CLARION COMMERCIAL HOLDINGS INC, 10-K, 1999-03-31

CLARION COMMERCIAL HOLDINGS INC
10-K, 1999-03-31
REAL ESTATE INVESTMENT TRUSTS

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________________________________________________________________________________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-K

[x]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 1-14167

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

CLARION COMMERCIAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

<TABLE>
<S> <C>
MARYLAND 13-3988895
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

335 MADISON AVENUE,
NEW YORK, NEW YORK 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (212) 883-2500

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS: ON WHICH REGISTERED:
- --------------------------------------------------------- ---------------------------------------------------------

<S> <C>
Class A Common Stock New York Stock Exchange
</TABLE>

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

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 [x] No [ ]

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 the 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. [ ]

At March 22, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $26,786,853 based upon the
closing sale price of the Class A Common Stock ($.001 par value) on the New York
Stock Exchange on that date. As of March 22, 1998, 4,418,450 shares of Class A
Common Stock ($.001 par value) were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement to be issued in
connection with the 1999 Annual Meeting of Stockholders are incorporated by
reference into Part III hereof.

________________________________________________________________________________

TABLE OF CONTENTS

<TABLE>
<S> <C> <C>
PART I...................................................................................................... 3
Item 1. Business..................................................................................... 3
Item 2. Properties................................................................................... 17
Item 3. Legal Proceedings............................................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 17

PART II..................................................................................................... 18
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters.................... 18
Item 6. Selected Financial Data...................................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 23
Item 8. Financial Statements and Supplementary Data.................................................. 25
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure......... 25

PART III.................................................................................................... 26
Item 10. Directors and Executive Officers of the Registrant........................................... 26
Item 11. Executive Compensation....................................................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 26
Item 13. Certain Relationships and Related Transactions............................................... 26

PART IV..................................................................................................... 27
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 27
</TABLE>

PART I

ITEM 1. BUSINESS

GENERAL

Clarion Commercial Holdings, Inc. (the 'Company'), a Maryland corporation,
was organized in February 1998 as a specialty finance company that intends to
elect to be a real estate investment trust (a 'REIT') for U.S. Federal income
tax purposes. The Company's objective is to build a diverse portfolio of
commercial real estate investments ('Real Estate Investments') in an attempt to
provide a high rate of return to its stockholders, without incurring risk deemed
unacceptable by the Company's investment manager or that would compromise the
Company's REIT qualification. The Company focuses primarily on the following
types of Real Estate Investments:

CMBS. The Company originates and acquires various classes (primarily
subordinate, including 'first loss') of commercial mortgage-backed securities
('CMBS'). CMBS are generally multiclass debt or pass-through securities backed
by a commercial mortgage loan or a pool of commercial mortgage loans.
Subordinate classes of CMBS offer a higher expected rate of return than more
senior classes of CMBS, but are subject to greater risk of loss of principal and
nonpayment of interest.

Commercial Mortgage Loans; Securitization. The Company acquires, originates
and accumulates commercial mortgage loans for investment and securitization.
Upon securitization, the Company will generally sell the more senior classes of
the new securities and retain the more subordinate classes. By originating
commercial mortgage loans and securitizing such loans itself, the Company
expects to achieve higher returns than from purchasing subordinate classes of
CMBS from third parties.

Mezzanine Investments. The Company invests in preferred or 'pari passu'
equity, leveraged joint venture equity and subordinate and participating
mortgage loans (collectively, 'Mezzanine Investments'). These investments
provide the Company with interest at a higher rate than generally paid on the
senior mortgage on the same property plus, in most cases, a percentage of gross
revenues or, to the extent consistent with REIT qualification, net operating
income from the underlying property, payable to the Company on an ongoing basis,
and a percentage of any increase in value of the property, payable upon maturity
or refinancing.

The Company may also make other investments in commercial real estate
assets, including real property investments and investments in companies that
have substantial holdings of real estate related assets.

The following table sets forth the composition of the Company's principal
assets as of December 31, 1998:

TABLE 1.1 -- PRINCIPAL ASSETS AS OF DECEMBER 31, 1998

<TABLE>
<CAPTION>
VALUE VALUE AS % OF
ASSET ($ MILLION) TOTAL ASSETS
- ---------------------------------------------------------------------------- ----------- -------------

<S> <C> <C>
CMBS........................................................................ $ 80.7 54.5%
Deposits with brokers as collateral for securities sold short............... 46.8 31.6
Commercial mortgage loan.................................................... 12.9 8.8
Mezzanine investment........................................................ 3.9 2.6
----------- -----
Total.................................................................. $ 144.3 97.5%
----------- -----
----------- -----
</TABLE>

THE MANAGER

The Company has no employees. The Company's day-to-day operations are
managed by Clarion Capital, LLC (the 'Manager'), subject to the direction and
oversight of the Company's Board of Directors and the terms of a Management
Agreement (the 'Management Agreement') between the Manager and the Company. The
Manager was formed in December 1997 and has registered with the SEC as an
investment adviser.

The Manager is responsible for the investments and day-to-day operations of
the Company and performs (or causes to be performed) services and activities
relating to the assets and operations of the Company, including:

1. serving as the Company's consultant with respect to formulation of
investment criteria and preparation of policy guidelines by the Board of
Directors;

2. representing the Company in connection with the purchase and sale
of assets, the commitment to purchase and sell assets, and the maintenance
and administration of its portfolio of assets.

3. furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for
the Company by the Manager;

4. monitoring and providing to the Board of Directors on an ongoing
basis price information and other data obtained from certain nationally
recognized dealers that maintain markets in assets identified by the Board
of Directors, and providing data and advice to the Board of Directors in
connection with the identification of such dealers;

5. providing executive and administrative personnel, office space and
office services required in rendering services to the Company;

6. administering the day-to-day operations of the Company and
performing and supervising the performance of other administrative
functions agreed upon by the Manager and the Board of Directors as
necessary in the management of the Company, including the collection of
revenues and the payment of the Company's debts and obligations, the
submission of required public filings by the Company and maintenance of
appropriate computer services to perform such administrative functions;

7. communicating on behalf of the Company with the holders of the
Company's equity or debt securities as required to satisfy the reporting
and other requirements of any governmental bodies or agencies or trading
markets and to maintain effective relations with those holders;

8. designating originators, servicers, property managers, developers,
asset managers and other servicers with respect to the investments made by
the Company and arranging for the monitoring and administering of those
service providers;

9. counseling the Company in connection with policy decisions to be
made by the Board of Directors;

10. engaging in hedging and financing activities on behalf of the
Company, consistent with the Company's status as a REIT;

11. counseling the Company regarding the maintenance of its status as
a REIT and monitoring compliance with the various REIT qualification tests
and other rules set out in the Code and Treasury Regulations thereunder.

During the term of the Management Agreement, the Manager has agreed not to
provide any of the foregoing services to any public REIT with investment
objectives similar to those of the Company.

MANAGEMENT FEES

For performing its services under the Management Agreement, the Manager
receives an annual base management fee, payable monthly, and an annual incentive
fee, payable quarterly, as described below. The incentive fee for the first four
quarters of the Company's operating history will be paid at the end of the
fourth such quarter. (Capitalized terms used and not defined in this section
have the meanings assigned to them in the Management Agreement.)

Base Management Fee -- 1% of the average stockholders' equity in the
Company, excluding any mark-to-market adjustments to the Company's assets.
Stockholders' equity will be determined in accordance with generally accepted
accounting principals.

Incentive Fee -- The product of (A) 25% of the dollar amount by which (1)
Adjusted Net Income of the Company per share of common stock (based on the
weighted average number of shares

outstanding) exceeds (2) an amount equal to (a) the weighted average of the
price per share of the common stock at the initial offering and the prices per
share at any secondary offerings of common stock by the Company multiplied by
(b) the Ten-Year U.S. Treasury Rate plus 2.5% per annum multiplied by (B) the
weighted average number of shares of common stock outstanding, calculated as a
quarterly average over the prior four quarters.

In accordance with the terms of the Management Agreement, the Company paid
the Manager $495,596 in base management fees for the period beginning June 2,
1998 and ending December 31, 1998. The Company has neither accrued for, nor paid
the Manager any incentive compensation since commencement of operations.

INVESTMENT OBJECTIVES AND POLICIES

The Company pursues policies and strategies for acquiring Real Estate
Investments in an attempt to provide a high rate of return to its stockholders
without incurring risk deemed unacceptable by the Manager or compromising the
Company's REIT qualification. The Company's income results primarily from the
spread between the interest generated by the Company's assets and the cost of
financing and hedging these assets. The Company also realizes capital gains or
losses upon the disposition of its assets. The Company leverages its investments
in such assets primarily through repurchase agreements. The Company also engages
in a variety of interest rate risk management techniques for the purpose of
managing the interest rate risk of its assets and liabilities. All of these
transactions are subject to risks and may limit the potential earnings from the
Company's investments.

INVESTMENTS

The Company invests principally in the following types of assets:

CMBS

The Company originates and acquires various classes (primarily subordinate,
including 'first loss') of CMBS. CMBS are generally multiclass debt or
pass-through securities backed by a commercial mortgage loan or a pool of
commercial mortgage loans. CMBS include, but are not limited to, regular and
residual interests in REMICs (the term 'REMIC' means a real estate mortgage
investment conduit) and regular interests in certain FASITs (the term 'FASIT'
means a financial asset securitization investment trust) and may be issued in
public (registered) or private transactions by either governmental or private
entities. Private issuers include investment banks, commercial banks, insurance
companies and property owners.

Of the interests in CMBS that the Company originates or acquires, most are
in subordinate classes; however, the Company may also purchase more senior
classes or combined classes of subordinate and more senior classes. Subordinate
CMBS are generally not registered under the Securities Act of 1933, as amended,
and are traded in the private market. However, a significant number of U.S.
investment banks are active dealers in this market and act as principal
underwriters of new CMBS issues.

Generally, investors in senior securities are protected against potential
losses on underlying mortgage collateral through priorities as to payment of
principal and interest. Although protections against loss to investors in
subordinate securities may include investor guarantees, reserve funds, excess
interest, cross-collateralization and over-collateralization, subordinate
securities may lack sufficient credit protection and are thus more sensitive to
the default of underlying mortgage collateral than senior securities of the same
issuer.

The yield-to-maturity on subordinate CMBS may be extremely sensitive to the
default and loss experience of the underlying mortgage collateral and the timing
of any such defaults or losses. Because the subordinate classes generally have
little or no credit support, to the extent there are realized losses on the
mortgage collateral, the Company will experience a concurrent loss and as a
result may not recover the full amount, or any, of its investment in such
subordinate CMBS.

Ratings may be assigned to CMBS by the rating agencies such as Duff &
Phelps Credit Rating Co. ('D&P'), Fitch IBCA Investors Service L.P. ('Fitch'),
Moody's Investors Service, Inc. ('Moody's') and

Standard & Poor's Ratings Group ('S&P'). These ratings are substantially
determined by the debt service coverage and loan-to-value ratios of the pool and
are relative, representing the subjective opinions of the agencies. It is
possible that an agency may change its rating, after its initial evaluation, to
reflect subsequent events, both negative and positive. Therefore, although these
ratings will be used by the Manager as an important factor in its selection
process, the Manager will rely principally upon its own credit analysis.

On March 9, 1999, the Company was notified that one of the CMBS in its
portfolio, BTR 1998-S1A, Class F, was upgraded by Moody's from a rating of Ba2
to Baa2.

The following tables present information on the Company's investments in
CMBS as of December 31, 1998. Included in the tables are the following terms:

Delinquencies -- Represents the total unpaid principal balance of the
loans underlying the CMBS more than 60 days delinquent at the indicated
date as a percentage of the unpaid principal balance of the collateral at
that date.

Issue Date -- Represents the date on which the indicated security was
issued.

Rating -- For any individual security, represents the lowest rating of
all ratings issued by D&P, Fitch, Moody's and S&P. Ratings by Moody's are
reported as follows: Baa2 reported as BBB, Baa3 as BBB-, Ba1 as BB+, Ba2 as
BB, Ba3 as BB-, B1 as B+, B2 as B, and B3 as B-.

Subordination Percentage -- Represents the principal amount of
securities and the reserve fund (if any) that are subordinate in right of
payment to the indicated class of CMBS, expressed as a percentage of the
entire outstanding amount of securities and the reserve fund.

Value -- Represents the fair market value of the CMBS as of the date
indicated.

Weighted Average DSCR -- Represents the weighted average of the debt
service coverage ratios of the loans underlying the CMBS, which is
calculated by dividing cash flow available for debt service by debt service
as reported in the offering memorandum for each issue.

Weighted Average LTV -- Represents the weighted average of the ratio
of the loan amount to the value of the underlying collateral as reported in
the offering memorandum for each issue.

TABLE 1.2 -- CMBS INVESTMENTS AS OF DECEMBER 31, 1998

<TABLE>
<CAPTION>
SUBORDINATION
SECURITIES VALUE RATING PERCENTAGE DELINQUENCIES
AS OF AS OF AS OF WTD. AVG WTD. AVG AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31, DSCR AT LTV AT DECEMBER 31, DECEMBER 31,
1998 1998 ISSUE DATE 1998 ISSUANCE ISSUANCE 1998 1998
- ---------------------------------- ------------ ---------- ------------ ------------ --------- ------------ ------------

<S> <C> <C> <C> <C> <C> <C> <C>
BTR 1998-SIA, Class F............. $17,422,240 2/13/98 BB* 1.65 73.90% 32.87% 0.00%
DLJCM 1998-CF1, Class B6.......... 6,184,688 3/2/98 B 1.35 65.40 2.77 0.32
DLJCM 1998-CF1, Class B7.......... 2,819,988 3/2/98 B- 1.35 65.40 2.02 0.32
DLJCM 1998-CF1, Class C........... 3,963,783 3/2/98 NR 1.35 65.40 0.00 0.32
GMAC 1997-C1, Class G............. 11,091,794 9/30/97 BB 1.33 71.04 6.72 0.25
MCF 1997-MC2, Class F............. 7,995,700 11/25/97 BB 1.50 70.60 6.57 0.26
MSC 1997-HF1, Class F............. 4,302,049 6/30/97 BB 1.40 68.20 4.89 0.88
MSC 1997-XL1, Class G............. 2,024,063 10/17/97 BB 2.00 52.70 3.03 0.00
MSC 1998-XL1, Class H............. 11,775,202 6/11/98 BB 1.90 58.40 1.51 0.00
MSC 1998-XL1, Class J............. 9,510,671 6/11/98 B 1.90 58.40 0.00 0.00
NB 1996-FSI, Class E.............. 3,641,610 8/15/96 BB 1.37 n/a 31.32 6.25
------------ ---- --------- ----- ----
Total/Wtd. Avg. .............. $80,731,788 1.59 66.56% 10.92% 0.44%
------------ ---- --------- ----- ----
------------ ---- --------- ----- ----
</TABLE>

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

* On March 9, 1999, the rating on the BTR 1998-S1A, Class F security was
upgraded by Moody's from Ba2 (BB) to Baa2 (BBB).

TABLE 1.3 -- DISTRIBUTION OF LOANS UNDERLYING THE CMBS INVESTMENTS
BY PROPERTY TYPE AND GEOGRAPHIC DISTRIBUTION

<TABLE>
<CAPTION>
PROPERTY TYPE PERCENTAGE(1) STATE PERCENTAGE(1)
- ---------------------------------------------- ------------- -------------- -------------

<S> <C> <C> <C>
Retail........................................ 25.7% CA 23.9%
Office........................................ 22.6 TX 13.0
Multifamily................................... 21.2 FL 6.8
Hotel......................................... 18.7 NY 6.0
Other......................................... 11.8 All others(2) 50.3
</TABLE>

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

(1) Based on a percentage of the total unpaid principal balance to the
underlying loans.

(2) No other state comprises more than 5% of the total.

TABLE 1.4 -- DISTRIBUTION OF CMBS INVESTMENTS BY RATING CLASS

<TABLE>
<CAPTION>
DISTRIBUTION
AS OF
RATING DECEMBER 31, 1998
- ------------------------------------------------------ -----------------

<S> <C>
BB*................................................... 72.2%
B..................................................... 19.4
B-.................................................... 3.5
NR.................................................... 4.9
-------
Total............................................ 100.00%
-------
-------
</TABLE>

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

* On March 9, 1999, the rating on the BTR 1998-S1A, Class F security (which
represents approximately 22% of the Company's CMBS portfolio) was upgraded by
Moody's from Ba2 (BB) to Baa2 (BBB).

COMMERCIAL MORTGAGE LOANS

The Company originates and acquires commercial mortgage loans. In
considering whether to originate or acquire a mortgage loan, the Company will
request that the Manager underwrite, and perform certain due diligence tasks
with respect to, that mortgage loan in order to ascertain material information
as to the value of that mortgage loan. The Manager will review and analyze many
factors, including market conditions (market interest rates, the availability of
mortgage credit and economic, demographic, geographic, tax, legal and other
factors), the yield to maturity of the mortgage loan, the liquidity of the
mortgage loan, in the case of an acquisition of a mortgage loan the limitations
on the obligations of the seller with respect to the mortgage loan, the rate and
timing of payments to be made with respect to the mortgage loan, the value and
quality of the mortgaged property underlying the mortgage loan, the risk of
adverse fluctuations in the market values of that mortgaged property as a result
of economic events or governmental regulations, the historical performance and
other attributes of the property manager responsible for managing the mortgaged
property, relevant laws limiting actions that may be taken with respect to loans
secured by real property and limitations on recourse against the obligors
following realization on the collateral through various means, risks associated
with geographic concentration of underlying assets constituting the mortgaged
property for the relevant mortgage loan, environmental risks, pending and
threatened litigation, junior liens and other issues relating to title and a
prior history of default by affiliated parties on their similar obligations.

