PALACE REIT, S-11/A, 1998-04-30

PALACE REIT
S-11/A, 1998-04-30
REAL ESTATE

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<PAGE> 1

As filed with the Securities and Exchange Commission on April 30, 1998

File No. 333 - 47855
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------

AMENDMENT NO.1
TO

FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------

PALACE REIT
(Exact Name of Registrant as Specified in Governing Instruments)
----------------------

3535 LAS VEGAS BOULEVARD SOUTH, LAS VEGAS, NEVADA 89109
(702) 732-7102
(Address and Telephone Number of Registrant's Principal Executive Offices)
----------------

DAVID R. MERKER, CHIEF EXECUTIVE OFFICER
PALACE REIT
3535 LAS VEGAS BOULEVARD SOUTH
LAS VEGAS, NEVADA 89109
(702) 732-7102
(Name, Address and Telephone Number of Agent for Service)
----------------
Copies To:

Bryan L. Goolsby David C. Wright
Stephen L. Sapp Hunton & Williams
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. Riverfront Plaza, East Tower
2001 Ross Avenue, Suite 3000 951 East Byrd Street
Dallas, Texas 75201 Richmond, Virginia 23219-4074
(214) 849-5500 (804) 788-8200

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the Registration Statement becomes effective.

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

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

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

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

<PAGE> 2

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

SUBJECT TO COMPLETION, DATED APRIL 30, 1998

PROSPECTUS

4,290,000 SHARES
PALACE REIT
COMMON SHARES OF BENEFICIAL INTEREST
------------

Palace REIT (the "Company"), a self-managed and self-advised real
estate investment trust, was formed on February 10, 1998 to acquire office and
industrial properties in selected markets in the United States. The Company will
use approximately 92% of the proceeds from this offering (the "Offering") to
acquire four Class A office buildings (the "Office Properties") and four
industrial buildings (the "Industrial Properties").

After the Offering, the Company intends to continue and expand the real
estate investment strategy pursued by David Merker, the Company's Chief
Executive Officer, in acquiring, redeveloping and managing office and industrial
properties for affiliates of Ralph Engelstad, from which the Company is
acquiring the Properties (as defined below). In managing Mr. Engelstad's real
estate operations since 1988, Mr. Merker has overseen the purchase or
development of office and industrial properties with a book value of
approximately $130 million. The Company's growth strategy is to acquire office
and industrial properties in mid-sized markets with a growing demand for office
and industrial space and strong economic growth, and to aggressively manage its
properties to maximize returns on investments.

Concurrently with the closing of the Offering, Palace Operating
Partnership, L.P. (the "Operating Partnership"), for which Palace REIT serves as
sole general partner, will acquire from affiliates of Mr. Engelstad the Office
Properties, which comprise approximately 1.0 million square feet of gross
leasable area ("GLA"), and the Industrial Properties, which comprise
approximately 365,115 of GLA (collectively, the "Properties"). The Office
Properties are located in Coral Springs, Florida and Midland, Texas, and the
Industrial Properties are located in Las Vegas, Nevada and D'Iberville,
Mississippi. The Company has rights of first refusal to purchase other office
and industrial properties owned or under development by affiliates of Mr.
Engelstad comprising approximately 2.1 million square feet of GLA located in Las
Vegas, Nevada; Norfolk, Virginia; Kansas City, Missouri; Midland, Texas and
Tyler, Texas.

All of the common shares of beneficial interest, $0.005 par value per
share (the "Common Shares"), of the Company offered hereby are being sold by the
Company. Upon completion of the Offering, certain trust managers and executive
officers of the Company will beneficially own approximately 2.9% of the
outstanding Common Shares of the Company on a fully diluted basis. It currently
is anticipated that the initial public offering price per share will be between
$14.00 and $16.00. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price.

Prior to the Offering, there has been no public market for the Common
Shares and there is no guarantee that a public market will develop or be
sustained. The Company has applied for listing of the Common Shares on the
Nasdaq Stock Market under the symbol "PALR." The Company intends to pay
quarterly cash distributions to its shareholders, at an initial annual rate
expected to be $1.20 per share. See "Distribution Policy."

The Company intends to qualify as a real estate investment trust
("REIT") for federal income tax purposes commencing with the taxable year ending
December 31, 1998.

SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON SHARES, INCLUDING:

o The Company's financial performance and distributions could
decline if the Company fails to manage growth and integrate
operations.
o The Company has no operating history, and Management has no
experience operating a REIT.
o The Company's financial performance and distributions could
decline if the Midland, Texas and Las Vegas, Nevada markets
experience an economic downturn.
o Acquired properties may not perform as expected.
o The Company's financial performance and distributions could
decline in the event that the Company's major tenants become
bankrupt or insolvent or are otherwise unable to meet their
lease obligations.
o Loss of service of certain key personnel could have an adverse
effect on the Company's operations.
o The Company could be taxed as a corporation if the Company
fails to qualify as a REIT, resulting in a loss of
pass-through tax treatment that could significantly reduce the
return to shareholders.

<PAGE> 3

o Limiting ownership to 9.8% of the outstanding Common Shares
and certain other provisions contained in the Company's
organizational documents and the Texas REIT Act may have an
anti-takeover effect.
o The Board of Trust Managers has the ability to change the
investment, financing, borrowing and other policies of the
Company at any time without shareholder approval.
o There are no limits on the amount or type of indebtedness that
may be incurred by the Company.
o Immediate dilution in the net tangible book value of Common
Shares purchased in the Offering will occur in the amount of
$2.58 per share.
o There is no prior public market for the Common Shares and the
Company cannot guarantee that a public market will develop or
be sustained.
o The liquidation value of the Company may be less than the
value of the Company as a going concern.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------

=========================================================================================
Underwriting Discounts
Price to Public and Commissions(1) Proceeds to Company(2)
<S> <C> <C> <C>
Per Share $ $ $
Total(3) $ $ $
=========================================================================================
</TABLE>

(1) The Company and the Operating Partnership have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $593,000.
(3) The Company has granted the Underwriters an option exercisable for 30 days
to purchase up to 643,500 additional Common Shares on the same terms set forth
above solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discount and Commissions and
Proceeds to Company will be $ , $ and $ , respectively.

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

The Common Shares are offered by the several Underwriters named herein,
subject to prior sale when, as and if issued to and accepted by them, and
subject to certain conditions. It is expected that delivery of the Common Shares
will be made through the facilities of The Depository Trust Company on or about
_____, 1998.

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

MORGAN KEEGAN & COMPANY, INC.

The date of this Prospectus is __________ __, 1998.

<PAGE> 4

[Picture of exterior of Sunrise Tower, Coral Springs, Florida]

[Picture of exterior of Ten Conoco, Midland, Texas]

[Picture of exterior of Caballo, Las Vegas, Nevada]

[Picture of interior of Caballo, Las Vegas, Nevada]

[Picture of exterior of Escondido, Las Vegas, Nevada]

[Picture of exterior of Heritage Center, Midland, Texas]

[Picture of exterior of Claydesta Center, Midland, Texas]

[Picture of exterior of D'Iberville, D'Iberville, Mississippi]

[Picture of interior of Claydesta Center, Midland, Texas]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
SHARES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED IN THE OPEN MARKET. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY SECURITIES IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION IS UNLAWFUL.

ANY TRADENAMES IN THIS PROSPECTUS ARE USED SOLELY TO IDENTIFY THE
ENTITIES CLAIMING THE MARKS. NONE OF THE COMPANIES IDENTIFIED BY SUCH TRADENAMES
HAVE PARTICIPATED IN OR ENDORSED THIS OFFERING.

<PAGE> 5

TABLE OF CONTENTS

Page
No.
----
<S> <C>
PROSPECTUS SUMMARY...................................................................................................1
The Company....................................................................................................1
Summary Risk Factors...........................................................................................2
Business Objectives And Strategies.............................................................................3
The Properties.................................................................................................4
The Formation Transactions.....................................................................................6
Ownership Structure............................................................................................6
Distribution Policy............................................................................................7
Tax Status.....................................................................................................7
The Offering...................................................................................................7
Summary Financial Data.........................................................................................7
RISK FACTORS........................................................................................................12
Decrease in Financial Performance and Distributions Due to Failure to Manage Growth or Integrate
Future Operations ............................................................................................12
Lack of Operating History; Inexperience of Management ........................................................12
Limited Geographic Diversification of the Portfolio...........................................................12
Inability to Acquire Additional Properties; Properties May Not Perform As Expected............................12
Decrease in Common Share Price and Financial Performance Due to Increase in Market Interest Rate..............12
Possible Inability to Meet REIT Distribution Requirements.....................................................13
Real Estate Risk Factors Specific to the Company's Business...................................................13
Lease Expirations and Renewals...........................................................................13
Bankruptcy or Insolvency of Major Tenants................................................................13
Risks of Joint Ownership of Assets.......................................................................13
Real Estate Investment Risks..................................................................................13
Economic Performance and Value of Properties Dependent on Many Factors...................................13
Dependence on Rental Income from Real Property to Meet Debt Obligations and Make Distributions...........14
Illiquidity of Real Estate Investments...................................................................14
Changes in Laws..........................................................................................14
Reliance on Key Personnel.....................................................................................14
Competition...................................................................................................14
Loss of Tax Benefits Upon a Failure to Qualify as a REIT......................................................14
Ownership Limit; Anti-Takeover Effect.........................................................................15
Environmental Matters.........................................................................................15
Changes in Investment and Financing Policies Without Shareholder Approval.....................................16
No Limitation in Organizational Documents on the Incurrence of Debt...........................................16
Immediate and Substantial Dilution............................................................................16
No Prior Trading Market.......................................................................................16
Shares Available for Future Sale..............................................................................16
Liquidation Value of The Company May Be Less Than Value as a Going Concern....................................17
Uninsured Loss and Condemnation...............................................................................17
Investors Subject to ERISA....................................................................................17
Cost of Compliance with the Americans with Disabilities Act...................................................17
Forward Looking Information...................................................................................18
THE COMPANY.........................................................................................................19
General.......................................................................................................19
Business Strategy.............................................................................................19
Formation Transactions........................................................................................20
The Operating Partnership.....................................................................................20
USE OF PROCEEDS.....................................................................................................22
DISTRIBUTION POLICY.................................................................................................23
General.......................................................................................................23
CAPITALIZATION......................................................................................................25
DILUTION............................................................................................................26
SELECTED FINANCIAL DATA.............................................................................................27
</TABLE>

(i)

<PAGE> 6

<TABLE>

<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................................................31
Overview......................................................................................................31
Results of Operations of the Properties.......................................................................31
Pro Forma Liquidity and Capital Resources of the Company......................................................33
Historical Cash Flow..........................................................................................33
Funds From Operations.........................................................................................34
Inflation.....................................................................................................34
New Accounting Pronouncement..................................................................................35
PROPERTIES..........................................................................................................36
General.......................................................................................................36
Office Properties.............................................................................................36
Industrial Properties.........................................................................................38
Lease Expirations.............................................................................................42
Significant Buildings.........................................................................................42
Depreciation of Significant Properties........................................................................45
Real Estate Taxes on Significant Properties...................................................................45
Current and Prospective Markets...............................................................................45
Capital Expenditures..........................................................................................48
Competition...................................................................................................48
Insurance.....................................................................................................48
Rental Revenues...............................................................................................49
Legal Proceedings.............................................................................................49
Regulations ..................................................................................................49
Environmental Matters.........................................................................................49
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES.........................................................................51
Acquisition Strategy..........................................................................................51
Internal Growth Strategy......................................................................................51
Investment Objectives.........................................................................................51
Sale of Property..............................................................................................52
Financing Policy..............................................................................................52
Working Capital Reserves......................................................................................52
Other Policies................................................................................................52
MANAGEMENT..........................................................................................................53
Trust Managers and Officers...................................................................................53
Staggered Board...............................................................................................54
Committees of the Trust Managers..............................................................................54
Compensation of Trust Managers................................................................................54
Trust Managers and Officers Insurance.........................................................................54
Indemnification...............................................................................................54
Executive Compensation........................................................................................55
Incentive Share Plan..........................................................................................55
Employment Contracts..........................................................................................56
Limitation of Liability and Indemnification...................................................................56
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................................58
PARTNERSHIP AGREEMENT...............................................................................................59
Management....................................................................................................59
Amendment.....................................................................................................59
Transferability of OP Units...................................................................................59
Redemption of OP Units........................................................................................59
Capital Contributions.........................................................................................59
Partners......................................................................................................60
Term..........................................................................................................60
Tax Matters...................................................................................................60
PRINCIPAL SHAREHOLDERS..............................................................................................61
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST........................................................................62
General.......................................................................................................62
Restrictions on Transfer......................................................................................62
Preemptive Rights And Cumulative Voting.......................................................................63
</TABLE>

(ii)

<PAGE> 7

<TABLE>

<S> <C>
Share Distributions...........................................................................................63
Redemption of Company Shares..................................................................................63
Voting Rights.................................................................................................64
CERTAIN PROVISIONS OF THE TEXAS REIT ACT AND OF
THE COMPANY'S CHARTER AND BYLAWS....................................................................................65
Board of Trust Managers.......................................................................................65
Removal of Trust Managers.....................................................................................65
Business Combinations.........................................................................................65
Shareholder Liability.........................................................................................66
Trust Manager Liability.......................................................................................66
Special Shareholder Meetings..................................................................................67
Termination of the Company....................................................................................67
Amendment of Charter and Bylaws...............................................................................67
SHARES AVAILABLE FOR FUTURE SALE....................................................................................68
FEDERAL INCOME TAX CONSEQUENCES.....................................................................................69
General.......................................................................................................69
Requirements for Qualification as a Real Estate Investment Trust..............................................70
Federal Taxation of the Company--Specific Items...............................................................74
Partnership Anti-Abuse Rule...................................................................................74
Failure to Qualify............................................................................................75
Taxation of Shareholders......................................................................................75
Taxation of Tax-Exempt Shareholders...........................................................................76
Taxation of Foreign Shareholders..............................................................................77
Tax Aspects of the Operating Partnership......................................................................78
Other Taxation................................................................................................81
Proposed Tax Legislation......................................................................................81
BENEFIT PLAN CONSIDERATIONS.........................................................................................82
Investment in the Common Shares Under the "Plan Asset" Rules..................................................82
Other Investment Considerations Under ERISA and the Code......................................................82
Investment Considerations for Other Benefit Plans.............................................................82
UNDERWRITING........................................................................................................83
LEGAL MATTERS.......................................................................................................85
EXPERTS.............................................................................................................85
ADDITIONAL INFORMATION..............................................................................................85
GLOSSARY............................................................................................................86
INDEX TO COMBINED FINANCIAL STATEMENTS.............................................................................F-1
</TABLE>

(iii)

<PAGE> 8

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed

description and financial information and statements, and the notes thereto,
appearing elsewhere in this Prospectus. Capitalized and certain other terms used
herein shall have the meanings assigned to them in the Glossary, which begins on
page 84. Except as otherwise indicated, all information in this Prospectus
assumes: (i) an initial public offering price of $15.00 per Common Share (the
midpoint of the range of the estimated initial offering price range set forth on
the cover page of this Prospectus); and (ii) that the Underwriters'
over-allotment option is not exercised.

Unless the context requires otherwise, the term "Company" as used
herein includes Palace REIT and the Operating Partnership.

This Prospectus contains forward-looking statements, including, without
limitation, statements containing the words "believes," "anticipates," "expects"
and words of similar import. Such forward-looking statements relate to future
events and the future financial performance of the Company, and involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
based upon reasonable assumptions, there can be no assurance that these
expectations will be realized. Factors that could cause actual results to differ
materially from current expectations include changes in general economic
conditions, changes in local real estate conditions, timely leasing of
unoccupied square footage, timely re-leasing of occupied square footage upon
expiration, the Company's ability to generate sufficient revenues to meet debt
service payments, availability of equity and debt financing and other risks
described in this Prospectus. Prospective investors should specifically consider
the various factors identified in this Prospectus that could cause actual
results to differ, including those discussed in the sections entitled
"Prospectus Summary," "Risk Factors," "The Properties" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Neither the delivery of this Prospectus nor any distribution of securities made
hereunder shall, under any circumstances, create any implication that there has
been a change in the affairs of the Company or in the information set forth
herein since the date of this Prospectus.

THE COMPANY

Palace REIT, a self-managed and self-advised real estate investment
trust, was formed on February 10, 1998 to acquire office and industrial
properties in selected markets in the United States. The Company will use
approximately 92% of the proceeds from the Offering to acquire four Class A
office buildings and four industrial buildings.

After the Offering, the Company intends to continue and expand the real
estate investment strategy pursued by David Merker, the Company's Chief
Executive Officer, in acquiring, redeveloping and managing office and industrial
properties for affiliates of Ralph Engelstad, from which the Company is
acquiring the Properties. In managing Mr. Engelstad's real estate operations
since 1988, Mr. Merker has overseen the purchase or development of office and
industrial properties with a book value of approximately $130 million. The
Company's growth strategy is to acquire office and industrial properties in
mid-sized markets with a growing demand for office and industrial space and
strong economic growth, and to aggressively manage its properties to maximize
returns on investments.

Concurrently with the closing of the Offering, the Operating
Partnership, for which Palace REIT serves as sole general partner, will acquire
from affiliates of Mr. Engelstad the Office Properties, which comprise
approximately 1.0 million square feet of GLA, and the Industrial Properties,
which comprise approximately 365,115 of GLA. The Office Properties are located
in Coral Springs, Florida and Midland, Texas, and the Industrial Properties are
located in Las Vegas, Nevada and D'Iberville, Mississippi. The Company has
rights of first refusal to purchase other office and industrial properties owned
or under development by affiliates of Mr. Engelstad comprising approximately 2.1
million square feet of GLA located in Las Vegas, Nevada; Norfolk, Virginia;
Kansas City, Missouri; Midland, Texas and Tyler, Texas.

In seeking acquisition opportunities, the Company intends to focus on
Class A office properties and industrial properties that it can acquire at
prices that are accretive to Funds From Operations per share. The Company will
seek such properties in markets (i) where the Company believes demand for space
in office and industrial properties is growing, (ii) where the Company believes
it will face less competition for property acquisitions from large,
well-capitalized buyers, (iii) where the Company believes it can add value to
properties through aggressive management, and (iv) where population and
employment growth are strong.

<PAGE> 9

The Company believes that its most attractive acquisition opportunities
will be individual properties and mid-sized portfolios. In implementing its
acquisition strategy, the Company plans to utilize Management's extensive
network of contacts among commercial real estate brokers, owners and investors,
developed over the years through Management's experience, prior employment and
longevity in the real estate business. Management expects that these contacts
will provide the Company with increased access to available properties.

The Company intends to fund future property acquisitions through the
most appropriate sources of capital, including the issuance of OP Units, the use
of proceeds from a secured line of credit, undistributed Cash Available for
Distribution, bank and institutional borrowings (secured and unsecured) and the
issuance of debt and equity securities (including Preferred Shares). The Company
is currently negotiating with several financial institutions to obtain a secured
line of credit in the approximate amount of $25 million. The Company believes
that the absence of any debt immediately after the Offering, coupled with the
available sources of capital will provide the Company with significant financial
flexibility in pursuing office and industrial property acquisition
opportunities. The Company intends to maintain a capital structure with a ratio
of indebtedness to Total Market Capitalization of no more than approximately
50%. See "Policies with Respect to Certain Activities--Financing Policy."

The Company is a real estate investment trust formed under the Texas
REIT Act. The Company intends to elect to be taxed as a REIT under the Code
commencing with its taxable year ending December 31, 1998. The principal
executive offices of the Company are located at 3535 Las Vegas Boulevard South,
Las Vegas, Nevada 89109, and its telephone number is (702) 732-7102.

SUMMARY RISK FACTORS

An investment in the Common Shares involves various risks, and
prospective investors should carefully consider the matters discussed under
"Risk Factors" beginning on page 12 prior to any investment in the Company. Such
risks include, among others:

o The Company's financial performance and distributions could decline if
the Company fails to manage growth and integrate operations.

o The Company has no operating history, and Management has no experience
operating a public company or a REIT and limited experience working
together as a management team.

o An economic downturn in the Midland, Texas or Las Vegas, Nevada markets
could cause a decline in the Company's performance.

o Acquired properties may not perform as expected.

o Increases in market interest rates may lead prospective purchasers of
the Common Shares to demand a higher annual yield from future
distributions, which could reduce the market price of the Common
Shares.

o Cash distributions will be dependent upon a number of factors, and no
assurance can be given that necessary funds will be available to meet
the REIT distribution requirements.

o There can be no assurance that the Company will be able to implement
its investment and internal growth strategies successfully.

o The Company's financial performance and distributions could decline in
the event that the Company's major tenants become bankrupt or insolvent
or are otherwise unable to meet their lease obligations.

o Certain real estate investment risks exist, such as the effect of
economic and other conditions on commercial property values, including
the dependence of the Properties on the economies of the metropolitan
areas in which they are located, the ability of tenants to make rent
payments, the ability of the Properties to generate revenues sufficient
to meet operating expenses, including future debt service, and the
illiquidity of real estate investments.

<PAGE> 10

o Loss of service of certain key personnel could have an adverse effect
on the operations of the Company.

o Many entities, as well as individuals, compete to acquire properties
similar to those proposed to be acquired by the Company, many of whom
have greater resources than the Company.

o The Company will be taxed as a corporation if it fails to qualify as a
REIT, resulting in a loss of pass-through tax treatment that could have
a significant adverse affect on the return to shareholders.

o The anti-takeover effect of limiting share ownership to 9.8% of the
outstanding Common Shares and certain other provisions contained in the
organizational documents of the Company and the Texas REIT Act, such as
the ability to issue preferred shares, any of which may delay, defer,
or discourage a change in control, may limit the opportunity for the
Company's shareholders to receive a premium price for their Common
Shares.

o The Company is potentially liable for unknown or future environmental
conditions, including liability for costs of removal or remediation of
hazardous or toxic substances found on a property owned or leased by
the Company.

o The Board of Trust Managers has the ability to change the investment,
financing and other policies of the Company at any time without
shareholder approval.

o No provision in the organizational documents of the Company limits the
amount or type of debt that the Company may incur, which could permit
the Company to incur substantial indebtedness that could adversely
affect the Company's Funds From Operations and its ability to make
distributions to shareholders and result in an increased risk of
default on the Company's obligations.

o Investors in the Offering will experience immediate dilution in the net
tangible book value of Common Shares purchased in the Offering.

o There can be no assurance that an active trading market will develop or
be sustained or that the market price of the Common Shares will not
decline below the initial public offering price.

o Future sales of Common Shares could reduce the prevailing market price
of the Common Shares.

o The liquidation value of the Company may be less than the value of the
Company as a going concern.

o The Company may suffer losses in the event of a casualty or other
liabilities that are not insured, are uninsurable or are not
economically insurable.

o An investment in the Common Shares may not be suitable for certain
investors subject to ERISA.

o The cost of complying with the Americans With Disabilities Act ("ADA")
could have a materially adverse effect on the ability of the Company to
make distributions to its shareholders.

o There can be no assurance that any forward-looking statements included
in this Prospectus will prove to be accurate.

BUSINESS OBJECTIVES AND STRATEGIES

The Company's principal business objective is to provide attractive
returns to its shareholders. The Company intends to achieve this objective by
pursuing integrated acquisition, internal growth and financing strategies.

Acquisition Strategy

The Company intends to grow by acquiring additional Class A office
properties and industrial properties. In pursuing such acquisitions, the Company
intends to:

<PAGE> 11

o Focus on individual properties or mid-sized portfolios of properties
that can be acquired from private groups or individuals.

o Utilize a secured line of credit and offer OP Units to sellers to
provide flexible acquisition terms and facilitate the Company's ability
to close transactions quickly.

o Target selected, growing markets with strong demand for Class A office
space and industrial space.

o Utilize Management's extensive network of contacts among commercial
real estate brokers, owners and investors, developed over the years
through Management's experience, prior employment and longevity in the
real estate business, to acquire individual properties and small
portfolios of Class A office properties and industrial properties.

o Consider properties that may require repositioning or renovation.

Internal Growth Strategy

As part of its business strategy, the Company also intends to generate
internal growth. The Company intends to hold properties for long-term
investment, aggressively manage its properties and achieve internal growth by:

o Providing for contractual rent increases and negotiating periodic rent
increases, whenever possible.

o Retaining and attracting tenants by providing levels of service that
exceed the service provided by competitors in the Company's markets.

o Performing regular maintenance and making capital improvements to
maintain the attractiveness of properties.

o Providing a skilled management team with substantial flexibility in
conducting operations while offering Management performance-based
compensation.

o Offering an incentive share plan to compensate, attract and retain
quality employees.

o Proactively leasing available and soon to be available space.

o Focusing the Company's operational efforts on providing quality
service, active preventive maintenance programs and individualized
attention to tenants while managing operating expenses to achieve
competitive pricing.

Financing Strategy

The Company intends to enhance its growth opportunities by pursuing the
following financing strategy:

o Utilize the proceeds from a secured line of credit and the issuance of
OP Units to facilitate the Company's ability to close acquisitions
quickly.

o Maintain a capital structure with a ratio of debt to Total Market
Capitalization of no more than approximately 50%. Immediately after the
Offering, the Company will have no debt. See "The Company--Business
Strategy."

o Use debt and equity financing to create a flexible capital structure
that will enable the Company to pursue its acquisition and internal
growth strategies and increase returns to its shareholders.

THE PROPERTIES

The following table sets forth information relating to the Properties
as of December 31, 1997:

<PAGE> 12

Total Total Net
Gross Effective Net Effective % of Total
Leasable Rent (in Rent Per Portfolio Number
Year Area Percent thousands) Square Foot Net Effective of
Properties Location Built (Sq. Ft.) Leased (1) (1) Rent Tenants
- ---------- -------- ----- --------- ------ ---------- ----------- ------------- -------

OFFICE
PROPERTIES

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Florida Sunrise Coral Springs, Florida 1985 201,610 79% $ 2,395 $14.94 21.5% 42
Tower

Claydesta Midland, Texas 1985 440,448 77% $ 3,426 $10.04 30.7% 69
Center

Heritage Center Midland, Texas 1981 213,302 81% $ 1,740 $10.07 15.5% 12

Ten Conoco Midland, Texas 1982 175,007 92% $ 1,486 $ 8.93 13.3% 16

TOTAL/ WEIGHTED AVERAGE 1,030,367 82% $ 9,047 $10.76 81.0% 139

INDUSTRIAL
PROPERTIES

D'Iberville D'Iberville, Miss. 1997 96,000 100% $ 576 $ 6.00 5.2% 2

Caballo Las Vegas, Nevada 1994 62,000 100% $ 313 $ 5.04 2.8% 1

Escondido Las Vegas, Nevada 1995 153,120 100% $ 900 $ 5.88 8.1% 3

Polaris Las Vegas, Nevada 1998 53,995 100% $ 324 $ 6.00 2.9% 1

TOTAL/ WEIGHTED AVERAGE 365,115 100% $ 2,113 $ 5.79 19.0% 7

PORTFOLIO TOTAL/WEIGHTED AVERAGE 1,395,482 86% $11,160 $ 9.26 100% 146

Representative Tenants
Properties Location (% of Property Leased)
- ---------- -------- ----------------------

OFFICE
PROPERTIES

<S> <C> <C>
Florida Sunrise Coral Springs, Florida State of Florida (21.9%)
Tower Ford Motor Credit (13.1%)
Smith Barney, Inc. (9.2%)
Unisys Corp (7.8%)
Cypress Foods (0.8%)

Claydesta Midland, Texas Oxy USA, Inc. (23.1%)
Center Norwest Bank Texas, N.A. (20.9%)
Clayton Williams Energy (8.2%)
Fina Oil & Chemical Co. (5.4%)
Smith Barney, Inc. (1.8%)
Danka Industries (0.4%)

Heritage Center Midland, Texas Texaco, Inc. (87.8%)
Atwell & Associates (1.5%)
Anderson Geoconsultants (0.4%)

Ten Conoco Midland, Texas Conoco, Inc. (62.9%)
Midland Orthopedic Clinic (4.8%)
March of Dimes (0.2%)

TOTAL/ WEIGHTED AVERAGE

INDUSTRIAL
PROPERTIES

D'Iberville D'Iberville, Miss. Imperial Palace of Miss. (66.7%)
Imperial Laundry, Inc. (33.3%)

Caballo Las Vegas, Nevada Crown Laboratories (100%)

Escondido Las Vegas, Nevada Imperial Palace, Inc. (55.4%)
Walmart (13.1%)

Polaris Las Vegas, Nevada Imperial Palace, Inc. (100%)

TOTAL/ WEIGHTED AVERAGE

PORTFOLIO TOTAL/WEIGHTED AVERAGE

</TABLE>

(1) Net Effective Rent is defined in the Glossary.

<PAGE> 13

THE FORMATION TRANSACTIONS

Concurrently with the closing of the Offering, the following Formation
Transactions will occur:

o The Company will contribute substantially all of the net proceeds of
the Offering to the Operating Partnership in exchange for an
approximate 90.4% limited partnership interest in the Operating
Partnership. The Company will also hold a 1.0% general partnership
interest in the Operating Partnership. The Operating Partnership will
retain any proceeds received from the Company in connection with the
Underwriters' over-allotment option for working capital purposes.

o The Prior Owners will sell six Properties to the Operating Partnership
for $57,379,063 in cash payable from the net proceeds of the Offering
contributed by the Company to the Operating Partnership, based upon an
initial public offering price of $15.00 per share. As of March 31,
1998, the six Properties had an aggregate book value (net of
accumulated depreciation) of $27,546,000 to the Prior Owners.

o The Prior Owners will contribute two Properties to the Operating
Partnership in exchange for $1,823,437 in cash payable from the net
proceeds of the Offering, based upon an initial public offering price
of $15.00 per share, and an aggregate of 415,312 OP Units, representing
an approximate 8.6% limited partnership interest in the Operating
Partnership. The OP Units issued to the Prior Owners will be redeemable
at the election of the holder for cash or, at the Company's sole
option, Common Shares on a one-for-one basis at any time after the
first anniversary of the completion of the Offering. Based upon an
initial public offering price of $15.00 per share, the 415,312 OP Units
will have a value of $6,229,680 upon completion of the Offering,
resulting in an aggregate purchase price of $8,053,117 for the two
Properties exchanged therefor. As of March 31, 1998, the two Properties
had an aggregate book value (net of accumulated depreciation) of
$2,622,000 to the Prior Owners. See "The Company--The Operating
Partnership."

OWNERSHIP STRUCTURE

Following completion of the Offering and the Formation Transactions,
the relationships among the Company, the public shareholders, the Operating
Partnership, the Prior Owners and Management will be as follows:

[GRAPHIC OMITTED]

<PAGE> 14

DISTRIBUTION POLICY

The Company intends to make regular quarterly distributions to the
holders of the Common Shares. The Company expects to pay its first cash
distribution after completion of the Offering on or about September 30, 1998, to
holders of record of Common Shares as of August 15, 1998. The payment will
represent a pro-rata distribution for the period from the closing of the
Offering to September 30, 1998. Future distributions by the Company will be
determined by and at the discretion of the Board of Trust Managers and will be
dependent upon a number of factors, including the federal income tax requirement
that a REIT must distribute annually at least 95% of its taxable income.

Based on its estimated Cash Available for Distribution, the Company
initially expects to make distributions of $1.20 per share on an annualized
basis, or an annual distribution rate of approximately 8.0%, based on an assumed
initial public offering price of $15.00 per share. The Company currently intends
to maintain its initial distribution rate for the 12-month period following
consummation of the Offering, unless actual results of operations, economic
conditions or other factors differ materially from the assumptions used in its
estimate. The Company does not intend to reduce the expected distribution rate
if the Underwriters' over-allotment option is exercised. OP Units and Common
Shares will receive equal distributions. See "Distribution Policy."

TAX STATUS

The Company will elect to be treated as a REIT under sections 856
through 859 of the Code for the taxable year ending December 31, 1998 and for
each subsequent taxable year. As a REIT, the Company generally will not be
subject to federal income tax provided it makes certain distributions to its
shareholders and meets certain organizational and other requirements. If the
Company fails to qualify as a REIT in any taxable year, it will be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. See "Risk Factors--Adverse
Consequences of the Failure to Qualify as a REIT" and "Federal Income Tax
Consequences." As a REIT, the Company may be subject to certain federal, state
and local taxes. See "Federal Income Tax Consequences."

Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. will deliver prior to the
effective date of this Prospectus its opinion that: (1) the Company was
organized in conformity with the requirements for qualification as a REIT for
federal income tax purposes for the taxable year ending December 31, 1998, and
has continued to meet the requirements for qualification as a REIT through the
date of the opinion; and (2) the Company's anticipated investments and plan of
operation as described in the Prospectus will enable it to continue to meet the
requirements for qualification as a REIT for federal income tax purposes.

THE OFFERING

<TABLE>

<S> <C>
Common Shares Offered by the Company................... 4,290,000
Common Shares and OP Units to be Outstanding
After the Offering..................................... 4,846,572 (1)
Use of Proceeds........................................ To purchase certain of
the Properties and for
general working capital.
Proposed Nasdaq Stock Market Symbol.................... PALR
</TABLE>

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

(1) Includes 141,260 Common Shares issued to certain executive officers and
Trust Managers of the Company prior to the Offering and 415,312 Common
Shares issuable upon redemption of OP Units to be issued in the
Formation Transactions. Excludes 242,328 Common Shares reserved for
issuance under the Company's Employee and Trust Manager Incentive Share
Plan. See "Management--Incentive Share Plan." OP Units to be issued in
the Formation Transactions are redeemable, at the option of the holder,
beginning one year after the closing of the Offering for cash or, at
the option of the Company, Common Shares on a one-for-one basis,
subject to certain exceptions. See "Partnership Agreement."

