CAPITAL AUTOMOTIVE REIT, 10-K, 1998-03-30

CAPITAL AUTOMOTIVE REIT
10-K, 1998-03-30
REAL ESTATE INVESTMENT TRUSTS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

COMMISSION FILE NUMBER: _________

CAPITAL AUTOMOTIVE REIT
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS DECLARATION OF TRUST)

MARYLAND 54-1870224
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

1420 SPRING HILL ROAD, SUITE 525, MCLEAN, VIRGINIA
(Address of principal executive offices)

22102 (703) 288-3075
(Zip Code) (Registrant's telephone number, including area code)

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

Common Shares of Beneficial Interest, $.01 par value per share
---------------------------------------------------------
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes[_] No [X]

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

The number of Registrant's Common Shares of Beneficial Interest outstanding on
March 25, 1998 was 24,792,115. The aggregate market value of voting stock held
by non-affiliates of the Registrant, based upon the closing price of the
Registrant's Common Shares of Beneficial Interest on March 25, 1998 was
$416,669,316*.

* Excludes 2,862,151 shares deemed to be held by trustees, officers and
shareholders whose ownership exceeds ten percent of the Common Shares of
Beneficial Interest outstanding at March 25, 1998. Exclusion of shares
held by any person should not be construed to indicate that such person
possesses the power, direct or indirect, to direct or cause the direction
of the management or policies of the Registrant, or that such person is
controlled by, or under common control with, the Registrant.
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CAPITAL AUTOMOTIVE REIT
FORM 10-K ANNUAL REPORT
YEAR ENDED DECEMBER 31, 1997

TABLE OF CONTENTS
<TABLE>
<CAPTION>

PAGE REFERENCE
TO
PRELIMINARY STATEMENT FORM 10-K
- --------------------- --------------
<S> <C> <C>
Part I
- ------
Item 1. Business 2
Item 2. Properties 20
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22

Part II
- -------
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters 23
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 25
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 40

Part III
- --------
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners
and Management 47
Item 13. Certain Relationships and Related Transactions 48

Part IV
- -------
Item 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K 51
</TABLE>
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FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward looking statements involve a
number of risks and uncertainties. The Company's actual operations may differ
significantly from the results discussed in the forward-looking statements. Such
statements can be identified by the use of forward-looking terminology such as
"may," "will," "could," "should," "expect," "anticipate," "estimate," or
"continue" or the negative thereof or other variations thereon or comparable
terminology. Factors which may cause the actual results of operations in
future periods to differ materially from forecast or anticipated results
include, but are not limited to, (i) the failure of any lessee of real
property owned by Capital Automotive REIT to perform the terms of its lease in
any material respects , (ii) the inability of the Company to acquire suitable
real properties that conform to its business strategy as described herein, (iii)
the termination or abandonment of the dealerships or other motor vehicle related
businesses that occupy any real property owned by the Company, (iv) the
inability of the Company to release any real property, (v) general economic and
business conditions, both nationally and in the regions in which the Company
owns real property, including, but not limited to, those conditions affecting
real estate generally or the motor vehicle retail and related businesses
specifically, (vi) zoning changes in locations in which any such real property
is located, (vii) existing governmental regulations and changes in, or the
failure to comply with government regulations, (viii) changes to laws, rules and
regulations affecting the Company, including the tax laws affecting real estate
investment trusts, (ix) competition, (x) changes in business strategy, (xi)
divestiture of real property, (xii) retention of the Company's executive
officers, (xiii) the ability of the Company to attract and retain key personnel,
and (xiv) the availability and terms of additional capital to fund the
acquisition of additional properties and for working capital purposes. See "Item
1--Business--Business Risks."

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ITEM 1. BUSINESS

RECENT EVENTS

Capital Automotive REIT (the "Company") is a Maryland real estate investment
trust organized on October 20, 1997. On February 19, 1998, the Company closed
its initial public offering (the "Offering") of 20,000,000 common shares of
beneficial interest, $.01 par value per share ("Common Shares") for which it
received aggregate net proceeds of approximately $275.4 million. On February
19, 1998, the Company issued 1,792,115 Common Shares (the "FBR Offering") in a
private placement to FBR Asset Investment Corporation for which the Company
received aggregate proceeds of approximately $25 million. On March 12, 1998,
the Company closed the Offering of 3,000,000 additional Common Shares pursuant
to the exercise of the underwriters' over-allotment option in full for which it
received aggregate net proceeds of approximately $41.9 million. The net
proceeds of the sale of 24,792,115 Common Shares have been contributed to
Capital Automotive L.P., a Delaware limited partnership (the "Operating
Partnership"), in exchange for units of partnership interest ("Units")
representing approximately 83.3% of the outstanding equity of the Operating
Partnership.

Prior to the Company's closing of the initial public offering of Common
Shares, it had limited operations. Unless the context otherwise requires,
references to the Company include Capital Automotive REIT and Capital
Automotive L.P., or either of them, and references to the "Dealers (as hereafter
defined)," the "Sellers (as hereafter defined)" and the "Lessees (as defined
hereafter)" or any specifically named "Dealer," "Seller" or "Lessee" also refer
to persons or entities who are their affiliates ("Affiliates") as defined in
Rule 405 of the Securities Act of 1933, as amended (the "Securities Act").
References to "Industry Sources" refer to statistical industry data regarding
franchised motor vehicle dealerships ("Dealerships"), motor vehicle related
businesses ("Related Businesses") or operators of Dealerships or Related
Businesses ("Dealers") taken or derived from information published by (i) the
Industry Analysis Division of the National Automobile Dealers Association
("NADA") in its NADA Data 1996 and NADA Data 1997, and on the "NADANET" web-site
located at "www.nadanet.com/news/nadadata/econfyi.htm," (ii) Crain
Communications Inc. in its Automotive News 100-Year Almanac, 1996 Market Data
Book and 1997 Market Data Book, (iii) ADT Automotive, Inc. in its 1997 Used Car
Market Report, (iv) the Bureau of the Census in the U.S. Department of Commerce
in its Statistical Abstract of the United States 1996 from the National Data
Book, or (v) the Washington Business Journal, thirteenth annual The Book of
Lists, 1997-1998.

The following transactions have been completed in connection with the
Company's Offering:

. On February 19, 1998, FBR Asset Investment Corporation, an Affiliate of
Friedman, Billings, Ramsey & Co., Inc., acquired 1,792,115 Common Shares in
the FBR Offering for which the Company received aggregate proceeds of
approximately $25 million.

. On February 19, 1998, the Company contributed the aggregate net proceeds of
approximately $300.4 million from the Offering of 20,000,000 Common Shares and
the FBR Offering to the Operating Partnership in exchange for 21,792,115 Units

. On March 12, 1998, the Company contributed the net proceeds of approximately
$41.9 million from the Offering of 3,000,000 additional Common Shares pursuant
to the exercise of the underwriters' over-allotment option in full to the
Operating Partnership in exchange for 3,000,000 additional Units.

. On February 19, 1998, the Company acquired certain properties from Affiliates
of Pohanka Automotive Group ("Pohanka"), Rosenthal Automotive Organization
("Rosenthal"), Sheehy Auto Stores ("Sheehy") and Cherner Automotive Group
("Cherner") or related persons thereto in exchange for 1,160,162; 3,351,886;
341,336 and 108,008 Units of the Operating Partnership, respectively, and
the assumption of mortgage debt of approximately

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$13.4 million, $14.2 million, $8.9 million and $4.8 million, respectively.
See "Item 2--Properties."

. On February 24, 1998, the Company acquired certain properties from Cross-
Continent Auto Retailers, Inc. ("Cross Continent") for a total cash cost of
approximately $13.3 million. See "Item 2--Properties."

. On February 27, 1998, the Company acquired certain properties from Good News
Auto Mall ("Good News") for a total cash cost of approximately $5.5 million.
See "Item 2 -- Properties."

. On February 27, 1998, the Company acquired certain properties from Kline
Automotive Group ("Kline") for a total cash cost of approximately
$8.5 million. See "Item 2-- Properties."

. Contemporaneously with the closing of the acquisition of the relevant
properties, Affiliates of Pohanka, Rosenthal, Sheehy, Cherner, Cross-
Continent, Good News and Kline, entered into long-term triple-net Leases with
the Company with respect to such properties. See "Item 2--Properties."

. On February 19, 1998, the executive officers and trustees of the Company and
their Affiliates or family members acquired an aggregate of 1,091,657 Common
Shares in the Offering. See "Item 12--Security Ownership of Certain
Beneficial Owners and Management."

. Effective on February 19, 1998, the Company's executive officers were granted
pursuant to the Company's 1998 Equity Incentive Plan ("Plan") options to
acquire in the aggregate 106,664 Common Shares and 2,362,013 Units. See
"Item 11--Executive Compensation."

. On February 19, 1998, the Company obtained a $10 million line of credit from
NationsBank, N.A., and borrowed approximately $5.1 million at the closing of
the Offering (approximately $2.8 million of which has been guaranteed by
Affiliates of, or persons related to, Robert M. Rosenthal and approximately
$2.3 million of which has been guaranteed by Affiliates of Vincent A.
Sheehy).

. As of March 12, 1998, the Company issued to Messrs. Pohanka and Rosenthal,
Trustees of the Company and Affiliates of certain Sellers and Lessees,
warrants representing the right to acquire up to 707,079 Units, at an exercise
price equal to $15.00 per share, such warrants to be exercisable beginning on
February 19,1998 and for a period of five years thereafter (the ''Dealer
Warrants'').

. On March 16, 1998, the Company moved its principal place of business to 1420
Spring Hill Road, Suite 525, McLean, Virginia 22102, telephone no. (703)
288-3075.

OVERVIEW

The Company is a newly organized self-administered and self-managed Maryland
real estate investment trust formed to invest in the real property and
improvements (the "Properties") used by operators of multi-site, multi-
franchised Dealerships and Related Businesses located in major metropolitan
areas throughout the United States. The Company is the first publicly-traded
real estate investment trust formed primarily to acquire and lease back
Properties for use by Dealers.

As described under the caption "Business-Recent Events," contemporaneously
with or following the Offering, the Company acquired 34 Properties on which 54
franchisees of 24 brands of motor vehicles are located. Twenty of the Properties
are located in the Washington, D.C. Metropolitan Area, which Properties are
operated by four of the top 20 Dealers in the Washington, D.C. Metropolitan
Area, as measured by total new vehicles sold in 1996. Other Properties acquired
by the Company are located in the eastern shore of Maryland, Pennsylvania,

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Texas and southern Virginia. In addition, the Company contracted on December 31,
1997 to acquire one Property located in Denver, Colorado and one Property
located in Las Vegas, Nevada, that are expected to close during the second
quarter of 1998. Dealers located on the Properties sell domestic and imported
luxury, family, economy and sport utility vehicles, trucks and vans, including
Mercedes-Benz, Honda, Toyota, Lexus, Chevrolet, Saturn, Ford, GMC, Mazda,
Infiniti, Jaguar, Acura, Lincoln-Mercury, Mitsubishi and Nissan. The Properties
have been purchased from the Sellers, each of whom is an Affiliate of a Dealer
and have been leased back to entities who are also Affiliates of the Sellers
(the "Lessees"). The leases entered into by the Company and the Lessees' (the
"Leases") are long-term leases that require the Lessees to pay all operating
costs of the Properties, as well as all real estate taxes, utilities, insurance,
repairs, maintenance and other expenses (commonly referred to as ''triple net''
leases).

The Company has employees located in McLean, Virginia, Chicago, Los Angeles
and Naples, Florida who are responsible for identifying and negotiating
acquisitions and leasing of Properties. The Company expects to identify Dealers
through existing contacts, existing Sellers, participation in professional
organizations or through other methods or by Dealers contacting the Company.

Thomas D. Eckert, President and Chief Executive Officer, Scott M. Stahr,
Executive Vice President and Chief Operating Officer, Donald L. Keithley,
Executive Vice President of Business Development, and David S. Kay, Vice
President and Chief Financial Officer, the Company's executive officers, have
22; 12; 38; and 10 years of experience, respectively, in the real estate,
financial or motor vehicle industries, although they have limited experience
managing or operating a real estate investment trust.

The Pohanka Automotive Group, led by its Chairman, John J. Pohanka, has been
in business for almost 80 years. The Pohanka family began operating dealerships
in 1919, and the business' current leader, Mr. Pohanka has been involved in the
automotive industry for almost 50 years. Today the second and third generation
of the Pohanka family lead the business' operations. In 1996, the Pohanka
Automotive Group Dealerships sold 11,900 new and used motor vehicles. The
Pohanka Automotive Group is currently comprised of nine Dealerships, each of
which is located in the Washington, D.C. Metropolitan Area. Under Mr. Pohanka's
leadership, the Pohanka Automotive Group's Dealerships have received numerous
awards, including the Time Magazine Quality Dealer Award. The Company has
acquired all of the Properties used or owned by the Pohanka Automotive Group or
its Affiliates. Mr. Pohanka is the Chairman of the Board of the Company.

The Rosenthal Automotive Organization, led by its Chairman, Robert M.
Rosenthal, has been in business for over 50 years. With 19 franchises, the
Rosenthal Automotive Organization is the 14th largest automotive group in the
United States in terms of total new vehicles sold in 1996. In 1996, the
Rosenthal Automotive Organization Dealerships sold more than 31,500 new and used
motor vehicles. Under Mr. Rosenthal's leadership, the Rosenthal Automotive
Organization's Dealerships have received numerous national and local awards,
including the Time Magazine Quality Dealer Award, the International American
Automobile Dealers/Sports Illustrated Dealer of Distinction, the Acura Precision
Team Award, the Jaguar Pride of Jaguar Award, and the Mazda President's Award.
The Company has acquired seven of the 13 Properties used by the Rosenthal
Automotive Organization or its Affiliates or related persons (which are
substantially all of the Properties used or owned by the Rosenthal Automotive
Organization). Mr. Rosenthal is a Trustee of the Company.

The Sheehy Auto Stores, led by its Chairman, Vincent A. Sheehy, were
established in 1965. Mr. Sheehy entered the automotive business in 1945. Mr.
Sheehy is a past chairman of the Ford Dealer Advertising Fund and a past
director of the National Automobile Dealers Association. Mr. Sheehy's
Dealerships have won numerous awards including the North American Customer
Excellence Awards in 1995, 1996 and 1997 and the President's Circle Award in
1996. The Sheehy Auto Stores sold approximately 14,500 motor vehicles in 1996.
The Company has acquired four Properties used or owned by the Sheehy Auto Stores
or its Affiliates.

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The Cherner Automotive Group first began operating in the mid-1920's in
Washington, D.C. Jonathan and Andrew Cherner took over management of the
Dealerships in 1993. Jonathan Cherner is a board member of the Washington
Lincoln Mercury Dealers Association, the Washington Area Isuzu Dealer
Advertising Association and the Isuzu National Dealer Council. Andrew Cherner is
an active member of Kia's National Dealer Council and the Lincoln Mercury
Regional Marketing Committee. The Cherner Automotive Group sold approximately
4,200 motor vehicles in 1996. The Company has acquired one Property used or
owned by Cherner Automotive Group or its Affiliate.

Cross-Continent, led by its Chief Executive Officer, Bill Gilliland, was
created in 1996 by reorganizing the ownership of six Dealerships controlled by
Mr. Gilliland. Cross-Continent became a publicly-traded company on September 23,
1996, and is listed on the New York Stock Exchange under the symbol ''XC.''
Prior to this, Mr. Gilliland had been involved in the automotive industry for
over 30 years. Cross-Continent owns and operates 11 Dealerships and Related
Businesses located in Amarillo, Texas, Oklahoma City, Oklahoma, Denver, Colorado
and Las Vegas, Nevada, certain of which have been in continuous operation under
various owners since the 1920s. Since its 1996 initial public offering Cross-
Continent has acquired seven Dealerships located in Oklahoma City, Oklahoma,
Denver, Colorado, and Las Vegas, Nevada. The Company has acquired four
Properties used or owned by Cross-Continent or its Affiliates and has entered
into contracts to acquire two more Properties that are expected to close during
the second quarter of 1998.

Good News, led by its Chairman, Roy L. Meyers, Jr., has been in business for
20 years. With Dealerships located on the eastern shore of Maryland that
represent nine franchises, the Good News sold 4,200 new and used motor vehicles
in 1996. Under Mr. Meyers' leadership, the Good News Dealerships have won
several awards, including top dealership awards from Honda, Toyota, Nissan,
Mazda and GMC Truck. The Company has acquired seven Properties used or owned by
the Good News or its Affiliates.

The Kline Automotive Group, led by its Chairman and President, James M. Kline,
has been in business for over 70 years. The Kline family began operating
dealerships in 1926, and the business' current leader, Mr. Kline has been
involved in the automotive industry for over 40 years. In 1996, the Kline
Automotive Group's Dealerships sold over 16,400 new and used motor vehicles. The
Kline Automotive Group is currently comprised of six Dealerships located in
southern Virginia and the Washington, D.C. metropolitan area. Under Mr. Kline's
leadership, the Kline Automotive Group's Dealerships have received numerous
awards, including the Toyota President's Award, Board of Governor's Award and
Leadership Board Award and the Chevrolet Sales Volume Campaign Award. The
Company has acquired two Properties used or owned by the Kline Automotive Group
or its Affiliates.

New and used franchised motor vehicle retailing, including the sale of trucks,
minivans and sport utility vehicles, parts and services, and other ancillary
businesses, is the largest consumer retail sector in the United States, with
approximately $500 billion in 1996 sales. Sales by franchised motor vehicle
retail dealerships are estimated to account for one-fifth of the nation's total
retail sales of all products and merchandise. In 1996, the 100 largest
Dealership groups generated less than 10% of total sales revenue and controlled
approximately 5% of the over 22,000 existing franchised Dealerships,
demonstrating the fragmentation of the industry. The Company believes that the
size and the fragmentation of the industry and the increasing capital needs of
Dealers provide an attractive environment in which the Company can seek to
implement its primary business strategy. The current trend is for Dealers to
consolidate their operations to increase efficiency and their competitive
position. That trend should facilitate the Company's strategy of acquiring
Properties from Dealers with multi-site, multi-franchised and diversified
locations.