As of December 31, 1998, the Company owns an investment in a commercial
mortgage loan with a carrying value of $12.9 million. The investment is a first
mortgage loan secured by The OMNI Hotel in Newport News, Virginia. The mortgage
loan was made on December 18, 1997 at a 70% loan-to-value ratio, is in an
original principal amount of $12.6 million and bears interest at a fixed rate
equal to 7.885% per annum. The loan matures on December 1, 2004 and amortizes
over a 25-year schedule. The mortgage loan may not be prepaid until December 1,
2001, and any prepayment thereafter shall be subject to a yield maintenance
premium.

The mortgaged property consists of 183 rentable guest rooms, four of which
are suites, in a nine-story tower. The hotel is located on 5.85 acres with
improvements totaling 128,500 square feet, including 8,650 square feet of
meeting and pre-function space. Other improvements include two restaurants, a
nightclub, a fitness room, a sauna and an enclosed pool. The hotel was
constructed in 1989.

As of December 31, 1998 the borrower was current on all obligations to the
Company under the terms of the loan.

MEZZANINE INVESTMENTS

The Company makes mezzanine investments, primarily in the form of preferred
equity, leveraged joint venture equity and subordinate and participating
mortgage loans. These investments may involve development, rehabilitation or
renovation projects. A preferred equity investment is an ownership interest in
real property that is generally entitled to receive preferential treatment with
respect to distributions of income generated by that property. Leveraged joint
venture equity involves an equity investment in real property that is encumbered
by mortgage debt, which will generally provide the investor with preferential
returns and/or conversion rights into equity of another partner in the venture.
A subordinate mortgage loan is a loan secured by a subordinated lien on real
property. A participating mortgage may be a senior or junior lien and will
entitle the mortgagee to mortgage interest plus a participation in the
property's operating cash flows or residual value. To the extent the Company
invests in participating mortgages, it will attempt to ensure that the
participating income satisfies the income tests for REIT qualification.

Mezzanine investments generally provide the Company with interest at a
higher rate than typically paid on the senior mortgage plus, in most cases, a
percentage of gross revenues or, to the extent consistent with REIT
qualification, net operating income from the underlying property, payable to the
Company on an ongoing basis, and a percentage of any increase in value of the
property, payable upon maturity or refinancing. In other instances, the Company
may receive an interest rate that provides an attractive risk-adjusted return.
Alternatively, the mezzanine investments could take the form of a nonvoting
preferred equity investment in a single purpose entity borrower with the terms
of the preferred equity substantially the same as described above. As a result
of REIT qualification requirements, such a preferred equity investment in a
taxable corporation would be limited to not more than 5%, measured by fair
market value, of the total assets of the Company.

As an example of a mezzanine investment, the Company may lend to, or invest
as preferred equity in, the owner of a commercial property that is subject to a
first mortgage lien equal to 70% of its value an additional 20% to 25% of the
value of the property. Typically, in the case of a loan, either the owner would
pledge to the Company, as security for its debt to the Company, the property
subject to the first lien (giving the Company a second lien position), or,
subject to REIT qualification requirements, partners (or members) of the owner
would pledge a partnership or limited liability company ('LLC') interest in the
owner (with, in either case, covenants by the partnership or LLC in favor of the
Company). If a partnership or LLC interest is pledged, then the Company may be
in a position to make decisions with respect to the operations of the property
in the event of a default on the loan.

The Company may also create mezzanine debt investments by originating first
mortgage loans and mezzanine investments using warehouse lines of credit and
securitizing such loans and issuing and selling senior securities while
retaining subordinate securities and mezzanine investments.

As of December 31, 1998, the Company had one mezzanine investment with a
carrying value of $3.9 million. The investment is a preferred limited
partnership interest in the owner of The Allwood Brighton Office Center in
Clifton, Passaic County, New Jersey. This investment is entitled to an annual
return of 11% per annum and a $20,000 return of capital per annum, plus an
accrual of an additional 3% per annum, payable on the redemption date for this
investment or earlier to the extent of available net cash flow from the
property. Such redemption date is August 1, 2002, subject to certain
acceleration and extension options. With respect to this investment, 'available
net cash flow' means cash flow after the payment of operating expenses, tenant
improvements, mortgage payments, the 11% annual return on this investment, the
$20,000 return of capital per annum and agreed upon reserves. In addition to

such fixed returns, the Company will be entitled to receive (1) 20% of
'available net cash flow' after payment of the 3% accrual described above and
(2) 20% of the 'residual.' With respect to this investment, 'residual' means net
proceeds from the disposition or refinancing of the property less the remaining
balance of the senior mortgage, less the principal amount of this investment and
any unpaid or accrued interest thereon, less any capital contributions made by
the property owner, these contributions not to exceed $300,000. In the case of a
refinancing, an independent appraisal will be used to determine the disposition
of proceeds.

The senior mortgage loan on the property is in an original principal amount
of $9.6 million and bears interest at a fixed rate of 7.85% per annum, which
rate can be reset by the mortgagee on August 1, 2002. In the event the property
owner accepts a rate reset, the senior loan will be extended for an additional
five years. If the property owner does not accept a rate reset, the loan will
mature on August 1, 2002. The senior mortgage amortizes over a 25-year period,
was originated on July 16, 1997 and prepayment is prohibited until July 16,
1999. A yield maintenance premium will be due in the case where a prepayment is
made after July 16, 1999 and more than 120 days before maturity.

The property consists of three suburban office buildings totaling 162,339
square feet of net rentable area. The first building contains four floors,
50,748 rentable square feet and is 100% occupied by nine tenants. The second
building contains four floors, 52,591 rentable square feet and is 95.7% occupied
by 13 tenants. The third building contains two floors, 59,000 rentable square
feet. The effective rent for all three buildings as of March 1999 was $16.38 per
square foot.

The two four story buildings were built in 1986. Each building lobby has a
four-story atrium featuring circular interior stairwells and rooftop skylights.
Two elevators in each building provide access from the lobby. The third building
was constructed in the 1950's and was completely renovated in 1992. There are
currently no plans to further renovate or improve the property.

The third building is 100% leased to a national retailer, pursuant to a
lease that expires on September 30, 2008 and has an annual rent of $860,810. The
same retailer also occupies 17,560 square feet in the first building under a
separate lease that expires on December 31, 2005 and has an annual rent of
$298,520. The same retailer also occupies 3,584 square feet in the second
building under a third lease that expires on December 31, 2005 and has an annual
rent of $60,928. The businesses carried on by the other tenants include an
employment agency, a trade association, a health care company and a publishing
company. The retailer is the only tenant occupying more than 10% of the rentable
square footage of the property.

The following table details the schedule of lease expirations for the next
ten years:

TABLE 1.5 -- LEASE EXPIRATIONS FOR MEZZANINE INVESTMENT

<TABLE>
<CAPTION>
% OF GROSS
SQUARE FOOTAGE ANNUAL RENT ANNUAL RENT
EXPIRING EXPIRING EXPIRING
-------------- ----------- -----------

As of December 31, 1998, the borrower was current on all obligations to the
Company under the terms of this mezzanine investment.

OTHER ELIGIBLE INVESTMENTS

The Company may invest in real property, including under-performing real
property and development and rehabilitation projects. Under-performing real
property and development and rehabilitation projects can be risky investments
because they generally do not generate sufficient cash flow to provide a current
cash return on the investment after meeting operating expenses and debt service.
The Company, however, will seek opportunities to purchase such real property at
attractive prices. The Company's general goal with respect to each real property
will be to purchase it at a favorably low price and to reposition or convert the
use of the property if required to improve its cash flow by proper management.

The Company may also invest in companies that have substantial holdings of
Real Estate Investments. In the case of an investment in a taxable corporation,
the investment generally may represent neither (1) more than 5%, measured by
fair market value, of the total assets of the Company nor (2) more than 10% of
the voting securities of the taxable corporation.

As of December 31, 1998, the Company had made no investments in real
property, development and rehabilitation projects, foreign real estate or real
estate companies.

The Company may also make investments in U.S. Government securities
(including U.S. Treasury securities and securities issued by agencies or
instrumentalities of the U.S. Government), asset-backed securities including,
but not limited to, securities backed by consumer receivables, business
receivables, corporate obligations, insurance premiums, etc.), mortgage-backed
securities (agency and non-agency), corporate debt securities, commercial paper,
money market instruments, non-contingent interest bearing deposits in banks
chartered by or within the U.S. and money market mutual funds.

As of December 31, 1998, the Company had sold short U.S. Treasury
securities with a face amount of $39.8 million as part of the Company's strategy
of hedging the Company's portfolio against interest rate changes.

REQUIREMENTS FOR QUALIFICATION

The Company intends to elect to be taxed as a REIT under sections 856
through 860 of the Code (the 'Code' means the Internal Revenue Code of 1986, as
amended) commencing with its short taxable year ending on December 31, 1998. The
Company currently expects that it will operate in a manner that will permit the
Company to qualify as a REIT. This treatment will permit the Company to deduct
dividend distributions to its stockholders for federal income tax purposes,
thus, effectively eliminating the 'double taxation' that generally results when
a corporation earns income and distributes that income to its stockholders.

There can be no assurance, however, that the Company will qualify as a REIT
in any particular taxable year, given the highly complex nature of the rules
governing REITs, the ongoing importance of factual determinations and the
possibility of future changes in the circumstances of the Company.

FAILURE TO QUALIFY

If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the Company's stockholders in any year
in which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of the Company's
current and accumulated earnings and profits, all distributions to stockholders
will be taxable as ordinary income and, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company also will be disqualified from taxation as a REIT for the four taxable
years following the year during which the Company ceased to qualify as a REIT.
It is not possible to state whether in all circumstances the Company would be
entitled to statutory relief.

The Code defines a REIT as a corporation, trust, or association (1) that is
managed by one or more trustees or directors; (2) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (3) that would be taxable as a domestic corporation, but

for sections 856 through 860 of the Code; (4) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(5) the beneficial ownership of which is held by 100 or more persons; (6) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the '5/50 Rule');
(7) that makes an election to be a REIT (or has made such a REIT election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and maintain REIT status; (8) that uses a calendar year for federal
income tax purposes and complies with the record-keeping requirements of the
Code and Treasury Regulations promulgated thereunder; and (9) that meets certain
other tests, described below, regarding the nature of its income and assets. The
Code provides that conditions (1) to (4), inclusive, must be met during the
entire taxable year and that condition (5) must be met during at least 335 days
of a taxable year of 12 months, or during a proportionate part of a taxable year
of less than 12 months. Conditions (5) and (6) do not apply until after the
first taxable year for which an election is made by the Company to be taxed as a
REIT.

For purposes of determining stock ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. A trust that is a qualified
trust under Code Section 401(a), however, generally is not considered an
individual and beneficiaries of a Section 401(a) trust are treated as holding
shares of a REIT in proportion to their actuarial interests in the trust for
purposes of the 5/50 Rule.

INCOME TESTS

In order to qualify and to maintain its qualification as a REIT, the
Company must satisfy annually two requirements relating to its gross income.
First, at least 75% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of any combination
of defined types of income derived directly or indirectly from investments
relating to real property or mortgages on real property (including 'rents from
real property' and interest on obligations secured by mortgages on real property
or on interests in real property) or qualified temporary investment income.
Second, at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from transactions
involving real property, mortgages on real property, or temporary investments,
and from dividends, other types of interest, and gain from the sale or
disposition of stock or securities, or from any combination of the foregoing.
The specific application of these tests to the Company is discussed below.

The term 'interest,' as defined for purposes of the 75% and 95% gross
income tests, generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole or
in part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term 'interest' solely by reason
of being based on a fixed percentage or percentages of receipts or sales. In
addition, an amount received or accrued generally will not be excluded from the
term 'interest' solely by reason of being based on the income or profits of a
debtor if the debtor derives substantially all of its gross income from the
related property through the leasing of substantially all of its interests in
the property, to the extent the amounts received by the debtor would be
characterized as rents from real property if received by a REIT. Subject to this
exception, the Company generally will not be able to derive qualifying income
from a loan, the interest on which is based in whole or in part on the net
income of the obligor or any other person.

Interest on obligations secured by mortgages on real property or on
interests in real property is qualifying income for purposes of the 75% gross
income test. Any amount included in gross income with respect to a regular or
residual interest in a REMIC or regular interest in a FASIT generally is treated
as interest on an obligation secured by a mortgage on real property. If,
however, less than 95% of the assets of the REMIC or FASIT consists of real
estate assets (determined as if the Company held such assets), the Company will
be treated as receiving directly its proportionate share of the income of the
REMIC or FASIT. In addition, if the Company receives interest income with
respect to a mortgage loan that is secured by both real property and other
property and the highest principal amount of the loan outstanding during a
taxable year exceeds the fair market value of the real property on the date

the Company purchased the mortgage loan, the interest income will be apportioned
between the real property and the other property. This apportionment may cause
the Company to recognize income that is not qualifying income for purposes of
the 75% gross income test.

The Company expects to structure its investments so that the interest,
original issue discount, and market discount income that the Company derives
from CMBS and mezzanine debt investments generally will be qualifying interest
income for purposes of both the 75% and the 95% gross income tests, except to
the extent that less than 95% of the assets of a REMIC in which the Company
holds an interest consists of real estate assets (determined as if the Company
held such assets), and the Company's proportionate share of the income of the
REMIC includes income that is not qualifying income for purposes of the 75% and
95% gross income tests. In some cases, however, the loan amount of a mortgage
loan may exceed the value of the real property securing the loan, which will
result in a portion of the income from the loan being classified as qualifying
income for purposes of the 95% gross income test, but not for purposes of the
75% gross income test. Further, in the event that the interest income from a
mortgage loan would be based in part on the borrower's profits or net income,
the income from the loan generally would be disqualified for purposes of both
the 75% and the 95% gross income tests.

The Company may originate or acquire mezzanine investments that provide for
interest based in part on shared appreciation. To the extent that interest from
a loan that is based on the cash proceeds from the sale of the property securing
the loan constitutes a 'shared appreciation provision' (as defined in the Code),
income attributable to that participation feature will be treated as gain from
the sale of the secured property, which generally is qualifying income for
purposes of the 75% and 95% gross income tests but which also must be tested
under the 'prohibited transaction' rules. In addition, the Company may be
required to recognize income from a shared appreciation provision over the term
of the related loan using the constant yield method pursuant to certain Treasury
Regulations.

The rent received by the Company from the tenants of its real property
('Rent') will qualify as 'rents from real property' in satisfying the gross
income tests for a REIT described above only if several conditions are met.
First, the amount of Rent must not be based, in whole or in part, on the income
or profits of any person. However, an amount received or accrued generally will
not be excluded from the term 'rents from real property' solely by reason of
being based on a fixed percentage or percentages of receipts or sales. Second,
the Code provides that the Rent received from a tenant will not qualify as
'rents from real property' in satisfying the gross income tests if the Company,
or a direct or indirect owner of 10% or more of the Company, owns 10% or more of
that tenant, taking into account both direct and constructive ownership (a
'Related Party Tenant'). For this purpose, a partnership is deemed to
constructively own stock owned by its partner if that partner owns 25% or more
of the capital or profits interest in the partnership. Third, if Rent
attributable to personal property, leased in connection with a lease of real
property, is greater than 15% of the total Rent received under the lease, then
the portion of Rent attributable to that personal property will not qualify as
'rents from real property.' Finally, for the Rent to qualify as 'rents from real
property', the Company generally must not operate or manage the real property or
furnish or render services to the tenants of that real property, other than
through an 'independent contractor' who is adequately compensated and from whom
the Company derives no revenue. The 'independent contractor' requirement,
however, does not apply to the extent the services provided by the Company are
'usually or customarily rendered' in connection with the rental of space for
occupancy only and are not otherwise considered 'rendered to the occupant'.
However, all of the rental income derived by the Company with respect to a
property will not cease to qualify as 'rents from real property' if any
impermissible tenant services income from that property (which is deemed to be
an amount that is no less than 150% of the Company's direct costs of furnishing
or rendering the service or providing the management or operation) does not
exceed 1% of all amounts received or accrued during the taxable year directly or
indirectly by the Company with respect to that property.

REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of that income. 'Foreclosure property' is defined
as any real property (including interests in real property) and any personal
property incident to

such real property (1) that is acquired by a REIT as the result of that REIT
having bid in such property at foreclosure, or having otherwise reduced that
property to ownership or possession by agreement or process of law, after there
was a default (or default was imminent) on a lease of that property or on an
indebtedness owed to the REIT that such property secured, (2) for which the
related loan was acquired by the REIT at a time when default was not imminent or
anticipated, and (3) for which the REIT makes a proper election to treat that
property as foreclosure property. The Company does not anticipate that it will
receive significant income from foreclosure property that is not qualifying
income for purposes of the 75% gross income test, but, if the Company does
receive any income from foreclosure property, the Company expects to make an
election to treat the related property as foreclosure property.

If property is not eligible for the election to be treated as foreclosure
property ('Ineligible Property') because the related loan was acquired by the
REIT at a time when default was imminent or anticipated, income received with
respect to such Ineligible Property may not be qualifying income for purposes of
the 75% or 95% gross income tests. The Company anticipates that any income it
receives with respect to Ineligible Property will be qualifying income for
purposes of the 75% and 95% gross income tests.

