and Soliciting Dealers for the
wholesaling services referred to above, exceed ten percent of the Gross Offering
Proceeds of the offering of Units and Shares (plus 0.5% for actual and bona fide
due diligence expenses). The Company and the Sales Agent will monitor the
payment of all fees and expense reimbursements to assure that this limit is not
exceeded.

Every prospective investor desiring to purchase Shares will be
required to comply with the procedures for ordering units or Shares imposed by
the Company, the Sales Agent and the Soliciting Dealer from whom such investor
intends to purchase units or Shares. The Sales Agent and certain Soliciting
Dealers will require an Order Form, a specimen of which is attached to this
Prospectus, to be completed and delivered together with a cheek payable to the
Escrow Agent for the aggregate purchase price of the Units or Shares ordered.

8% PREFERRED OFFERING

The Company is also offering up to 1,136,364 shares of 8% Convertible
Preferred Stock through various broker-dealers, on a best-efforts basis, at
$13.20 per share.

Broker-dealers will receive a selling commission in an amount equal to
$0.66 per share of 8% Preferred (five percent of the proceeds) if they arrange
for the sale and $0.13 per share (approximately one percent) on sales made to
Persons who have been introduced to the broker-dealer by finders. In such cases,
the finders will receive $0.53 per share (approximately four percent of the
sales price of $13.20). The Company has agreed to indemnify the broker-dealers
against certain liabilities, including liabilities under the Securities Act. In
addition to the foregoing selling commissions and expense allowance, Strategic
Planning Consultants, Inc. will also receive a financial advisory fee equal to
one and one-half percent of the gross proceeds from the sale of shares of the 8%
Preferred. The total offering compensation to be paid to broker-dealers and
others in connection with the sale of the 8% Preferred is 6.5% of the gross
offering proceeds from the sale of such shares.

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<PAGE>

Every prospective investor desiring to purchase shares of 8% Preferred
will be required to comply with the procedures for ordering such shares imposed
by the Company or the broker-dealers from whom such investor intends to purchase
such shares. Such broker-dealers will require a Order Form, a specimen of which
is attached to this Prospectus, to be completed and delivered, together with a
check payable to the Escrow Agent for the aggregate purchase price of such
shares ordered.

A minimum of 152,000 shares of 8% Preferred must be sold. No shares of
8% Preferred will be sold unless (i) the Minimum Common Offering is consummated
and (ii) sales of the 8% Preferred have been made to at least 100 persons.

Purchases by Officers, Directors and Others. Officers and directors of
the Company, the Soliciting Dealers and broker-dealers engaged in the sale of 8%
Preferred and their respective employees may purchase the securities offered
herein net of selling commissions and the Company will pay no selling
commissions on such securities. Subject to the Ownership Limit, there is no
limit on the number of securities such persons may purchase. Securities
purchased by officers and directors of the Company and the Soliciting Dealers
and their employees will be included in determining whether the Minimum Common
Offering is achieved. Any resale of the Company's securities currently owned by
the officers and directors of the Company, or securities such person may
purchase pursuant to this Offering, are subject to Rule 144 promulgated under
the Securities Act, which limits the number of securities which may be resold at
any one time and the manner of such resale.

ESCROW ARRANGEMENTS

Commencing on the date of this Prospectus, all funds received by the
Sales Agent and Soliciting Dealers from orders for Units, Shares or 8% Preferred
will be placed promptly in an interest bearing escrow account with the Escrow
Agent at the Company's expense until such funds are released as described below.
Separate escrow accounts will be established for Benefit Plan funds as required
by law or such Benefit Plans. Payment for Units, Shares or 8% Preferred is to be
sent to the Escrow Agent at Trust Company of America, 7103 South Revere Parkway,
Englewood, Colorado 80112. Such funds will be held in trust for the benefit of
investors to be used for the purposes set forth in this Prospectus. The Escrow
Agent will be given the right to invest non-Benefit Plan funds in United States
government securities, certificates of deposit or other time or demand deposits
of commercial banks which have a net worth of at least $100,000,000 or in which
such certificates or deposits are fully insured by any federal or state
government agency. Benefit Plan funds will be invested in a money market account
maintained by the Escrow Agent. The interest, if any, earned on escrow funds
prior to the transmittal of such proceeds to the Company will not become part of
the Company's capital. Instead, within 15 days following each issuance of units
or Shares, the Company will cause the Escrow Agent to make distributions to
investors of all interest earned on their escrowed funds used to purchase the
units or Shares.

As soon as practicable after the Minimum Common Offering is achieved,
the Company will issue Units and Shares to all investors whose orders have been
accepted, as well as shares of 8% Preferred to investors whose orders have been
accepted if the minimum number of shares of 8% Preferred (152,000) are sold to
at least 100 investors. Following such first issuance, additional funds received
by the Company from prospective investors will continue to be placed in escrow
during the Offering and the Company will issue additional Units, Shares or 8%
Preferred periodically as agreed between the Company and the applicable selling
agents. The Offering will terminate at the time all Units, Shares and 8%
Preferred being offered are sold or withdrawn from registration by order of the
Board, but in no case later than the earlier of (i) one year after the date of
this Prospectus, or (ii) 180 days after the Initial Closing.

On or after the date accepted by the Company, investors will have no
right to withdraw any funds submitted to the Escrow Agent during the Offering
period. The Company has the unconditional right in its sole discretion to accept
or reject any order or any part thereof within ten days of receipt of such
order. If the Company rejects any order or any part thereof, it will notify the
investor in writing thereof and arrange for the Escrow Agent to promptly return
to the investor the entire purchase price or portion thereof which was rejected,
along with any interest earned thereon. No sales of Units, Shares or 8%
Preferred will be consummated unless the Minimum Common Offering is achieved.
Shares, 8% Preferred and warrants will be evidenced by appropriate certificates.

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<PAGE>

If the Minimum Common Offering is not achieved within six months after
the date of this Prospectus, then the Company will cancel all existing orders
for Units, Shares and 8% Preferred and all funds submitted on account of such
orders will be released from escrow and promptly returned to each investor
together with all interest earned thereon.

REPORTS TO SHAREHOLDERS

The Company intends to provide periodic reports to shareholders
regarding the operations of the Company over the course of the year. Financial
information contained in all reports to shareholders will be prepared on the
accrual basis of accounting in accordance with generally accepted accounting
principles. Tax information will be mailed to the shareholders within 90 days
following the close of each fiscal year. The Company's annual report, which will
include financial statements audited and reported upon by independent public
accountants, will be furnished within 120 days following the close of each
fiscal year. Summary information regarding the quarterly financial results of
the Company will be furnished to shareholders on a quarterly basis.

Investors have the right under applicable federal and Maryland laws to
obtain information about the Company and, at their expense, may obtain a list of
names and addresses of all of the shareholders. In the event that the Commission
promulgates rules and/or in the event that the applicable American Stock
Exchange rules and regulations are amended so that, taking such changes into
account, the Company's reporting requirements are reduced, the Company may cease
preparing and distributing certain of the aforementioned reports, if the
directors determine such action to be in the best interests of the Company and
if such cessation is in compliance with the rules and regulations of the
Commission.

LEGAL OPINIONS

Certain legal matters, including the legality of the Shares and 8%
Preferred, the liquidation preference of the 8% Preferred and the description of
federal income tax consequences contained under "Federal Income Tax
Considerations," will be passed upon for the Company by Thelen, Marrin, Johnson
& Bridges, 333 South Grand Avenue, 34th Floor, Los Angeles, California 90071.
Thelen, Marrin, Johnson & Bridges will rely as to certain matters of Maryland
law on an opinion of Piper & Marbury L.L.P., Baltimore, Maryland.

EXPERTS

The Financial Statements and Schedule of American Equity Trust Inc.,
the Financial Statements of American Equity Trust Funding, Inc., the Financial
Statements of the Prior Ownership Group and the Financial Statements of the
Proposed Acquisitions, included in this Prospectus and in the Registration
Statement of which this Prospectus is a part have been audited by BDO Seidman,
LLP, independent certified public accountants, to the extent and for the periods
set forth in their reports appearing elsewhere herein and in the Registration
Statement and have been so included in reliance upon such reports given upon the
authority of that firm as experts in accounting and auditing

87
<PAGE>

SALES LITERATURE

In addition to and apart from this Prospectus, the Company will use
certain sales material in connection with the Offering. This material includes a
broker-dealer fact sheet, investor information summary and visual presentation
and NAREIT collateral information, all of which will be reviewed by the
Commission and the NASD prior to its use. In some jurisdictions such sales
material will not be available. Other than as described herein, the Company has
not authorized the use of other sales material. The Offering is made only by
means of this Prospectus. Although the information contained in such sales
material does not conflict with any of the information contained in this
Prospectus, such sales material does not purport to be complete and should not
be considered as a part of this Prospectus or the Registration Statement of
which this Prospectus is a part, or as incorporated in this Prospectus or said
Registration Statement by reference, or as forming the basis of the Offering.

FURTHER INFORMATION

This Prospectus does not contain all the information set forth in the
Registration Statement on Form S-11 and the Exhibits relating thereto which the
Company has filed with the Commission, in Washington, D.C., under the Securities
Act, and to which reference is hereby made. The Registration Statement and the
exhibits and schedules forming a part thereof filed by the Company with the
Commission can be inspected and copies obtained from the Commission at Room
1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following regional offices of the Commission: 7 World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D. C. 20549, at prescribed rates.

All summaries contained herein of documents which are filed as
Exhibits to the Registration Statement are qualified in their entirety by this
reference to those Exhibits. The Company has not knowingly made any untrue
statement of a material fact or omitted to state any fact required to be stated
in the Registration Statement, including this Prospectus, or necessary to make
the statements therein not misleading.

88
<PAGE>

GLOSSARY

As used in this Prospectus, the following terms have the definitions
hereinafter indicated:

Acquisition Expenses. Those expenses, including but not limited to
legal fees and expenses, travel and communications expenses, costs of
appraisals, non-refundable option payments on property not acquired, accounting
fees and expenses, title insurance, and miscellaneous expenses related to
selection and acquisition of properties, whether or not acquired. Acquisition
Expenses shall not include Acquisition Fees.

Affiliate. An Affiliate of another Person shall mean (i) any Person
directly or indirectly owning, controlling, or holding, with power to vote ten
percent or more of the outstanding voting securities of such other Person, (ii)
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, (iii) any Person directly or indirectly controlling, controlled
by, or under common control with such other Person, (iv) any executive officer,
director, trustee or general partner of such other Person, or (Iv) any legal
entity for which such Person acts as an executive officer, director, trustee or
general partner.

Bankruptcy Code. Title 11 of the United States Code, as amended.

Beneficial Ownership, Beneficially Own or Beneficial Owner of Shares.
Ownership of such Shares for purposes of part 11, subchapter M of the Code,
including the attribution of ownership provisions of Section 542 and 544 of the
Code, or if, under Rule 13d-3 of the Exchange Act, such Person would be deemed
to have beneficial ownership of such Shares.

Benefit Plan. An IRA, Keogh Plan or employee benefit plan subject to
Title I of ERISA or Section 4975 of the Code.

Board or Board of Directors. The Board of Directors of the Company.

By-Laws. The By-Laws of the Company.

Cash from Financings. Net cash proceeds realized by the Company from
the financing of the Company's properties or the refinancing of any Company
indebtedness.

Cash from Sales. Net cash proceeds realized by the Company from the
sale, exchange or other disposition of any of its assets after deduction of all
expenses incurred in connection therewith. Cash from Sales shall not include
Cash from Financings.

Cash from Sales and Financings. The total sum of Cash from Sales and
Cash from Financings.

Charter. Articles of Incorporation of the Company under the General
Corporation Law of Maryland, as amended from time to time, pursuant to which the
Company is organized.

Code. Internal Revenue Code of 1986, as amended.

Commission. The Securities and Exchange Commission.

Company. American Equity Trust Inc., a corporation organized under the
laws of the State of Maryland.

Conversion Factor. A multiplier intended to adjust for the occurrence
of share splits, mergers, consolidations or similar pro rata share transactions
which otherwise would have the effect of diluting the ownership interests of the
OP Limited Partners or the shareholders of the Company.

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<PAGE>

Distributable REIT Taxable Income. An amount equal to or greater than
(i) the sum of 95% of (a) the REIT Taxable Income for the taxable year
(determined without regard to the deduction for dividends paid and by excluding
any net capital gain), and (b) the excess of the net income from Foreclosure
Property over the tax imposed on such income less (ii) any Excess Noncash
Income.

Distributions. Distributions from income or capital declared by the
Board.

8% Preferred Offering. The sale by the Company of up to 1,136,364
shares of the Company's 8% Convertible Preferred Stock at $13.20 per share.

ERISA. Employee Retirement Income Security Act of 1974, as amended.

Escrow Agent. Trust Company of America, or any other institution
permitted to serve as escrow agent under Rule 15c2-4 of the Exchange Act.

Excess Shares. Any Shares in excess of the Ownership Limit.

Exchange Act. The Securities Exchange Act of 1934, as amended.

Final Closing. The last date on which purchasers of Units, Shares and
8% Preferred offered pursuant to this Prospectus are issued such Units, Shares
or 8% Preferred.

Foreclosure Property. Real property (or any interest in real property)
and any personal property incident thereto, which is acquired or reduced to
possession by the Company as a result of a bid in foreclosure, or by agreement
or legal process, following a default (or where a default was imminent) on a
lease of the property or on an indebtedness secured by such property (other than
indebtedness arising upon the sale of dealer property which was not itself
Foreclosure Property) which the Company elects to treat as foreclosure property
under the Code for a period of two years, unless such period is extended with
the permission of the IRS.

Gross Offering Proceeds. The aggregate purchase price of Units, Shares
and 8% Preferred sold pursuant to the Offering.

Independent Director. A director of the Company who is not an
employee, officer or director of the Company, or otherwise an Affiliate of the
Company, prior to becoming a director, and who, upon becoming a director, is not
otherwise affiliated with the Company.

Individual. Any natural person and those organizations treated as
natural persons in Section 542(a) of the Code.

Initial Closing. The time after the Minimum Common Offering is
completed when Units, Shares or 8% Preferred sold are issued to investors and
funds in the escrow are released to the Company.

Initial Properties. The Properties to be acquired in the Formation
Transactions. In a Minimum Common Offering, the Initial Properties will be
Sandpainter Apartments, Northwest Garden Apartments, Orangewood Place Apartments
and Arrow Village Apartments. In a Maximum Common Offering, the Initial
Properties will be all Properties described in "Description of Properties."

IRA. An individual retirement account described in Section 408(a) of
the Code or an individual retirement annuity described in Section 408(b) of the
Code.

IRS. The Internal Revenue Service.

Keogh Plan. A retirement benefit plan covering a person with net
earnings from self-employment, also known as an H.R.10 plan.

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Leverage. The aggregate amount of indebtedness of the Company for
money borrowed (including purchase money mortgage loans) outstanding at any
time, both secured and unsecured.

Loans. The notes and other evidences of indebtedness or obligations
acquired or entered into by the Company as lender which are secured or
collateralized principally by fee or leasehold interests in real estate.