SUMMARY FINANCIAL DATA

The following table sets forth certain summary financial information
for the Company on a combined pro forma basis and for the Company's predecessor
entities on a combined historical basis, which consists of the combined
financial statements of the Properties that the Prior Owners have agreed to
contribute or sell in exchange for OP Units and cash in connection with the
Formation Transactions. The following financial information should be read in
conjunction with all of the financial statements and notes thereto included
elsewhere in this Prospectus. The historical and pro forma operating data of the
Company may not

<PAGE> 15

be indicative of future operating results of the Company. The pro forma
operating data of the Company for the year ended December 31, 1997 and the three
months ended March 31, 1998 are presented as if the Offering had occurred as of
January 1, 1997 and January 1, 1998, respectively. The pro forma balance sheet
data are presented as if the Offering had occurred on March 31, 1998. The
following pro forma information is not necessarily indicative of what the
Company's results of operations or financial condition would have been for the
periods or at the date indicated, and are not necessarily indicative of the
results that will be achieved for future periods as a result of the Offering and
the Formation Transactions. These pro forma financial statements and related
notes thereto should be read in conjunction with the Company's and Properties'
combined financial statements included elsewhere in this Prospectus.

<PAGE> 16

THE COMPANY (PRO FORMA) AND THE PROPERTIES (COMBINED HISTORICAL)
SUMMARY FINANCIAL DATA

PRO FORMA COMBINED HISTORICAL
-------------------------- ---------------------------------------------------
For the 3 months ended For the years
March 31, ended December 31,
------------------------- -----------------------
For the 3
months For the year
ended ended
March 31, December
1998 31, 1997 1998 1997 1997 1996
----------- ------------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Rental $ 2,311,801 $ 9,875,522 $2,311,801 $ 2,289,655 $ 9,875,522 $ 9,638,280
Rental - related party 251,640 402,720 251,640 65,178 402,720 158,400
Other 5,707 10,513 5,707 1,895 10,513 10,125
----------- ------------ ---------- ----------- ------------ ------------

Total revenue 2,569,148 10,288,755 2,569,148 2,356,728 10,288,755 9,806,805
----------- ------------ ---------- ----------- ------------ ------------

Expenses:
Property operations 876,646 3,385,524 876,646 881,446 3,385,524 3,404,564
Real estate taxes 180,210 712,242 180,210 177,795 712,242 728,270
Depreciation and amortization 448,066 1,798,092 277,358 272,690 1,115,261 1,035,291
Interest-related party 418,730 436,520 1,778,723 1,119,130
Property Management Fee 192,458 185,017 711,026 848,036
General and administrative 423,253 1,739,287 132,227 145,434 575,182 505,741
Write-off of tenant improvements 152,063
----------- ------------ ---------- ----------- ------------ ------------

Total expenses 1,928,175 7,635,145 2,077,629 2,098,902 8,277,958 7,793,095
----------- ------------ ---------- ----------- ------------ ------------

Net income (loss) before minority interest 640,973 2,653,610 $ 491,519 $ 257,826 $ 2,010,797 $ 2,013,710
========== =========== ============ ============
Minority interest (1) 54,931 227,414
----------- ------------
Net income applicable to common shareholders $ 586,042 $ 2,426,196
=========== ============

Pro forma net income per common share (2) $ 0.13 $ 0.55
=========== ============

COMBINED HISTORICAL
-----------------------------------------

For the years ended December 31,
-----------------------------------------

1995 1994 1993
------------ ------------ ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Rental $ 4,945,110 $ 1,595,342 $1,628,704
Rental - related party 26,400
Other 4,486
------------ ------------ ----------

Total revenue 4,975,996 1,595,342 1,628,704
------------ ------------ ----------

Expenses:
Property operations 1,821,350 942,459 838,784
Real estate taxes 289,071 177,801 227,261
Depreciation and amortization 596,039 283,034 307,017
Interest-related party 330,124 253,208 468,403
Property Management Fee 370,426 184,511 136,595
General and administrative 344,339 43,491 48,365
Write-off of tenant improvements
------------ ------------ ----------

Total expenses 3,751,349 1,884,504 2,026,425
------------ ------------ ----------

Net income (loss) before minority interest $ 1,224,647 $ (289,162) $ (397,721)
============ ============ ==========
Minority interest (1)

Net income applicable to common shareholders

Pro forma net income per common share (2)

</TABLE>

<PAGE> 17

PRO FORMA COMBINED HISTORICAL
-------------- --------------------------------------------------------------

December 31,
---------------------------------------------
March 31,
1998 March 31, 1998 1997 1996 1995
-------------- --------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Land $ 5,886,504 $ 3,070,875 $ 3,070,875 $ 2,925,875 $ 2,698,516
Buildings, improvements and equipment 55,673,020 29,043,533 28,971,990 26,168,962 21,382,596
Projects under development 811,339 811,339 299,919 70,539 27,145

Less accumulated depreciation and amortization (2,757,641) (2,757,641) (2,547,695) (1,688,018) (925,857)
-------------- --------------- ------------- ------------ ------------

Real estate - net 59,613,222 30,168,106 29,795,089 27,477,358 23,182,400
============== =============== ============= ============ ============

Total assets 60,286,026 32,535,496 32,069,993 29,002,614 24,525,515
============== =============== ============= ============ ============

Mortgage notes 19,893,980 19,893,980 20,300,000
=============== ============= ============
Total liabilities 173,525 21,411,277 21,263,199 20,988,184 3,612,524
============== =============== ============= ============ ============
Minority interest (3) 5,151,641
==============
Owners' equity 54,960,860 11,124,219 10,806,794 8,014,430 20,912,991
============== =============== ============= ============ ============

Liabilities and Shareholders' Equity 60,286,026 32,535,496 32,069,993 29,002,614 24,525,515
============== =============== ============= ============ ============

COMBINED HISTORICAL
----------------------------

December 31,
----------------------------

1994 1993
------------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Land $ 1,739,996 $ 1,739,996
Buildings, improvements and equipment 10,196,625 7,826,059
Projects under development 663,069 0

Less accumulated depreciation and amortization (329,818) (183,247)
------------- ------------

Real estate - net 12,269,872 9,382,808
============= ============

Total assets 12,804,310 10,320,384
============= ============

Mortgage notes

Total liabilities 3,320,146 3,158,817
============= ============
Minority interest (3)

Owners' equity 9,484,164 7,161,567
============= ============

Liabilities and Shareholders' Equity 12,804,310 10,320,384
============= ============
</TABLE>

PRO FORMA COMBINED HISTORICAL
--------------- --------------------------------------------------------------------------

December 31,
-------------------------------------------------------
March 31, March 31,
1998 1998 1997 1996 1995
--------------- --------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations (4) 4,451,702 1,089,039 3,126,058 3,049,001 1,820,686
=============== =============== ================ ================= ================
Cash flows from:
Operating activities 645,403 2,933,982 2,026,556 1,620,899
=============== ================ ================= ================
Investing activities (582,963) (3,033,377) (1,110,181) (3,173,647)
=============== ================ ================= ================
Financing activities 210,905 333,959 (1,251,673) 1,869,259
=============== ================ ================= ================
Office Properties:
Square footage 1,030,567* 1,035,792 1,035,792 1,035,792 822,490
Occupancy 82% 82%
Industrial properties:
Square footage 311,120 311,120 311,120 215,120 215,120
Occupancy 100% 100% 100%

</TABLE>

*Square footage adjusted for Conoco, Inc. lease in Ten Conoco property.

<PAGE> 18

(1) Calculated as 8.57% of the Operating Partnership's net income on a pro
forma basis for the year ended December 31, 1997.
(2) Calculated assuming 4,431,260 Common Shares outstanding for the Company
which represent the shares to be issued in the Offering and the shares
to be issued to Management.
(3) Calculated as 8.57% of the Operating Partnership's equity on a pro
forma basis at December 31, 1997.

(4) Management and industry analysts generally consider Funds From
Operations to be one measure of the financial performance of an equity
REIT that provides a relevant basis for comparison among REITs, and it
is presented to assist investors in analyzing the performance of the
Company. "Funds From Operations" is defined as income before minority
interest (computed in accordance with generally accepted accounting
principles), excluding gains (losses) from debt restructuring and sales
of property and real estate related depreciation and amortization.
Funds From Operations does not represent cash available from operating
activities in accordance with generally accepted accounting principles
and is not necessarily indicative of cash available to fund cash needs.
Funds From Operations should not be considered an alternative to net
income, as an indication of the Company's financial performance or as
an alternative to cash flows from operating activities as a measure of
liquidity, and may be determined differently from similarly titled
measures used by other REITs.

<PAGE> 19

RISK FACTORS

An investment in the Company involves various investment risks.
Prospective investors should carefully consider the following factors together
with the information provided elsewhere in this Prospectus in evaluating an
investment in the Company.

DECREASE IN FINANCIAL PERFORMANCE AND DISTRIBUTIONS DUE TO FAILURE TO MANAGE
GROWTH OR INTEGRATE FUTURE OPERATIONS

Assuming completion of the Offering, the Company expects to experience
a period of rapid growth. There can be no assurance that the Company will be
able to integrate its management, administrative, accounting and operational
systems to effectively manage the Properties on a combined basis, or be able to
adapt such systems to any future acquisitions of additional properties without
certain operating disruptions or unanticipated costs. The failure to
successfully manage the Properties on a combined basis or to successfully
integrate any future acquisitions into the Company's portfolio could have a
material adverse effect on the results of operations and financial condition of
the Company and its ability to pay expected distributions to shareholders. There
can be no assurance that the Company will be able to successfully execute its
growth strategy.

LACK OF OPERATING HISTORY; INEXPERIENCE OF MANAGEMENT

The Company has been recently organized and has no operating history.
As a consequence, investors have limited information upon which to base an
investment decision. There can be no assurance that the Company will be
successful operating the Properties as an independent public company as compared
to the Properties' historical operation. The Company will be subject to the
risks generally associated with the formation of any new business that is
publicly traded. For example, the Company will be required to address issues
faced by public companies, including legal and regulatory concerns, duties to
shareholders and public scrutiny of corporate actions. Prior to the Offering,
the Properties have been owned and operated by the Prior Owners. Such Prior
Owners provided financial, administrative and managerial expertise relevant to
the operation of the Properties. After the Offering, the Company will be
required to rely on its own sources of financing and management skills. In
addition, Management has no experience operating a public company or a REIT and
limited experience working together as a management team.

LIMITED GEOGRAPHIC DIVERSIFICATION OF THE PORTFOLIO

A significant portion of the Company's assets and revenues will be
derived from Properties located in the Midland, Texas and Las Vegas, Nevada
metropolitan areas. The concentration of the portfolio in these metropolitan
areas creates the risk that should these regions or other geographic markets in
which the Company in the future may acquire substantial assets experience an
economic downturn, the Company's operations may be adversely affected.

INABILITY TO ACQUIRE ADDITIONAL PROPERTIES; PROPERTIES MAY NOT PERFORM AS
EXPECTED

The fact that the Company must distribute 95% of its taxable income in
order to qualify and to maintain its qualification as a REIT will limit the
ability of the Company to rely upon income from operations or cash flow from
operations to finance new acquisitions. As a result, if permanent debt or equity
financing is not available on acceptable terms to finance acquisitions, then
further acquisitions might be limited or Cash Available for Distribution might
be adversely affected. As it acquires additional properties, the Company will be
subject to risks associated with managing new properties, including tenant
retention and indebted default. A larger portfolio of properties would generate
additional operating expenses that would be payable by the Company. Acquisitions
entail risks that investments will fail to perform in accordance with
expectations and that judgments with respect to the costs of improvements to
bring an acquired property up to standards established for the market position
intended for that property will prove inaccurate, as well as general investment
risks associated with any new real estate investment. There can be no assurance
that the Company will be able to negotiate and acquire any acceptable properties
in the future.

DECREASE IN COMMON SHARE PRICE AND FINANCIAL PERFORMANCE DUE TO INCREASE IN
MARKET INTEREST RATE

One of the factors that may influence the price of the Company's Common
Shares in public markets is the annual distribution rate on the Common Shares.
Thus, an increase in market interest rates may lead purchasers of Common Shares
to demand a higher annual distribution rate, which could adversely affect the
market price of the Common Shares. In addition, an increase in the market rate
of interest may increase interest expenses under any

<PAGE> 20

variable rate indebtedness of the Company. After the Offering, the Company
expects to obtain a revolving credit line with a variable interest rate.
Although the Company intends to purchase an interest rate collar or similar
hedging instrument against fluctuating interest rates, there can be no assurance
that such collar or similar arrangement will be available, or if available, at
economically feasible rates.

POSSIBLE INABILITY TO MEET REIT DISTRIBUTION REQUIREMENTS

Distributions will be determined by the Company's Trust Managers and
will be dependent on a number of factors, including the amount of Funds From
Operations available for distribution, the Company's financial condition, any
decision by the Trust Managers to reinvest funds rather than to distribute such
funds, the Company's capital expenditures, the annual distribution requirements
under the REIT provisions of the Code (see "Federal Income Tax
Consequences--Requirements for Qualification as a Real Estate Investment Trust")
and such other factors as the Trust Managers deem relevant. No assurance can be
given that necessary funds will be available to allow the Company to meet the
REIT requirements or the Company's other obligations.

REAL ESTATE RISK FACTORS SPECIFIC TO THE COMPANY'S BUSINESS

LEASE EXPIRATIONS AND RENEWALS. The Company is subject to the risks
that, upon expiration, leases for space in its properties may not be renewed,
the space may not be re-leased, and that the terms of any renewal or re-lease
(including the cost of required renovations or concessions to tenants) would not
be as favorable as current leases. As of April 30, 1998, approximately 27.7% of
the GLA of the Properties is subject to leases that expire in either 1998 or
1999. There can be no assurance that such leases can be renewed, that the space
subject to such leases can be re-leased, or that the terms of any renewal or
re-lease would be as favorable as current leases.

BANKRUPTCY OR INSOLVENCY OF MAJOR TENANTS. As of April 30, 1998, the
five largest tenants of the Properties generated approximately 42.6% of the
combined Net Effective Rent of the Properties. The bankruptcy or insolvency of a
major tenant or a number of small tenants may have an adverse impact on the
Company's income and its distributions to shareholders. Generally, under
bankruptcy law, a tenant has the option of continuing or terminating any
unexpired lease. If the tenant continues its lease with the Company, the tenant
must cure all defaults under the lease and provide the Company with adequate
assurance of its future performance under the lease. If the tenant terminates
the lease, the Company's claim for breach of the lease would (absent collateral
securing the claim) be treated as a general unsecured claim. General unsecured
claims are the last claims to be paid in a bankruptcy and therefore funds may
not be available to pay such claims. As of April 30, 1998, none of the
Properties' projected major tenants was in bankruptcy or had defaulted on a
lease that caused a material adverse effect.

RISKS OF JOINT OWNERSHIP OF ASSETS. The Company has the right to invest
in properties and assets jointly with other persons or entities. Joint ownership
of properties, under certain circumstances, may involve risks not otherwise
present, including the possibility that the Company's partners or co-investors
might become insolvent or bankrupt, that such partners or co-investors might at
any time have economic or other business interests or goals that are
inconsistent with the business interests or goals of the Company, and that such
partners or co-investors may be in a position to take action contrary to the
instructions or the requests of the Company or contrary to the Company's
policies or objectives, including the Company's policy with respect to
maintaining its qualification as a REIT.

REAL ESTATE INVESTMENT RISKS

ECONOMIC PERFORMANCE AND VALUE OF PROPERTIES DEPENDENT ON MANY FACTORS.
Real property investments are subject to varying degrees of risk. The yields
available from equity investments in real estate depend on the amount of income
generated and expenses incurred. If the Company's properties do not generate
income sufficient to meet operating expenses, including debt service, the
Company's income and ability to make distributions to its shareholders will be
adversely affected.

The income from and market value of a leased property may be adversely
affected by such factors as changes in the general economic climate, local
conditions such as an oversupply of space or a reduction in demand for real
estate in the area, the attractiveness of the properties to tenants and
competition from other available space. Real estate values and income are also
affected by such factors as government regulations and changes in real estate,
zoning or tax laws, interest rate levels, the availability of financing and
potential liability under environmental and other laws.

Adverse economic conditions could adversely affect the ability of a
tenant to make its lease payments to the

13
<PAGE> 21

Company, resulting in a reduction in the cash flow of the Company and a decrease
in the value of the property leased to such tenant in the event the lease is
terminated and the Company is unable to lease the property to another tenant on
similar or better terms, or at all. In addition, the Company may experience
delays in enforcing its rights as lessor and may incur substantial costs in
protecting its investment. The Company not only could lose the cash flow from
such defaulting tenant, but in order to prevent a foreclosure, also might divert
cash flow generated by other properties to meet mortgage payments, if any, and
pay other expenses associated with owning the property with respect to which the
default occurred.

DEPENDENCE ON RENTAL INCOME FROM REAL PROPERTY TO MEET DEBT OBLIGATIONS
AND MAKE DISTRIBUTIONS. As substantially all of the Company's income will be
derived from rental income from real property, the Company's income and Funds
From Operations could be adversely affected if a single major tenant or a number
of smaller tenants were unable to meet their obligations to the Company or if
the Company were unable to lease on economically favorable terms a significant
amount of space in its properties. In addition, the Company's tenants may have
the right to terminate their leases upon the occurrence of certain customary
events of default, or, in some cases, if the lease held by an anchor tenant or
other principal tenant of the property expires, is terminated or the property
subject to the lease is vacated, even if rent continues to be paid under the
lease. No assurance can be given that leases that expire or are terminated can
be renewed or replaced, or that the properties covered by leases that expire or
are terminated can be leased to comparable tenants or on comparable terms, or at
all.

ILLIQUIDITY OF REAL ESTATE INVESTMENTS. Equity real estate investments
are relatively illiquid and therefore tend to limit the ability of the Company
to vary its portfolio in response to changes in economic or other conditions. In
addition, mortgage payments and, to the extent a property is not subject to
Triple Net Leases, certain significant expenditures such as real estate taxes
and maintenance costs generally are not reduced when circumstances cause a
reduction in income from the investment, and should such events occur, the
Company's income and Cash Available for Distribution would be adversely
affected. See "Risk Factors--Increased Leverage May Result in Loss of Properties
in the Event of a Foreclosure."

CHANGES IN LAWS. Costs resulting from changes in real estate taxes
generally may be passed through to tenants and, to such extent, will not affect
the Company. Increases in income, service or transfer taxes, however, generally
are not passed through to tenants under the leases and may adversely affect the
Company's operating cash flow and its ability to make distributions to
shareholders. Similarly, changes in laws increasing the potential liability for
environmental conditions existing on properties or increasing the restrictions
on discharges or other conditions may result in significant unanticipated
expenditures, which would adversely affect the Company's operating cash flow and
its distributions to shareholders.

RELIANCE ON KEY PERSONNEL

The Company is dependent on the efforts of Mr. David R. Merker,
Chairman of the Board of Trust Managers and Chief Executive Officer of the
Company, and Mr. Arthur F. Lorentzen, Jr., President and Chief Operating Officer
of the Company. While the Company believes that it could find replacements for
these key executives, the loss of their services could have an adverse effect on
the operations of the Company. Mr. Merker and Mr. Lorentzen have employment
agreements with the Company and are not obligated to devote their full-time to
the Company. However, Messrs. Merker and Lorentzen are obligated to devote such
time, attention and energies to the business of the Company as are reasonably
necessary to satisfy their required responsibilities and duties under the terms
of their respective employment agreements, and Messrs. Merker and Lorentzen
intend to devote at least 95% of their business time to the affairs of the
Company. The Company will obtain key-man insurance for all of its executive
management personnel.

COMPETITION

Numerous real estate companies that operate in the Company's target
metropolitan and suburban markets compete with the Company in developing and
acquiring office and industrial properties and seeking tenants to occupy such
properties. Such competition could adversely affect the Company's business.
There are numerous commercial developers, real estate companies, REITs and major
retailers that compete with the Company in seeking properties for acquisition
and tenants for properties, many of which may have greater financial and other
resources than the Company and may have substantially more operating experience
than that of the Company, its officers and agents.

14
<PAGE> 22

LOSS OF TAX BENEFITS UPON A FAILURE TO QUALIFY AS A REIT

The Company must meet a number of highly technical and complex
requirements to qualify and continue to qualify as a REIT under the Code. For
any taxable year that the Company fails to qualify as a REIT, the Company will
be subject to federal income tax (including any applicable alternative minimum
tax) on its taxable income at corporate rates with no deduction for dividends
paid to its shareholders. This treatment would reduce the net earnings of the
Company available for investment or distribution to shareholders because of the
additional tax liability to the Company for the year or years involved. To the
extent that distributions to shareholders would have been made in anticipation
of the Company qualifying as a REIT, the Company might be required to borrow
funds or liquidate certain of its investments to pay the applicable tax. Failure
to qualify as a REIT under the Code during a taxable year would generally render
the Company ineligible to elect REIT status again until the fifth subsequent
taxable year. The Company will not be required to make distributions to
shareholders in the event that it fails to qualify as a REIT under the Code and
there can be no assurance that the Company will continue to make distributions
in such event. Transfers of the Common Shares are subject to certain
restrictions to protect the Company's REIT status under the Code. In addition,
the Company may be subject to state or local taxes. No assurance can be given
that legislation, new regulations, administrative interpretations or court
decisions will not change the tax laws with respect to qualification as a REIT,
the federal income tax consequences of such qualification or the application of
state or local taxes to the Company. See "Federal Income Tax Consequences."

The Operating Partnership has been structured to be classified as a
partnership for federal income tax purposes. If the Service were to challenge
successfully the tax status of the Operating Partnership as a partnership for
federal income tax purposes, the Operating Partnership would be treated as an
association taxable as a corporation. In such event, the character of the
Company's assets and items of gross income would change and preclude the Company
from satisfying certain requirements of the Code, which, in turn, would prevent
the Company from qualifying as a REIT. See "Federal Income Tax
Consequences--Requirements for Qualification as a Real Estate Investment Trust."
In addition, the imposition of a corporate tax on the Operating Partnership
would reduce the amount of Cash Available for Distribution. See "Federal Income
Tax Consequences."

OWNERSHIP LIMIT; ANTI-TAKEOVER EFFECT

In order to qualify and to continue to qualify as a REIT, not more than
50% in value of the outstanding Common Shares of the Company may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of any taxable year (other than
its 1998 taxable year). To ensure that the Company will not fail to qualify as a
REIT under this test, the Charter provides that no holder of capital shares,
other than any person to whom the Trust Managers grant an exemption, may
directly or indirectly own more than 9.8% of the number or value of the
outstanding shares of any class or series of the Company's outstanding shares of
beneficial interest (the "Ownership Limit"). There can be no assurance that
there will not be five or fewer individuals who will own more than 50% in value
of the Common Shares, thereby causing the Company to fail to qualify as a REIT.
The Ownership Limit may discourage a change of control of the Company and may
also (i) deter tender offers for the Common Shares, which offers may be
attractive to the shareholders or (ii) limit the opportunity for shareholders to
receive a premium for their Common Shares that might otherwise exist if an
investor attempted to assemble a block of Common Shares in excess of 9.8% in
number or value of the outstanding Common Shares or otherwise to effect a change
of control of the Company. See "Description of Shares of Beneficial
Interest--Restrictions on Transfer."

The Trust Managers may waive the Ownership Limit with respect to a
particular shareholder if it is satisfied, based upon the advice of tax counsel,
that such ownership in excess of such limit will not jeopardize the Company's
status as a REIT. See "Description of Shares of Beneficial Interest --
Restrictions on Transfer." A transfer of shares to a person who, as a result of
such transfer, violates the Ownership Limit may be void under some circumstances
or may be exchanged for Excess Securities which are held in trust for the
benefit of a charitable beneficiary. See "Description of Shares of Beneficial
Interest--Restrictions on Transfer" for additional information regarding the
Ownership Limit.

ENVIRONMENTAL MATTERS

Under various federal, state and local laws, ordinances and
regulations, an owner of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such property.
Such laws often impose such liability without regard to whether the owner knew
of, or was responsible for, the presence of such hazardous or toxic substances.
The costs of any required remediation or removal of such substances may be
substantial and the owner's liability therefor as to any property is generally
not limited under such laws, ordinances and regulations and

15
<PAGE> 23

could exceed the value of the property. The presence of such substances, or the
failure to properly remediate such substances, may adversely affect the owner's
ability to sell the property or to borrow using real estate as collateral. All
of the Properties have recently been subject to Phase I environmental audits
(which involves inspection without soil sampling or ground water analysis) by
independent environmental consultants. The completed Phase I audit reports have
not revealed any environmental liability, nor is the Company aware of any
environmental liability that the Company's Management believes would have a
material adverse effect on the Company's business, assets or results of
operations, taken as a whole. No assurance, however, can be given that a
material environmental condition not known to the Company does not exist on the
Properties.

The Company believes that each of the Properties is in compliance in
all material respects with all federal, state and local ordinances and
regulations regarding hazardous or toxic substances.

CHANGES IN INVESTMENT AND FINANCING POLICIES WITHOUT SHAREHOLDER APPROVAL

The Company's operating and financial policies, including its policies
with respect to acquisitions, growth, operations, indebtedness, capitalization
and distributions, will be determined by the Board of Trust Managers. The Board
of Trust Managers generally may revise these policies, from time to time,
without shareholder approval. Changes in the Company's policies could adversely
affect the Company's financial condition and results of operations. In addition,
the Company has the right and intends to acquire additional real estate assets
pursuant to and consistent with its investment strategies and policies without
shareholder approval.

NO LIMITATION IN ORGANIZATIONAL DOCUMENTS ON THE INCURRENCE OF DEBT

The Company intends to have a general policy of limiting its borrowings
to a ratio of approximately 50% or less of debt to Total Market Capitalization.
The organizational documents of the Company contain no limitation on the amount
or percentage of indebtedness that the Company may incur. Therefore, the Board
of Trust Managers, without a vote of the shareholders, could alter or eliminate
at any time the current policy of limiting borrowings. If the Company's debt to
capitalization policy were changed, the Company could become more highly
leveraged, resulting in an increase in debt service that could adversely affect
the Company's operating cash flow and its ability to make expected distributions
to shareholders and could result in an increased risk of default on its
obligations. There can be no assurance that the ratio of indebtedness to market
capitalization (or any other measure of asset value) or the incurrence of debt
at any particular level would not adversely affect the financial condition and
results of operations of the Company.

Although the Company will consider factors other than Total Market
Capitalization in making decisions regarding the incurrence of debt (such as the
purchase price of properties to be acquired with debt financing, the estimated
market value of properties upon refinancing, and the ability of particular
properties and the Company, as a whole, to generate cash flow to cover expected
debt service), there can be no assurance that the ratio of debt to Total Market
Capitalization will be consistent with the maintenance of the expected level of
distributions to shareholders.

IMMEDIATE AND SUBSTANTIAL DILUTION

The anticipated price per Common Share in the Offering substantially
exceeds the pro forma net tangible book value per share immediately subsequent
to the Offering. Accordingly, the shareholders acquiring shares in the Offering
will experience immediate and substantial dilution of $2.58 per share in the net
tangible book value of the Common Shares. See "Dilution."

NO PRIOR TRADING MARKET

Prior to the completion of this Offering, there has been no public
market for the Common Shares. The initial public offering price was determined
through negotiations between the Company and the Representative of the
Underwriters. See "Underwriting" for a discussion of factors considered in the
determination of the initial public offering price. There can be no assurance
that an active trading market will develop or be sustained or that the market
price of the Common Shares will not decline below the initial public offering
price.

SHARES AVAILABLE FOR FUTURE SALE

Upon consummation of the Offering, the Company will have a total of
4,431,260 Common Shares outstanding, of which 141,260 Common Shares will
constitute "restricted" securities as that term is defined in Rule 144 as

16
<PAGE> 24

promulgated under the Securities Act. The 141,260 restricted Common Shares are
subject to 180 day lock-up agreements with the Underwriters, which the
Underwriters may waive in their sole discretion. Such Common Shares will become
eligible for sale in the public market upon registration or from time to time
upon the expiration of the two-year holding period under Rule 144 on February
11, 2000. Certain of the Prior Owners will be issued 415,312 OP Units in
connection with the Formation Transactions. Such Common Shares may be redeemed
for cash or Common Shares, at the option of the Company, on a one-for-one basis
beginning one year after the Offering. Common Shares issued upon the redemption
of OP Units will become eligible for sale in the public market upon registration
or from time to time upon the expiration of the applicable holding period under
Rule 144.

Following this Offering, sales of substantial amounts of the Common
Shares in the public market pursuant to Rule 144 or otherwise, or the
availability of such shares for sale, could adversely affect the prevailing
market price of the Common Shares and impair the Company's ability to raise
additional capital through the sale of equity securities. See "Shares Available
for Future Sale." No prediction can be made of the effect that future sales of
Common Shares will have on the market price of Common Shares.

LIQUIDATION VALUE OF THE COMPANY MAY BE LESS THAN VALUE AS A GOING CONCERN

No independent third-party appraisals of the Properties were obtained.
The valuation of the Company has been determined based primarily upon a
capitalization of estimated cash flow of the Company available for distribution
and the factors discussed under "Underwriting" rather than by valuing individual
properties based on current market value or historical cost. The Company
believes this methodology to be appropriate because it values the Company as a
going concern rather than as the sum of values that could be obtained for the
Properties in liquidation. Accordingly, it is possible that the cash
consideration received by the Prior Owners in exchange for the Properties and
the value of the Common Shares that may be received by the Prior Owners upon
redemption of the OP Units received in exchange for the Properties (based upon
the initial public offering price set forth on the cover page of this
Prospectus) may exceed the fair market value of the Properties. Investors should
be aware that the liquidation value of the Company may be less than the value of
the Company as a going concern.

UNINSURED LOSS AND CONDEMNATION

The Company will carry comprehensive liability, fire, flood, extended
coverage and rental loss insurance with respect to its properties with policy
specifications and insured limits customarily carried for similar properties.
There are, however, certain types of losses (such as from wars or earthquakes)
that may be either uninsurable or not economically insurable. Should an
uninsured loss occur, the Company could lose both its invested capital in and
anticipated profits from the property.

Tenant leases may permit the tenant to terminate its lease in the event
of a substantial casualty or a taking by eminent domain of a substantial portion
of a property. Should any such event occur, the Company generally will be
compensated by insurance proceeds or a condemnation award. There can be no
assurance, however, that insurance proceeds, if available, or a condemnation
award, if given, will equal the value of such property or the Company's
investment in such property.

INVESTORS SUBJECT TO ERISA

Fiduciaries of a pension, profit-sharing or other employee benefit plan
subject to ERISA should consider whether the investment of plan assets in the
Common Shares satisfies the diversification requirements of ERISA, whether the
investment is prudent in light of possible limitations on the marketability of
the Common Shares, and whether such fiduciaries have authority to acquire such
Common Shares under their appropriate governing instruments and Title I of
ERISA. See "Benefit Plan Considerations."

COST OF COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT

ADA requires public accommodations to meet certain federal requirements
related to access and use by disabled persons. Compliance with the ADA could
require removal of structural barriers to handicapped access in certain public
areas of the Company's properties where such removal is readily achievable.
Failure to comply with the ADA could result in an imposition of fines or the
award of damages to private litigants, and also could result in an order to
correct any non-complying feature. The applicable lessee will be responsible for
correcting any such non-complying feature. If the lessee fails or is unable to
correct a non-complying feature, however, the Company likely will be required to
do

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<PAGE> 25

so. If required changes involve greater expenditures than the Company
currently anticipates, or if the changes must be made on a more accelerated
basis than it anticipates, there could be a material adverse effect on the
Company and its ability to make distributions to shareholders.

Additional and future legislation may impose other burdens or
restrictions on owners with respect to access by disabled persons. The ultimate
costs of complying with the ADA and other similar legislation are not currently
ascertainable and, while such costs are not expected to have a material adverse
effect on either the Company or its ability to make distributions to
shareholders, such costs could be substantial. See "Business and
Properties--Regulations."

FORWARD LOOKING INFORMATION

This Prospectus contains certain forward-looking information regarding
the plans and objectives of Management for future operations, including plans
and objectives relating to future growth of the property portfolio and
availability of funds. The forward-looking statements included herein are based
on current expectations that involve numerous risks and uncertainties.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could be inaccurate and, therefore, there
can be no assurance that the forward-looking statements included in this
Prospectus will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, including, without
limitation, the risks set forth in "Risk Factors," the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.

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<PAGE> 26

THE COMPANY

GENERAL

After the Offering, the Company intends to continue and expand the real
estate investment strategy pursued by David Merker, the Company's Chief
Executive Officer, in acquiring, redeveloping and managing office and industrial
properties for affiliates of Ralph Engelstad, from which the Company is
acquiring the Properties. In managing Mr. Engelstad's real estate operations
since 1988, Mr. Merker has overseen the purchase or development of office and
industrial properties with a book value of approximately $130 million. The
Company's growth strategy is to acquire office and industrial properties in
mid-sized markets with a growing demand for office and industrial space and
strong economic growth, and to aggressively manage its properties to maximize
returns on investments.

The Company is a REIT formed under the Texas REIT Act. The Company
intends to elect to be taxed as a REIT under the Code for its taxable year
ending December 31, 1998. The principal executive offices of the Company are
located at 3535 Las Vegas Boulevard South, Las Vegas, Nevada 89109, and its
telephone number is (702) 732-7102.

BUSINESS STRATEGY

The Company's business objective is to provide attractive returns to
shareholders, including growth of cash distributions and Common Share price
appreciation. The Company intends to achieve this objective by pursuing
integrated acquisition, internal growth and financing strategies.

Acquisition Strategy

The Company believes that its ability to make acquisitions will be
enhanced by (i) Management's ability to identify favorable acquisition
opportunities through its extensive network of contacts among real estate
professionals, (ii) the Company's ability to provide flexible acquisition terms
and close transactions quickly with proceeds from a secured line of credit and
by offering OP Units to sellers, and (iii) Management's experience in
repositioning properties.

The Company intends to focus on its target markets. The Company may,
however, acquire properties in other markets when potential returns justify such
acquisitions. The Company may also develop its own properties when potential
returns justify development. The Company intends to acquire properties that are
currently accretive as well

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<PAGE> 27
as accretive in the long-term.

Internal Growth Strategy

The Company's internal growth strategy is to increase cash flow at its
properties by (i) contracting for periodic rent increases and renewing or
replacing existing leases with new leases at higher rental rates, (ii) making
regular capital improvements and conducting preventive maintenance, (iii)
providing quality service, and (iv) aggressively managing its operating
expenses. The Company believes that providing quality service, performing
regular capital improvements and conducting preventive maintenance will enable
it to secure higher rental rates. The Company believes that providing a level of
service that exceeds that of its competitors and maintaining the aesthetic
attractiveness and functional efficiency of its properties with capital
improvements and active preventive maintenance will enhance its ability to
attract and retain tenants. The Company believes that capital improvements and
preventive maintenance will also enhance the market value of its properties. The
Company will aggressively manage operating expenses by, among other things,
expanding the management functions conducted in-house by the Company.