It is possible that, from time to time, the Company will enter into hedging
transactions with respect to one or more of its assets or liabilities. Any such
hedging transactions could take a variety of forms, including short sales of
U.S. Treasuries, interest rate swap contracts, interest rate cap or floor
contracts, futures or forward contracts, and options. To the extent that the
Company enters into an interest rate swap or cap contract, option, futures
contract, forward rate agreement, or any similar financial instrument to reduce
interest rate risk with respect to indebtedness incurred to acquire or carry
real estate assets, any periodic income and any gain from the disposition of
that contract would be qualifying income for purposes of the 95% gross income
test, but generally not the 75% gross income test. To the extent that the
Company hedges with other types of financial instruments or in other situations,
it may not be entirely clear how the income from those transactions will be
treated for purposes of the various income tests that apply to REITs under the
Code. The Company intends to structure any hedging transactions in a manner that
does not jeopardize its status as a REIT. Accordingly, the Company may conduct
some or all of its hedging activities through a corporation that is fully
subject to federal corporate income tax and in which it owns solely nonvoting
stock.

During the one-year period beginning June 2, 1998, income received or
accrued from the temporary investment of new capital in stock or debt
instruments is treated as 'qualified temporary investment income' that counts
favorably towards the 75% income test.

The Company may originate or acquire mortgage loans and securitize those
loans through the issuance of senior debt securities secured by those mortgage
loans. As a result of these types of transactions, the Company will retain an
equity ownership interest in the mortgage loans that has economic
characteristics similar to those of a CMBS. In addition, the Company may
resecuritize CMBS through the issuance of senior debt securities secured by
those CMBS, retaining an equity interest in the CMBS used as collateral for the
resecuritization. These transactions, which effectively are borrowings, will not
cause the Company to fail to satisfy the 75% and 95% gross income tests or the
asset tests (described below) and, as presently intended to be structured by the
Company, should not result in application of the taxable mortgage pool.

The Company may receive income not described above that is not qualifying
income for purposes of the 75% and 95% gross income tests. For example, certain
fees for services will not be qualifying income for purposes of the gross income
tests, nor will foreign currency gains from non-dollar denominated loans or from
hedges of non-dollar denominated assets. Further, dividends or interest received
from an entity taxable as a regular 'C' corporation would be qualifying income
for purposes of the 95% test but not the 75% test. The Company will monitor the
amount of non-qualifying income produced by its assets and has represented that
it will manage its portfolio in order to comply at all times with the gross
income tests.

If the Company fails to satisfy one or both of the 75% and 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for that year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the Company's failure to meet these

tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. Even if
those relief provisions apply, a 100% tax would be imposed on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income test.

Although not an income test for REIT qualification, the 'prohibited
transaction' penalty tax is imposed on certain types of REIT income. Any gain
realized by the Company on the sale of any property held as inventory or other
property held primarily for sale to customers in the ordinary course of its
trade or business will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax.

ASSET TESTS

In order to qualify and maintain its qualification as a REIT, the Company,
at the close of each quarter of each taxable year, also must satisfy two tests
relating to the nature of its assets. First, at least 75% of the value of the
Company's total assets must be represented by cash or cash items (including
certain receivables), government securities, 'real estate assets,' or, in cases
where the Company raises new capital through stock (other than pursuant to a
dividend reinvestment plan) or long-term (at least five-year) public debt
offerings, temporary investments in stock or debt instruments during the
one-year period following the Company's receipt of such capital (i.e., during
the one-year period beginning June 2, 1998). The term 'real estate assets'
includes interests in real property, interests in mortgages on real property to
the extent the principal balance of a mortgage does not exceed the fair market
value of the associated real property, regular or residual interests in a REMIC
or regular interests in a FASIT (except that, if less than 95% of the assets of
the REMIC or FASIT consists of 'real estate assets' (determined as if the
Company held those assets), the Company will be treated as holding directly its
proportionate share of the assets of that REMIC or FASIT), and shares of other
REITs.

For purposes of the 75% asset test, the term 'interest in real property'
includes an interest in mortgage loans or land and improvements thereon, such as
buildings or other inherently permanent structures (including items that are
structural components of those buildings or structures), a leasehold of real
property, and an option to acquire real property (or a leasehold of real
property). An 'interest in real property' also generally includes an interest in
mortgage loans secured by controlling equity interests in entities treated as
partnerships for federal income tax purposes that own real property, to the
extent that the principal balance of the mortgage does not exceed the fair
market value of the real property that is allocable to the equity interest.

The second asset test requires that, of the investments not included in the
75% asset class, the value of any one issuer's securities owned by the Company
may not exceed 5% of the value of the Company's total assets, and the Company
may not own more than 10% of any one issuer's outstanding voting securities
(except for interests in qualified REIT subsidiaries and any entity that is
disregarded as a separate entity under Treasury Regulations dealing with entity
classification).

In general, the Company intends to structure any real property, CMBS, and,
in general, mezzanine investments that it acquires so as to be qualifying assets
for purposes of the 75% asset test, except to the extent that less than 95% of
the assets of a REMIC or FASIT in which the Company owns an interest consists of
'real estate assets' and the Company's proportionate share of those assets
includes assets that are non-qualifying assets for purposes of the 75% asset
test. CMBS and mezzanine investments that are debt obligations will be
qualifying assets for purposes of the 75% asset test to the extent that the
principal balance of each such loan does not exceed the value of the associated
real property. The Company will monitor the status of the assets that it
acquires for purposes of the various asset tests and has represented that it
will manage its portfolio in order to comply at all times with the asset tests.

If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, that failure would not cause it to lose its REIT status if
(1) it satisfied the asset tests at the close of the preceding calendar quarter
and (2) the discrepancy between the value of the Company's assets and the asset
test requirements arose from changes in the market values of its assets and was
not wholly or partly caused

by the acquisition of one or more non-qualifying assets. If the condition
described in clause (2) of the preceding sentence were not satisfied, the
Company still could avoid disqualification by eliminating any discrepancy within
30 days after the close of the calendar quarter in which it arose.

DISTRIBUTION REQUIREMENTS

The Company, in order to avoid corporate income taxation of the earnings
that it distributes, is required to distribute with respect to each taxable year
dividends (other than capital gain dividends) to its stockholders in an
aggregate amount at least equal to (1) the sum of (A) 95% of its 'REIT taxable
income' (computed without regard to the dividends paid deduction and its net
capital gain) and (B) 95% of the net income (after tax), if any, from
foreclosure property, minus (2) the sum of certain items of non-cash income.
Distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before the Company timely files its federal
income tax return for that year and if paid on or before the first regular
dividend payment date after declaration.

To the extent that the Company does not distribute all of its 'REIT taxable
income,' as adjusted, it will be subject to tax thereon at regular corporate tax
rates. To the extent that the Company does not distribute all of its net capital
gain, it will be subject to tax on the undistributed amount of such gain. The
Company may elect, however, to pay the tax on its undistributed long-term
capital gains on behalf of its stockholders, in which case the stockholders
would include in income their proportionate share of the undistributed long-term
capital gains and receive a credit or refund for their share of the tax paid by
the Company.

Furthermore, if the Company should fail to distribute during each calendar
year (or, in the case of distributions with declaration and record dates falling
in the last three months of the calendar year, by the end of the January
immediately following that year) at least the sum of (1) 85% of its REIT
ordinary income for that year, (2) 95% of its REIT capital gain income for that
year, and (3) any undistributed taxable income from prior periods, the Company
would be subject to a 4% nondeductible excise tax on the excess of that required
distribution over the amounts actually distributed (apparently regardless of
whether the Company elects (as described above) to pay the capital gains tax on
undistributed capital gains). The Company intends to make timely distributions
sufficient to satisfy the annual distribution requirements.

It is possible that, from time to time, the Company may experience timing
differences between (1) the actual receipt of income and actual payment of
deductible expenses and (2) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, the Company will
recognize taxable income in excess of its cash receipts when, as generally
happens, OID (the term 'OID' means original issue discount with respect to debt
obligations) accrues with respect to its CMBS. Furthermore, some mortgage loans
may be deemed to have OID, in which case the Company will be required to
recognize taxable income in advance of the related cash flow. OID generally will
be accrued using a methodology that does not allow credit losses to be reflected
until they are actually incurred. The Company will attempt to structure its
investments so as not to recognize excess inclusion or other 'phantom' taxable
income from REMIC residual interests; however, there can be no assurance that
excess inclusion or other 'phantom' income can be avoided. While neither the
amount (if any) by which OID on a debt instrument exceeds cash receipts from
such instrument nor the amount (if any) of excess inclusion is generally subject
to the 95% distribution requirement relating to maintenance of REIT status,
those amounts would have to be distributed to avoid corporate income taxation
thereof at the REIT level.

In addition, the Company may recognize taxable market discount income upon
the receipt of proceeds from the disposition of, or principal payments on, CMBS
and mortgage loans that are 'market discount bonds' (i.e., obligations with a
stated redemption price at maturity that is greater than the Company's tax basis
in such obligations), although such proceeds often will be used to make
nondeductible principal payments on related borrowings. Market discount income
is treated as ordinary income that is subject to the 95% distribution
requirement. It also is possible that, from time to time, the Company may
recognize net capital gain attributable to the sale of depreciated property that
exceeds its cash receipts from the sale. In addition, pursuant to certain
Treasury Regulations, the Company may be required to recognize the amount of any
payment to be made pursuant to a shared

appreciation provision over the term of the related loan using the constant
yield method. Finally, the Company may recognize taxable income without
receiving a corresponding cash distribution if it forecloses on or makes a
'significant modification' (as defined in Treasury Regulations Section
1.1001-3(e)) to a loan, to the extent that the fair market value of the
underlying property or the principal amount of the modified loan, as applicable,
exceeds the Company's basis in the original loan. Therefore, the Company may
have less cash than is necessary to meet its annual 95% distribution requirement
or to avoid corporate income tax or the excise tax imposed on certain
undistributed income. In such a situation, the Company may find it necessary to
arrange for short-term (or possibly long-term) borrowings or to raise funds
through the issuance of preferred stock or additional Common Stock (the term
'Common Stock' means the class A common stock, $.001 par value per share, of the
company).

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

RECORD-KEEPING REQUIREMENTS

Pursuant to applicable Treasury Regulations, in order to be able to elect
to be taxed as a REIT, the Company must maintain certain records and request on
an annual basis certain information from its stockholders designed to disclose
the actual ownership of its outstanding stock. The Company intends to comply
with such requirements. A REIT's failure to comply with such requirements would
result in a monetary fine imposed on such REIT. However, no penalty would be
imposed if such failure is due to reasonable cause and not to willful neglect.

ADMINISTRATIVE PROPOSAL

The Company may conduct certain hedging and other activities (which include
certain activities likely to be conducted by the Company and might include, in
certain circumstances, the creation of mortgage securities through
securitization) through non-controlled taxable subsidiaries of the Company.

The 1999 Administrative Proposal would provide an exception to the
five-percent and 10-percent asset tests (discussed above) so that REITs could
have 'taxable REIT subsidiaries.' Under the proposal, there would be two types
of taxable REIT subsidiaries, a 'qualified independent contractor subsidiary'
and a 'qualified business subsidiary.' A qualified business subsidiary would be
allowed to undertake non-tenant related activities that currently generate
non-qualifying income for a REIT, such as third-party management and
development.

The Administration's proposal would impose a number of constraints on a
taxable REIT subsidiary to ensure that the REIT could not, through a taxable
REIT subsidiary, engage in substantial non-real estate activities, and also to
ensure that the taxable REIT subsidiary pays a corporate level tax on its
earnings. The following provisions, if enacted, may curtail the Company's
ability to conduct these types of transactions. Under the Administration's
proposal: (1) the value of all taxable REIT subsidiaries owned by a REIT could
not represent more than 15 percent of the value of the REIT's total assets; (2)
a taxable REIT subsidiary would not be entitled to deduct any interest incurred
on debt funded directly or indirectly by the REIT; (3) a 100-percent excise tax
would be imposed on excess payments to ensure arm's length pricing for services
provided to REIT tenants (i.e., REIT tenants could not pay for services provided
by the taxable REIT subsidiary through increased rental payments to the REIT)
and allocation of shared expenses between the REIT and the taxable REIT
subsidiary. Certain additional limitations may apply.

This proposal would be effective after the date of enactment. REITs would
be allowed to combine and convert preferred stock subsidiaries into taxable REIT
subsidiaries tax-free prior to a certain date. There would be a transition
period to allow for conversion of preferred stock subsidiaries before the
10-percent vote or value test would become effective. Persons other than the
REIT who hold stock in a

preferred stock subsidiary would recognize gain to the extent that they received
consideration other than REIT stock for their interest in the subsidiary.

INVESTMENT ACTIVITY

SIGNIFICANT ACQUISITIONS

On June 2, 1998, the Company acquired 22 classes of CMBS, one commercial
mortgage loan and a mezzanine investment (a preferred interest in a limited
partnership) for $201.3 million from private funds managed by the Manager. In
accordance with the Charter and By-laws of the Company, the acquisition was
approved by a majority of the Independent Directors.

On June 15, 1998, the Company acquired two classes of CMBS in open market
transactions for $38.2 million.

SIGNIFICANT DISPOSITIONS

In October and November 1998, the Company disposed of 14 classes of CMBS in
open market transactions for approximately $105.3 million. The sale of these
securities resulted in realized losses of $17.9 million. Concurrent with the
sale of the CMBS, the Company closed related hedge (short) positions in
government securities, resulting in additional realized losses of $9.5 million.

The proceeds from the sales of CMBS were used by the Company to reduce its
borrowings under repurchase agreements. The following chart shows the
outstanding principal amount of borrowings by the Company under repurchase
agreements, and shareholder's equity of the Company as of the end of the last
three fiscal quarters:

TABLE 1.6 -- BORROWINGS UNDER REPURCHASE AGREEMENTS

<TABLE>
<CAPTION>
BORROWINGS
UNDER
REPURCHASE STOCKHOLDERS
DATE AGREEMENTS EQUITY
- ------------------------------------------------------- ----------- -------------
($MM)

ITEM 2. PROPERTIES

The Company utilizes office space of the Manager at 335 Madison Avenue, New
York, NY 10017 as its executive office.

ITEM 3. LEGAL PROCEEDINGS

None.

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

None.

PART II

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

The Company was initially capitalized with the sale of 750 shares of Class
A common stock, par value $0.001 per share (the 'Common Stock'), on February 18,
1998, for a total of $15,000. The Company received commitments on March 11, 1998
for the purchase, in private placements, of 1,000,000 shares of Class A common
stock at $20 per share for a total of $20,000,000. The sale of these shares was
consummated at the time of the closing of the Company's initial public offering.

On June 2, 1998, the Company completed its initial public offering of
Common Stock. The Company issued 4,000,000 shares of Common Stock at a price of
$20 per share and received proceeds of $76,025,000, net of underwriting
discounts and commissions. Offering costs in connection with the public offering
amounting to $1,337,485 have been charged against the proceeds of the offering.

Concurrent with the initial public offering, the Company issued 175,000
shares of Class B stock in exchange for a 10% interest in the Manager and an
option to purchase the remaining 90% interest in (or all of the assets of) the
Manager for 90% of fair market value. The option may be exercised between
January 2, 2000 and March 31, 2001 only with the approval of the Company's
independent directors.

The Common Stock of the Company began trading on the New York Stock
Exchange on June 2, 1998 under the symbol 'CLR'. Prior to such date, no public
market for the Common Stock of the Company existed. As of March 22, 1999, the
Company had 4,418,450 shares of Common Stock outstanding, which were held by 29
holders of record and approximately 1,600 beneficial owners.

The following table sets forth the high, low and closing share price as
reported on the New York Stock Exchange and the cash distributions declared per
share of Common Stock.

TABLE 5.1 -- SHARE PRICE AND DISTRIBUTIONS DECLARED

<TABLE>
<CAPTION>
(PRICE PER SHARE) CASH DISTRIBUTIONS
---------------------------- DECLARED
PERIOD BEGINNING PERIOD ENDING HIGH LOW CLOSE PER SHARE
- -------------------- ------------------------ ------ ------ ------ ------------------
<S> <C> <C> <C> <C> <C>
May 28, 1998 June 30, 1998 $19.06 $15.13 $15.38 $ 0.14
July 1, 1998 September 30, 1998 16.69 10.19 11.56 0.45
October 1, 1998 December 31, 1998 11.56 1.88 4.25 0.15
------
$ 0.74
------
------
</TABLE>

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected consolidated financial data of the
Company and its subsidiaries for the period indicated. Additional financial
information is set forth in the audited financial statements and notes thereto
and in 'Management's Discussion and Analysis of Financial Condition and Results
of Operations' included herein.

<TABLE>
<CAPTION>
FOR THE PERIOD JUNE
2, 1998
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1998
--------------------
<S> <C>
Operations Data
Income
Interest income from securities -- trading......................... $ 12,580,589
Other investment income............................................ 919,876
--------------------
13,500,465
--------------------
Expense
Interest........................................................... 8,571,422
Other expenses..................................................... 1,683,411
--------------------
10,254,833
--------------------
Other operating losses.................................................. 51,969,592
--------------------
Total loss.............................................................. 48,723,960
--------------------
--------------------
Loss per share.......................................................... 9.93
Distributions per share................................................. $0.74
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------
<S> <C>
Selected Balance Sheet Data
Total assets............................................................ $148,022,878
Total liabilities....................................................... 108,106,054
Shareholders' equity.................................................... 39,916,824
</TABLE>

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

The Company was organized in February 1998 to invest in commercial
mortgage-backed securities (primarily subordinate securities), commercial
mortgage loans, mezzanine investments, equity investments, and other real estate
related investments. Substantially all of the $94.7 million of net proceeds
received from the sale of 5,000,000 shares of its Class A Common Stock in June
1998 together with the net proceeds of other financing arrangements has been
used to acquire the Company's current portfolio of investments.