Maximum Common Offering. The receipt by the Company of orders for all
of the Units and Shares offered by this Prospectus from at least 400 investors
and the receipt by the Escrow Agent of full payment for such securities with
funds that have cleared the banking system.

Maximum Combined Offering. A Maximum Common Offering plus the sale of
all shares of 8% Preferred offered in this Prospectus to at least 100 investors.

Minimum Combined Offering. A Minimum Common Offering plus a Mininum
Preferred Offering.

Minimum Common Offering. The receipt by the Company of orders for not
less than 2,142,858 shares of Common Stock (whether in the form of Units or
individual Shares) from the sales to at least the Escrow Agent of full payment
for such Units or Shares with funds that have cleared the banking system. Any
securities of the Company owned by officers or directors of the Company as of
the date of this Prospectus will not be included for purposes of determining
whether the Minimum Common Offering has been achieved.

Minimum Preferred Offering. Concurrently with or after the completion
of a Minimum Common Offering, the receipt by the Company of orders for not less
than 152,000 shares of 8% Preferred from at least 100 persons and receipt by the
Escrow Agent of full payment for such shares with funds that have cleared the
banking system.

NASD. The National Association of Securities Dealers, Inc.

Net Assets. The total assets of the Company (other than intangibles)
at cost before deducting depreciation or other noncash reserves less total
liabilities, calculated at least quarterly on a basis consistently applied.

Net Income. 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 noncash 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.

Offering. The offering of Units, Shares and 8% Preferred pursuant to
this Prospectus.

Operating Partnership Agreement. The partnership agreement of the
Operating Partnership as amended.

OP Units. Interests in the Operating Partnership.

Operating Partnership. American Equity Trust Operating Partnership,
L.P., a Delaware limited partnership of which the Company is the sole general
partner.

Ownership Limit. The percent limitation placed on the ownership of by
any one Person on equity stock of the Company. At the date of this Prospectus,
such limit is 9.8% of the value of the outstanding equity stock of the Company.
In addition, the percent limitation placed on the ownership by any one Person of
8% Preferred is that number of shares of 8% Preferred the value of which, when
added to the value of the Company's other equity securities owned by such
Person, does not exceed five percent of the value of the outstanding equity
securities of the Company.

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Permitted Temporary Investments. United States government securities,
certificates of deposit or other time or demand deposits of commercial banks,
savings banks, savings and loan associations or similar institutions which have
a net worth of at least $100,000,000 or in which such certificates or deposits
are fully insured by any federal or state government agency, United States
dollar deposits in foreign branches of banks which have a net worth of at least
$100,000,000, bank repurchase agreements covering securities of the United
States government or governmental agencies, commercial paper, bankers
acceptances, public money market funds or other similar short-term highly liquid
investments.

Person. An Individual, corporation, partnership, joint venture,
association, company, trust, bank or other entity or any government or any
agency and political subdivision of a government.

Prohibited Transaction. A sale of assets held by the Company primarily
for sale to customers in the ordinary course of business other than (i)
Foreclosure Property and (ii) certain dispositions of real estate assets which
satisfy Section 857(b)(6)(C) of the Code.

Prior Ownership Group ("POG"). The properties to be acquired by the
Company, known as the Hewlett Packard Building, Van Nuys, California; and
Westwood Self-Storage/Sportmart Building, Westwood, California.

Property or Properties. The Company's partial or entire interest in
real property described in this Prospectus (including leasehold interests) and
personal or mixed property connected therewith.

Proposed Acquisitions. The properties to be acquired by the Company,
known as the Arrow Village Apartments, the Northwest Gardens Apartments, the
Orangewood Place Apartments and the Sandpainter Apartments

Prospectus. This prospectus pursuant to which the Company is offering
up to 1,750,000 Units, 1,500,000 additional Shares, and 1,136,364 shares of 8%
Preferred, as the same may at any time and from time to time be amended or
supplemented.

Registration Statement. The Registration Statement on Form S-11 of
which this Prospectus is a part.

REIT A real estate investment trust, as defined in Sections 856-860 of
the Code.

REIT Provisions of the Code or REIT Provisions. Parts II and III of
Subchapter M of Chapter I of the Code or successor statutes, and regulations and
rulings promulgated thereunder.

REIT Taxable Income. The taxable income of a REIT, adjusted as
follows: (i) the deduction for dividends received allowable to corporations
under Sections 241 through 247, 249 and 250 of the Code is not allowed; (ii) the
deduction for dividends paid under Section 561 of the Code is allowed, but is
computed without regard to that portion of such deduction attributable to net
income from Foreclosure Property; (iii) taxable income is computed without
regard to Section 443(b) of the Code relating to the computation of tax upon the
change of an annual accounting period; (iv) net income from Foreclosure Property
that is not qualified REIT income without regard to the foreclosure property
provisions of the Code is excluded; (v) the tax imposed for failing the 75%
Income Test and/or the 95% Income Test is deducted; and (vi) income derived from
Prohibited Transactions is excluded.

Sales Agent. Brookstreet Securities Corporation.

Securities Act. The Securities Act of 1933, as amended.

Soliciting Dealers. Broker-dealers who are members of the NASD and who
have executed a Soliciting Dealer Agreement with the Sales Agent in whom the
Soliciting Dealers agree to participate with the Sales Agent in the Offering.

Shares. All of the shares of common stock of the Company, $.01 par
value, and all other shares of common stock of the Company issued in this or any
subsequent Offering.

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UBTI. Unrelated business taxable income as defined in Section 512 of
the Code.

Unimproved Real Property. Property which has the following three
characteristics: (i) an equity interest in property which was not acquired for
the purpose of producing rental or other operating income, (ii) no development
or construction is in process on such property, and (iii) no development or
construction on such property is planned in good faith to commence on such
property within one year.

Unit. A Unit consists of two shares of Common Stock of the Company and
one detachable Series "A" Warrant.

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INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION:
Pro Forma Condensed Combined Balance Sheets as of December 31, 1995 ..... F-3
Notes to Pro Forma Condensed Combined Balance Sheets .................... F-5
Pro Forma Condensed Combined Statements of Operations
for the year ended December 31, 1995 .................................. F-7
Notes to Pro Forma Condensed Combined Statements of Operations .......... F-9

Pro Forma Condensed Combined Statements of Cash Flows
for the year ended December 31, 1995 .................................. F-10
Notes to Pro Forma Condensed Combined Statements of Cash Flows .......... F-12

AMERICAN EQUITY TRUST INC.
Report of Independent Certified Public Accountants...................... F-13
Balance Sheet as of December 31, 1995................................... F-14
Notes to Balance Sheet.................................................. F-15

PRIOR OWNERSHIP GROUP
Report of Independent Certified Public Accountants....................... F-18
Combined Balance Sheets as of December 31, 1995 and 1994................. F-19
Combined Statements of Operations for three years
ended December 31, 1995................................................ F-20
Combined Statements of Owners' Equity for three years
ended December 31, 1995................................................ F-21
Combined Statements of Cash Flows for three years
ended December 31, 1995............................................... F-22
Notes to Combined Financial Statements................................... F-23

PROPOSED ACQUISITIONS
Report of Independent Certified Public Accountants....................... F-26
Combined Statements of Operations for the year ended December 31, 1995... F-27
Notes to Combined Statements of Operations............................... F-28

FINANCIAL STATEMENT SCHEDULE OF PRIOR OWNERSHIP GROUP
Report of Independent Certified Public Accountants....................... S-1

Schedule III - Real Estate and Accumulated Depreciation.................... S-2
</TABLE>

<PAGE>

AMERICAN EQUITY TRUST INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEETS

The following unaudited Pro Forma Condensed Combined Balance Sheets as of
December 31, 1995 and the Pro Forma Condensed Combined Statements of Operations
for the year ended December 31, 1995 have been prepared to reflect the Minimum
Common Offering, the Minimum Combined Offering, the Maximum Common Offering, and
the Maximum Combined Offering (together the Offerings), the acquisitions of
properties from the Prior Ownership Group (POG) and the Proposed Acquisitions
described in the accompanying notes. The unaudited Pro Forma Balance Sheets has
been prepared as if the Offerings, the POG Acquisitions and the Proposed
Acquisitions had been consummated as of December 31, 1995. The unaudited Pro
Forma Statements of Operations for the year ended December 31, 1995 have been
prepared as if the Offerings, the POG Acquisitions and the Proposed Acquisitions
occurred on January 1, 1995. The unaudited Pro Forma Condensed Combined
Financial Statements and related notes should be read in conjunction with the
audited financial statements contained elsewhere in this Prospectus. The
unaudited Pro Forma Condensed Combined Financial Statements are not necessarily
indicative of what the actual financial position or results of operations would
have been for the respective periods if the transactions had been consummated on
the dates indicated, nor does it purport to represent the future financial
position or results of operations of the Company.

F-2
<PAGE>

AMERICAN EQUITY TRUST INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31, 1995
---------------------------------------------------------
The Proposed Pro Forma Pro Forma
Company Acquisitions Adjustments Combined
--------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
MINIMUM COMMON OFFERING
- -----------------------
ASSETS:
Rental properties, net................... $ - $8,178,058 $ 6,141,942(1) $14,320,000
Cash and cash equivalents................ 19,824 62,715 1,868,911(2) 1,951,450
Deferred offering costs.................. 674,000 - (674,000)(2) -
Other assets............................. 172,574 183,684 (286,304)(3) 69,954
-------- ---------- -----------
$866,398 $8,424,457 $16,341,404
======== ========== ===========
LIABILITIES:
Mortgage notes payable................... $ - $6,924,607 (4,424,607)(4) $ 2,500,000
Convertible notes........................ 258,781 - 258,781
Accounts payable and other liabilities... 239,300 253,973 (253,973)(3) 239,300
-------- ---------- -----------
Total liabilities...................... 498,081 7,178,580 2,998,081
-------- ---------- -----------

STOCKHOLDERS' EQUITY:
Common Stock............................. 2,747 - 21,429(5) 24,176
8% Convertible Preferred................. - - -
1995 Convertible Preferred............... 10,210 10,210
Additional paid-in-capital............... 420,155 - 12,953,577(5) 13,373,732
Owners' equity (deficit)................. - 1,245,877 (1,245,877)(7) -
Retained earnings (deficit).............. (64,795) - (64,795)
-------- ---------- -----------
Total stockholders' equity............. 368,317 1,245,877 13,343,323
-------- ---------- -----------
Total liabilities and
stockholders' equity................. $866,398 $8,424,457 $16,341,404
======== ========== ===========

MINIMUM COMBINED OFFERING
- -------------------------
ASSETS:
Rental properties, net................... $ - $8,178,058 $ 6,141,942(1) $14,320,000
Cash and cash equivalents................ 19,824 62,715 1,238,911(2) 1,321,450
Deferred offering costs.................. 674,000 - (674,000)(2) -
Other assets............................. 172,574 183,684 (286,304)(3) 69,954
-------- ---------- -----------
$866,398 $8,424,457 $15,711,404
======== ========== ===========
LIABILITIES:
Mortgage notes payable................... $ - $6,924,607 (6,924,607)(4) $ -
Convertible notes........................ 258,781 - 258,781
Accounts payable and other liabilities... 239,300 253,973 (253,973)(3) 239,300
-------- ---------- -----------
Total liabilities...................... 498,081 7,178,580 498,081
-------- ---------- -----------

STOCKHOLDERS' EQUITY:
Common Stock............................. 2,747 - 21,429(5) 24,176
8% Convertible Preferred................. - - 2,006,400(5) 2,006,400
1995 Convertible Preferred............... 10,210 10,210
Additional paid-in-capital............... 420,155 - 12,817,177(5) 13,237,732
Owners' equity (deficit)................. - 1,245,877 (1,245,877)(7) -
Retained earnings (deficit).............. (64,795) - (64,795)
-------- ---------- -----------
Total stockholders' equity............. 368,317 1,245,877 15,213,323
-------- ---------- -----------
Total liabilities and
stockholders' equity................. $866,398 $8,424,457 $15,711,404
======== ========== ===========
</TABLE>

F-3
<PAGE>

MAXIMUM COMMON OFFERING
- -----------------------
ASSETS:
Rental properties, net.......... $ - $23,456,014 $8,178,058 $ 10,149,272(1) $41,783,344
Cash and cash equivalents....... 19,824 230,683 62,715 800,083(2) 1,113,305
Deferred offering costs......... 674,000 - - (674,000)(2) -
Other assets.................... 172,574 298,249 183,684 (584,553)(3) 69,954
-------- ----------- ---------- -----------
$866,398 $23,984,946 $8,424,457 $42,966,603
======== =========== ========== ===========
LIABILITIES:
Mortgage notes payable.......... $ - $17,796,767 $6,924,607 (16,259,513)(4) $ 8,461,861
Convertible notes............... 258,781 - - - 258,781
Accounts payable and other...... 239,300 2,144,847 253,973 (2,398,820)(3) 239,300
-------- ----------- ---------- -----------
Total liabilities............. 498,081 19,941,614 7,178,580 8,959,942
-------- ----------- ---------- -----------
Minority interest............... 3,450,444(6) 3,450,444
-----------
STOCKHOLDERS' EQUITY:
Common Stock.................... 2,747 - - 50,000(5) 52,747
8% Convertible Preferred........ - - - -
1995 Convertible Preferred...... 10,210 10,210
Additional paid-in-capital...... 420,155 - - 31,205,000(5)
(1,067,100)(7) 30,558,055
Owners' equity (deficit)........ - 4,043,332 1,245,877 (5,289,209)(7) -
Retained earnings (deficit)..... (64,795) - - (64,795)
-------- ----------- ---------- -----------
Total stockholders' equity.... 368,317 4,043,332 1,245,877 30,556,217
-------- ----------- ---------- -----------
$866,398 $23,984,946 $8,424,457 $42,966,603
======== =========== ========== ===========

MAXIMUM COMBINED OFFERING
- -------------------------
ASSETS:
Rental properties, net.......... $ - $23,456,014 $8,178,058 $ 10,149,272(1) $41,783,344
Cash and cash equivalents....... 19,824 230,683 62,715 6,138,226(2) 6,451,448
Deferred offering costs......... 674,000 - - (674,000)(2) -
Other assets.................... 172,574 298,249 183,684 (584,553)(3) 69,954
-------- ----------- ---------- -----------
$866,398 $23,984,946 $8,424,457 $48,304,746
======== =========== ========== ===========
LIABILITIES:
Mortgage notes payable.......... $ - $17,796,767 $6,924,607 (24,721,374)(4) $ -
Convertible notes............... 258,781 - - - 258,781
Accounts payable and other...... 239,300 2,144,847 253,973 (2,398,820)(3) 239,300
-------- ----------- ---------- -----------
Total liabilities............. 498,081 19,941,614 7,178,580 498,081
-------- ----------- ---------- -----------
Minority interest............... 3,450,444(6) 3,450,444
-----------
STOCKHOLDERS' EQUITY:
Common Stock.................... 2,747 - - 50,000(5) 52,747
8% Convertible Preferred........ - - - 15,000,004(5) 15,000,004
1995 Convertible Preferred...... 10,210 10,210
Additional paid-in-capital...... 420,155 - - 30,005,000(5)
(1,067,100)(7) 29,358,055
Owners' equity (deficit)........ - 4,043,332 1,245,877 (5,289,209)(7) -
Retained earnings (deficit)..... (64,795) - - (64,795)
-------- ----------- ---------- -----------
Total stockholders' equity.... 368,317 4,043,332 1,245,877 44,356,221
-------- ----------- ---------- -----------
$866,398 $23,984,946 $8,424,457 $48,304,746
======== =========== ========== ===========
</TABLE>