The Company intends to implement its internal growth strategy by
providing operating autonomy and performance-based incentives to operating
personnel. The Company will adopt an incentive share plan to compensate, attract
and retain quality personnel.

Financing Strategy

The Company intends to pursue a conservative financing strategy to
provide a flexible capital structure with efficient access to the capital
markets and thereby enhance growth opportunities. The Company believes that such
a strategy will enable it to offer flexible terms to sellers, enhancing the
Company's ability to acquire properties. The Company intends to maintain a
capital structure with a ratio of debt to Total Market Capitalization of no more
than approximately 50%. Immediately following the Offering, the Company will
have no debt.

FORMATION TRANSACTIONS

The Prior Owners will sell six Properties to the Operating Partnership
for $57,379,063 in cash payable from the net proceeds of the Offering
contributed by the Company to the Operating Partnership, based upon an initial
public offering price of $15.00 per share. As of March 31, 1998, the six
Properties had an aggregate book value (net of accumulated depreciation) of
$27,546,000 to the Prior Owners.

The Prior Owners will contribute two Properties to the Operating
Partnership in exchange for $1,823,437 in cash payable from the net proceeds of
the Offering, based upon an initial public offering price of $15.00 per share,
and an aggregate of 415,312 OP Units, representing an approximate 8.6% limited
partnership interest in the Operating Partnership. The OP Units issued to the
Prior Owners will be redeemable at the election of the holder for cash or, at
the Company's sole option, Common Shares on a one-for-one basis at any time
after the first anniversary of the completion of the Offering. Based upon an
initial public offering price of $15.00 per share, the 415,312 OP Units will
have a value of $6,229,680 upon completion of the Offering, resulting in an
aggregate purchase price of $8,053,117 for the two Properties exchanged
therefor. As of March 31, 1998, the two Properties had an aggregate book value
(net of accumulated depreciation) of $2,622,000 to the Prior Owners. See "The
Company--The Operating Partnership."

THE OPERATING PARTNERSHIP

The Company will conduct all of its operations through the Operating
Partnership. The Operating Partnership

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<PAGE> 28

will own the Properties and will provide management, leasing and development
services. The Operating Partnership structure will enable persons contributing
properties (or interests therein) to the Operating Partnership to defer some or
all of the tax liability that they otherwise might incur in certain
circumstances. The Company believes the flexible terms it can offer through the
issuance of OP Units may facilitate its acquisition of additional properties in
the future.

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<PAGE> 29

USE OF PROCEEDS

The net cash proceeds to the Company from the sale of Common Shares in
the Offering, after payment of expenses, are estimated to be approximately $59.2
million (based on an estimated Offering price per share of $15.00). The Company
will contribute substantially all of the net proceeds of the Offering to the
Operating Partnership in exchange for an approximate 90.4% limited partnership
interest in the Operating Partnership. The Operating Partnership will use all
but approximately $50,000 of the net proceeds to acquire the Properties. The
Operating Partnership will retain approximately $50,000 of the net proceeds for
working capital. The Operating Partnership will retain any net proceeds received
from the Company in connection with the Underwriters' over-allotment option, if
any, for working capital purposes.

Neither the Company nor the Operating Partnership will use any portion
of the net proceeds from the Offering to acquire any asset other than the
Properties.

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<PAGE> 30

DISTRIBUTION POLICY

GENERAL

After completion of the Offering, the Company intends to pay regular
quarterly distributions to its shareholders of $0.30 per share or $1.20 per
share on an annualized basis. This would represent an initial annualized yield
of 8.0%, based on the assumed public offering price of $15.00 per share. The
Company does not expect to change its estimated distribution rate if the
Underwriters' over-allotment option is exercised.

The Company's intended initial distribution is based upon an estimate
of Cash Available for Distribution after the Offering under present conditions.
This estimate is based upon pro forma 1998 Cash Available for Distribution with
certain adjustments based on the assumptions described below. The first cash
distribution after completion of the Offering is expected to be paid on or about
September 30, 1998, to holders of record of Common Shares as of August 15, 1998.
The payment will represent a pro-rata distribution for the period from the
closing of the Offering to September 30, 1998.

The Company believes that its estimate of cash flow that will be
available for distributions constitutes a reasonable basis for setting the
initial distribution, and the Company expects to maintain its initial
distribution rate for the balance of the calendar year in which the Offering is
completed, unless actual results of operations, economic conditions or other
factors differ materially from the assumptions used in the estimate. The actual
return that the Company will realize will be affected by a number of factors,
including the revenues received from rental properties, the operating expenses
of the Company, the interest expense incurred in its borrowings, the ability of
tenants to meet their obligations to the Company and unanticipated capital
expenditures. No assurance can be given that the Company's estimate will prove
accurate. Distributions in subsequent years will be impacted by the Company's
investing and financing strategies. In particular, the Company expects to
initially finance certain acquisitions and redevelopments through borrowings. As
a result, the Company's need to repay and/or refinance such indebtedness may
adversely affect its ability to make future distributions.

The following table illustrates the adjustments made by the Company to
its pro forma Net Income for the year ended December 31, 1997, to calculate
estimated Cash Available for Distribution. The Company will have no debt upon
completion of the Offering. Accordingly, cash flows used in financing activities
for the year ended December 31, 1998 are zero.

AMOUNTS
-------

<S> <C>
Pro forma net income before minority interests for the year ended December 31, 1997.............. $ 2,653,610
Add (deduct) non-cash items:
Pro forma depreciation and amortization for the year ended December 31, 1997 (1)............. 1,798,092
-----------
Pro forma Funds From Operations for the year ended December 31, 1997............................. 4,451,702
Adjustments:
Net increases in contractual rental income (2) .............................................. 1,280,618
Increases from new leases (3)................................................................ 751,599
Reduction in operating expenses due to changes in management structure (4)................... 283,502
Other income - management fees and interest income (5)....................................... 454,116
-----------
Estimated adjusted pro forma Funds From Operations for the year ended December 31,1998 (6)....... 7,221,537
Net effect of straight-line rents (7)........................................................ (604,173)
-----------
Estimated adjusted pro forma cash flows from operating activities for the year ended
December 31, 1998................................................................................ 6,617,364
Estimated cash flows used in investing activities for the year ended December 31, 1998:
Estimated capitalized tenant improvements and leasing commissions (8)........................ 140,655
Estimated capital expenditures (8)........................................................... 95,895
-----------
Estimated cash available for distribution for the year ended December 31, 1998................... 6,380,814
Total estimated initial annual distribution...................................................... $ 5,815,886
Estimated initial annual distribution per share.................................................. $ 1.20
Expected payout ratio of estimated cash available for distribution (9)........................... 91.1%
</TABLE>

(1) Pro forma depreciation for the year ended December 31, 1997, represents
actual 12 months depreciation on the Properties plus additional
depreciation related to the allocation of the purchase price for
buildings,

23
<PAGE> 31

improvements and equipment of $26,350,416, assuming an estimated useful
life of 39 years.

(2) Represents the incremental increase in Funds From Operations
attributable to contractual rent increases for the year ending December
31, 1998 over actual rental revenue included in pro forma Funds From
Operations for the number of months in which the increased rental rate
will be in effect for each lease.

(3) Represents the incremental increase in pro forma Funds From Operations
attributable to rental revenue from new executed leases commencing
after December 31, 1997.

(4) Represents expected operating expense reductions as a result of the
elimination of third party management and the Company becoming
self-managed.

(5) Represents management fees of $394,116 and interest income on rental
revenues of $60,000.

(6) Management and industry analysts generally consider Funds From
Operations to be one measure of the financial performance of an equity
REIT that provides a relevant basis for comparison among REITs, and it
is presented to assist investors in analyzing the performance of the
Company. "Funds From Operations" is defined as income before minority
interest (computed in accordance with generally accepted accounting
principles), excluding gains (losses) from debt restructuring and sales
of property and real estate related depreciation and amortization.
Funds From Operations does not represent cash available from operating
activities in accordance with generally accepted accounting principles
and is not necessarily indicative of cash available to fund cash needs.
Funds From Operations should not be considered an alternative to net
income, as an indication of the Company's financial performance or as
an alternative to cash flows from operating activities as a measure of
liquidity, and may be determined differently from similarly titled
measures used by other REITs.

(7) Represents the effect of adjusting straight-line rental income and
accrued tenant improvements in lieu of rent included in the year ended
December 31, 1997, from an accrual basis under GAAP to a cash basis.

(8) Capitalized tenant improvements and capital expenditures are budgeted
at the anticipated capital expenditures and tenant improvement reserves
of $0.20 per square foot for the Office Properties and $0.08 per square
foot for the Industrial Properties.

(9) Calculated as the estimated initial annual distribution divided by the
estimated cash available for distribution.

Future distributions by the Company will be at the discretion of the
Board of Trust Managers and will depend on the actual cash flow of the Company,
its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Code (see "Federal Income Tax
Consequences--Federal Taxation of the Company") and such other factors as the
Board of Trust Managers deems relevant. The Company anticipates that
distributions will be paid from Cash Available for Distribution, which will be
affected by a number of factors, including: (i) changes in rent attributable to
the renewal of existing leases or replacement leases; (ii) operating expenses
and capital expenditure requirements; and (iii) debt service requirements. For a
discussion of the tax treatment of distributions to shareholders, see "Federal
Income Tax Consequences--Taxation of Shareholders" and "--Taxation of Foreign
Shareholders."

The Company anticipates that Cash Available for Distribution will not
exceed earnings and profits because the Company's non-cash expenses, primarily
depreciation, are not expected to be significant due to the long depreciation
life assigned to the Properties for earnings and profits purposes by the
Company. Distributions by the Company to the extent of its current and
accumulated earnings and profits for federal income tax purposes, other than
capital gain dividends, will be taxable to shareholders as ordinary dividend
income. Any distributions designated by the Company as capital gain dividends
generally will give rise to capital gain for shareholders. Distributions in
excess of the Company's current and accumulated earnings and profits generally
will be treated as a non-taxable reduction of a shareholder's basis in the
Common Shares to the extent thereof, and thereafter as capital gain.
Distributions treated as non-taxable reduction in basis will have the effect of
deferring taxation until the sale of a shareholder's Common Shares or future
distributions in excess of the shareholder's basis in the Common Shares. See
"Federal Income Tax Considerations--Requirements for Qualification as a Real
Estate Investment Trust--Distribution Requirements."

24
<PAGE> 32

CAPITALIZATION

The following table sets forth, as of March 31, 1998, the combined
capitalization of the Properties and on a pro forma basis for the Company after
giving effect to the Offering, the consummation of the Formation Transactions
and the use of the estimated net proceeds from the Offering as described under
"Use of Proceeds." The information set forth in the following table should be
read in conjunction with the combined financial statements and notes thereto
included elsewhere in the Prospectus, as well as "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Pro Forma Liquidity
and Capital Resources of the Company."

As of March 31, 1998
-----------------------------------
Pro Forma
Historical As Adjusted
(Properties) (Company)
---------- -----------
(in thousands) (in thousands)

<S> <C> <C>
Long Term Debt............................................... $20,208 $ --
------- -------
Minority Interest............................................ -- 5,157
-------
Shareholders' Equity:
Owners' Equity 10,807 --
Preferred shares, $0.005 par value, 10,000,000 shares
authorized, 0 shares issued and outstanding............... -- --

Common shares of beneficial interest, $0.005 par value,
100,000,000 shares authorized, 4,431,260 shares issued
and outstanding........................................... -- 22(1)

Additional paid in Capital................................... -- 57,057
------- -------
Accumulated Deficit.......................................... -- (2,118)

Total Owners' Equity......................................... 10,807 54,961
------- -------
Total Capitalization......................................... $31,015 $60,113
======= =======
</TABLE>

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

(1) Includes the Offering of 4,290,000 Common Shares at the assumed
offering price per share of $15.00 less Offering expenses and
underwriting discounts and commissions. Assumes the Underwriters'
over-allotment option to purchase up to 643,500 Common Shares is not
exercised. Includes 141,260 Common Shares issued to certain Trust
Managers and executive officers of the Company prior to the Offering.

25
<PAGE> 33

DILUTION

At February 28, 1998, the pro forma net tangible book value of the
Company immediately prior to the Offering would have been $1,000 or $0.01 (after
rounding) per Common Share. After giving effect to the sale by the Company of
the Common Shares offered hereby, the pro forma net tangible book value
(including minority interest) of the Company at March 31, 1998 would have been
$60,112,501 or $12.40 per Common Share. This represents an immediate decrease in
the net tangible book value per Common Share to purchasers of Common Shares in
the Offering. Net tangible book value per Common Share represents the amount of
total tangible assets of the Company less total liabilities, divided by the
number of Common Shares outstanding. The following table illustrates the
foregoing dilution.

<TABLE>

<S> <C>
Initial public offering price per Common Share (1)................................ $ 15.00

Pro forma net tangible book value per share prior to the Offering attributable to
Common Shares issued to certain executive officers and trust managers............. 0.01

Pro forma net tangible book value per share prior to the Offering attributable to
OP Units issued to the Prior Owners............................................... 2.07

Increase in net tangible book value per share attributable to the Offering........ 10.32
-----------
Pro Forma net tangible book value after the Offering.............................. 12.40
-----------
Dilution per share purchased in the Offering...................................... $ 2.60
===========
</TABLE>

- --------------
(1) Before deduction of underwriting discounts and estimated expenses of
the Offering.

The following table sets forth on a pro forma basis the number of
Common Shares to be sold by the Company in the Offering, the total contributions
to be paid to the Company by purchasers of the Common Shares sold in the
Offering, the number of Common Shares previously outstanding or to be issued to
or for the benefit of certain of the Prior Owners and members of Management, the
net book value as of March 31, 1998 of the assets transferred or amount of cash
contributed to the Company and the net book value of the average contribution or
amount of cash contribution per Common Share based on total contributions.

SHARES ISSUED BOOK VALUE OR BOOK VALUE
BY CASH CONTRIBUTIONS TO OR CASH
THE COMPANY THE COMPANY CONTRIBUTION
---------------------- ------------------------ PER
SHARES PERCENT AMOUNT PERCENT SHARE
---------- -------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C>
Shares sold to new public investors 4,290,000 88.52% $64,350,000 98.68% $15.00

Shares issued in connection with the
transfer of assets of the Properties 415,312 8.57 859,001 1.32 2.07

Shares issued in connection with the
formation of the Company 141,260 2.91 1,000 -- 0.01
---------- -------- ----------- ------
Total 4,846,572 100.00% $65,210,001 100.00%
========== ======== =========== ======
</TABLE>

26
<PAGE> 34

SELECTED FINANCIAL DATA

The following table sets forth (i) selected combined pro forma
financial information for the Company and (ii) selected combined historical
financial information for the Properties. Such information should be read in
conjunction with the financial statements and notes thereto appearing elsewhere
in this Prospectus.

The pro forma information for the year ended December 31, 1997 and the
three months ended March 31, 1998 assumes (i) completion of the Offering and the
use of the net proceeds therefrom to purchase the Properties, and (ii) the
Company qualified as a REIT and was not subject to income tax liabilities during
the applicable periods. The pro forma balance sheet data is presented as if the
events assumed in the preceding sentence occurred at March 31, 1998. The pro
forma financial information is not necessarily indicative of what the actual
financial position and results of operations of the Company would have been as
of and for the periods indicated, nor does it purport to represent the financial
position and results of operations for future periods.

27
<PAGE> 35

THE COMPANY (PRO FORMA) AND THE PROPERTIES (COMBINED HISTORICAL)
SELECTED FINANCIAL DATA

PRO FORMA COMBINED HISTORICAL
-------------------------- --------------------------------------------------
For the 3 months ended For the years ended
March 31, December 31,
------------------------- ----------------------
For the 3
months For the year
ended ended
March 31, December
1998 31, 1997 1998 1997 1997 1996
---------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Rental $2,311,801 $ 9,875,522 $2,311,801 $2,289,655 $ 9,875,522 $9,638,280
Rental - related party 251,640 402,720 251,640 65,178 402,720 158,400
Other 5,707 10,513 5,707 1,895 10,513 10,125
---------- ----------- ---------- ---------- ----------- ----------

Total revenue 2,569,148 10,288,755 2,569,148 2,356,728 10,288,755 9,806,805
---------- ----------- ---------- ---------- ----------- ----------

Expenses:
Property operations 876,646 3,385,524 876,646 881,446 3,385,524 3,404,564
Real estate taxes 180,210 712,242 180,210 177,795 712,242 728,270
Depreciation and amortization 448,066 1,798,092 277,358 272,690 1,115,261 1,035,291
Interest-related party 418,730 436,520 1,778,723 1,119,130
Property Management Fee 192,458 185,017 711,026 848,036
General and administrative 423,253 1,739,287 132,227 145,434 575,182 505,741
Write-off of tenant improvements 152,063
---------- ----------- ---------- ---------- ----------- ----------

Total expenses 1,928,175 7,635,145 2,077,629 2,098,902 8,277,958 7,793,095
---------- ----------- ---------- ---------- ----------- ----------

Net income (loss) before minority interest 640,973 2,653,610 $ 491,519 $ 257,826 $ 2,010,797 $2,013,710
========== ========== =========== ==========
Minority interest (1) 54,931 227,414
---------- -----------
Net income applicable to common shareholders $ 586,042 $ 2,426,196
========== ===========

Pro forma net income per common share (2) $ 0.13 $ 0.55
========== ===========
<CAPTION>

COMBINED HISTORICAL
-----------------------------------------
For the years ended December 31,
-----------------------------------------
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Rental $4,945,110 $ 1,595,342 $ 1,628,704
Rental - related party 26,400
Other 4,486
---------- ----------- -----------

Total revenue 4,975,996 1,595,342 1,628,704
---------- ----------- -----------

Total expenses 3,751,349 1,884,504 2,026,425
---------- ----------- -----------

Net income (loss) before minority interest $1,224,647 $ (289,162) $ (397,721)
========== =========== ===========
Minority interest (1)

Net income applicable to common shareholders

Pro forma net income per common share (2)
</TABLE>

28
<PAGE> 36

PRO FORMA COMBINED HISTORICAL
----------- ----------------------------------------------------------------------------

December 31,
---------------------------------------------------------------
March 31, March 31,
1998 1998 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Land $ 5,886,504 $ 3,070,875 $ 3,070,875 $ 2,925,875 $ 2,698,516 $ 1,739,996 $ 1,739,996
Buildings, improvements and equipment 55,673,020 29,043,533 28,971,990 26,168,962 21,382,596 10,196,625 7,826,059
Projects under development 811,339 811,339 299,919 70,539 27,145 663,069 0

Less accumulated depreciation and
amortization (2,757,641) (2,757,641) (2,547,695) (1,688,018) (925,857) (329,818) (183,247)
----------- ----------- ----------- ----------- ----------- ----------- -----------

Real estate - net 59,613,222 30,168,106 29,795,089 27,477,358 23,182,400 12,269,872 9,382,808
=========== =========== =========== =========== =========== =========== ===========

Total assets 60,286,026 32,535,496 32,069,993 29,002,614 24,525,515 12,804,310 10,320,384
=========== =========== =========== =========== =========== =========== ===========

Mortgage notes 19,893,980 19,893,980 20,300,000
=========== =========== ===========
Total liabilities 173,525 21,411,277 21,263,199 20,988,184 3,612,524 3,320,146 3,158,817
=========== =========== =========== =========== =========== =========== ==========
Minority interest (3) 5,151,641
===========
Owners' equity 54,960,860 11,124,219 10,806,794 8,014,430 20,912,991 9,484,164 7,161,567
=========== =========== =========== =========== =========== =========== ==========

Liabilities and Shareholders' Equity 60,286,026 32,535,496 32,069,993 29,002,614 24,525,515 12,804,310 10,320,384
=========== =========== =========== =========== =========== =========== ==========
</TABLE>

PRO FORMA COMBINED HISTORICAL
--------- --------------------------------------------------

December 31,
-------------------------------------
March 31, March 31,
1998 1998 1997 1996 1995
--------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations (4) 4,451,702 1,089,039 3,126,058 3,049,001 1,820,686
========= ========= ========== ========== ==========
Cash flows from:
Operating activities 645,403 2,933,982 2,026,556 1,620,899
========= ========== ========== ==========
Investing activities (582,963) (3,033,377) (1,110,181) (3,173,647)
========= ========== ========== ==========
Financing activities 210,905 333,959 (1,251,673) 1,869,259
========= ========== ========== ==========
Office Properties:
Square footage 1,030,567* 1,035,792 1,035,792 1,035,792 822,490
Occupancy 82% 82%
Industrial properties:
Square footage 311,120 311,120 311,120 215,120 215,120
Occupancy 100% 100% 100%
</TABLE>

*Square footage adjusted for Conoco, Inc. lease in the Ten Conoco property.

29
<PAGE> 37

(1) Calculated as 8.57% of the Operating Partnership's net income on a pro
forma basis for the year ended December 31, 1997.

(2) Calculated assuming 4,431,260 Common Shares outstanding for the Company
which represent the shares to be issued in the Offering and the shares
to be issued to Management.

(3) Calculated as 8.57% of the Operating Partnership's equity on a pro
forma basis at December 31, 1997.

30
<PAGE> 38

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

The following discussion should be read in conjunction with the
Selected Combined Financial Data and the pro forma and historical Combined
Financial Statements and the related notes included elsewhere in this
Prospectus.

OVERVIEW

Upon completion of this Offering and the Formation Transactions, the
Operating Partnership will own all of the Properties, and the Company will own
an approximate 1.0% general partnership interest and an approximate 90.4%
limited partnership interest in the Operating Partnership. The Company is the
sole general partner of the Operating Partnership.

The Company intends to acquire additional Class A office properties and
industrial properties. See "The Company--Business Strategy." The Company expects
to have access to a variety of debt and equity financing sources to fund
acquisitions, including a secured line of credit and the ability to issue OP
Units. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Pro Forma Liquidity and Capital Resources of the
Company." OP Units represent limited partnership interests in the Operating
Partnership.

The following discussion and analysis of financial condition and
results of operations of the Properties is based upon the historical financial
statements of the Properties and the pro forma consolidated financial statements
of the Company. The historical results of operations of the Properties are not
necessarily indicative of what the Company's results of operations would have
been had the Company actually consummated the Formation Transactions on the
dates indicated, nor do they purport to project future results of operations.
Any significant transactions in future periods could impact future revenues and
expenses.

RESULTS OF OPERATIONS OF THE PROPERTIES

Quarter Ended March 31, 1998 Compared to the Quarter Ended March 31, 1997

Rental revenues increased by $0.21 million, or 0.9%, to $2.57 million
for the quarter ended March 31, 1998, compared to $2.36 million for the quarter
ended March 31, 1997. The increase in rental revenues resulted primarily from
Florida Sunrise Tower of $18,000; Claydesta Center of $196,000; Heritage Center
of $24,000; D'Iberville of $166,000 and Escondido of $7,000, offset by a
decrease from Ten Conoco of $202,000. The quarter ended March 31, 1998 does not
include a $752,000 increase from new leases as the scheduled payments under
those leases had not begun. Tenant reimbursements increased to $5,700 for the
quarter ended March 31, 1998, compared to $1,900 for the quarter ended March 31,
1997. Industrial Property tenants pay the majority of their own expenses
directly.

Operations and maintenance expenses increased by $17,400, or 4.1%, to
$437,100 for the quarter ended March 31, 1998, compared to $419,700 for the
quarter ended March 31, 1997. This increase resulted primarily from Heritage
Center of $16,900 and Ten Conoco of $12,700, offset by decreases from Florida
Sunrise Tower of $6,100; Claydesta Center of $4,500; Caballo of $900 and Polaris
of $700.

Electricity, water and gas utility expenses decreased by $22,100, or
4.8%, to $439,600 for the quarter ended March 31, 1998, compared to $461,700 for
the quarter ended March 31, 1997. This decrease resulted primarily from Florida
Sunrise Tower of $9,400; Claydesta Center of $6,300; Ten Conoco of $6,000 and
Heritage Center of $1,000.

Management fees increased by $7,400, or 4.0%, to $192,400 for the
quarter ended March 31, 1998, compared to $185,000 for the quarter ended March
31, 1997. This increase resulted primarily from Claydesta Center of $9,600; Ten
Conoco of $2,300; Heritage Center of $8,500, offset by decreases from Florida
Sunrise Tower of $13,000.

General and administrative expenses decreased by $13,200, or 9.1%, to
$132,200 for the quarter ended March 31, 1998, compared to $145,400 for the
quarter ended March 31, 1997. The decrease resulted primarily from Claydesta
Center of $5,300; Ten Conoco of $10,300; Heritage Center of $4,400; and Caballo
of $3,900, and increases from Florida Sunrise Tower of $6,300; Escondido of
$2,100 and Polaris of $2,300.

Depreciation and amortization increased by $4,700, or 1.7%, to $277,400
for the quarter ended March 31, 1998, compared to $272,700 for the quarter ended
March 31, 1997. This increase resulted primarily from Claydesta Center of
$8,500; Ten Conoco of $1,600; D'Iberville of $10,600, and decreases from Florida
Sunrise Tower $12,700 and Escondido of $3,600.

31
<PAGE> 39

Interest expense decreased by $17,800, or 4.1%, to $418,700 for the
quarter ended March 31, 1998, compared to $436,500 for the quarter ended March
31, 1997. This decrease resulted primarily from Florida Sunrise Towers of
$23,500 and increases by Claydesta Center of $2,200; Ten Conoco of $1,800 and
Heritage Center of $1,800.

As a result of the foregoing, net income increased by $233,700, or
91.6%, to $491,500 for the quarter ended March 31, 1998, compared to $257,800
for the quarter ended March 31, 1997.

Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996

Rental revenues increased by $482,000, or 4.9%, to $10.3 million for
the year ended December 31, 1997 compared to $9.8 million for the year ended
December 31, 1996. The increase in rental revenues resulted from rental revenue
increases at Florida Sunrise Tower of $20,000, Ten Conoco of $472,000, Heritage
Center of $308,000, Caballo of $9,000, and D'Iberville of $111,000, and rental
revenue decreases at Claydesta Center of $369,000 and Escondido of $69,000.
Tenant reimbursements were nominal and remained unchanged at $10,100. Industrial
Property tenants pay the majority of their own expenses directly.

Operation and maintenance expenses decreased by $45,200, or 2.8%, to
$1.59 million for the year ended December 31, 1997, compared to $1.64 million
for the year ended December 31, 1996. The decrease resulted primarily from
decreases in operations and maintenance expenses at Florida Sunrise Tower of
$92,000 and Ten Conoco of $32,000, and increases at Claydesta Center of $47,000
and Heritage Center of $31,000.

Electricity, water and gas utility expenses increased by $26,100, or
1.5%, to $1.79 million for the year ended December 31, 1997, compared to $1.77
million for the year ended December 31, 1996. The increase resulted primarily
from a $37,000 increase at Heritage Center, with decreases at the remaining
Properties of $11,800.

Management fees decreased by $137,000, or 16.2%, to $711,000 for the
year ended December 31, 1997, compared to $848,000 for the year ended December
31, 1996. Of this decrease, $122,000 resulted primarily from the Florida Sunrise
Tower becoming self-managed, replacing third-party management.

General and administrative expenses increased by $69,400, or 13.7%, to
$575,000 for the year ended December 31, 1997, compared to $506,000 for the year
ended December 31, 1996. Of this increase, $66,000 resulted from the Florida
Sunrise Tower becoming self-managed.

Depreciation and amortization increased by $61,000, or 5.9%, to $1.10
million for the year ended December 31, 1997, compared to $1.04 million for the
year ended December 31, 1996. This increase resulted from increases at Ten
Conoco of $13,000, Heritage Center of $29,000, Claydesta Center of $25,000 and
D'Iberville of $12,000, and decreases at Florida Sunrise Tower of $10,000 and
Escondido of $8,000.

Interest expense increased by $659,600, or 58.9%, to $1.8 million for
the year ended December 31, 1997, compared to $1.1 million for the year ended
December 31, 1996. This increase resulted primarily from a $511,000 increase for
Claydesta Center and a $100,000 increase for Heritage Center. The Company will
have no outstanding debt upon completion of the Offering.

As a result of the foregoing, net income decreased by $2,900 to $2.11
million for the year ended December 31, 1997, compared to $2.14 million for the
year ended December 31, 1996. Adjusting net income to eliminate the increase in
interest expense of $659,600 for the year ended December 31, 1997, would result
in an increase in net income of $656,700, or 32.6%.

Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995

Rental revenues increased by $4.83 million, or 97.1%, to $9.8 million
for the year ended December 31, 1996 compared to $4.98 million for year ended
December 31, 1995. The increase in rental revenues resulted primarily from the
Claydesta Center ($1.98 million) and Escondido ($732,000) properties being in
operation for a full year and the acquisition of Heritage Center ($1.44 million)
for part of the year ended December 31, 1996. Tenant reimbursements increased to
$10,000 for the year ended December 31, 1996, compared to $4,500 for the year
ended December 31, 1995. Industrial Property tenants pay the majority of their
own expenses directly.

Operation and maintenance expenses increased by $749,000, or 84.2%, to
$1.64 million for the year ended December 31, 1996, compared to $888,800 for the
year ended December 31, 1995. This increase resulted primarily from the
Claydesta Center ($475,000) property being in operation for a full year and the
acquisition of Heritage Center ($227,000) for part of the year.

32
<PAGE> 40

Electricity, water and gas utility expenses increased by $834,500, or
89.5%, to $1.77 million for the year ended December 31, 1996, compared to
$932,500 for the year ended December 31, 1995. This increase resulted primarily
from the Claydesta Center ($464,000) property being in operation for a full year
and the acquisition of Heritage Center ($292,000) for part of the year.

Management fees increased by $477,600, or 128.9%, to $848,000 for the
year ended December 31, 1996, compared to $370,400 for the year ended December
31, 1995. This increase resulted primarily from the outside management of
Claydesta Center ($221,000), which was operational for a full year, and the
acquisition of Heritage Center ($163,000) for part of the year.

General and administrative expenses increased by $161,400, or 46.9%, to
$505,700 for the year ended December 31, 1996, compared to $344,300 for the year
ended December 31, 1995. This increase resulted primarily from the Claydesta
Center ($118,000) property being in operation for a full year, and the
acquisition of Heritage Center ($57,000) for part of the year.

Depreciation and amortization increased by $439,300, or 73.7%, to $1.04
million for the year ended December 31, 1996, compared to $596,000 for the year
ended December 31, 1995. This increase resulted primarily from the Claydesta
Center ($164,000) and Escondido ($73,000) properties being in operation for a
full year, and the acquisition of Heritage Center ($101,000) for part of the
year.

Interest expense increased by $0.79 million, or 239%, to $1.12 million
for the year ended December 31, 1996, compared to $0.33 million for the year
ended December 31, 1995. This increase resulted primarily from Claydesta Center
($280,000) and Heritage Center ($499,000). The Company will have no outstanding
debt upon completion of the Offering.

As a result of the foregoing, net income increased by $0.79 million, or
64.4%, to $2.01 million for the year ended December 31, 1996, compared to $1.22
million for the year ended December 31, 1995. Adjusting net income to eliminate
the increase in interest expense of $0.79 million for the year ended December
31, 1996, would result in an increase in net income of $1.6 million, or 128.9%.

PRO FORMA LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY

On a pro forma basis, cash flow from operating activities for the year
ended December 31, 1997, excluding changes in working capital, would have been
$4.45 million. This reflects net income before non-cash charges to income for
depreciation and amortization. Cash flows used in financing activities will have
totaled zero and the estimated initial annual distribution will total $5.8
million, representing distributions (based upon an initial estimated per share
and OP Unit distribution rate of $1.20) to holders of the Common Shares and OP
Units.

The Company's principal source of cash to meet its cash requirements,
including distributions to its shareholders, will be its share of the Operating
Partnership's cash flow. The Operating Partnership's sources of revenue will be
cash flow from the Properties. The Company's liquidity, including the ability to
make distributions to its shareholders, will depend upon its, and the Operating
Partnership's, ability to generate sufficient cash flow from operation of the
Properties. See "Risk Factors--Possible Inability to Meet Distribution
Requirements."

Upon completion of the Formation Transactions, it is anticipated that
the Company will have approximately $50,000 in initial working capital ($9.48
million if the Underwriters' over-allotment option, after deducting for
Underwriting discounts and commissions, is exercised). After completion of the
Offering, the Company expects to have a secured line of credit, which will be
used primarily for the acquisition of additional properties. The Company has
not, however, finalized negotiations on the line of credit and there can be no
assurance that the Company will have access to sufficient debt and equity
financing to allow it successfully to pursue its acquisition strategy. The
Company will have no outstanding indebtedness upon completion of the Offering.
The Company believes its initial zero debt, coupled with a line of credit and
the ability to issue OP Units, will provide the Company with significant
financial flexibility in pursuing office and industrial property acquisition
opportunities. The Company intends to maintain a capital structure that limits
consolidated indebtedness to no more than 50% of its total market
capitalization.

HISTORICAL CASH FLOW

Historically, the Properties' principal source of Funds From Operations
and capital expenditures has been cash flows

33
<PAGE> 41

from operating activities and secured debt financing. The Properties had net
income for the quarter ended March 31, 1998 and the years ended December 31,
1997, 1996 and 1995.

Net cash provided by operating activities decreased by $152,300, or
19.1%, to $645,400 for the quarter ended March 31, 1998, compared to $797,700
for the quarter ended March 31, 1997. The decrease in net cash resulted
primarily from changes in operating assets and liabilities with decreases in
prepaid expenses of $5,400 and accounts payable and accrued expenses of $424,900
and increases in deferred costs of $60,700; other liabilities of $108,400 and
receivables of $87,200. Net cash provided by operating activities increased by
$907,000, or 44.8%, to $2.9 million for the year ended December 31, 1997,
compared to $2.03 million for the year ended December 31, 1996. The increase in
net cash resulted primarily from changes in operating assets and liabilities
(increases in accounts payable of $672,000, other liabilities of $350,000 and
deferred costs of $330,000 offset by decreases in receivables of $379,000). Net
cash provided by operating activities decreased by $53,800 to $1.72 million for
the year ended December 31, 1996, compared to $1.78 million for the year ended
December 31, 1995. The decrease in net cash from operating activities resulted
primarily from an increase in depreciation and amortization, offset in part by
increases in deferred costs, accounts payable and accrued expenses.