The following discussion of the Company's financial condition, results of
operations, and capital resources and liquidity should be read in conjunction
with the Company's financial statements and related notes.

MARKET CONDITIONS

The year 1998 was a difficult year for the Company. Following the initial
public offering of the Common Stock on June 2, 1998, the Company immediately
deployed its capital through a series of investments in CMBS, a commercial whole
loan and a mezzanine investment.

In the month of August, however, new CMBS issuance and credit concerns
across other markets led to the limited widening of spreads on CMBS. The price
of a fixed income security is often determined by adding an interest rate spread
to a benchmark interest rate, such as the U.S. Treasury rate. As the spread on a
security widens (or increases), the price (or value) of the security falls.

In September, the restructuring of several prominent hedge funds led to
extensive spread widening in CMBS and other fixed income markets as well as a
rally in the market for government securities. Continued credit concerns led to
a tightening of credit markets. At the same time, liquidity in the CMBS market
diminished significantly, with much of the diminution occurring in the month of
September. This lack of liquidity continued through the end of the year.

In October and November, the Company disposed of 14 classes of CMBS to
reduce leverage and the Company's exposure to continued spread widening. The
sale of these securities resulted in realized losses of approximately $17.9
million. In conjunction with the sale of the CMBS, the Company closed related
short positions in US Government securities. The closing of these positions
resulted in realized losses of approximately $9.5 million. For more information
on the sale of these CMBS, see 'INVESTMENT ACTIVITY -- Significant
Dispositions.'

The month of December offered some small signs of improvement in the CMBS
market as limited liquidity returned, primarily for investments in investment
grade securities.

RESULTS OF OPERATIONS

GENERAL

The Company began operations on June 2, 1998. Net losses for the period
from June 2, 1998 to December 31, 1998 amounted to $48,723,960 or $9.93 per
share. The total loss for the period from June 2, 1998 to December 31, 1998 was
attributable primarily to realized losses on sales of CMBS of $17,935,969,
losses from the closing of short positions in government securities of
$10,774,778, interest expense of $8,571,422 and offset by income from
investments of $13,500,465.

The results of operations realized during the period ended December 31,
1998 are not necessarily indicative of the results that may be expected for
future periods.

INVESTMENT INCOME

For the period June 2, 1998 to December 31, 1998, the Company earned income
of $13,500,465 from investments as follows:

TABLE 7.1 -- INVESTMENT INCOME FOR THE PERIOD JUNE 2, 1998 THROUGH DECEMBER 31,
1998

<TABLE>
<CAPTION>
INVESTMENT INCOME EARNED
---------- -------------
<S> <C>
CMBS................................................................ $ 8,894,931
Deposits with brokers as collateral for securities sold short....... 3,685,658
Commercial mortgage loan............................................ 560,452
Mezzanine investment................................................ 316,903
Cash and cash equivalents........................................... 42,521
-------------
Total.......................................................... $13,500,465
-------------
-------------
</TABLE>

In the months of October and November, 1998, the Company sold 14 classes of
CMBS in open market transactions. The interest income earned on the securities
that were sold was approximately $3.72 million for the period June 2, 1998 to
December 31, 1998.

INTEREST EXPENSE

For the period June 2, 1998 to December 31, 1998, the Company incurred
interest expense of $8,571,422 from repurchase agreements and government
securities sold short.

TABLE 7.2 -- INTEREST EXPENSE FOR THE PERIOD JUNE 2, 1998 THROUGH DECEMBER 31,
1998

<TABLE>
<CAPTION>
INTEREST EXPENSE
----------------

<S> <C>
Repurchase agreements............................................. $4,383,251
Government securities sold short.................................. 4,188,171
----------------
$8,571,422
----------------
----------------
</TABLE>

As of December 31, 1998, the Company had entered into repurchase agreements
in the amount of $58,924,000. The weighted average interest rate was 6.44%, and
is a variable rate, based on one-month LIBOR plus a weighted average spread of
0.89%.

As of December 31, 1998, the Company had the following open short positions
in U.S. Treasury securities: $36,320,000 (face) of U.S. Treasury 7.00%,
07/15/2006 and $3,493,000 (face) of U.S. Treasury 6.50%, 11/15/2026.

OTHER EXPENSES

Other expenses consist primarily of due diligence costs of $548,284
incurred relating to transactions that were ultimately abandoned and
miscellaneous general and administrative expenses.

In accordance with the terms of the Management Agreement, an accrual of
$495,596 in base management fees was made for the period June 2, 1998 to
December 31, 1998. The Company has not accrued for or paid any incentive
compensation to the Manager since inception.

During 1998, the Company recorded impairment losses on other investments of
$2,500,000.

CHANGES IN FINANCIAL CONDITION

General. Total assets as of December 31, 1998 amounted to $148.0 million
and were comprised primarily of $80.7 million of CMBS, $46.8 million of deposits
with brokers as collateral for securities sold short, an investment of $12.9 in
a commercial mortgage loan, and a mezzanine investment of $3.9 million. The
Company purchased these assets during the year ended December 31, 1998 with the
net proceeds from its initial public offering on June 2, 1998.

Total liabilities of the Company as of December 31, 1998 amounted to $108.1
million and were comprised primarily of repurchase agreements in the amount of
$58.9 million and government securities sold short in the amount of $45.6
million.

CAPITAL RESOURCES AND LIQUIDITY

Liquidity is a measurement of the Company's ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, loan acquisition and lending activities and for other general
business purposes. The Company's primary sources of funds for liquidity consist
of repurchase agreements and maturities and principal payments on securities and
loans, and proceeds from sales thereof.

The tightening of credit markets and the widening of yield spreads on CMBS
in the third and fourth quarters adversely affected the liquidity position of
the Company. While the Company met all obligations under its financing
agreements, it was required to post additional collateral in order to meet
margin calls from its lenders. In addition, in October and November 1998, the
Company sold 14 classes of CMBS for $105.3 million in order to improve its
liquidity. If credit and/or fixed income markets worsen, the Company may not be
able to meet its obligations under its financing agreements.

TABLE 7.3 -- BORROWINGS UNDER REPURCHASE AGREEMENTS

<TABLE>
<CAPTION>
REPURCHASE
AGREEMENT
DEBT
DATE ($ MM)
- ----------------------------------------------------------------------- ----------

The Company's operating activities used cash flows of $126.7 million during
period from June 2, 1998 through December 31, 1998, primarily through a net
loss, net purchases of securities -- trading and deposits with brokers as
collateral for short sales.

The Company's investing activities used cash flows totaling $16.8 million
during the period from June 2, 1998 through December 31, 1998 to purchase the
commercial mortgage loan and limited partnership investment.

The Company's financing activities provided $144.1 million during the
period from June 2, 1998 through December 31, 1998 and consisted primarily of
proceeds from the issuance of common stock and borrowings under repurchase
agreements.

The Manager regularly evaluates investment opportunities on behalf of the
Company. In the event that the Manager identifies an investment opportunity
consistent with the Company's investment objectives, the Company may seek
sources of additional capital, including various third-party borrowings or the
issuance of preferred equity. The Company may also elect to increase its
borrowings under repurchase agreements. The Company currently has no outstanding
investment commitments or any immediate investment plans.

The Company, in order to avoid corporate income taxation of the earnings
that it distributes, is required to distribute annually at least 95% if its
taxable income to stockholders. It is possible that the Company may experience
timing differences between the actual receipt of income and the inclusion of
that income in the calculation of taxable income. In the event that the cash
generated by the Company's investments is insufficient to fund the distributions
to stockholders that are required to maintain the Company status as a REIT, the
Company may access cash reserves or seek sources of additional capital in order
to fund the distributions.

Except as discussed herein, management is not aware of any other trends,
events, commitments or uncertainties that may have a significant effect on
liquidity.

STOCKHOLDERS' EQUITY

Stockholders' equity as of December 31, 1998 was $39,916,824. The
stockholders' equity balance as of this date was attributable primarily to the
proceeds of the initial public offering, realized losses in
securities -- trading of $28,710,747, unrealized losses in securities -- trading
of $20,758,845, an impairment loss of $2,500,000 and a decrease of $5,982,490
due to the repurchase of stock. During the period June 2, 1998 through December
31, 1998, the Company made distributions of $0.74 per share for a total of
$3,579,242.

YEAR 2000 COMPLIANCE

Substantially all of the Company's computer systems are supplied by the
Manager. In 1998, the Manager formed a internal team of information technology
professionals to identify the risks to the business operations of the Manager,
and the Company, that may arise from the transition to the Year 2000 and beyond.
The team also assumed responsibility for increasing awareness of the potential
risks to the business operations through presentations to employees and
management of the Manager. The team has also completed a written plan that
identifies corrective steps to mitigate these risks.

The Manager's plan for Year 2000 compliance covers mission-critical
systems, physical facilities and communications systems. It also addresses
external interfaces with third-party computer systems that communicate with the
systems of the Manager. The Manager has allocated approximately $50,000 to cover
expenses associated with the assessment of potential Year 2000 issues. The
Company has not allocated any funds to cover Year 2000 compliance; however, the
Company may bear a portion of the costs incurred by the Manager in this regard.

MISSION CRITICAL SYSTEMS

The Manager advised the Company that, as of December 31, 1998, it had
completed an inventory of all systems, and had identified all mission-critical
systems that were not Year 2000 compliant. The Manager had also developed
remediation and testing plans to address Year 2000 issues. As of December 31,
1998, the Manager advised the Company that it had completed remediation and
testing of substantially all internal mission-critical systems. The Manager
advised the Company that it expects to complete remediation and testing by June
30, 1999.

ASSESSMENT OF YEAR 2000 READINESS OF THIRD PARTIES

On December 31, 1998, the Manager advised the Company that it had
identified all third-parties upon whom the Manager relies for mission-critical
and non-mission-critical systems. The Manager also notified the Company that it
had contacted approximately one-half of the identified third parties. All of the
third-parties contacted by the Manager had documented their plans for addressing
Year 2000 issues and their progress in achieving Year 2000 compliance. The
Manager advised the Company that it expects to contact all remaining
third-parties upon whom the Manager relies for mission-critical and
non-mission-critical systems by June 30, 1999.

DEVELOPMENT OF CONTINGENCY PLAN

On December 31, 1998, the Manager advised the Company that it had yet to
create a written contingency plan for systems it uses if, after December 31,
1999, it has computer problems caused by the Year 2000. The Manager has reported
that it is in the process of preparing a written contingency plan and that it
expects the contingency plan to be complete by June 30, 1999.

RISKS ASSOCIATED WITH ACHIEVING YEAR 2000 COMPLIANCE

Based upon the Manager's representations regarding its own efforts and
responses from third parties, the Company believes that the Manager will be Year
2000 compliant by mid-1999. Until the Manager advises the Company that it has
completed further testing and has received confirmations of Year 2000 compliance
from additional third parties, the Company cannot assure that the Manager will
achieve Year 2000 compliance within its current time and cost estimates. There
can be no assurance that the assessments or remediation measures made by the
Manager or significant third parties with whom the Manager's systems interface
have been or will be accurate. There is a risk that failure by the Manager or
those significant third parties to achieve Year 2000 compliance will have an
adverse effect on the business operations of the Company.

FORWARD-LOOKING STATEMENTS

Certain statements contained herein are not, and certain statements
contained in future filings by the Company with the SEC, in the Company's press
releases or in the Company's other public or shareholder communications may not
be, based on historical facts and are 'forward-looking statements' within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements which are based on various assumptions (some of which are beyond the
Company's control), may be identified by reference to a future period or
periods, or by the use of forward-looking terminology, such as 'may,' 'will,'
'believe,' 'expect,' 'anticipate,' 'continue,' or similar terms or variations on
those terms, or the negative of those terms. Actual results could differ
materially from those set forth in forward-looking statements due to a variety
of factors, including, but not limited to, those related to the economic
environment, particularly in the market areas in which the Company operates,
competitive products and pricing, fiscal and monetary policies of the U.S.
Government, changes in prevailing interest rates, acquisitions and the
integration of acquired businesses, credit risk management, asset/liability
management, the financial and securities markets and the availability of and
costs associated with sources of liquidity. The Company does not undertake, and
specifically disclaims any obligation, to publicly release the result of any
revisions, which may be made to any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to loss resulting from changes in interest
rates, changes in spreads on CMBS, foreign currency exchange rates, commodity
prices and equity prices. The primary market risks to which the investments of
the Company are exposed are interest rate risk and CMBS spread risk, which are
highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations and
other factors beyond the control of the Company.

Changes in the general level of interest rates can affect the net interest
income of the Company. The following table demonstrates the estimated effect
that changes in interest rates would have on the operating performance of the
Company and the value of the Company's investments in CMBS and short positions
in government securities. All changes in income and value are measured as
percentage changes from the projected income and portfolio value if no change in
interest rates were to occur.

TABLE 7.4 -- PERCENTAGE CHANGE IN EXPECTED INCOME AND PORTFOLIO VALUE
FROM CHANGES IN INTEREST RATES

<TABLE>
<CAPTION>
CHANGE IN
CHANGE IN PORTFOLIO
CHANGE IN INTEREST RATES INCOME* VALUE**
- ------------------------ --------- ---------

<S> <C> <C>
- 250 Basis Points................................................... 23.8% 2.6%
- 200 Basis Points................................................... 18.7 2.0
- 150 Basis Points................................................... 13.8 1.5
- 100 Basis Points................................................... 9.1 1.0
- 50 Basis Points................................................... 4.5 0.5
No change............................................................. 0.0 0.0
+50 Basis Points................................................... - 4.3 - 0.5
+100 Basis Points................................................... - 8.4 - 0.9
+150 Basis Points................................................... - 12.3 - 1.3
+200 Basis Points................................................... - 16.1 - 1.7
+250 Basis Points................................................... - 19.7 - 2.1
</TABLE>

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

* Income includes expected interest income from CMBS, amortization of market
discount on CMBS, net interest income on short positions in government
securities and mark to market adjustments to CMBS and government securities
from changes in interest rates.

** Portfolio value includes fair value estimate of CMBS and net short position
in government securities.

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

The Company is further exposed to interest rate risk through its short term
financing through repurchase agreements at rates that are based on 30-day LIBOR.
The repurchase agreements into which the Company has entered are for terms of
less than, or equal to 30 days. Changes in interest rates may increase the
Company's cost of financing its investments. The following table demonstrates
the estimated effect that changes in interest rates would have on the interest
expense of the Company:

TABLE 7.5 -- PERCENTAGE CHANGE IN INTEREST EXPENSE
UNDER REPURCHASE AGREEMENTS FROM CHANGES IN LIBOR

<TABLE>
<CAPTION>
CHANGE IN
INTEREST
CHANGE IN LIBOR EXPENSE
- --------------- ---------

<S> <C>
- 250 Basis Points..................................................... - 38.8%
- 200 Basis Points..................................................... - 31.1
- 150 Basis Points..................................................... - 23.3
- 100 Basis Points..................................................... - 15.5
- 50 Basis Points..................................................... - 7.8
No change in LIBOR...................................................... 0.0
+50 Basis Points..................................................... 7.8
+100 Basis Points..................................................... 15.5
+150 Basis Points..................................................... 23.3
+200 Basis Points..................................................... 31.1
+250 Basis Points..................................................... 38.8
</TABLE>

The investments of the Company are also exposed to spread risk. The price
of a fixed income security is generally determined by adding an interest rate
spread to a benchmark interest rate, such as the U.S. Treasury rate. As the
spread on a security widens (or increases), the price (or value) of the security
falls. As spreads on CMBS widen, the fair value of the Company's portfolio
falls. Spread widening in the market for CMBS can occur as a result of market
concerns over the stability of the commercial real estate market, excess supply
of CMBS, or general credit concerns in other markets. The following table
demonstrates the estimated effect that changes in CMBS spreads would have on the
value of the Company's CMBS portfolio:

TABLE 7.6 -- PERCENTAGE CHANGE IN CMBS PORTFOLIO VALUE FROM
CHANGES IN CMBS SPREADS

<TABLE>
<CAPTION>
CHANGE IN CMBS
PORTFOLIO
CHANGE IN CMBS SPREADS VALUE
- ---------------------- --------------

<S> <C>
- 250 Basis Points............................................... 14.7%
- 200 Basis Points............................................... 11.5
- 150 Basis Points............................................... 8.4
- 100 Basis Points............................................... 5.5
- 50 Basis Points............................................... 2.7
No change in CMBS Spreads 0.0
+ 50 Basis Points............................................... - 2.6
+100 Basis Points............................................... - 5.1
+150 Basis Points............................................... - 7.4
+200 Basis Points............................................... - 9.7
+250 Basis Points............................................... - 11.9
</TABLE>

The Company enters into contracts to sell securities that it does not own
at the time of the sale, at a specified price at a specified time (short sales).
The Company utilizes these contracts as a means of mitigating ('hedging') the
potential financial statement impact of changes in the fair value of its
portfolio of CMBS due to changes in interest rates. As the value of the
Company's CMBS declines (increases) with increases (decreases) in interest
rates, the value of the contracts increases (decreases). There can be no
guarantee, however, that the change in value of the contract will completely
offset the change in value of the fixed-rate interest earning asset. These
contracts involve the short sale of U.S. Treasury securities. Risks in these
contracts arise from the possible inability of counterparties to meet the terms
of their contracts and from movements in securities values and interest rates.
If the market value of the securities involved in the short sale increases, the
Company may be required to meet a 'margin call'.