The Company believes that because the real property and improvements used by
Dealerships or Related Businesses are usually single use properties used by a
single industry, that type of property is a major and discrete sector of the
national retail real estate industry. Industry sources estimate that the real
property and improvements associated with franchised auto retailers represents
in excess of $40 billion of real estate. The Company believes that those
properties present attractive

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acquisition and financing opportunities because they have locations with
frontage on, and visibility from, major thoroughfares and zoning for a wide
range of alternative uses. In the event that such properties can no longer be
leased to Dealers, the Company believes that they can be redeveloped for other
commercial or residential uses.

STRATEGY

The Company's primary business strategy is to acquire a diversified portfolio
of Properties used by Dealers throughout the United States, including Properties
used by new motor vehicle retail dealerships, used motor vehicle retail
dealerships, motor vehicle auctioneers and service, repair or parts businesses.
In addition, the Company intends to commit to purchase Properties under
construction, renovation or expansion upon completion of such construction,
renovation or expansion. The Company believes that its acquisition strategy will
provide Sellers with an opportunity (i) to acquire liquidity, while maintaining
ownership and control of the Dealerships or Related Businesses, (ii) to
diversify their investments, (iii) to obtain funds to expand the operations of
their Dealerships or Related Businesses, and (iv) to facilitate their estate
planning.

The Company's primary objective is to own and lease Properties operated by
Dealers throughout the United States for the primary purpose of generating
rental income in order to provide the Company with predictable streams of cash
flow to maximize shareholder value. To achieve these objectives, the Company is:

. Implementing an aggressive, yet disciplined, acquisition program by purchasing
Properties used by Dealers of multi-site, multi-franchised Dealerships or
Related Businesses that have demonstrated historic growth, are well managed,
and have been maintained in good condition, and whose location and
characteristics will be suitable for alternative use by:

. Diversifying geographically by acquiring Properties located primarily in
major metropolitan areas in order to minimize the potential adverse impact
of economic downturns in certain markets;

. Leveraging the contacts and experience of the Company's management to build
and maintain long-term relationships with Dealers;

. Maintaining long-term working relationships with Dealers, by providing
capital for multiple acquisitions of Properties on a market-by-market basis,
thereby enhancing efficiency and value; and

. Taking advantage of opportunities created by the fragmented ownership of
Dealerships and Related Businesses, and the large number of suitable
locations with adequate roadway frontage, high visibility and appropriate
zoning.

. Using the Company's "UPREIT" structure to acquire Properties in exchange for
cash or Units, or a combination of cash and Units, thereby deferring some or
all of a Seller's potential taxable gain, and enhancing the ability of the
Company to consummate transactions and to structure more competitive
acquisitions than other real estate companies in the market that lack the
Company's access to capital and the ability to acquire Properties with Units.

. Using several valuation mechanisms, including evaluations of comparable sales
and leases of properties, analysis of the alternative uses of the Properties,
calculations of discounted cash flow, and evaluation of the Dealers' financial
strength, to determine the purchase price and lease terms for the Properties.

. Leasing back Properties to Lessees on a triple-net basis, thereby eliminating
brokerage, re-leasing and similar costs and the risk of high Lessee turnover
due to the general historic long-term operation of Dealerships or Related
Businesses at Property locations.

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. Negotiating Lease covenants designed to minimize the likelihood of loss to the
Company, by permitting the Company to establish the ability of the Lessees
(together with any guarantor of the Lessee's Lease obigations (the
"Guarantor") to pay rent by bi-annually monitoring compliance with a rent
coverage ratio of 1.5 to 1 or require the Lessee to provide additional
security in the form of the guaranty of one or more Affiliates.

. Utilizing a variety of other financing sources, that may include the issuance
of Units, or other equity securities or debt securities, or a combination
thereof; and entering into a bank credit facility that will be used to
leverage Properties, acquire additional Properties and for working capital
purposes as a means to gain positive spread on investment. The Company's
policy is to operate with a debt to total market capitalization ratio of not
more than 50%, which policy may be changed from time to time by the Board of
Trustees.

THE PROPERTIES, LEASES, TYPICAL LEASE TERMS AND DEALERSHIPS

PROPERTIES

As described under the caption "Business-Recent Events," contemporaneously
with or following the Offering, the Company acquired 20 Properties that are
located primarily in suburban communities of the Washington, D.C. metropolitan
area. The locations of the other 14 Properties acquired by the Company include
the eastern shore of Maryland, Pennsylvania, Texas and southern Virginia. As of
December 31, 1997, the Company has also entered into contracts to acquire one
additional Property located in Denver, Colorado and one additional Property
located in Las Vegas, Nevada.

The Company's interest in each Property owned by it includes the land,
buildings and improvements, related easements and rights and fixtures. The
Company does not now, nor does it intend to, own or lease any significant
personal property, furniture or equipment at any Property, all of which are or
will be owned or leased from third parties or by the respective Lessee. The
Properties are generally zoned for a wide range of commercial uses and typically
have frontage on major transportation arteries with high traffic patterns, high
visibility, bright signage, and ease of entrance and exit. The improvements on
the Properties generally consist of one or more retail showrooms, office space
(which may or may not be contained in separate buildings), adjacent full service
and repair facilities, parts and accessories departments, and in many cases,
acreage set aside for used car sales, body shops and parking for inventory.

The Company holds fee simple title to the Properties owned by it, with the
exception of Rosenthal Chevrolet, a portion of which is subject to a ground
lease. The sites of the Properties are generally subject to standard and
customary utility and other easements, certain covenants and restrictions and
certain reciprocal easements regarding access. The Properties acquired from
Affiliates of Pohanka secure the line of credit from NationsBank, N.A. in the
amount of $10 million.

LEASES

Concurrently with the Company's acquisition of the Properties, the Company
leased them back to the Lessees pursuant to the Leases. Substantially all of the
Company's current Leases are for terms of ten years, and it expects that future
Leases will be for fixed terms ranging from ten to 15 years (the "Fixed Term").
In addition, the Company's current Leases have, and it expects that future
Leases will have, extension terms for one or two ten-year periods (the "Extended
Terms") exercisable at the option of the respective Lessee. The Company's
current Leases require, and the Company expects that its future Leases will
require, the Lessees to pay substantially all expenses associated with the
operation of the Properties, such as real estate taxes and other governmental
charges, insurance, utilities, service, repair and maintenance and, therefore,
are or will be on a "triple-net" basis. The Leases also require, and the Company
intends that future Leases will
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require, the applicable Lessee to undertake and pay for any substantial
additions, repairs, renovations and improvements to the Property after
receiving the consent of the Company, unless the Company decides, at its
option, to pay for such expenditures, which would be on terms to be negotiated.
Upon expiration or termination of the Leases, the Leases generally provide that
additions, repairs, renovations and improvements will become the property of the
Company. Each Lease requires, and the Company intends that future Leases will
require, the Lessee to operate the Property only for the same purpose for which
it was used on the Company's purchase date, unless the Company consents to a
different use.

The annual base rent under each Lease (the "Annual Base Rent") has been
negotiated by the Company to produce an appropriate yield to the Company (based
on the return on the Company's investment) considering (i) the purchase price of
the Property, (ii) the credit worthiness of the Lessee, (iii) the rental rates
for similarly situated properties in the geographic location in which the
Property is situated, (iv) the characteristics of the Property, (v) the cost to
the Company of the funds used to acquire the Property, and (vi) the return that
the Company could realize from alternative investments on that Property's
purchase price (including acquisition fees and expenses). The yield to the
Company from an investment in Properties will differ from the yield to
shareholders from an investment in the Common Shares. The Company's current
Leases provide, and the Company expects that future Leases will provide, that
the Annual Base Rent under such Lease adjusts upward periodically based on a
factor of the consumer price index ("CPI"). The Company has general recourse
to the Lessees under its current Leases, but the Lessees' payment obligations
under the Leases are unsecured.

TYPICAL LEASE TERMS

In general, the Company's Leases include the following general lease terms.
The Company expects to negotiate substantially the same terms with Lessees of
additional Properties.

Use of the Properties. Generally the Lease will require the Property to be
continuously operated for the same purpose as they were used on the Company's
purchase date unless the Company consents otherwise. The Lease will generally
require that the Lessee or any permitted assignee operate the Property in an
efficient and professional manner.

Amounts Payable Under the Leases; Net Provisions. During the Fixed Term and
any Extended Terms, each Lessee or its assigns will pay the Annual Base Rent,
which is payable in monthly installments. The Annual Base Rent will be adjusted
upward periodically based on a factor of the CPI.

Each Lease is what is commonly referred to as a "triple net" lease, under
which each Lessee is required to pay thereunder rent and substantially all
expenses associated with operation of a particular Property. Such expenses
include all taxes, assessments and levies, excises, fees, and all other
governmental charges with respect to such Property, and all charges for
insurance, utilities, service, repair and maintenance, including, without
limitation, electricity, telephone, trash disposal, gas, oil, water, sewer,
communication and all other utilities used in each Property, and any ground
lease payments. Each Lessee will generally be obligated to comply with all laws,
contracts, covenants and restrictions affecting a Property and to perform all
obligations under any ground lease affecting a Property.

Maintenance, Alterations, Capital Additions or Improvements. The Lessee or
its assigns generally is obligated, at its sole cost and expense, to maintain
its Property in good order, repair and appearance and to make structural and
non-structural, interior and exterior, foreseen and unforeseen, and ordinary and
extraordinary repairs and replacements, which may be necessary and appropriate
to keep such Property in good order, repair

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and appearance (excluding ordinary wear and tear) or which may be required by
any governmental authority, including those required to continue to satisfy any
licensure requirements related to the operation of the Dealership or Related
Business. The Company will not be required to build or rebuild any improvements
to any Property, or to make any repairs, replacements, alterations, restorations
or renewals to any Property.

The Lessee or its assigns, at its sole cost and expense, generally may make
alterations, additions, changes and/or improvements to each Property with the
prior written consent of the Company, provided that the value and primary
intended use of such Property (determined in the Company's reasonable judgment)
is not impaired. The Company may, but is under no obligation to, provide or
arrange construction, permanent or other financing for any addition, alteration
or improvement, the terms of which will be separately negotiated. Typically, all
improvements, additions, alterations and replacements constructed upon each
Property by the Lessee during the Fixed Term or an Extended Term of a Lease will
be the sole property of the Lessee until the expiration or early termination of
such Lease, at which time all improvements, additions, alterations and
replacements will become the property of the Company. All machinery, equipment,
furniture, furnishings and other personal property installed at the expense of a
Lessee on any Property will remain the property of such Lessee and may be
removed by such Lessee at the expiration or earlier termination of the Lease.

Insurance. Each Lease provides that the Lessee will maintain insurance on
the related Property under the Lessee's insurance policies providing for the
following coverages in such amounts as are or shall customarily be insured
against with respect to properties similar to the Properties, including: (i)
fire, vandalism and malicious mischief, extended coverage perils and all
physical loss perils, (ii) commercial general public liability, (iii) flood
(when the Property is located in whole or in material part in a designated flood
plain area), earthquake and other similar hazards as may be customary for
comparable properties in the area, (iv) worker's compensation and (v) such other
insurance as the motor vehicle manufacturer (or its authorized distributor) (the
"Manufacturer") under the related written franchise agreement (the "Franchise
Agreement") or any holder of a mortgage, deed of trust or other security
agreement on such Property (a "Company Mortgagee") may reasonably require,
which at the time is usual and commonly obtained on commercially reasonable
terms in connection with properties similar in type of building size and use to
the Property and located in the geographic area where the Property is located.
The foregoing insurance policies would name the Company and any Company
Mortgagee as additional insureds or loss payees, as applicable. Each Lease
specifies the deductibles for insurance covering each class of risk.
Notwithstanding, there will be risks for which insurance will not be obtainable
or will be prohibitively expensive. In such event, a Lessee's ability to restore
the Property may be dependent on its internally generated funds or borrowing
capacity.

Damage to, or Condemnation of, a Property. In the event of any insurable
damage or destruction to any Property, the Lessee is required to submit complete
and detailed plans and specifications to the Company, and upon authorization of
the Company (which will not be unreasonably withheld or delayed), will have the
obligation to promptly repair or restore the same, at the Lessee's expense so as
to make such Leased Property at least equal in value to such Property
immediately prior to such occurrence and as nearly similar to it in character as
is practicable and reasonable. Typically, the Annual Base Rent, real estate
taxes and other impositions on the particular Property will be proportionately
abated during the time of restoration, but only to the extent of any rental
interruption insurance proceeds actually received by the Company. If any
Property is damaged by an insurable event to such an extent that the Property is
"completely destroyed" (which will be sufficient damage to such leased
Property such that the Company and the Lessee agree to that classification) or
"partially destroyed" (which will be damage to such Property such that the
Property will not be suitable for use by a Dealership or Related Business (as
determined by a reasonable Dealer in light of standard trade practices) within a
specified period after the date of the occurrence of such damages), the Lessee
may elect to terminate the relevant Lease upon notice to the Company. In the
event of the termination of the Lease upon a Property being "completely
destroyed" or "partially destroyed," typically, the Lessee will have no
obligation to repair, rebuild or replace such Property, and the entire insurance
proceeds will belong to the Company.

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<PAGE>

Generally, under the Lease terms, if at any time during the Fixed Term or any
Extended Term, any Property is totally and permanently taken by right of eminent
domain or by conveyance made in response to the threat of the exercise of such
right ("Condemnation"), the Lease will terminate as to Property so taken as of
the date the condemning authority has the right to possession of the Property
being condemned. Generally, the Lessee will be required to pay all outstanding
applicable rent and other charges through the date of termination. The Lease
generally will not terminate if the condemnation occurred due to the failure of
the Lessee to maintain such Property, whether or not such failure constituted an
event of default at the time of the Condemnation.

If a portion of a Property is taken by condemnation, the Lease generally will
remain in effect as to such Property if such Property is not thereby rendered
unsuitable for use as a Dealership or Related Business. In such event, the
Company will retain the amount of any award received by the Company, is
obligated to apply such award to restore the Property, and any excess after such
application will be retained by the Company. Any award made by the condemning
authority to the Lessee will belong to the Lessee.

Financial Covenants. Substantially all affiliated Lessees and Guarantors, if
any, as a group will be required to maintain a rent coverage ratio of at least
1.5 to 1 as of the date of the Lease and at 24 month intervals thereafter,
computed as the aggregate of net income before taxes plus mortgage interest,
rent expense, depreciation, compensation of principals of the Lessees,
management fees plus the annual LIFO adjustment and other non-cash expenses,
less recurring capital expenditures and gain (loss) on sale of real estate,
dividends and/or profits taken out of the Lessees and Guarantors if any,
divided by the aggregate of the Lessees' and Guarantors', if any, obligations
under the Leases. In addition, the Lessee will be required to comply with all
financial covenants imposed by Manufacturers with whom the Lessee has a
Franchise Agreement. These covenants have been designed to minimize the
likelihood of loss to the Company, by permitting the Company to establish the
ability of affiliated Lessees (and any Guarantors) to pay rent. The Company
will monitor bi-annually the Lessee's compliance with the rent coverage ratio
and, if a Lessee is in breach, the Lessee may cure by providing additional
security such as the guaranty of one or more Affiliates.

Assignment and Subletting. The Lease generally provides that the Lessee may
not, without the prior written consent of the Company (which will not be
unreasonably withheld) or upon compliance with conditions established by the
Company, assign, mortgage, pledge, hypothecate, encumber or otherwise transfer
any Lease or sublease any Property, in whole or in part, except to an Affiliate.
Generally, an assignment of the Lease includes any change of control of the
Lessee. In the event that (i) the Company withholds any consent to any
assignment or transfer of such Lease or any interest herein, and (ii) such
assignee or transferee is approved by the relevant Manufacturer for continuation
as a franchisee, there will be a presumption that such assignment or transfer
was reasonable and the Company will have the burden of rebutting such
presumption and of proving that such consent was in fact reasonably withheld (or
that such conditions were reasonable). The Company will also receive an
assignment of all management, operating or service agreements relating to the
maintenance, management, possession or use of such Property. Certain Lessees
affiliated with Mr. Rosenthal may assign their Leases (subject to compliance
with certain conditions, including the requirements of the applicable Franchise
Agreement, to the satisfaction of the Company) to a limited liability company to
be formed by Mr. Rosenthal or his Affiliates or related persons as members.

Generally, if the Company withholds its consent to any assignment or if the
Company establishes conditions to approval of any assignment but such conditions
have not been complied with to the satisfaction of the Company, the Lessee will
continue to be primarily liable under the Lease. Any assignment or other
transfer of all or any portion of the Lessee's interest in a Lease in violation
of the restrictions on assignment or subletting will be voidable at the
Company's option.

Generally, if the Lessee requests the assignment of a Lease with respect to
less than the entire Property, and such Property is not a separate subdivided
lot, the Company may condition its approval of an assignment upon a

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showing that the Lessee has taken the actions necessary to sever and spin-off
one or more of such parcels of such Property from such Lease.

The Lessee will need the Company's prior approval before entering into any
sublease, license agreement or other arrangement which would have the effect of
causing all or a portion of the amount received or accrued by the Company under
the Lease to be treated as other than "rents from real property" within the
meaning of Section 856(d) of the Code.

Indemnification. Generally, a Lessee will be required to indemnify, and will
be obligated to save harmless, the Company generally from and against
liabilities, costs and expenses (including reasonable attorneys' fees and
expenses) and actual or consequential damages imposed upon or asserted against
the Company, its officers, directors, trustees, employees, shareholders,
agents or Affiliates on account of, among other things, (a) the use, condition,
operation or occupancy of a Property; (b) any activity, work, or thing done, or
permitted or suffered by the Lessee in, on or about such Property; (c) any
acts, omissions, or negligence of the Lessee or any person claiming under the
Lessee, or the contractors, agents, employees, invitees, or visitors of the
Lessee or any such person; (d) any breach, violation, or nonperformance by the
Lessee or any person claiming under the Lessee or the employees, agents,
contractors, invitees, or visitors of the Lessee or of any such person, of any
term, representation, warranty, covenant, or provision of the Lease or any law,
ordinance, or governmental requirement of any kind; (e) any injury or damage to
the person, property or business of Lessee, its employees, agents, contractors,
invitees, visitors, or any other person entering upon such Property under the
express or implied invitation of the Lessee; (f) any accident, injury to or
death of persons or loss or damage to any item of property occurring at such
Property; (g) any environmental law or any pollution or other threat to human
health or the environment at, arising out of or relating to such Property, and
(h) any brokers' or agents' fees and commissions. If any action or proceeding is
brought against the Company or any of its employees, directors, trustees or
agents by reason of any such demand, claim or cause of action, the Lessee, upon
notice from the Company, will defend the same at the Lessee's expense with
counsel reasonably satisfactory to the Company. In the event the Company
reasonably determines that its interests and the interests of the Lessee in any
such action or proceeding are not substantially the same and that Lessee's
counsel cannot adequately represent the interests of the Company, the Company
shall have the right to hire separate counsel in any such action or proceeding
and the reasonable costs thereof shall be paid for by the Lessee. The Lessee's
obligations to indemnify the Company will continue after the expiration or
earlier termination of the Lease until the later of (i) two years following the
date of the Lease, (ii) the expiration of the period 90 days after the date the
Company has actual knowledge of the existence of a claim covered by
indemnification, or (iii) 90 days after the expiration of the applicable statute
of limitations for claims arising from, or relating to, any environmental law or
any pollution or other threat to human health or the environment.