Net cash used in investing activities decreased by $1.688 million to
$583,000 for the quarter ended March 31, 1998, compared to $2.271 million for
the quarter ended March 31, 1997. The change resulted from a decrease in
additions to real estate. Net cash used in investing activities increased by
$1.96 million to $3.03 million for 1997, compared to net cash used in investing
activities of $1.11 million in 1996. The increase resulted from additions to
real estate. Net cash used in investing activities decreased by $2.063 million
to $1.110 million for 1996 compared to net cash used in investing activities of
$3.173 million in 1995. The decrease resulted from less additions to real
estate.

Net cash used in financing activities decreased by $1.997 million to
$211,000 for the quarter ended March 31,1998, compared to $2.208 million for the
quarter ended March 31, 1997. The decrease resulted primarily from capital
contributions of $2.259 million and distributions to owners of $24,000 and
increases from proceeds from notes payable of $286,500. Net cash provided by
financing activities increased by $1.59 million to $334,000 for the year ended
December 31, 1997, compared to $1.25 million in net cash used in financing
activities for the year ended December 31, 1996. The increase resulted primarily
from issuance of notes payable in the prior year of $16.4 million, offset by
distribution to owners of $15.7 million and repayment of notes payable of $2.4
million. Net cash provided by financing activities decreased by $3.12 million to
a $1.25 million deficit for the year ended December 31, 1996, compared to net
cash provided by financing activities of $1.87 million for the year ended
December 31, 1995. The decrease resulted primarily from a combination of
offsetting activities in distributions to owners, capital contributions,
payments received on notes receivable related parties, proceeds from issuance of
notes payable, and repayment of notes payable.

FUNDS FROM OPERATIONS

The Company believes Funds from Operations, as defined by NAREIT, is an
alternative measure of performance of an equity REIT. Funds from Operations is
defined by NAREIT to mean net income (loss) determined in accordance with GAAP,
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization (other than amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustment for
unconsolidated partnerships and joint ventures. The Company believes that in
order to facilitate a clear understanding of the combined historical operating
results of the Company, Funds from Operations should be examined in conjunction
with net income (loss) as presented in the Combined Financial Statements and
selected financial data included elsewhere in this Prospectus. The Company
computes Funds from Operations in accordance with standards established by the
Board of Governors of NAREIT in its March 1995 White Paper (with the exception
that the Company reports rental revenues on a cash basis for purposes of
computing Funds from Operations, rather than a straight-line GAAP basis, which
the Company believes will result in a more accurate presentation of its actual
operating activities), which may differ from the methodology for calculating
Funds from Operations used by other certain office and/or industrial REITs, and,
accordingly, may not be comparable to such other REITs. As a result of the
Company's reporting rental revenues on a cash basis, contractual rent increases
will cause reported Funds from Operations to increase. Further, Funds from
Operations does not represent amounts available for Management's discretionary
use because of needed capital replacement or expansion, debt repayment
obligations, or other commitments and uncertainties. Funds from Operations
should not be considered as an alternative to net income (loss), as an
indication of the Company's performance or to cash flows as a measure of
liquidity or the ability to pay dividends or make distributions.

INFLATION

The Company's leases with the majority of the tenants in the Office
Properties require the tenant to pay annual rent increases, obtain their own
personal property and liability insurance, and pay increases in common area
maintenance expenses,

34
<PAGE> 42

which reduce the Company's exposure to increased costs and operating expenses
resulting from inflation.

The Company's leases with the majority of the tenants in the Industrial
Properties require the tenant to pay annual rent increases, operating expenses
excluding real estate taxes (except for one tenant who pays one-half of the real
estate taxes) and property insurance, obtain their own personal property and
liability insurance, and pay increases in common area maintenance expenses,
which reduce the Company's exposure to increased costs and operating expenses
resulting from inflation.

NEW ACCOUNTING PRONOUNCEMENT

In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
which simplifies the standards for computing and presenting EPS and makes them
comparable to international EPS standards. This statement was effective for the
year ended December 31, 1997. The Company has stated its earnings per share in
accordance with SFAS No. 128.

35
<PAGE> 43

PROPERTIES

GENERAL

Concurrently with the closing of the Offering, the Operating
Partnership, for which Palace REIT serves as sole general partner, will acquire
from affiliates of Mr. Engelstad four Class A Office Properties, which comprise
approximately 1.0 million square feet of GLA, and four Industrial Properties,
which comprise approximately 365,115 of GLA. The Office Properties are located
in Coral Springs, Florida and Midland, Texas, and the Industrial Properties are
located in Las Vegas, Nevada and D'Iberville, Mississippi. The Company has
rights of first refusal to purchase other office and industrial properties owned
or under development by affiliates of Mr. Engelstad comprising approximately 2.1
million square feet of GLA located in Las Vegas, Nevada; Norfolk, Virginia;
Kansas City, Missouri; Midland, Texas and Tyler, Texas.

In seeking acquisition opportunities, the Company intends to focus on
Class A office properties and industrial properties in mid-sized markets that it
can acquire at prices that are accretive to Funds From Operations per share. The
Company will seek such properties in markets (i) where the Company believes
demand for space in office and industrial properties is growing, (ii) where the
Company believes it will face less competition for property acquisitions from
large, well-capitalized buyers, (iii) where the Company believes it can add
value to properties through aggressive management, and (iv) where population and
employment growth are strong.

All references herein to "Class A" buildings refer to office buildings
that are centrally located, professionally managed and maintained, attract
high-quality tenants and command upper-tier rental rates in the markets in which
they are located.

OFFICE PROPERTIES

Florida Sunrise Tower, Coral Springs, Florida. Florida Sunrise Tower is
a ten-story Class A office building built in 1985. The largest Class A office
building in Coral Springs, it has approximately 201,610 Square Feet on a 6.0
acre site. As of December 31, 1997, the Property had an average occupancy of
79%. Florida Sunrise Tower has leases with many national credit tenants. The
office building has the following representative tenants: Ford Motor Credit
Corporation, State of Florida, Smith Barney, Inc., Unisys Corporation, AF Best
Securities, Tri-M Investments and Cypress Foods.

Claydesta Center, Midland, Texas. Claydesta Center is a Class A office
building built in 1985. It has approximately 440,448 square feet. The office
building is 77% leased and representative tenants include Clayton Williams
Energy, Oxy, U.S.A., Norwest Bank Texas, N.A., Smith Barney, Fina Oil and
Chemical Corporation and Danka Industries. The building is part of the upscale
Claydesta Plaza Complex.

Heritage Center, Midland, Texas. Heritage Center is a Class A office
building built in 1981. It has approximately 213,302 square feet. The office
building is 81% leased and representative tenants include Texaco, Inc.,
Sproles-Woodard & Co., Trend Exploration, Atwell and Associates and Anderson
Geoconsultants.

Ten Conoco, Midland, Texas. Ten Conoco is a Class A office building
built in 1982. It has approximately 175,007 square feet. The office building is
92% leased and representative tenants include Conoco, Diabetes Center of the
Southwest, Inc., March of Dimes and Midland Orthopedic Clinic. The building is
part of the upscale Claydesta Plaza Complex.

The following tables set forth scheduled lease expirations during the
next ten years beginning with 1998 for the Office Properties:

36
<PAGE> 44

GROSS LEASABLE AREA NET EFFECTIVE RENT (1)
------------------------- -------------------------------------
LEASE NO. OF LEASES APPROXIMATE PERCENT AMOUNT PERCENT AVERAGE
PROPERTY EXPIRATION EXPIRING SQ. FT. OF TOTAL (THOUSANDS) OF TOTAL SQ. FT.
- -------- ---------- ------------- ----------- -------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
FLORIDA SUNRISE 1998 12 17,638 8.7% $ 291 12.2% $16.52
TOWER 1999 8 8,427 4.2 127 5.3 15.02
2000 8 67,208 33.3 1,016 42.4 15.11
2001 6 26,960 13.4 367 15.3 13.60
2002 4 10,228 5.1 148 6.2 14.49
2003 1 7,343 3.6 100 4.2 13.55
2004 2 15,781 7.8 221 9.2 14.00
2005 2 6,750 3.3 127 5.3 18.74
2006 - - - - - -
2007 - - - - - -
2008+ - - - - - -
-- ------- ---- ------ ----- ------
TOTAL 43 160,335 79.5% $2,397 100.0% $14.94

CLAYDESTA 1998 36 60,782 13.8% $555 16.2% $9.13
CENTER 1999 11 36,908 8.4 324 9.5 8.78
2000 7 38,206 8.7 368 10.7 9.63
2001 6 17,469 4.0 177 5.2 10.13
2002 6 134,425 30.5 1,243 36.3 9.25
2003 - - - - - -
2004 1 16,073 3.6 36 1.1 2.24
2005 - - - - - -
2006 - - - - - -
2007 1 6,088 1.4 61 1.8 10.02
2008+ 1 31,123 7.1 662 19.3 21.27
--- ------- ---- ------ ----- ------
TOTAL 69 341,074 77.4% $3,426 100.0% $10.04
</TABLE>

(1) Net Effective Rent is defined in the Glossary.

37
<PAGE> 45

GROSS LEASABLE AREA NET EFFECTIVE RENT (1)
--------------------------- -------------------------------------
LEASE NO. OF LEASES APPROXIMATE PERCENT AMOUNT PERCENT AVERAGE
PROPERTY EXPIRATION EXPIRING SQ. FT. OF TOTAL (THOUSANDS) OF TOTAL SQ. FT.
- -------- ---------- -------- --------------------------- ----------- -------- -------

<S> <C> <C> <C> <C> <C> <C> <C>
HERITAGE 1998 9 17,724 8.3% $ 119 6.8% $ 6.71
CENTER 1999 4 154,861 72.6 1,618 93.0 10.45
2000 - - - - - -
2001 - - - - - -
2002 1 200 0.1 3 .2 15.00
2003 - - - - - -
2004 - - - - - -
2005 - - - - - -
2006 - - - - - -
2007 - - - - - -
2008+ - - - - - -
-- ------- ----- ------ ----- ------
TOTAL 14 172,785 81.0% $1,740 100.0% $10.07

TEN CONOCO 1998(2) 12 144,988 80.4% $1,311 88.2% $9.04
1999 3 15,203 8.4 123 8.3 8.11
2000 2 6,253 3.4 52 3.5 8.25
2001 - - - - - -
2002 - - - - - -
2003 - - - - - -
2004 - - - - - -
2005 - - - - - -
2006 - - - - - -
2007 - - - - - -
2008+ - - - - - -
-- ------- ---- ------ ----- ------
TOTAL 17 166,444 92.2% $1,486 100.0% $ 8.93

</TABLE>

(1) Net Effective Rent is defined in the Glossary.

(2) On March 2, 1998, an existing major tenant signed a new five year lease
with a four year minimum lease payment on 109,506 square feet at a
straight rate of $9.13, reducing the percentage of total building GLA
that is scheduled to expire in 1998 from 80.4% to 17.2%. The Company
will not incur any costs for tenant improvements on such lease. Tenants
are no longer charged for basement storage, reducing GLA by 5,425
square feet.

INDUSTRIAL PROPERTIES

D'Iberville, D'Iberville, Mississippi. D'Iberville, completed in
November 1997, is a single-story warehouse containing a total of 96,000 square
feet on approximately eight acres. The warehouse is constructed of concrete
block poured and has a four phase roof system and eight dock doors. Parking is
provided by 100 surface spaces. Imperial Palace of Mississippi, Inc. and
Imperial Laundry, Inc., which are affiliates of the Prior Owners, occupy 100% of
the building.

Caballo, Las Vegas, Nevada. Caballo is a single-story, 62,000 square
foot industrial office/warehouse building on 2.3 acres built in 1994. The
building is constructed of concrete block poured with a four phase roof system
and five loading dock doors. Parking is provided by 67 surface spaces. The
property is adjacent to McCarren International Airport and Hughes

38
<PAGE> 46
Airport Center, the premier business park in South Las Vegas. The property has
freeway visibility from the Southern Beltway/Airport Interconnect. The property
is 100% leased to Crown Laboratories, Inc., which produces nutritional and
dietary products.

Escondido, Las Vegas, Nevada. Escondido is two single-story industrial
warehouses containing 153,120 square feet on 5.8 acres built in 1995. The
buildings are constructed of concrete block poured and have a four phase roof
system and seven dock doors. Parking is provided by 150 surface spaces. The
property is 100% occupied and major tenants include Imperial Palace, Inc., an
affiliate of the Prior Owners, and WalMart.

Polaris, Las Vegas, Nevada. Polaris, scheduled for completion in May
1998, is a single-story warehouse containing 53,995 square feet on approximately
2.2 acres. The warehouse is constructed of concrete block poured with a four
phase roof system, two dock doors and two drive-in doors. The warehouse is
located approximately one mile west of the Las Vegas Strip. Parking is provided
by 56 surface spaces. Imperial Palace, Inc., an affiliate of the Prior Owners,
will occupy 100% of the building.

The following tables set forth scheduled lease expirations during the
next ten years beginning with 1998 for the Industrial Properties:

GROSS LEASABLE AREA NET EFFECTIVE RENT (1)
----------------------- ---------------------------------------
LEASE NO. OF LEASES APPROXIMATE PERCENT AMOUNT PERCENT AVERAGE
PROPERTY EXPIRATION EXPIRING SQ. FT. OF TOTAL (THOUSANDS) OF TOTAL SQ. FT.
- -------- ---------- -------- ------- -------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CABALLO 1998 - - - - - -
1999 - - - - - -
2000 - - - - - -
2001 - - - - - -
2002 - - - - - -
2003 - - - - - -
2004 1 62,000 100.0% $313 100.0% $5.04
2005 - - - - - -
2006 - - - - - -
2007 - - - - - -
2008+ - - - - - -
--- ------- ------- ----- ------- ------
TOTAL 1 62,000 100.0% $313 100.0% $5.04
</TABLE>

(1) Net Effective Rent is defined in the Glossary.

<PAGE> 47

GROSS LEASABLE AREA NET EFFECTIVE RENT (1)
----------------------- ---------------------------------------
LEASE NO. OF LEASES APPROXIMATE PERCENT AMOUNT PERCENT AVERAGE
PROPERTY EXPIRATION EXPIRING SQ. FT. OF TOTAL (THOUSANDS) OF TOTAL SQ. FT.
- -------- ---------- -------- ------- -------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
ESCONDIDO 1998 4 133,320 87.1% $782 86.8% $5.86
1999 1 19,800 12.9 118 13.2 5.98
2000 - - - - - -
2001 - - - - - -
2002 - - - - - -
2003 - - - - - -
2004 - - - - - -
2005 - - - - - -
2006 - - - - - -
2007 - - - - - -
2008+ - - - - - -
------ --------- -------- ------ -------- -------
TOTAL 5 153,120 100.0% $900 100.0% $5.88

D'IBERVILLE 1998 - - - - - -
1999 - - - - - -
2000 - - - - - -
2001 - - - - - -
2002 - - - - - -
2003 - - - - - -
2004 - - - - - -
2005 - - - - - -
2006 - - - - - -
2007 2 96,000 100.0% $576 100.0% $6.00
2008+ - - - - - -
------ --------- -------- ------ -------- -------
TOTAL 2 96,000 100.0% $576 100.0% $6.00

</TABLE>

(1) Net Effective Rent is defined in the Glossary.

<PAGE> 48

GROSS LEASABLE AREA NET EFFECTIVE RENT (1)
----------------------- ---------------------------------------
LEASE NO. OF LEASES APPROXIMATE PERCENT AMOUNT PERCENT AVERAGE
PROPERTY EXPIRATION EXPIRING SQ. FT. OF TOTAL (THOUSANDS) OF TOTAL SQ. FT.
- -------- ---------- -------- ------- -------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
POLARIS 1998 - - - - - -
1999 - - - - - -
2000 - - - - - -
2001 - - - - - -
2002 - - - - - -
2003 - - - - - -
2004 - - - - - -
2005 - - - - - -
2006 - - - - - -
2007(2) 1 53,995 100.0% $324 100.0% $6.00
2008+ - - - - - -
------- -------- ------- -------- ------- ------
TOTAL 1 53,995 100.0% $324 100.0% $6.00

</TABLE>

(1) Net Effective Rent is defined in the Glossary.

(2) The Polaris lease will be effective upon completion of the building,
anticipated to be May 1998.

<PAGE> 49

LEASE EXPIRATIONS

The following table sets forth certain information regarding lease
expirations for the Properties for each of the ten years beginning with 1998,
assuming that none of the tenants exercises renewal options or termination
rights:

<TABLE>
<CAPTION>
Net Effective Rent (1)
% of Total ----------------------------------------------
Number of Square Footage Portfolio Percent of
Leases Under Expiring Expiring Amount - Net Total Average
Year Expiring Leases GLA Effective Rent Portfolio Sq. Ft.
---- -------- ------ --- -------------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
1998(2) 73 374,452 26.7% $3,058 27.4% $8.17
1999 27 235,199 16.8 2,310 20.7 9.82
2000 17 111,667 8.0 1,436 12.9 12.85
2001 12 44,429 3.2 544 4.9 12.23
2002 11 144,853 10.3 1,394 12.5 9.62
2003 1 7,343 0.5 100 0.9 13.55
2004 4 93,854 6.7 570 5.1 6.07
2005 2 6,750 0.5 127 1.1 18.74
2006 - - - - - -
2007 4 156,083 11.1 961 8.6 6.16
2008+ 1 31,123 2.2 662 5.9 21.27
----- ----------- ----- ---------- ------- ------
152 1,205,753 86.0% $11,162 100.0% $9.26
</TABLE>

(1) Net Effective Rent is defined in the Glossary.
(2) On March 2, 1998, an existing major tenant signed a new five year lease
with a four year minimum lease payment on 109,506 square feet at a
straight-line rate of $9.13, reducing the percentage of total GLA that
is scheduled to expire in 1998 from 26.7% to 18.6%. The Company will
not incur any costs for tenant improvements on such lease. Tenants are
no longer charged for basement storage, reducing GLA by 5,425 square
feet.

SIGNIFICANT BUILDINGS

The following tables set forth certain information as of December 31,
1997, with respect to the Company's significant Properties:

<PAGE> 50

SUNRISE CLAYDESTA HERITAGE TEN CONOCO D'IBERVILLE CABALLO ESCONDIDO
------- --------- -------- ---------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF
COMPANY RENTAL
REVENUES (1) 21.5% 30.7% 15.5% 13.3% 5.2% 2.8% 8.1%

OCCUPANCY RATE
1997 79% 77% 81% 92% 100% 100% 100%
1996 68% 77% * 90% * 100% 100%
1995 55% * * 88% * 100% 100%
1994 48% * * * * 100% *
1993 32% * * * * 100% *

10% TENANTS Ford Motor Oxy USA, Texaco, Inc. Conoco, Inc. Imperial Crown Imperial
Credit Corp. Inc. Palace of Laboratories, Palace, Inc.
Mississippi Inc.
State of
Florida Imperial
Laundry, Inc.
BUILDING BUSINESS Financial, Oil and Gas, Oil and Gas, Oil and Gas Warehouse, Manufacturer Warehouse
Technological, Financial, Financial Laundry Health Food
Government Technological Products
RENT PER SQ. FOOT
1997 $14.94 $10.04 $10.07 $8.93 $6.00 $5.04 $5.88
1996 $14.86 8.05 * 7.81 * $4.98 $5.88
1995 $14.14 * * 7.85 * $4.92 $5.88
1994 $12.96 * * * * $4.85 *
1993 $15.44 * * * * * *

(1) Calculation includes rental revenues from Polaris, which would account for 2.9% of Company rental revenues.

* Property not owned by Prior Owners or building not constructed during the applicable period.

</TABLE>

<PAGE> 51

<TABLE>
<CAPTION>
LEASE LEASED GLA
NUMBER OF EXPIRATION RENEWAL AS OF 12/31/97 % OF TOTAL
BUILDING/TENANTS LEASES DATE OPTION (SQ. FT.) LEASED GLA
- ---------------- ---------- ------ -------- --------------- ----------
<S> <C> <C> <C> <C> <C>
SUNRISE
Ford Motor Credit Company 1 7/14/00 Y 22,512 1.8%
State of Florida 2 1/19/00 Y 32,521 2.6
Smith Barney, Inc. 2 6/30/07 Y 21,869 1.8
5/31/04 Y
Unisys Corporation 1 9/14/01 Y 13,376 1.1

Claydesta
OXY USA, Inc. 1 7/31/02 Y 84,939 6.9
Norwest Bank Texas, N.A. 1 11/14/28 Y 31,123 2.5
Clayton Williams Energy, Inc. 1 2/28/02 Y 27,853 2.3
Fina Oil & Chemical Co. 1 2/28/00 Y 18,489 1.5

HERITAGE
Texaco, Inc. 1 8/31/99 Y 143,431 11.6

TEN CONOCO
Conoco, Inc. 3 9/30/03 Y 114,931 9.3

D'Iberville
Imperial Palace of Miss., Inc. 1 9/30/07 N 74,000 6.0
Imperial Laundry, Inc. 1 9/30/07 N 22,000 1.8

CABALLO
Crown Laboratories, Inc. 1 2/29/04 Y 62,000 5.0

ESCONDIDO
month-to-
Imperial Palace Hotel & Casino 4 month(2) N 83,160 6.7
--------- -------
21 752,204 60.9%
TOTAL

NET EFFECTIVE RENT (1)
---------------------------------------------
AVERAGE NET % OF TOTAL
AMOUNT - NET EFFECTIVE NET EFFECTIVE
BUILDING/TENANTS EFFECTIVE RENT RENT/SQ. FT. RENT
- ---------------- -------------- ------------ -------------
<S> <C> <C> <C>
SUNRISE
Ford Motor Credit Company $314 $13.94 2.8%
State of Florida 500 15.38 4.5
Smith Barney, Inc. 282 12.89 2.5

Unisys Corporation 181 13.52 1.6

Claydesta
OXY USA, Inc. 773 9.10 6.9
Norwest Bank Texas, N.A. 662 21.27 5.9
Clayton Williams Energy, Inc. 258 9.25 2.3
Fina Oil & Chemical Co. 185 10.00 1.7

HERITAGE
Texaco, Inc. 1,529 10.66 13.7

TEN CONOCO
Conoco, Inc. 1,094 9.52 9.8

D'Iberville
Imperial Palace of Miss., Inc. 444 6.00 4.0
Imperial Laundry, Inc. 132 6.00 1.2

CABALLO
Crown Laboratories, Inc. 326 5.25 2.9

ESCONDIDO

Imperial Palace Hotel & Casino 499 6.00 4.5
-------- ------- ------
TOTAL $7,179 $9.39 64.3%

(1) NET EFFECTIVE RENT IS DEFINED IN THE GLOSSARY.
(2) THESE LEASES HAVE NOW BEEN REPLACED BY ONE LEASE EXPIRING MARCH 1, 2002 AND THREE LEASES EXPIRING APRIL 30, 2001.

</TABLE>

<PAGE> 52

DEPRECIATION OF SIGNIFICANT PROPERTIES

For federal income tax purposes, the pro forma combined balance sheet
basis, assuming an initial public offering price of $15.00 per share, in the
Properties to be acquired by the Company and Operating Partnership was
approximately $59.6 million at March 31, 1998. The real property associated with
the Properties (other than land) generally will be depreciated, net of
accumulated depreciation, for federal income tax purposes over 39 years using
the straight line method. For financial reporting purposes, the Properties will
be valued in approximately the same way as tax and will be depreciated using the
straight line method over their estimated lives typically 39 years. The pro
forma combined balance sheet federal tax basis is:

In Thousands
----------------------------------
Property Land Building
-------- ---- --------
<S> <C> <C>
Florida Sunrise Tower $1,598 $16,822
Claydesta Center 1,500 13,040
Heritage Center 493 7,157
Ten Conoco 1,034 5,198
D'Iberville 376 3,841
Caballo 236 2,400
Escondido 492 6,127
</TABLE>

REAL ESTATE TAXES ON SIGNIFICANT PROPERTIES

The annual real estate taxes paid in 1997 on the Florida Sunrise
property were approximately $222,000 and the Coral Springs real estate tax is
2.92% of assessed value. The Midland real estate tax rate is 2.38% of assessed
value. The 1997 annual real estate taxes paid on the Claydesta Center property
were $228,000; the Ten Conoco property were $78,000 and the Heritage Center
property were $122,000.

CURRENT AND PROSPECTIVE MARKETS

Upon completion of the Offering and the Formation Transactions, the
Company will have Properties in four primary markets: Coral Springs, Florida;
Las Vegas, Nevada; Gulfport/Biloxi, Mississippi and Midland/Odessa, Texas. The
Company intends to focus its property acquisition efforts in Florida and Nevada.
In addition, the Company will target properties in the Hampton Roads/Norfolk,
Virginia market. Presented below is a discussion of these markets.

Information contained in this section contains "forward-looking
statements" relating to the future performance of the economies of Coral Springs
(Broward/Dade/Palm Beach Counties), Florida; Midland/Odessa, Texas;
Gulfport/Biloxi, Mississippi; Las Vegas, Nevada and Norfolk/Hampton Roads,
Virginia, and the office and industrial property markets thereof. Actual results
may differ materially from those set forth herein as the result of a number of
factors, including, without limitation, the national and regional economic
climate (which may be adversely affected by business layoffs or downsizing,
industry slowdowns, relocations of business, changing demographics,
infrastructure quality and governmental budgetary constraints) and priorities
and conditions in the national and regional office and industrial property
markets (such as oversupply of or reduced demand for office or industrial
space).

Florida

The Coral Springs (Broward/Dade/Palm Beach Counties) Metropolitan
Market.

Upon completion of the Offering and the Formation Transactions, the
Company will own one Class A Office Property in the Coral Springs (Broward
County) metropolitan market. The Company believes the central and south Florida
markets present excellent opportunities.

Coral Springs is located between Miami and West Palm Beach,
approximately eight miles northwest of Fort Lauderdale. The City of Coral
Springs was incorporated in 1963 and consists of approximately 20 square miles
under a master land use plan. Coral Springs is the northernmost city in Broward
County. Historically, Coral Springs has experienced explosive growth. In 1970,
the city contained an estimated 1,590 persons, expanding to 37,349 persons in
1980 and is estimated to expand to more than 100,000 persons in 1998. By April
1, 1998, Broward County is estimated to have a population of 1,433,000, Dade
County 2,079,000 and Palm Beach County 1,026,000, for a total in the three
county metropolitan area of 4,538,000 persons.

<PAGE> 53

Major highways directly serving Coral Springs are the Sawgrass
Expressway, U.S. Highway 441, and Highway 817. The Fort Lauderdale Hollywood
International Airport is located 15 miles southeast of Coral Springs, while the
Palm Beach Airport is situated approximately 30 miles northeast.

The Tri-County (Broward/Dade/Palm Beach) office market comprised 60.2
million square feet as of 1997, with an average vacancy rate for Class A & B
space of approximately 10%. The average full service rental rate for all classes
is $17.71 per square foot, with the average Class A rental rate slightly over
$20.00 per square foot.

The Broward County office market totals 16.2 million square feet, with
an average vacancy rate in 1997 for Class A & B space of approximately 9%. The
average full service rental rate for all classes is $17.30 per square foot, with
the average Class A rental rate over $20.00 per square foot.

The Coral Springs office submarket in Broward County comprises 1.25
million square feet, with an average vacancy rate in 1997 of approximately 7.5%
for Class A & B space, with the vacancy rate expected to decrease in 1998. The
average full service rental rate for all classes is over $15.00, with the rate
expected to increase in 1998.

The Dade County office market totals 31.0 million square feet, with an
average vacancy rate in 1997 for Class A & B space of approximately 12%, which
represents a decrease of 4 to 5% from 1996. The average full service rental rate
for all classes is $18.33 per square foot, with the average Class A rental rate
over $20.00 per square foot. In 1998, overall vacancy rates are expected to
decrease and rental rates are expected to increase.

The Palm Beach County office market totals 13.0 million square feet,
with an average vacancy rate in 1997 for Class A & B space of approximately 10%,
which represents a decrease of approximately 3% from 1996. The average full
service rental rate for all classes is $17.50 per square foot, with the average
Class A rental rate approximately $20.00 per square foot. In 1998, overall
vacancy rates are expected to decrease and rental rates are expected to
increase.

The Tri-County (Broward/Dade/Palm Beach) industrial market comprises
over 76.7 million square feet as of 1997, with warehouse/distribution space of
approximately 8%. The average vacancy rate for office/service space is
approximately 8%, down by 2% from 1996. The average gross rental rate for
warehouse/distribution space is approximately $6.00 per square foot and
office/service space is approximately $9.00 per square foot.

The Broward County industrial market totals approximately 19.0 million
square feet, with an average vacancy rate in 1997 for warehouse/distribution
space of approximately 8%, down by 1% from 1996. The average vacancy rate for
office/service space is approximately 10%, a 2% decrease from 1996. The average
gross rental rate for warehouse/distribution space is approximately $6.00 per
square foot and office/service space is approximately $9.00 per square foot.

The Dade County industrial market totals approximately 49.1 million
square feet, with an average vacancy rate in 1997 for warehouse/distribution
space of approximately 7%. The average vacancy rate for office/service space is
approximately 8%. The average gross rental rate for warehouse/distribution space
is approximately $5.00 per square foot and office/service space is over $9.00
per square foot.

The Palm Beach County industrial market totals approximately 8.6
million square feet, with an average vacancy rate in 1997 for
warehouse/distribution space of approximately 7%, down by 3% from 1996. The
average vacancy rate for office/service space is approximately 7%. The average
gross rental rate for warehouse/distribution space is approximately $6.00 per
square foot and office/service space is approximately $8.00 per square foot.

Texas

The Midland/Odessa Metropolitan Market

Upon completion of the Offering and the Formation Transactions, the
Company will own and operate three Office Properties in the Midland/Odessa
Metropolitan Market. The Office Properties are among the highest quality
buildings in Midland and two of the Properties are in the prestigious Claydesta
Plaza Center.

Midland is located in West Texas, approximately 300 miles west of
Dallas/Fort Worth. The following companies have facilities in Midland: Chevron
USA, Inc.; Mobil Exploration & Production U.S.; Burlington Resources; Parker &
Parsley; WalMart; Clayton W. Williams, Jr. Co.; Compressor Systems, Inc.;
Conoco, Inc.; Marathon Oil Company; Meridian Oil; Shell Pipeline; Texaco, Inc.;
Texas Instruments, Inc.; Coca-Cola Bottling; Albertson's; Dillard's; Kmart;
NationsBank;

<PAGE> 54

and UNOCAL. Together with its sister city of Odessa, which lies 20 miles to the
southwest, Midland forms a single MSA (metropolitan statistical area) of a
quarter million people. The Midland/Odessa MSA has attracted significant
interest from national retailers while the oil industry remains the dominant
industry. Midland County has seen a 9.1% growth in population from 1990 to 1996.
The median income is $45,965, compared to $40,386 for the State of Texas. By
1999, median income is projected to be $53,852.

Mississippi

The Gulfport/Biloxi Metropolitan Market

Upon completion of the Offering and the Formation Transactions, the
Company will own one Industrial Property in the City of D'Iberville
(Gulfport/Biloxi) metropolitan market, Mississippi, which was developed by the
Prior Owner.

The Gulfport/Biloxi metropolitan market has a diverse economy that
includes port cargo, gaming/tourism and manufacturing/shipbuilding. In addition,
the metropolitan area has seen growth in retail facilities and home building.
The gaming industry has attracted major casino operators and has become one of
the largest employers in the metropolitan area.
The unemployment rate has declined from 7.2% in 1992 to 5.0% in 1997.

Nevada

The Las Vegas Metropolitan Market

After completion of the Offering and the Formation Transactions, the
Company will own three Industrial Properties in the City of Las Vegas, which
were developed by the Prior Owners.

Las Vegas is located in Clark County, Nevada. The county comprises
approximately 7,910 square miles of which the Las Vegas Metropolitan Area
contains 550 square miles. The Las Vegas Metropolitan area is one of the fastest
growing areas in the United States, with a 40% growth rate from 1990 to 1995 and
a current population estimated at 1,138,000.

Las Vegas has four major highways that connect the city with such
metropolitan areas as Los Angeles, California, Phoenix, Arizona and Reno,
Nevada. Las Vegas is positioned at the hub of an eleven-state region having a
population base of 42 million residents. Air transportation is provided by
McCarren International Airport and McCarren International Airport's Air Cargo
Center.

Nevada has no personal income, corporate income, inheritance, estate or
gift taxes, which the Company believes will promote growth in the Las Vegas
Metropolitan Area. The Nevada Freeport Law exempts all personal property from
state taxation that is in transit through the state while it is being stored,
assembled, or processed for ultimate use in another state.
This law has created a surge in demand for industrial space.

The Las Vegas industrial market, generally divided into ten submarkets
with more than 1,200 industrial buildings in excess of 5,000 square feet, had
grown to approximately 48.2 million square feet through the third quarter of
1997. The market has expanded dramatically since 1985, when it comprised
approximately 17.0 million square feet of space. Net absorption through the
first three quarters of 1997 totaled approximately 3 million square feet. The
average vacancy rate for the entire Las Vegas industrial market is approximately
9%. Average triple net lease rates through the third quarter of 1997 range from
$0.32 to $0.65 per square foot per month, depending on submarket and size of
space. The Company believes that the market will continue to expand to include
large national and international tenants desiring to take advantage of the
Nevada business climate.

The Las Vegas office market as of the end of 1997 had an existing
office space inventory base totaling approximately 15 million square feet, with
a vacancy factor for all classes of approximately 12% in 403 properties. The
Class A office space vacancy factor was approximately 6%. The weighted average
lease rate for vacant space in the market totaled approximately $1.74 per square
foot, up from $1.69 per square foot at the end of the first quarter of 1997. Net
absorption for 1997 totaled approximately 1 million square feet.