F-4
<PAGE>

AMERICAN EQUITY TRUST INC.
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEETS

PRO FORMA ADJUSTMENTS

These pro forma adjustments reflect i) the issuance of 2,142,858 shares of
Common Stock (Minimum Common Offering); ii) 2,142,858 shares of Common Stock
plus 152,000 shares of 8% Convertible Preferred Stock at an offering price of
$13.20 per share (Minimum Combined Offering); iii) 5,000,000 shares of Common
Stock, par value $.01 per share at an initial offering price of $7.00 per share
(Maximum Common Offering); and iv) 5,000,000 shares of Common Stock, at an
initial offering price of $7.00 per share plus 1,136,364 shares of 8%
Convertible Preferred Stock at an offering price of $13.20 per share (Maximum
Combined Offering) and the application of the net proceeds from such offerings.
The following sets forth the adjustments:

<TABLE>
<CAPTION>
Minimum Minimum Maximum Maximum
Common Combined Common Combined
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
(1) Increase in rental property:
Proposed Acquisitions:
Purchase price.............................. $14,200,000 $14,200,000 $ 14,200,000 $ 14,200,000
Net book value of properties acquired....... (8,178,058) (8,178,058) ( 8,178,058) ( 8,178,058)
----------- ----------- ------------ ------------
Excess of purchase price over net book
value of Proposed Acquisitions.......... 6,021,942 6,021,942 6,021,942 6,021,942
Prior Ownership Group - excess of purchase
price of $28,900,000 over net book value
of $23,456,014 of properties acquired....... - - 5,443,986 5,443,986
Adjustment to reduce to predecessor basis..... - - (1,506,656) (1,506,656)
Estimated closing and other costs............. 120,000 120,000 190,000 190,000
----------- ----------- ------------ ------------
$ 6,141,942 $ 6,141,942 $ 10,149,272 $ 10,149,272
=========== =========== ============ ============
</TABLE>

The properties described as the Proposed Acquisitions consist of four
rental properties and will be acquired 100% in the Offerings. The properties
described as the Prior Ownership Group consist of two commercial buildings which
will be acquired by newly-formed partnerships in the Maximum Common Offering as
well as the Maximum Combined Offering. The Company will acquire a 67% and a 80%
general partnership interest in the new partnerships and the former owner will
receive a 33% and a 20% limited partnership interest in the newly-formed
partnerships.
<TABLE>
<CAPTION>
Minimum Minimum Maximum Maximum
Common Combined Common Combined
------------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
(2) Increase in cash:
Proceeds from the Offerings................. $ 15,000,006 $ 17,006,406 $ 35,000,000 $ 50,000,004
Offering expenses........................... (2,025,000) (2,161,400) (3,745,000) (4,945,000)
------------ ------------ ------------ ------------
Net proceeds from Offerings................. 12,975,006 14,845,006 31,255,000 45,055,004

Purchase of Proposed Acquisition Properties. (11,700,000) (11,700,000) (11,700,000) (11,700,000)
Purchase of Prior Ownership Group properties - - (11,048,139) (11,048,139)
Acquisition debt assumed and retired with
proceeds from the Offerings............... - - (8,000,000) (16,461,861)
Offering expenses incurred to date.......... 674,000 674,000 674,000 674,000
Acquisitions costs incurred to date......... 102,620 102,620 102,620 102,620
Estimated closing and other costs........... (120,000) (120,000) (190,000) (190,000)
Cash and cash equivalents not being acquired (62,715) (62,715) (293,398) (293,398)
------------ ------------ ------------ ------------
$ 1,868,911 $ 1,238,911 $ 800,083 $ 6,138,226
============ ============ ============ ============
</TABLE>
(3) Reflects the elimination of rents and other receivables, accounts payable
and other liabilities which are not being acquired by the Company.

F-5
<PAGE>

AMERICAN EQUITY TRUST INC.
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEETS (CONTINUED)

(4) Reduction of certain mortgage notes payable as follows:
<TABLE>
<CAPTION>
Minimum Minimum Maximum Maximum
Common Combined Common Combined
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Acquisition debt not assumed:
Proposed Acquisitions.......................... $4,424,607 $ 4,424,607 $ 4,424,607 $ 4,424,607
Prior Ownership Group.......................... - - 3,834,906 3,834,906
Debt assumed and retired with proceeds
from the Offerings............................. - 2,500,000 8,000,000 16,461,861
----------- ----------- ----------- ------------
Reduction of mortgage notes payable............. $ 4,424,607 $ 4,424,607 $16,259,513 $ 24,721,374
=========== =========== =========== ============
(5) Net increases in equity accounts:
Proceeds from the Offerings.................. $15,000,006 $17,006,406 $35,000,000 $ 50,000,004
Offering expenses............................ (2,025,000) (2,161,400) (3,745,000) (4,945,000)
----------- ----------- ----------- ------------
Net proceeds from Offerings................. 12,975,006 14,845,006 31,255,000 45,055,004
Par value of common stock.................... (21,429) (21,429) (50,000) (50,000)
Value of 8% convertible preferred stock...... - (2,006,400) - (15,000,004)
----------- ----------- ----------- ------------
Net increase in additional paid-in-capital... $12,953,577 $12,817,177 $31,205,000 $ 30,005,000
=========== =========== =========== ============
</TABLE>

(6) Reflects minority interest retained by the former owners of the POG
Properties in the Maximum Common and Maximum Combined Offerings as follows:

<TABLE>
<CAPTION>
Hewlett-
Packard Westwood
Building Building Total
----------------- ----------------- -----------------
<S> <C> <C> <C>
Historical equity of POG properties.......... $1,771,225 $2,272,107 $ 4,043,332
Adjustments:
Mortgage notes not assumed by Company....... 2,429,576 1,405,330 3,834,906
Other assets/liabilities not acquired
by Company................................. 1,566,323 49,592 1,615,915
---------- ---------- -----------
POG's net equity in property................. 5,767,124 3,727,029 9,494,153
---------- ---------- -----------
Portion exchanged (20% & 33%) for OP Units... 1,153,425 1,229,920 2,383,345
Portion acquired (80% & 67%) for cash........ 6,400,000 4,648,139 11,048,139
---------- ---------- -----------
New equity of POG properties................. $7,553,425 $5,878,059 $13,431,484
========== ========== ===========
Minority interest (20% & 33%)................ $1,510,685 $1,939,759 $ 3,450,444
========== ========== ===========
</TABLE>

(7) Elimination of predecessor equity of the properties acquired accounted for
under the purchase method of accounting except for the portion of the equity
interest retained by sellers which is reflected at predecessor cost basis.

(8) Maturities of pro forma mortgage notes payable is as follows:

<TABLE>
<CAPTION>
Minimum Maximum
Year Common Common
- ---- ---------- ----------
<S> <C> <C>
1996............................................. $ 31,102 $ 140,546
1997............................................. 36,539 154,750
1998............................................. 39,473 167,154
1999............................................. 42,644 180,554
2000............................................. 46,069 195,026
Thereafter....................................... 2,304,173 7,623,831
---------- ----------
$2,500,000 $8,461,861
========== ==========
</TABLE>

F-6
<PAGE>

AMERICAN EQUITY TRUST INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS

The pro forma combined statements of operations presented below reflect the
acquisitions as previously described as if they occurred at the beginning of the
periods presented. The Company was omitted from the statements presented below
since it had no operations during the period presented.
<TABLE>
<CAPTION>
Year Ended December 31, 1995
-------------------------------------------
Proposed Pro Forma Pro Forma
Acquisitions Adjustments Combined
------------ -------------- -----------
<S> <C> <C> <C>
MINIMUM COMMON OFFERING
- -----------------------
Rental revenues............................ $2,394,578 $ 83,500(1) $2,478,078
---------- ----------
Property management fees................... 102,317 102,317
Property taxes............................. 114,942 114,942
Other expenses............................. 998,420 456,250(4) 1,454,670
---------- ----------
Total expenses............................. 1,215,679 1,671,929
---------- ----------
Excess of revenues over expenses........... 1,178,899 806,149
----------
Depreciation expense....................... 533,644(2) (533,644)
Interest expense........................... 193,750(3) (193,750)
----------
Net income................................. $ 78,755
==========
Net income per common share(5)............. $0.02
==========

MINIMUM COMBINED OFFERING
- -------------------------
Rental revenues............................ $2,394,578 $ 83,500(1) $2,478,078
---------- ----------
Property management fees................... 102,317 102,317
Property taxes............................. 114,942 114,942
Other expenses............................. 998,420 456,250(4) 1,454,670
---------- ----------
Total expenses............................. 1,215,679 1,671,929
---------- ----------
Excess of revenues over expenses........... 1,178,899 806,149
----------
Depreciation expense....................... 533,644(2) (533,644)
----------
Net income................................. 272,505
==========
Dividends on preferred shares.............. (160,512)
----------
Net income attributable to common shares... $ 111,993
==========
Net income per common share(5)............. $0.03
==========
</TABLE>

F-7
<PAGE>

AMERICAN EQUITY TRUST INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1995
---------------------------------------------------------------------------
Proposed Pro Forma Pro Forma
POG Acquisitions Adjustments Combined
----------- ---------------- --------------- ------------
<S> <C> <C> <C> <C>
MAXIMUM COMMON OFFERING
- -----------------------
Rental revenues............................ $3,685,622 $2,394,578 $ 83,500(1) $6,163,700
---------- ---------- -----------
Depreciation / amortization................ 1,067,896 496,641(2) 1,564,537
Property management fees................... 52,000 102,317 154,317
Property taxes............................. 225,507 114,942 340,449
Interest expense........................... 1,608,750 (1,057,288)(3) 551,462
Other expenses............................. 774,886 998,420 600,000(4) 2,373,306
---------- ---------- -----------
Total expenses............................. 3,729,039 1,215,679 4,984,071
---------- ---------- -----------
Excess revenues over expenses.............. (43,417) 1,178,899 1,179,629
---------- ----------
Minority interest.......................... (55,357)
-----------
Net income................................. $1,124,272
===========
Net income per common share(5)............. $0.17
===========

MAXIMUM COMBINED OFFERING
- -------------------------
Rental revenues............................ $3,685,622 $2,394,578 $ 83,500(1) $6,163,700
---------- ---------- -----------
Depreciation / amortization................ 1,067,896 496,641(2) 1,564,537
Property management fees................... 52,000 102,317 154,317
Property taxes............................. 225,507 114,942 340,449
Interest expense........................... 1,608,750 (1,608,750)(3) -
Other expenses............................. 774,886 998,420 600,000(4) 2,373,306
---------- ---------- -----------
Total expenses............................. 3,729,039 1,215,679 4,432,609
---------- ---------- -----------
Excess revenues over expenses.............. (43,417) 1,178,899 1,731,091
---------- ----------
Minority interest.......................... (55,357)
-----------
Net income................................. 1,675,734
Dividends on preferred shares ............. (1,200,000)
----------
Net income attributable to common shares... $ 475,734
===========
Net income per common share(5)............. $0.07
===========
</TABLE>

F-8
<PAGE>

AMERICAN EQUITY TRUST INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS

PRO FORMA ADJUSTMENTS

(1) Increase revenues relate to higher occupancy and higher rental rates on one
of the Proposed Acquisition properties, to be acquired in each of the
offering scenarios, after the renovation of the property was completed in
May 1995.

(2) Represents the increase in depreciation and amortization resulting from the
step-up in basis of the POG properties (Maximum Offerings) and the
depreciation of the Proposed Acquisitions properties (all offerings) based
on their acquisitions prices. Depreciation is computed based upon estimated
useful lives of 28.5 years for buildings and improvements, 7 years for
furniture, fixtures and equipment and the term of leases for tenant
improvements which range from 5 to 10 years. The increase in depreciation
relates primarily to buildings.

(3) Reflects the reduction of interest expense associated with mortgages and
notes payable on the POG properties (Maximum Offerings) assumed to be
retired using the net proceeds from the Offering, while reflecting an
increase of $193,750 of interest expense on the Minimum Common Offering and
the Maximum Common Offering from new mortgage debt on the Proposed
Acquisition properties.

(4) Includes the estimated increases in general and administrative as well as
payroll expenses associated with the operation of the Company as a REIT.

(5) Assumes 3,752,822 (Minimum Offerings) and 6,609,964 (Maximum Offerings)
weighted average number of shares of common stock outstanding including the
dilutive effect of 463,133 Series "D" Warrants, 72,500 Series "E" Warrants,
1,021,500 shares of 1995 Preferred Stock and the 10% Convertible and Series
"B" 10% Convertible notes. Net income (loss) per share also assumes that
annual preferred dividends will be paid in the Minimum Combined and Maximum
Combined Offerings.