Environmental Matters. Generally, the Lease provides for various
representations and warranties by the Lessee relating to environmental matters
with respect to a Property. Each Lease also requires the Lessee to indemnify
and hold harmless the Company from and against all liabilities, costs and
expenses imposed upon or asserted against the Company, the Lessee or the
Property on account of, among other things, any federal, state or local law,
ordinance, regulation, order or decree relating to the protection of human
health or the environment in respect of the Property (irrespective of whether
there has occurred any violation of any environmental law). Such Lessee is
required to comply with all environmental laws. See "--Governmental Regulations
Affecting the Properties--Environmental Laws."

Events of Default. Generally, the following events, among others, will
constitute "Events of Default" under the Lease: (a) the Lessee fails to pay
in full any installment of rent, or any other monetary obligation payable by the
Lessee to the Company hereunder, within ten days after notice is given by the
Company to the Lessee (except that after two defaults within any 12 month
period, any further default during such 12 month period will constitute an
immediate event of default); (b) the Lessee fails to observe and perform any
covenant (other than the covenant in respect of insurance), and certain
conditions or agreements required to be performed by the Lessee and such failure
continues for a period of 20 days after written notice thereof is given to
Lessee by

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the Company; or if, by reason of the nature of such default, the same cannot
with due diligence be remedied within said 20 days, such failure will not be
deemed to continue if the Lessee proceeds promptly and with due diligence to
remedy the failure and diligently completes the remedy thereof; provided,
however, said cure period will not extend beyond 40 days if the facts or
circumstances giving rise to the default are creating a further harm to the
Company or the subject Property and the Company makes a good faith determination
that the Lessee is not undertaking remedial steps that the Company would cause
to be taken if the Lease were then to terminate; (c) if the Lessee (i) admits in
writing its inability to pay its debts generally as they become due, (ii) files
a petition in bankruptcy or a petition to take advantage of any insolvency act,
(iii) makes an assignment for the benefit of its creditors, (iv) is unable to
pay its debts as they mature, (v) consents to the appointment of a receiver of
itself or of the whole or any substantial part of its property, or (vi) files a
petition or answer seeking reorganization or arrangement under the federal
bankruptcy laws or any other applicable law or statute of the United States of
America or any state thereof; (d) if the Lessee, on insolvency proceedings or on
a petition in bankruptcy filed against it, is adjudicated as bankrupt or a court
of competent jurisdiction enters an order or decree appointing, without the
consent of the Lessee, a receiver of Lessee of the whole or substantially all of
its property, or approving a petition filed against it seeking reorganization or
arrangement of the Lessee under the federal bankruptcy laws or any other
applicable law or statute of the United States or any state thereof, and such
judgment, order or decree is not vacated, dismissed or set aside within 60 days
from the date of the entry thereof; (e) if the estate or interest of the Lessee
in such Property or any part thereof is levied upon or attached in any
proceeding and the same is not vacated or discharged within 15 days after
commencement thereof (unless the Lessee is contesting such lien or attachment in
accordance with the Lease); (f) any representation, warranty or covenant made by
the Lessee on behalf of itself or an Affiliate in the Lease or in any
certificate, demand or request made pursuant hereto proves to be incorrect, in
any material respect, as of the date of issuance or making thereof; (g)
conviction of Lessee of a crime or offense constituting a felony in the
jurisdiction in which committed or under federal law, which conviction results
in termination of the related franchise; (h) termination or relinquishment of
the franchise or license pursuant to which a Lessee conducts business on or from
the Property, provided that such event shall not constitute an Event of Default
if (i) no other Event of Default shall have occurred and be continuing, and (ii)
at a date no later than 24 months following such date of termination or
relinquishment, the Lessee has entered into written new or amended franchises or
licenses for operation of the Dealership or Related Business at the Property
satisfactory to the Company, in its discretion, applying commercially reasonable
standards; (i) default under any franchise or license pursuant to which Lessee
conducts business at a Property, if in the Company's judgment such default in
light of commercially reasonable standards and industry practice would have a
material adverse effect on the Lessee or the Property; (j) a final, non-
appealable judgment or judgments for the payment of money not fully covered
(excluding deductibles) by insurance is rendered against the Lessee and the same
remains undischarged, unvacated, unbonded, unappealed or unstayed for a period
of 15 consecutive days; (k) the Lessee shall fail to observe the covenant in
respect to insurance; or (l) except after the effective date of a permitted
assignment, if the Lessee is liquidated or dissolved or proceedings for that
purpose or for the purpose of selling or divesting the Lessee of all or
substantially all of its assets have been brought.

Subject to the Lease, the Company may exercise any one or more of the
following remedies upon the occurrence of an Event of Default: (i) the Company
may terminate the Lease, (ii) exclude the Lessee from possession of the
Property, or (iii) use reasonable efforts to lease such Property to others. If
a Lease is terminated with respect to all or a portion of the Property, the
Lessee will remain liable to the Company for damages in an amount equal to the
rent and other sums which would have been owing by the Lessee as to the Property
for the balance of the Fixed Term or Extended Term as if the Lease had not been
so terminated, less the net proceeds, if any, of any re-letting of the Property
by the Company subsequent to such termination, after deducting all the Company's
expenses in connection with such re-letting. In the event of any Event of
Default, the Company may cause the Lessee to vacate the Property without
terminating the Lease. In addition, the Company may exercise any other rights
that it may have under law or under the Lease. However, except in certain
circumstances or for certain Lessees, there will be no cross defaults between or
among any Property to any other Property leased to affiliated Lessees.

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<PAGE>

Right of First Offer and Option to Purchase Property. The Lessee under the
Lease may have a right of first offer to purchase the Property if the Company
decides to sell the Property. The Company will notify the Lessee of its
intention to sell the Property and the Lessee will have 30 days to extend an
offer, including specifying the purchase price for the Property. The Company may
reject the offer, at its discretion based on its reasonable judgment. If the
Company rejects the Lessee's offer, it may sell the Property to a third party on
other terms if the purchase price is higher or the Company reasonably believes
such terms are more advantageous than the terms proposed by the Lessee. In
addition, upon expiration of any Extended Term, provided that there is no Event
of Default, the Lessee has an option to purchase the Property at a purchase
price equal to the mean of the closest two appraised values of the Property to
be determined by three independent appraisers.

Governing Law. Each Lease will be governed by and construed in accordance
with the law of the Commonwealth of Virginia (but not including such state's
conflict of laws rules) except when the law of the state in which the Property
is located is required to control.

DEALERSHIPS

The Dealerships are operated pursuant to written Franchise Agreements with
Manufacturers that, among other things, (i) generally designate the location or
geographic area in which the Dealerships have the right to sell and service
motor vehicles, (ii) impose requirements on the size, design, layout and
maintenance of showrooms and other structures, and (iii) provide guidelines
relating to matters such as advertising, inventory maintenance, personnel
training, and the use and display of the Manufacturers' trademarks, service
marks and designs. In addition, Dealers have entered into related agreements
with certain Manufacturers that establish financial covenants, and that, in
certain cases, restrict changes in control of the Dealerships without the
consent of such Manufacturers. Certain of the Franchise Agreements contain
certain restrictions relating to the sale or transfer of assets or properties
necessary for the operation of the Dealership, or grant the Manufacturer a right
of first refusal to purchase such assets or properties. The Franchise Agreements
generally have terms of one to five years, and have historically been renewed by
the Manufacturers in the ordinary course of business. No Dealer operating
Properties currently owned by the Company had its Franchise Agreements
involuntarily terminated by a Manufacturer nor has a Manufacturer failed to
renew a Franchise Agreement upon request for renewal by such Dealer.
See "--Franchise Agreements."

Dealers affiliated with the Lessees sell domestic and imported luxury, family,
economy and sport utility vehicles, trucks and vans including, Mercedes-Benz,
Honda, Toyota, Lexus, Chevrolet, Saturn, Ford, GMC, Mazda, Infiniti, Jaguar,
Acura, Lincoln-Mercury, Mitsubishi and Nissan. The diversification of
Manufacturers decreases the risks associated with changes in consumer
preferences and dependence on any single brand, Manufacturer or market.

In addition to selling new vehicles, many of those Dealers lease new vehicles
and sell used vehicles. Lease arrangements could provide Dealers with a steady
source of late-model, off-lease vehicles for its used vehicle inventory. Dealers
also provide service and parts primarily for the vehicle makes and models that
they sell or lease, and perform both warranty and non-warranty service work. In
general, parts departments support the sales and service divisions. Dealers may
also sell factory-approved parts at retail to their customers or at wholesale to
independent repair shops. Dealers arrange third party financing for their
customers, sell vehicle service contracts and arrange selected types of credit
insurance for which they receive financing fees, subject to a charge-back
against a portion of the finance fees if contracts are terminated prior to their
scheduled maturity.

WASHINGTON, D.C. METROPOLITAN AREA

Currently, the Company owns 20 Properties in the Washington, D.C. metropolitan
area representing approximately 68% of the aggregate purchase prices for the
Properties. According to Population Estimates Program, Population Division, U.S.
Bureau of the Census, December 1997 Internet Reference, the 1996 mid-year

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population of the Washington, D.C. metropolitan area was 4,563,123, an increase
of 8.1% from the 1990 census (compared to a 6.7% increase for the United States
as a whole). According to the U.S. Department of Commerce, Economics and
Statistics Administration, Bureau of Economic Analysis, per capita income for
the Washington, D.C. metropolitan area for 1995 was $30,824, compared to $24,594
for U.S. metropolitan areas generally. According to the U.S. Department of
Labor, Bureau of Labor Statistics, Philadelphia Regional Office, the average
annual unemployment rate for calendar year 1996 in Virginia was 4.4%, and the
corresponding figure for the first nine months of 1997 was 4.2%. According to
that same source, the average annual unemployment rate for calendar year 1996 in
Maryland was 4.9%, and the corresponding figure for the first nine months of
1997 was 4.7%.

GOVERNMENTAL REGULATIONS AFFECTING THE PROPERTIES

Environmental Laws. Under various federal, state and local laws, ordinances
and regulations, a current or previous owner, developer or operator of real
estate may be liable for the costs of removal or remediation of certain
hazardous or toxic substances at, on, under or in its property. The costs of
such removal or remediation could be substantial. Such laws often impose such
liability without regard to whether the owner or operator knew of, or was
responsible for, the release or presence of such hazardous or toxic substances.
The presence of such substances may adversely affect the owner's ability to sell
or rent such real estate or to borrow using such real estate as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances also may be liable for the costs of removal or remediation of such
substances at the disposal or treatment facility, whether or not such facility
is owned or operated by such person.

The Company is not aware of any environmental liability that the Company
believes would have a material adverse effect on the Company's business,
financial condition or results of operations. Based on certain environmental
"Phase 1 reports" obtained by Sellers, the Company estimates that the
aggregate cost of addressing environmental conditions at certain of the
Properties identified in the Phase 1 reports will not be material. In addition,
the Sellers of such Properties have agreed to indemnify the Company for third
party claims based on those conditions at a minimum until such time as the
relevant statutes of limitations have expired, and the Lessees and their
Affiliates are obligated to comply with environmental laws and remediation
requirements and hold harmless the Company and its officers, directors,
trustees, employees, shareholders, agents and Affiliates from any failure to
comply with those requirements. No assurance can be given, however, that all
potential environmental liabilities have been identified, that no prior owner or
operator or other person created any material environmental condition not known
to the Company or that future uses, conditions or legal requirements (including,
without limitation, those that may result from future acts or omissions or
changes in applicable environmental laws and regulations) will not result in the
imposition of environmental liabilities. The Lessees and the Sellers have made
certain representations in the Leases and the agreements pursuant to which the
Company acquired the Properties, whether for cash, Units or a combination
thereof (the "Contribution Agreements"), respectively, regarding the
environmental matters and will indemnify the Company for third party claims
arising from breach of such representations. There can be no assurance that such
indemnification will be available or uncontested, however, or that any
environmental conditions of concern at such time which are not remediated by the
Sellers or Lessees and their Affiliates will not impede the ability of the
Company to sell or re-lease the Properties in the future or negatively impact
future sales or rental proceeds.

Americans With Disabilities Act of 1990. The Properties and any subsequently
acquired Properties must comply with Title III of the ADA to the extent that
such properties are "public accommodations" and/or "commercial facilities"
as defined by the ADA. Compliance with the ADA requires that public
accommodations "reasonably accommodate" individuals with disabilities and that
new construction or alterations made to "commercial facilities" conform to
accessibility guidelines unless "structurally impracticable" for new
construction, or technically infeasible for alterations. The Company believes
that the Properties substantially comply with all present requirements under the
ADA and applicable state laws. Under the Lease, the Lessee is

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responsible for all costs associated with compliance with the ADA. However,
noncompliance with the ADA could result in the imposition of injunctive relief,
fines, an award of damages to private litigants or additional capital
expenditures to remedy such noncompliance.

FRANCHISE AGREEMENTS

Each Dealer operates its Dealership pursuant to a written Franchise Agreement
with the applicable Manufacturer. The typical automotive Franchise Agreement
specifies the locations at which the Dealer has the right and the obligation to
sell motor vehicles and related parts and products and to perform certain
approved services in order to serve a specified market area. The designation of
such areas and the allocation of new vehicles among Dealerships are subject to
the discretion of the Manufacturer, which generally does not guarantee
exclusivity within a specified territory. A Franchise Agreement may impose
requirements on the Dealer concerning such matters as the showrooms, the
facilities and equipment for servicing vehicles, the maintenance of inventories
of vehicles and parts, the maintenance of minimum net working capital and the
training of personnel. Compliance with these requirements is closely monitored
by the Manufacturer. In addition, Manufacturers require the Dealers to submit a
financial statement of operations on a monthly basis. The Franchise Agreement
also grants the Dealer the non-exclusive right to use and display the
Manufacturer's trademarks, service marks and designs in the form and manner
approved by the Manufacturer.

Each Franchise Agreement sets forth the name of the person approved by the
Manufacturer to exercise full managerial authority over the operations of a
Dealership and the names and ownership percentages of the approved owners of the
Dealership and contains provisions requiring the Manufacturer's prior approval
of changes in management or transfers of ownership of the Dealership. Each
Lessee's Dealerships are owned, directly or indirectly, by such Lessee. Several
Manufacturers include provisions in their Franchise Agreements that prohibit
transfers of assets or real property considered necessary for the conduct of the
related Dealerships or similar restrictions that could prohibit or require the
prior consent of such Manufacturers before Sellers can sell and the Company can
purchase such properties.

Most Franchise Agreements expire after a specified period of time, ranging
from one to five years, and the Company believes that each Lessee expects to
renew any expiring agreements in the ordinary course of business. The typical
Franchise Agreement provides for early termination or non-renewal by the
Manufacturer under certain circumstances such as change of management or
ownership without Manufacturer approval, insolvency or bankruptcy of the
Dealership, death or incapacity of the dealer manager, conviction of a dealer
manager or owner of certain crimes, misrepresentation of certain information by
the Dealer or owner to the Manufacturer, failure to adequately operate the
Dealership, failure to maintain any license, permit or authorization required
for the conduct of business, or material breach of other provisions of the
Franchise Agreement. The Dealership is typically entitled to terminate the
Franchise Agreement at any time without cause.

The motor vehicle franchise relationship is also governed by various federal
and state laws established to protect Dealers from the general unequal
bargaining power between the parties. The following discussion of state court
and administrative holdings and various state laws is based on management's
beliefs and may not be an accurate description of the state court and
administrative holdings and various state laws. Under the laws of most states,
despite the terms of contracts between the Manufacturer and the Dealer, such
Manufacturer may not unreasonably withhold approval of a transfer of a
Dealership, or reject a prospective transferee of a Dealership who is of good
moral character and who otherwise meets the Manufacturer's written, reasonable
and uniformly applied standards or qualifications relating to the prospective
transferee's business experience and financial qualifications. In addition,
under the laws of certain states, a franchised Dealership may challenge
Manufacturer's attempts to establish new franchises in the franchised dealer's
market, and state regulators may deny applications to establish new Dealerships
for a number of reasons, including a determination that the Manufacturer is

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adequately represented in the market. The laws of certain states also limit the
ability of Manufacturers to terminate or fail to renew franchises.

COMPETITION

The Company believes that it is the first publicly-traded real estate
investment trust to primarily focus on consolidating the properties utilized by
Dealerships or Related Businesses under one ownership structure. A subsidiary of
Kimco Realty Corporation, a public diversified real estate investment trust, has
publicly announced that it will pursue the acquisition of properties used by
motor vehicle dealerships. Two other private entities have announced that they
also intend to acquire properties used by motor vehicle dealerships. Some of
the Company's competitors may have greater financial resources or general real
estate experience than the Company. Those entities will compete with the
Company in seeking properties for acquisition and disposition or land for
development. The Company believes that competition for properties will
primarily be on the basis of acquisition price and negotiation of rents.
Lessees or their Affiliates may own other properties that will not be acquired
by the Company and which may instead be sold to competitors.