At December 31, 1998, the Company had open contracts to sell U.S. Treasury
securities with face amounts totaling $39.8 million. Although the Company
generally does not settle these contracts at expiration, but instead rolls them
over into new contracts, if the Company had settled its open contracts at
December 31, 1998, the counterparty would have been required to pay the Company
$175,343.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements of the Company and the related notes, together
with the Independent Auditors' Report thereon are set forth on pages F-1 through
F-13 of this Form 10-K.

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 as to the directors and executive
officers of the Company is incorporated herein by reference to the definitive
Proxy Statement to be filed pursuant to Regulation 14A under the headings
'Election of Directors' and 'Management of the Company.'

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated herein by reference to
the definitive Proxy Statement to be filed pursuant to Regulation 14A under the
headings 'Executive Compensation.'

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is incorporated herein by reference to
the definitive Proxy Statement to be filed pursuant to Regulation 14A under the
headings 'Security Ownership of Certain Beneficial Owners and Management.'

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated herein by reference to
the definitive Proxy Statement to be filed pursuant to Regulation 14A under the
headings 'Certain Relationships and Related Transactions.'

PART IV

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

(a) Exhibits

<TABLE>
<S> <C>
3.1 -- Articles of Incorporation(1)
3.2 -- Bylaws of the Company(2), as amended by Resolution of the Board of Directors dated March 10, 1999*
4.1 -- Form of Common Stock Certificate(1)
10.1 -- Form of Management Agreement(1)
10.2 -- Form of 1998 Stock Incentive Plan(1)
10.3 -- Purchase and Sale Agreement between the Company and Monroe Investment Corp.(3)
10.4 -- Purchase and Sale Agreement between the Company and Gramon Fund (BVI), LP(3)
21.1 -- List of Subsidiaries of the Company as of March 22, 1999*
27.1 -- Financial Data Schedule -- For the period ended December 31, 1998*
</TABLE>

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

(1) Incorporated by reference to the similarly described exhibit filed in
connection with the Company's Registration Statement on Form S-11 (File No.
333-47887), as amended.

(2) As filed with the Company's Registration Statement on Form S-11 (File No.
333-47887), as amended.

(3) Incorporated by reference to the similarly described exhibit filed in
connection with the Company's Quarterly Report on Form 10-Q filed on August
14, 1998.

* Filed herewith

(b) Reports on Form 8-K filed during the quarter ended December 31, 1998

(1) Form 8-K filed on October 30, 1998, announcing financial results for
the three months ended September 30, 1998 and the subsequent
disposition of assets.

CLARION COMMERCIAL HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Financial Statements:
Consolidated Statement of Financial Condition at December 31, 1998.................................... F-3
Consolidated Statement of Operations for the period June 2, 1998 (Commencement of Operations) through
December 31, 1998.................................................................................... F-4
Consolidated Statement of Changes in Stockholders' Equity for the period June 2, 1998 (Commencement of
Operations) through December 31, 1998................................................................ F-5
Consolidated Statement of Cash Flows for the period June 2, 1998 (Commencement of Operations) through
December 31, 1998.................................................................................... F-6
Notes to Consolidated Financial Statements............................................................ F-7
</TABLE>

All schedules have been omitted because either the required information is
not applicable or the information is shown in the consolidated financial
statements or notes thereto.

F-1

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
CLARION COMMERCIAL HOLDINGS, INC.
New York, New York

We have audited the accompanying consolidated statement of financial
condition of Clarion Commercial Holdings, Inc. and Subsidiaries (together, the
'Company') as of December 31, 1998, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the period June
2, 1998 (commencement of operations) through December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principals 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, such consolidated financial statements present fairly, in
all material respects, the financial condition of Clarion Commercial Holdings,
Inc. and Subsidiaries as of December 31, 1998 and the results of their
operations and their cash flows for the period June 2, 1998 (commencement of
operations) through December 31, 1998 in conformity with generally accepted
accounting principles.

DELOITTE & TOUCHE LLP

New York, New York
March 10, 1999

F-2

CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1998

<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents............................................................... $ 565,684
Securities -- trading, at fair value.................................................... 80,731,788
Commercial mortgage loan receivable..................................................... 12,949,224
Other investments....................................................................... 4,856,250
Deposits with brokers as collateral for securities sold short........................... 46,830,041
Accrued interest receivable............................................................. 1,514,932
Other assets............................................................................ 574,959
------------
Total assets....................................................................... $148,022,878
------------
------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Repurchase agreements................................................................... $ 58,924,000
Government securities sold short........................................................ 45,578,695
Dividends payable....................................................................... 689,348
Treasury stock payable.................................................................. 577,851
Other liabilities....................................................................... 2,336,160
------------
Total liabilities.................................................................. 108,106,054
------------

STOCKHOLDERS' EQUITY
Preferred Stock, par value $.01 per share, 25,000,000 shares authorized; no shares
issued................................................................................ --
Class A Common Stock, par value $.001 per share 74,000,000 sharers authorized; 5,000,750
issued; 4,451,050 shares outstanding.................................................. 5,001
Class B Common Stock, par value $.001 per share 1,000,000 shares authorized; 175,000
issued and outstanding................................................................ 175
Additional paid-in capital.............................................................. 98,197,339
Net loss and distributions.............................................................. (52,303,201)
Treasury stock -- (549,700 shares), at cost............................................. (5,982,490)
------------
Total stockholders' equity......................................................... 39,916,824
------------
Total liabilities and stockholders' equity......................................... $148,022,878
------------
------------
</TABLE>

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

F-3

CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD JUNE 2, 1998 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31,
1998

<TABLE>
<S> <C>
Income:
Interest income from securities -- trading.......................................... $12,580,589
Income from commercial mortgage loan................................................ 560,452
Income from other investments....................................................... 316,903
Interest income -- other............................................................ 42,521
-----------
Total income................................................................... 13,500,465
-----------
Expenses:
Interest............................................................................ 8,571,422
Management fee...................................................................... 495,596
Other expenses...................................................................... 1,187,815
-----------
Total expenses................................................................. 10,254,833
-----------
Other operating losses:
Realized losses from securities -- trading.......................................... 28,710,747
Unrealized losses from securities -- trading........................................ 20,758,845
Writedown of other investments...................................................... 2,500,000
-----------
Total other operating losses................................................... 51,969,592
-----------
Net loss................................................................................. $48,723,960
-----------
-----------
Net loss per share:
Basic............................................................................... $9.93
-----
-----
Diluted............................................................................. $9.93
-----
-----
Weighted average shares outstanding:
Basic............................................................................... 4,905,778
---------
---------
Diluted............................................................................. 4,905,778
---------
---------

</TABLE>

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

F-4

CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD JUNE 2, 1998 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31,
1998

<TABLE>
<CAPTION>
ADDITIONAL
CLASS A CLASS B PAID-IN NET LOSS AND TREASURY
SHARES SHARES CAPITAL DISTRIBUTIONS STOCK TOTAL
------- ------- ----------- ------------- ----------- ------------

<S> <C> <C> <C> <C> <C> <C>
Balance at June 2, 1998.............. $ 1 $-- $ 14,999 $ -- $ -- $ 15,000
Issuance of common stock:
Class A......................... 5,000 -- 94,682,515 -- -- 94,687,515
Class B......................... -- 175 3,499,825 -- -- 3,500,000
Distributions declared:
Class A common stock............ -- -- -- (3,475,991) -- (3,475,991)
Class B common stock............ -- -- -- (103,250) -- (103,250)
Net loss............................. -- -- -- (48,723,960) -- (48,723,960)
Treasury stock purchases............. -- -- -- -- (5,982,490) (5,982,490)
------- ------- ----------- ------------- ----------- ------------
Balance at December 31, 1998......... $5,001 $ 175 $98,197,339 $ (52,303,201) $(5,982,490) $ 39,916,824
------- ------- ----------- ------------- ----------- ------------
------- ------- ----------- ------------- ----------- ------------
</TABLE>

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

F-5

CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD JUNE 2, 1998 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31,
1998

<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss......................................................................................... $ (48,723,960)
Adjustments to reconcile net loss to net cash used by operating activities:
Premium amortization (discount accretion), net.............................................. (276,391)
Unrealized loss on investment in commercial mortgage-backed securities...................... 18,937,803
Unrealized loss on short sales of government securities..................................... 1,821,042
Writedown of other investments.............................................................. 2,500,000
Increase in accrued interest receivable & other assets...................................... (2,089,891)
Increase in accrued interest payable & other liabilities.................................... 3,603,359
Investment in securities -- trading......................................................... (222,588,765)
Proceeds from sale of securities -- trading................................................. 123,218,096
Increase in deposits with broker as collateral for securities sold short.................... (46,830,041)
Increase in government securities sold short................................................ 43,757,652
-------------
Net cash used in operating activities............................................................ (126,671,096)
-------------
Cash flows from investing activities:
Commercial mortgage loan receivable......................................................... (12,971,754)
Investment in limited partnership........................................................... (3,856,250)
-------------
Net cash used in investing activities............................................................ (16,828,004)
-------------
Cash flows from financing activities:
Proceeds from reverse repurchase agreements................................................. 58,924,000
Proceeds from issuance of common stock, net of offering costs............................... 94,687,515
Distributions paid.......................................................................... (3,579,241)
Purchases of treasury stock................................................................. (5,982,490)
-------------
Net cash provided by financing activities........................................................ 144,049,784
-------------
Net increase in cash and cash equivalents........................................................ 550,684
Cash and cash equivalents at beginning of period................................................. 15,000
-------------
Cash and cash equivalents at end of period....................................................... $ 565,684
-------------
-------------
</TABLE>

Supplemental information: Interest paid: $7,141,976

Supplemental disclosures of cash flow information:

Dividends in the amount of $689,348 were declared on 12/23/98 and paid on
1/15/99.

Treasury stock in the amount of $577,581 was purchased prior to 12/31/98
for settlement after 1/1/99.

175,000 shares of Class B Common Stock valued at $3,500,000 were exchanged
for a 10% interest in the Manager on June 2, 1999.

F-6

CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Clarion
Commercial Holdings, Inc. ('Clarion') and its consolidated subsidiaries
(together with Clarion, the 'Company'). Clarion directly owns two subsidiaries,
CCHI General, Inc. ('General Partner') and CLARCOMM Limited, Inc. ('Limited
Partner'). General Partner and Limited Partner own 1% and 99% respectively of
CLARCOMM Holdings, L.P. ('Operating Partnership'). All intercompany transactions
and balances are eliminated in consolidation.

Clarion was incorporated in Maryland in February 1998 and commenced its
operations on June 2, 1998. The Company is a specialty finance company organized
to invest in commercial mortgage-backed securities (primarily subordinate
securities), commercial mortgage loans, mezzanine investments, equity
investments and other real estate related investments. The Company is organized
and managed as a single business segment.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES

In preparing the consolidated financial statements, management is required
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 consolidated statement of financial condition and the reported amounts of
revenues and expenses for the period covered. Actual results could differ from
those estimates and assumptions. Significant estimates in the financial
statements include the valuation of the Company's investments in securities and
other investments.

A summary of the Company's significant accounting policies follows:

SECURITIES -- TRADING

At the date of acquisition, the Company elected to designate its government
securities and commercial mortgage-backed securities ('CMBS') as trading assets.
Such securities are carried at their estimated fair value, with the net
unrealized gains or losses included in earnings. For a description of the
methodology used in determining fair value of the Company's CMBS investments,
refer to Note 3. Interest income is recognized as it becomes receivable, and
includes amortization of premiums and accretion of discounts, computed using the
effective yield method, after considering estimated prepayments and credit
losses. Actual credit loss and prepayment experience is reviewed periodically
and effective yields adjusted if necessary.

The Company may, in the future, acquire similar assets that will be held
for longer periods of time, and will therefore, not be held principally for the
purpose of selling them in the near term. In this case, the Company may elect to
designate these assets as 'Available-For-Sale' and any subsequent unrealized
gains and losses on the assets would be reported in other comprehensive income.

SHORT SALES

The Company enters into contracts to sell securities that it does not own
at the time of the sale, at a specified price at a specified time (short sales).
The Company utilizes these contracts as a means of mitigating ('hedging') the
potential financial statement impact of changes in the fair value of its
portfolio of CMBS due to changes in interest rates. These contracts involve the
sale of U.S. Treasury securities borrowed from a broker. The broker retains the
proceeds from the sale until the Company replaces the borrowed securities. Risks
in these contracts arise from the possible inability of counterparties to meet
the terms of their contracts and from movements in securities values and
interest rates. If the market value of the securities involved in the short sale
increases, the Company may be required to meet a 'margin call'. The Company
accounts for its liability to return the borrowed securities under short sales
contracts at their market values, with unrealized gains or losses recorded in
earnings. Income earned on the proceeds on deposit with brokers is included in
interest income from securities -- trading and interest due under the short
sales is included in interest expense.

F-7

CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMMERCIAL MORTGAGE LOAN

The Company's investment in a commercial mortgage loan is carried at
amortized cost, with interest income recognized as it becomes receivable. The
Company periodically evaluates the collectibility of both interest and principal
on its loan to determine whether such loan is impaired. A loan is considered to
be impaired when, based on current information and events, it is probable that
the Company will be unable to collect all amounts due according to the existing
contractual terms. If a loan is determined to be impaired, a loss accrual is
recorded through income, determined by discounting the expected future cash
flows at the loan's effective interest rate or, for practical purposes, from the
estimated fair value of the collateral.

OTHER INVESTMENTS

The Company's 10% interest in Clarion Capital, LLC (the 'Manager') and the
preferred interest in a limited partnership are accounted for at cost, with
income from distributions recognized as distributions are declared. The Company
periodically reviews these investments for other-than-temporary impairment. Any
such impairment would be recognized in income by reducing the investment to its
estimated fair value.

COMPREHENSIVE INCOME

SFAS No. 130, 'Reporting Comprehensive Income' defines comprehensive income
as the change in equity of a business enterprise during a period from
transactions and other events and circumstances, excluding those resulting from
investments by and distributions to owners. The Company had no items of other
comprehensive income during the period June 2, 1998 (commencement of operations)
through December 31, 1998, so its net loss was the same as its comprehensive
loss.

NEW ACCOUNTING PRONOUNCEMENT

In June of 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, 'Accounting for Derivative
Instruments and Hedging Activities' ('SFAS 133'). This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that the Company recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge of the exposure to changes in the fair value
of a recognized asset or liability or a hedge exposure to variable cash flows of
a forecasted transaction. The accounting for changes in the fair value of a
derivative (e.g. through earnings or outside earnings, through comprehensive
income) depends on the intended use of the derivative and the resulting
designation.

The Company is required to implement SFAS 133 on January 1, 2000. Company
management is evaluating the impact that this statement will have on its hedging
strategies and use of derivative instruments and is currently unable to predict
the effect, if any, it will have on the Company's financial statements.

NET LOSS PER SHARE

Net loss per share is computed in accordance with Statement of Financial
Accounting Standards ('SFAS') No. 128, Earnings Per Share, and is calculated on
the basis of the weighted average number of common shares outstanding during the
period plus the additional dilutive effect of common stock equivalents. The
dilutive effect of outstanding stock options is calculated using the treasury
stock method.

F-8

CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

For the period June 2, 1998 (commencement of operations) through December
31, 1998, diluted net loss per share was the same as basic net loss per share,
because all outstanding stock options at December 31, 1998 were antidilutive.

DISTRIBUTIONS

On July 15, 1998, the Company made a distribution of $0.14 per share to
stockholders of record at the close of business on June 30, 1998. On October 15,
1998, the Company made a distribution of $0.45 per share to stockholders of
record at the close of business on September 30, 1998. On January 15, 1999, the
Company made a distribution of $0.15 per share to stockholders of record at the
close of business on December 31, 1998. No portion of these distributions is
expected to be either a return of capital or a capital gain for income tax
purposes.

INCOME TAXES

The Company intends to elect to be taxed as a Real Estate Investment Trust
('REIT') and comply with the provisions of the Internal Revenue Code of 1986, as
amended (the 'Code'), with respect thereto. Accordingly, the Company will not be
subjected to federal income tax to the extent of its distributions to
stockholders and as long as certain asset, income and stock ownership tests are
met.

NOTE 3 -- SECURITIES -- TRADING AND SHORT SALES

The Company's securities -- trading consist of CMBS with an estimated fair
value of $80,731,788 and an amortized cost of $99,669,591 at December 31, 1998,
resulting in an unrealized loss of $18,937,803 at that date.

The aggregate estimated fair value by underlying credit rating of the
Company's CMBS at December 31, 1998 is as follows:

<TABLE>
<CAPTION>
ESTIMATED
SECURITY RATING FAIR VALUE % OF TOTAL
- --------------- ----------- ----------

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

* Subsequent to December 31, 1998, the rating on the BTR 1998-S1A, Class F
security (carrying value of $17,422,240 at December 31, 1998) was upgraded by
Moody's from Ba2 (BB) to Baa2 (BBB).

As of December 31, 1998, the mortgage loans underlying the CMBS interests
held by the Company were secured by properties of the types and in the states
identified below:

<TABLE>
<CAPTION>
PROPERTY TYPE PERCENTAGE(1) STATE PERCENTAGE(1)
- --------------- ------------- -------------- -------------

<S> <C> <C> <C>
Retail 25.7% CA 23.9%
Office 22.6 TX 13.0
Multifamily 21.2 FL 6.8
Hotel 18.7 NY 6.0
Other 11.8 All others(2) 50.3
</TABLE>

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

(1) Based on a percentage of the total unpaid principal balance of the
underlying loans.

(2) No other state comprises more than 5% of the total.

F-9

CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of December 31, 1998, the weighted average unpaid principal balance of
loans that are (1) underlying the CMBS investments of the Company and (2) more
than 60 days delinquent is 0.44% of the unpaid principal balance of the
collateral as of that date.