F-9
<PAGE>

AMERICAN EQUITY TRUST INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
As of December 31 1995
-------------------------------------------------------------
The Proposed Pro Forma Pro Forma
Company Acquisitions Adjustments Combined
---------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
MINIMUM COMMON OFFERING
- -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................. $ - $1,178,899 $ (1,100,144)(1) $ 78,755
Adjustments - operating activities:
Depreciation and amortization.............. - - 533,644(1) 533,644
Increase (decrease) from changes in:
Receivables................................ - 13,149 13,149
Other assets............................... (38,532) 20,153 (18,379)
Payables and other liabilities............. 239,510 14,876 254,386
--------- ---------- ------------
Net cash provided by operating activities... 200,978 1,227,077 861,555
--------- ---------- ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuances................ 258,781 159,238 (190,340)(3) 227,679
Net proceeds from sale of stock............. 358,107 - 12,975,006(4) 13,333,113
Deferred loan costs......................... (31,422) (31,443)
Deferred offering costs..................... (674,000) - 674,000(5) -
--------- ---------- ------------
Net cash provided by financing activities... (88,534) 159,238 13,529,370
--------- ---------- ------------
PRO FORMA FUNDS AVAILABLE FOR
DISTRIBUTION TO COMMON STOCKHOLDERS........ $ 9,824 $1,084,673 $ 2,166,663
========= ========== ============

MINIMUM COMBINED OFFERING
- -------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................. $ - $1,178,899 $ (906,394)(1) $ 272,505
Adjustments - operating activities:
Depreciation and amortization.............. - - 533,644(1) 533,644
Increase (decrease) from changes in:
Receivables................................ - 13,149 13,149
Other assets............................... (38,532) 20,153 (18,379)
Payables and other liabilities............. 239,510 14,876 254,386
--------- ---------- ------------
Net cash provided by operating activities... 200,978 1,227,077 1,055,305
--------- ---------- ------------

CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures........................ - (301,642) (301,642)
Acquisition of Properties................... (102,620) - (11,820,000)(2) (11,922,620)
--------- ---------- ------------
Net cash used in investing activities..... (102,620) (301,642) (12,224,262)
--------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuances................ 258,781 159,238 (159,238)(3) 258,781
Repayment of mortgage notes acquired........ - - (2,500,000)(5) (2,500,000)
Net proceeds from sale of stock............. 358,107 - 14,845,006(4) 15,203,113
Dividends on preferred stock................ - - (160,512)(6) (160,512)
Deferred loan costs......................... (31,422) (31,422)
Deferred offering costs..................... (674,000) - 674,000(4) -
--------- ---------- ------------
Net cash provided by financing activities... (88,534) 159,238 12,769,960
--------- ---------- ------------
PRO FORMA FUNDS AVAILABLE FOR
DISTRIBUTION TO COMMON STOCKHOLDERS........ $ 9,824 $1,084,673 $ 1,601,003
========= ========== ============
</TABLE>

F-10
<PAGE>

AMERICAN EQUITY TRUST INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
As of December 31, 1995
---------------------------------------------------------------------------
The Proposed Pro Forma Pro Forma
Company POG Acquisitions Adjustments Combined
---------- ----------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
MAXIMUM COMMON OFFERING
- -----------------------
CASH FLOWS - OPERATING ACTIVITIES:
Net income (loss)....................... $ - $1,178,899 $ (43,417) $ (11,210)(1) $ 1,124,272
Adjustments - operating activities:
Depreciation and amortization.......... - - 1,067,896 496,641(1) 1,564,537
Minority interest...................... - - - 55,357(7) 55,357
Increase (decrease) from changes in:
Receivables and other assets........... (38,532) 33,302 - (5,230)
Payables and other liabilities......... 239,510 14,876 123,190 377,576
--------- ---------- ---------- ------------
Net cash provided by operating activities 200,978 1,227,077 1,147,669 3,116,512
--------- ---------- ---------- ------------

CASH FLOWS - INVESTING ACTIVITIES:
Capital expenditures.................... - (301,642) (3,163) (304,805)
Acquisition of Properties............... (102,620) - - (22,938,139)(2) (23,040,759)
--------- ---------- ---------- ------------
Net cash used in investing activities... (102,620) (301,642) ( 3,163) (23,345,564)
--------- ---------- ---------- ------------
CASH FLOWS - FINANCING ACTIVITIES
Proceeds (repayment) of debt............ 258,781 159,238 (391,934) 92,150(3) 118,235
Repayment of mortgage notes acquired.... - - - (8,000,000)(5) (8,000,000)
Net proceeds from sale of stock......... 358,107 - - 31,255,000(4) 31,613,107
Distributions to former owners.......... - - (614,642) 614,642(8) -
Deferred loan costs..................... (31,422) - - (31,422)
Deferred offering costs................. (674,000) - - 674,000(4) -
--------- ---------- ---------- ------------
Net cash provided by financing activities 88,534 159,238 (1,006,576) 23,699,920
--------- ---------- ---------- ------------
PRO FORMA FUNDS AVAILABLE FOR
DISTRIBUTION TO COMMON STOCKHOLDERS... $ 9,824 $1,084,673 $ 137,930 $ 3,470,868
========= ========== ========== ============

MAXIMUM COMBINED OFFERING
- -------------------------
CASH FLOWS - OPERATING ACTIVITIES:
Net income (loss)....................... $ - $1,178,899 $ (43,417) $ 540,252(1) $ 1,675,734
Adjustments - operating activities:
Depreciation and amortization.......... - - 1,067,896 496,641(1) 1,564,537
Minority interest...................... - - - 55,357(7) 55,357
Increase (decrease) from changes in:
Receivables and other assets........... (38,532) 33,302 - (5,230)
Payables and other liabilities......... 239,510 14,876 123,190 377,576
--------- ---------- ---------- ------------
Net cash provided by operating activities 200,978 1,227,077 1,147,669 3,667,974
--------- ---------- ---------- ------------

CASH FLOWS - FINANCING ACTIVITIES
Proceeds (repyament) of debt............ 258,781 159,238 (391,934) 232,696(3) 258,781
Repayment of mortgage notes acquired.... - - - (16,461,861)(5) (16,461,861)
Net proceeds from sale of stock......... 358,107 - - 45,055,004(4) 45,413,111
Distributions to former owners.......... - - (614,642) 614,642(8) -
Dividends on preferred stock............ - - - (1,200,000)(6) (1,200,000)
Deferred loan costs..................... (31,422) - - (31,422)
Deferred offering costs................. (674,000) - - 674,000(4) -
--------- ---------- ---------- ------------
Net cash provided by financing activities 88,534 159,238 1,006,576 27,978,609
---------- ---------- ----------- ------------
PRO FORMA FUNDS AVAILABLE FOR
DISTRIBUTION TO COMMON STOCKHOLDERS $ 9,824 $1,084,673 $ 137,930 $ 8,301,019
========== ========== =========== ============
</TABLE>

F-11
<PAGE>

AMERICAN EQUITY TRUST INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF CASH FLOWS

PRO FORMA ADJUSTMENTS

(1) To record adjustments reflected in the pro forma statement of operations on
pages F-7 and F-8 as follows:

<TABLE>
<CAPTION>
Minimum Minimum Maximum Maximum
Common Combined Common Combined
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Rental revenues.......................... $ 83,500 $ 83,500 $ 83,500 $ 83,500
Depreciation expense..................... (533,644) (533,644) (496,641) (496,641)
Interest expense......................... (193,750) - 1,057,288 1,608,750
Minority share of income................. - - (55,357) (55,357)
REIT expenses............................ (456,250) (456,250) (600,000) (600,000)
----------- --------- ---------- ----------
$(1,100,144) $(906,394) $ (11,210) $ 540,252
=========== ========= ========== ==========
</TABLE>
(2) To record acquisition of the Properties including related acquisition
expenses of $120,000 (Minimum Offerings) and $190,000 (Maximum Offerings).

(3) To record adjustments to historical debt to reflect debt maturities of pro
forma debt after the acquisition of the Properties has been consummated as
follows:

<TABLE>
<CAPTION>
Minimum Minimum Maximum Maximum
Common Combined Common Combined
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Historical debt proceeds (repayments):
Proposed Acquisitions.................. $159,238 $159,238 $ 159,238 $ 159,238
Prior Ownership Group.................. - - (391,934) (391,934)
-------- -------- --------- ---------
159,238 159,238 (232,696) (232,696)
Pro forma debt maturities................ 31,102 31,102 140,546 -
-------- -------- --------- ---------
Pro forma adjustment..................... $190,340 $190,340 $ (92,150) $(232,696)
======== ======== ========= =========
</TABLE>
(4) To record the net proceeds of the Offerings.

(5) To record reduction of mortgage notes with proceeds of the Offerings.

(6) To record dividends on preferred stock.

(7) To record the minority share of income.

(8) To eliminate historical distributions to the former owners of the POG
properties.

F-12
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

American Equity Trust Inc.
Los Angeles, California

We have audited the accompanying balance sheet of American Equity Trust Inc. as
of December 31, 1995. The financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statement based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is 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 audit provides a reasonable basis for our opinion.

In our opinion, based on our audit, the financial statement referred to above
presents fairly, in all material respects, the financial position of American
Equity Trust Inc. of as of December 31, 1995 in conformity with generally
accepted accounting principles.

BDO SEIDMAN, LLP

Los Angeles, California
March 25, 1996

F-13
<PAGE>

AMERICAN EQUITY TRUST INC.

BALANCE SHEET

DECEMBER 31, 1995

<TABLE>
<S> <C>
ASSETS:
Cash................................................................... $ 19,824
Deferred offering costs................................................ 674,000
Deferred loan costs.................................................... 31,422
Property acquisition costs............................................. 102,620
Other assets........................................................... 38,532
--------
Total assets.......................................................... $866,398
========
LIABILITIES:
Accounts payable and accrued expenses.................................. $239,300
Notes payable.......................................................... 258,781
--------
Total liabilities..................................................... 498,081

STOCKHOLDERS' EQUITY (Note 2):
Common Stock, $0.01 par value; shares authorized -
35,000,000; shares issued and outstanding - 274,714................... 2,747
1995 Convertible Preferred Stock, shares authorized - 1,100,000;
issued and outstanding 1,021,500; (liquidation value $.01 per share).. 10,210
8% Convertible Preferred Stock, shares authorized - 1,500,000
issued and outstanding - none; (liquidation value $13.20 per share)... -
Additional paid-in capital............................................. 420,155
Deficit................................................................ (64,795)
--------
Total stockholders' equity............................................ 368,317
--------

Total liabilities and stockholders' equity ........................... $866,398
========
</TABLE>

F-14
<PAGE>

AMERICAN EQUITY TRUST INC.

NOTES TO BALANCE SHEET

NOTE 1. ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION

American Equity Trust Inc. (the Company) was originally organized and
incorporated as Insight Environmental Corporation (Insight), an inactive
publicly-held shell. On November 22, 1994, Insight merged into its wholly-
owned subsidiary American Equity Trust Inc., a Maryland corporation, and changed
its name to that of the Company. The purpose of the Company was to be a vehicle
to form a Real Estate Investment Trust (REIT) to raise funds from the public
market for the purpose of acquiring and managing a diversified portfolio of
income producing real estate assets for the purpose of dividend distribution and
capital appreciation. The Company proposes to sell a maximum of 1,750,000 Units
consisting of two shares of common stock and one detachable Series "A" Warrant
at $14.00 per Unit plus 1,500,000 shares of Common Stock at a price of $7.00 per
share which would result in $35,000,000 of gross proceeds and net proceeds of
approximately $31,300,000. In addition the Company is offering 1,136,364 shares
of its 8% Convertible Preferred Stock at $13.20 and expects to raise additional
funds amounting to $13,800,000 (net of offering expenses of $1,200,000).

Commencing with the year beginning January 1, 1996, the Company intends to
make an election to be taxed as a REIT under section 856(c) of the Internal
Revenue Code of 1986, as amended (the Code). If the Company qualifies as a
REIT, the Company generally will not be subject to federal income taxes to the
extent REIT taxable income (exclusive of capital gains, if any, distribution of
which is optional) is distributed to its stockholders. A REIT is subject to a
number of organizational and operational requirements, including a requirement
that it currently distribute at least 95% of its ordinary taxable income to its
stockholders. 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 rates. If
the Company qualifies for taxation as a REIT, the Company may be subject to
certain state and local taxes on its income and property and federal income and
excise taxes on its undistributed income. The Company intends to obtain an
opinion from its counsel concerning its REIT status.

Formation of Operating Partnership
----------------------------------

On October 24, 1995, the Company formed American Equity Trust Operating
Partnership, L.P., a Delaware limited partnership (Operating Partnership), in
which the Company is the sole general partner and will own an initial 99%
interest in the Operating Partnership. The Operating Partnership was
capitalized with $10,000.

Merger with Funding
-------------------

In October 1995, the Company merged with American Equity Funding (Funding), a
related entity formed for the purpose of exploring opportunities for the
formation of a publicly-held REIT and to raise capital to organize the REIT and
fund a portion of the cost of offering the REIT's shares to the public. Funding
raised $400,000 which was used for the purposes described above.

The merger was accomplished by an exchange of 114,286 common shares of the
Company plus warrants to purchase additional 57,133 common shares of the Company
at $3.50 per share. At the same time the founders of Funding exchanged their
common shares in Funding for 1,021,500 shares of the Company's 1995 Convertible
Preferred Stock and Series D Warrants to purchase 406,000 shares at $3.50 per
share. The merger was accounted for as a combination of entities under common
control in a manner similar to a pooling of interest.

F-15
<PAGE>

AMERICAN EQUITY TRUST INC.

NOTES TO BALANCE SHEET
(CONTINUED)

NOTE 2. STOCKHOLDERS' EQUITY

Deficit
-------

The Company and its predecessor had no operations for at least the past five
years.

Preferred Stock
---------------

The Company is authorized to issue up to 21,515,000 preferred shares from
time to time in one or more series as authorized by the Board of Directors.
Prior to issuance of shares of each series, the Board of Directors shall
designate that series from all other series and classes of stock of the Company,
shall specify the number of shares to be included in the series and shall set
the terms, preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption.

8% Convertible Preferred Stock
------------------------------

The Board of Directors has authorized the issuance of up to 1,500,000 shares
of 8% Convertible Preferred Stock (8% Preferred). The 8% Preferred shall be
entitled to a $13.20 liquidation preference, subject to adjustment in the event
of adjustments in the conversion price. The 8% Preferred shall be entitled to
receive cumulative dividends equal to the greater of 8% of the liquidation
preference or the amount of dividends paid on Common Stock, up to an annual
maximum of $1.30 per share. Each preferred share is entitled to one vote. The
8% Preferred are convertible into Common Stock for a period of 60 months from
the date of issue.

1995 Convertible Preferred Stock
--------------------------------

The Board of Directors has authorized the issuance of up to 1,100,000 shares
of 1995 Convertible Preferred Stock (95 Preferred). Each share of 95 Preferred
shall receive liquidating dividends at the rate of $0.01 per share ($110,000 in
the aggregate). Each share of 95 Preferred shall be automatically converted
into one share of Common Stock based on asset levels as defined in the articles
of incorporation.

Stock Incentive Plan
--------------------

The Company has approved a stock incentive plan (Plan), for the issuance of
up to 500,000 shares, to enable officers, key employees and directors of the
Company to participate in the ownership of the Company. The Plan provides for
the issuance of non-qualified stock options and incentive stock options. Non-
qualified stock options will provide the right to purchase common stock at a
specified price which may be less than fair market value. Incentive stock
options will be issued at fair market value and carry a ten year restriction.

Series "A" Warrants
-------------------

Series "A" Warrants will be issued as part of the Units. The A Warrants will
have a three year life and are exercisable into common shares of the Company at
$7.00 per share.

Series "D" Warrants
-------------------

The Company has authorized and issued 463,133 Series "D" Warrants which
permit the holders to purchase one common share of the Company at $3.50 per
share. The "D" Warrants are exercisable for a 35-month period commencing at the
end of the 13th month after the final closing of the Offering described in Note
1 above, after which they expire. Holders of 336,000 of such warrants have
agreed with the Company that they will not exercise their rights to purchase
common stock pursuant to the warrants until six months after the end of the
Company's first fiscal year wherein its audited consolidated financial
statements reflect an adjusted equity value of $25,000,000 or more plus funds
from operations of $2,500,000 or more. The common stock issuable upon exercise
of the D Warrants will not be registered under the Securities Act of 1933 at the
time the stock is issued.

F-16
<PAGE>

AMERICAN EQUITY TRUST INC.

NOTES TO BALANCE SHEET
(CONTINUED)

NOTE 2. STOCKHOLDERS' EQUITY (CONTINUED)

Series "E" Warrants
-------------------

The Company issued 72,500 Series "E" Warrants during October 1995 which were
issued as part of the private placement of $202,500 of 10% Convertible Notes of
the Company. The "E" Warrants have a two-year life commencing with the Offering
described in Note 1 above and will be exercisable into common shares of the
Company at $4.50 per share. See Note 4.