OTHER INVESTMENT POLICIES

The Company engages in the investment in Properties used by Dealerships and
Related Properties. The Company has established no limit on the amount that can
be invested in any one Property. The Company does not intend to acquire
properties used by businesses other than Dealerships and Related Businesses.
The Company currently does not intend to invest in mortgages (including
participating and convertible mortgages), the securities of other issuers,
except in connection with acquisitions of indirect interests in Properties
(normally through partnership interests in special purpose partnerships owning
title to Properties) or generally to make loans to third parties. The Company
does not intend to underwrite the securities of other issuers. The Company
currently has no plans to repurchase or otherwise reacquire its shares or the
shares of others (except pursuant to the redemption rights of holders of Units).
The Company may change its policies with respect to the above activities without
the approval of its shareholders. In any event, any activities of the Company
with respect to investments in securities of other issuers will be subject to
the asset and gross income tests necessary for qualification as a real estate
investment trust for federal income tax purposes.

EMPLOYEES

As of March 20, 1998, the Company had 17 employees. None of the employees is
represented by a collective bargaining unit. The Company believes that its
relationship with its employees is good.

BUSINESS RISKS

16
<PAGE>

business strategy as described herein, (iii) the termination or abandonment of
the Dealerships or other Related Businesses that occupy any Property owned by
the Company, (iv) the inability of the Company to release any Property, (v)
general economic and business conditions, both nationally and in the regions
in which the Company owns Properties, including, but not limited to, those
conditions affecting real estate generally or the motor vehicle retail and
Related businesses specifically, (vi) zoning changes in locations in which any
such Property is located, (vii) existing governmental regulations and changes
in, or the failure to comply with government regulations, (viii) changes to
laws, rules and regulations affecting the Company, including the tax laws,
affecting real estate investment trusts, (ix) competition, (x) changes in
business strategy, (xi) divestiture of Property, (xii) retention of the
Company's executive officers, (xiii) the ability of the Company to attract and
retain key personnel, and (xiv) the availability and terms of additional capital
to fund the acquisition of additional Properties and for working capital
purposes.

The following factors should be considered in addition to the other
information contained in this Report in evaluating the Company and its business:

. Inability of the Company to close the acquisition of any Property or close
such acquisition as scheduled due to delays or issues relating to title,
zoning, encumbrances or other events that may arise in connection with a
real estate acquisition, which may adversely affect the financial results of
the Company and distributions to shareholders;

. Dependence on the ability of Lessees to pay rent and perform their
obligations under the Leases, which ability may be affected by risks
inherent in operating Dealerships or Related Businesses, including, but not
limited to, (i) the ability of Dealers to access financing, (ii) competitive
factors, including consolidation of ownership, (iii) the expansion or
contraction of the motor vehicle retail industry, (iv) performance of
Dealers under their Franchise Agreements with Manufacturers, (v) general
factors affecting Manufacturers, including union and labor issues, product
safety issues, health and safety regulations, environmental regulations,
consumer tastes and preferences, recalls and litigation, (vi) governmental
regulation, including health, safety and environmental regulation, and
(vii) general economic factors that affect new and used motor vehicle sales
and leases;

. Conflicts of interest between the Company and Mr. Pohanka or Mr. Rosenthal,
who have joined the Board of Trustees and who are Affiliates of certain
Sellers and Lessees, and the potential influence of those Trustees and their
Affiliates over the business and affairs of the Company, including, but not
limited to, (i) negotiation of the terms of the Contribution Agreements and
Leases for the Properties acquired from any one of them, (ii) operation of
the Company's ongoing businesses, including conflicts associated with the
tax consequences to certain Sellers, which, together with certain provisions
of the Amended and Restated Agreement of Limited Partnership of the
Operating Partnership (the "Partnership Agreement"), may influence the
Company's decision to sell or finance, or to prepay debt secured by, certain
Properties, (iii) potential election by a related Lessee to exercise its
right of first offer or option to purchase a Property at the end of the
initial Lease term or any renewal term and negotiation of the terms of such
acquisitions, (iv) the terms of any lock-out restrictions, that limit the
ability of the Company to sell or refinance particular Properties, and (v)
the enforcement of the Leases or other agreements;

. The limited operating history of the Company and management's limited
experience operating a REIT;

. Approximately 72% of the net proceeds of the Offering and the FBR Offering
have not been committed to specific investments; the Company may face
significant competition in acquiring additional Properties, which may
inhibit the Company's ability to achieve its investment objectives and
necessitate the investment of the proceeds of the Offering and the FBR
Offering in short-term or government securities that could produce a
lower yield to the Company than could be generated from an investment in
real estate. The shareholders will not have the opportunity to evaluate
future acquisitions by the Company;

17
<PAGE>

. The Company's limited control over the management of the Properties, which
could affect the maintenance and repair of the Properties;

. The taxation of the Company as a regular corporation if it fails to qualify
as a real estate investment trust and the resulting decrease in funds
available to pay distributions to shareholders;

. The possibility that the consideration paid by the Company for certain
Properties acquired by the Company may exceed fair market values estimated
by other methodologies, such as third party appraisals (such consideration
has been or will be determined through negotiations with the Seller, wherein
the Company considers (i) the Property's market value based on its analysis
of comparable property sales, (ii) the rents and terms of the Lease at which
the Property will be leased back to the Seller, (iii) the potential for
appreciation of the value of the Property over the Lease term and any
renewal term, (iv) the characteristics of the Property, including the size,
configuration and zoning, (v) the condition of the Property, including
improvements, and assessment of its useful life, and (vi) alternative uses
for the Property);

. Inability to obtain consents required under certain Franchise Agreements
that impose restrictions relating to the sale or transfer of certain assets
or property of certain Dealerships without the consent or waiver of such
Manufacturers, which could result in the Company being unable to acquire
certain properties;

. The Company's dependence on key executive officers and trustees of the
Company, including Thomas D. Eckert, President and Chief Executive Officer,
Scott M. Stahr, Executive Vice President and Chief Operating Officer, Donald
L. Keithley, Executive Vice President of Business Development, and David S.
Kay, Vice President and Chief Financial Officer, the loss of whom could
adversely affect the management of the Company. The executive officers will
receive substantial compensation from the Company.

. The distribution requirements for a real estate investment trust under
federal income tax laws, which may limit the Company's ability to finance
future acquisitions, developments and improvements without additional debt
or equity financing;

. The current geographic concentration of the Properties primarily in suburban
communities of Washington, D.C., which could render the Company vulnerable
to local economic conditions and other local factors;

. General risks relating to commercial real estate ownership and investment,
including, but not limited to (i) the effect of economic and other
conditions on real estate values, including, those associated with cyclical
weaknesses in the real estate markets, (ii) the general lack of liquidity of
investments in real estate, (iii) competition from other real estate
investors seeking properties of the types which the Company intends to
acquire or finance, (iv) the inability of Lessees to make rent payments, (v)
the possibility that the Company may be able to replace existing
Lessees, if necessary, or reposition Properties for alternative uses, (vi)
governmental regulation, including, changes in use, zoning, health and
safety and environmental requirements, (vii) potential for unknown or future
environmental or other liabilities, and (viii) uninsurable losses;

. Limitations on the Company's ability to sell or refinance certain
Properties, which could adversely effect the financial performance of the
Company;

. The ability of the Board of Trustees to change the policies of the Company,
including investment, financing, leverage and distribution policies, without
a vote of the shareholders;

. Failure by the Company to invest a significant portion of the proceeds of
the Offering in Properties within one year of closing of the Offering and
the FBR Offering, which could result in the Company investing any

18
<PAGE>

unused proceeds in certain government securities in order to avoid
registering as an investment company and becoming subject to the
requirements of the Investment Company Act of 1940, as amended;

. The Company intends to use leverage, generally with a ratio of debt to total
market capitalization of not more than 50%. This policy may be changed by
the Board of Trustees without the approval of the shareholders. If the
Company modifies this strategy to permit a higher degree of leverage and
incurs additional indebtedness, debt service requirements would increase
accordingly, and such an increase could adversely affect the Company's
financial condition and results of operations. In addition, increased
leverage could increase the risk of default by the Company on its debt
obligations, with the potential for loss of the Properties secured thereby,
or a reduction of cash available for distribution or asset values, of
the Company;

. The potential anti-takeover effects of provisions in the Company's
Declaration of Trust and Bylaws, including, among other things, provisions
generally limiting the actual or constructive ownership of Common Shares by
any one person or entity to 9.9% of the outstanding Common Shares, unless
the Board of Trustees waives that restriction, which could deter the
acquisition of control by a third party, thus making it more difficult to
effect a change in management or limiting the opportunity for shareholders
to receive a premium over the market price for their Common Shares; or

. The potential fluctuations in market interest rates or equity markets,
which may lead prospective shareholders to demand higher yields, may
adversely affect the market price of the Common Shares or may limit the
Company's ability to raise additional equity to finance future acquisitions,
developments and improvements.

19
<PAGE>

ITEM 2-PROPERTIES

Set forth below is certain information relating to the 34 Properties
acquired by the Company as of March 20, 1998 and the two Properties under
contract by the Company as of December 31, 1997:

<TABLE>
<CAPTION>
AGGREGATE
GROSS
LAND LEASABLE
PURCHASE AREA BUILDING
DEALERSHIPS(1) LOCATION PRICE(2)(3) IN ACRES AREA (SQ. FT.)
- --------------------------------------------------- ------------------ ----------------- -------- --------------
<S> <C> <C> <C> <C>
Rosenthal Infiniti, Mazda/Nissan ................. Tysons Corner, VA $ 23,827,474 12.0 84,384
Rosenthal Nissan, Acura, Mazda & Isuzu ........... Gaithersburg, MD 11,809,094 8.4 68,898
Rosenthal Honda & Jaguar ......................... Tysons Corner, VA 11,449,103 7.8 46,836
Rosenthal Chevrolet & Jeep/Eagle ................. Arlington, VA 6,792,708 5.2 67,000
Rosenthal Mazda .................................. Arlington, VA 5,367,927 2.2 16,176
Rosenthal Storage Lot ............................ Arlington, VA 4,909,219 4.7 32,349
Rosenthal Body Shop .............................. Tysons Corner, VA 1,085,077 0.9 16,000
------------ ----- ---------
Subtotal ........................................ $ 65,240,602 41.2 331,643
============ ===== =========

Pohanka Acura & Chevrolet/GEO(4) ................. Chantilly, VA $ 7,639,567 5.1 48,571
Pohanka Saturn/Isuzu Oldsmobile & GMC Truck(4) ... Marlow Heights, MD 4,333,392 5.9 38,377
Pohanka Saturn(4) ................................ Bowie, MD 4,074,875 5.3 22,679
Pohanka Honda(4) ................................. Marlow Heights, MD 3,705,822 2.3 40,769
Pohanka Lexus(4) ................................. Chantilly, VA 3,440,285 2.3 15,111
Pohanka Cadillac, Hyundai, Nissan & Kia(4) ....... Fredricksburg, VA 3,444,486 6.2 42,473
Pohanka Undeveloped Dealership Lot(4) ............ Chantilly, VA 2,461,942 7.1 --
Pohanka Hyundai & Subaru(4) ...................... Marlow Heights, MD 1,571,391 2.6 15,372
Pohanka Body Shop(4) ............................. Marlow Heights, MD 712,773 2.7 22,650
------------ ----- ---------
Subtotal ........................................ $ 31,384,533 39.5 246,002
============ ===== =========

Sheehy Ford & Kia.................................. Springfield, VA $ 6,322,662 6.6 51,512
Chapman Ford Sales(5) ............................ Philadelphia, PA 3,014,662 7.9 --
Sheehy Lincoln-Mercury & Mitsubishi .............. Woodbridge, VA 2,580,587 3.1 24,597
Sheehy Ford ...................................... Marlow Heights, MD 2,146,662 4.6 26,400
------------ ----- ---------
Subtotal ...................................... $ 14,064,573 22.2 102,509
============ ===== =========

Cherner Lincoln-Mercury .......................... Annandale, VA $ 6,424,355 5.3 43,884
============ ===== =========

T. West Sales & Service (Toyota) ................. Las Vegas, NV $ 13,685,000 8.8 126,685
Douglas Motors (Toyota) .......................... Denver, CO 9,225,000 6.5 148,461
Plains Chevrolet ................................. Amarillo, TX 4,713,937 16.1 121,425
Westgate Chevrolet ............................... Amarillo, TX 4,413,937 8.0 48,000
Midway Chevrolet ................................. Amarillo, TX 3,113,937 12.2 43,262
Quality Nissan ................................... Amarillo, TX 1,013,937 3.4 16,947
------------ ----- ---------
Subtotal ...................................... $ 36,165,748 55.0 504,780
============ ===== =========

Price Buick & Pontiac ............................ Salisbury, MD $ 1,346,546 3.3 12,500
Good News Body Shop .............................. Salisbury, MD 1,270,220 6.2 12,200
Good News Olds-Cadillac-GMC ...................... Salisbury, MD 832,020 3.5 14,700
Good News Honda .................................. Salisbury, MD 588,280 2.4 11,800
Towne Toyota & Mercedes-Benz ..................... Salisbury, MD 570,220 2.3 12,100
Good News Nissan ................................. Salisbury, MD 451,120 1.2 17,200
Good News Mazda .................................. Salisbury, MD 414,720 1.4 12,400
------------ ----- ---------
Subtotal ...................................... $ 5,473,126 20.3 92,900
============ ===== =========

Kline Toyota Greenbrier/Kline Chevrolet .......... Chesapeake, VA $ 6,989,076 11.2 71,280
Kline (Land) ..................................... Chesapeake, VA 1,529,567 14.0 --
------------ ----- ---------
Subtotal ...................................... $ 8,518,643 25.2 71,280
============ ===== =========
Total $167,271,580 208.7 1,392,998
============ ===== =========
</TABLE>
- -------------
(1) The acquisition of the Cross-Continent Properties located in Las Vegas,
Nevada and Denver, Colorado are scheduled to close during the second quarter
of 1998.
(2) The purchase prices for the Properties are allocated among the initial
selling groups as follows:

<TABLE>
<CAPTION>
ALLOCATION OF PURCHASE PRICE
--------------------------------------
TOTAL PURCHASE ASSUMED NUMBER OF
SELLING GROUP PRICE CASH MORTGAGE DEBT UNITS
- -------------------------------------------- -------------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
Pohanka Automotive Group ................. $ 31,384,533 $ 599,534 $13,382,514 1,160,162
Rosenthal Automotive Organization ........ 65,240,602 729,931 14,232,309 3,351,886
Sheehy Auto Stores ....................... 14,064,573 58,649 8,885,855 341,336
Cherner Automotive Group ................. 6,424,355 34,412 4,769,850 108,008
Cross-Continent Auto Retailers, Inc. ..... 36,165,748 36,165,748 -- --
Good News Auto Mall ...................... 5,473,126 5,473,126 -- --
Kline Automotive Group ................... 8,518,643 8,518,643 -- --
------------ ----------- ----------- ---------
Totals .................................. $167,271,580 $51,580,043 $41,270,528 4,961,392
============ =========== =========== =========
</TABLE>

(3) Included in the purchase price are certain estimated acquisition fees and
expenses (i.e consulting and attorney fees).
(4) On February 19, 1998, the Company entered into a line of credit with
NationsBank, N.A. in the amount of $10 million and borrowed approximately
$5.1 million. The line of credit accrues interest payable monthly in arrears
at a floating interest rate equal to Libor + 1.50%. The line of credit will
mature in August 1998. The line of credit is secured by first mortgage liens
on the Properties acquired by the Company from Affiliates of Pohanka
(collectively, the "Pohanka Mortgage"). At maturity, the principal payment
in the aggregate amount of the then outstanding borrowings plus any accrued
and unpaid interest will be due and payable, unless the line of credit is
renewed or is refinanced as is currently contemplated by the Company. The
line of credit may be paid in full at any time without prepayment penalty or
premium. In addition, approximately $2.3 million of the line of credit has
been guaranteed by Affiliates of Mr. Sheehy and approximately $2.8 million
has been guaranteed by Affiliates of, or persons related to, Mr. Rosenthal.
(5) The Company has acquired the land but not the improvements occupying the
site of Chapman Ford Sales.