SIOR, which publishes an annual survey of office and industrial
markets, forecasts growth in rents in Las Vegas of 11% to 15% for all industrial
property types (i.e., warehouse, manufacturing, and office/showroom). Side
absorption and construction are both forecasted to increase approximately 20%
over 1993 to meet tenant demand. According to SIOR, the Las Vegas industrial
market for spaces of less than 5,000 square feet has a moderate shortage, and
the market for spaces of

<PAGE> 55

5,000 square feet or greater has a substantial shortage.

Virginia

The Norfolk/Hampton Roads Metropolitan Market

The Norfolk/Hampton Roads metropolitan market has a diverse economy
known for its shipbuilding facilities, military complexes, and natural harbor.
The metropolitan market is now emerging as a center for high technology. The
area has two national laboratories in the Thomas Jefferson National Accelerator
Facility (Jefferson Lab) and the NASA Langley Research Center. Over 15% of
workers in the metropolitan market are employed by the Department of Defense.
Key companies in the market are Advanced Technologies, Canon Virginia Inc.,
Siemens Automotive and O & K Escalator. In addition, many telecommunications
centers, such as MCI, Harris Select and United Parcel, have expanded into the
market. Old Dominion University is one of the seven higher learning institutions
in the region. Hampton Roads has grown to a population base of approximately
1,540,000 persons and is now the country's 27th largest metropolitan area.

The office market in Hampton Roads has rebounded from the conditions of
the early 1990s, with an average office rental rate of $17.50 per square foot.
The vacancy rate declined to 9.6% in 1997. The industrial market saw a modest
decline in vacancy rates in 1997, which in turn has pushed gross annual rents to
more than $5.00 per square foot in some larger industrial properties, compared
to $3.00 a year ago. The demand for small warehouses with 5,000 to 15,000 square
feet is especially strong, with annual rents surpassing $6.00 per square foot.

CAPITAL EXPENDITURES

Capital expenditures may fluctuate in any given period depending upon
the nature, extent and timing of improvements required to be made in the
Company's Property portfolio. The Company plans to continue an active preventive
maintenance program in order to minimize required capital improvements. In
addition, capital improvement costs are recoverable from tenants in many
instances.

Tenant improvement and leasing costs also may fluctuate in any given
period depending upon factors such as the term of the lease, the type of lease
(renewal or replacement tenant), the involvement of external leasing agents and
overall competitive market conditions. Management believes that, as its markets
continue to recover, the level of tenant improvement and leasing costs incurred
by the Company will decrease on a per square foot basis.

The Company anticipates capital expenditures and tenant improvement
reserves of $0.20 per square foot for the Office Properties and $0.08 per square
foot for the Industrial Properties. The Company will make appropriate
adjustments to these reserves commensurate with changes in its portfolio.

COMPETITION

The Company will compete with other owners and developers of office and
industrial properties, some of whom may have greater resources and more
experience than the Company. An increase in the number of competitive properties
in any particular market in which the Properties are located could have a
material adverse effect on the Company's ability to lease space at the
Properties or any newly-acquired property and could adversely affect the rental
rates at the properties owned by the Company. The Company believes, however,
that its acquisition and internal growth strategies will enable it to compete
effectively in its target markets. The Company also believes that (i) proceeds
from the Offering, (ii) the Line of Credit, (iii) its ability to acquire
properties by issuing OP Units, and (iv) its ability as a public company to
raise funds through the capital markets during periods when conventional sources
of financing may be unavailable or prohibitively expensive will provide the
Company with competitive advantages.

INSURANCE

The Company will carry comprehensive liability, fire, extended coverage
and rental loss insurance covering all of the Properties, with policy
specifications and insured limits that the Company believes are adequate and
appropriate under the circumstances. There are, however, certain types of losses
that are not generally insured because they are either uninsurable or not
economically feasible to insure. Should an uninsured loss or a loss in excess of
insured limits occur, the Company could lose its capital invested in any such
Property, as well as the anticipated future revenues from such Property and, in
the case of recourse debt, the Company would remain obligated for any mortgage
debt, if any, or other financial obligations related to such Property. Any such
loss would adversely affect the Company. Moreover, as a general partner of

<PAGE> 56

the Operating Partnership, the Company will generally be liable for any of the
Operating Partnership's unsatisfied obligations other than non-recourse
obligations. The Company believes that the Properties will be adequately
insured; however, no assurance can be given that material losses in excess of
insurance proceeds will not occur in the future.

RENTAL REVENUES

Substantially all of the income from the Properties consists of rent
received under long-term leases. In addition, certain leases provide for payment
from tenants of a pro rata share of the real estate taxes, insurance, utilities
and common area maintenance of the property.

LEGAL PROCEEDINGS

The Company is not presently involved in any litigation nor, to its
knowledge, is any litigation threatened against the Company or any of the
Properties, except for routine litigation arising in the ordinary course of
business that, in the opinion of the executive officers of the Company, would
not have a material adverse effect on the Company.

REGULATIONS

General. The Properties, as well as any other properties that the
Company may acquire in the future, are subject to various federal, state and
local laws, ordinances and regulations, including, among other things, zoning
regulations, land use controls, and environmental controls relating to air and
water quality, noise pollution and indirect environmental impacts such as
increased motor vehicle activity. The Company believes that each Property, when
acquired, will have all permits and approvals necessary under current law.

Insurance. The Company believes that the Properties are covered by
adequate property and liability insurance provided by reputable, commercially
rated companies and with commercially reasonable deductibles and limits.
Management expects to maintain such insurance coverage and to obtain similar
coverage with respect to any additional properties acquired by the Company in
the future. The Company has obtained or will obtain title insurance relating to
the Properties in an aggregate amount that the Company believes to be adequate.
See "Risk Factors--Uninsured Loss and Condemnation."

Americans With Disabilities Act. The Properties are subject to the ADA.
The ADA has separate compliance requirements for "public accommodations" and
"commercial facilities" but generally requires that all public facilities be
made accessible to people with disabilities. The requirements became effective
in 1992. Compliance with the ADA requirements could require removal of access
barriers and other capital improvements at the Properties. Noncompliance could
result in the imposition of fines by the U.S. government or an award of damages
to private litigants. The Company believes that the Properties are substantially
in compliance with these requirements.

ENVIRONMENTAL MATTERS

Under CERCLA, as well as similar state and local laws, owners and
operators of property, both past and present, may be held financially
responsible for the investigation and, if appropriate, the remediation of
hazardous substance releases into the environment. Other parties who arranged
for the disposition of hazardous substances or transported hazardous substances
for disposition also may be held liable. Liability under CERCLA and similar laws
is strict, joint and several and, in many instances, may be imposed without
regard to the party's culpability concerning the hazardous substance release.
Potentially responsible parties may be liable to one another, the government
and, in some instances, third parties.

Costs recoverable under CERCLA must be consistent with the National
Contingency Plan, which establishes a procedure whereby contaminated properties
are identified and, if necessary, remediated in a priority fashion. If conducted
in the appropriate manner, these costs will include, but may not be limited to,
funds expended to investigate and to remediate hazardous substance releases.
Costs associated with any such environmental activity may be substantial.

All of the Properties have recently been subject to Phase I
environmental audits. See "Risk Factors--Environmental Matters." The purpose of
the Phase I environmental assessments was to determine if past or present uses
of, or conditions on, the Properties or properties in the vicinity of the
Properties, indicate the potential for soil or groundwater contamination or if
other environmental conditions might affect future uses of the Properties or
liability associated therewith. The Phase I environmental assessments generally
included the following: visual inspection of the property, review of available
land use records, interviews with property representatives; examination of
information from environmental agencies; and a walk-through survey for suspected
asbestos and lead-containing materials. As may be required by any applicable
federal, state or local laws, the Company has addressed or will address any
recommendations contained in the Phase I environmental

<PAGE> 57

assessment reports.

None of the completed reports from the Phase I environmental
assessments or subsequent investigations has revealed, nor is the Company aware
of, any environmental condition that the Company believes would have a material
adverse effect on the Company's business, assets or results of operations. The
Company believes that the Properties are in compliance in all material respects
with applicable federal, state and local laws, ordinances and regulations
concerning the presence of hazardous substances. It is possible, however, that
the Phase I environmental assessments and subsequent investigations did not
reveal all environmental liability concerns or that there are material
environmental liabilities of which the Company is unaware. Accordingly, no
assurance can be given that: (i) future laws, ordinances or regulations will not
require or impose any material expenditures or liabilities in connection with
the environmental conditions by or on the Company or the Properties: (ii) the
current environmental condition of each Property will not be affected by tenants
and occupants of such Property, by the condition of properties in the vicinity
of such Property or by third parties unrelated to the Company; and (iii) prior
owners or prior or current tenants of a Property did not create any material
adverse environmental condition of which the Company is unaware.

<PAGE> 58

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

The following is a discussion of the Company's current policies with
respect to investments, financings, affiliate transactions and certain other
activities. The Company's policies with respect to these activities have been
determined by Management and may be amended or revised from time to time at the
discretion of the Board of Trust Managers without a vote of the shareholders of
the Company. No assurance can be given that the Company's investment objectives
will be attained or that the value of the Company will not decrease.

ACQUISITION STRATEGY

INTERNAL GROWTH STRATEGY

INVESTMENT OBJECTIVES

The Company's investment objective is to provide quarterly cash
distributions and to achieve long-term capital appreciation through increases in
cash flow and the value of the Company. The Company will seek to accomplish
these objectives through the ownership of the Properties, improved operations of
the Properties, acquisitions of additional properties, lease-up of unleased
space in existing Properties and in any acquired properties and, where
appropriate, renovations and expansions of these properties. The key criteria
for new investments will be the opportunity for growth in per share Funds From
Operations.

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

<PAGE> 59

Company emphasizes equity real estate investments, it may, in its discretion,
invest in mortgages, stock of other real estate investment trusts and other real
estate interests. Mortgage investments may include participating or convertible
mortgages. The Company has not previously invested in mortgages or stock of
other real estate investment trusts, and currently has no plans to do so.

SALE OF PROPERTY

The Company does not currently intend to dispose of any of the
Properties, although it reserves the right to do so if, based upon Management's
periodic review of the Company's Properties, Management proposes the disposition
of a Property or Properties and the Trust Managers determine that such action
would be in the best interests of the Company. For a description of certain tax
consequences arising from the disposition of a Property, see "Federal Income Tax
Consequences-Federal Taxation of the Company--Dispositions of Assets."

FINANCING POLICY

The Company intends to fund future property acquisitions through the
most appropriate sources of capital, including the issuance of OP Units to
sellers, the use of proceeds from a secured line of credit, undistributed Cash
Available for Distribution, bank and institutional borrowings (secured and
unsecured) and the issuance of debt and equity securities (including Preferred
Shares). The Company is currently negotiating with several financial
institutions to obtain a secured line of credit in the approximate amount of $25
million.

The Company believes its use of debt and equity financing will create a
flexible capital structure that will enable the Company to pursue its
acquisition and internal growth strategies and maximize returns to its
shareholders.

WORKING CAPITAL RESERVES

The Operating Partnership will maintain working capital reserves in
amounts that the Trust Managers determine to be adequate to meet normal
contingencies in connection with the operation of the Operating Partnership's
business and investments.

OTHER POLICIES

The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not intend
to (i) invest in the securities of other issuers (other than the Operating
Partnership) for the purpose of exercising control over such issuers, (ii)
underwrite securities of other issuers or (iii) actively trade in loans or other
investments.

The Company may make investments other than as previously described,
although it does not currently intend to do so. The Company has not made any
loans to third parties since its formation, although it may in the future make
loans to such persons and entities, including, without limitation, its officers,
and to joint ventures in which it participates. Since formation, the Company has
not engaged in trading, underwriting or agency distribution or sale of
securities of other issuers, and the Company does not intend to do so in the
future. The Company's policies with respect to such activities may be reviewed
and modified from time to time by the Trust Managers without the vote of the
shareholders.

At all times, the Company intends to make investments in such a manner
as to be consistent with the requirements of the Code to qualify as a REIT
unless, because of circumstances or changes in the Code (or in the Treasury
Regulations), the Trust Managers, with the consent of a majority of the
Company's shareholders, determine to revoke the Company's REIT election.

The Company may, under certain circumstances, purchase its Common
Shares in the open market or otherwise. The Trust Managers have no present
intention of causing the Company to repurchase any of the Common Shares, and any
such action would be taken only in conformity with applicable federal and state
laws and the requirements for qualifying as a REIT under the Code and the
Treasury Regulations.

The Company will be required to file reports and other information with
the Commission pursuant to the Exchange Act. In addition to applicable legal or
Nasdaq Stock Market requirements, if any, holders of Common Shares will receive
annual reports containing audited financial statements with a report thereon by
the Company's independent certified public accountants.

<PAGE> 60

MANAGEMENT

TRUST MANAGERS AND OFFICERS

The Company's Trust Managers are elected annually by the shareholders
and remain in office until their successors, if any, are elected. The Trust
Managers are responsible for appointing the executive officers of the Company
and for approving borrowings by the Company. The Trust Managers are also
responsible for the adoption from time to time of such investment policies and
limitations as they may deem appropriate in light of the Company's investment
objectives.

The following table sets forth the names and positions of the Trust Managers and
officers of the Company.

Name Age Position
---- --- --------
<S> <C> <C>
Merker, David R. 55 Chairman of the Board, Chief Executive
Officer and Trust Manager

Lorentzen, Arthur F., Jr. 48 President, Chief Operating Officer and
Trust Manager

Deborah J. Pierce 49 Chief Financial Officer, Secretary
and Treasurer nominee

Laffey, Stephen P. 36 Independent Trust Manager

Cook, John F. 70 Independent Trust Manager

Fishman, Edward M. 52 Independent Trust Manager
</TABLE>

DAVID R. MERKER is Chairman of the Board and Chief Executive Officer of
the Company. Since 1988, Mr. Merker has served as Vice President and Chief
Operating Officer of affiliates of Ralph Engelstad that are selling or
contributing the Properties to the Operating Partnership in connection with the
Offering. In such capacity, Mr. Merker has been responsible for all aspects of
operations, including acquisitions, development, marketing and management. From
1959 to 1987, Mr. Merker worked for C.I.T. Corporation, Westinghouse Credit
Corporation, and Southwest Funding Corporation. These companies specialized in
finance of industrial and real estate related transactions. Mr. Merker is a
native of Kansas City, Missouri and attended De La Salle Military Academy.

ARTHUR F. LORENTZEN, JR. is President and Chief Operating Officer of
the Company. Since September 1995, Mr. Lorentzen has worked as an independent
real estate consultant. From April 1994 to September 1995, Mr. Lorentzen worked
with Koll-Dove Global Disposition Services with responsibility for real estate
advisory and consulting services. For 24 years prior to April 1994, Mr.
Lorentzen served in various capacities with the FDIC, where he served as
Associate Director (Asset Disposition), Division of Depositor and Asset
Services, formerly the Division of Liquidation, from 1988 to 1993. Mr. Lorentzen
was responsible for the disposition of more than $80 billion in assets from
failed financial institutions. In his last year with FDIC, Mr. Lorentzen served
as Regional Director, leading a $7.7 billion, 6 office, 2,000 employee region.
Mr. Lorentzen holds a B.S. degree in Accounting from Northeastern University,
Boston, Massachusetts and a commercial banking graduate degree from the Pacific
Coast Banking School, University of Washington, Seattle, Washington. Mr.
Lorentzen is also a Commissioned Bank Examiner.

DEBORAH J. PIERCE, a Certified Public Accountant, will serve as Chief
Financial Officer, Secretary and Treasurer of the Company upon completion of the
Offering. Since June 1995, Ms. Pierce has served as Vice President of Finance
for Tropicana Resort & Casino, a subsidiary of Aztar, Inc., a publicly traded
company. From 1988 to 1995, Ms. Pierce served as Chief Financial Officer of John
Midby & Associates, a development company, and served as Chief Financial Officer
and Assistant Treasurer of an affiliated publicly registered company, Gold River
Hotel & Casino, Inc. From 1985 to 1988, Ms. Pierce served as Audit Manager for
Laventhol & Horwath and from 1977 to 1985 for KPMG Main Hurdman (currently KPMG
Peat Marwick). Ms. Pierce has experience in Securities Exchange Commission
reporting, internal controls and financial reporting.

STEPHEN P. LAFFEY serves as a Trust Manager of the Company. Mr. Laffey
currently serves as President of Equity Capital Markets at Morgan Keegan &
Company, Inc. He joined Morgan Keegan & Company, Inc. in June 1992 to work with

<PAGE> 61

CEO and founder Allen Morgan in international sales. In January 1996, Mr. Laffey
was appointed Director of Equity Research and was named Institutional Sales
Manager in May and Equity Trading Manager in September 1996. After graduating
Magna Cum Laude from Bowdoin College in 1984, Mr. Laffey received an MBA from
Harvard Business School in 1986.

JOHN F. COOK serves as a Trust Manager of the Company. Mr. Cook served
as President, Chairman, and Chief Executive Officer of Valley Bank and Trust
Co., Grand Forks, North Dakota, from 1972 until his retirement in 1995. Mr. Cook
has served as an officer and board member of many civic, educational, charitable
and fraternal organizations.

EDWARD M. FISHMAN serves as a Trust Manager of the Company. Mr. Fishman
has been President and a shareholder of the law firm Fishman, Jones, Walsh &
Marsh, P.C. in Dallas, Texas, since its founding in 1986, and practices
primarily in the areas of real estate and general corporate planning. Mr.
Fishman graduated Cum Laude from Bowdoin College and received his Juris
Doctorate degree from Columbia University Law School.

STAGGERED BOARD

The Company's Board of Trust Managers is divided into three classes,
with staggered three-year terms. The initial terms of Messrs. Merker and
Lorentzen will expire at the Company's third annual meeting of shareholders; of
Messrs. Laffey and Fishman at the Company's second annual meeting of
shareholders; and of Mr. Cook at the Company's first annual meeting of
shareholders. Upon the expiration of the initial terms of each class, the
succeeding terms of each class will be three years.

COMMITTEES OF THE TRUST MANAGERS

Audit Committee. The Board of Trust Managers has established an Audit
Committee that consists of the three independent Trust Managers. The Audit
Committee will make recommendations concerning the engagement of independent
public accountants, review with the independent public accountants the plans and
results of the audit engagement, approve professional services provided by the
independent public accountants, review the independence of the independent
public accountants, consider the range of audit and non-audit fees and review
the adequacy of the Company's internal accounting controls.

Compensation Committee. Promptly following the Offering, the Trust
Managers will establish a Compensation Committee to determine compensation,
including bonuses, for the Company's executive officers. In determining the
amount of executive compensation, the Compensation Committee will consider both
individual and Company performance. The Compensation Committee shall also
administer the Plan. The Compensation Committee shall consist of the three
independent Trust Managers, as required under the Plan. See
"Management--Incentive Share Plan."

COMPENSATION OF TRUST MANAGERS

The Company intends to pay the independent Trust Managers fees for
their services as Trust Managers. Trust Managers will receive annual
compensation of $10,000 plus a fee of $1,000 for attendance at each of the Trust
Manager, but not committee, meetings. Trust Managers who are not independent
Trust Managers will not be paid any trust manager fees. An independent Trust
Manager may elect to receive all or part of his or her annual retainer fee in
the form of Common Shares pursuant to procedures set forth in the Plan.

In addition, on the last day of each calendar year beginning with the
last day of 1998, each independent Trust Manager will receive a non-qualified
option to purchase 1,000 Common Shares. Each such option shall have an exercise
price equal to the fair market value of the Common Shares on the date of grant,
shall be immediately exercised in full, and shall have a ten-year term subject
to earlier expiration if the independent Trust Manager leaves the Board of Trust
Managers.

TRUST MANAGERS AND OFFICERS INSURANCE

The Company intends to have trust manager and officer liability
insurance. Trust manager and officer liability insurance insures (i) the Trust
Managers and officers of the Company against any claim arising out of an alleged
wrongful act by such persons while acting as Trust Managers or officers of the
Company, and (ii) the Company to the extent that it has indemnified the Trust
Managers and officers for such loss.

<PAGE> 62

INDEMNIFICATION

The Company will enter into indemnification agreements with each of its
Trust Managers and executive officers requiring the Company to indemnify such
persons and advance expenses to such persons to the maximum extent permitted by
Texas law. In addition, pursuant to the Underwriting Agreement, the officers,
Trust Managers and controlling persons of the Company will be indemnified
against certain liabilities by the Underwriters, and the Underwriters will be
indemnified against certain liabilities by the Company. See "Underwriting."

EXECUTIVE COMPENSATION

To date, the Company has not paid any compensation to its executive
officers. The following table sets forth the estimated 1998 compensation, on an
annualized basis, expected to be paid to the Chairman of the Board and Chief
Executive Officer; President and Chief Operating Officer; and Chief Financial
Officer, Secretary and Treasurer of the Company under their respective
employment agreements. In addition, the Company's executive officers will be
eligible to receive cash bonuses at the discretion of the Compensation Committee
under the Plan, as described below. Incentive compensation will be determined by
the Compensation Committee.

PRINCIPAL CAPACITIES ANNUAL
NAME IN WHICH SERVED COMPENSATION (1)
---- --------------- ----------------
<S> <C> <C>
Merker, David R. Chairman of the Board and $200,000
Chief Executive Officer

Lorentzen, Arthur F. Jr. President and Chief Operating Officer $200,000

Pierce, Deborah J. Chief Financial Officer, $120,000
Secretary and Treasurer
</TABLE>

- -------------
(1) Amounts are annualized projections for the year ending December 31, 1998.

INCENTIVE SHARE PLAN

The Company has adopted the Plan to (i) furnish incentives to
individuals chosen to receive share-based awards because they are considered
capable of improving operations and increasing profits; (ii) encourage selected
persons to accept or continue employment with the Company; and (iii) increase
the interest of Trust Managers in the Company's welfare through their
participation in the growth in value of the Common Shares. The Plan provides for
the award (subject to the Ownership Limit) to full-time employees and Trust
Managers of, and certain consultants to, the Company of a broad variety of
equity-based compensation alternatives, i.e., nonqualified share options,
incentive share options, restricted shares, share appreciation rights, and
dividend equivalent rights.

The total number of Common Shares that may be issued under the Plan is
an amount of shares equal to 5% of the outstanding Common Shares on a
fully-diluted basis, but not to exceed 500,000 Common Shares. Notwithstanding
the foregoing, no downward adjustment in the number of shares available for
issuance under the Plan will be made as a result of decreases in the number of
shares outstanding that do not constitute changes in the capitalization of the
Company that affect all shareholders (e.g., self-tender). Upon completion of the
Offering, 242,328 Common Shares may be issued under the Plan based upon the
Company's capital structure at that time.

Options entitle the optionees to purchase Common Shares from the
Company for a specified exercise price during a specified period. Under the
Plan, the Company may grant options that are intended to be incentive stock
options within the meaning of Section 422 of the Code ("incentive share
options") or options that are not incentive stock options ("nonqualified share
options"). Incentive share options and nonqualified share options granted under
the Plan may not have an exercise price less than 100% of the fair market value
of the Common Shares on the date of grant and must expire within ten years after
such date.

Restricted share awards entitle the recipient to purchase Common Shares
from the Company in consideration of a specified price equal, at a minimum, to
the par value of the shares being purchased. The award may provide for vesting
over

<PAGE> 63

a specified period of time and forfeiture to the Company with respect to the
unvested shares upon the termination of the recipient's employment or other
relationship with the Company or upon the occurrence or non-occurence of other
conditions or events. Restricted shares may not be issued to independent Trust
Managers (although an independent Trust Manager may elect to receive all or part
of his or her annual retainer in Common Shares under the Plan). Restricted
shares may not, in general, be sold or otherwise transferred until restrictions
are removed and the shares have vested. Holders of restricted shares will
receive distributions prior to the time when the restrictions lapse.

Share appreciation rights entitle the recipient to receive from the
Company at the time of exercise a per share amount equal to the excess of the
fair market value at the date of exercise of a Common Share over a price
specified at the time of grant, which cannot be less than the fair market value
of the Common Shares on the grant date. The per share amount may be paid in cash
or Common Shares. Share appreciation rights may be issued alone or in tandem
with options, but may not be issued to independent Trust Managers.

Dividend equivalent rights entitle the recipient to receive, for a
specified period, a payment (in cash or Common Shares) equal to the quarterly
dividend declared and paid by the Company on one Common Share. Dividend
equivalent rights may not be granted to independent Trust Managers and are
forfeited to the Company upon the termination of the recipient's employment or
other relationship with the Company, unless otherwise provided by the
Compensation Committee.

The Plan will be administered by the Compensation Committee, which is
authorized to determine the eligible persons to whom, and the time or times at
which, awards under the Plan will be granted and to determine the number of
shares to be subject thereto and the terms and conditions thereof.
Notwithstanding the foregoing, the terms and conditions of option grants to
independent Trust Managers and the procedures by which independent Trust
Managers may receive annual fees in the form of Common Shares are not
discretionary with the Compensation Committee but shall be as specified in the
Plan. See "Management-Compensation of Trust Managers." The Compensation
Committee is also authorized to adopt, amend and rescind administrative and
interpretive rules and regulations relating to the Plan. The members of the
Compensation Committee are required to be independent Trust Managers. Prior to
the establishment of the Compensation Committee, the Plan will be administered
by the Board. See "Management--Committees of the Trust Managers."

Upon the closing of the Offering, Messrs. Merker and Lorentzen will
each receive options to purchase 75,000 Common Shares under the Plan at the
Offering price, and Ms. Pierce will receive options to purchase 20,000 Common
Shares under the Plan at the Offering price.

EMPLOYMENT CONTRACTS

Each of Messrs. Merker and Lorentzen will receive annual cash
compensation and a bonus pursuant to three-year employment contracts, renewable
from year to year thereafter, with the Company. The base salary provided for in
such contracts may be increased after one year at the discretion of the
Compensation Committee. The employment agreements provide that Messrs. Merker
and Lorentzen will be eligible for a cash bonus to be set by the Compensation
Committee. The agreements provide for Messrs. Merker and Lorentzen to receive
severance payments upon the death, disability, termination or resignation of
such executive, unless such executive resigns without "good cause" or unless the
Company terminates such executive with "good reason" (i.e., as a result of gross
negligence, willful misconduct, fraud or a material breach of the employment
agreement). Each such executive will have "good cause" to terminate his
employment with the Company in the event of any material reduction in his
compensation or benefits, material breach or material default by the Company
under his employment agreement or following a change in control of the Company.
The employment agreements provide for severance payments to be paid for two
years equal to base compensation plus bonus for the executive at the most recent
annual amount.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Section 9.20 of the Texas REIT Act, subject to procedures and
limitations stated therein, allows the Company to indemnify any person who was,
is or is threatened to be made a named defendant or respondent in a proceeding
because the person is or was a trust manager or officer against judgments,
penalties (including excise and similar taxes), fines, settlements and
reasonable expenses actually incurred by the person in connection with the
proceeding. The Company is required by Section 9.20 of the Texas REIT Act to
indemnify a trust manager or officer against reasonable expenses incurred by him
in connection with a proceeding in which he is a named defendant or respondent
because he is or was a trust manager or officer if he has been wholly
successful, on the merits or otherwise, in the defense of the proceeding. Under
the Texas REIT Act, trust managers and officers are not entitled to
indemnification if (i) the trust manager or officer is found liable to the real
estate investment trust or is found liable on the basis that personal benefit
was improperly received and (ii) the trust manager or officer was found liable
for willful or intentional misconduct in the performance of his duty to the real
estate investment trust.

<PAGE> 64

The statute provides that indemnification pursuant to its provisions is not
exclusive of other rights of indemnification to which a person may be entitled
under any provision of the Charter or Bylaws of the Trust, agreements or
otherwise. In addition, the Company has, pursuant to Section 15.10 of the Texas
REIT Act, provided in its Charter that, to the fullest extent permitted by
applicable law, a trust manager of the Company shall not be liable for any act,
omission, loss, damage or expense arising from the performance of his duty under
the Texas REIT Act, except for his own willful misfeasance or malfeasance or
negligence.

<PAGE> 65

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In connection with the formation of the Company, certain executive
officers and Trust Managers of the Company acquired a total of 141,260 Common
Shares on February 11, 1998, at a purchase price of $0.007 per share and an
aggregate cost of $1000. David R. Merker purchased 89,258 Common Shares. Arthur
F. Lorentzen, Jr. purchased 48,430 Common Shares. Edward M. Fishman purchased
3,572 Common Shares. Each of these shareholders will experience an immediate
accretion in value upon completion of the Offering. Based on an initial offering
price of $15.00 per share, the value of Mr. Merker's Common Shares shall be
$1,338,870, the value of Mr. Lorentzen's Common Shares shall be $726,450, and
the value of Mr. Fishman's Common Shares shall be $53,580 upon completion of the
Offering. Prior to the Offering, Mr. Merker served as an executive officer, and
managed the real estate operations, of the Prior Owners and certain affiliates
of the Prior Owners.

Upon completion of the Offering, Messrs. Merker and Lorentzen will each
receive options to purchase 75,000 Common Shares under the Plan at the Offering
price, and Ms. Pierce will receive options to purchase 20,000 Common Shares
under the Plan at the initial offering price.

Edward M. Fishman is a Trust Manager of the Company. Mr. Fishman is
also the President and a shareholder of the law firm of Fishman, Jones, Walsh &
Marsh, P.C., which renders legal services to the Company from time to time.

Stephen P. Laffey is a Trust Manager of the Company. Mr. Laffey also
serves as President of Equity Capital Markets for Morgan Keegan & Company, Inc.,
which is acting as an Underwriter in the Offering.

<PAGE> 66

PARTNERSHIP AGREEMENT

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

MANAGEMENT

The Operating Partnership is organized as a Delaware limited
partnership pursuant to the terms of the Partnership Agreement. Pursuant to the
Partnership Agreement, the Company, as the sole general partner of the Operating
Partnership, shall have the right and power to make all decisions and take any
and every action with respect to the property, the business and affairs of the
Operating Partnership and shall have all the rights, power and authority
generally conferred by law, or necessary, advisable or consistent with
accomplishing the purposes of the Partnership. All such decisions or actions
made or taken by the general partner shall be binding upon all of the partners
and the Operating Partnership.

AMENDMENT

The consent of limited partners holding 67% of the limited partnership
interests in the Operating Partnership is required with respect to certain
amendments to the Partnership Agreement, including amendments which (i) modify
the allocation of profits, losses, or distributions among the partners, (ii)
modify the issuance and conversion of OP Units, and (iii) modify the provisions
related to the transfer of OP units. The written consent of the general partner
and any partner adversely affected is required to amend the Partnership
Agreement so as to enlarge the obligation of any partner to make capital
contributions to the Operating Partnership. The written consent of all the
partners is required to amend these amendment limitations.

TRANSFERABILITY OF OP UNITS

The Partnership Agreement generally provides that the general partner
may not transfer its interest in the Operating Partnership without the consent
of a majority-in-interest of the limited partners. The limited partners
generally may not transfer their OP Units without the consent of the general
partner.

REDEMPTION OF OP UNITS

Pursuant to the Partnership Agreement, the limited partners will
receive rights which will enable them to request the redemption of their OP
Units for cash or, at the option of the Company, Common Shares ("Redemption
Rights"). The Redemption Rights shall be exercisable beginning one year after
the OP Units are issued to the limited partner. A limited partner shall not have
the right to exercise its redemption right for Common Shares if (i) the Company
would, as a result thereof, no longer qualify (or it would be likely that the
Company no longer would qualify) as a REIT under the Code; or (ii) such exchange
would constitute or be likely to constitute a violation of applicable federal or
state securities laws or would violate any applicable provisions of the
organizational documents of the Company (including without limitation any
restrictions on ownership of securities of the Company set forth in the
Declaration of Trust or Bylaws of the Company).

CAPITAL CONTRIBUTIONS

The Company will contribute substantially all of the net proceeds of
the Offering to the Operating Partnership in exchange for an approximate 90.4%
limited partnership interest in the Operating Partnership. The Company will also
hold a 1.0% general partnership interest in the Operating Partnership. The Prior
Owners will contribute two Properties (or interests therein) to the Operating
Partnership in exchange for cash and an aggregate of 415,312 OP Units,
representing an approximate 8.6% limited partnership interest in the Operating
Partnership. The Partnership Agreement provides that if the Operating
Partnership requires additional funds, any partner may, but is not required to,
make an additional capital contribution to the Operating Partnership.
Furthermore, the general partner may loan to the Operating Partnership the
proceeds of any loan obtained or debt securities issued by the Company so long
as the terms of such loan to the Operating Partnership are substantially
equivalent to the loan obtained or debt securities issued by the Company. If any
partner so contributes additional capital to the Operating Partnership, the
partner will receive additional OP Units and its percentage interests in the
Operating Partnership will be increased on a proportionate basis based upon the
amount of such additional capital contributions and the value of the Operating
Partnership at the time of such contributions. Conversely, the percentage
interests of the other partners will be decreased on a proportionate basis in
the event of additional capital contributions by the Company. Under the
Partnership Agreement, the Company generally is obligated to contribute the
proceeds of a securities offering as additional

<PAGE> 67

capital to the Operating Partnership in exchange for additional OP Units.

PARTNERS

Unless the general partner determines in good faith that the Operating
Partnership will not be classified as a publicly traded partnership for federal
income tax purposes, the Partnership shall not at any time have more than 100
partners.

TERM

The Operating Partnership will continue in full force and effect until
December 31, 2097, or until sooner dissolved pursuant to the terms of the
Partnership Agreement.

TAX MATTERS

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

<PAGE> 68

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the
beneficial ownership of the Common Shares and OP Units immediately following the
consummation of the Offering and the Formation Transactions by (i) persons who
will own beneficially more than 5% of the outstanding Common Shares or OP Units;
(ii) each Trust Manager and the executive officers of the Company; and (iii) the
Trust Managers and executive officers as a group. Unless otherwise indicated,
each person named in the table has sole voting and investment power with respect
to all of the Common Shares and OP Units shown as beneficially owned by such
person:

<TABLE>
<CAPTION>
Percentage
Number of Percent of Interest in
Common Shares Common Shares Number of Operating
Name of Beneficial Owner Beneficially Owned Outstanding OP Units (1) Partnership
- ------------------------ ------------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
David R. Merker 89,258 1.8%
Arthur F. Lorentzen, Jr. 48,430 1.0%
Edward M. Fishman 3,572 *
Ralph and Betty Engelstad (2) 415,312 8.57%
Trust Managers/Officers 141,260 2.9%
as a Group (3 persons)
</TABLE>

- ------------------
* Less than 1%.
(1) OP Units (other than those owned by the Company) may be redeemed one year
after the completion of the Offering for cash or, at the option of the
Company, for Common Shares on a one-for-one basis.
(2) Ralph Engelstad and Betty Engelstad will be the beneficial owners under
Rule 13d-3 of the Exchange Act of the 184,906 OP Units to be held by
Bayview Investments, Inc., the 92,107 OP Units to be held by Imperial
Warehouse, Inc., and the 138,299 OP Units to be held by Polaris Warehouse,
Inc. Bayview Investments, Inc., Imperial Warehouse, Inc. and Polaris
Warehouse, Inc. are Prior Owners.