The fair value of the Company's portfolio of CMBS is generally estimated by
management based on market prices provided by certain dealers who make a market
in these financial instruments. The market for the Company's CMBS is currently
suffering from a lack of liquidity, accordingly, the fair values reported
reflect estimates and may not necessarily be indicative of the amounts the
Company could realize in a current market exchange.

At December 31, 1998, the un-leveraged, un-hedged, weighted average yield
to maturity of the Company's CMBS portfolio was 12.34%.

The yield to maturity on the Company's CMBS interests depends on, among
other things, the rate and timing of principal payments, the pass-through rate
and interest rate fluctuations. The subordinated CMBS interests owned by the
Company provide credit support to the more senior interests of the related
commercial securitization. Cash flow from the mortgages underlying the CMBS
interests generally is allocated first to the senior interests, with the most
senior interest having a priority entitlement to cash flow. Remaining cash flow
is allocated generally among the other CMBS interests in order of their relative
seniority. To the extent that there are defaults and unrecoverable losses on the
underlying mortgages, resulting in reduced cash flows, the most subordinate CMBS
interest will bear this loss first. To the extent there are losses in excess of
the most subordinated interest's stated entitlement to principal and interest,
then the remaining CMBS interests will bear such losses in order of their
relative subordination. There is, therefore no assurance that the yield to
maturity discussed above will be achieved.

At December 31, 1998, the Company had open contracts to sell U.S. Treasury
securities with face amounts totaling $39.8 million and a fair value of $45.6
million. Although the Company generally does not settle these contracts at
expiration, but instead rolls them over into new contracts, if the Company had
settled its open contracts at December 31, 1998, the counterparty would have
been required to pay the Company $175,343.

The unrealized loss on these contracts at December 31, 1998 was $1,821,042
which is included in unrealized losses from securities-trading in the statement
of operations. During the period June 2, 1998 through December 31, 1998, the
Company recorded realized losses of $10,774,778 from settled contracts. The
Company earned $3,685,658 on short sale proceeds held by brokers and incurred
interest of $4,188,171 on the short sales contracts during the period.

The composition of the portfolio of securities shown above should not be
considered indicative of the composition of the portfolio that might be expected
in the future.

NOTE 4 -- COMMERCIAL MORTGAGE LOAN

As of December 31, 1998, the Company owns a commercial mortgage loan
collateralized by a first mortgage on The OMNI Hotel, a 183-room hotel in
Newport News, Virginia. The mortgage loan was made on December 18, 1997 in an
original principal amount of $12.6 million and bears interest at a fixed rate
equal to 7.885% per annum. The loan matures on December 1, 2004 and amortizes
over a 25-year schedule. The mortgage loan may not be prepaid until December 1,
2001, and any prepayment thereafter shall be subject to a yield maintenance
premium.

NOTE 5 -- COMMON STOCK

Clarion common stock was sold through several transactions as follows:

Clarion was initially capitalized with the sale of 750 shares of Class A
Common Stock, par value $0.001 per share (the 'Class A Common Stock') on
February 18, 1998, for a total of $15,000. Clarion

F-10

CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

received commitments on March 11, 1998 for the purchase, in private placements,
of 1,000,000 shares of Class A Common Stock at $20 per share for a total of
$20,000,000. The sale of these shares was consummated at the time of the closing
of Clarion's initial public offering on June 2, 1998 (the 'IPO').

In the IPO, Clarion issued 4,000,000 shares of Class A Common Stock at a
price of $20 per share and received proceeds of $76,025,000, net of underwriting
discounts and commissions. Offering costs in connection with the IPO amounting
to approximately $1,337,485 have been charged against the proceeds of the IPO.
Concurrent with the IPO, Clarion issued 175,000 shares of Class B common stock,
par value $0.001 per share (the 'Class B Common Stock') in exchange for a 10%
interest in the Manager and an option to purchase the remaining 90% interest (or
all of the assets of) the Manager for 90% of fair market value. The option may
be exercised between January 2, 2000 and March 31, 2001 only with the approval
of the Independent Directors, as defined in the Company's prospectus.

On June 30, 1998, the Board of Directors of Clarion authorized a program to
repurchase up to 400,000 shares of Class A Common Stock (the 'Stock Repurchase
Program'). Pursuant to the Stock Repurchase Program, purchases of Class A Common
Stock have been and will be made at the sole discretion of management in the
open market or in privately negotiated transactions until the earlier to occur
of (i) the date on which the Company acquires, in the aggregate, 400,000 shares
of Class A Common Stock, or (ii) June 30, 1999. On September 8, 1998, the Board
of Directors authorized management to repurchase an additional 400,000 shares
prior to September 30, 1999, at a price not to exceed $13.60.

Between June 30, 1998 and December 31, 1998, the Company acquired a total
of 549,700 shares in the open market at a cost of $5,982,490. Subsequent to
December 31, 1998 and prior to March 18, 1999, the Company acquired 32,100
shares in the open market at a cost of $188,257.

NOTE 6 -- TRANSACTIONS WITH AFFILIATES

Clarion has entered into a Management Agreement (the 'Management
Agreement') with the Manager, under which the Manager manages the Company's
day-to-day operations, subject to the direction and oversight of Clarion's Board
of Directors. The Company will pay the Manager an annual base management fee
equal to 1% of the average stockholders' equity.

The Company will also pay the Manager, as incentive compensation, an amount
equal to 25% of the Adjusted Net Income of Clarion, before incentive
compensation, in excess of the amount that would produce an annualized return on
equity equal to 2.5% over the Ten-Year U.S. Treasury. See 'Item 1 -- Business.'

In accordance with the terms of the Management Agreement, the Company paid
$495,596 in base management fees for 1998. The Company has not accrued for, or
paid, the Manager any incentive compensation since inception.

During 1998, the Company reduced the carrying amount of its investment in
the Manager to $1,000,000.

On June 2, 1998, the Company acquired 22 classes of CMBS, one commercial
mortgage loan and a preferred interest in a limited partnership for $201.3
million from private funds managed by the Manager. In accordance with the
Charter and By-laws of the Company, the acquisition was approved by a majority
of the Independent Directors.

NOTE 7 -- STOCK INCENTIVE PLAN

Clarion has adopted a stock incentive plan (the '1998 Stock Incentive
Plan') that provides for the grant of both non-qualified stock options,
incentive stock options that meet the requirements of Section 422 of the Code,
stock awards, deferred stock awards, dividend equivalents or other awards. Stock
incentive awards may be granted to the directors, officers, consultants and key
employees of Clarion,

F-11

CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Manager or affiliates of the Manager. Subject to anti-dilution provisions
for stock splits, stock dividends and similar events, the 1998 Stock Incentive
Plan authorizes the grant of awards in the aggregate of up to 590,900 shares of
Class A Common Stock.

The exercise price for any stock option granted under the 1998 Stock
Incentive Plan may not be less than 100% of the fair market value of the shares
of Class A Common Stock at the time the option is granted. Each option must
terminate no more than ten years from the date it is granted.

On June 2, 1998, pursuant to the 1998 Stock Incentive Plan, options to
purchase 350,000 shares of Class A Common Stock were granted. 178,250 shares
were granted to certain officers and directors of the Company, and 171,750
shares were granted to certain officers and employees of the Manager and its
affiliates who are not officers and directors of the Company. The exercise price
of these options is $20 per share. The remaining contractual life of each option
is approximately ten years. One third of the options vested on June 30, 1998.
The remaining options vest in equal installments on June 30, 1999 and June 30,
2000. No options were exercised or expired during 1998.

The Company considers its officers and directors to be employees for the
purpose of stock option accounting. The Company adopted the disclosure-only
provisions of SFAS No. 123, 'Accounting for Stock-Based Compensation' for stock
issued to employees. Accordingly, no compensation cost for the estimated fair
value of the 178,250 shares ($0.75 per option grant, or a total of $133,210)
issued to employees under the 1998 Stock Incentive Plan has been recorded,
consistent with the provisions of SFAS No. 123. For the Company's pro forma net
earnings, the compensation cost will be amortized over the vesting period of the
options. The Company's 1998 net loss per share would have been increased to the
pro forma amounts indicated below:

<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- -----------

<S> <C> <C>
Net loss....................................................... $48,723,960 $48,801,666
Loss per share (basic and diluted)............................. $9.93 $9.95
</TABLE>

For the 171,750 options issued to non-employees under the 1998 Stock Option
Plan, compensation cost is accrued based on the estimated fair value of the
options issued, and amortized over the vesting period. Because vesting of the
options is contingent upon the recipient continuing to provide services to the
Company to the vesting date, the Company estimates the fair value of the
non-employee options at each period end up to the vesting date, and adjusts
expensed amounts accordingly. The 57,250 options that vested on June 30, 1998
had an estimated fair value at that date of $0.10 per option grant, or a total
of $5,725. The remaining 114,500 non-employee options, which vest in 1999 and
2000, were deemed to have nominal value as of December 31, 1998, so no
compensation cost was recorded for these options in 1998.

The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
grants in the period ended December 31, 1998: dividend yield of 12% at 6/2/98
and 15.6% at 6/30/98, expected volatility of 25%, risk-free interest rate of
5.79% at 6/2/98 and 5.63% at 6/30/98, and expected lives of ten years.

NOTE 8 -- REPURCHASE AGREEMENTS

The Company has entered into repurchase agreements to finance a portion of
its investments. As of December 31, 1998, the Company had entered into
repurchase agreements in the amount of $58,924,000. The weighted average
maturity of the agreements as of December 31, 1998, was 12.2 days, with no
agreement having a maturity greater than 14 days. The weighted average interest
rate of the agreements was 6.44% and is a variable rate based on one-month LIBOR
plus a weighted average spread of 0.89% At the maturity of each repurchase
agreement, the agreement is reset to reflect any changes in the 30-day LIBOR
rate. The repurchase agreements are collateralized by the Company's portfolio of
CMBS investments.

F-12

CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9 -- FAIR VALUE OF FINANCIAL INSTRUMENTS

As discussed above, the Company's portfolio of CMBS securities and its
liabilities under short sales contracts are carried at estimated fair value.
Company management believes that the fair value of its government securities,
deposits with brokers as collateral for securities sold short, commercial
mortgage loan, cash and cash equivalents, and repurchase agreements approximates
their carrying values, due to the short-term nature of the instruments or the
fact that their terms approximate current market terms.

NOTE 10 -- SUMMARIZED QUARTERLY RESULTS (UNAUDITED)

The following is a summarized presentation of quarterly results of
operations:

<TABLE>
<CAPTION>
29 DAY QUARTERS ENDING
PERIOD ENDING -----------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998
------------- ------------- ------------

<S> <C> <C> <C>
Income:
Interest income from securities -- trading.................. $ 1,634,766 $ 7,358,168 $ 3,587,655
Income from commercial mortgage loan........................ 72,790 231,599 256,063
Income from other investments............................... 30,858 150,776 135,269
Interest income -- other.................................... 14,454 16,372 11,695
----------- ------------- ------------
Total income........................................... 1,752,868 7,756,915 3,990,682
----------- ------------- ------------
Expenses:
Interest.................................................... 820,724 5,544,220 2,206,478
Management fee.............................................. 79,360 241,326 174,910
Other expenses.............................................. 20,295 1,001,661 165,859
----------- ------------- ------------
Total expenses......................................... 920,379 6,787,207 2,547,247
----------- ------------- ------------
Other operating losses:
Realized losses from securities -- trading.................. 210,501 1,099,396 27,400,850
Unrealized losses from securities -- trading................ (134,709) 48,041,149 (27,147,595)
Writedown of other investments.............................. 0 0 2,500,000
----------- ------------- ------------
Total other operating losses........................... 75,792 49,140,545 2,753,255
----------- ------------- ------------
Net income (loss)................................................ $ 756,697 $ (48,170,837) $ (1,309,820)
----------- ------------- ------------
----------- ------------- ------------
Net income (loss) per share:
Basic....................................................... $0.15 $(9.80) $(0.27)
----- ------ ------
----- ------ ------
Diluted..................................................... $0.15 $(9.80) $(0.27)
----- ------ ------
----- ------ ------
Weighted average shares outstanding:
Basic....................................................... 5,172,109 4,916,584 4,808,751
--------- --------- ---------
--------- --------- ---------
Diluted..................................................... 5,172,109 4,916,584 4,808,751
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-13

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

CLARION COMMERCIAL HOLDINGS, INC.

By: /S/ DANIEL S. HEFLIN
.................................

DANIEL S. HEFLIN
CHIEF EXECUTIVE OFFICER

Dated: March 25, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons in the
capacities and on the date indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------

<C> <S> <C>
/s/ DANIEL S. HEFLIN Chief Executive Officer and Director March 29, 1999
......................................... (Principal Executive Officer)
DANIEL S. HEFLIN

/s/ FRANK L. SULLIVAN, JR. Chairman of the Board and Director March 29, 1999
.........................................
FRANK L. SULLIVAN, JR.

/s/ ROBERT S. KOPCHAINS Chief Financial Officer March 29, 1999
......................................... Clarion Capital LLC
ROBERT S. KOPCHAINS (Principal Financial Officer and
Accounting Officer)

/s/ STEPHEN C. ASHEROFF Director March 29, 1999
.........................................
STEPHEN C. ASHEROFF

/s/ STEVEN N. FAYNE Director March 29, 1999
.........................................
STEVEN N. FAYNE

/s/ HAROLD E. ROSEN Director March 29, 1999
.........................................
HAROLD E. ROSEN
</TABLE>

<PAGE>

EXHIBIT 3.2 BYLAWS OF THE COMPANY, AS AMENDED BY RESOLUTION OF THE BOARD OF
DIRECTORS

CLARION COMMERCIAL HOLDINGS, INC.
BYLAWS

ARTICLE I
SEAL

The Board of Directors may provide a suitable seal for the Corporation, which
may be either facsimile or any other form of seal and shall remain in the
custody of the Secretary. If the Board so provides, it shall be affixed to all
certificates of the Corporation's stock and to other instruments requiring a
seal.

ARTICLE II
STOCK

SECTION 1. CERTIFICATES. Each stockholder shall be entitled to a certificate or
certificates which shall represent and certify the number and kind and class of
shares owned by him in the Corporation. Each certificate shall be signed by the
Chairman of the Board or the President or a Vice President and countersigned by
the Secretary or an assistant secretary or the Treasurer or an assistant
treasurer.

The signatures may be either manual or facsimile signatures. If any officer who
has signed any certificate ceases to be an officer of the Corporation before the
certificate is issued, the certificate may nevertheless be issued by the
Corporation with the same effect as if the officer had not ceased to be such
officer as of the date of its issue. Each stock certificate shall include on its
face the name of the Corporation, the name of the stockholder and the class of
stock and number of shares represented by the certificate. If the Corporation
has authority to issue stock of more than one class, the stock certificate shall
contain on its face or back a full statement or summary of the designations and
any preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption of the stock of each class which the Corporation is authorized to
issue and if the Corporation is authorized to issue any preferred or special
class in series, the differences in the relative rights and preferences between
the shares of each series to the extent they have been set, and the authority of
the Board of Directors to set the relative rights and preferences of subsequent
series. In lieu of such full statement or summary, there may be set forth upon
the face or back of the certificate a statement that the Corporation will
furnish to any stockholder upon request and without charge, a full statement of
such information.A summary of such information included in a registration
statement permitted to become effective under the Securities Act of 1933, as
amended, shall be an acceptable summary for the purposes of this Section. Every
stock certificate representing shares of stock which are restricted as to
transferability by the Corporation shall contain a full statement of the
restriction or state that the Corporation will furnish information about the
restriction to the stockholder on request and without charge.

SECTION 2. LOST CERTIFICATES. The Board of Directors may order a new certificate
or certificates of stock to be issued in place of any certificates shown to have
been lost, stolen or destroyed under such terms and conditions as the Board of
Directors deems reasonable. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such stolen, lost or
destroyed certificate or certificates, or his legal representative to indemnify
the Corporation against any loss or claim which may arise by reason of the
issuance of a new certificate.

SECTION 3. TRANSFER AGENTS AND REGISTRARS. At such time as the Corporation lists
its securities on a national securities exchange or NASDAQ, the Board of
Directors shall appoint one or more banks or trust companies in such city or
cities as the Board of Directors may deem advisable, from time to time, to act
as transfer agents and/or registrars of the shares of stock of the Corporation;
and, upon such appointments being made, no certificate representing shares shall
be valid until countersigned by one of such transfer agents and registered by
one of such registrars.

SECTION 4. TRANSFER OF STOCK. No transfers of shares of stock of the Corporation
shall be made if (i) void AB INITIO pursuant to any Article of the Corporation's
Charter, or (ii) the Board of Directors, pursuant to such Article, shall have
refused a tender of such shares. Permitted transfers of shares of stock of the
Corporation shall be made on

the stock records of the Corporation only upon the instruction of the registered
holder thereof, or by his attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary or with a transfer agent or transfer
clerk, and upon surrender of the certificate or certificates, if issued, for
such shares properly endorsed or accompanied by a duly executed stock transfer
power and the payment of all taxes thereon. Upon surrender to the Corporation or
the transfer agent of the Corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, as to any transfers not prohibited by such Article of the Charter or
by action of the Board of Directors thereunder, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.

SECTION 5. FIXING OF RECORD DATES; CLOSING OF TRANSFER BOOKS. The Board of
Directors may fix, in advance, a date as the record date for the purpose of
determining stockholders entitled to notice of, or to vote at, any meeting of
stockholders, or stockholders entitled to receive payment of any dividend or the
allotment of any rights, or in order to make a determination of stockholders for
any other proper purpose. Such date, in any case, shall be not more than ninety
(90) days, and in case of a meeting of stockholders, not less than ten (10)
days, prior to the date on which the particular action requiring such
determination of stockholders is to be taken.