20
<PAGE>

Set forth below is certain information relating to the Leases of the
Properties owned by the Company as of March 20, 1998 or contracted to be
acquired by the Company as of December 31, 1997:

ANNUAL BASE LEASE FIXED EXTENDED
LESSEE (DEALERSHIPS)(1) LOCATION RENT EXPIRATION TERM TERM(2)
- ---------------------------------------------------- ------------------ ----------- ---------- -------- --------------------
<S> <C> <C> <C> <C> <C>
Geneva Enterprises, Inc.
d/b/a Rosenthal Nissan/Mazda(3) ................... Tysons Corner, VA $2,499,396 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a Rosenthal
Mazda ............................................ Arlington, VA 619,930 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a Rosenthal
Chevrolet/Jeep/Eagle (Storage Lot) ............... Arlington, VA 561,835 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a Rosenthal
Honda(3) ......................................... Tysons Corner, VA 510,536 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a Rosenthal
Jaguar ........................................... Tysons Corner, VA 510,524 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a Geneva
Management (Related Business) .................... Arlington, VA 452,902 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a Rosenthal Isuzu .... Gaithersburg, MD 448,739 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Nissan Gaithersburg ........................ Gaithersburg, MD 348,135 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a Rosenthal
Acura ............................................ Gaithersburg, MD 328,152 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal Chevrolet/Jeep/Eagle ............. Arlington, VA 311,996 Feb. 2008 10 years 2-10 year options
Maryland Imported Cars, Inc.
d/b/a Gaithersburg Mazda(4) ...................... Gaithersburg, MD 259,758 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a Rosenthal Honda
(2-acre lot)(3) .................................. Tysons Corner, VA 178,533 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a Rosenthal Honda
(Body Shop)(3) ................................... Tysons Corner, VA 127,365 Feb. 2008 10 years 2-10 year options
----------
Subtotal ......................................... $7,157,801
==========
Pohanka Properties, Inc. (Chevrolet/GEO and
Acura)(5) ........................................ Chantilly, VA $ 839,549 Feb. 2009 11 years 2-10 year options
Pohanka Properties, Inc. (Saturn, Isuzu,
Oldsmobile and GMC Truck)(5) .................... Marlow Heights, MD 475,608 Feb. 2009 11 years 2-10 year options
Pohanka Virginia Properties Partnership
(Saturn)(5) ...................................... Bowie, MD 447,171 Feb. 2008 10 years 2-10 year options
Pohanka Properties, Inc. (Honda)(5) .............. Marlow Heights, MD 406,575 Feb. 2009 11 years 2-10 year options
Pohanka Properties, Inc. (Lexus)(5) ............... Chantilly, VA 377,366 Feb. 2009 11 years 2-10 year options
Pohanka Virginia Properties Partnership
(Cadillac, Hyundai, Nissan, Oldsmobile &
Kia)(5) .......................................... Fredricksburg, VA 377,828 Feb. 2008 10 years 2-10 year options
Pohanka Virginia Properties Partnership
(Undeveloped Dealership Lot)(5) .................. Chantilly, VA 270,010 Feb. 2008 10 years 2-10 year options
Pohanka Properties, Inc. (Hyundai &
Subaru)(5) ....................................... Marlow Heights, MD 171,788 Feb. 2009 11 years 2-10 year options
Pohanka Properties, Inc. (Body Shop)(5) ........... Marlow Heights, MD 77,340 Feb. 2009 11 years 2-10 year options
----------
Subtotal ......................................... $3,443,235
==========
</TABLE>

<TABLE>
<CAPTION>
ANNUAL BASE LEASE FIXED EXTENDED
LESSEE (DEALERSHIPS)(1) LOCATION RENT EXPIRATION TERM TERM(2)
- ------------------------------------------- ------------------ -------------- --------------- --------- --------------------
<S> <C> <C> <C> <C>
Sheehy Ford of Springfield, Inc. (Ford & Springfield, VA 662,340 Feb. 2008 10 years 2-10 year options
Kia) .
Sheehy Ford, Inc.(6) ...................... Philadelphia, PA 330,000 Oct. 2007 9 years 2-10 year options
Sheehy Lincoln-Mercury, Inc.
(Lincoln-Mercury & Mitsubishi) .......... Woodbridge, VA 282,252 Feb. 2008 10 years 2-10 year options
Sheehy Ford, Inc. ......................... Marlow Heights, MD 255,840 Feb. 2008 10 years 2-10 year options
-----------
Subtotal ................................. $1,530,432
===========

Cherner Lincoln Mercury-Annandale, Inc. .. Annandale, VA $ 702,894 Feb. 2008 10 years 2-10 year options
===========

T. West Sales & Service, Inc. (Toyota) (7).. Las Vegas, NV $ 1,452,000 Feb. 2008 10 years 2-10 year options
Douglas Motors, Inc. (Toyota)(7) .......... Denver, CO 979,000 Feb. 2008 10 years 2-10 year options
Plains Chevrolet, Inc.(7) ................. Amarillo, TX 517,000 Feb. 2008 10 years 2-10 year options
Westgate Chevrolet, Inc.(7) ............... Amarillo, TX 484,000 Feb. 2008 10 years 2-10 year options
Midway Chevrolet, Inc.(7) ................. Amarillo, TX 341,000 Feb. 2008 10 years 2-10 year options
Quality Nissan, Inc.(7) ................... Amarillo, TX 110,000 Feb. 2008 10 years 2-10 year options
-----------
Subtotal ............................... $ 3,883,000
===========
Good News Salisbury, Inc.(8) .............. Salisbury, MD $ 469,920 Feb. 2008 10 years 2-10 year options
Price Buick-Pontiac, Inc. and the Price
Organization(9)(10).................... Salisbury, MD 153,936 Dec. 2006 8 years n/a
-----------
Subtotal................................... $ 623,856
===========
Kline Chevrolet Sales Corp.(11) ........... Chesapeake, Va $ 960,000 Feb. 2008 10 years 3-10 year options
=========== (12)

Total ................................ $18,301,218
===========

</TABLE>
- --------------------
(1) The Company believes that all the Properties are adequately covered by
insurance.
(2) If any Lease is renewed for a second Extended Term, the Annual Base Rent
will be renegotiated at the time of renewal by the parties to reflect the
fair market rate at the renewal date.
(3) The Lessees may assign these Leases (subject to compliance with certain
conditions to the satisfaction of the Company), to a limited liability
company to be formed by Mr. Rosenthal or his Affiliates or related persons
as members.
(4) Guaranteed by Geneva Enterprises, Inc., an Affiliate of Mr. Rosenthal.
(5) Each Lease with an Affiliate of Pohanka Automotive Group has been
guaranteed by each other Lessee and Dealership affiliated with the Pohanka
Automotive Group.
(6) The occupant is Chapman Ford Sales, which is an third party unrelated to
Mr. Sheehy or the Company.
(7) Guaranteed by Cross-Continent.
(8) Master Lease covering all Properties acquired from Affiliates of Good News
Automotive, Inc. other than Price Buick-Pontiac.
(9) The occupant is Price Buick Pontiac, which is a third party unrelated to
Good News or the Company. The Company has assumed an existing Lease among
Price Buick-Pontiac, Inc. and the Price Organization (Lessees) and Meyers
and Rose (Lessors) dated December 10, 1991 and terminating December 31,
2006.
(10) Guaranteed by Warren A. Price and Good News Salisbury, Inc.
(11) Guaranteed by Kline Imports Chesapeake, Inc. The Property is occupied by
both Kline Chevrolet and Kline Toyota (subleased to Kline Chesapeake).
(12) If the Company is required by the Lessee to pay for repairs to such
Property in an amount in excess of $50,000 during the 29th Lease year, the
Lessee will be required to extend such Lease for a third 10-year term at a
rental rate equal to fair market value.

21
<PAGE>

ITEM 3-LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings. Pursuant to the Leases,
the Lessees will indemnify the Company from and against all liabilities, costs
and expenses imposed upon or asserted against the Company as owner of the
Properties on account of certain matters relating to the operation of the
Properties by Lessee. The Lessee, where appropriate, and the Seller pursuant
to the Contribution Agreement, will indemmnify the Company and its employees,
directors, trustees, shareholders, agents and Affiliates, on account of certain
matters relating to the ownership of a Property prior to its acquisition by
the Company. See "Item 1-Business--Properties, Leases, Typical Lease Terms and
Dealerships--Typical lease Terms--Indemnification."

ITEM. 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company was organized on October 20, 1997 and acquired its first
Properties on February 19, 1998 simultaneously with the closing of its Offering.
No matters were submitted to a vote of shareholders during the fourth quarter of
the year ended December 31, 1997.

22
<PAGE>

PART II

ITEM 5-MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS

Market Information. The Company's Common Shares began trading on the Nasdaq
National Market ("Nasdaq") on February 13, 1998, under the symbol "CARS."
Because the Company's Common Shares commenced trading on the Nasdaq on February
13, 1998, no sales prices for the Company's Common Shares are available for
periods prior to that date.

Holders. On March 25, 1998, the reported closing sale price on Nasdaq was
$19.00 per share and there were approximately 19 holders of record of the Common
Shares of the Company.

Concurrently with the initial closing of the Offering on February 19, 1998,
the Operating Partnership issued 20,000,000 Units to the Company in
consideration of the proceeds of the Offering of 20,000,000 Common Shares, and
issued 4,961,392 Units to the Sellers of certain Properties to the Company in
consideration of the sale of such Properties. On February 19, 1998, the
Operating Partnership issued 1,792,115 Units to the Company in consideration of
the Proceeds of the FBR Offering. On March 12, 1998, the Operating Partnership
issued an additional 3,000,000 Units to the Company in consideration of the
proceeds of the Offering of 3,000,000 Common Shares pursuant to the exercise of
the underwriters' over-allotment option in full. Holders of Units, other than
the Company, after the first anniversary of the issuance of such Units may put
such Units for redemption to the Operating Partnership for cash, or at the
Company's option, to the Company for Common Shares on a one-to-one basis.

As of December 31, 1997, there was one holder of the Company's Common Shares.
In connection with the formation of the Company on October 20, 1997, the Company
issued to Thomas D. Eckert, Chief Executive Officer and President of the
Company, ten Common Shares for a purchase price of $10.00 per share. Such sale
was made by the Company in reliance upon the exemption from registration under
Section 4(2) of the Securities Act. Such Common Shares were repurchased by the
Company for a cash purchase price of $10.00 per share concurrently with the
consummation of the Offering of 20,000,000 Common Shares on February 19, 1998.
There were no other sales of unregistered securities of the Company during the
year ended December 31, 1997.

Distributions. The Company has not declared or paid any cash distributions on
its Common Shares since its organization on October 20, 1997. The Company plans
to pay regular quarterly distributions to its shareholders of at least 95% of
its taxable income (as defined in Section 857(b)(2) of the Internal Revenue Code
of 1986, as amended (the ''Code'')) each year so as to qualify for the benefits
accorded to a real estate investment trust under the Code. The Board of Trustees
may vary the amount which will be distributed to holders of the Common Shares
based upon the actual results of operations of the Company, including (i) the
timing of the investment of the proceeds of the Offering and the FBR Offering,
(ii) the rent received from the Lessees, (iii) the ability of the Lessees of the
Properties to meet their obligations under the Leases, and (iv) the operating
expenses of the Company.

23
<PAGE>

ITEM 6-SELECTED FINANCIAL INFORMATION

The following table sets forth selected consolidated financial and operating
information on a historical basis for the Company. The following information
should be read in conjunction with the consolidated financial statements and
notes thereto as well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
For the Period
October 20, 1997
(date of organization)
through December 31, 1997
-------------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Total expenses (1) $ 649,783
Net loss 649,783

CASH FLOW DATA:
Cash flows used in operating activities (1) $437,878
Cash flows used in investing activities 546,430
Cash flows from financing activities (2) 1,008,842

As of December 31, 1997
BALANCE SHEET DATA: -------------------------
Total assets $1,011,415
Debt outstanding under short-term
revolving line of credit (2) 1,000,000
Total shareholders' deficit 649,683

</TABLE>

(1) Represents primarily salaries, office, audit and other general and
administrative expenses paid by the Company.
(2) Represents proceeds from the line of credit extended to the Company by
Friedman, Billings, Ramsey Group, Inc. which was paid in full from the
proceeds of the Offering.

24
<PAGE>

ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the "Selected
Financial Information Data" and the Consolidated Financial Statements for the
Company and the notes thereto appearing elsewhere in this Report.

OVERVIEW

The Company was organized as a Maryland real estate investment trust on
October 20, 1997, and intends to make an election to qualify under the Code as a
real estate investment trust commencing with its taxable year ending December
31, 1998. Substantially all of the Company's revenues are expected to be derived
from: (i) rents received under long-term triple-net Leases of Properties
operated as Dealerships and Related Businesses, including the 34 Properties that
the Company has acquired prior to March 20, 1998 and which the Company has
leased back to Affiliates of such Sellers pursuant to the Leases (which are in
some cases guaranteed by a Seller or its Affiliate) and (ii) interest earned
from the temporary investment of funds, including the net proceeds of the
Offering and the FBR Offering, in short-term investments. The Annual Base Rent
for each Property leased by the Company has been initially set at a fixed amount
and the Annual Base Rent will be adjusted upward periodically based on a factor
of the CPI.

The Company will incur operating and administrative expenses including,
principally, compensation expense for its executive officers and other
employees, professional fees and various expenses incurred in the process of
acquiring additional Properties. The Company will be self-administered and
managed by its executive officers and staff, and will not engage a separate
advisor or pay an advisory fee for services, although the Company will engage
legal, accounting, tax and financial advisors from time to time.

The primary non-cash expense of the Company will be the depreciation of its
Properties. The Company expects to depreciate buildings and improvements on the
Properties currently owned by it over a 39.5-year and 20-year period for tax and
financial reporting purposes, respectively. The Company will not own or lease
any significant personal property, furniture or equipment at any Property
currently owned by it.

The Company also expects to employ leverage, using a combination of debt or
other equity securities and a bank credit facility, to fund additional
investments, and will incur long and short-term indebtedness, and related
interest expense, from time to time.

The Company intends to make distributions to its shareholders in amounts not
less than the amounts required to maintain its status as a real estate
investment trust under the Code. The Company's ability to make distributions
will depend on actual results of operations, including (i) the timing of the
investment of the proceeds of the Offering and the FBR Offering, (ii) the rent
received from the Lessees, (iii) the ability of the Lessees of the Properties to
meet their obligations under the Leases, and (iv) the operating expenses of the
Company.

RESULTS OF OPERATIONS

The Company has had no operations prior to October 20, 1997 (the date of
organization). The Company's future results of operations will depend upon the
Company's receipt of payments under the Leases, the acquisition of the
additional Properties, and the terms of any other investments the Company may
make.

The Company incurred a net loss of $649,783 for the period from October 20,
1997 (date of organization) through December 31, 1997. As indicated above, the
Company closed on the acquisition of 34 Properties and leased those
Properties to Affiliates of the Sellers in 1998, and therefore no rental income
was received from the Leases in 1997. However, the Company did record total
expenses of $649,783 for that period, which represent payroll and
25
<PAGE>

related benefits, overhead costs and miscellaneous expenses incurred during the
start-up phase of the acquisition and Offering process.

Environmental Matters. Each Lease and Contribution Agreement to which the
Company is a party provides for various representations and warranties by the
Lessee and Seller, respectively, relating to environmental matters with respect
to each Property. The Phase 1 environmental reports delivered by Sellers of
certain Properties acquired by the Company indicate that petroleum products have
been released from leaking underground storage tanks removed from three of such
Properties and asbestos is present at two of such Properties. Each Lease and
Contribution Agreement for Properties acquired by the Company require such
Lessee and such Seller to indemnify and hold harmless the Company from and
against third party liabilities, costs and expenses imposed upon or asserted
against the Company or such Property on account of, among other things, any
federal, state or local law, ordinance, regulation, order or decree relating to
the protection of human health or the environment in respect of such Property.
Each Lessee of Property owned by the Company is obligated to comply with all
environmental laws. Notwithstanding the terms of such Leases or Contribution
Agreements, the environmental laws impose liabilities on the Company as the
owner of the Properties. The Company, therefore, could incur liabilities
regardless of the provisions of the Leases or Contribution Agreements to which
the Company is a party, especially if any Lessee and/or Seller defaults on its
or their obligations to the Company. See "Item 1 -- Business -- Governmental
Regulations Affecting the Properties."

LIQUIDITY AND CAPITAL RESOURCES

The Company anticipates that the proceeds of the Offering and the FBR
Offering, together with its cash from operations, and any bank credit facility
anticipated to be available to the Company, will provide adequate liquidity to
acquire additional Properties, conduct its operations, fund administrative and
operating costs, interest payments and acquisitions, and allow distributions to
shareholders in accordance with the Code's requirements for qualification as a
real estate investment trust and to avoid any corporate level federal income or
excise tax.

In order to qualify as a real estate investment trust for federal income tax
purposes, the Company will be required to make substantial distributions to its
shareholders. The following factors, among others, will influence the decisions
of the Board of Trustees regarding distributions: (i) Annual Base Rent under the
Leases; and (ii) returns from short-term investments pending application of the
net proceeds of the Offering and the FBR Offering. Although the Company will
receive most of its rental payments on a monthly basis, it intends to make
distributions quarterly. Amounts accumulated for distribution will be invested
by the Company in short-term investments.

Under the terms of the Leases for Properties owned by the Company, each Lessee
is responsible for substantially all expenses associated with the operation of
the related Property, such as taxes and other governmental charges, insurance,
utilities, service, maintenance and any ground lease payments. See ''Item 1-
Business--The Properties, Leases, Typical Lease Terms and Dealerships.'' As a
result of these arrangements, the Company does not believe it will be
responsible for any major expenses in connection with the Properties owned by it
during the terms of the respective Leases. The Company anticipates entering into
similar Leases with respect to additional Properties. After the term of a
Lease expires, or in the event a Lessee is unable to meet its obligations, the
Company anticipates that any expenditures it might become responsible for in
maintaining the related Property will be funded by cash from operations and, in
the case of major expenditures, possibly by borrowings. To the extent that
unanticipated expenditures or significant borrowings are required, the Company's
liquidity and ability to make distributions to shareholders may be adversely
affected.

On February 19, 1998, the Company entered into a bank credit facility with
NationsBank, N.A. for $10 million, approximately $5.1 million of which was drawn
down on that date. The NationsBank line of credit is secured by the Properties
that the Company acquired from Affiliates of Pohanka. See ''Item 2-Properties."
The Company also intends to obtain an additional line of credit for acquisition
of Properties and may borrow additional amounts in connection with the
acquisition of additional Properties, the renovation or expansion of Properties,
or, as necessary, to meet certain distribution requirements imposed on a real
estate investment fund under the Code. The Company may also raise additional
long-term capital by issuing, in public or private transactions, debt or

26
<PAGE>

other equity securities, but the availability and terms of any such issuance
will depend upon the market and other conditions. The Company anticipates that
as a result of its initially low ratio of debt to total market capitalization
and its intention to maintain such ratio at no more than 50%, it will be able to
obtain financing for its long-term capital needs. However, there can be no
assurance that additional financing or capital will be available, or that the
terms will be acceptable or advantageous to the Company.

Acquisitions will be made subject to the investment objectives and policies of
the Company to maximize both current income and long-term growth in income. The
Company's liquidity requirements with respect to future acquisitions may be
reduced to the extent the Company uses Common Shares or Units as consideration
for such purchases.

YEAR 2000

The Company has conducted a comprehensive review of its internal computer
systems and related software to identify issues related to year 2000 compliance.
Accordingly, the Company has determined that it has no material risks related to
the ability of its hardware and software to recognize the year 2000 and beyond
as valid dates. The Company's financial and operational software programs are
purchased from outside vendors who have resolved year 2000 issues. During 1998,
the Company will continue to monitor year 2000 issues (primarily using internal
staff). The Company does not expect any material adverse impact to its business
operations from service providers' inability, if any, to become year 2000
compliant.

27
<PAGE>

ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT

Pages
-----
<S> <C>
Report of Independent Public Accountants 29

Consolidated Balance Sheet 30

Consolidated Statement of Operations 31

Consolidated Statement of Shareholders' Deficit 32

Consolidated Statement of Cash Flows 33

Notes to Consolidated Financial Statements 34 to 39

</TABLE>

SCHEDULES FILED AS PART OF THIS REPORT

All Schedules have been omitted because the required information of such
Schedules is not present in amounts sufficient to require submission of the
schedule or because the required information is included in the consolidated
financial statements.