<PAGE> 69

DESCRIPTION OF SHARES OF BENEFICIAL INTEREST

GENERAL

The Charter authorizes the Company to issue up to 100,000,000 Common
Shares at $0.005 par value per share and 10,000,000 Preferred Shares at $0.005
par value per share. Upon completion of the Offering, 4,846,572 Common Shares
will be issued and outstanding (including 415,312 Common Shares issuable upon
the conversion of OP Units). Not included in the issued and outstanding Common
Shares are 643,500 Common Shares that may be purchased by the Underwriters to
cover over-allotments. After the Offering, no Preferred Shares will be issued or
outstanding.

Common Shares of Beneficial Interest. Each outstanding Common Share
entitles the holder to one vote on all matters submitted to a vote of
shareholders, including the election of Trust Managers. There is no cumulative
voting in the election of Trust Managers, which means that the holders of a
majority of the outstanding Common Shares can elect all of the Trust Managers
then standing for election. Holders of Common Shares are entitled to such
distributions as may be declared from time to time by the Trust Managers out of
funds legally available therefor. See "Distribution Policy."

Holders of Common Shares have no conversion, redemption or preemptive
rights to subscribe for any securities of the Company. All outstanding Common
Shares will be fully paid and nonassessable. In the event of any liquidation,
dissolution or winding-up of the affairs of the Company, holders of Common
Shares will be entitled to share ratably in the assets of the Company remaining
after provision for payment of liabilities to creditors and payment of
liquidation preferences to holders of outstanding Preferred Shares, if any.

Preferred Shares. The Trust Managers are authorized (without any
further action by the shareholders) to issue Preferred Shares in one or more
series and to fix the voting rights, liquidation preferences, dividend rates,
conversion rights, redemption rights and terms, including sinking fund
provisions, and certain other rights and preferences. Satisfaction of any
dividend preferences of outstanding Preferred Shares would reduce the amount of
funds available for the payment of dividends on the Common Shares. Also, holders
of Preferred Shares would normally be entitled to receive a preference payment
in the event of any liquidation, dissolution or winding up of the Company before
any payment is made to the holders of Common Shares. In addition, under certain
circumstances, the issuance of Preferred Shares may render more difficult or
tend to discourage a merger, tender offer or proxy contest, the assumption of
control by a holder of a large block of the Company's securities, or the removal
of incumbent Management. The Trust Managers, without shareholder approval, may
issue Preferred Shares with voting and conversion rights which could adversely
affect the holders of Common Shares.

The Preferred Shares and the variety of related terms, rights and
preferences offers the Company flexibility in financing and acquisition
transactions. An issuance of such shares could dilute the book value or
adversely affect the relative voting power of the Common Shares. The issuance of
such shares could be used to discourage unsolicited business combinations, for
example, by providing for class voting rights that would enable the holders of
Preferred Shares to block such a transaction. Although the Trust Managers are
required when issuing such securities to act based on their best judgment as to
the best interests of the shareholders of the Company, the Trust Managers could
act in a manner that would discourage or prevent a transaction that some
shareholders might believe is in the Company's best interests or in which
shareholders could or would receive a premium for their shares over the market
price. Any Preferred Shares issued would be subject to restrictions similar to
those set forth under "Restrictions on Transfer" below.

The Company has no present intention to issue any Preferred Shares or
any other new class of securities.

RESTRICTIONS ON TRANSFER

For the Company to qualify as a REIT under the Code, (i) not more than
50% in value of its outstanding Trust Shares may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year; (ii) the Trust Shares
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months or during a proportionate part of a shorter taxable
year; and (iii) certain percentages of the Company's gross income must be from
particular activities. See "Federal Income Tax Consequences." Because the Trust
Managers believe it is essential for the Company to continue to qualify as a
REIT, the Charter, subject to certain exceptions, provides that no holder other
than any person approved by the Trust Managers, at their option and in their
discretion (provided that such approval will not result in the termination of
the status of the Company as a REIT), may own, or be deemed to own by virtue of
the attribution provisions of the Code, more than 9.8%

<PAGE> 70

of the number or value (in either case as determined in good faith by the Trust
Managers) of the outstanding shares of any class or series of Trust Shares. The
Trust Managers may waive the Ownership Limit if evidence satisfactory to the
Trust Managers and the Company's tax counsel is presented that such ownership
will not then or in the future jeopardize the Company's status as a REIT. The
foregoing restrictions on transferability and ownership will not apply if the
Trust Managers determine that it is no longer in the best interests of the
Company to attempt to qualify, or to continue to qualify, as a REIT. Any
transfer or issuance of Trust Shares or any security convertible into Trust
Shares that would (i) create a direct or indirect ownership of Trust Shares in
excess of the Ownership Limit; (ii) with respect to transfers only, result in
the Trust Shares being owned by fewer than 100 persons; (iii) result in the
Company being "closely held" within the meaning of Section 856(h) of the Code;
(iv) result in the Company owning, directly or indirectly, 10% or more of the
ownership interests in any tenant or subtenant; or (v) result in the Company's
disqualification as a REIT, shall be null and void, and the intended transferee
will acquire no rights to the Trust Shares. The Company's Charter provides that
any or all securities ("Excess Securities") that are proposed to be transferred
pursuant to a transfer which, if consummated, would result in the intended
transferee owning Trust Shares in excess of the Ownership Limit, or would
otherwise violate the restrictions on transfer set forth in the charter, shall
be deemed to be transferred to a trust ("Beneficial Trust") to be held for the
exclusive benefit of a charitable beneficiary. The trustee of the Beneficial
Trust, as record holder of the Excess Securities, shall be entitled to receive
all dividends and distributions as may be declared by the Board of Trust
Managers on such Excess Securities for the benefit of the charitable
beneficiary, and the trustee of the Beneficial Trust shall be entitled to vote
all Excess Securities. The trustee of the Beneficial Trust may select a
transferee to whom the Excess Securities may be sold (as long as such sale does
not violate the Ownership Limit or the other restrictions on transfer), and the
intended transferee (the transferee of the Excess Securities whose ownership
would violate the Ownership Limit or the other restrictions on transfer) shall
receive from the trustee of the Beneficial Trust the lesser of (i) such sale
proceeds, or (ii) the price per share the intended transferee paid for the
Excess Securities (or, in the case of a gift or devise to the intended
transferee, the price per share equal to the market value per share on the date
of the transfer to the intended transferee). Any amounts received by the trustee
of the Beneficial Trust in respect of such Excess Securities and in excess of
such amounts to be paid the intended transferee shall be distributed to the
charitable beneficiary. In addition, the Company shall have the right to
purchase any Excess Securities for a period of ninety days after the transfer
that created such Excess Securities. Any dividend or distribution paid to an
intended transferee on Excess Securities prior to the discovery by the Company
that such Excess Securities have been transferred in violation of the provisions
of the Charter shall be paid to the trustee of the Beneficial Trust for the
benefit of the charitable beneficiary. If the foregoing transfer restrictions
are determined to be void or invalid by virtue of any legal decision, statute,
rule or regulation, then the intended transferee of any Excess Securities may be
deemed, at the option of the Company, to have acted as an agent on behalf of the
Company in acquiring such Excess Securities and to hold such Excess Securities
on behalf of the Company.

PREEMPTIVE RIGHTS AND CUMULATIVE VOTING

The Common Shares issued by the Company will have no preemptive rights,
and no shareholder may cumulate his votes in the election of Trust Managers. The
prohibition on cumulative voting is intended to insure that the vote of holders
of a majority of outstanding voting Common Shares elects Trust Managers, rather
than a plurality of the voting Common Shares voted in the election of Trust
Managers.

SHARE DISTRIBUTIONS

The Charter allows for the payment of Common Share distributions to be
paid in Common Shares of the Company, cash or property. The general effect of
the provision is to afford the Company greater flexibility in the means by which
it pays distributions to its shareholders. When making a determination of
whether to declare a distribution, the Trust Managers shall make the
determination consistent with their fiduciary duties as Trust Managers. No
distribution may be declared or paid, however, when the Company is unable to pay
its debts as they become due in the usual course of its business, or when the
payment of such distribution would result in the Company being unable to pay its
debts as they become due in the usual course of business.

REDEMPTION OF COMPANY SHARES

Pursuant to the Charter, the Company may purchase or redeem its own
shares, subject to the limitations of the Texas REIT Act, which allows REITs
formed thereunder to redeem or repurchase shares, unless (i) after giving effect
thereto, the Company would be insolvent or (ii) the amount paid therefor would
exceed the surplus of the Company. This provision affords the Company with a
means of distributing assets by acquiring shares, as well as the ability to
redeem shares in transactions in which such a redemption may be beneficial to
the Company and its shareholders.

<PAGE> 71

VOTING RIGHTS

Each shareholder shall be entitled at each meeting of shareholders to
one vote on each matter submitted to a vote at such meeting for each share
having voting rights registered in his name on the books of the Company at the
time of the closing of the share transfer books (or at the record date) for such
meeting. When a quorum is present at any meeting (and not withstanding the
subsequent withdrawal of enough shareholders to leave less than a quorum
present), the votes of a majority of the Common Shares entitled to vote, present
in person or by proxy, shall decide any matter submitted to such meeting, unless
the matter is one upon which by law or by express provision of the Charter or of
the Bylaws the vote of a greater number is required, in which case the vote of
such greater number shall govern and control the decision of such matter. In
determining the number of Common Shares entitled to vote, shares abstaining from
voting or not voted on a matter (including elections) will not be treated as
entitled to vote.

<PAGE> 72

CERTAIN PROVISIONS OF THE TEXAS REIT ACT AND OF
THE COMPANY'S CHARTER AND BYLAWS

The following paragraphs summarize certain provisions of Texas law and
the Charter and Bylaws. The summary does not purport to be complete and
reference is made to Texas law and the Charter and Bylaws, copies of which are
exhibits to the registration statement of which this Prospectus is a part.

BOARD OF TRUST MANAGERS

The Bylaws provide that the number of Trust Managers of the Company may
not be fewer than three nor more than ten. In accordance with the terms of the
Charter and Bylaws, the Board of Trust Managers currently consists of five
persons. The Board of Trust Managers is divided into three classes, as nearly
equal in number as possible. The term of office of the first class shall expire
at the first annual meeting of shareholders, the term of office of the second
class shall expire at the second annual meeting of shareholders, and the term of
office of the third class shall expire at the third annual meeting of
shareholders. At each annual meeting of shareholders commencing with the first
annual meeting held after such division into classes, Trust Managers elected to
succeed those Trust Managers whose terms then expire shall be elected for a
three year term of office, serving until their successors are duly elected and
qualified or until their death, resignation or removal.

The Bylaws provide that vacancies on the Board of Trust Managers may be
filled by successor Trust Managers either appointed by a majority of the
remaining Trust Managers or elected by the vote of the holders of at least
two-thirds of the outstanding Common Shares at an annual or special meeting of
shareholders. The Bylaws also provide that nominations of persons for election
as Trust Managers may be made at any annual meeting of shareholders (i) by or at
the direction of the Trust Managers or (ii) by any shareholder of the Company
who is a shareholder of record on the date of the giving of notice provided for
in the Bylaws and on the record date for the determination of shareholders
entitled to vote at such annual meeting and who complies with the notice
procedures set forth in the Bylaws. The Bylaws require Trust Manager nominees
who have not been previously elected as Trust Managers by the shareholders of
the Company to be elected at the annual meeting of shareholders by the
affirmative vote of two-thirds of the outstanding Common Shares entitled to vote
thereon. Trust Managers who have been previously elected by the shareholders of
the Company may be re-elected by the affirmative vote of a majority of the
Common Shares entitled to vote on such matter.

REMOVAL OF TRUST MANAGERS

The Charter and Bylaws require the affirmative vote of two-thirds of
the outstanding Common Shares to remove a Trust Manager, with or without cause.

BUSINESS COMBINATIONS

The Charter requires that except in certain circumstances, a Business
Combination (as defined below) between the Company and a Related Person (as
defined below) must be approved by the affirmative vote of the holders of not
less than 80% of the outstanding Common Shares of the Company, including the
affirmative vote of the holders of not less than 50% of the outstanding Common
Shares not owned by the Related Person. The 50% voting requirement, however, is
not applicable if the Business Combination is approved by the affirmative vote
of the holders of not less than 90% of the outstanding Common Shares.

The Charter provides that a "Business Combination" is: (i) any merger or
consolidation, if and to the extent permitted by law, of the Company or a
subsidiary, with or into a Related Person; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of more than 35% of the book
value of the total assets of the Company and its subsidiaries (taken as a
whole), to or with a Related Person; (iii) the issuance or transfer by the
Company or a subsidiary (other than by way of a pro rata distribution to all
shareholders) of any securities of the Company or a subsidiary of the Company to
a Related Person; (iv) any reclassification of securities (including any reverse
share split) or recapitalization by the Company, the effect of which would be to
increase the voting power of the Related Person; (v) the adoption of any plan or
proposal for the liquidation or dissolution of the Company proposed by or on
behalf of a Related Person which involves any transfer of assets, or any other
transaction, in which the Related Person has any direct or indirect interest
(except proportionally as a shareholder); (vi) any series or combination of
transactions having, directly or indirectly, the same or substantially the same
effect as any of the foregoing; and (vii) any agreement, contract or other
arrangement providing, directly or indirectly, for any of the foregoing.

A "Related Person" generally is defined in the Charter to include any
individual, corporation, partnership or

<PAGE> 73

other person and the affiliates and associates of any such individual,
corporation, partnership or other person that individually or together is the
beneficial owner in the aggregate of more than 50% of the outstanding Common
Shares of the Company.

The 80% and 50% voting requirements described above will not apply if:
(i) the Trust Managers, by a vote of not less than 80% of the Trust Managers
then holding office, (a) have expressly approved in advance the acquisition of
Shares of the Company that caused the Related Person to become a Related Person
or (b) have expressly approved the Business Combination prior to the date on
which the Related Person involved in the Business Combination shall have become
a Related Person; or (ii) the Business Combination is solely between the Company
and another entity, 100% of the voting stock, shares or comparable interests of
which is owned directly or indirectly by the Company; or (iii) the Business
Combination is proposed to be consummated within one year of the consummation of
a Fair Tender Offer (as defined in the Charter) by the Related Person in which
Business Combination the cash or fair market value of the property, securities
or other consideration to be received per share by all remaining holders of
Common Shares of the Company in the Business Combination is not less than the
price offered in the Fair Tender Offer; or (iv) all of the following conditions
have been met: (a) the Business Combination is a merger or consolidation, the
consummation of which is proposed to take place within one year of the date of
the transaction pursuant to which such person became a Related Person and the
cash or fair market value of the property, securities or other consideration to
be received per share by all remaining holders of Common Shares of the Company
in the Business Combination is not less than the highest per share price, with
appropriate adjustments for recapitalizations, share splits and share dividends,
paid by the Related Person in acquiring any of its Common Shares (the "Fair
Price"); (b) the consideration to be received by such holders is either cash or,
if the Related Person acquired the majority of its Common Shares for a form of
consideration other than cash, the same form of consideration with which the
Related Person acquired such majority; (c) after such person has become a
Related Person and prior to consummation of such Business Combination: (1) there
has been no reduction in the annual rate of dividends, if any, paid on the
Company's Common Shares (adjusted as appropriate for recapitalizations, share
splits, reverse share splits and share dividends), except any reduction that is
made proportionately with any decline in the Company's net income for the period
for which such dividends are declared and except as approved by a majority of
the Trust Managers continuing in office, and (2) such Related Person has not
received the benefit, directly or indirectly (except proportionately as a
shareholder), of any loans, advances, guarantees, pledges or other financial
assistance or any tax credits or other tax advantages provided by the Company
prior to the consummation of such Business Combination (other than in connection
with financing a Fair Tender Offer); and (d) a proxy statement that conforms
with the provisions of the Exchange Act and the rules and regulations thereunder
has been mailed to holders of the Company's Common Shares at least 45 days prior
to the consummation of the Business Combination for the purpose of soliciting
shareholder approval of the Business Combination; or (v) the Rights (as
hereinafter defined) have become exercisable.

If a person has become a Related Person and within one year after the
date of the transaction pursuant to which the Related Person became a Related
Person (the "Acquisition Date"), (x) a Business Combination meeting all of the
requirements of clause (iv) above has not been consummated, and (y) a Fair
Tender Offer has not been consummated, and (z) the Company has not been
dissolved and liquidated, then, in such event the beneficial owner of each
Common Share (not including shares beneficially owned by the Related Person)
shall have the Right (a "Right"), commencing at the opening of business on the
one-year anniversary date of the Acquisition Date and continuing for a period of
90 days thereafter (the "Exercise Period"), subject to certain extensions, to
sell to the Company one Share at the Fair Price upon the exercise of such Right.
At the end of the Exercise Period, each Right not exercised shall become void
and all rights in respect thereof shall cease as of such time.

SHAREHOLDER LIABILITY

Both the Texas REIT Act and the Bylaws provide that shareholders of the
Company shall not be liable personally or individually in any manner whatsoever
for any debt, act, omission or obligation incurred by the Company or Trust
Managers and shall be under no obligation to the Company or its creditors with
respect to their shares other than the obligation to pay to the Company the full
amount of the consideration for which their shares were issued.

TRUST MANAGER LIABILITY

Pursuant to the Texas REIT Act, the Charter provides that each Trust
Manager shall be indemnified against all judgments, penalties (including excise
and similar taxes), fines, amounts paid in settlement and reasonable expenses
actually incurred by the Trust Manager in connection with any Proceeding (as
defined in the Charter) in which he or she was, is or is threatened to be named
defendant or respondent, or in which he or she was or is a witness without being
named a defendant or respondent, by reason, in whole or in part, of his or her
serving or having served, or having been

<PAGE> 74

nominated or designated to serve, as a Trust Manager, to the fullest extent that
indemnification is permitted by Texas law. This indemnification shall not be
deemed exclusive of, or to preclude, any other rights to which those seeking
indemnification may at any time be entitled under the Bylaws, any law, agreement
or vote of shareholders or disinterested Trust Managers, or otherwise.

SPECIAL SHAREHOLDER MEETINGS

The Texas REIT Act provides that holders of 10% or more of the Common
Shares entitled to vote may call a special meeting of shareholders of a REIT
formed under the Texas REIT Act unless the declaration of trust for such REIT
provides otherwise. The Charter provides for the holders of 5% or more of the
Common Shares to call a special meeting of shareholders. Without this provision
in the Charter, the Texas REIT Act might prevent special meetings from ever
being called by shareholders of the Company in light of the Ownership Limit,
which, in order to protect the Company's continued qualification as a REIT,
generally limits the ownership of the Company's Common Shares by a person to
9.8% of the Company's outstanding Common Shares.

TERMINATION OF THE COMPANY

The Charter permits the termination of the Company and the
discontinuation of the operations of the Company by the affirmative vote of the
holders of a majority of the outstanding voting Common Shares.

AMENDMENT OF CHARTER AND BYLAWS

The Charter may be amended from time to time by the affirmative vote of
the holders of at least two-thirds of the outstanding Common Shares, except for
certain provisions of the Charter that relate to Business Combinations, number
and removal of Trust Managers, certain Trust business and share ownership
requirements, which may not be amended or repealed, or provisions inconsistent
therewith adopted, except by the affirmative vote of the holders of at least 80%
of the outstanding Common Shares. The Bylaws may be amended by an affirmative
vote of a majority of the Trust Managers. The Bylaws may also be amended, to the
extent not inconsistent with the Texas REIT Act and the Charter and specified in
the notice of the applicable meeting, by an affirmative vote of two-thirds of
the outstanding Common Shares with respect to certain sections relating to
business that may be conducted at the annual meeting, election of Trust
Managers, nomination of Trust Managers, removal of Trust Managers, vacancies on
the Board of Trust Managers and amendment of the Bylaws. The Bylaws may
otherwise be amended by a majority vote of the outstanding Common Shares.

<PAGE> 75

SHARES AVAILABLE FOR FUTURE SALE

Upon consummation of the Offering, the Company will have 4,431,260
Common Shares outstanding (assuming the Underwriters' over-allotment option to
purchase an additional 643,500 Common Shares is not exercised), of which 141,260
Common Shares will constitute "restricted" securities as that term is defined in
Rule 144 under the Securities Act. The 141,260 restricted Common Shares are
subject to 180 day lock-up agreements with the Underwriters, which the
Underwriters may waive in their sole discretion. Such Common Shares will become
eligible for sale in the public market upon registration or from time to time
upon the expiration of the two-year holding period under Rule 144 on February
11, 2000. The remaining Common Shares issued in the Offering will be freely
tradable by persons other than "affiliates" of the Company without restriction
under the Securities Act.

The Prior Owners will be issued 415,312 OP Units in connection with the
Formation Transactions. Such Common Shares may be redeemed for cash or, at the
option of the Company, Common Shares on a one-for-one basis beginning one year
after the date of the Offering. The Company intends to register the Common
Shares that may be issued upon redemption of OP Units. Accordingly, the Common
Shares received by the Prior Owners upon redemption of the OP Units likely will
be freely tradeable after they are redeemed for Common Shares.

In general, under Rule 144 as currently in effect, if one year has
elapsed since the later of the date of acquisition of restricted securities from
the Company or from any "affiliate" of the Company, as that term is defined
under the Securities Act, the acquiror or subsequent holder thereof is entitled
to sell within any three-month period a number of Common Shares that does not
exceed the greater of 1% of the then-outstanding Common Shares or the average
weekly trading volume of the Common Shares on all exchanges and/or reported
through the automated quotation system of a registered securities association
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Commission. Sales under Rule 144 are also subject to certain
manner of sale provisions, notice requirements and the availability of current
public information about the Company. If one year has elapsed since the date of
acquisition of restricted securities from the Company or from any "affiliate" of
the Company, and the acquiror or subsequent holder thereof is deemed not to have
been an affiliate of the Company at any time during the three months preceding a
sale, such person would be entitled to sell such Common Shares in the public
market under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements of Rule
144.

In addition, Rule 144A as currently in effect, in general, permits
unlimited resales of certain restricted securities of any issuer provided that
the purchaser is an institution that owns and invests on a discretionary basis
at least $100 million in securities or is a registered broker-dealer that owns
and invests at least $10 million in securities. Rule 144A allows the existing
shareholders of the Company to sell their Common Shares to such institutions and
registered broker-dealers without regard to any volume or other restrictions.
Unlike Rule 144, restricted securities sold under Rule 144A to non-affiliates do
not lose their status as "restricted securities."

Prior to the date of this Prospectus, there has been no public market
for the Common Shares. Trading of the Common Shares is expected to commence
following the completion of the Offering. No prediction can be made as to the
effect, if any, that future sales of shares, or the availability of shares for
future sale, will have on the market price prevailing from time to time. Sales
of substantial amounts of Common Shares or the perception that such sales may
occur could adversely affect prevailing market prices of the Common Shares. The
Trust Managers and certain executive officers of the Company and the Company
have agreed not to offer, sell, contract to sell or otherwise dispose of any
Common Shares for a period of 180 days from the closing of the Offering, without
the prior consent of Morgan Keegan & Company, Inc.

<PAGE> 76

FEDERAL INCOME TAX CONSEQUENCES

The Company intends to elect to be taxed as a REIT for federal income
tax purposes commencing with its tax year ended December 31, 1998. The following
general summary of the federal tax rules governing a REIT and its shareholders
is based on the Code, judicial decisions, Treasury Regulations, rulings and
other administrative interpretations, all of which are subject to change.
Because many provisions of the Code have been revised substantially by recent
legislation, very few judicial decisions, Treasury Regulations, rulings or other
administrative pronouncements have been issued interpreting many of the
revisions to the Code. Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. has acted as
counsel to the Company and has reviewed this summary and has rendered an opinion
that the description of the law and the legal conclusions contained herein are
correct in all material respects, and the discussion hereunder fairly summarizes
the federal income tax considerations that are likely to be material to the
Company and a holder of a Common Share. However, Investors should be aware that
Congress continues to consider new tax bills. Accordingly, no assurance can be
given that future legislation, administrative regulations, rulings, or
interpretations or court decisions will not alter significantly the tax
consequences described below or that such changes or decisions will not be
retroactive. The Company has not requested, nor does it presently intend to
request, a ruling from the Service with respect to any of the matters discussed
below. Because the provisions governing REITs are complex, no attempt is made in
the following discussion to discuss in detail all of the possible tax
consequences applicable to the Company or its shareholders, including state tax
laws. ACCORDINGLY, THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL
TAX PLANNING AND EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT HIS OR HER OWN
TAX ADVISOR WITH SPECIFIC REFERENCE TO HIS OR HER OWN TAX SITUATION BEFORE
PURCHASING COMMON SHARES.

GENERAL

In general, as long as the Company qualifies as a REIT, it will not be
subject to federal income tax on income or capital gain that it distributes in a
timely manner to shareholders. The Company will, however, be subject to tax at
normal corporate rates upon any taxable income or capital gain not distributed.

In addition to the opinion filed as an exhibit to the registration
statement of which this Prospectus is a part, the Company and the Underwriters
will, prior to the closing of this offering, obtain an opinion of Liddell, Sapp,
Zivley, Hill & LaBoon, L.L.P., counsel to the Company, that the Company has been
organized in conformity with the requirements for qualification as a REIT for
federal income tax purposes and that its anticipated investments and its plan of
operation (which plan includes complying with all of the REIT requirements
described in this Prospectus) will enable it to continue to so qualify. Unlike a
tax ruling (which will not be sought), an opinion of counsel, which is based on
counsel's review and analysis of existing law, is not binding on the Service.
Accordingly, no assurance can be given that the Service would not successfully
challenge the tax status of the Company as a real estate investment trust. It
must be emphasized that this opinion is based on various assumptions and is
conditioned upon certain representations made by the Company as to factual
matters. In addition, this opinion is based upon the factual representations of
the Company concerning its business and properties as set forth in this
Prospectus and assumes that the actions described in this Prospectus are
completed in a timely fashion. Moreover, such qualification and taxation as a
REIT depends upon the Company's ability to meet, through actual annual operating
results, distribution levels, diversity of stock ownership, and the various
other qualification tests imposed under the Code discussed below, the results of
which will not be reviewed by Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
Accordingly, no assurance can be given that the actual results of the Company's
operations for any particular taxable year will satisfy such requirements. See
"Federal Income Tax Consequences--Failure to Qualify."

If the Service successfully challenged the tax status of the Company as
a REIT, all of the Company's income and capital gains would become subject to
federal income tax (including any applicable alternative minimum tax) at
corporate rates. Consequently, the amount of after tax earnings available for
distribution to shareholders would decrease substantially. In addition, "net
capital gain" (net long-term capital gain in excess of net short-term capital
loss) distributed by the Company would be taxed as ordinary dividends to
shareholders rather than as long-term capital gain. The Company would not be
eligible to re-elect REIT status under the Code until the fifth taxable year
beginning after the taxable year in which it failed so to qualify, unless its
failure to qualify was due to reasonable cause and not to willful neglect and
certain other requirements were satisfied. Also, immediately prior to
requalification as a REIT under the Code, the Company could be taxed on any
unrealized appreciation in its assets.

Qualification of the Company as a REIT for federal tax purposes will
depend on its continuing to meet various requirements governing, among other
things, the ownership of its Common Shares, the nature of its assets, the
sources of its income, and the amount of its distributions to shareholders.
Although the Trust Managers intend to cause the

<PAGE> 77

Company to continue to operate in a manner that will enable it to comply with
such requirements, there can be no certainty that such intention will be
realized. In addition, because the relevant laws may change, compliance with one
or more of the REIT requirements may be impossible or impractical.

Notwithstanding its qualification as a REIT, the Company may also be
subject to taxation in certain other circumstances. If the Company should fail
to satisfy the 75% or the 95% gross income test (as discussed below), and
nonetheless maintains its qualification as a REIT because certain other
requirements are met, it will be subject to a 100% tax on the gross income
attributable to the greater of the amount by which the Company fails the 75% or
the 95% test, multiplied by a fraction intended to reflect the Company's
profitability. The Company will also be subject to a tax of 100% on net income
from "prohibited transactions" (which are, in general, certain sales or other
dispositions of property held primarily for sale to customers in the ordinary
course of business, other than foreclosure property) and, if the Company has (i)
net income from the sale or other disposition of "foreclosure property"
(generally, property acquired by reason of a default on indebtedness or a lease)
which is held primarily for sale to customers in the ordinary course of business
or (ii) other non-qualifying income from foreclosure property, it will be
subject to tax on such income from foreclosure property at the highest corporate
rate. In addition, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior years, the Company would be subject to a
4% excise tax on the excess of such required distribution over the amounts
actually distributed. The Company may also be subject to the corporate
"alternative minimum tax," on its undistributed items of tax preference, as well
as tax in certain situations not presently contemplated. If the Company acquires
any asset from a C corporation (i.e., generally a corporation subject to full
corporate-level tax) in certain transactions in which the basis of the asset in
the hands of the Company is determined by reference to the basis of the asset
(or any other property) in the hands of the C corporation, and the Company
recognizes gain on the disposition of such asset during the ten-year period
beginning on the date on which such asset was acquired by the Company (the
"Recognition Period"), then, pursuant to Treasury Regulations that have not yet
been issued and to the extent of the excess of the fair market value of the
asset as of the date of the Company's acquisition over the Company's adjusted
basis in such asset on such date, such gain will be subject to tax at the
highest regular corporate rate. The results described above with respect to
assets acquired from a C corporation assume that the Company will make an
election pursuant to Internal Revenue Service Notice 88-19 and that the
availability or nature of such election is not modified as proposed in President
Clinton's 1999 federal budget proposal.
See "Proposed Tax Legislation."

REQUIREMENTS FOR QUALIFICATION AS A REAL ESTATE INVESTMENT TRUST

Although the Company must meet certain qualifications to be a real
estate investment trust under the Texas REIT Act (see "Certain Provisions of the
Texas REIT Act and of the Company's Charter and Bylaws"), the Company must
independently qualify as a REIT under the Code. To qualify as a REIT under the
Code, the Company must properly elect to be a real estate investment trust and
must satisfy various requirements in each taxable year. Generally, for federal
income tax purposes an entity will qualify as a REIT if it is a corporation,
trust or association (i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) which would be
taxable as a domestic corporation, but for Sections 856 through 859 of the Code;
(iv) which is neither a financial institution nor an insurance company subject
to certain provisions of the Code; (v) the beneficial ownership of which is held
by 100 or more persons; (vi) during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, directly or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) see "Federal Income Tax Consequences -Requirements for
Qualification as a Real Estate Investment Trust - Share Ownership"; and (vii)
which meets certain other tests, described below, regarding the nature of its
income and assets. The Code provides that conditions (i) to (iv), inclusive,
must be met during the entire taxable year and that condition (v) must be met
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. See "Federal Income
Tax Consequences -- Requirements for Qualification as a Real Estate Investment
Trust - Share Ownership". Conditions (v) and (vi) will not apply until after the
first taxable year for which an election is made to be taxed as a REIT.

The Company believes that it will have issued sufficient shares
pursuant to this Offering to allow it to satisfy conditions (v) and (vi). In
addition, the Charter provides for restrictions regarding the transfer and
ownership of shares, which restrictions are intended to assist the Company in
continuing to satisfy the share ownership requirements described in (v) and (vi)
above. Those restrictions may not ensure that the Company in all cases will be
able to satisfy the share ownership requirements described above. If the Company
fails to satisfy those share ownership requirements, the Company's status as a
REIT will terminate. See "Federal Income Tax Consequences -- Failure to
Qualify". However, if the Company complies with Treasury Regulations for
ascertaining the ownership of its shares (see "Federal Income Tax Consequences
- -- Requirements for Qualification as a Real Estate Investment Trust -- Share
Ownership") and does

<PAGE> 78

not know or, exercising reasonable diligence would not have known, whether it
failed condition (vi) in a taxable year, it will be treated as meeting condition
(vi) for such taxable year.

Code Section 856(i) provides that a corporation that is a "qualified
REIT subsidiary" shall not be treated as a separate corporation, and all assets,
liabilities, and items of income, deduction, and credit of a "qualified REIT
subsidiary" shall be treated as assets, liabilities, and items of income,
deduction, and credit of the REIT. A "qualified REIT subsidiary" is a
corporation, 100% of the stock of which is held by the REIT. Thus, in applying
the requirements described herein, any "qualified REIT subsidiaries" acquired or
formed by the Company will be ignored, and all assets, liabilities, and items of
income, deduction, and credit of such subsidiaries will be treated as assets,
liabilities and items of income, deduction, and credit of the Company.

In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income of the partnership retain the same character in the hands of the REIT for
purposes of Section 856 of the Code, including satisfying the gross income tests
and the asset tests. Thus, the Company's proportionate share of the assets,
liabilities and items of income of the Operating Partnership will be treated as
assets, liabilities and items of income of the Company for purposes of applying
the requirements described herein. A summary of the rules governing the federal
income taxation of partnerships and their partners is provided below in "Federal
Income Tax Consideration--Tax Aspects of the Operating Partnership."