SECTION 6. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments, if any, a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by law.

SECTION 7. REGULATIONS. The Board of Directors may make such additional rules
and regulations, not inconsistent with the Bylaws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation.

ARTICLE III
STOCKHOLDERS' MEETING

SECTION 1. ANNUAL MEETING. The annual meeting of the stockholders of the
Corporation shall be held in each year at the principal office of the
Corporation or at such other place in the United States as the Board of
Directors may determine, at a time and date determined by the Board of Directors
which time and date shall be within one hundred eighty (180) days after the last
day of the Corporation's fiscal year, for the purpose of electing Directors and
for the transaction of such other business as may lawfully be brought before the
meeting.

SECTION 2. SPECIAL MEETINGS. Subject to Article IV, Section 2, special meetings
of the stockholders for any purpose or purposes may be called at any time by the
President, the Chairman of the Board of Directors, by a majority of the Board of
Directors, by a majority of the Independent Directors (as defined in Section 1
of Article IV hereof), or the stockholders entitled to cast at least
thirty-three percent (33%) of the votes which all stockholders are entitled to
cast at a particular meeting.

SECTION 3. NOTICES. Notice of the annual meeting and of any special meeting of
stockholders shall, at least ten (10) days but not more than ninety (90) days
prior to the date thereof, be mailed to each stockholder entitled to vote
thereat at his last known post office address as the same appears on the records
of the Corporation. Every notice of a special meeting shall state briefly the
purpose or purposes thereof, and no business, other than that specified in such
notice and matters germane thereto, shall be transacted at any special meeting
without further notice to stockholders not present in person or by proxy.

SECTION 4. QUORUM; MANNER OF ACTING AND ADJOURNMENT. The Charter of the
Corporation provides that a majority of the stock issued and outstanding and
entitled to vote and represented by the holders of record thereof in person or
by proxy shall constitute a quorum at any meeting of stockholders, but less than
such a majority may adjourn the meeting from time to time, and at any such
adjourned meeting, any business may be transacted which might have been
transacted if the meeting had been held as originally called. No notice of any
adjourned meeting of the stockholders of the Corporation shall be required to be
given, except by announcement at the meeting, unless the adjournment is for more
than thirty (30) days or, after the adjournment, a new record date is fixed for
the adjourned meeting.

Except as otherwise specified in the Charter or these Bylaws or provided by
applicable law, the acts, at a duly organized meeting, of stockholders present
in person or by proxy entitled to cast at least a majority of the votes which
all stockholders present in person or by proxy are entitled to cast, shall be
the acts of the stockholders.

SECTION 5. ORGANIZATION. At every meeting of the stockholders, (i) the Chairman
of the Board shall conduct the meeting or, in the case of vacancy in office or
absence of the Chairman of the Board, one of the following officers present
shall conduct the meeting in the order stated: the Vice Chairman of the Board,
if there be one, the President, the Vice Presidents in their order of rank and
seniority, or a Chairman chosen by the stockholders entitled to cast a majority
of the votes which all stockholders present in person or by proxy are entitled
to cast; and (ii) shall act as Chairman, and the Secretary or, in his absence,
an assistant secretary, or in the absence of both Secretary and assistant
secretaries, a person appointed by the Chairman, shall act as Secretary.

SECTION 6. PROXIES. Any stockholder entitled to vote at a meeting of the
stockholders may be represented and vote thereat by proxy, authorized or
appointed by an instrument in writing (or by any other method permitted by
Maryland law) by such stockholder or by his duly authorized agent and submitted
to the Secretary at or before such meeting. A proxy is revocable by the
stockholder at any time without condition or qualification unless the proxy
states that it is irrevocable and the proxy is coupled with an interest. A proxy
may be made irrevocable for such time as it is coupled with an interest.

SECTION 7. VOTING. Each stockholder entitled to vote in accordance with the
terms and provisions of the Charter and these Bylaws, except the holder of
shares which have been called for redemption and with respect to which an
irrevocable deposit of funds has been made, shall be entitled to one vote, in
person or by proxy, for each share of stock entitled to vote held by such
stockholder. Upon the demand of any stockholder, the vote for directors and upon
any question before the meeting shall be by ballot.

SECTION 8. VOTING RIGHTS. The officer or agent of the Corporation having charge
of the transfer books for shares of the Corporation shall make, at least ten
(10) days before each meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting or any adjournment thereof,
arranged in alphabetical order, with the address of and the number of shares
held by each, which list shall be kept on file at the registered office of the
Corporation. Such list also shall be produced and kept open at the time and
place of the meeting and shall be subject to the inspection of any stockholder
during the whole time of the meeting. The original share ledger or transfer
book, or duplicate thereof, shall be prima facia evidence as to who are the
stockholders entitled to examine such list or share ledger or transfer book, or
to vote, in person or by proxy, at any meeting of stockholders.

SECTION 9. INFORMAL ACTION BY STOCKHOLDERS. Unless otherwise provided by law,
any action required to be taken at a meeting of the stockholders, or any other
action which may be taken at a meeting of the stockholders, may be taken without
a meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the stockholders entitled to vote with respect to the subject
matter thereof.

SECTION 10. NOTICE OF NOMINATIONS AND OTHER STOCKHOLDER BUSINESS AND NOMINATIONS

(A) ANNUAL MEETINGS OF STOCKHOLDERS.

(1) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of other business to be considered by the
stockholders at an annual meeting of stockholders may be made (a) pursuant to
the Corporation's notice of meeting delivered pursuant to Section 3 of this
Article III, (b) by or at the direction of the Chairman of the Board of
Directors or (c) by any stockholder of the Corporation who is entitled to vote
at the meeting, who complied with the notice procedures set forth in clauses (2)
and (3) of this paragraph (A) of this Bylaw and who is a stockholder of record
at the time such notice is delivered to the Secretary of the Corporation.

(2) For nominations or other business to be properly brought before an annual
meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this
Bylaw, the stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice shall be
delivered to the Secretary, at the principal executive offices of the
Corporation not less than sixty (60) days nor more than ninety (90) days prior
to the first anniversary of the preceding year's annual meeting; PROVIDED,
HOWEVER, that in the event that the date of the

annual meeting is advanced by more than thirty (30) days or delayed by more than
sixty (60) days from such anniversary date, notice by the stockholders to be
timely must be so delivered not earlier than the ninetieth (90th) day prior to
such annual meeting and not later than the close of business on the later of the
sixtieth (60th) day prior to such annual meeting or the tenth (10th) day
following the day on which public announcement of the date of such meeting is
first made. Such stockholder's notice shall set forth (a) as to each person whom
the stockholder proposes to nominate for election or reelection as a director
all information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), including such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected; (b) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made; and (c) as to the
stockholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made (i) the name and address of such stockholder,
as they appear on the Corporation's books, and of such beneficial owner and (ii)
the class and number of shares of the Corporation which are owned beneficially
and of record by such stockholder and such beneficial owner.

(3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this
Bylaw to the contrary, in the event that the number of directors to be elected
to the Board of Directors of the Corporation is increased and there is no public
announcement naming all of the nominees for director or specifying the size of
the increased Board of Directors made by the Corporation at least seventy (70)
days prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Bylaw shall also be considered timely, but
only with respect to nominees for any new positions created by such increase, if
it shall be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the tenth (10th) day
following the day on which such public announcement is first made by the
Corporation.

(B) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be conducted at a
special meeting of stockholders as shall have been brought before the meeting
pursuant to the Corporation's notice of meeting pursuant to Section 3 of this
Article III. Nominations of persons for election to the Board of Directors may
be made at a special meeting of stockholders at which Directors are to be
elected pursuant to the Corporation's notice of meeting (a) by or at the
direction of the Board of Directors or (b) by any stockholder of the Corporation
who is entitled to vote at the meeting, who complies with the notice procedures
set forth in this Bylaw and who is a stockholder of record at the time such
notice is delivered to the Secretary of the Corporation. Nominations by
stockholders of persons for election to the Board of Directors may be made at
such a special meeting of stockholders provided that notice required by
paragraph (A)(2) of this Bylaw shall be delivered to the Secretary at the
principal executive offices of the Corporation not earlier than the ninetieth
(90th) day prior to such special meeting and not later than the close of
business on the later of the sixtieth (60th) day prior to such special meeting
and the tenth (10th) day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Board of Directors to be elected at such meeting.

(1) Only persons who are nominated in accordance with the procedures set forth
in this Bylaw shall be eligible to be elected to serve as directors and only
such business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
Bylaw. Except as otherwise provided by law, the Charter or these Bylaws, the
chairman of the meeting shall have the power and duty to determine whether a
nomination or any business proposed to be brought before the meeting was made in
accordance with the procedures set forth in this Bylaw, and, if any proposed
nomination or business is not in compliance with this Bylaw, to declare that
such defective proposal or nomination shall be disregarded.

(2) For purposes of this Bylaw, "public announcement" shall mean disclosure in a
press release reported by the Dow Jones News Service, Associated Press or
comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.

(3) Notwithstanding the foregoing provisions of this Bylaw, a stockholder shall
also comply with all applicable requirements of the Exchange Act and the rules
and regulations thereunder with respect to the matters set forth in this

Bylaw. Nothing in this Bylaw shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.

ARTICLE IV
DIRECTORS

SECTION 1. NUMBER AND CLASS.

(A) The affairs of the Corporation shall be under the direction of the Board of
Directors which shall be divided into classes as provided in the Charter.

(B) The number of directors comprising the Board of Directors shall be five or
such other number as shall be fixed from time to time by a vote of eighty
percent 80% of the entire Board of Directors; provided, however, the number of
directors shall not exceed seven (7) nor be less than three (3) except as
permitted by law and the Charter of the Corporation. The tenure of office of a
director shall not be affected by any decrease or increase in the number of
directors so made by the Board of Directors. In the event the number of
directors is increased in advance of any annual meeting of stockholders, the
Board of Directors shall elect a director or directors to fill such vacancies
until the next annual meeting of stockholders, and shall appoint them to a
class.

(C) During the time that the Corporation is to qualify as a real estate
investment trust ("REIT"), except in the case of a vacancy, a majority of the
Board of Directors shall be Independent Directors (as hereinafter defined). For
purposes of these Bylaws, "Independent Director" shall mean a director of the
Corporation who is not affiliated, directly or indirectly, with any person or
entity, if any, responsible for directing or performing the day-to-day business
affairs of the Corporation (the "Manager"), whether by ownership of, ownership
interest in, employment by, any material business or professional relationship
with, or service as an officer or director of the Manager or an affiliated
business entity of the Manager; PROVIDED, HOWEVER, that a director shall not be
considered an Independent Director if he or she is serving as a director of more
than three REITs organized by the Manager or its affiliated business entities.
"Affiliate" means, when used with reference to a specified person, (i) any
person that directly or indirectly controls or is controlled by or is under
common control with the specified person, (ii) any person that is an officer of,
partner in or trustee of, or serves in a similar capacity with respect to, the
specified person or of which the specified person is an officer, partner or
trustee, or with respect to which the specified person serves in a similar
capacity and (iii) any person that, directly or indirectly, is the beneficial
owner of five percent (5%) or more of any class of equity securities of the
specified person or of which the specified person is directly or indirectly the
owner of five percent (5%) or more of any class of equity securities ("person"
includes any individual, corporation, partnership, trust, or other entity).
Directors need not be stockholders in the Corporation.

SECTION 2. POWER. All the powers of the Corporation are vested in and shall be
exercised by the Board of Directors except as otherwise prescribed by statute,
by the Charter or by these Bylaws. If the entire Board of Directors should
become vacant, any stockholder may call a special meeting and Directors for the
unexpired term may be elected at the said special meeting in the same manner as
provided for their election at annual meetings.

SECTION 3. VACANCIES. Any vacancy occurring on the Board of Directors for any
cause other than by reason of an increase in the number of directors may,
subject to the provisions of Section 5, be filled by a majority of the remaining
members of the Board of Directors, although such majority may be less than a
quorum; provided, however, that if the Corporation has sought to qualify as a
REIT and in accordance with Section 1 of this Article IV a majority of the Board
of Directors are required to be Independent Directors, then Independent
Directors shall nominate replacements for vacancies among the Independent
Directors, which must be elected by a majority of the directors, including a
majority of the Independent Directors. Any vacancy occurring by reason of an
increase in the number of directors may be filled by action of a majority of the
entire Board of Directors including a majority of Independent Directors. If the
stockholders of any class or series are entitled separately to elect one or more
directors, a majority of the remaining directors elected by that class or series
or the sole remaining director elected by that class or series may fill any
vacancy among the number of directors elected by that class or series. A
director elected by the Board of Directors to fill a vacancy shall be elected to
hold office until the next annual meeting of stockholders and until his or her
successor is elected and qualified.

SECTION 4. RESIGNATIONS. Any director or member of a committee may resign at any
time. Such resignation shall be made in writing and shall take effect at the
time specified therein, or if no time be specified, at the time of the receipt
by the Chairman of the Board, the President or the Secretary.

SECTION 5. REMOVAL. At any meeting of stockholders duly called and at which a
quorum is present, the stockholders may, by the affirmative vote of the holders
of a majority of the votes entitled to be cast thereon, remove any director or
directors from office with, but not without, cause, and may elect a successor or
successors to fill any resulting vacancies for the unexpired terms of removed
directors.

SECTION 6. COMMITTEES OF THE BOARD. The Board of Directors may appoint from
among its members, an executive committee and other committees comprised of one
or more directors. A majority of the members of any committee, except the
executive committee, so appointed shall be Independent Directors. If the
Corporation lists its shares on a national securities exchange or on the
National Association of Securities Dealers, Inc.'s Automated Quotation System
("NASDAQ"), the Board of Directors shall appoint an audit committee comprised of
not less than two (2) members, all of whom are Independent Directors. The Board
of Directors may delegate to any committee any of the powers of the Board of
Directors except the power to fill vacancies on the Board of Directors, declare
dividends or distributions on stock, recommend to the stockholders any action
which requires stockholder approval, amend or repeal the Bylaws, approve any
merger or share exchange which does not require stockholder approval or issue
stock. If, however, the Board of Directors has given general authorization for
the issuance of stock, a committee of the Board, in accordance with a general
formula or method specified by the Board of Directors by resolution or by
adoption of a stock option plan, may fix the terms of stock subject to
classification or reclassification and the terms on which any stock may be
issued.

Notice of committee meetings shall be given in the same manner as notice for
special meetings of the Board of Directors.

The Board of Directors may designate a chairman of any committee, and such
chairman may fix the time and place of its meetings unless the Board shall
otherwise provide. In the absence or disqualification of any member of any such
committee, the members thereof present at any meeting and not disqualified from
voting, whether or not they constitute a quorum, may unanimously, if there are
only two members, or by a majority, if there are more than two members, appoint
another director to act at the meeting in the place of such absent or
disqualified members; provided, however, that in the event of the absence or
disqualification of an Independent Director, such appointee shall be an
Independent Director.

Each committee shall keep minutes of its proceedings and shall report the same
to the Board of Directors at the meeting next succeeding, and any action by the
committees shall be subject to revision and alteration by the Board of
Directors, provided that no rights of third persons shall be affected by any
such revision or alteration.

Subject to the provisions hereof, the Board of Directors shall have the power at
any time to change the membership of any committee, to fill all vacancies, to
designate alternative members to replace any absent or disqualified member, or
to dissolve any such committee.

SECTION 7. MEETINGS OF THE BOARD OF DIRECTORS. Meetings of the Board of
Directors, regular or special, may be held at any place in or out of the State
of Maryland as the Board may from time to time determine or as shall be
specified in the notice of such meeting.

Members of the Board of Directors may participate in a meeting by means of a
conference telephone or similar communications equipment if all persons
participating in the meeting can hear each other at the same time. Participation
in a meeting by such means constitutes presence in person at a meeting.

The first meeting of each newly elected Board of Directors shall be held as soon
as practicable after the annual meeting of the stockholders at which the
directors were elected. The meeting may be held at such time and place as shall
be specified in a notice given as hereinafter provided for special meetings of
the Board of Directors, or as shall be specified in a written waiver signed by
all of the directors as provided in Section 8, except that no notice shall be
necessary if such meeting is held immediately after the adjournment, and at the
site, of the annual meeting of stockholders.

Special meetings of the Board of Directors may be called at any time by two (2)
or more directors or by a majority of the members of the executive committee, if
one be constituted, in writing with or without a meeting of such committee, or
by the Chairman of the Board or the President. Special meetings may be held at
such place or places in or out of the State of Maryland as may be designated
from time to time by the Board of Directors; in the absence of such designation,
such meetings shall be held at such places as may be designated in the notice of
meeting.

Notice of the place and time of every meeting of the Board of Directors shall be
delivered by the Secretary to each director either personally or by telephone,
telegraph, overnight courier or facsimile, or by leaving the same at his
residence or usual place of business at least twenty-four (24) hours before the
time at which such meeting is to be held or, if by first-class mail, at least
four (4) days before the day on which such meeting is to be held. If mailed,
such notice shall be deemed to be given when deposited in the United States mail
addressed to the director at his post office address as it appears on the
records of the Corporation, with postage thereon paid.

SECTION 8. INFORMAL ACTION BY DIRECTORS. Unless otherwise provided by law, any
action required to be taken at a meeting of the directors or any other action
which may be taken at a meeting of the directors may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.