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Capital Automotive REIT:

We have audited the accompanying consolidated balance sheet of Capital
Automotive REIT (a Maryland real estate investment trust, the "Company") and
subsidiary as of December 31, 1997 and the related consolidated statements of
operations, changes in shareholders' deficit and cash flows for the period from
October 20, 1997 (date of organization) through December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Capital Automotive
REIT and subsidiary as of December 31, 1997 and the results of their operations
and their cash flows for the period from October 20, 1997(date of organization)
through December 31, 1997 in conformity with generally accepted accounting
principles.

/s/ Arthur Andersen LLP

Washington, D.C.
March 19, 1998

29
<PAGE>

CAPITAL AUTOMOTIVE REIT

CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
ASSETS
<S> <C>
CASH $ 24,534
DEFERRED ACQUISITION COSTS 516,369
FIXED ASSETS:
Furniture, fixtures and equipment 30,061
Accumulated depreciation (798)
-----------
Total fixed assets 29,263
-----------
DEFERRED OFFERING COSTS 437,899
OTHER ASSETS 3,350
-----------
Total assets $1,011,415
===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIT
<S> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 661,098
Short-term revoling line of credit 1,000,000
-----------
Total liabilities 1,661,098
-----------

SHAREHOLDERS' DEFICIT:
Common stock, par value $.01, 10 shares issued and outstanding -
Additional paid-in-capital 100
Accumulated deficit (649,783)
-----------
Total shareholders' deficit (649,683)
-----------
Total liabilities and shareholders' deficit $1,011,415
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

30
<PAGE>

CAPITAL AUTOMOTIVE REIT

CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM OCTOBER 20, 1997 (DATE OF ORGANIZATION)
THROUGH DECEMBER 31, 1997

<S> <C>
REVENUES:
Rental income $ -

EXPENSES:
General and administrative:
Payroll and related expenses 476,587
Professional fees 100,578
Other 71,820
----------
Total general and administrative 648,985
Depreciation expense 798
----------
Total expenses 649,783
----------
NET LOSS $ 649,783
==========

</TABLE>

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

31
<PAGE>

CAPITAL AUTOMOTIVE REIT

CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT

FOR THE PERIOD FROM OCTOBER 20, 1997 (DATE OF ORGANIZATION)
THROUGH DECEMBER 31, 1997

<TABLE>
<S> <C>
BALANCE, October 20, 1997 $ -
Net loss (649,783)
Capital contribution 100
----------
BALANCE, December 31, 1997 $ (649,683)
==========
</TABLE>

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

32
<PAGE>

CAPITAL AUTOMOTIVE REIT

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM OCTOBER 20, 1997 (DATE OF ORGANIZATION)
THROUGH DECEMBER 31, 1997

<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net loss $ (649,783)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 798
Increase in other assets (3,350)
Increase in accounts payable and accrued expenses 214,457
-------------
Net cash used in operating activities (437,878)
-------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment (30,061)
Deferred acquisition costs (516,369)
-------------
Net cash used in investing activities (546,430)
-------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term revolving line of credit 1,000,000
Capital contribution 100
Advance from operating account 446,641
Deferred offering costs (437,899)
-------------
Net cash provided by financing activities 1,008,842
-------------
NET INCREASE IN CASH 24,534
CASH, BEGINNING OF THE PERIOD -
-------------
CASH, END OF THE PERIOD $ 24,534
=============

</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

33
<PAGE>

CAPITAL AUTOMOTIVE REIT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997

1. THE COMPANY:

Capital Automotive REIT (the "Company") was formed as a Maryland real estate
investment trust on October 20, 1997 and was initially capitalized on such date
through the sale of 10 shares of common stock. The Company's mission is to
invest in the real property and investments used by operators of motor vehicle
dealerships and related businesses, through its ownership interest in Capital
Automotive L.P. (the "Operating Partnership").

The Company's sole activity through December 31, 1997, consisted of the
organization and start-up of the Company, as well as costs incurred as related
to real property acquisition and the Company's initial public offering (See
Note 4). As of December 31, 1997, the Operating Partnership had not completed
any real property acquisitions.

As of December 31, 1997, the Company was in the process of filing a Registration
Statement for 20.0 million shares of common stock (the "IPO") (excluding the
underwriters' over-allotment option of 3,000,000 Common Shares). In addition,
FBR Asset Investment Corporation, an affiliate of Friedman, Billings, Ramsey &
Co., Inc. ("FBR"), the representatives of the underwriters in the IPO, was to
separately purchase 1,792,115 common shares of the Company at the initial public
offering price (net of underwriting discounts and commissions) (the "FBR
Offering").

On February 19, 1998, the Company completed the IPO and FBR Offering. On
March 12, 1998, the Company completed the sale of the 3,000,000 Common Shares
subject to the underwriters' over-allotment option. (See Note 4.)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") and include
all accounts of the Company and the Operating Partnership. All intercompany
amounts have been eliminated in the consolidation.

CASH

Cash includes cash on hand. As of December 31, 1997, the Company had a bank
overdraft in the amount of $446,641. The overdraft was created due to a timing
difference between when the cash was disbursed and when the cash was received
from the draw down on the short-term revolving line of credit. (See Note 3.)
This amount has been included in accounts payable and accrued expenses in the
accompanying consolidated balance sheet.

DEFERRED ACQUISITION COSTS

Deferred acquisition costs include consulting and other costs incurred by the
Company as related to the potential acquisition of real property and
improvements. These costs have been capitalized and will be either written off
as a period expense if the related acquisition

34
<PAGE>

is unsuccessful or included in the purchase price of the related successful
acquisition and depreciated consistent with the real property.

DEFERRED OFFERING COSTS

Deferred offering costs consist of legal, registration fees and other costs paid
in connection with the Company's IPO. These costs have been capitalized as paid
and will be recorded as a reduction of shareholders' equity upon completion of
the IPO.

FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment are recorded at cost. Depreciation is
calculated on a straight-line basis over the estimated useful lives of the
assets, approximately three to five years.

INCOME TAXES

The Company intends to qualify as a real estate investment trust under the
provisions of the Internal Revenue Code of 1986, as amended. As a real estate
investment trust, the Company is required to distribute at least 95 percent of
its taxable income to shareholders and meet certain other requirements.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

RISK FACTORS

The Company is in its initial stage of operations, and therefore is subject to
several risk factors, including the following:

. The lack of operating history of the Company;

. Dependence on the ability of lessees to pay rent or perform obligations under
leases;

. Taxation of the Company as a regular corporation if it fails to qualify as a
real estate investment trust:

. The Company's dependence on key officers and trustees of the Company; and

. The general risks to commercial real estate ownership and investment.

35
<PAGE>

3. RELATED PARTY TRANSACTIONS:

In October 1997, and amended as of January 30, 1998, Friedman, Billings, Ramsey
Group, Inc., an affiliate of FBR, issued to the Company a short-term revolving
line of credit in the amount of approximately $2.5 million. Draws on the line
of credit were used by the Company for organizational costs and offering costs,
and were repaid with the proceeds from the IPO. Draws on the line of credit
bear interest at a rate of 10 percent per annum. As of December 31, 1997, the
Company had drawn down $1 million under the line of credit.

4. SUBSEQUENT EVENTS:

INITIAL PUBLIC OFFERING

In February 1998, the Company completed an IPO of its common stock whereby
20.0 million shares were issued at $15 per share of common stock, resulting in
net proceeds of approximately $275.4 million, after underwriting discounts and
commissions and other expenses of the IPO. In addition, the Company received
an aggregate of $25 million from the proceeds of the FBR Offering. In March
1998, 3.0 million shares for the underwriters' over-allotment option were
issued at $15 per share of common stock, resulting in net proceeds of
approximately $41.9 million, after underwriting discounts and commissions. The
Company contributed the net proceeds of the IPO, over-allotment option and the
FBR Offering to the Operating Partnership in exchange for an equal number of
units in the Operating Partnership. Reconciliation of net proceeds from the
above is as follows (in thousands):

<TABLE>
<S> <C>
Proceeds of offerings $300,000
Underwriter discounts and commissions (21,000)
Offering expenses (3,565)
---------
Net proceeds $275,400
=========

Proceeds of over-allotment option $ 45,000
Underwriter discounts and commissions (3,150)
---------
Net proceeds $ 41,850
=========
</TABLE>

ACQUISITION OF INITIAL PROPERTIES

At the time of the IPO, the Company, through the Operating Partnership, had
entered into agreements to acquire 36 parcels of real property and improvements
(the "Initial Properties") from the affiliates of seven motor vehicle dealers
(the "Dealers") on which 54 franchisees of 24 brands of motor vehicles are
located. Concurrent with the IPO, the Operating Partnership acquired 21 of the
Initial Properties that are located primarily in suburban communities of the
Washington, D.C. Metropolitan Area and Pennsylvania. These properties were
contributed by the respective Dealers to the Operating Partnership in exchange
for the assumption of approximately $41.3 million of mortgage debt (immediately
repaid by Company with proceeds of the IPO) and approximately 5.0 million
Operating Partnership Units, which represent a 16.7 percent limited partnership
interest in the Operating Partnership.

36
<PAGE>

Subsequent to the IPO, the Company acquired 13 of the Initial Properties located
on the Eastern Shore of Maryland, Texas and southern Virginia. These properties
were contributed by their prior owners to the Operating Partnership in exchange
for approximately $27.2 million in cash. The acquisition of the Cross-Continent
Initial Properties located in Las Vegas, Nevada and Denver, Colorado are
scheduled to close during the second quarter of 1998 in exchange for
approximately $22.9 million in cash.

Unaudited summarized pro-forma information for the Company, assuming the IPO,
over-allotment option, FBR Offering and acquisition of the Initial Properties
occurred as of December 31, 1997, and January 1, 1997, for the balance sheet
and statement of operations, respectively, is as follows (in thousands):

BALANCE SHEET DATA

<TABLE>
<S> <C>
Net real estate $167,272
Total assets 422,694
Long-term debt 5,100
Minority interest 69,486
Shareholders' equity 346,571
</TABLE>

INCOME STATEMENT DATA

<TABLE>
<S> <C>
Total revenue $15,870
Total expenses 7,919
Minority interest 1,326
Net income 6,625
Net income per common share 0.81
Weighted average common shares outstanding 8,206
</TABLE>

The above mentioned pro forma information does not include rental income of
approximately $2.4 million and depreciation of approximately $401,000 as
related to the two Cross-Continent Initial Properties, as they are still under
construction and acquisition has not closed.

SEE ADDITIONAL INFORMATION RELATING TO THE INTIAL PROPERTIES ON THE INITIAL
PROPERTIES, LEASES AND DEALERSHIPS IN PART I, "ITEM 2 - PROPERTIES" OF THE FORM
10-K

RENTAL INCOME

As part of the acquisitions described above, the Company will enter into lease
agreements (the "Leases") with the operators of the Dealers (the "Lessees"). The
Leases generally have initial terms of eight to eleven years, and generally may
be extended upon the same terms and conditions for one or two additional ten-
year terms, at the option of the Lessees. The Company anticipates that the term
of future leases will range from ten to 15 years. The Leases are triple-net
leases and require the Lessees to pay substantially all expenses associated with
operations, including taxes, insurance, utilities, service, maintenance and
ground lease payments. Base rent will be increased annually over the

37
<PAGE>

term of the Leases by a factor of the consumer price index. Future minimum
rental payments will be received as follows (in thousands):

<TABLE>
<CAPTION>
For the Year Ended
December 31,
<S> <C>
1998 $ 13,634
1999 15,870
2000 15,870
2001 15,870
2002 15,870
Thereafter 83,299
--------
$160,413
========
</TABLE>

The future minimum rental payments above do not include annual rent of
approximately $2.4 million for the two Cross-Continent Initial Properties as the
sale-leaseback has not been closed. Two of the Dealers with whom the Company has
entered into Leases are members of the Board of Trustees. Annual base revenue
related to these two Dealers in the aggregate is approximately $10.6 million.

LINE OF CREDIT

In February 1998, the Company entered into a secured revolving line of credit
from NationsBank providing for a borrowing capacity of $10 million, of which
$5.1 million was drawn down at the closing of the Offering. Borrowings bear
interest at a fluctuating rate equal to the Libor plus 1.50 percent (7.31
percent as of December 31, 1997). The line of credit is secured by a blanket
mortgage or mortgages on all of the Initial Properties acquired from affiliates
of Mr. Pohanka. The line of credit matures in August 1998. At maturity, the
principal payment in the aggregate amount of the then outstanding borrowings
plus any accrued and unpaid interest will be due and payable, unless the line of
credit is renewed or is refinanced as is currently being contemplated by the
Company. The line of credit may be paid in full at any time without prepayment
penalty or premium. In addition, approximately $2.8 million of the line of
credit is guaranteed by affiliates of Mr. Rosenthal and approximately $2.3
million is guaranteed by affiliates of Mr. Sheehy.

STOCK OPTION PLANS

The Company has established a plan (the "Plan") for the purpose of attracting
and retaining trustees, executive officers and other key employees. Each option
granted pursuant to the Plan shall be designated at the time of grant as either
an "incentive share option" or as a "non-qualified share option." Options in the
amount of 8 percent of the aggregate number of Common Shares outstanding (on a
fully diluted basis (i.e. assuming exercise of all outstanding options and
warrants for Common Shares and Units and redemption of such Units and Units
issued to Sellers for Common Shares) and including exercise of the overallotment
option in full) are available for grant under the Plan. The options will become
exercisable, subject to certain conditions, at a rate of 25 percent per year
over a four-year period, commencing on the first anniversary of the date of
grant and with a term of ten years.

Concurrent with the closing of the IPO, the Company granted options in the
amount of 7 percent of the aggregate number of Common Shares outstanding (on a
fully diluted basis and including exercise of the overallotment option in full).
Such options were granted
38
<PAGE>

under the Plan to several key officers and employees of the Company, exercisable
at the IPO price.

STOCK WARRANTS

Concurrent with the IPO, the Company issued warrants to two affiliates of the
Dealers, representing the right to acquire units in the Operating Partnership in
the aggregate amount of 4 percent of the Common Shares outstanding (on a fully
diluted basis and including the exercise of the over-allotment option in full).
In addition, the Company issued warrants to FBR, representing the right to
acquire 1,277,794 Common Shares of the Company. These warrants are exercisable
on the effective date of the IPO and for a period of five years thereafter,
with an exercise price equal to the IPO price.

EMPLOYMENT AGREEMENTS

As of December 31, 1997, the Company had entered into employment agreements with
each of its four executive officers. The Company had assigned the employment
agreements to the Operating Partnership effective January 1, 1998. The
agreements are for a four-year term and provide that the executive officers
agree to devote their full time to the operation of the Company and Operating
Partnership.

<PAGE>

ITEM 9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

ITEM 10-TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT

TRUSTEES, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth certain information concerning each of the
Company's trustees, executive officers and key employees:
<TABLE>
<CAPTION>

NAME AGE POSITION
- -------------------------- --- ----------------------------------------------------
<S> <C> <C>

John J. Pohanka(1) 69 Chairman of the Board of Trustees
Thomas D. Eckert 50 President and Chief Executive Officer, Trustee
Scott M. Stahr 41 Executive Vice-President and Chief Operating Officer
Donald L. Keithley 58 Executive Vice-President of Business Development
David S. Kay 31 Vice President and Chief Financial Officer
Robert M. Rosenthal(1) 69 Trustee
John E. Reilly (1)(2) 71 Trustee
William E. Hoglund(1)(2) 63 Trustee
William R. Swanson(1) 50 Trustee

- -------------
</TABLE>
(1) Messrs. Pohanka, Rosenthal, Reilly and Hoglund joined the Board of Trustees
of the Company on February 11, 1998. Mr. Swanson joined the Board of
Trustees of the Company on February 19, 1998.

(2) Members of Audit Committee.

The Company's Declaration of Trust requires that within 90 days of the closing
of the Offering, the Board of Trustees will increase the size of the Board of
Trustees to not less than nine and not more than 15 members, a majority of whom
will be unaffiliated with the Company, the Sellers, the Lessees or Friedman,
Billings, Ramsey & Co., Inc. (the "Independent Trustees"). Each trustee will
hold office until the next annual meeting of shareholders of the Company and his
successor is elected and qualified.

John J. Pohanka has served as the Chairman of the Board of Trustees of the
Company since February 11, 1998. Mr. Pohanka is the Chairman of the Pohanka
Automotive Group. Mr. Pohanka has been involved in the automotive industry for
almost 50 years, and is a member of the second-generation of the Pohanka family
to be involved in the automotive industry, with the first Pohanka dealership
having been founded in 1919. The Pohanka Automotive Group is currently comprised
of eight Dealerships, each of which is located in the Washington, D.C.
metropolitan area. In 1996, the Pohanka Automotive Group's Dealerships sold more
than 11,900 new and used motor vehicles. The Pohanka Automotive Group's
Dealerships have received numerous awards, including the Time Magazine Quality
Dealer Award. Mr. Pohanka has been active in a number of national and local
industry and business groups during his career, having served as a past
President of the National Automobile Dealers Association, a past President of
the National Capitol Area Automotive Trade Association, and a past Chairman of
the National Institute for Automotive Service Excellence, a group which he co-
founded. Mr. Pohanka also is a co-founder of the National Automobile Technicians
Educational Foundation. Mr. Pohanka is a graduate of Princeton University.

Thomas D. Eckert has served as the Company's President and Chief Executive
Officer and a member of the Board of Trustees since October 1997. From 1983 to
1997, Mr. Eckert was employed by Pulte Home Corporation ("Pulte"), the largest
homebuilding firm in the U.S. Most recently, Mr. Eckert served as President of
Pulte's Mid-Atlantic Region, which included oversight of that company's land
acquisition, development and homebuilding operations from Virginia to New
Jersey. Mr. Eckert is a former director of PHM Mortgage Company and is currently
a director of the Munder Funds, a $6.2 billion mutual fund group, and the
Celotex Corporation, a building products manufacturing entity with $700 million
in annual revenues. Prior to working at Pulte, Mr. Eckert was employed with the
public accounting firm of Arthur Andersen LLP for over seven years. Mr. Eckert
is a graduate of the University of Michigan. From November 1996 to November
1997, Mr. Eckert was a director of the FBR Funds, a diversified family of mutual
funds affiliated with Friedman, Billings, Ramsey & Co, Inc.