Share Ownership. (a) The beneficial ownership of the Company must be
held by a minimum of 100 persons for at least 335 days of a taxable year
consisting of 12 months (or a proportionate part of a taxable year consisting of
less than 12 full months), and (b) no more than 50% (by value) of the
outstanding shares of the Company may be owned (directly or under rules of
constructive ownership prescribed by the Code) by five or fewer individuals at
any time during the last half of a taxable year (the "50% Shareholder Test").
Certain tax-exempt entities are treated as individuals for purposes of the 50%
Shareholder Test. In addition, the applicable constructive ownership rules
provide, among other things, that Common Shares held by a corporation,
partnership, trust or estate will be regarded as being held proportionately by
its shareholders, partners or beneficiaries, as the case may be, and Common
Shares owned by certain persons will be regarded as being owned by certain
members of their families. Common Shares held by a qualified pension plan will
be treated as held proportionately by its beneficiaries; however, Common Shares
held by a qualified pension plan will be treated as held by one individual if
persons related to the plan (such as the employer, employees, officers, or Trust
Managers) own in the aggregate more than 5% by value of the Common Shares and
the Company has accumulated earnings and profits attributable to any period for
which it did not qualify as a REIT.

To assure continued compliance with the 50% Shareholder Test, the
Company's Charter prohibits any investor from acquiring an interest in the
Company such that the investor would own (or be deemed under the applicable
rules of constructive ownership to own) more than 9.8% of the outstanding Common
Shares, unless the Trust Managers are provided evidence satisfactory to them in
their sole discretion that the qualification of the Company as a REIT will not
be jeopardized.

Treasury Regulations require the Company to maintain records of the
actual and constructive beneficial ownership of its Common Shares. If the
Company fails to comply with regulations to ascertain its ownership in any
taxable year, it will be subject to a monetary penalty of $25,000 ($50,000 for
intentional violations) for failing to do so. The Company will also be required,
when requested by the IRS, to send curative demand letters. In accordance with
those Regulations, the Company must and will demand from shareholders written
statements concerning the actual and constructive beneficial ownership of Common
Shares. Any shareholder who does not provide the Company with required
information concerning share ownership will be required to include certain
information relating thereto with his income tax return.

Asset Diversification. At the close of each quarter of the taxable
year, at least 75% of the value of the Company's total assets must be
represented by "real estate assets" (which category includes interests in real
property, mortgages on real property and certain temporary investments), cash,
cash items and U.S. Government securities (the "75% Asset Test"). In addition,
at those times, no more than 25% of the value of the Company's total assets may
consist, in whole or in part, of securities in respect of any one issuer in an
amount greater in value than 5% of the value of the Company's total assets or
more than 10% of the outstanding voting securities of such issuer (the "25%
Asset Test"). See "Proposed Tax Legislation." If the Company is in violation of
the foregoing requirements (due to a discrepancy between the value of its
investments and such requirements) after the acquisition of any security or
property, then the Company will be treated as not violating the requirements if
it cures the violation within 30 days of the close of the quarter during which
the Company acquires such asset.

<PAGE> 79

While the Trust Managers intend to manage the Company to meet the 75%
Asset Test and 25% Asset Test, no assurance can be given that the Company will
be able to do so.

The assets of the Company's wholly-owned subsidiaries will be
attributed directly to the Company for purposes of the asset diversification
rules. Additionally, the Company will be deemed to own a proportionate share
(based upon its capital interest) of the assets of any partnerships in which the
Company owns an interest.

Sources of Income. The Company must satisfy two distinct income-based
tests for each taxable year: the "75% Income Test" and the "95% Income Test."

The 75% Income Test requires that at least 75% of the Company's gross
income (other than from certain "prohibited transactions") in each taxable year
consist of certain types of income identified in the Code, including qualifying
rents from real property; qualifying interest on obligations secured by
mortgages on real property or interests in real property; gain from the sale or
other disposition of real property (including interests in real property and
mortgages on real property) held for investment and not primarily for sale to
customers in the ordinary course of business; dividends or other distributions
on, and gain (other than gain from prohibited transactions) from the sale or
other disposition of transferable shares (or transferable certificates of
beneficial interest) in other REITs; abatements and refunds of taxes and real
property; income and gain from certain properties acquired by the Company
through foreclosure; certain commitment fees; gain from the sale or other
disposition of a real estate asset that is not a prohibited transaction solely
by reason of Code Section 857(b)(6); and income earned from certain qualifying
types of temporary investments. Income earned from qualifying temporary
investments means income that is (i) attributable to stock or debt instruments,
(ii) attributable to the temporary investment of capital received by the Company
from the issuance of shares of beneficial interest or from a public offering of
debt securities that have a maturity of at least five years, and (iii) received
or accrued within one year from the date the Company receives such capital.
Interest income and gain realized from the disposition of loans which are
secured solely by real property will constitute qualifying income for purposes
of the 75% Income Test, assuming that such interest income is not excluded from
the calculation of interest for purposes of the 75% Income Test by reason of
such interest being dependent on income or profits as described in Code Section
856(f) and assuming that any such loan which is disposed of is held for
investment and not primarily for sale to customers in the ordinary course of a
trade or business.

Under the 95% Income Test, at least 95% of the Company's gross income
(other than from certain "prohibited transactions") in each taxable year must
consist of income which qualifies under the 75% Income Test as well as dividends
and interest from any other source, gain from the sale or other disposition of
stock and other securities which are not dealer property, any payment to the
Company under an interest rate swap or cap agreement, option, futures contract,
forward rate agreement, or similar financial instrument entered into to reduce
interest rate risk with respect to indebtedness incurred or to be incurred to
acquire or carry real estate assets, and any gain from the disposition of such
an agreement.

The income of the Company's wholly-owned subsidiaries will be
attributed to the Company for purposes of the income tests described above.
Additionally, a proportionate share of the items of income of any partnership in
which the Company owns an interest will be attributed to the Company (based on
the Company's capital interest in any such partnership).

If the Company fails to meet the requirements of either or both the 75%
Income Test or the 95% Income Test in a taxable year but otherwise meets the
applicable requirements for qualification as a REIT, it may nevertheless
continue to qualify under the Code as a REIT if certain conditions are met.
While satisfaction of the conditions would prevent the Company from losing its
tax status as a REIT, the Company generally would be liable for a special tax
equal to 100% of the gross income attributable to the greater of the amount by
which the Company fails the 75% Income Test or the 95% Income Test, multiplied
by a fraction intended to reflect the Company's profitability.

Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if several conditions are met. First, the amount of rent 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 rents received
from a tenant will not qualify as "rents from real property" in satisfying the
gross income tests if the Company, or an owner of 10% or more of the Company,
directly or constructively owns 10% or more of such tenant (a "Related Party
Tenant"). Third, if rent attributable to personal property, leased in connection
with a lease of real property, is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to such personal property
will not qualify as "rents from real property."

<PAGE> 80

Finally, for rents received to qualify as "rents from real property," the
Company generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an independent
contractor from whom the Company derives no revenue; provided, however, the
Company may directly perform certain services that are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
otherwise considered "rendered to the occupant" of the property. Moreover,
pursuant to the Taxpayer Relief Act of 1997, the Company may derive income from
non-qualifying services provided to tenants or from managing or operating a
property which it owns as long as the Company's income from such services does
not exceed one percent of the Company's gross income from the property. The
Company does not and will not (i) charge rent for any property that is based in
whole or in part on the income or profits of any person (except by reason of
being based on a percentage of receipts or sales, as described above), (ii) rent
any property to a Related Party Tenant, (iii) derive rental income attributable
to personal property (other than personal property leased in connection with the
lease of real property, the amount of which is less than 15% of the total rent
received under the lease), or (iv) perform services considered to be rendered to
the occupant of the property (other than pursuant to the 1% exception described
above) other than through an independent contractor from whom the Company
derives no revenue. The Company believes that the aggregate amount of any
non-qualifying income in any taxable year will not exceed the limit on
non-qualifying income under the gross income tests.

Distribution Requirements. With respect to each taxable year, the
Company must distribute to shareholders an amount at least equal to the sum of
95% of its "REIT taxable income," computed without regard to the dividends paid
deduction and by excluding any net capital gain ("net investment income"), and
95% of the excess of its net income from "foreclosure property" over the federal
income tax imposed on such income, minus certain items of noncash income. As
noted under the caption "Distributions Policy," the Company intends to
distribute substantially all of its net investment income annually. The Company
likewise intends to distribute annually substantially all of its realized net
capital gains. The Service may waive the distribution requirements for any tax
year if the Company establishes that it was unable to meet such requirements by
reason of distributions previously made to meet the requirement of section 4981
of the Code (relating to the 4% federal excise tax on undistributed income
discussed below).

Unlike net investment income, the Company's net capital gain need not
be distributed in order for the Company to maintain its status under the Code as
a REIT; however, the Company will be taxable on any net capital gain and net
investment income which it fails to distribute in a timely manner. Pursuant to
the Taxpayer Relief Act of 1997, a REIT may elect to retain and pay income tax
on net long-term capital gains that it receives during a taxable year. If a REIT
makes this election, its shareholders are required to include in their income as
long-term capital gain their proportionate share of the undistributed long-term
capital gains so designated by the REIT. A shareholder will be treated as having
paid his or her share of the tax paid by the REIT in respect of long-term
capital gains so designated by the REIT, for which the shareholder will be
entitled to a credit or refund. In addition, the shareholder's basis in his or
her REIT shares will be increased by the amount of the REIT's designated
undistributed long-term capital gains that are included in the shareholder's
long-term capital gains, reduced by the shareholder's proportionate share of tax
paid by the REIT on those gains that the shareholder is treated as having paid.
The earnings and profits of the REIT will be reduced, and the earnings and
profits of any corporate shareholder of the REIT will be increased, to take into
account amounts designated by the REIT pursuant to this rule. A REIT must pay
its tax on its designated long-term capital gains within 30 days of the close of
any taxable year in which it designates long-term capital gains pursuant to this
rule, and it must mail a written notice of its designation to its shareholders
within 60 days of the close of the taxable year.

Distributions in excess of current and accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's shares, but rather will reduce the adjusted
basis of such shares. To the extent that such distributions exceed the adjusted
basis of a shareholder's shares they will be included in income as long-term
capital gain (or short-term capital gain if the shares have been held for one
year or less) assuming the shares are a capital asset in the hands of the
shareholder.

While the Company expects to meet its distribution requirements, its
ability to make distributions may be impaired if it has insufficient cash flow
or otherwise has excessive noncash income or nondeductible expenditures.
Furthermore, the distribution requirement may be determined not to have been met
in a given year by reason of the Service later successfully challenging the
deductibility of a Company expenditure. In such event, however, it may be
possible to cure a failure to meet the distribution requirement with a
"deficiency dividend," but if the Company uses that procedure, it may incur
substantial tax penalties and interest.

The Company will be subject to a nondeductible 4% federal excise tax
with respect to undistributed ordinary income and capital gain net income unless
it also meets a calendar year distribution requirement. To meet this
requirement, the Company must, in general, distribute with respect to each
calendar year an amount equal to the sum of (a) 85% of its ordinary income
(adjusted under the Code for various items), (b) 95% of its capital gains in
excess of its

<PAGE> 81

capital losses (subject to certain adjustments) and (c) any ordinary income and
capital gain net income not distributed in prior calendar years. To the extent
that the Company elects to retain and pay income tax on its net capital gain,
such retained amounts will be treated as having been distributed for purposes of
the 4% excise tax. The Company intends to make distributions to shareholders so
that it will not incur this tax but, as noted above, various situations could
make it impractical to meet the prescribed distribution schedule.

The Company is authorized to issue Preferred Shares. Should the Company
do so, and should the Company distribute a capital gain dividend while Preferred
Shares are outstanding, it may be required to designate a portion of dividends
entitled to be received by holders of the Preferred Shares as capital gain
dividends, thereby reducing the portion of total distributions paid to holders
of the Company's Common Shares which may be characterized as capital gains
dividends.

FEDERAL TAXATION OF THE COMPANY--SPECIFIC ITEMS

Dispositions of Assets. The Company may realize a gain or loss on the
disposition of an asset that it owns. The gain or loss may be capital or
ordinary in character, depending upon a number of factors and the tax rules
governing the type of disposition involved.

If the Company were deemed to be holding property (such as real
property or loans) primarily for sale to customers in the ordinary course of
business (i.e., as a "dealer"), then (a) any gains recognized by the Company
upon the disposition of such property would be subject to a 100% tax on
prohibited transactions and (b) depending on the composition of the Company's
total gross income, the Company could fail the 75% Income Test for qualification
as a real estate investment trust.

Under existing law, whether property is held primarily for sale to
customers in the ordinary course of business must be determined from all the
facts and circumstances surrounding the particular property and sale in
question. The Company intends to hold all property for investment purposes and
to make occasional dispositions which are, in the opinion of the Trust Managers,
consistent with the Company's investment objectives and in compliance with all
the rules discussed above governing the qualification of the Company for REIT
status under the Code. Accordingly, the Company does not expect to be treated as
a "dealer" with respect to any of its assets. No assurance, however, can be
given that the Service will not take a contrary position.

Alternative Minimum Tax. Under certain circumstances, the Company may
be subject to the alternative minimum tax on its undistributed items of tax
preference.

Net Income From Foreclosure Property. If the Company has net income
from foreclosure property, it will be subject to tax on such income at the
highest corporate rate. Foreclosure property generally means real property (and
any personal property incident to such real property) which is acquired as a
result of a default either on a lease of such property or on indebtedness which
such property secured and with respect to which an appropriate election is made.

PARTNERSHIP ANTI-ABUSE RULE

The United States Treasury Department has issued a regulation (the
"Anti-Abuse Rule") under the partnership provisions of the Code (the
"Partnership Provisions") that authorizes the Service, in certain "abusive"
transactions involving partnerships, to disregard the form of the transaction
and recast it for federal tax purposes as the Service deems appropriate. The
Anti-Abuse Rule applies where a partnership is formed or utilized in connection
with a transaction (or series of related transactions) with a principal purpose
of substantially reducing the present value of the partners' aggregate federal
tax liability in a manner inconsistent with the intent of the Partnership
Provisions. The Anti-Abuse Rule states that the Partnership Provisions are
intended to permit taxpayers to conduct joint business (including investment)
activities through a flexible economic arrangement that accurately reflects the
partners' economic agreement and clearly reflects the partners' income without
incurring any entity-level tax. The purposes for structuring a transaction
involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions.

The Anti-Abuse Rule contains an example in which a corporation that
elects to be treated as a REIT contributes substantially all of the proceeds
from a public offering to a partnership in exchange for a general partner
interest. The limited partners of the partnership contribute real property
assets to the partnership, subject to liabilities that exceed their

<PAGE> 82

respective aggregate bases in such property. In addition, the limited partners
have the right, beginning one year after the formation of the partnership, to
require the exchange of their limited partnership interests for cash or REIT
shares (at the Company's option) equal to the fair market value of their
respective interests in the partnership at the time of the exchange. The example
concludes that the use of the partnership is not inconsistent with the intent of
the Partnership Provisions and, thus, cannot be recast by the Service. Based on
the foregoing, the Company believes that the Anti-Abuse Rule will not have any
adverse impact on the Company's ability to qualify as a REIT. However, the
Anti-Abuse Rule is extraordinarily broad in scope and is applied based on an
analysis of all of the facts and circumstances. As a result, there can be no
assurance that the Service will not attempt to apply the Anti-Abuse Rule to the
Company. If the conditions of the Anti-Abuse Rule are met, the Service is
authorized to take appropriate enforcement action, including disregarding the
Operating Partnership for federal tax purposes or treating one or more of its
partners as nonpartners.

FAILURE TO QUALIFY

If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which the
Company 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 current and accumulated
earnings and profits, all distributions to shareholders 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 will also be
disqualified from taxation as a REIT for the taxable years following the year
during which qualification was lost. If the Company's election to be taxed as a
REIT is terminated, the Company will not be eligible to make a new election to
be taxed as a REIT prior to the fifth taxable year after the first taxable year
for which the termination is effective. It is not possible to state whether in
all circumstances the Company would be entitled to such statutory relief.

TAXATION OF SHAREHOLDERS

Distributions by the Company of net investment income will be taxable
to shareholders as ordinary income to the extent of the current or accumulated
earnings and profits of the Company. Distributions of net capital gain, if any,
designated by the Company as capital gain dividends or retained capital gain
generally will be taxable to shareholders as long-term capital gain, regardless
of the length of time the Common Shares have been held by the shareholders.
However, corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income pursuant to Section 291 of the Code.
All distributions are taxable, at least to the extent of the current or
accumulated earnings and profits of the Company, whether received in cash or
invested in additional Common Shares. Further, pursuant to the Taxpayer Relief
Act of 1997, a REIT may elect to retain and pay income tax on net long-term
capital gains that it receives during a taxable year. If a REIT makes this
election, its shareholders are required to include in their income as long-term
capital gain their proportionate share of the undistributed long-term capital
gains so designated by the REIT. A shareholder will be treated as having paid
his or her share of the tax paid by the REIT in respect of long-term capital
gains so designated by the REIT, for which the shareholder will be entitled to a
credit or refund. In addition, the shareholder's basis in his or her REIT shares
will be increased by the amount of the REIT's designated undistributed long-term
capital gains that are included in the shareholder's long-term capital gains,
reduced by the shareholder's proportionate share of tax paid by the REIT on
those gains that the shareholder is treated as having paid. The earnings and
profits of the REIT will be reduced, and the earnings and profits of any
corporate shareholder of the REIT will be increased, to take into account
amounts designated by the REIT pursuant to this rule. A REIT must pay its tax on
its designated long-term capital gains within 30 days of the close of any
taxable year in which it designates long-term capital gains pursuant to this
rule, and it must mail a written notice of its designation to its shareholders
within 60 days of the close of the taxable year. Distributions in excess of
current and accumulated earnings and profits will not be taxable to a
shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's shares, but rather will reduce the adjusted basis of such shares.
To the extent that such distributions exceed the adjusted basis of a
shareholder's shares they will be included in income as long-term capital gain
(or short-term capital gain if the shares have been held for one year or less)
assuming the shares are a capital asset in the hands of the shareholder. In
addition, any dividend declared by the Company in October, November or December
payable to shareholders of record on a date in such a month and paid during the
following January will be treated as having been received by shareholders on
December 31 in the year in which such dividends were declared. Income (including
dividends) from the Company normally will be characterized as "portfolio" income
(as opposed to "passive" income) for purposes of the tax rules governing
"passive" activities; accordingly, passive losses of the shareholder may not be
used to offset income derived by the shareholder from the Company.

In general, any loss upon a sale or exchange of shares by a shareholder
who has held such shares for six months

<PAGE> 83

or less (after applying certain holding period rules), will be treated as a
long-term capital loss to the extent of distributions from the Company required
to be treated by such shareholder as long-term capital gain.

None of the distributions from the Company (as a REIT) received by
corporate shareholders, whether characterized as ordinary income or capital
gain, will qualify for the dividends received deduction generally available to
corporations.

The Company may be required to withhold and remit to the Service 31% of
the dividends paid to any shareholder who (a) fails to furnish the Company with
a properly certified taxpayer identification number, (b) has under reported
dividend or interest income to the Service or (c) fails to certify to the
Company that he is not subject to backup withholding. Any amount paid as backup
withholding will be creditable against the shareholder's income tax liability.
The Company will report to its shareholders and the Service the amount of
dividends paid during each calendar year and the amount of any tax withheld.

In general, any gain or loss realized upon a taxable disposition of
Common Shares of the Company or upon receipt of a liquidating distribution by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the Common Shares have been held for more than one year
and as short-term capital gain or loss if the Common Shares have been held for
one year or less. The Taxpayer Relief Act of 1997 changed the tax rates and
holding periods applicable to long-term capital gains of noncorporate taxpayers.
In general, under applicable provisions of the Taxpayer Relief Act of 1997, the
maximum tax rate applicable to net capital gains of noncorporate taxpayers
realized upon the sale of property held for more than 18 months is 20% (10% for
individuals in a tax bracket below 28%), and the maximum tax rate on net capital
gains of noncorporate taxpayers realized upon the sale of property held for more
than one year but not more than 18 months is 28%. The maximum tax rate on
long-term capital gain from the sale or exchange of "section 1250 property"
(i.e., depreciable real property) held for more than 18 months is 25% to the
extent that such gain would have been treated as ordinary income if the property
were "section 1245 property." With respect to distributions designated by the
Company as capital gain dividends and any retained capital gains that the
Company is deemed to distribute, the Company may designate (subject to certain
limits) whether such a distribution is taxable to its noncorporate shareholders
at a 20%, 25%, or 28% rate. Because the tax rates and applicable holding periods
will vary depending upon a shareholder's individual circumstances, investors
should consult their own tax advisors concerning the effect of these Taxpayer
Relief Act of 1997 changes. If, however, the shareholder receives any capital
gain dividends with respect to Common Shares held six months or less, any loss
realized upon a taxable disposition of such Common Shares shall, to the extent
of such capital gain dividends, be treated as a long-term capital loss. All or a
portion of any loss realized upon a taxable disposition of Common Shares of the
Company may be disallowed if other Common Shares of the Company are purchased
(under a dividend reinvestment plan or otherwise) within 30 days before or after
the disposition.

TAXATION OF TAX-EXEMPT SHAREHOLDERS

Except as noted below, based upon a revenue ruling issued by the
Service, dividend distributions by the Company to a shareholder that is a
tax-exempt entity should not constitute "unrelated business taxable income"
("UBTI"), provided that the tax-exempt entity has not financed the acquisition
of its Common Shares with "acquisition indebtedness" within the meaning of the
Code and the Common Shares are not otherwise used in an unrelated trade or
business of the tax-exempt entity. However, if a tax-exempt entity borrows money
to purchase its Common Shares, a portion of its income from the Company will
constitute UBTI pursuant to the "debt-financed property" rules of the Code.
Furthermore, social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal service organizations
that are exempt from taxation under Code Sections 501(c)(7), (9), (17) and (20),
respectively, are subject to different UBTI rules, which generally will require
them to characterize distributions from the Company as UBTI. Also, it should be
noted that dividend distributions by a REIT to an exempt organization that is a
private foundation should constitute investment income for purposes of the
excise tax on net investment income of private foundations imposed by Section
4940 of the Code. If an employee trust qualified under Code Section 401(a) (a
"qualified trust") owns more than 10% by value of the Common Shares in the
Company at any time during a tax year, then a portion of the dividends paid by
the Company to such trust may be treated as UBTI, but only if (i) the Company
would not have qualified as a REIT but for the provisions of the Code which
"look through" such a qualified trust for purposes of determining ownership of a
REIT, (ii) at least one qualified trust holds more than 25% (by value) of the
Common Shares in the Company or one or more qualified trusts (each of which
holds more than 10% of the Common Shares) hold in the aggregate more than 50%
(by value) of the Common Shares, and (iii) at least 5% of the Company's gross
income (less direct expenses related thereto) is derived from the conduct of
unrelated trades or business, determined as if the Company were a tax-exempt
pension fund.

<PAGE> 84

Because of the complexity and variations of the UBTI rules, tax-exempt
entities should consult their own tax advisors.

TAXATION OF FOREIGN SHAREHOLDERS

The rules governing United States federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign shareholders (collectively, "non-U.S. shareholders") are complex
and no attempt will be made herein to provide more than a summary of such rules.
Prospective non-U.S. shareholders should consult with their own tax advisors to
determine the impact of federal, state and local income tax laws with regard to
an investment in Common Shares, including any reporting requirements.

Distributions that are not attributable to gain from sales or exchanges
by the Company of "United States Real Property Interests" and not designated by
the Company as capital gain dividends or retained capital gains will be treated
as dividends of ordinary income to the extent that they are made out of current
or accumulated earnings and profits of the Company. Generally, such
distributions will be subject to a U.S. withholding tax equal to 30% of the
gross amount of the distribution unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in the Common Shares
is treated as effectively connected with the non-U.S. shareholder's conduct of a
United States trade or business, the non-U.S. shareholder generally will be
subject to a tax at graduated rates, in the same manner as U.S. shareholders are
taxed with respect to such dividends (and may also be subject to the 30% branch
profits tax in the case of a shareholder that is a foreign corporation). The
Company expects to withhold United States income tax at the rate of 30% on the
gross amount of any such dividends made to a non-U.S. shareholder unless (a) a
lower treaty rate applies and the non-U.S. shareholder files an IRS Form 1001 or
(b) the non-U.S. shareholder files an IRS Form 4224 with the Company claiming
that the distribution is effectively connected income. Under recently
promulgated final Treasury Regulations that are effective for distributions made
after December 31, 1999 (the "New Withholding Regulations"), however, a non-U.S.
shareholder who wishes to claim the benefit of an applicable treaty rate will be
required to satisfy applicable certification requirements. In addition, under
the final Treasury Regulations, in the case of Common Shares held by a foreign
partnership, (x) the certification requirement generally will be applied to the
partners in the partnership and (y) the partnership will be required to provide
certain information, including a United States taxpayer identification number.
The New Withholding Regulations provide look-through rules in the case of tiered
partnerships. Shareholders that are partnerships or entities that are similarly
fiscally transparent for federal income tax purposes, and persons holding Common
Shares through such entities, may be subject to restrictions on their ability to
claim benefits under U.S. tax treaties and should consult a tax advisor.

The New Withholding Regulations also require a corporation that is a
REIT to treat as a dividend the portion of a distribution that is not designated
as a capital gain dividend or return of basis and apply the 30% withholding tax
(subject to any applicable deduction or exemption) to such portion, and to apply
the FIRPTA withholding rules (discussed below) with respect to the portion of
the distribution that could be designated by the REIT as capital gain dividend.
The New Withholding Regulations will generally be effective for payments made
after December 31, 1999, subject to certain transition rules.

In general, backup withholding and information reporting will not apply
to a payment of the proceeds of a sale of Common Shares to or through a foreign
office of a broker. If, however, such broker is, for U.S. federal income tax
purposes, a U.S. person, a controlled foreign corporation, or a foreign person
that derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States, such payments will not be
subject to backup withholding but will be subject to information reporting,
unless (i) such broker has documentary evidence in its records that the
beneficial owner is a non-U.S. shareholder (as defined below) and certain other
conditions are met, or (ii) the beneficial owner otherwise establishes an
exemption. Under the New Withholding Regulations, such payments by a
U.S.-related broker will be subject to backup withholding if such broker has
actual knowledge that the payee is a U.S. person.

Payment to or through a U.S. office of a broker of the proceeds of a
sale of Common Shares is subject to both backup withholding and information
reporting unless the beneficial owner certifies under penalties of perjury that
it is a non-U.S. shareholder or otherwise establishes an exemption.

Any amounts withheld under the backup withholding rules will be allowed
as a refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the Service.

Distributions to a non-U.S. shareholder that are designated by the
Company at the time of distribution as capital gain dividends which are not
attributable to or treated as attributable to the disposition by the Company of
a U.S. real

<PAGE> 85

property interest generally will not be subject to U.S. federal income taxation,
except as described below.

Any distributions in excess of current and accumulated earnings and
profits of the Company will not be taxable to a non-U.S. shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's Common
Shares, but rather will reduce the adjusted basis of such Common Shares. To the
extent that such distributions exceed the adjusted basis of a non-U.S.
shareholder's Common Shares, they will give rise to tax liability if the
non-U.S. shareholder would otherwise be subject to tax on any gain from the sale
or disposition of his Common Shares, as described below. If it cannot be
determined at the time a distribution is made whether or not such distribution
will be in excess of current and accumulated earnings and profits, the
distributions will be subject to withholding at the same rate as dividends.
However, amounts thus withheld are refundable if it subsequently is determined
that such distribution was, in fact, in excess of current and accumulated
earnings and profits of the Company.

For any year in which the Company qualifies as a real estate investment
trust, distributions that are attributable to gain from sales or exchanges by
the Company of "United States real property interests" will be taxed to a
non-U.S. shareholder under the provisions of FIRPTA. Under FIRPTA, these
distributions are taxed to a non-U.S. shareholder as if such gain were
effectively connected with a United States business. Non-U.S. shareholders would
thus be taxed at the normal capital gain rates applicable to U.S. shareholders
(subject to applicable alternative minimum tax). Also, distributions subject to
FIRPTA may be subject to a 30% branch profits tax in the hands of a foreign
corporate shareholder not entitled to treaty exemption. The Company is required
by applicable Treasury Regulations to withhold 35% of any distribution that
could be designated by the Company as a capital gain dividend to the extent that
such capital gain dividends are attributable to the sale or exchange by the
Company of United States real property interests. This amount is creditable
against the non-U.S. shareholder's federal tax liability. Fixed rate mortgage
loans will not normally be classified as "United States real property
interests."

Gain recognized by a non-U.S. shareholder upon a sale of Common Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled real estate investment trust," defined generally as a real estate
investment trust in which at all times during a specified testing period less
than 50% in value of the Common Shares were held directly or indirectly by
non-U.S. persons. Additionally, gain recognized by a non-U.S. shareholder upon a
sale of Common Shares generally will not be taxed under FIRPTA unless the
shareholder beneficially owns more than 5% of the total fair market value of the
Common Shares at any time during the shorter of the five-year period ending on
the date of disposition or the period during which the shareholder held the
Common Shares. Gain not subject to FIRPTA will be taxable to a non-U.S.
shareholder if (a) investment in the Common Shares is effectively connected with
the non-U.S. shareholder's United States trade or business, in which case the
non-U.S. shareholder will be subject to the same treatment as U.S. shareholders
with respect to such gain or (b) the non-U.S. shareholder is a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year, in which case the nonresident alien individual will be subject to
a 30% tax on his U.S. source capital gains. If the gain on the sale of Common
Shares becomes subject to taxation under FIRPTA, the non-U.S. shareholder will
be subject to the same treatment as U.S. shareholders with respect to such gain
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals).

Subject to the provisions of any tax treaty that may exist between the
United States and the country in which the foreign holder is domiciled at the
time of his death, an individual foreign shareholder who owns Common Shares at
the time of his death will have the Common Shares subject to federal estate tax.
The federal estate tax will be assessed on the fair market value of such Common
Shares at the time of the foreign holder's death.

THE DISCUSSION SET FORTH IN "TAXATION OF FOREIGN SHAREHOLDERS" DOES NOT
TAKE THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT. PROSPECTIVE NON-U.S.
SHAREHOLDERS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT
TO THE NEW WITHHOLDING REGULATIONS.

TAX ASPECTS OF THE OPERATING PARTNERSHIP

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

Classification as a Partnership. The Company will be entitled to
include in its income its distributive share of the Operating Partnership's
income and to deduct its distributive share of the Operating Partnership's
losses only if the Operating Partnership is classified for federal income tax
purposes as a partnership rather than as a corporation or

<PAGE> 86

an association taxable as a corporation. An organization formed as a partnership
will be treated as a partnership, rather than as a corporation, for federal
income tax purposes if (i) it is not expressly classified as a corporation under
Section 301.7701-2(b)(1) through (8) of the Treasury Regulations; (ii) it does
not elect to be classified as an association taxable as a corporation; and (iii)
it is not treated as a corporation by virtue of being classified as a "publicly
traded partnership."

Under Section 7704 of the Code, a partnership is treated as a
corporation for federal income tax purposes if it is a "publicly traded
partnership" (except in situations in which 90% or more of the partnership's
gross income is of a specified type). A partnership is deemed to be publicly
traded if its interests are either (i) traded on an established securities
market, or (ii) readily tradable on a secondary market (or the substantial
equivalent thereof). While the OP Units will not be traded on an established
securities market, they could possibly be deemed to be traded on a secondary
market or its equivalent due to the Redemption Rights enabling the partners to
dispose of their OP Units.

Under Treasury Regulations governing the classification of partnerships
under Section 7704 (the "PTP Regulations"), the classification of partnerships
is generally based on a facts and circumstances analysis. However, the
regulations also provide limited "safe harbors" which preclude publicly traded
partnership status. Pursuant to one of those safe harbors (the "private
placement safe harbor"), interests in a partnership will not be treated as
readily tradable on a secondary market or the substantial equivalent thereof if
(i) all interests in the partnership were issued in a transaction (or
transactions) that was not required to be registered under the Securities Act,
and (ii) the partnership does not have more than 100 partners at any time during
the partnership's taxable year. In determining the number of partners in a
partnership for this purpose, a person owning an interest in a flow through
entity (i.e., a partnership, grantor trust, or S corporation) that owns an
interest in the partnership is treated as a partner in such partnership only if
(x) substantially all of the value of the person's interest in the flow-through
entity is attributable to the flow-through entity's interest (direct or
indirect) in the partnership and (y) a principal purpose of the use of the
tiered arrangement is to permit the partnership to satisfy the 100-partner
limitation.

The Operating Partnership is expected to have less than 100 partners
(including persons owning interests through flow-through entities). The
Operating Partnership has not issued any OP Units required to be registered
under the Securities Act. Thus, the Operating Partnership presently qualifies
for the private placement safe harbor provided in the PTP Regulations. If the
Operating Partnership were to have more than 100 partners (including, in certain
circumstances, persons owning interests through flow-through entities), it
nevertheless would be treated as a partnership for federal income tax purposes
(rather than an association taxable as a corporation) if at least 90% of its
gross income in each taxable year (commencing with the year in which it is
treated as a publicly traded partnership) consists of "qualifying income" with
the meaning of Section 7704(c)(2) of the Code (including interest, dividends,
"real property rents" and gains from the disposition of real property (the "90%
Passive-Type Income Exception").

If for any reason the Operating Partnership were taxable as a
corporation, rather than as a partnership, for federal income tax purposes, the
Company would not be able to satisfy the income and asset requirements for REIT
status. See "-- Requirements for Qualification as a Real Estate Investment
Trust." In addition, any change in the Operating Partnership's status for tax
purposes might be treated as a taxable event, in which case the Company might
incur a tax liability without any related cash distribution. See "--
Requirements for Qualification as a Real Estate Investment Trust." Further,
items of income and deduction of the Operating Partnership would not pass
through to its partners, and its partners would be treated as shareholders for
tax purposes. Consequently, the Operating Partnership would be required to pay
income tax at corporate tax rates on its net income, and distributions to its
partners would constitute dividends that would not be deductible in computing
the Operating Partnership's taxable income.