SECTION 9. QUORUM AND VOTING. At all meetings of the Board, a majority of the
entire Board of Directors shall constitute a quorum for the transaction of
business, and the action of a majority of the directors present at any meeting
at which a quorum is present shall be the action of the Board of Directors
unless the concurrence of a greater proportion is required for such action by
law, the Corporation's Charter or these Bylaws. If a quorum shall not be present
at any meeting of the directors, the directors present thereat may, by a
majority vote, adjourn the meeting from time to time, without notice other than
announcement at the meeting of the time, date and place of the next meeting of
the directors, until a quorum shall be present.

SECTION 10. ORGANIZATION. The Chairman of the Board shall preside at each
meeting of the Board of Directors. In the absence or inability of the Chairman
of the Board to preside at a meeting, the President or, in his absence or
inability to act, another director chosen by a majority of the directors
present, shall act as chairman of the meeting and preside thereat. The Secretary
(or, in his absence or inability to act, any person appointed by the chairman of
the meeting) shall act as Secretary of the meeting and keep the minutes thereof.

SECTION 11. COMPENSATION OF DIRECTORS. Independent Directors shall receive a
stated salary for their services or a fixed sum, and expenses of attendance at
each regular or special meeting of the Board of Directors, or of any committee
thereof or both, as may be determined from time to time by the Board. Nothing
herein contained shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.

SECTION 12. MANAGEMENT ARRANGEMENTS. The Board of Directors may delegate the
duty of management of the assets and the administration of the Corporation's
day-to-day operations to a Manager pursuant to a written contract or contracts,
or any extension thereof, which have obtained the requisite approvals of the
Board of Directors, including a majority of the Independent Directors, or the
stockholders of the Corporation, as provided in the Charter.

All transactions involving the Corporation in which the Manager has an interest
must be approved by a majority of the Independent Directors.

The Board of Directors shall evaluate the performance of the Manager before
entering into or renewing any management arrangement. The minutes of meetings
with respect to such evaluation shall reflect the criteria used by the Board of
Directors in making such evaluation. Upon any termination of the initial
management arrangements reflected in the Registration Statement, the Board of
Directors shall determine (a) to perform the management function for the
Corporation, and (b) to justify the compensation provided for in its contract
with the Corporation. The initial contract for the services of a Manager entered
into by the Board of Directors shall have a term of no more than two (2) years,
renewable at or prior to expiration of the contract. Each contract shall be
terminable without cause by a majority of the Independent Directors or the
Manager on sixty (60) days' written notice.

The Independent Directors shall determine at least annually, following the
Manager's initial term, that the compensation which the Corporation contracts to
pay the Manager is reasonable in relation to the nature and quality of services
performed and also shall supervise performance of the Manager and the
compensation paid to it by the Corporation to determine that the provisions of
such contract are being carried out. Each such determination shall be based upon
the following factors and all other factors the Independent Directors may deem
relevant and the findings of the Independent Directors on each of such factors
shall be recorded in the minutes of the Board of Directors:

(A) the size of the management fee in relation to the size, compensation and
profitability of the investment portfolio of the Corporation;

(B) the success of the Manager in generating opportunities that meet the
investment objectives of the Corporation;

(C) the rates charged to other corporations similar to the Corporation
and to other investors by advisors performing similar services;

(D) additional revenues realized by the Manager and its affiliates
through their relationship with the Corporation, including loan administration,
underwriting or other commissions, fees for issuance and administration services
in connection with issuances of structured securities and other fees, whether
paid by the Corporation or by others with whom the Corporation does business;

(E) the quality and extent of service and advice furnished to the
Corporation;

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

(G) the quality of the investment portfolio of the Corporation in
relationship to the investments generated by the Manager for its own account.

SECTION 14. TOTAL EXPENSES. The Independent Directors shall determine, from time
to time to time but at least annually, that the total fees and expenses of the
Corporation are reasonable in light of all relevant factors.

SECTION 15. INVESTMENT POLICIES AND RESTRICTIONS. It shall be the duty of the
Board of Directors to ensure that the purchase, sale, retention and disposal of
the Corporation's assets, and the investment policies of the Corporation and the
limitations thereon or amendment thereof are at all times:

(A) consistent with such policies, limitations and restrictions recited in the
registration statement on Form S-11, as amended (the "Registration Statement"),
filed with the Securities and Exchange Commission in connection with this
Corporation's initial public offering of common stock (the "Initial Public
Offering"); and

(B) in compliance with the restrictions applicable to REITs pursuant to the
Internal Revenue Code of 1986, as amended.

ARTICLE V
OFFICERS

SECTION 1. OFFICERS. The officers of the Corporation shall be a Chairman of the
Board, a President, a Treasurer and a Secretary, who shall be elected by the
Board of Directors to serve for one year and until their respective successors
are elected and qualified, except as otherwise provided in any employment
agreement between the Corporation and any officer. The President shall always be
a member of the Board of Directors. The Board of Directors may also appoint one
or more Vice Presidents. The same person may hold any two or more offices except
those of President and Vice President.

SECTION 2. SUBORDINATE OFFICERS, COMMITTEES AND AGENTS. The Board of Directors
may from time to time elect such officers and appoint such committees, employees
or other agents as the business of the Corporation may require, including one or
more assistant secretaries, and one or more assistant treasurers, each of

whom shall hold office for such period, have such authority, and perform such
duties as are provided in these Bylaws, or as the Board of Directors may from
time to time determine. The directors may delegate to any officer or committee
the power to elect subordinate officers and to retain or appoint employees or
other agents.

SECTION 3. PRESIDENT. The President shall, subject to the control of the
directors, in general supervise and control all of the business and affairs of
the Corporation. He may sign any deeds, mortgages, bonds, contracts, or other
instruments which the directors have authorized to be executed, except in cases
where the signing and execution thereof shall be expressly delegated by the
directors or by these Bylaws to some other officer or agent of the Corporation,
or shall be required by law to be otherwise signed or executed; and in general
shall perform all duties incident to the office of president and such other
duties as may be prescribed by the directors from time to time.

SECTION 4. VICE PRESIDENT. In the absence of the President or in event of his
death, inability or refusal to act, the Vice President shall perform all the
powers of and subject to all the restrictions upon, the President. The Vice
President shall perform such other duties as from to time may be assigned to him
by the President or by the directors.

SECTION 5. SECRETARY. The Secretary shall keep the minutes of the stockholders'
and of the directors' meetings in one or more books provided for that purpose,
see that all notices are duly given in accordance with the provisions of these
Bylaws or as required, be custodian of the corporate records and of the seal of
the Corporation and keep a register of the post office address of each
Stockholder which shall be furnished to the Secretary by such stockholder, have
general charge of the stock transfer books of the Corporation and, in general,
perform all duties incident to the office of Secretary and such other duties as
from time to time may be assigned to him by the President or by the directors.

SECTION 6. TREASURER. The Treasurer shall have charge and custody of and be
responsible for all funds and securities of the Corporation; receive and give
receipts for moneys due and payable to the Corporation from any source
whatsoever, and deposit all such moneys in the name of the Corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with these Bylaws and in general perform all of the duties incident to the
office of Treasurer and such other duties as from time to time may be assigned
to him by the President or by the directors.

SECTION 7. OTHER OFFICERS. The other officers of the Corporation shall perform
such duties as the President may from time to time assign to them.

SECTION 8. REMOVAL. Any officer elected by the Board of Directors may be
removed, either for or without cause, at any time upon the vote of a majority of
the Board of Directors. Any other employee of the Corporation may be removed or
dismissed at any time by the President.

SECTION 9. RESIGNATION. Any officer or agent may resign at any time by giving
written notice to the Board of Directors, or to the President or to the
Secretary of the Corporation. Any such resignation shall take effect at the date
of the receipt of such notice or at any later time specified therein, the
acceptance of such resignation shall not be necessary to make it effective.

SECTION 10. VACANCIES. A vacancy in any office because of death, resignation,
removal, disqualification, or any other cause, shall be filled by the Board of
Directors or by the officer or remaining members of the committee to which the
power to fill such office has been delegated pursuant to Section 2 of this
Article, as the case may be, and if the office is one for which these Bylaws
prescribe a term, shall be filled for the unexpired portion of the term.

SECTION 11. SALARIES. The salaries of the officers elected by the Board of
Directors shall be fixed from time to time by the Board of Directors or by such
officer as may be designated by resolution of the Board. The salaries or other
compensation of any other officers, employees and other agents shall be fixed
from time to time by the officer or committee to which the power to elect such
officers or to retain or appoint such employees or other agents has been
delegated pursuant to Section 2 of this Article. No officer shall be prevented
from receiving such salary or other compensation by reason of the fact that he
is also a director of the Corporation.

ARTICLE VI
SIGNATURES

SECTION 1. NEGOTIABLE INSTRUMENTS. All checks, drafts or notes of the
Corporation shall be signed and/or countersigned by such officer, officers,
agent or agents of the Corporation as may be so designated from time to time by
the Board of Directors of the Corporation.

SECTION 2. STOCK TRANSFER. All endorsements, assignments, stock powers or other
instruments of transfer of securities standing in the name of the Corporation
shall be executed for and in the name of the Corporation by the President or
Vice President or by such officer as the Board of Directors may designate.

ARTICLE VII
FISCAL YEAR

The fiscal year of the Corporation shall end on the last day of each calendar
year.

ARTICLE VIII
WAIVER OF NOTICE

Whenever, under the provisions of these Bylaws or of any law, the stockholders
or Directors are authorized to hold any meeting after notice, or after the lapse
of any prescribed period of time, such meeting may be held without notice, or
without such lapse of time, by the written waiver of such notice signed by every
person entitled to notice, or if every person entitled to notice shall be
present at such meeting.

ARTICLE IX
AMENDMENTS

SECTION 1. GENERAL AMENDMENTS. These Bylaws, except as otherwise provided in
Section 2 of this Article IX, may be amended, added to, rescinded or repealed
either: (1) by the vote of the stockholders entitled to cast at least a majority
of the votes which all stockholders are entitled to cast thereon at any duly
organized annual or special meeting of stockholders; or (2) with respect to
those matters which are not by statute reserved exclusively to the stockholders,
by vote of a majority of the Board of Directors, including a majority of the
Independent Directors in office at any regular or special meeting of directors
(except for provisions specifying that a majority vote of the Independent
Directors is required for the approval of certain matters, which provision may
be amended, added to, rescinded or repealed only with the approval of a majority
of the Independent Directors).

SECTION 2. CLASSIFIED BOARD AMENDMENTS. A vote of the stockholders entitled to
cast at least two-thirds of all the votes entitled to be cast thereon at any
duly held annual or special meeting of stockholders or a vote of 80% of the
Board of Directors is required to amend, alter, change, repeal or adopt any
provisions inconsistent with Article IV, Section 1 of these Bylaws.

ARTICLE X
INDEMNIFICATION

SECTION l. PROCEDURE. Any indemnification, or payment of expenses in advance of
the final disposition of any proceeding, shall be made promptly, and in any
event within sixty (60) days, upon the written request of the director or
officer entitled to seek indemnification (the "Indemnified Party"). The right to
indemnification and advances hereunder shall be enforceable by the Indemnified
Party in any court of competent jurisdiction, if (i) the Corporation denies such
request, in whole or in part, or (ii) no disposition thereof is made within
sixty (60) days. The Indemnified Party's costs and expenses incurred in
connection with successfully establishing his or her right to indemnification,
in whole or in part, in any such action shall also be reimbursed by the
Corporation. It shall be a defense to any action for advance for expenses that
(a) a determination has been made that the facts then known to those making the
determination would preclude indemnification or (b) the Corporation has not
received either (i) an undertaking as required by law to repay

such advances in the event it shall ultimately be determined that the standard
of conduct has not been met or (ii) a written affirmation by the Indemnified
Party of such Indemnified Party's good faith belief that the standard of conduct
necessary for indemnification by the Corporation has been met.

SECTION 2. EXCLUSIVITY, ETC. The indemnification and advance of expenses
provided by the Charter and these Bylaws shall not be deemed exclusive of any
other rights to which a person seeking indemnification or advance of expenses
may be entitled under any law (common or statutory), or any agreement, vote of
stockholders or disinterested directors or other provision that is consistent
with law, both as to action in his or her official capacity and as to action in
another capacity while holding office or while employed by or acting as agent
for the Corporation and such rights shall continue in respect of all events
occurring while a person was a director or officer after such person has ceased
to be a director or officer, and shall inure to the benefit of the estate,
heirs, executors and administrators of such person. All rights to
indemnification and advance of expenses under the Charter of the Corporation and
hereunder shall be deemed to be a contract between the Corporation and each
director or officer of the Corporation who serves or served in such capacity at
any time while this Bylaw is in effect. Nothing herein shall prevent the
amendment of this Bylaw, provided that no such amendment shall diminish the
rights of any person hereunder with respect to events occurring or claims made
before its adoption or as to claims made after its adoption in respect of events
occurring before its adoption. Any repeal or modification of this Bylaw shall
not in any way diminish any rights to indemnification or advance of expenses of
such director or officer or the obligations of the Corporation arising hereunder
with respect to events occurring, or claims made, while this Bylaw or any
provision hereof is in force.

SECTION 3. SEVERABILITY; DEFINITIONS. The invalidity or unenforceability of any
provision of this Article X shall not affect the validity or enforceability of
any other provision hereof.

ARTICLE XI
MISCELLANEOUS PROVISIONS

SECTION 1. BOOKS AND RECORDS. The Corporation shall keep correct and complete
books and records of its accounts and transactions and minutes of the
proceedings of its stockholders and Board of Directors and of any executive or
other committee when exercising any of the powers of the Board of Directors. The
books and records of the Corporation may be in written form or in any other form
which can be converted within a reasonable time into written form for visual
inspection. Minutes shall be recorded in written form but may be maintained in
the form of a reproduction. The original or a certified copy of the Bylaws shall
be kept at the principal office of the Corporation.

SECTION 2. VOTING SHARES IN OTHER CORPORATIONS. Stock of other corporations or
associations, registered in the name of the Corporation, may be voted by the
President, a Vice President, or a proxy appointed by either of them. The Board
of Directors, however, may by resolution appoint some other person to vote such
shares, in which case such person shall be entitled to vote such shares upon the
production of a certified copy of such resolution.

SECTION 3. ANNUAL STATEMENT OF AFFAIRS. The President or chief accounting
officer shall prepare annually a full and correct statement of the affairs of
the Corporation, to include a balance sheet and a financial statement of
operations for the preceding fiscal year. The statement of affairs shall be
submitted at the annual meeting of the stockholders and, within 20 days after
the meeting, placed on file at the Corporation's principal office.

SECTION 4. MAIL. Except as herein expressly provided, any notice or other
document which is required by these Bylaws to be mailed shall be deposited in
the United States mails, postage prepaid.

SECTION 5. RELIANCE. Each director, officer, employee and agent of the
Corporation shall, in the performance of his or her duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon the opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the adviser, accountants,
appraisers or other experts or consultants selected by the Board of Directors or
officers of the Corporation, regardless of whether such counsel or expert may
also be a director.

SECTION 6. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. The
directors shall have no responsibility to devote their full time to the affairs
of the Corporation. Any director or officer, employee or agent of the
Corporation, in his or her personal capacity or in a capacity as an affiliate,
employee or agent of any

other person, or otherwise, may have business interests and engage in business
activities similar to or in addition to those of or relating to the Corporation.

CLARION COMMERCIAL HOLDINGS, INC.
RESOLUTION OF THE BOARD OF DIRECTORS
MARCH 10, 1999

WHEREAS, the Board of Directors deems it advisable and in the best interests of
the Corporation to amend the Bylaws of the Corporation (the "Bylaws"), in
general, with respect to setting the date of the annual meeting of stockholders.

NOW THEREFORE, BE IT RESOLVED, That pursuant to Section I of Article IX of the
Bylaws, the Board of Directors hereby adopts and approves the following
amendment to the Bylaws:

Section I of Article III of the Bylaws is hereby amended to delete the
words "determined by the Board of Directors which time and date shall be
within one hundred eighty (180) days after the last day of the
Corporation's fiscal year", and to substitute in lieu thereof the words
"during the month of May set by the Board of Directors".

<PAGE>

EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY AS OF MARCH 22, 1999

The Company has incorporated two qualified REIT subsidiaries:

1. CCHI General, Inc., a Delaware corporation (the "General Partner")
2. Clarcomm Limited, Inc. -- a Delaware corporation (the "Initial Limited
Partner")

The Initial Limited Partner and the General Partner have organized a limited
partnership:

1. Clarcomm Holdings, L.P., a Delaware limited partnership

<PAGE>

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUN-02-1998
<PERIOD-END> DEC-31-1998
<CASH> 565,684
<SECURITIES> 145,367,303<F1>
<RECEIVABLES> 1,514,932
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 574,959
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 148,022,878
<CURRENT-LIABILITIES> 108,106,054<F2>
<BONDS> 0
0
0
<COMMON> 98,202,515
<OTHER-SE> (58,285,691)
<TOTAL-LIABILITY-AND-EQUITY> 148,022,878
<SALES> 0
<TOTAL-REVENUES> 13,500,465
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 53,653,003
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,571,422
<INCOME-PRETAX> (48,723,960)
<INCOME-TAX> 0
<INCOME-CONTINUING> (48,723,960)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,723,960)
<EPS-PRIMARY> (9.93)
<EPS-DILUTED> (9.93)

<FN>
<F1> Includes commercial mortgage loans receivable of $12,949,224, $4,856,250 in
other investments, and $46,830,041 deposits with brokers as collateral for
securities sold short.

<F2> Includes $45,578,695 in government securities sold short.

</FN>

</TABLE>