<PAGE>

Scott M. Stahr has served as the Company's Executive Vice-President and Chief
Operating Officer since October 1997. From 1985 to 1997, Mr. Stahr was a
Principal at LaSalle Partners, a Chicago-based real estate investment firm. In
that role, Mr. Stahr was responsible for sourcing, underwriting and negotiating
acquisitions of office, retail, parking and industrial properties. Mr. Stahr has
also advised and provided consulting services to corporate and institutional
clients on the acquisition, disposition and value enhancement of their real
estate-related holdings. Prior to joining LaSalle Partners, Mr. Stahr was a
practicing attorney with a broad commercial litigation and real estate practice.
Mr. Stahr is a graduate of the University of Virginia and holds a J.D. from the
University of Texas.

Donald L. Keithley has served as the Company's Executive Vice-President of
Business Development since November 1997. From 1984 to 1997, Mr. Keithley was
the J.D. Power and Associates Partner in charge of Dealer Relations. In 1996,
Mr. Keithley authored "The Revolution in Automotive Retailing: A Perspective of
the New Millennia," a book which addresses the rapidly evolving changes in the
dealership franchise system. He has given numerous presentations on this subject
to executives within the industry. Before his tenure at J.D. Power and
Associates, Mr. Keithley was employed by the Toyota Motor Company and the Ford
Motor Company for numerous years. Mr. Keithley received a Masters in Business
Administration from the University of California at Los Angeles, and currently
serves on the Business Advisory Council for Loyola Marymount University.

David S. Kay has served as the Company's Vice-President and Chief Financial
Officer since 1997. Prior to joining the Company, Mr. Kay was employed by the
public accounting firm of Arthur Andersen LLP in Washington, D.C. for
approximately ten years. His areas of expertise included emerging companies in
the automotive, retail, and distribution industries. While at Arthur Andersen
LLP, Mr. Kay provided clients with consultation regarding mergers and
acquisitions, business planning and strategy and equity financing. He also has
several years of experience in capital formation projects, roll-up transactions,
and initial public offerings for motor vehicle dealerships across the nation.
Mr. Kay has participated on an NADA task force and has given presentations at
NADA conventions and at other industry seminars. Mr. Kay is a graduate of James
Madison University.

Robert M. Rosenthal has served as a member of the Board of Trustees of the
Company since February 11, 1998. Mr. Rosenthal is the Chairman of the Rosenthal
Automotive Organization. Mr. Rosenthal has been involved in the automotive
industry for 50 years and during that time has founded more than 35 Dealerships.
Mr. Rosenthal is a second-generation member of the Rosenthal family involved in
the automotive industry. His father's association with Chevrolet began in 1919.
With 19 current Dealerships, the Rosenthal Automotive Organization was the
nation's 14th largest automotive group in terms of total new and used vehicle
retail sales in 1996. In 1996, the Rosenthal Automotive Group Dealerships sold
more than 31,500 new and used motor vehicles. Under Mr. Rosenthal's leadership,
the Rosenthal Automotive Organization's Dealerships have received numerous
national and local awards, including the Time Magazine Quality Dealer Award, the
International American Automobile Dealers/Sports Illustrated Dealer of
Distinction, the Acura Precision Team Award, the Jaguar Pride of Jaguar Award,
and the Mazda President's Award. Mr. Rosenthal has been active in a number of
national and local industry and business groups during his career, including,
the Washington New Automobile Dealers Association, of which he has served as a
past Director and President, the National Capitol Automobile Dealers
Association, the Chief Executives Organization and the World Business Council.
He also serves on the Board of Directors of First Virginia Bank and is an
officer and trustee of the Phillips Collection. Mr. Rosenthal is a graduate of
Temple University.

John E. Reilly has served as a member of the Board of Trustees of the Company
since February 11, 1998. Currently, Mr. Reilly is serving as a consultant to
American Isuzu Motors, Inc. From 1980 until his retirement in 1997, Mr. Reilly
was employed by American Isuzu Motors, Inc. At the time of his retirement, Mr.
Reilly was serving as a Senior Executive Advisor. His previous assignments at
American Isuzu Motors, Inc. included serving as Chairman and Senior Vice
President. During his tenure, Mr. Reilly oversaw the initial establishment of
the Isuzu franchise in the U.S. marketplace. Prior to his employment with
American Isuzu Motors, Inc., Mr. Reilly held a number of positions within the
automotive industry, including positions with General Motors Corporation, Toyota
and Volkswagen of America. Mr. Reilly has also served three terms as the
Chairman of the Association of International Automobile Manufacturers. Mr.
Reilly attended Boston College and Boston College Law School and is a graduate
of Siena University.

41
<PAGE>

William E. Hoglund has served as a member of the Board of Trustees of the
Company since February 11, 1998. From 1956 until his retirement in 1994, Mr.
Hoglund was employed by General Motors Corporation. At the time of his
retirement in 1994, Mr. Hoglund was serving as an Executive Vice President and
member of the General Motors Corporation Board of Directors. His previous
assignments at General Motors Corporation included serving as Corporate
Comptroller, Chief Financial Officer, President of Saturn, General Manager of
the Pontiac Division, and Group Executive for the Buick-Oldsmobile-Cadillac
Group. Currently, Mr. Hoglund is a director of the Mead Corporation, Detroit
Diesel Corporation and the Sloan Foundation. Mr. Hoglund is a graduate of
Princeton University and received a Masters in Business Administration from the
University of Michigan.

William R. Swanson has served as a member of the Board of Trustees of the
Company since February 19, 1998. Mr. Swanson has been a Managing Director of
Friedman, Billings, Ramsey & Co., Inc., in its real estate investment banking
group since February 1994. From 1993 to 1994, Mr. Swanson served as President
of H.G. Smithy Company, Inc., a full service commercial, multi-family and
mortgage servicing real estate company headquartered in Washington, D.C. From
1991 to 1993, Mr. Swanson headed Equity Management Associates, a real estate
consultation company. Mr. Swanson began working for LaSalle Partners, Ltd. in
1973 as the controller of the firm's first public fund and as the financial
officer for its development subsidiary. Mr. Swanson then served as a Managing
Director of LaSalle Partners from 1982 until his departure in 1991. While with
LaSalle Partners, he managed and directed the firm's acquisition and development
activities for the southeastern region of the United States. Mr. Swanson
received a Bachelor of Science in Accounting from the University of Illinois at
Urbana-Champaign and upon graduation joined KPMG Peat Marwick as a CPA and tax
specialist.

COMMITTEES OF THE BOARD OF TRUSTEES

Audit Committee. Within 90 days after the closing of the Offering, the Board
of Trustees of the Company will establish an Audit Committee. The Audit
Committee will be established to make recommendations concerning the engagement
of independent public accountants, to review with the independent accountants
the plans and results of the audit engagement, to approve professional services
provided by the independent public accountants, to review the independence of
the independent public accountants, to consider the range of audit and non-audit
fees and to review the adequacy of the Company's internal accounting controls.
Messrs. Reilly and Hoglund will be members of the Audit Committee.

Executive Committee. Within 90 days after the closing of the Offering, the
Board of Trustees of the Company intends to establish an Executive Committee.
Subject to the Company's conflicts of interest policies, the Executive Committee
may be granted certain authority to acquire and dispose of real property and the
power to authorize, on behalf of the full Board of Trustees, the execution of
certain contracts and agreements, including those related to the borrowing of
money by the Company, and, consistent with the Partnership Agreement, to cause
the Operating Partnership to take such actions.

Executive Compensation Committee. Within 90 days after the closing of the
Offering, the Board of Trustees of the Company intends to establish an Executive
Compensation Committee to determine compensation for the Company's executive
officers and to implement and administer the Company's 1998 Equity Incentive
Plan (the "Plan").

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and trustees and persons who own
more than 10% of a registered class of the Company's equity securities under
Section 12 of the Exchange Act to file reports of ownership (Form 3) and changes
in beneficial ownership (Forms 4 and 5) with the Securities and Exchange
Commission. Officers, trustees and greater than 10% shareholders are required
to furnish the Company with copies of all such forms which they file. Because
the Company did not have a class of equity securities registered under Section
12 of the Exchange Act

42
<PAGE>

during its fiscal year ended December 31, 1997, no reports of ownership or
reports of changes in beneficial ownership were required to be filed during that
period.

ITEM 11-EXECUTIVE COMPENSATION

The Company was organized on October 20, 1997 and did not conduct any
operations prior to that date. Accordingly, the Company did not pay any
significant annual compensation to its executive officers for its fiscal year
ended December 31, 1997. The following table sets forth the base salary rates
and other compensation expected to be paid to the Company's President and Chief
Executive Officer and each of the Company's other executive officers. Both the
Company and the Operating Partnership have entered into employment agreements
with the executive officers (the "Employment Agreements"), and the Operating
Partnership will pay substantially all of their compensation.

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($)(1) BONUS($)(2) OPTIONS
---------------------------- ------------- ----------- --------------
<S> <C> <C>
Thomas D. Eckert 350,000 1,058,004
President and Chief Executive Officer

Scott M. Stahr 225,000 573,086
Executive Vice President and Chief Operating Officer(3)

Donald L. Keithley 200,000 264,501
Executive Vice President of Business Development

David S. Kay 150,000 573,086
Vice President and Chief Financial Officer
</TABLE>
- -------------
(1) This reflects the initial annual base salaries payable to Mr. Stahr and Mr.
Keithley for the 12-month period beginning on the date of commencement of
each officer's Employment Agreement and to Mr. Eckert and Mr. Kay for the
12-month period beginning on October 27, 1997. See "--Employment
Agreements."
(2) Each executive officer named above will be eligible for a bonus of up to
100% of their initial base salary. In addition, Mr. Keithley is also
eligible for an additional incentive bonus of $200,000.
(3) Mr. Stahr received a signing bonus of $250,000 to compensate him for
terminating his employment with his prior employer.

EMPLOYMENT AGREEMENTS

The Company and the Operating Partnership have entered into an Employment
Agreement with each of the executive officers named in the table above, which,
in the case of the Company was effective on date of hire, and, in the case of
the Operating Partnership was effective as of January 1, 1998. Each Agreement is
for a four year term and provides that the executive officer agrees to devote
his full business time to the operation of the Company (except as the Company
otherwise agrees, including on behalf of the Operating Partnership). The
Employment Agreement permits the Company to terminate the executive officer's
employment with appropriate notice for or without cause. In general, cause is
defined to include (i) engaging in dishonesty relating materially to performance
of services or obligations contained in the Employment Agreement, (ii)
conviction of any misdemeanor (other than minor infractions) involving fraud,
breach of trust, misappropriation, or other similar activity or any felony,
(iii) performance of duties in a grossly negligent manner; or (iv) wilful breach
of the Employment Agreement in a manner materially injurious to the Company. In
addition, executives may resign for good reason (generally defined in the
Employment Agreement to include the Company's failure to comply with

43
<PAGE>

such Agreement's material terms, the reduction of responsibilities and duties
or, for Mr. Eckert, his involuntary departure from the Board of Trustees),
relocation, or a change of control. In general terms, a change of control occurs
(i) if a person, entity, or group (with certain exceptions) acquires more than
40% of the Company's then-outstanding voting securities, (ii) if the Company
merges into another entity unless prior Company shareholders have at least 60%
of the combined voting power of the securities in the merged entity, or (iii)
the liquidation, dissolution, or sale or disposition of substantially all of the
Company's assets.

If an executive officer's employment ends for any reason, the Company will pay
accrued salary, bonuses already determined, and other existing obligations. In
addition, if the Company terminates an executive officer's employment without
cause or any of them resigns for good reason, the Company will be obligated to
pay (i) a lump sum payment of severance equal to 24 months' salary, (ii) payment
of premiums for the period of group health coverage, if any, to which he is
entitled by law, and (iii) a pro rata annual bonus for the year of termination.
Notwithstanding the foregoing, the Company has not agreed to pay severance and
provide the foregoing benefits if the executive officer's employment ends
because of expiration or non-extension of his Employment Agreement.

While employed and for a one-year period after employment, the executive
officers have agreed not to compete with the Company by working with or
investing in any enterprise engaged in forming or operating Dealerships or that
invest primarily in Dealerships or Related Businesses or properties used by
Dealerships or Related Businesses or that provide real estate financing to
Dealerships or Related Businesses.

COMPENSATION OF TRUSTEES

The Company will pay its trustees who are not employees of the Company or
affiliated with a Seller $15,000 a year for their services as trustees. Each
non-employee trustee (other than Messrs. Pohanka and Rosenthal) also receives a
grant of options to purchase 15,000 Units under the Company's Plan upon election
or appointment to the Company's Board of Trustees. See "--1998 Equity Incentive
Plan."

REPORT ON EXECUTIVE COMPENSATION

The Company's executive compensation program will be administered by the
Executive Compensation Committee, a majority of whose members will be
independent, which is to be elected by the Board of Trustees. Compensation for
executive officers for 1998 was determined through negotiations with Friedman,
Billings, Ramsey & Co., Inc. and such executive officers prior to formation of
the Company on October 20, 1997. In the future, the Board of Trustees intends
to make recommendations, or to accept recommendations from the President and
Chief Executive Officer of the Company, regarding executive compensation for
consideration by the Executive Compensation Committee. The Executive
Compensation Committee will then make an independent determination of the
executive compensation (including any bonus or incentive compensation) to be
paid to each executive officer of the Company in light of the following goals:

Attraction and Retention of Qualified Executive Officers. The goal of the
Company is to design and administer an executive compensation program to (i)
attract and retain qualified executive officers, (ii) reward executive officers
for superior performance in achieving the Company's business objectives and
enhancing shareholder value, (iii) to align the executive officers interests
with those of the shareholders, and (iv) to provide incentives for the creation
of long-term shareholder value. The key elements of executive compensation are
base salary, annual incentive and performance bonuses and equity options. The
Executive Compensation Committee will be charged with reviewing and approving
the Company's policies and practices regarding executive compensation, including
(a) base salary levels, (b) incentive compensation plans and related performance
objectives and awards, and (c) lone-term incentives, principally equity option
awards.

Base Salary Levels. The Company believes that its base salary levels are
reasonably related to the salary levels of executive officers of comparable real
estate investment trusts at similar stages of development. The Company also
believes that the current base salary levels of its executive officers take into
account the unique

44
<PAGE>

talents and skills of its executive officers. Base salary levels may be adjusted
annually. The Company expects that any such adjustments will take into account
such factors as individual past performance, changes in responsibilities,
changes in pay levels of companies deemed comparable by the Executive
Compensation Committee and inflation. Certain aspects of salary and benefits are
also governed by the Employment Agreements to which the named executive officers
are a party. See "--Employment Agreements."

Long-Term Incentive Compensation. The Company has authorized its 1998 Equity
Incentive Plan as the principal means of providing long-term incentives. The
Company believes that the use of equity incentives better aligns the interests
of its executive officers with those of its shareholders and promotes long-term
shareholder value. The Plan will be administered by the Executive Compensation
Committee. The Executive Compensation Committee will be responsible for
determining the terms of the options and the number of Common Shares or Units
subject to option grants. The equity options previously granted to executive
officers of the Company were authorized by the Board of Trustees on February 3,
1998.

1998 EQUITY INCENTIVE PLAN

The Company (including the Operating Partnership) has established the Plan for
the purpose of attracting and retaining trustees, executive officers and other
key employees. Each option granted pursuant to the Plan shall be designated at
the time of grant as either an "incentive option" or as a "non-qualified
option." If the grant is for an "incentive option," the Company will issue
options for Common Shares. If the grant is for "non-qualified options" the
Company intends to issue options for Units.

The Plan provides for the grants of options ("Options") to purchase a
specified number of Common Shares or Units. Under the Plan, Common Shares and
Units in an aggregate number equal to 2,821,344, representing 8% of the Common
Shares outstanding on March 12, 1998 on a fully diluted basis (i.e. assuming
exercise of all outstanding options and warrants for Common Shares and Units and
redemption of such Units and Units issued to Sellers for Common Shares) will be
available for grants. The Company has granted Options for an aggregate 2,468,677
Common Shares and Units equal to 7% of the Common Shares outstanding on
March 12, 1998 on a fully diluted basis (the "Initial Grants") to the following
executive officers of the Company: Thomas D. Eckert, Scott M. Stahr, Donald L.
Keithley and David S. Kay. In addition, effective on the date that each joined
the Board of Trustees of the Company, Messrs. Reilly, Hoglund and Swanson were
each granted options to acquire 15,000 Units under the Plan. Upon organization
of the Executive Compensation Committee, it will select the trustees, officers
or employees of the Company, or its subsidiaries or Company-owned partnerships,
who will be granted Options.

The Plan authorizes the administrator of the Plan to grant incentive Options
for Common Shares at an exercise price to be determined by it, provided that
such price cannot be less than 100% of the fair market value of Common Shares on
the date on which the Option is granted. The exercise price of non-qualified
Options will be at 100% of the fair market value of Units on the date the Option
is granted as determined by the administrator.

The Board of Trustees intends to authorize the acceleration of the vesting of
the Initial Grants to each named executive officer of the Company to become
exercisable, subject to certain conditions being met, at a rate of 25% per year
over four years commencing on the first anniversary of the date such executive
officer was hired by the Company. The Initial Grants have a term of ten years.
The exercise price of the Options issued under the Initial Grants equal $15.00
per share, the initial public offering price of the Common Shares in the
Offering. The exercise price for any Option may be paid in cash or, in certain
circumstances, by the surrender, at the fair market value on the date on which
the Option is exercised, of Common Shares. The Plan provides that exercise may
be delayed or prohibited if it would adversely affect the Company's status as a
real estate investment trust.

All unexercisable Options held by an optionee will automatically be forfeited
if the optionee leaves his employment for any reason other than death or
permanent disability. Upon a "change in control" (as defined in the Plan), all
unexercisable Options will become exercisable. The rights of any optionees to
exercise a Option may not be transferred in any way other than by will or
applicable laws of descent and distribution.

The administrator of the Plan may grant options under the Plan in substitution
for outstanding options with higher exercise prices. In addition, in the event
of certain extraordinary events, the administrator of the Plan may

45
<PAGE>

make adjustments in the vesting schedule for Options, the aggregate number and
kind of shares of beneficial interest reserved for issuance, the number and kind
of shares of beneficial interest covered by outstanding awards and the exercise
prices specified therein as may be determined to be appropriate.