NOTE 3. PROPOSED ACQUISITIONS

The Company will contribute the net proceeds of the Offering to, and become
the sole general partner in, the Operating Partnership. It is anticipated that
the Operating Partnership will use the net proceeds to acquire the following
real estate properties:
<TABLE>
<CAPTION>
New Debt
Interest or
Purchase Retained Debt Payable
Property Price by Sellers Assumed in Cash
- ----------------------------------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Arrow Village Apartments $ 3,250,000 $ - $2,500,000 $ 750,000
Northwest Gardens Apartments 6,950,000 - - 6,950,000
Orangewood Place Apartments 1,800,000 - - 1,800,000
Sandpainter Apartments 2,200,000 - - 2,200,000
Hewlett-Packard Building 16,000,000 1,600,000 14,400,000
Westwood Self-Storage and Sportmart Building 12,900,000 2,290,000 5,961,861 4,648,139
----------- ---------- ---------- -----------
$43,100,000 $3,890,000 $8,461,861 $30,748,139
=========== ========== ========== ===========
</TABLE>

NOTE 4. NOTES PAYABLE

10% Convertible Notes
---------------------

In October 1995 the Company issued 10% Convertible Notes (Notes) in the
amount of $202,500 due October 1996. The Notes are convertible into 45,000
shares of the Company's common stock at $4.50 per share. The Notes are callable
by the Company, at any time, at 115% of the face amount of the Notes.

Series B 10% Convertible Notes
------------------------------

In November and December 1995, the Company issued Series B 10% Convertible
Notes ("B" Notes) in the amount of $56,281 due October 1, 1996. The B Notes are
convertible into 12,507 shares of the Company's common stock at $4.50 per share.
The B Notes are callable by the Company, at any time, at 115% of the face amount
of the "B" Notes.

10% Notes
---------

During February and March 1996 the Company issued 10% Notes (New Notes) in
the amount of $245,555 due the earlier of 90 days after the Offering or April
15, 1997. The New Notes were issued at a 10% discount and the Company received
net proceeds of $221,000.

F-17
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
American Equity Trust Inc.
Los Angeles, California

We have audited the accompanying combined balance sheets of the Prior Ownership
Group (as defined in Note 1) as of December 31, 1995 and 1994, and the related
combined statements of operations, changes in owners' equity and cash flows for
each of the three years in the period ended December 31, 1995. These combined
financial statements are the responsibility of the Prior Ownership Group's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the combined financial position of the
Prior Ownership Group as of December 31, 1995 and 1994, and the combined results
of operations and cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.

BDO SEIDMAN, LLP

Los Angeles, California
March 25, 1996

F-18
<PAGE>

PRIOR OWNERSHIP GROUP

COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>

ASSETS:
Real Estate.............................. $28,278,219 $28,275,056
Accumulated depreciation................. (4,822,205) (3,817,441)
----------- -----------
Net investment in Real Estate............ 23,456,014 24,457,615

Cash and cash equivalents................ 230,683 92,753
Other assets............................. 298,249 361,382
----------- -----------

Total assets........................... $23,984,946 $24,911,750
=========== ===========

LIABILITIES:...............................
Mortgage notes payable (Note 3).......... $17,796,767 $18,188,701
Notes payable to affiliates (Note 5)..... 1,717,189 1,717,189
Accounts payable and other liabilities... 427,658 304,469
----------- -----------
Total liabilities...................... 19,941,614 20,210,359

OWNERS' EQUITY:
Owners' Equity........................... 4,043,332 4,701,391
----------- -----------
Total liabilities and
owners' equity $23,984,946 $24,911,750
=========== ===========
</TABLE>

F-19
<PAGE>

PRIOR OWNERSHIP GROUP

COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
REVENUES........................ $3,685,622 $3,632,928 $3,546,735
---------- ---------- ----------

EXPENSES:
Operating expenses.............. 1,000,393 1,137,291 1,081,242
Management fees................. 52,000 48,894 80,144
Depreciation and amortization... 1,067,896 1,067,804 947,134
Interest expense................ 1,608,750 1,555,242 1,512,543
---------- ---------- ----------
Total expenses................ 3,729,039 3,809,231 3,621,063
---------- ---------- ----------

Net income (loss)............... $ (43,417) $ (176,303) $ (74,328)
========== ========== ==========
</TABLE>

F-20
<PAGE>

PRIOR OWNERSHIP GROUP

COMBINED STATEMENTS OF OWNERS' EQUITY

<TABLE>
<S> <C>
Balance January 1, 1993..... $5,716,878

Capital distributions....... (153,613)
Net loss for the period..... (74,328)
----------

Balance December 31, 1993... 5,488,937

Capital distributions....... (611,243)
Net loss for the period..... (176,303)
----------

Balance December 31, 1994... 4,701,391

Capital distributions....... (614,642)
Net loss for the period..... (43,417)
----------

Balance December 31, 1995... $4,043,332
==========
</TABLE>

F-21
<PAGE>

PRIOR OWNERSHIP GROUP

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>

CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss................................. $ (43,417) $ (176,303) $ (74,328)
Adjustments net loss to cash
provided by operating activities:
Depreciation and amortization........ 1,067,896 1,067,803 947,134
Increase (decrease) from changes in:
Accounts receivable.................. - -
Other assets......................... - 54,287 (330,747)
Accounts payable and
other liabilities.................. 123,190 (45,523) 163,214
----------- ---------- -----------
Net cash provided by
operating activities................... 1,147,669 900,264 705,273
----------- ---------- -----------

CASH FLOWS USED IN
INVESTING ACTIVITIES:
Capital improvements..................... (3,163) - (1,559,647)
----------- ---------- -----------

CASH FLOWS FROM
FINANCING ACTIVITIES:
Debt proceeds (repayments)............... (391,934) (336,378) 1,100,453
Distributions............................ (614,642) (611,243) (153,613)
----------- ---------- -----------
Net cash provided by (used in)
financing activities................... (1,006,576) (947,621) 946,840
---------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents................ 137,930 (47,357) 92,466

Cash and cash equivalents
at beginning of period................... 92,753 140,110 47,644
----------- ---------- -----------

Cash and cash equivalents
at end of period......................... $ 230,683 $ 92,753 $ 140,110
=========== ========== ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 1,464,029 $1,550,131 $ 1,444,047
=========== ========== ===========
</TABLE>

F-22
<PAGE>

PRIOR OWNERSHIP GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

The accompanying combined financial statements include the accounts of two
(2) real estate properties which American Equity Trust Inc. intends to acquire
equity interests of between 67% to 80% in limited partnerships to be formed
which will own the properties. The real estate properties included in these
financial statements are as follows:
<TABLE>
<CAPTION>
Ownership Partnership
Expected Interest Type
Property/Location Purchase Price Purchased Acquired
- ------------------------------------------------ -------------- ---------- -----------
<S> <C> <C> <C>
Hewlett-Packard Building, Van Nuys, CA $16,000,000 80% General
Westwood Self-Storage and Sportmart Building,
Los Angeles, CA 12,900,000 67% General
</TABLE>

American Equity Trust Inc.

American Equity Trust Inc. a Maryland corporation, was formed to be a vehicle
to form a Real Estate Investment Trust (REIT) to raise funds from the public
market for the purpose of acquiring and managing a diversified portfolio of
income producing real estate assets. American Equity Trust Inc. expects to sell
a maximum of 5,000,000 shares of common stock at a price of $7.00 per share
which would result in $35,000,000 of gross proceeds and net proceeds of
approximately $31,125,000. In addition the Company is offering 1,136,364 shares
of its 8% Convertible Preferred Stock at $13.20 and expects to raise additional
funds amounting to $13,800,000 (net of offering expenses of $1,200,000). A
portion of the net proceeds are intended to be used to acquire the properties
described above and the remaining portion is intended to be used to acquire
other real estate properties.

Basis of Presentation

The accompanying combined financial statements of the Prior Ownership Group
have been presented on a historical cost basis since the Prior Ownership Group
is to be the subject of a business combination upon the contribution of real
estate properties in exchange for interest in a limited partnerships to be
formed by the Operating Partnership. The combined financial statements include
only the accounts and activity of the real estate properties and do not include
other accounts or operations of the sellers that are not related to the
properties.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents
The Prior Ownership Group considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash equivalents.

Real Estate Properties

Real estate properties are carried at the sellers' cost. Depreciation is
computed using the straight-line method over their estimated useful lives of
28.5 years for buildings and improvements, 7 years for furniture, fixtures and
equipment and the term of leases for tenant improvements which range from 5 to
10 years.

Income Taxes
The combined financial statements include the activity of the two real estate
properties which were held in limited partnerships and not subject to income
taxes.

F-23
<PAGE>

PRIOR OWNERSHIP GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)

NOTE 3. MORTGAGE NOTES PAYABLE
Mortgage notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
Interest -------------------------
Rate 1995 1994
---- ---- ----
<S> <C> <C> <C>
HEWLETT-PACKARD BUILDING
- ------------------------
First Mortgage note payable in equal
monthly installments of $105,229
including interest; collateralized
by a first trust deed on the property
with all remaining outstanding principal
and interest due December 1998 9.0% $10,429,576 $10,726,839

WESTWOOD BUILDING
- -----------------
First Mortgage note payable in monthly
installments necessary to fully
amortize the then outstanding principal
balance at the current interest rate
by February 28, 2022; collateralized by
a first trust deed on the property Bank's Index
with all remaining outstanding principal Rate plus 2 1/2%
and interest due February 2007. (7.56% at
December 31, 1995) 7,367,191 7,461,862
----------- -----------

$17,796,767 $18,188,701
=========== ===========
</TABLE>

Aggregate annual principal payments for the above mortgage notes payable at
December 31, 1995 are as follows:

December 31, Amount
------------ ------
<S> <C>
1996 $ 437,566
1997 476,276
1998 9,809,493
1999 114,212
2000 123,364
Thereafter 6,835,574
-----------
$17,796,485
===========
</TABLE>

F-24
<PAGE>

PRIOR OWNERSHIP GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)

NOTE 4. MINIMUM LEASE RENTAL INCOME

The POG rental properties are entitled to receive future minimum rental
income under non cancelable leases with remaining terms in excess of one year as
follows:

<TABLE>
<CAPTION>
December 31, Amount
- ------------ ----------
<S> <C>
1996 $2,352,000
1997 1,747,000
1998 1,262,000
1999 813,000
2000 813,000
Thereafter 1,693,000
----------
$8,680,000
==========
</TABLE>

NOTE 5. NOTES PAYABLE TO AFFILIATE

The notes payable to affiliate are unsecured demand notes with interest
payable at the rate of 10% to 12% per annum.

F-25
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
American Equity Trust Inc.
Los Angeles, California

We have audited the accompanying combined statement of revenues and certain
expenses of the Proposed Acquisitions (as defined in Note 1) for the year ended
December 31, 1995. The combined financial statement is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statement based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 presentation of the financial
statement. We believe that our audit provides a reasonable basis for our
opinion.

The accompanying combined statement of revenues and certain expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of American Equity Trust Inc. Material amounts (described in Notes
to the combined statement of revenues and certain expenses) that would not be
comparable to those resulting from the proposed future operations of the
properties are excluded, and the statements are not intended to be a complete
presentation of the revenues and expenses of the properties.

In our opinion, based on our audit, the financial statement referred to above
presents fairly, in all material respects, the combined statement of revenues
and certain expenses for the year ended December 31, 1995 in conformity with
generally accepted accounting principles.

BDO SEIDMAN, LLP

Los Angeles, California
March 25, 1996

F-26
<PAGE>

PROPOSED ACQUISITIONS

COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES

Year Ended
December 31,
1995
----
<S> <C>
REVENUES.................................... $2,394,578
----------

CERTAIN EXPENSES:
Operating expenses.......................... 1,113,362
Management fees............................. 102,317
----------
Total expenses............................ 1,215,679
----------

Revenues in excess of certain expenses ..... $1,178,899
==========
</TABLE>

F-27
<PAGE>

PROPOSED ACQUISITIONS

NOTES TO COMBINED FINANCIAL STATEMENT

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

The accompanying combined financial statement includes the accounts of real
estate properties which American Equity Trust Inc. intends to acquire with the
net proceeds of the Offering.

The real estate properties included in this financial statement are as
follows:

<TABLE>
<CAPTION>
Expected
Property/Location Purchase Price
- -------------------------------------------------- --------------
<S> <C>
Arrow Village Apartments, Azusa, CA $3,250,000
Northwest Garden Apartments, Peoria, AZ 6,950,000
Orangewood Place Apartments, Phoenix, AZ 1,800,000
Sandpainter Apartments, Phoenix, AZ 2,200,000
</TABLE>

The accompanying combined financial statement includes the accounts of the
Proposed Acquisitions and have been presented on a combined historical cost
basis in the hands of the present owners. No adjustments have been reflected in
this combined financial statement to give effect to the purchase by American
Equity Trust Inc. of the properties listed above.

The combined financial statement includes only the accounts and activity of
the four real estate properties and does not include other accounts or
operations of the sellers that are not related to the properties. The
accompanying statement is not representative of the actual operations for the
year presented as certain expenses that may not be comparable to the expenses
expected to be incurred by American Equity Trust Inc. in the proposed future
operations of the Proposed Acquisitions have been excluded. Expenses excluded
consist of interest and depreciation and amortization.

F-28
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE

American Equity Trust Inc.
Los Angeles, California

Our report to American Equity Trust Inc., dated March 25, 1996 which is
contained in the Prospectus constituting part of this Registration Statement
included the audit of the schedule listed under Item 16(b) as of December 31,
1995. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based upon our audit.

In our opinion, such schedule presents fairly, in all material respects, the
information set forth therein.

BDO SEIDMAN, LLP

Los Angeles, California
March 25, 1996

S-1
<PAGE>

PRIOR OWNERSHIP GROUP

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Cost Capitalized
Subsequent to Gross Amounts at Which
Initial Cost Acquisition Carried at Close of Period
------------------------- --------------------- ------------------------------------
Buildings and Buildings and Buildings and
Description Encumbrances Land Improvements Land Improvements Land Improvements Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hewlett-Packard Building,
Van Nuys, CA 10,429,576 1,770,000 - - 15,708,219 1,770,000 15,708,219 17,478,219

Westwood Self-Storage
and Sportmart Building 7,367,191 5,800,000 5,000,000 - - 5,800,000 5,000,000 10,800,000
---------- --------- --------- --- ---------- --------- ---------- ----------
17,796,767 7,570,000 5,000,000 - 15,708,219 7,570,000 20,708,219 28,278,219
========== ========= ========= === ========== ========= ========== ==========

<CAPTION>
Life Upon
Which
Depreciation
Accumulated Net In Latest
Depreciation Book Value Income
Buildings and Buildings and Date of Date of Statement
Description Improvements Improvements Construction Acquisition is Computed
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Hewlett-Packard Building,
Van Nuys, CA (3,711,095) 13,767,124 1989 - 5-30 years

Westwood Self-Storage
and Sportmart Building (1,111,110) 9,688,890 - 1988 31.5 years
--------- ----------
4,822,205 23,456,014
========= ==========

<CAPTION>
Real Estate Assets December 31,
---------------------------------------------
1995 1994 1993
---------------------------------------------
<S> <C> <C> <C>
Balance at beginning
of year 28,275,056 28,275,056 26,715,409

Improvements 3,163 - 1,559,647
---------- ---------- ----------

Balance 28,278,219 28,275,056 28,275,056
========== ========== ==========

<CAPTION>
Accumulated Depreciation December 31,
---------------------------------------------
1995 1994 1993
---------------------------------------------
<S> <C> <C> <C>
Balance at beginning
of year 3,817,441 2,812,768 1,924,748

Depreciation expense 1,004,764 1,004,673 888,020
---------- ---------- ----------

Balance 4,822,205 3,817,441 2,812,768
========== ========== ==========

</TABLE>

S-2
<PAGE>

EXHIBIT A

INSTRUCTIONS FOR COMPLETION
OF ORDER FORM

INSTRUCTIONS TO INVESTORS

YOU MUST COMPLETE ITEMS 1-7. INVESTORS ARE ENCOURAGED TO READ THE
PROSPECTUS IN ITS ENTIRETY FOR A COMPLETE EXPLANATION OF AN INVESTMENT IN
THE COMPANY.