Until the formation of the Executive Compensation Committee, the administrator
of the Plan will be the Board of Trustees of the Company.

The following table contains information concerning the grant of Options under
the Company's Plan to the named executive officers of the Company effective
February 19, 1998. Prior to February 19, 1998, no effective options had been
granted to any executive officers, trustees or key employees of the Company,
whether pursuant to the Plan or otherwise. The table also lists potential
realizable values of such options on the basis of assumed annual compounded
share appreciation rates of 5% and 10% over the life of the Options.
<TABLE>
<CAPTION>

POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
NUMBER OF % OF TOTAL PRICE APPRECIATION FOR
SECURITIES OPTIONS OPTION TERM
NAME AND UNDERLYING GRANTED TO (IN THOUSANDS)
PRINCIPAL OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION -------------------------
POSITION GRANTED(1) FISCAL YEAR BASE PRICE DATE(2) 5%(3) 10%(3)
- -------------------------- ---------- ----------- ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Thomas D. Eckert 1,058,004 40.2% $ 15 $9,981 $25,293
President and Chief
Executive Officer

Scott M. Stahr 573,086 21.8 15 5,406 13,700
Executive Vice President
and Chief Operating
Officer

Donald L. Keithley 264,501 10.0 15 2,495 6,323
Executive Vice President
of Business
Development

David S. Kay 573,086 21.8 15 5,406 13,700
Vice President and
Chief Financial
Officer
</TABLE>
__________
(1) The Board of Trustees intends to accelerate the vesting schedule for such
Options to become exercisable at a rate of 25% per year over four years
commencing on the first anniversary of the executive officer's date of hire.
(2) The expiration date of the Options will be ten years after the date of the
grant.
(3) The potential realizable value is reported net of the option price, but
before the income taxes associated with exercise. These amounts represent
assumed annual compounded rates of appreciation at 5% and 10% from the date
of grant to the expiration date of the Options.

46
<PAGE>

ITEM. 12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of March 20, 1998,
regarding the beneficial ownership of the Common Shares by (a) each person known
by the Company to be the beneficial owner of more than 5% of the Common Shares,
(b) each Trustee of the Company, (c) each executive officer of the Company and
(d) all Trustees and executive officers of the Company as a group. Unless
otherwise indicated in the footnotes, all of such interests are owned directly,
and the indicated person or entity has sole voting and investment power. The
number of shares represents the number of Common Shares the person holds or the
number of Common Shares into which Units held by the person are exchangeable (if
the Company elects to issue shares or Units rather than pay cash upon such
exchange).
<TABLE>
<CAPTION>
NUMBER OF
------------- ---------------
COMMON SHARES PERCENTAGE OF
------------- ---------------
BENEFICIALLY COMMON SHARES
------------- ---------------
NAME OWNED OUTSTANDING (3)
- -------------------------------------------- ------------- ---------------

<S> <C> <C>
Thomas D. Eckert(3)(4) . 107,526 (8)
Scott M. Stahr(3)(4) . 7,168 (8)
Donald L. Keithley(3)(4) . 7,000 (8)
David S. Kay(3)(4) . - -
John J. Pohanka(1)(4)(5)(9) . 945,192 3.6%
Robert M. Rosenthal(1)(4)(5) . - -
Friedman, Billings, Ramsey Group, 3,069,909 11.8%
Inc.(6)(7).
John E. Reilly(10) . 1,000 (8)
William E. Hoglund (10) 2,150 (8)
William R. Swanson (10) - -
Trustees and Executive Officers as a group
(nine persons) . 4,139,945 15.9%
</TABLE>
- -------------
(1) Mr. Pohanka and Mr. Rosenthal or their Affiliates own an aggregate of
1,160,162 Units and 2,644,807 Units, respectively, issued in connection
with the acquisition of Properties, that are not redeemable for a period of
one year from February 19, 1998. If the holder chooses to redeem the Units,
the Operating Partnership may redeem them for cash, or at the option of the
Company, they may be redeemed for Common Shares.
(2) The total number of Common Shares outstanding used in calculating the
percentage assumes that none of the Units is redeemed for Common Shares.
(3) Excludes Options held by Messrs. Eckert, Stahr, Keithley and Kay to acquire
26,666; 26,666; 26,666; and 26,666 Common Shares and 1,031,338; 546,420;
237,835; and 546,420 Units, respectively, which are not exercisable within
60 days from the date of this Report.
(4) The address for the executive officers and Trustees of the Company is c/o
1420 Spring Hill Road, Suite 525, McLean, Virginia 22102.
(5) Does not assume redemption of Units for Common Shares issued on exercise of
the warrants granted to Mr. Rosenthal and Mr. Pohanka, each warrant
exercisable for 707,079 Units (the "Dealer Warrants"), that will be subject
to a one year holding period beginning February 19, 1998. Assuming
(i) redemption of the Units issued upon the acquisition of Properties
acquired from Affiliates of Mr. Pohanka and Affiliates of Mr. Rosenthal, for
Common Shares and (ii) exercise of the Dealer Warrants and issuance of
Common Shares on redemption of such Units. Mr. Pohanka and his Affiliates
and Mr. Rosenthal and his Affiliates would own approximately an aggregate of
2,812,433 and 3,830,002 Common Shares, respectively, representing
approximately 8.8% and 12% of "Percentage of Common Shares Outstanding,"
respectively, on a fully diluted and converted basis as of March 20, 1998.
The total number of Common Shares outstanding used in calculating these
percentages assumes that all of the outstanding Units as of March 20, 1998
are redeemed for Common Shares.

47
<PAGE>

(6) Includes 1,277,794 Common Shares to be issued on exercise of the warrants
issued to Friedman, Billings, Ramsey & Co., Inc., and 1,792,115 Common
Shares held by FBR Asset Investment Corporation, Affiliates of Friedman,
Billings, Ramsey Group, Inc. Excludes an estimated 49,810 Common Shares
issuable upon redemption of an estimated 49,810 Units indirectly
beneficially owned by an employee of Friedman, Billings, Ramsey & Co., Inc.
who is the daughter of Vincent A. Sheehy and a partner in certain Sellers
Affiliated with Mr. Sheehy to which Friedman, Billings, Ramsey Group,
Inc. disclaims beneficial ownership.
(7) Based on Schedule 13G filed on behalf of Friedman, Billings, Ramsey Group,
Inc. with the Securities and Exchange Commission on March 2, 1998.
(8) Represents less than 1%.
(9) Owned by Mr. Pohanka or direct or indirect Affiliates of Mr. Pohanka.
(10) Excludes Options held by Messrs. Reilly, Hoglund and Swanson to each
acquire 15,000 Units, which are not exercisable within 60 days from the
date of this Report.

ITEM 13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In connection with the Offering, the Company completed the following related
transactions involving an executive officer, trustee or 10% or greater
shareholder:

<TABLE>
<CAPTION>
PERSON RECEIVING NATURE AND AMOUNT OF BENEFIT
- ----------------------- ----------------------------------------------------------------------------
BENEFIT
- -----------------------
<S> <C>
John J. Pohanka and
Robert M. Rosenthal Affiliates of Messrs. Pohanka and Rosenthal will lease Properties
from the Company and will continue to control the operations of the
Dealerships or Related Businesses operated on those Properties.
See "Item 2-Properties."

Each of Messrs. Pohanka and Rosenthal has received warrants to
acquire 707,079 Units at the initial public offering price.

Beginning one year after the closing of the Offering, Messrs. Pohanka
and Rosenthal or their affiliated holders of such Units, as the case may
be, will have the right to convert the Units held by them for Common
Shares, subject to the Company's limit on ownership of Units.

Purchase by Mr. Pohanka, his Affiliates or his family of 948,580
Common Shares in this Offering at the initial public offering price, of
which 195,372 were purchased at a price net of underwriting discounts
and commissions because executive officers and trustees had the right
to acquire in the aggregate up to 2% of the offered Common Shares at
the initial public offering price (net of underwriting discounts and
commissions).

Executive Officers . Salary and bonus as executive officers of the Company as described
under ''Management--Executive Compensation.''

Thomas D. Eckert purchased ten Common Shares at a purchase price of
$10.00 per share in connection with the organization of the Company on
October 20, 1997. On February 19, 1998, the Company repurchased
such shares from Mr. Eckert at a purchase price of $10.00 per share.

</TABLE>
48

<PAGE>

Options granted to Messrs. Eckert, Stahr, Keithley and Kay to acquire
26,666; 26,666; 26,666; and 26,666 Common Shares and 1,031,338;
546,420; 237,835; and 546,420 Units, respectively.

Common Shares purchased by Messrs. Eckert, Stahr, Keithley, Reilly
and Hoglund in the Offering in the amounts of 107,526; 7,168; 7,000;
1,000 and 2,150, respectively, at the initial public offering price (net of
underwriting discounts and commissions).
</TABLE>

In addition to the foregoing, FBR Asset Management Corporation or its
Affiliates received certain benefits in connection with the Offering in addition
to the compensation paid to Friedman, Billings, Ramsey & Co., Inc. as an
underwriter of the Offering:

<TABLE>
<CAPTION>
PERSON RECEIVING BENEFIT NATURE AND AMOUNT OF BENEFIT
- ------------------------------------- ----------------------------------------------------------------------------

<S> <C>
Friedman, Billings,
- ------------------------------------- Repayment of the loan made to the Company in the amount of up to
Ramsey Group, Inc. . approximately $2.5 million, plus interest thereon at the rate of 10%
per annum.

For the Company to maintain its qualification as a REIT under the
Code, not more than 50% in value of the outstanding shares of
beneficial interest of the Company may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) at any time during the last half of the
Company's taxable year (other than the first taxable year for which the
election to be treated as a REIT has been made). To ensure that the
Company will not fail to qualify as a REIT under this and other tests
under the Code, the Company's Declaration of Trust, subject to certain
exceptions, authorizes the Board of Trustees to take such actions as are
necessary and desirable to preserve its qualification as a REIT and to
limit any person to direct or indirect ownership of no more than (i)
9.9% of the number of the outstanding Common Shares, or (ii) 9.9%
of the number of outstanding Preferred Shares or any series of
Preferred Shares (the ''Ownership Limit''). The Company's Board of
Trustees, upon receipt of a ruling from the IRS, an opinion of counsel
or other evidence satisfactory to the Board and upon such other
conditions as the Board may establish, may exempt a proposed
transferee from the Ownership Limit; provided that such exemption
would not result in the termination of the Company's status as a REIT.
The Company has waived the Ownership Limit with respect to Friedman, Billings,
Ramsey Group, Inc. and its Affiliates to permit ownership of the Common Shares.
The Company's Declaration of Trust and the Operating Partnership's Partnership Agreement
contain provisions that require the approval of a majority of the Independent Trustees of the
Company for waiver of the Ownership Limit with respect to any Trustee or his Affiliates. The
foregoing restrictions on transferability and ownership will continue to apply until (i) the
Board of Trustees determines that it is no longer in the best interests of the Company to
attempt to qualify, or to continue to qualify, as a REIT, and (ii) there is an affirmative
vote of two-thirds of the votes entitled to be cast on such matter at a regular or special
meeting of the shareholders of the Company.
Friedman, Billings, Ramsey
& Co., Inc....................... Warrants (the "Underwriting Warrants") representing the right to
acquire up to 1,277,794 Common Shares at the initial public offering
price of the Common Shares, exercisable beginning on the closing date
of the Offering and for a period of five years thereafter, as
compensation for its assistance in the formation and structuring of the
Company, identifying key managers of the Company and raising the
initial capital necessary to form the Company. However, the
Underwriting Warrants and any Common Shares received upon
exercise of the Underwriting Warrants may not be sold or otherwise
transferred (except to executive officers of Friedman, Billings, Ramsey
& Co., Inc. or members of the selling group for the Offering) for a
period of one year following the closing of the Offering.
</TABLE>

49
<PAGE>

<TABLE>
<S> <C>
FBR Asset Investment Corporation . Purchase of 1,792,115 Common Shares at the initial public offering
price (net of underwriting discounts and commissions). FBR Asset
Investment Corporation has certain ''demand'' and ''piggy-back''
registration rights with respect to such Common Shares. Subject to
certain conditions, the demand registration rights permit holders of
such shares to request one demand registration. Subject to certain
conditions, the piggyback registration rights permit the holders of such
shares to include their Common Shares in the registration by the
Company of its equity securities other than in connection with (i) the
registration by the Company under the Securities Act of any of its
securities, (ii) any corporate reorganization, or (iii) registration of an
employee benefit plan.

</TABLE>

<PAGE>

Item 14-EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

14(a)(1) FINANCIAL STATEMENTS

Reference is made to the Index to the Consolidated Financial Statements
on Page 28 of this Form 10-K.

14(a)(2) FINANCIAL STATEMENT SCHEDULES

Reference is made to the Index to the Consolidated Financial Statements
on Page 28 of this Form 10-K.

All Schedules have been omitted because the required information of such
Schedules is not present in amounts sufficient to require submission of
the schedule or because the required information is included in the
consolidated financial statements.

(3) Exhibits

(a) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
- ------------
NUMBER DESCRIPTION
- ------------ --------------------------------------------------------------------------------------
<S> <C>
3.1* Amended and Restated Declaration of Trust of Capital Automotive REIT

3.2* Amended and Restated Bylaws of Capital Automotive REIT

10.1* Form of Agreement of Limited Partnership of Capital Automotive L.P.

10.2* Form of Indemnification Agreement

10.3* Form of 1998 Equity Incentive Plan

10.4* Employment Agreement by and between the Company and Thomas D. Eckert

10.5* Employment Agreement by and between the Company and Scott M. Stahr

10.6* Employment Agreement by and between the Company and Donald L. Keithley

10.7* Employment Agreement by and between the Company and David S. Kay

10.8* Form of Option Agreement

10.9* Form of NationsBank, N.A. Credit Agreement

10.10* FBR Asset Investment Purchase Agreement

10.11* FBR Registration Rights Agreement

10.12* Pohanka Contribution Agreement dated as of November 21, 1997, as amended

10.13* Rosenthal Contribution Agreement dated as of November 21, 1997, as amended

10.14* Sheehy Contribution Agreement dated as of November 24, 1997, as amended

10.15* Cherner Contribution Agreement dated as of November 24, 1997, as amended
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
- ------------
NUMBER DESCRIPTION
- ------------ --------------------------------------------------------------------------------------
<S> <C>
10.16* Cross-Continent Auto Retailers, Inc. Purchase Agreement dated as of December 31, 1997,
as amended

10.17* Form of Pohanka Lease Agreement

10.18* Form of Rosenthal Lease Agreement

10.19* Form of Sheehy Lease Agreement

10.20* Form of Cherner Lease Agreement

10.21* Form of Cross-Continent Lease Agreement

10.22* Form of Underwriting Warrant

10.23* Form of Dealers' Warrant

10.24* Form of Guaranty Agreement with Affiliate of John J. Pohanka

10.25* Form of Guaranty Agreement with Affiliate of Robert M. Rosenthal

10.26* Amendment No. 1 to Friedman, Billings, Ramsey Group, Inc. Loan Agreement

10.27* Amendment No. 1 to Friedman, Billings, Ramsey Group, Inc. Security Agreement

10.28* Form of Guaranty Agreement with Cross-Continent Auto Retailers, Inc.

10.29* Meyers Family Limited Partnership L.P. (Good News) Purchase Agreement dated as of
January 10, 1998

10.30* Form of Good News Lease Agreement

10.31* Form of Guaranty Agreement with Good News Salisbury, Inc. and Warren A. Price

10.32* Kline Purchase Agreement dated as of January 12, 1998

10.33* Form of Kline Lease Agreement

10.34* Form of Guaranty Agreement with Kline Imports Chesapeake, Inc.

10.35* Amended and Restated Employment Agreement by and between Capital Automotive L.P.
and Thomas D. Eckert
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
- ------------
NUMBER DESCRIPTION
- ------------ --------------------------------------------------------------------------------------
<S> <C>
10.37* Amended and Restated Employment Agreement by and between Capital Automotive L.P.
and Donald L. Keithley

10.38* Amended and Restated Employment Agreement by and between Capital Automotive L.P.
and David S. Kay

10.39* Meyers Family Limited Partnership (Good News) Purchase Agreement dated as of
January 10, 1998

21.1* Subsidiaries of the Company

23.1 Consent of Arthur Andersen LLP

27 Financial Data Schedule

</TABLE>
- -------------
* Previously filed as an Exhibit to Registration Statement on Form S-11 (File
No. 333-41183) and incorporated herein by reference.

(b) Reports on Form 8-K

None

53
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned thereunto duly authorized this __th day of March, 1998.

CAPITAL AUTOMOTIVE REIT
(Registrant)

By:
---------------------------------------------
Thomas D. Eckert
President, Chief Executive Officer and Trustee

Pursuant to the requirement of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated

SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
_____________________________ President, Chief Executive Officer and Trustee March , 1998
Thomas D. Eckert (Principal Executive Officer)

_____________________________ Vice President and Chief Financial Officer March , 1998
David S. Kay (Principal Financial and Accounting Officer)

_____________________________ Chairman of the Board March , 1998
John J. Pohanka

_____________________________ Trustee March , 1998
Robert M. Rosenthal

_____________________________ Trustee March , 1998
John E. Reilly

_____________________________ Trustee March , 1998
William E. Hoglund

_____________________________ Trustee March , 1998
William R. Swanson

</TABLE>

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent accountants, we hereby consent to the incorporation by reference
of our report included in this Form 10-K, into Capital Automotive REIT's
previously filed Registration Statement on Form S-11 (No. 333-41183).

/s/ ARTHUR ANDERSEN LLP

Washington, D.C.
March 30, 1998

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> OCT-20-1997
<PERIOD-END> DEC-31-1997
<CASH> 24,534
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 982,152
<PP&E> 30,061
<DEPRECIATION> 798
<TOTAL-ASSETS> 1,011,415
<CURRENT-LIABILITIES> 1,661,098
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (649,683)
<TOTAL-LIABILITY-AND-EQUITY> 1,011,415
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 649,783
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (649,783)
<INCOME-TAX> 0
<INCOME-CONTINUING> (649,783)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (649,783)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>