Item 1. Check the appropriate box to indicate form of ownership. If the
investor is a Custodian, Corporation, Partnership or Trust, please provide the
additional requested information and/or documents.

Item 2. Indicate the number of Units, Shares or shares of 8% Preferred you
are purchasing, and the dollar amount of your investment. Check the appropriate
box to indicate whether this is an initial or additional investment.

Item 3. Please print name(s) in which Units (including Series "A"
Warrants), Shares or shares of 8% Preferred are to be registered and provide
address and telephone numbers. Check appropriate box if you are a non-resident
alien, a U.S. citizen residing outside U.S. or subject to back up withholding
(if the latter applies to you, cross out clause (ii) in the paragraph appearing
immediately above Item 1). IRAs and KEOGHs should provide the taxpayer
identification number of the account AND the social security number of the
---
account holder. Trusts should provide their taxpayer identification number.
Custodians should provide the minor's social security number. All individuals
investors should provide their social security number. Other entities should
provide their taxpayer identification number. If you have an account with the
broker/dealer named on the reverse side of the form, provide your account
number.

Item 4. Provide alternate mailing address if so desired for dividend
checks.

Item 5. Provide mailing address of beneficiary of a Trust, IRA or Keogh if
so desired so that duplicate copies of shareholder reports can be sent to such
beneficiary.

Item 6. Print the two letter abbreviation of your state of residence (if an
IRA or Keogh, state of residence of beneficiary).

Item 7. Sign the form in Item 7. The date of signing must be inserted on
the line provided.

AFTER FOLLOWING THE ABOVE INSTRUCTIONS, RETURN THE ORDER FORM TO THE BROKER
WHO SOLICITED YOUR ORDER TOGETHER WITH A CHECK MADE PAYABLE TO "TRUST COMPANY OF
AMERICA, AS ESCROW AGENT" (OR, INSTEAD OF A CHECK, A REQUEST TO THE BROKER TO
DEBIT YOUR ACCOUNT IN THE AMOUNT OF YOUR ORDER).

TRUSTS should furnish a copy of the trust instrument and all amendments
thereto. CORPORATIONS should furnish an appropriate corporation resolution
authorizing the purchase of the Shares. PARTNERSHIPS should furnish a copy of
the partnership agreement.

INSTRUCTIONS TO BROKERS

Please be sure verify all investor information provided on the Order Form.
YOU MUST COMPLETE ITEM 8 AND SIGN THE ORDER FORM IN ORDER FOR THE ORDER TO BE
ACCEPTED. Please verify that investors have signed Item 7.

Please send check(s) payable to or wire transfer funds to "Trust Company of
America, as Escrow Agent" and completed Order Form(s) to Trust Company of
America, 7103 South Revere Parkway, Englewood, Colorado 80112, Attention: Phil
McCarthy. For wiring instructions, contact Trust Company of America at 303-705-
6000 prior to wiring funds.

A-1
<PAGE>

AMERICAN EQUITY TRUST INC.
ORDER FORM

The investor named below, under penalties of perjury, certifies that
(i) the number shown under Item 3 on this Order form is his or her correct
Taxpayer Identification Number or Social Security Number (or he or she is
waiting for a number to be issued to him or her) and (ii) he is not subject to
backup withholding either because he or she has not been notified by the
Internal Revenue Service (IRS) that he or she is subject to backup withholding
as a result of a failure to report all interest or dividends, or the IRS has
notified him that he or she is no longer subject to backup withholding (NOTE:
CLAUSE (ii) IN THIS CERTIFICATION SHOULD BE CROSSED OUT IF THE APPROPRIATE BOX
IN ITEM 3 BELOW HAS BEEN CHECKED.)

<S> <C> <C>
1. FORM OF OWNERSHIP Mark only one box. [_] IRA
[_] SINGLE PERSON [_] KEOGH
[_] HUSBAND AND WIFE AS COMMUNITY PROPERTY [_] PENSION OR PROFIT SHARING PLAN
(both signatures must appear in Item 7)
[_] JOINT TENANTS WITH RIGHT OF SURVIVORSHIP [_] TRUST (Trust Agreement MUST be enclosed.)
(both signatures must appear in Item 7) [_] ALL SECTIONS MUST BE FILLED IN
[_] TENANTS IN COMMON [_] Trustee name(s)
[_] A MARRIED PERSON SEPARATE PROPERTY ------------------------------------
(only one signature must appear in Item 7) Trust Date
[_] CUSTODIAN -----------------------------------------
Custodian for Month Day Year
------------------------------ [_] For the benefit of
Under Uniform Transfers/Gifts to Minors Act ---------------------------------
of the State of [_] OTHER
---------------------------- ----------------------------------------------
[_] CORPORATION OR PARTNERSHIP
(Corporate Resolution or Partnership Agreement
MUST be enclosed)

2. PURCHASE INFORMATION Dollar Amount of Investment
No. of Units (Minimum 50) ($14.00 per Unit) $
----- --------------------
No. of Shares (Minimum 100) ($7.00 per Share) $
----- --------------------
No. of shares of 8% Preferred ($13.20 per share) $
----- --------------------

[_] Broker authorized to transfer funds directly from undersigned's
brokerage account
</TABLE>
This is an (check one): [_] Initial Investment
[_] Additional Investment in this offering

3. INVESTOR INFORMATION Name(s) and address will be recorded exactly as
printed below.

Name
------------------------------------------------------------
Name of
Joint Investor
------------------------------------------------------------

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

Address
------------------------------------------------------------
City State Zip Code
----------------- ----------- -----------

<TABLE>
<S> <C> <C>
Investor Business Phone Number - - [_] Check box if you are a non-resident alien
-----------------
Check box if you are a U.S. citizen residing outside the U.S.
Investor Home Phone Number - - [_] Check box if you are subject to backup withholding
-----------------
</TABLE>

<TABLE>
<S> <C> <C>
- - - - -
- ------------------------------ -------------------------------- ------------------------------------
Investor's Social Security No. Joint Investor's Taxpayer ID. No.
Social Security No.
</TABLE>
Investor's Account Number with Broker/Dealer
(if any) ----------------------------------

(REVERSE SIDE MUST BE SIGNED BY
BROKER AND BY INVESTOR)

A-2
<PAGE>

4. DIVIDEND ADDRESS If you would like your dividend check mailed to an address
other than the address shown in Item 3, please complete.

Name
------------------------------------------------------------
Name of
Joint Investor
------------------------------------------------------------

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

Address
------------------------------------------------------------

City State Zip Code
----------------- ----------- -----------

Account number (if any) Account Name
------------------- -----------------

5. SHAREHOLDER REPORT ADDRESS If you are investing through a Trust, IRA or
KEOGH and want duplicate copies of shareholder reports sent to you, please
complete:

Name
------------------------------------------------------------

Name of
Joint Investor
------------------------------------------------------------

------------------------------------------------------------
Address
------------------------------------------------------------

City State Zip Code
----------------- ----------- -----------

Account number (if any) Account Name
------------------- -----------------

6. STATE OF RESIDENCE
-------------------

7. SIGNATURE OF INVESTOR(S)

--------------------------------------------- --------------------
SIGNATURE OF INVESTOR DATE

--------------------------------------------- --------------------
SIGNATURE OF JOINT INVESTOR DATE
===============================================================================
8. BROKER/DEALER INFORMATION THE BROKER MUST SIGN BELOW TO COMPLETE
ORDER. BROKER HEREBY WARRANTS THAT IT
IS A DULY LICENSED BROKER AND MAY
LAWFULLY SELL SHARES IN THE STATE
DESIGNATED AS THE INVESTOR'S RESIDENCE

Licensed Firm Name
------------------------------------------------------------

Broker Name
------------------------------------------------------------

Broker Mailing Address
------------------------------------------------------------

City State Zip Code
----------------- ----------- -----------

Broker Number Telephone Number - -
------------------------------- -------------

The undersigned confirms by his or her signature that he or she (i) has
reasonable grounds to believe that the information and representations
concerning the investor identified herein are true, correct and complete in all
respects; (ii) has discussed such investor's prospective purchase of Shares with
such investor; (iii) has advised such investor of all pertinent facts with
regard to the liquidity and marketability of the Shares; (iv) has delivered a
current Prospectus and related supplements, if any, to such investor; and (v)has
reasonable grounds to believe that the purchase of Shares is a suitable
investment for such investor, that such investor meets the suitability standards
applicable to such investor set forth in the Prospectus and related supplements,
if any, and that such investor is in a financial position to enable such
investor to realize the benefits of such an investment and to suffer any loss
that may occur with respect thereto.

------------------------------------ --------------------
Broker Signature Date

ALL INVESTOR AND BROKER/DEALER INFORMATION MUST BE COMPLETED OR
REGISTRATION CANNOT BE PROCESSED.

===============================================================================
FOR COMPANY USE ONLY:

A-3
<PAGE>

===============================================================================

TABLE OF CONTENTS

Page
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 12
The Company............................................................... 21
Terms of the Offering..................................................... 23
Estimated Use of Proceeds................................................. 24
Distribution Policy....................................................... 26
Capitalization............................................................ 27
Dilution.................................................................. 27
Selected Financial Information............................................ 29
Management Discussion and Analysis
of Financial Condition and Results of Operations........................ 31
Conflicts of Interest..................................................... 35
Management................................................................ 35
Principal Shareholders.................................................... 42
Investment Objectives and Policies........................................ 43
Operating Partnership Agreement........................................... 48
Description of Properties................................................. 51
Description of Securities................................................. 58
Certain Provisions of Maryland Law and
of the Company's Charter and By-Laws................................... 64
Shares Available for Future Sale.......................................... 67
Federal Income Tax Considerations......................................... 68
ERISA Considerations...................................................... 82
The Offering.............................................................. 84
Reports to Shareholders................................................... 87
Legal Opinions............................................................ 87
Experts................................................................... 87
Sales Literature.......................................................... 88
Further Information....................................................... 88
Glossary.................................................................. 89
Financial Statements...................................................... F-1
Specimen Order Form Exhibit A............................................. A-1
</TABLE>

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS UNLESS
PRECEDED OR ACCOMPANIED BY THIS PROSPECTUS NOR HAS ANY PERSON BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. HOWEVER, IF
ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE
DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.

AMERICAN EQUITY
TRUST INC.

Minimum of $15,000,000
in Units or Shares of Common Stock
and minimum of $2,006,400
in shares of 8% Convertible Preferred Stock

BROOKSTREET SECURITIES CORPORATION

PROSPECTUS

, 1996
-------------------

===============================================================================
<PAGE>

PART II

INFORMATION NOT REQUIRED
IN PROSPECTUS

Item 32. Recent Sales of Unregistered Securities.

In December 27, 1994, pursuant to a reincorporation merger, the Registrant
issued 16,428 shares of its common stock, $0.01 par value per share (the "Common
Stock"), to the former shareholders of Insight Environmental Corporation, a
Colorado corporation ("IEC"), who approved the merger of IEC into a Maryland
subsidiary for the purpose of reincorporating. The shares of Common Stock issued
in this reincorporation merger did not constitute a "sale" or "offer to sell"
pursuant to Section 2(3) of the Securities Act of 1933, as amended (the In
December 27, 1994, pursuant to a reincorporation merger, the Registrant "'33
Act") pursuant to the exclusion set forth in Rule 145(a)(2) under the '33 Act.
No underwriters were used in connection with the issuance of shares of Common
Stock pursuant to the reincorporation transaction.

On or about October 24, 1995, the Registrant issued 114,286 shares of its
Common Stock and 57,133 Series "D" Warrants to purchase 57,133 shares of Common
Stock (the "D Warrants") pursuant to an exchange offer with the former
shareholders of American Equity Trust Funding, Inc., a California corporation
("AETFI") who were not founders of AETFI. Such former shareholders are: Ocean
Bluffs, Ltd.; Resources Trust Co. Trustee FBO Jin-Hee Jung-Normura IRA; William
C. Barks IRS; Lance Siegel; John E. Morse; John E. Morse IRA; Marvin D. Kaufmann
as Trustee of the Marvin D. Kaufmann and Marjorie B. Kaufmann second amended
Inter Vivos Trust Agreement dtd 7/8/92; Kenneth Chapin; First Trust Corp. TTEE
FBO; Jimmie Lloyd Hess and Patricia Ann Hess; Donald E. Winfrey and Georgiann
Winfrey; N.F.S.C./F.M.T. FBO Richard S. Mueller IRA Acct; James Madama; John
Heaney Trust; Paul F. Virobik IRA; M&J Associates; Delaware Charter Guarantee &
Trust Co. TTEE FBO Charles Herman Richardson IRA; Jeffrey Siegel; John M. Mills;
and First Trust Corp. TTEE FBO Gregory A. McAndrews IRA. Each non-founder
shareholder of AETFI received 285.71 shares of Registrant's Common Stock and a
warrant to purchase an additional 142.86 shares of Registrant's Common Stock at
$3.50 per share for each share of AETFI common stock. The balance of 406,000
Series "D" Warrants were issued in combination with 1,021,500 shares of 1995
Convertible Preferred Stock to those in the founders group, subject to an
agreement regarding the resale or conversion of such securities.

The issuances of the Common Stock, the D Warrants and the 1995 Preferred
Stock were exempt from the provisions of Section 5 of the '33 Act under Section
4(2) of the '33 Act and Regulation D promulgated thereunder. No underwriters
were used in connection with the issuance of the Registrant's securities
pursuant to the exchange offers with AEFTI shareholders.

In August 1995, Registrant commenced the sale of $202,500 aggregate
principal amount of its 10% Convertible Notes due October 1, 1996. Brookstreet
Securities Corporation served as the agent for placement of these Notes. Prior
to filing the Registration Statement, $202,500 aggregate principal amount of the
10% Convertible Notes were sold for cash in the face amount thereof. The sales
of the 10% Convertible Notes were made only to persons who qualified as
"accredited" investors, as defined in Regulation D under the '33 Act and such
sales are exempt from the requirements of Section 5 of the '33 Act, by virtue of
Sections 4(2) and 4(6) of the '33 Act.

In addition to the Warrants issued to AEFTI shareholders described above,
the Registrant issued on October 24, 1995, 11,000 additional D Warrants to
Gregory McAndrews, a provider of graphics and design services. No underwriters
were used in the issuance of these D Warrants. The issuance of the D Warrants to
this service provider are exempt from the requirements of Section 5 of the '33
Act by virtue of Section 4(2) of the '33 Act.

In November 1995, Registrant sold $56,281.50 aggregate principal amount of
its 10% Convertible Notes, Series B, due October 1, 1996 ("Series B Notes").
There is no principal sales agent for the placement of these notes. Placements
were effected by members of management without compensation. Series B Notes were
sold to four investors who are "accredited" investors, as defined in Regulation
D under the '33 Act. Such sales were made

II-1
<PAGE>

without an exemption from the requirements of Section 5 of the '33 Act.
Registrant has disclosed the contingent possibility of a rescission by the
purchasers of the Series B Notes based on a claim of violation of Section 5 of
the '33 Act.

In February and March 1996, the Company sold an aggregate of $245,555.55 of
10% Notes, due April 15, 1997. Such notes are due and payable on April 15, 1997
and have no equity features. There is no principal sales agent and placements
were made by management without compensation. Such notes have been sold to
persons qualified as "accredited investors," as defined in Regulation D under
the '33 Act, and such sales are exempt from registration pursuant to Sections
4(2) and 4(6) of the '33 Act.

Item 35. Financial Statements and Exhibits.

Page
-----
<S> <C> <C>
(a) Financial Statements Filed as Part of Registration Statement.

PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (IN PROSPECTUS):
Pro Forma Condensed Combined Balance Sheet as of December 31, 1995 F-3
Notes to Pro Forma Condensed Combined Balance Sheet.... F-5
Pro Forma Condensed Combined Statements of Operations for the years ended
December 31, 1995.................................... F-7
Notes to Pro Forma Condensed Combined Statements of Operations F-9
Pro Forma Condensed Combined Statement of Cash Flows for the year ended
December 31, 1995.................................... F-10
Notes to Pro Forma Condensed Combined Statements of Cash Flows F-12

AMERICAN EQUITY TRUST INC. (IN PROSPECTUS):
Report of Independent Certified Public Accountants..... F-13
Balance Sheet as of December 31, 1995.................. F-14
Notes to Balance Sheet................................. F-15

PRIOR OWNERSHIP GROUP (IN PROSPECTUS):
Report of Independent Certified Public Accountants..... F-18
Combined Balance Sheets as of December 31, 1995 and 1994 F-19
Combined Statements of Operations for three years ended December 31, 1995 F-20
Combined Statements of Owners' Equity for three years ended December 31, 1995 F-21
Combined Statements of Cash Flows for three years ended December 31, 1995 F-22
Notes to Combined Financial Statements................. F-23

PROPOSED ACQUISITIONS (IN PROSPECTUS):
Report of Independent Certified Public Accountants..... F-26
Combined Statements of Operations for the year ended December 31, 1995 F-27
Notes to Combined Statements of Operations............. F-28

FINANCIAL STATEMENT SCHEDULE OF PRIOR OWNERSHIP GROUP
Report of Independent Certified Public Accountants..... S-1
Schedule III - Real Estate Accumulated Depreciation.... S-2
</TABLE>

II-2
<PAGE>

(b) Exhibits

The Exhibits required by Item 601 of Regulation S-K have been supplied
as follows:

Exhibit
- -------
<C> <S>
1.1 Sales Agency Agreement between the Company and Brookstreet Securities
Corporation (form) (Revised)*
1.2 Wholesaling Agreement (Revised)*
1.3 Selling Agreement (for 8% Convertible Preferred Stock) (form)*
3.1 Articles of Incorporation of American Equity Trust Inc., as amended,
including: Articles of Incorporation of American Equity Trust Inc.,
filed November 22, 1994; Articles of Merger of Insight Environmental
Corporation (formerly Ramapo) into American Equity Trust Inc., filed
December 27, 1994; Articles of Amendment of Articles of Incorporation
of American Equity Trust Inc., filed July 11, 1995; Articles of
Amendment and Restatement of Articles of Incorporation of American
Equity Trust Inc., filed August 30, 1995; Articles of Amendment and
Restatement of Articles of Incorporation of American Equity Trust
Inc., filed September 22, 1995; and Articles of Merger of American
Equity Trust Funding Inc. into American Equity Trust Inc. (form)*
3.2 By-Laws of American Equity Trust Inc.*
4.1 Articles Supplementary of American Equity Trust Inc. defining terms of
8% Convertible Preferred Stock and 1995 Convertible Preferred Stock
(form) (Revised)*
4.2 American Equity Trust Inc. Series "A" Warrant Agreement (form)*
5.1 Opinion of Thelen, Marrin, Johnson & Bridges re legality of Shares
(Executed)*
5.2 Opinion of Piper & Marbury LLP (Maryland counsel) re legality of
Shares (Executed)*
7.1 Opinion of Thelen, Marrin, Johnson & Bridges re liquidation preference
(Executed)*
7.2 Opinion of Piper & Marbury LLP (Maryland counsel) re liquidation
preference (Executed)*
8 Opinion of Thelen, Marrin, Johnson & Bridges re tax matters (Executed)
10.1 Agreement of Limited Partnership of American Equity Trust Operating
Partnership, L.P. between American Equity Trust Inc. (as general
partner) and Arthur P. Herring and Dois Brock (as limited partners),
dated October 24, 1994*
10.2 Certificate of Limited Partnership for American Equity Trust Operating
Partnership, L.P.*
10.3 Form of Purchase and Sale Agreement, together with form of Limited
Partnership Agreement of AMREIT No. 5805, a California Limited
Partnership, between American Equity Trust Operating Partnership, L.P.
(as general partner) and Sepulveda Hatteras, Ltd. (as limited partner)
for the purpose of acquiring the property at 5805 Sepulveda Boulevard,
Van Nuys, California*
10.4 Form of Purchase and Sale Agreement, together with form of Limited
Partnership Agreement of AMREIT No. 1901, a California Limited
Partnership, between American Equity Trust Operating Partnership, L.P.
(as general partner) and General Western Property Company (as limited
partner) for the purpose of acquiring the property at 1901 South
Sepulveda Boulevard, Los Angeles, California*
10.5 Residential Income Real Estate Purchase Contract, Receipt for Deposit,
and Escrow Instructions between American Equity Trust Inc. (buyer) and
Arrow Village LTD (seller), dated June 9, 1995, for the purchase of
the Arrow Village Apartments*
10.6 Purchase and Sale Agreement between American Equity Trust Inc. (buyer)
and Professor's Fund I (seller), dated September 15, 1995, for the
purchase of the Northwest Garden Apartments*
10.7 Purchase and Sale Agreement between American Equity Trust Inc. (buyer)
and Professor's Fund I (seller), dated September 15, 1995, for the
purchase of the Orangewood Place Apartments*
10.8 Purchase and Sale Agreement between American Equity Trust Inc. (buyer)
and Professor's Fund II (seller), dated September 15, 1995, for the
purchase of the Sandpainter Apartments*
10.11 Employment Agreement between American Equity Trust Inc. and Arthur P.
Herring*
</TABLE>

II-3
<PAGE>

Exhibit
- -------
10.12 Employment Agreement between American Equity Trust Inc. and Dois
Brock*
10.13 Office Lease between Sepulveda Hatteras, Ltd. (landlord) and Hewlett-
Packard Company (tenant) for the lease of office space at 5805
Sepulveda Boulevard, Van Nuys, California*
10.14 Lease Agreement between Sepulveda Hatteras, Ltd. (landlord) and FHP,
Inc. (tenant) for the lease of office space at 5805 Sepulveda
Boulevard, Van Nuys, California*
10.15 Office Building Lease between Sepulveda Hatteras, Ltd. (landlord) and
Mischel, Trock and Associates (tenant) for the lease of office space
at 5805 Sepulveda Boulevard, Van Nuys, California*
10.16 Office Building Lease between Sepulveda Hatteras, Ltd. (landlord) and
Industrial Bank (tenant) for the lease of office space at 5805
Sepulveda Boulevard, Van Nuys, California*
10.17 Lease between 1901 Sepulveda Venture (landlord) and Sportmart Inc.
(tenant) for the lease of commercial space at 1901 South Sepulveda
Boulevard, Los Angeles, California*
10.18 Financial Consulting Agreement, dated September 1, 1995, between
Registrant and Strategic Planning Consultants, Inc.*
10.19A-H Shareholder and Warrantholders Standstill Agreements, dated October
24, 1995, between Registrant and Dois Brock, Jacob Segal, Gerald
Weisstein, Norm Miller, Kalismart Inc., Raging Bull, Danube Rousse
Inc., and Regent IV Trust*
10.20 1995 Stock Option and Incentive Plan for the Officers, Independent
Directors and Employees of American Equity Trust Inc. and AETI
Operating Partnership, L.P.*

12 Statement re Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Thelen, Marrin, Johnson & Bridges as counsel (See
Exhibit 8)

23.2 Consent of Piper & Marbury LLP (Maryland counsel) (See Exhibit 5.2)*

23.4 Consent of BDO Seidman as independent accountants
24 Power of Attorney*

* Previously filed.

II-4
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of El Segundo, State of California, on May 15,
1996.

AMERICAN EQUITY TRUST INC.

By /s/ Arthur P. Herring
----------------------------------------
Arthur P. Herring, Chairman of the Board

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

Signature Title Date
--------- ----- ----
<S> <C> <C>

Principal Executive Officer/Principal Chairman of the Board of Directors,
Financial Officer: Chief Executive Officer, and Chief
Financial Officer
/s/ Arthur P. Herring
- ------------------------------------- May 15, 1996
Arthur P. Herring

Principal Accounting Officer: President, Controller, Secretary
and Director
/s/ Dois Brock
------------------------------------- May 15, 1996
Dois Brock

Charles B. Allen* Director May 15, 1996
- -------------------------------------
Charles B. Allen

Mark Ross* Director May 15, 1996
- -------------------------------------
Mark Ross

Gerald S. Weisstein* Director May 15, 1996
- -------------------------------------
Gerald S. Weisstein
</TABLE>

*By: /s/ Arthur P. Herring
-----------------------------------
Arthur P. Herring, Attorney-in-Fact

II-5
<PAGE>

EXHIBIT INDEX

Exhibit
- -------
<C> <S>
8 Opinion of Thelen, Marrin, Johnson & Bridges re tax matters (Executed)
12 Statement re Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Thelen, Marrin, Johnson & Bridges as counsel (see
Exhibit 8)
23.4 Consent of BDO Seidman as independent accountants
</TABLE>

<PAGE>

[LETTERHEAD OF THELEN, MARRIN, JOHNSON & BRIDGES]

EXHIBIT 8

19 April 1996

15938/3

American Equity Trust Inc.
2221 Rosecrans Avenue
Suite 110

El Segundo, California 90245

Re: American Equity Trust Inc./Tax Opinion
--------------------------------------

Gentlemen:

We have acted as counsel to American Equity Trust Inc., a Maryland
corporation (the "Company"), in connection with the preparation of a
Registration Statement on Form S-11 (Registration File No. 33-98766) filed with
the Securities and Exchange Commission on October 31, 1995 (as amended, the
"Registration Statement"), with respect to (i) the offering and sale (the
"Offering") of up to 1,750,000 Units (the "Units") consisting of two shares of
the Company's common shares (the "Common Shares") and one Series "A" warrant
(the "Warrants"); 1,500,000 Common Shares; and 1,136,364 shares of the Company's
8% convertible preferred shares (the "Preferred Shares"); and (ii) the Company's
contribution of substantially all of the net proceeds of the Offering to
American Equity Trust Operating Partnership, L.P., a Delaware limited
partnership (the "Partnership"), in exchange for an interest in the Partnership.
The Common Shares and the Preferred Shares shall be referred to collectively as
the "Equity Shares," and partners in the Partnership shall be referred as the
"Partners."

The Partnership intends to acquire residential and commercial real
properties (the "Properties"). Generally, the Company expects to conduct its
operations through the Partnership although it is not required to do so. The
Company will be the sole general partner of the Partnership.
<PAGE>

American Equity Trust Inc.
19 April 1996
Page 2

The Company has requested our opinion as to:

A. Whether the description of law and legal conclusions contained in
the Registration Statement with respect to the Offering (the "Prospectus") under
the caption "Federal Income Tax Considerations" are correct in all material
respects, and whether the discussion thereunder fairly summarizes the federal
income tax considerations that are material to a holder of the Units or the
Equity Shares.

B. Whether the Partnership will be treated for federal income tax
purposes as a partnership and not as an association taxable as a corporation.

C. Whether the Company will be organized in conformity with the
requirements for qualification as a real estate investment trust (a "REIT")
under the Internal Revenue Code of 1986, as amended (the "Code"), and whether
the Company's proposed method of operation will enable it to meet the
requirements for qualification and taxation as a REIT under the Code.

In connection with the opinions rendered below, we have examined the
following:

1. The Charter (as defined in the Prospectus) of the Company.

2. The By-Laws (as defined in the Prospectus) of the Company.

3. The Registration Statement.

4. The Agreement of Limited Partnership of the Partnership (the
"Partnership Agreement").

5. Such other documents as we have deemed necessary or appropriate
for purposes of this opinion.
<PAGE>

American Equity Trust Inc.
19 April 1996
Page 3

In connection with the opinions rendered below, we have assumed
generally that:

a. Each of the documents referred to above has been duly authorized,
executed, and delivered, is authentic, if an original, or accurate, if a copy,
and has not been amended.

b. During its 1996 taxable year and subsequent taxable years, the
Company will operate in such a manner that will make the representations set
forth below true for all such years.

c. The Company will not make any amendments to its organizational
documents after the date of this opinion that would adversely affect its
qualification as a REIT for any taxable year.

d. The Company and each other Partner of the Partnership, other than
the Company, has full power, authority, and legal right to enter into and
perform the terms of Partnership Agreement and the transactions contemplated
thereby.

e. No actions will be taken by the Company, the Partnership, or the
Partners after the date hereof that would have the effect of altering the facts
upon which the opinions set forth below are based.

Furthermore, we have relied upon the correctness of the following
representations of the Company and its authorized representatives on behalf of
itself and the Partnership:

1. The Company will operate in accordance with its organizational
documents, the applicable provisions of Maryland state law, and the statements
and representations referred to herein and made in the Prospectus.

2. The Partnership will operate in accordance with Delaware law, the
Partnership Agreement, as in effect on the date hereof, and the statements and
representations referred to herein and made in the Prospectus.

3. The Partnership was formed and will be operated with a profit
motive.
<PAGE>

American Equity Trust Inc.
19 April 1996
Page 4

4. The Company's taxable year for federal income tax purposes will be
the calendar year. The Company will make the election specified in Section
856(c) of the Code to be a REIT under the Code, effective for its taxable year
ending December 31, 1996.

5. For its taxable year commencing January 1, 1996, and each taxable
year thereafter, the Company expects that, and will take all measures within its
control to ensure that, (A) the beneficial ownership of the Company at all times
after the Initial Closing (as defined in the Prospectus) will be held by 100 or
more persons, and (B) at no time during the last half of any taxable year will
more than 50% in value of the Company's outstanding stock of all classes (taking
into account ownership of the Warrants, options to acquire Equity Shares or
certain convertible securities of the Company) be owned, directly or indirectly
(taking into account the constructive ownership rules of Section 856(h) of the
Code), by or for five or fewer individuals.

6. The Company at all times will be managed by one or more directors,
and the beneficial ownership in the Company will be evidenced by transferable
shares.

7. The Company and the Partnership expect that, and the Company and
the Partnership will take all measures within their control to ensure that, at
least 95 percent of the gross income derived by the Company and the Partnership
(directly or indirectly through other partnerships) will consist of amounts
derived by the Partnership from the following sources:

(A) income from the rental of the Properties (which term shall be
deemed to include, for purposes of this letter, any properties acquired by the
Company or the Partnership in the future), including for this purpose both rents
---------
attributable to personal property that satisfies the conditions described in
paragraph 10 below and charges for services customarily furnished or rendered in
connection with the rental of real property, whether or not such charges are
separately stated, but excluding for such purposes (i) any rents received from
---------
related parties as defined in Section 856(d)(2)(B) of the Code (as described in
paragraph 12 below), (ii) any amount described in Section 856(d)(2)(A) of the
Code (which is described in paragraph 9 below), and (iii) any rent received from
a tenant

<PAGE>

American Equity Trust Inc.
19 April 1996
Page 5

to whom or with respect to which services described in paragraph 13
below are provided;

(B) gain realized upon sale of all or a portion of the Properties
(including for this purpose any income derived from a shared appreciation
provision within the meaning of Section 856(j) of the Code);

(C) interest attributable to obligations held by the Company or
the Partnership and the determination of the amount of which does not depend in
whole or in part on the income or profit of any person;

(D) dividends attributable to stock held by the Company or the
Partnership; and

(E) amounts described in Section 856(c)(2)(D) through (H) of the
Code.

8. The Company and the Partnership expect that, and the Company and
the Partnership will take all measures within their control to ensure that, at
least 75 percent of the gross income derived by the Company and the Partnership
(directly or indirectly through other partnerships) will consist of amounts
derived by the Partnership from the following sources: (A) the sources described
in clauses (A), (B) and (E) of paragraph 7 above; other than gain from the sale
or other disposition of stock or other securities; (B) interest on obligations
secured by mortgages on real property or on interests in real property; and (C)
"qualified temporary investment income" (within the meaning of Section
856(c)(6)(D) of the Code.)

9. No amounts payable to the Company or the Partnership in connection
with the rental of the Properties depends in whole or in part on the income or
profits derived from any tenant (or sub-tenant) of such Properties (except that
such amounts may be based on a fixed percentage or percentages of receipts or
sales). In the future, neither the Company nor the Partnership will enter into
any lease agreement or other arrangement (and will take all measures within its
control to ensure that no partnership in which the Company or the Partnership
holds a direct or indirect interest will enter into any agreement or
arrangement) in connection with the rental of the Properties under which amounts
payable to the Company or the

<PAGE>

American Equity Trust Inc.
19 April 1996
Page 6

Partnership will depend in whole or in part on the income or profits derived
from any tenant (or sub-tenant) of such Properties (except that such amounts may
be based on a fixed percentage or percentages of receipts or sales) .

l0. The Company and the Partnership expect that, and the Company and
the Partnership will take all measures within their control to ensure that: (A)
less than 15 percent of the rent received by the Company or the Partnership with
respect to each lease relating to the Properties will be attributable to
personal property; (B) all personal property contained in the Properties will be
leased under or in connection with a lease of the real property contained in the
Properties; and (C) no personal property owned by the Partnership at any time
will have a value significantly in excess of its adjusted basis for federal
income tax purposes.

11. The Company and the Partnership expect that, and the Company and
the Partnership will take all measures within their control to ensure that, in
any taxable year, less than 30 percent of the gross income of the Company and
the Partnership (directly or indirectly through other partnerships) will be
derived from the sale or other disposition of the following: (A) stock or
securities held for less than one year; (B) property in a transaction which is a
"prohibited transaction" within the meaning of Section 856(c)(4)(B) of the Code;
and (C) real property (including interests in real property and interests in
mortgages on real property) held for less than four years (other than property
compulsorily or involuntarily converted within the meaning of Section 1033 of
the Code and property which is foreclosure property within the definition of
Section 856(e) of the Code and taking into account the treatment of any income
from a shared appreciation provision under Section 856(j) of the Code).

12. The Company and the Partnership expect that, and the Company and
the Partnership will take all measures within their control to ensure that, less
than one percent of the gross income received by the Company and the Partnership
(directly or indirectly through other partnerships) will be received or accrued
directly or indirectly from any person in which the Company and the Partnership
own in the aggregate (A) in the case of a corporation, 10% or more of the total
combined voting power of all classes of stock entitled to vote, or 10% or more
of the
<PAGE>

American Equity Trust Inc.
19 April 1996
Page 7

total number shares of all classes of stock, or (B) in the case of an entity
other than a corporation, an interest of 10% or more in the assets or net
profits of such entity. For purposes of this paragraph, ownership will be
determined by taking into account the attribution rules of Section 318 of the
Code (as modified by Section 856(d)(5) of the Code).

13. Neither the Company nor the Partnership currently provides to any
tenants of the Properties (directly or through any other entity) any services
that (i) are not customarily rendered in connection with the rental of space for
occupancy only and (ii) are rendered primarily for the convenience of the
tenant. In the event that the Company or the Partnership decides in the future
to provide any services to tenants that reasonably might be considered to fall
within the scope of the preceding sentence, all such services will be provided
exclusively by an entity that qualifies as an "independent contractor" within
the meaning of Section 856(d)(3) of the Code from whom neither the Company nor
the Partnership derives any income (unless the Company or the Partnership
obtains a ruling from the Internal Revenue Service or an opinion from tax
counsel concluding that such services would not be considered to fall with the
scope of the preceding sentence).

14. The Company and the Partnership expect that, and the Company and
the Partnership will take all measures within their control to ensure that, at
least 75% of the total value of the assets of the Company (taking into account
the Company's pro rata share of the assets of the Partnership(owned directly or
indirectly through other partnerships)) will at all times consist of assets of
the following types:

(A) land;

(B) buildings, including wiring, plumbing systems, elevators,
---------
escalators, and other structural components thereof, but, not including any
-------------
personal property associated with such real property (such as furnishings,
appliances, equipment, machinery, etc. even if such items constitute fixtures
under local law);

(C) loans (including accrued interest thereon) directly secured
by a duly recorded mortgage on real property of the type described in paragraphs
(A) or (B) above;

<PAGE>

American Equity Trust Inc.
19 April 1996
Page 8

(D) cash and cash items, including cash on hand, time and demand
deposits with financial institutions, and receivables arising in the ordinary
course of the Company's operations (other than those purchased from another
person) but excluding bankers' acceptances, repurchase agreements, and other
---------
similar instruments;

(E) securities (including accrued interest thereon) issued or
guaranteed by the United States or by a person controlled or supervised by and
acting as an instrumentality of the United States, pursuant to any authority
granted by Congress, or any certificates of deposit for any of the foregoing;
and

(F) only during the one year period commencing on the Closing
Date, stock or debt instruments attributable to the temporary investment of new
equity capital.

15. The Company and the Partnership in the aggregate will not own
securities in any issuer (other than, in the case of the Company, the
Partnership) that either (A) represent in excess of 10 percent of the
outstanding voting securities of such issuer or (B) have any aggregate value in
excess of 5 percent of the value of the total assets of the Company (as
determined in accordance with Regulations section 1.856-2(d)(2)).

16. The Company, the Partnership (and any partnership in which the
Company or the Partnership holds an interest) will at all times hold the
Properties (and all other assets of the Company, the Partnership (or such
partnership)) for investment purposes and not as (A) stock in trade or other
property of a kind which would properly be includable in inventory if on hand at
the close of the taxable year, or (B) property held primarily for sale to
customers in the ordinary course of the trade or business of the
Partnership.

17. The Company and the Partnership, expect that, and will take all
measures within their control to ensure that, sufficient distributions are made
on a timely basis to shareholders of the Company to permit the Company to
satisfy the annual distribution requirements of Section 857 of the Code.
<PAGE>

American Equity Trust Inc.
19 April 1996
Page 9

18. The Company's sole asset will initially be its interest as a
general partner in the Partnership, as described in the Prospectus, except that
the Company may make investments, directly or indirectly through a partnership,
in assets in the nature of those described in paragraph 14 above.

19. No Partnership Units of the Partnership will be issued in a
transaction registered under the Securities Act of 1933, and the Partnership at
no time will have more than 100 partners (taking into account as a partner,
unless otherwise advised by tax counsel, any person which indirectly owns an
interest in the Partnership through a flow-through entity only if such flow-
through entity was formed either (A) less than two years prior to its direct or
indirect acquisition of an interest in the Partnership, or (B) prior to such
period and has not conducted an active business for the two-year period ending
on such acquisition date).

20. To the best of its knowledge, the facts and circumstances as to
which it has made certain representations in paragraphs 5, 9, 10, 12, 13, 14, 15
and 19 above in fact will exist immediately following the closing of the
Offering pursuant to the Prospectus.

21. Representations herein as to the Properties also will be true with
respect to properties acquired by the Company or the Partnership after the date
hereof.

22. The Company will take all steps necessary to satisfy the record
keeping requirements that must be satisfied in order to qualify as a REIT under
the Code.

23. A majority of the independent directors of the Company must
approve all actions of the Board of Directors of the Company.

24. The interests in the Partnership will not be traded on an
established securities market.

25. As of the date hereof, the Company has no earnings and profits
attributable to a non-REIT year for federal income tax purposes.

<PAGE>

American Equity Trust Inc.
19 April 1996
Page 10

26. Insight Environmental Corporation, a corporate predecessor of the
Company, had no earnings and profits for federal income tax purposes.

After reasonable inquiry, we are not aware of any facts inconsistent
with the representations set forth in paragraphs 1 through 26 above.
Furthermore, where such representations involve matters of law, we have
explained to the representatives of the Company and the Partnership the relevant
and material sections of the Code, the Regulations thereunder, published rulings
of the Internal Revenue Service ("IRS"), and other relevant authority to which
such representations relate and are satisfied that such representatives
understand such provisions and are capable of making such representations.

Based on the documents, assumptions and representations set forth
above, the discussion in the Prospectus under the caption "Federal Income Tax
Considerations" (which is incorporated herein by reference) and the discussion
set forth below, we are of the opinion that:

(a) The description of law and legal conclusions contained in the
Prospectus under the heading "Federal Income Tax Considerations" are correct in
all material respects, and the discussion thereunder fairly summarizes the
federal income tax considerations that are material to a holder of the Units or
Equity Shares.

(b) The Partnership will be treated as a partnership for federal
income tax purposes and not as an association taxable as a corporation.

(c) The Company will be organized in conformity with the requirements
for qualification as a REIT under the Code, and the Company's proposed method of
operation will enable it to meet the requirements for qualification and taxation
as a REIT under the Code. However, we note that due to the possible fluctuation
between the relative market values of different classes of the Company's equity
shares, the Charter restrictions relating to ownership limits of any person do
not mathematically assure that there will be compliance with the statutory
ownership requirements governing REIT status.

<PAGE>

American Equity Trust Inc.
19 April 1996
Page 11

We will not review the Company's compliance with the documents,
assumptions, and representations set forth above on a continuing basis.
Accordingly, we can provide no assurance that the Company's operations for any
given taxable year will satisfy the requirements for qualification and taxation
as a REIT.

The foregoing opinions are based on current provisions of the Code and
the Regulations, published administrative interpretations thereof, and published
court decisions. The IRS has not issued Regulations or administrative
interpretations with respect to various provisions of the Code relating to REIT
qualification. No assurance can be given that the law will not change in a way
that will prevent the Company from qualifying as a REIT, or the Partnership from
being classified as a partnership for federal income tax purposes.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Thelen, Marrin,
Johnson & Bridges under the captions "Federal Income Tax Considerations" and
"Legal Matters" in the Prospectus.

The foregoing opinions are limited to the federal income tax matters
addressed herein, and no other opinions are rendered with respect to other
federal tax matters or to any issues arising under the tax laws of any state or
locality. We undertake no obligation to update the opinions expressed herein
after the date of this letter. This opinion letter is solely for the information
and use of the addressee and the purchasers of the Units and Equity Shares
pursuant to the Prospectus, and may not be relied upon for any purpose by any
other person without our express written consent.

Very truly yours,

/s/ THELEN, MARRIN, JOHNSON & BRIDGES

<PAGE>

EXHIBIT 12

AMERICAN EQUITY TRUST, INC.
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
(In thousands except per share data)

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
Common Combined Common Combined
Minimum Minimum Maximum Maximum 1995 1994 1993
--------- --------- --------- --------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from
continuing operations 79 273 1,124 1,676 (43) (176) (74)

Interest on indebtedness 194 0 551 0 1,609 1,555 947
---- ----- ------ ------ ----- ----- ----
Income as adjusted 273 273 1,675 1,676 1,566 1,379 873
==== ===== ====== ====== ===== ===== ====

Preferred dividend requirement 0 161 0 1,200 0 0 0
---- ----- ------ ------ ----- ----- ----

Fixed charges:

Interest on indebtedness 0 0 1,609 1,609 1,609 1,555 947

Interest incurred/(repaid) in conjunction
with offering 194 0 (1,058) (1,609) 0 0 0
---- ----- ------ ------ ----- ----- ----

Interest on remaining indebtedness 194 0 551 0 1,609 1,555 947
---- ----- ------ ------ ----- ----- ----

Fixed charges and preferred dividends 194 161 551 1,200 1,609 1,555 947
==== ===== ====== ====== ===== ===== ====

Excess (deficiency) 79 112 1,124 476 (43) (176) (74)
==== ===== ====== ====== ===== ===== ====

Ratio of earning to fixed charges and
preferred stock dividends 1.41 1.70 3.04 1.40 0.97 0.89 0.92
==== ===== ====== ====== ===== ===== ====
</TABLE>

<PAGE>

CONSENT OF INDEPENDENT AUDITORS

To the Stockholders and Directors of
American Equity Trust, Inc.

We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-11 of our reports dated March 25, 1996,
relating to the financial statement and schedule of American Equity Trust, Inc.,
as of December 31, 1995; and our reports dated March 25, 1996 relating to the
financial statements of the Prior Ownership Group for each of the three years in
the period ended December 31, 1995 and the financial statement of the Proposed
Acquisitions for the year ended December 31, 1995, which are contained in that
Prospectus.

We also consent to the reference to us under the caption "Experts" in the
Prospectus.

BDO Seidman, LLP

Los Angeles, California
May 15, 1996