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

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

Tax Allocations With Respect to the Properties. Pursuant to Section
704(c) of the Code, income, gain, loss and

<PAGE> 87

deduction attributable to appreciated or depreciated property (such as the
Properties contributed by the Prior Owners) that is contributed to a partnership
in exchange for an interest in such partnership must be allocated in a manner
such that the contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain or
unrealized loss is generally equal to the difference between the fair market
value of contributed property at the time of contribution and the adjusted tax
basis of such property at the time of contribution (a "Book-Tax Difference").
Such allocations are solely for federal income tax purposes and do not affect
the book capital accounts or other economic or legal arrangements among the
partners. The Operating Partnership was formed by way of contributions of
appreciated property (including the Properties). Consequently, the Partnership
Agreement will require such allocations to be made in a manner consistent with
Section 704(c) of the Code. In general, the Prior Owners will be allocated
depreciation deductions for tax purposes which are lower than such deductions
would be if determined on a pro rata basis. In addition, in the event of the
disposition of any of the contributed assets (including the Properties) which
have a Book-Tax Difference, all income attributable to such Book-Tax Difference
will generally be allocated to the Prior Owners and the Company will generally
be allocated only its share of capital gains attributable to appreciation, if
any, occurring after the closing of this Offering. This will tend to eliminate
the Book-Tax Difference over the life of the Operating Partnership. However, the
special allocation rules of Section 704(c) do not always entirely eliminate the
Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed assets
in the hands the Operating Partnership will cause the Company to be allocated
lower depreciation and other deductions, and possibly an amount of taxable
income in the event of a sale of such contributed assets in excess of the
economic or book income allocated to it as a result of such sale. This may cause
the Company to recognize taxable income in excess of cash proceeds, which might
adversely affect the Company's ability to comply with the REIT distribution
requirements. See "-- Requirements for Qualification as a Real Estate Investment
Trust." The foregoing principles also apply in determining the earnings and
profits of the Company for purposes of determining the portion of distributions
taxable as dividend income. The application of these rules over time may result
in a higher portion of distributions being taxed as dividends than would have
occurred had the Company purchased the contributed assets entirely for cash.

The Treasury Regulations under Section 704(c) of the Code allow
partnerships to use any reasonable method of accounting for Book-Tax Differences
so that the contributing partner receives the tax benefits and burdens of any
built-in gain or loss associated with the contributed property.

Basis in Operating Partnership Interest. The Company's adjusted tax
basis in its interest in the Operating Partnership generally (i) will be equal
to the amount of cash and the basis of any other property contributed to the
Operating Partnership by the Company, (ii) will be increased by (a) its
allocable share of the Operating Partnership's income and (b) its allocable
share of indebtedness of the Operating Partnership and (iii) will be reduced,
but not below zero, by the Company's allocable share of (a) losses suffered by
the Operating Partnership, (b) the amount of cash distributed to the Company and
(c) by constructive distributions resulting from a reduction in the Company's
share of indebtedness of the Operating Partnership.

If the allocation of the Company's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of the Company's partnership
interest in the Operating Partnership, the recognition of such excess loss will
be deferred until such time and to the extent that the Company has adjusted tax
basis in its interest in the Operating Partnership. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's share of
the indebtedness of the Operating Partnership (such decreases being considered a
cash distribution to the partners), exceeds the Company's adjusted tax basis,
such excess distributions (including such constructive distributions) constitute
taxable income to the Company. Such taxable income will normally be
characterized as a capital gain, and if the Company's interest in the Operating
Partnership has been held for longer than the long-term capital gain holding
period (currently one year), the distributions and constructive distributions
will constitute long-term capital gain. Under current law, capital gains and
ordinary income of corporations are generally taxed at the same marginal rates.

Sale of the Properties. The Company's share of any gain realized by the
Operating Partnership on the sale of any property held by the Operating
Partnership as inventory or other property held primarily for sale to customers
in the ordinary course of the Operating Partnership's trade or business will be
treated as income from a prohibited transaction that is subject to a 100%
penalty tax. See "-- Requirements for Qualification as a Real Estate Investment
Trust." Such prohibited transaction income may also have an adverse effect upon
the Company's ability to satisfy the income tests for qualification as a REIT.
See "-- Requirements for Qualification as a Real Estate Investment Trust." Under
existing law, whether property is held as inventory or primarily for sale to
customers in the ordinary course of a partnership's trade or business is a
question of fact that depends on all the facts and circumstances with respect to
the particular transaction. The Operating Partnership intends to hold the
Properties for investment with a view to long-term appreciation, to engage in
the business of acquiring, developing, owning, and operating the Properties (and
other similar

<PAGE> 88

properties) and to make such occasional sales of the Properties, including
peripheral land, as are consistent with the Operating Partnership's investment
objectives.

OTHER TAXATION

Tax treatment of the Company and its shareholders under tax laws other
than those governing federal income tax may differ substantially from the
federal income tax treatment described in this summary. CONSEQUENTLY, EACH
PROSPECTIVE SHAREHOLDER SHOULD CONSULT WITH HIS OWN TAX ADVISOR WITH REGARD TO
THE STATE, LOCAL AND OTHER TAX CONSEQUENCES (OTHER THAN FEDERAL TAX
CONSEQUENCES) OF AN INVESTMENT IN THE COMPANY.

PROPOSED TAX LEGISLATION

On February 2, 1998, President Clinton released his budget proposal for
fiscal year 1999 (the "Proposal"). Two provisions contained in the Proposal
potentially could affect the Company if enacted in final form as presently
proposed. First, the Proposal would prohibit a REIT from owning, directly or
indirectly, more than 10% of the voting power or value of all classes of a C
corporation's stock (other than the stock of a qualified REIT subsidiary).
Currently, a REIT may own no more than 10% of the voting stock of a C
corporation (other than the stock of a qualified REIT subsidiary), but its
ownership of the nonvoting stock of a C corporation is not limited (other than
by the rule that the value of a REIT's combined equity and debt interest in a C
corporation may not exceed 5% of the value of a REIT's total assets). That
provision is proposed to be effective with respect to stock in a C corporation
acquired by a REIT on or after the date of "first committee action" (i.e., first
action by the House Ways and Means Committee with respect to the provision). If
enacted as presently written, that provision could limit the Company's ability
to use taxable subsidiaries to conduct businesses the income from which would be
nonqualifying income if received directly by the Company.

Second, the Proposal would require recognition of any built-in gain
associated with the assets of a "large" C corporation (i.e., a C corporation
whose stock has a fair market value of more than $5 million) upon its conversion
to REIT status or merger into a REIT. That provision is proposed to be effective
for conversions to REIT status effective for taxable years beginning after
January 1, 1999 and mergers of C corporations into REITs that occur after
December 31, 1998. This provision would require immediate recognition of any
"built-in gain" of an acquired C corporation that is determined to be "large"
if, at any time after December 31, 1998, such corporation merges into the
Company.

<PAGE> 89

BENEFIT PLAN CONSIDERATIONS

INVESTMENT IN THE COMMON SHARES UNDER THE "PLAN ASSET" RULES

ERISA and the Code do not define "plan assets." On November 13, 1986,
the U.S. Department of Labor published a final regulation, amended on December
31, 1986 and effective March 13, 1987, relating to the definition of "plan
assets," under which the assets of an entity in which benefit plans, including
ERISA Plans, IRAs and Keogh Plans, acquire interests would be deemed "plan
assets" under certain circumstances (the "Regulation"). The Regulation generally
provides that when a plan acquires an equity interest in an entity which is a
"publicly-offered security," the plan's assets include only the acquired equity
interest and not any interest in the underlying assets of the entity. The
Regulation defines a "publicly-offered security" as a security that is "widely
held," freely transferable and registered pursuant to certain provisions of the
federal securities laws. The Company believes that the Common Shares offered
hereby will be a "publicly-offered security," and thus that the Company's assets
will not be deemed to be assets of any benefit plan that is a holder of Common
Shares, but, rather, that the Common Shares will be considered assets of such
plan.

If the assets of the Company were deemed to be "plan assets" of plans
that are holders of Common Shares, Subtitle A and Parts 1 and 4 of Subtitle B of
Title I of ERISA (the prudence and fiduciary standards) with respect to ERISA
Plans and Keogh Plans covering common law employees, and Section 4975 of the
Code (the prohibitions on transactions involving disqualified persons) with
respect to ERISA Plans, IRAs and Keogh Plans, would extend to transactions
entered into and decisions made by the Company's Management. Furthermore, the
Company's Management would be deemed fiduciaries with respect to such plans.

OTHER INVESTMENT CONSIDERATIONS UNDER ERISA AND THE CODE

A fiduciary of an ERISA Plan should also consider the fiduciary
standards under ERISA in the context of the plan's particular circumstances
before authorizing an investment of a portion of such plan's assets in Common
Shares. Accordingly, among other factors, such fiduciary should consider (i)
whether the plan's aggregate investments (including such an investment) satisfy
the diversification requirements of Section 404(a)(I)(C) of ERISA; (ii) whether
the investment is in accordance with ERISA, the Code and the documents and
instruments governing the plan (as required by Section 404(a)(I)(D) of ERISA);
and (iii) whether the investment is prudent, considering all facts and
circumstances, including the role the investment plays in the plan's portfolio,
the nature of the Company's business, the possible limitations on the
marketability of Common Shares and the anticipated earnings of the Company.
Investors proposing to purchase Common Shares for their IRAs and Keogh Plans
should consider that an IRA and a Keogh Plan may only make investments that are
authorized by the governing instruments. Moreover, Keogh Plans that cover common
law employees are also subject to the ERISA fiduciary standards described above.

Any ERISA Plan or Keogh Plan covering common law employees should also
consider prohibitions in ERISA relating to improper delegation of control over
or responsibility for "plan assets," prohibitions in ERISA and the Code relating
to an ERISA Plan's engaging in certain transactions involving "plan assets" with
persons who are "parties in interest" under ERISA or "disqualified person" under
the Code with respect to the plan ("Prohibited Transactions"), and other
provisions in ERISA dealing with "plan assets." The Code provisions relating to
Prohibited Transactions also apply to IRAs and all Keogh Plans. In general,
those Code provisions impose on the disqualified person (i) an initial 15%
excise tax on the amount involved in any Prohibited Transaction, and (ii) an
excise tax equal to 100% of the amount involved if any Prohibited Transaction is
not corrected. In the case of a Prohibited Transaction involving assets of an
IRA, the IRA will lose its tax-exempt status and its assets will be deemed to
have been distributed to the IRA beneficiary in a taxable transaction (and no
excise tax will be imposed).

INVESTMENT CONSIDERATIONS FOR OTHER BENEFIT PLANS

Benefit plans, including governmental and church plans, that are exempt
from ERISA's fiduciary standards and the Prohibited Transaction provisions of
the Code should consider the effect of applicable state law on an investment in
the Common Shares. FIDUCIARIES OF ERISA PLANS, KEOGH PLANS, IRAS AND OTHER
BENEFIT PLANS THAT ARE PROSPECTIVE SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN
COUNSEL AND FINANCIAL ADVISORS TO DETERMINE THE CONSEQUENCES OF AN INVESTMENT IN
THE COMPANY UNDER ERISA, SECTION 4975 OF THE CODE, AND, FOR PLANS EXEMPT FROM
ERISA AND SECTION 4975 OF THE CODE, APPLICABLE STATE LAW, AND TO DETERMINE THE
PROPRIETY OF SUCH AN INVESTMENT IN LIGHT OF THE CIRCUMSTANCES OF THAT PLAN AND
CURRENT APPLICABLE LAW.

<PAGE> 90

UNDERWRITING

The Underwriters named below, acting through their Representative,
Morgan Keegan & Company, Inc., have severally agreed, subject to the terms and
conditions contained in the Underwriting Agreement, to purchase from the Company
the number of shares of Common Stock set forth opposite their respective names
below:

Number of
Common Shares
Underwriter to be Purchased
----------- ---------------
<S> <C>
Morgan Keegan & Company, Inc.

==============
Total 4,290,000

</TABLE>

The Underwriting Agreement provides that the Underwriters are obligated
to purchase all of the Common Shares offered hereby (other than those covered by
the over-allotment option described below) if any such shares are purchased. The
Company has been advised by the Representative that the Underwriters propose to
offer the Common Shares to the public at the offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $____ per Common Share. The Underwriters may allow,
and such dealers may reallow, a discount not in excess of $____ per Common Share
to other dealers. The public offering price and the concessions and discounts to
dealers may be changed by the Representative after the initial public offering.

The Company has granted to the Underwriters an option, expiring on the
close of business on the thirtieth day subsequent to the date of this
Prospectus, to purchase up to an additional 643,500 Common Shares at the public
offering price, less an underwriting discount, as shown on the cover page of
this Prospectus. The Underwriters may exercise such option solely for the
purpose of covering over-allotments incurred in the sale of the Common Shares.
To the extent that the Underwriters exercise such option, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number of Common Shares set
forth next to such Underwriters name in the preceding table bears to the total
offered initially.

The Company has agreed to indemnify the several Underwriters or to
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act.

The Company has agreed that it will not offer, sell, grant any option
(other than pursuant to the Plan) for the sale of, or otherwise dispose of any
Common Shares, or any securities convertible into, or exercisable or
exchangeable for, Common Shares for a period of 180 days after the date of this
Prospectus, without the prior written consent of Morgan Keegan & Company, Inc.
Such restriction shall not apply, however, to Common Shares issued in exchange
for real property or to Common Shares issued in exchange for units in any
operating partnership controlled by the Company, if such Common Shares are
subject to a restriction on transferability of at least six months. In addition,
the officers and Trust Managers of the Company have agreed with the Underwriters
not to offer, sell or otherwise dispose of any Common Shares for a period of 180
days after the after the date of this Prospectus, without the prior written
consent of Morgan Keegan & Company, Inc.

The Underwriters do not intend to sell Common Shares to any account
over which they exercise discretionary authority.

Prior to this Offering, there has been no public market for the Common
Shares. The initial public offering price will be determined through
negotiations between the Company and the Representative. Among the factors to be
considered in determining the initial public offering price of the Common
Shares, in addition to prevailing market conditions, will be divided yields and
price-earnings ratios of publicly traded REITs that the Company and the
Representative believe to be comparable to the Company, the expected results of
operations of the Company (which are based on the results of operations of the
Properties in recent periods), the current state of the real estate market in
the

<PAGE> 91

Company's target markets and an assessment of the Company's Management.

The Company has been advised by the Representative that it presently
intends to make a market in the Common Shares offered hereby; however, the
Representative is not obligated to do so, and any market making activity may be
discontinued at any time. There can be no assurance that an active public market
for the Common Shares will develop and continue after the Offering.

Stephen P. Laffey, who serves as President of Equity Capital Markets at
Morgan Keegan & Company, Inc., the Representative, has agreed to serve as a
Trust Manager of the Company upon completion of the Offering. See "Management."

Until the distribution of the Common Shares is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Shares. As an exception to these
rules, the Representative is permitted to engage in certain transactions that
stabilize the price of the Common Shares. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Shares.

If the Underwriters create a short position in the Common Shares in
connection with the Offering (i.e., if they sell more Common Shares than are set
forth on the cover page of this Prospectus) the Representative may reduce that
short position by purchasing Common Shares in the open market. The
Representative also may elect to reduce any short position by exercising all or
part of the over-allotment option described above.

The Representative also may impose a penalty bid on certain
Underwriters and selling group members. This means that if the Representative
purchases Common Shares in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Shares, it may reclaim the
amount of the selling concession from the Underwriters and selling group members
that sold those shares as part of the Offering.

In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security before the distribution is completed.

Neither the Company nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above might have on the price of the Common Shares.
In addition, neither the Company nor any of the Underwriters makes any
representations that the Representative will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.

<PAGE> 92

LEGAL MATTERS

The legality of the Common Shares offered hereby will be passed upon
for the Company by Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., Dallas, Texas.
The description of federal tax matters entitled "Federal Income Tax
Consequences" is based on the opinion of Liddell, Sapp, Zivley, Hill & LaBoon,
L.L.P. The validity of the Common Shares offered hereby will be passed on for
the Underwriters by Hunton & Williams, Richmond, Virginia. Hunton & Williams
will rely on the opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. with
respect to all matters involving Texas law.

EXPERTS

The balance sheet of the Company as of February 28, 1998, and the
combined balance sheets of the Properties as of December 31, 1997 and 1996, and
the related combined statements of operations, changes in owners' equity and
cash flows for each of the three years in the period ended December 31, 1997,
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement on
Form S-11 under the Securities Act and the rules and regulations promulgated
thereunder, with respect to the Common Shares offered pursuant to this
Prospectus. This Prospectus, which is part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement and
the exhibits and financial statement schedules thereto. For further information
with respect to the Company and the Common Shares offered hereby, reference is
made to the Registration Statement and such exhibits and financial statement
schedules, copies of which may be examined without charge at, or obtained upon
payment of prescribed fees from the Public Reference Section of the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York 10048 and at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding the
Company and other registrants that have been filed electronically with the
Commission. The address of such site is http://www.sec.gov.

Statements contained in this Prospectus as to the contents of any
contract or other document that is filed as an exhibit to the Registration
Statement are not necessarily complete, and each such statement is qualified in
its entirety by reference to the full text of such contract or document.

The Company will be required to file reports and other information with
the Commission pursuant to the Exchange Act. In addition to applicable legal or
Nasdaq requirements, if any, holders of the Common Shares will receive annual
reports containing audited financial statements with a report thereon by the
Company's independent certified public accountants, and quarterly reports
containing unaudited financial information for each of the first three quarters
of each fiscal year.

<PAGE> 93

GLOSSARY

"ADA" means the Americans with Disabilities Act of 1990.

"Audit Committee" means the committee, consisting of three independent Trust
Managers, established by the Board of Trust Managers to approve, review, and
establish procedures related to the Company's independent public accountants.

"Board of Trust Managers" means the Company's Board of Trust Managers.

"Bylaws" means the Company's Bylaws.

"Cash Available for Distribution" is defined as net income (loss) as computed in
accordance with GAAP, excluding gains and losses from debt restructuring and
property sales, plus depreciation and amortization, less capital expenditures.

"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.

"Charter" means the Company's First Amended and Restated Declaration of Trust.

"Class A" means office buildings that are centrally located, professionally
managed and maintained, attract high-quality tenants, and command upper-tier
rental rates in the markets in which they are located.

"Code" means the Internal Revenue Code of 1986, as amended.

"Commission" means the Securities and Exchange Commission.

"Common Shares" means the Company's common shares of beneficial interest, $0.005
par value per share.

"Company" means Palace REIT, a Texas real estate investment trust.

"Compensation Committee" means the committee established by the Board of Trust
Managers to determine compensation for the Company's executive officers.

"EPS" means earnings per share.

"ERISA" means the Employee Retirement Income Securities Act of 1974, as amended.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Excess Securities" means the securities into which securities of the Company
owned, or deemed to be owned or transferred to the shareholders in excess of the
Ownership Limit, will be automatically exchanged.

"FASB" means the Financial Accounting Standards Board.

"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended

"FDIC" means the Federal Deposit Insurance Corporation.

"Formation Transactions" means the sequence of transactions in which the Company
will form its operational structure.

"Funds From Operations," as defined by the Board of Governors of NAREIT, means
net income (loss) computed in accordance with GAAP, excluding gains or losses
from debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures.

"GAAP" means generally accepted accounting principles in effect at the date of
the Offering.

"GLA" means gross leasable area.

"Gross Receipts" means the gross revenues generated by the Company during a
period of time from operations, including rents, percentage rents, tenant
reimbursements, interest and income, but excluding receipts from capital
transactions,

<PAGE> 94

including sales, financings, refinancings and the sale of equity securities.

"Investment Advisors Act" means the Investment Advisors Act of 1974, as amended.

"IRA" means an individual retirement account.

"Keogh Plans" means plans subject to ERISA and IRAs and H.R. 10 Plans.

"Management" means the Company's Board of Trust Managers and executive officers.

"NAREIT" means the National Association of Real Estate Investment Trusts, Inc.

"Net Effective Rent" means, with respect to a lease, the amount due from the
tenant under the lease with deductions for any "give-backs" or other concessions
made by the lessor, if applicable.

"Offering" means the initial public offering of the Common Shares as described
in this Prospectus.

"Operating Partnership" means Palace Operating Partnership, L.P., a Delaware
limited partnership.

"OP Units" means units of the Operating Partnership.

"Ownership Limit" means the restriction contained in the Charter providing that,
subject to certain exceptions, the holder may not own or be deemed to own, by
virtue of attribution rules of the Code, more than 9.8% of the total outstanding
Trust Shares.

"Partnership Agreement" means the First Amended and Restated Agreement of
Limited Partnership of Palace Operating Partnership, L.P.

"Plan" means the Company's Employee and Trust Manager Incentive Share Plan.

"Plan Participants" means the executive officers, Trust Managers and other
employees of the Company subject to the Plan.

"Preferred Shares" means the Company's preferred shares of beneficial interest,
of which 10,000,000 shares are authorized to be issued with a $0.005 par value
per share.

"Prior Owners" means the following entities that are wholly-owned or controlled
by Ralph Engelstad and Betty Engelstad and that will transfer the Properties to
the Operating Partnership in connection with the Formation Transactions: Florida
Sunrise, Ltd.; Heritage Loraine, Inc.; Nobody, Inc.; Imperial Warehouse, Inc.;
Bayview Investments, Inc.; Southpark, Ltd.; Escondido, Inc.; and Polaris
Warehouse, Inc.

"Properties" means the eight properties located in Texas, Florida, Mississippi
and Nevada that the Company intends to acquire prior to or concurrently with the
Offering.

"REIT" means a real estate investment trust, as defined by Sections 856 through
860 of the Code.

"Representative" means Morgan Keegan & Company, Inc.

"Service" means the Internal Revenue Service.

"Securities Act" means the Securities Act of 1933, as amended.

"SIOR" means the Society of Industrial and Office Realtors.

"SFAS" means Statement of Financial Accounting Standards.

"Texas REIT Act" means the Texas Real Estate Investment Trust Act.

"Total Market Capitalization" means the total number of Common Shares and
Preferred Shares outstanding times the

<PAGE> 95

current market price of such shares plus long-term debt.

"Treasury Regulations" means those regulations promulgated by the Service under
the Code.

"Triple Net Lease" means a lease under which a tenant pays in addition to base
rent its pro rata share of the common area maintenance expenses, real estate
taxes and insurance expenses.

"Trust Managers" means the individuals selected to serve on the Company's Board
of Trust Managers.

"Trust Shares" means, collectively, the Common Shares and the Preferred Shares.

"Underwriters" means Morgan Keegan & Company, Inc. and ____________________.

"UPREIT" means umbrella limited partnership.

<PAGE> 96
INDEX TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

PAGE
<S> <C>
PALACE REIT

Pro Forma Combined Balance Sheet as of March 31, 1998 F-2

Pro Forma Combined Statement of Operations for the year ended December 31, 1997 F-3

Pro Forma Combined Statement of Operations for the three-month
period ended March 31, 1998 F-4

Notes to Pro Forma Combined Financial Statements F-5

Independent Auditors' Report F-8

Balance Sheet as of February 28, 1998 F-9

Notes to Balance Sheet F-10

PALACE PROPERTIES

Independent Auditors' Report F-11

Combined Financial Statements

Combined Balance Sheets as of March 31, 1998 (unaudited) and
December 31, 1997 and 1996 F-12

Combined Statements of Operations for the three month periods ended
March 31, 1998 and 1997 (unaudited) and for the three years
ended December 31, 1997, 1996 and 1995 F-13

Combined Statements of Changes in Owners' Equity for the three month
period ended March 31, 1998 (unaudited) and for the three years
ended December 31, 1997, 1996 and 1995 F-14

Combined Statements of Cash Flows for the three month periods ended
March 31, 1998 and 1997 (unaudited) and for the three years
ended December 31, 1997, 1996 and 1995 F-15

Notes to Combined Financial Statements F-16
</TABLE>

F-1
<PAGE> 97

PALACE REIT
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998

<TABLE>
<CAPTION>
PALACE
PROPERTIES PROCFORMA PRO FORMA
HISTORICAL ADJUSTMENTS PALACE REIT
------------------ ------------------ -------------------
<S> <C> <C> <C>

REAL ESTATE:
Land $ 3,070,875 $ 2,815,629 c $ 5,886,504
Buildings, improvements and equipment 29,043,533 26,629,487 c 55,673,020
Projects under development 811,339 811,339
------------------ ------------------ -------------------
32,925,747 29,445,116 62,370,863
Less accumulated depreciation (2,757,641) (2,757,641)
------------------ ------------------ -------------------

Real Estate - net 30,168,106 29,445,116 59,613,222
------------------ ------------------ -------------------

59,252,500 a
(20,593,047) b
(38,609,453) c
1,000 f
CASH AND CASH EQUIVALENTS 646,023 (472,e98) 224,525
------------------ ------------------ -------------------

RECEIVABLES:
Accounts receivable - net 546,048 (546,048) e -
Accounts receivable - related parties 277,500 (277,500) e -
------------------ ------------------ -------------------
Receivables - net 823,548 (823,548) -
------------------ ------------------ -------------------

DEFERRED COSTS - NET 653,902 (205,623) e 448,279
------------------ ------------------ -------------------

PREPAID EXPENSES 243,917 (243,917) e -
------------------ ------------------ -------------------

TOTAL ASSETS $ 32,535,496 $ 27,750,530 $ 60,286,026
================== ================== ===================

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgage notes and loans payable - related parties $ 20,593,047 $ (20,593,047) b -
Accounts payable and accrued expenses 644,705 (644,705) e $ -
Tenants' security deposits 173,525 173,525
------------------ ------------------ -------------------
Total liabilities 21,411,277 (21,237,752) 173,525
------------------ ------------------ -------------------

MINORITY INTEREST 5,151,641 d 5,151,641
------------------ -------------------

SHAREHOLDERS' EQUITY:
(859,001) d
(1,100,881) e
OWNERS' EQUITY 11,124,219 (9,164,337) c -

706 f
COMMON STOCK 21,450 a 22,156

294 f
(4,292,640) d
59,231,050 a
ADDITIONAL PAID IN CAPITAL 2,117,900 f 57,056,604

ACCUMULATED DEFICIT (2,117,900) f (2,117,900)
------------------ ------------------ -------------------
TOTAL SHAREHOLDERS' EQUITY 11,124,219 43,836,641 54,960,860
------------------ ------------------ -------------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 32,535,496 $ 27,750,530 $ 60,286,026
================== ================== ===================

</TABLE>

See notes to pro forma combined financial statements.

F-2

<PAGE> 98

PALACE REIT
PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1997

PALACE
PROPERTIES PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PALACE REIT
------------------ ------------------ -------------------
<S> <C> <C> <C>
REVENUES:
Lease rentals $ 9,875,522 $ 9,875,522
Lease rentals - related parties 402,720 402,720
Miscellaneous 10,513 10,513
------------------- ------------------- --------------------
Total revenues 10,288,755 - 10,288,755
------------------- ------------------- --------------------

EXPENSES:
Operation and maintenance 1,592,383 1,592,383
Interest expense - related parties 1,778,723 (1,778,723) g -
Real estate taxes 712,242 712,242
Electricity, water and gas utilities 1,793,141 1,793,141
Management fee 711,026 (711,026) h -
General and administrative 575,182 1,164,105 h 1,739,287
Depreciation and amortization 1,115,261 682,831 i 1,798,092
------------------- ------------------- --------------------
Total expenses 8,277,958 (642,813) 7,635,145
------------------- ------------------- --------------------

NET INCOME BEFORE MINORITY INTEREST 2,010,797 642,813 2,653,610

MINORITY INTEREST 227,414 j 227,414
------------------- ------------------- --------------------

NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS $ 2,010,797 $ 415,399 $ 2,426,196
=================== =================== ====================

COMMON SHARES OUTSTANDING 4,431,260
====================

PRO FORMA NET INCOME PER COMMON SHARE $ 0.55
====================
</TABLE>

See notes to pro forma combined financial statements.

F-3
<PAGE> 99

PALACE REIT
PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 1998

PALACE
PROPERTIES PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PALACE REIT
------------------ ------------------ -------------------
<S> <C> <C> <C>

REVENUES:
Lease rentals $ 2,311,801 $ 2,311,801
Lease rentals - related parties 251,640 251,640
Miscellaneous 5,707 5,707
------------------- ------------------- --------------------
Total revenues 2,569,148 - 2,569,148
------------------- ------------------- --------------------

EXPENSES:
Operation and maintenance 437,077 437,077
Interest expense - related parties 418,730 (418,730) g -
Real estate taxes 180,210 180,210
Electricity, water and gas utilities 439,569 439,569
Management fee 192,458 (192,458) h -
General and administrative 132,227 291,026 h 423,253
Depreciation and amortization 277,358 170,708 i 448,066
------------------- ------------------- --------------------
Total expenses 2,077,629 (149,454) 1,928,175
------------------- ------------------- --------------------

NET INCOME BEFORE MINORITY INTEREST 491,519 149,454 640,973

MINORITY INTEREST 54,931 j 54,931
------------------- ------------------- --------------------

NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS $ 491,519 $ 94,523 $ 586,042
=================== =================== ====================

COMMON SHARES OUTSTANDING 4,431,260
====================

PRO FORMA NET INCOME PER COMMON SHARE $ 0.13
====================
</TABLE>

See notes to pro forma combined financial statements.

F-4
<PAGE> 100

PALACE REIT

Notes to Pro Forma Combined Financial Statements

The accompanying pro forma combined financial statements present pro forma
information for the Company and the Properties. The pro forma financial
statements are based on the historical financial statements of the Properties.

The accompanying pro forma combined balance sheet as of March 31, 1998 has been
presented on the assumption that the Offering and related contribution of two
properties and acquisition of the remaining six properties occurred on March 31,
1998. The accompanying pro forma combined statements of operations for the year
ended December 31, 1997 and for the three month period ended March 31, 1998 have
been presented on the assumption that the Offering and related contribution of
two properties and acquisition of the remaining six properties occurred on
January 1, 1997. These pro forma financial statements are not necessarily
indicative of the results that will be achieved for future periods as a result
of the Offering and related contribution and acquisition of the Properties.
These pro forma financial statements and related notes should be read in
conjunction with the Company's and Properties' combined financial statements
included elsewhere in this Prospectus.

For purposes of these pro forma combined financial statements, the Company has
assumed an initial public offering price of $15.00 per share, the midpoint of
the range of the estimated initial public offering price.

The pro forma adjustments contained in the accompanying pro forma combined
financial statements reflect:

(a) Adjustment to Cash, Common Stock and Additional Paid in Capital to
reflect the issuance of and the net proceeds from the offering of
4,290,000 Common Shares of stock. Such proceeds will be contributed to
the Operating Partnership in exchange for a 91.43% interest in the
Operating Partnership.

(b) The portion of total payments by the Operating Partnership to the Prior
Owners representing the amount necessary to retire $20,593,047
($19,986,991 related to the six properties being acquired for cash and
$606,056 related to the two properties being contributed) of
indebtedness related to the Properties.

(c) The net remaining net proceeds after retirement of indebtedness and the
Operating Partnership's retention of $50,000 for working capital
purposes is estimated to be $38,609,453. Of such amount $37,392,072
($57,379,063 if the debt noted in b above is included) will be paid to
the Prior Owners in exchange for 100% ownership interest in six of the
Properties. The remaining amount of $1,217,381 ($1,823,437 if the debt
noted in b above is included) will be paid to the Prior Owners along
with the issuance of OP Units

F-5
<PAGE> 101

described in d below in exchange for the contribution of two properties.
Such estimated amount exceeds the owners' historical cost basis in such
Properties by $29,446,116. The Company will allocate such amounts based
on its estimate of the fair market value of the Properties. For purposes
of these pro forma combined financial statements the Company has
estimated that such amount will be allocated as follows:
<TABLE>

<S> <C>
Land $ 2,815,629
Buildings, improvements and equipment 26,629,487
-----------------
Real Estate - net $29,445,116
=================
</TABLE>

(d) The issuance of 415,312 OP Units (an 8.57% minority interest in the
Company), in exchange for the owners' contribution of two of the
Properties to the Operating Partnership. The operating partnership pro
forma equity will be approximately $60,112,501 of which an 8.57%
interest would be $5,151,641. The transaction has been structured as an
acquisition for cash of the six properties and a contribution of the two
properties in exchange for OP Units for tax purposes. The Operating
Partnership expects to carry over the historical cost of the two
properties contributed from the Prior Owners for financial statement
reporting purposes.

(e) To eliminate assets and liabilities related to the Properties which will
not be acquired from the Prior Owners. The Company expects to acquire
the benefit of certain deferred lease costs, cash related to tenants'
security deposits and the real property and to assume the liability
related to tenants' security deposits. All other assets and liabilities
of the Properties will be retained by the Prior Owners and have been
eliminated against Owners' Equity related to the Prior Owners.

(f) To record the sale of 141,260 shares of stock to certain officers and a
trust manager of the Company for $1,000, a price below the Offering
price of such shares. The Company expects to record a one time charge
for compensation expense as a result of this transaction. The Company
estimates such cost to be $2,117,900, based on the estimated per share
price in the Offering less the amount paid for the shares. Such amount
has been recorded as an increase to additional paid in capital and as
accumulated deficit. The amount has not been reflected in the Pro Forma
Combined Statements of Operations since it does not relate to the
recurring operations of the Company.

(g) The elimination of interest expense, for each applicable period, related
to the retirement of indebtedness as discussed in (b).

(h) Elimination of management fees, for each applicable period, paid to an
unrelated party for the management of certain of the properties and the
addition of costs to be incurred associated with the management of the
Properties by the Company. Such additional costs

F-6
<PAGE> 102

represent legal, audit, office costs, salaries and other general and
administrative expenses to be paid by the Company on an annual basis as
follows:
<TABLE>

<S> <C>
Salaries and benefits - executive officers $ 624,000
Other salaries and benefits 60,000
Directors and officers insurance 200,000
Legal and accounting 86,000
Directors fees and travel 42,000
SEC reporting and other stockholder costs 92,540
Office rent, telephone, supplies and other administrative costs 54,965
Other 4,600
----------
$1,164,105
==========
</TABLE>

Salaries and benefits for executive officers are based upon agreements
with two of the officers and management's estimate with respect to
others. Other amounts are based upon management's estimates of expenses
to be incurred given the Company's estimated level of operations and
related administrative requirements. Such amounts are expected to be
expensed ratably over the year and accordingly the adjustment for the
three month period ended March 31, 1998 would represent one fourth of
the total.

(i) Additional depreciation related to the allocation of the purchase price
noted in (c) assuming an estimated useful life of 39 years. The amount
for the three month period ended March 31, 1998 would represent one
fourth of the annual amount to be expensed.

(j) To reflect 8.57% of net income for the period as income applicable to
minority interest.

F-7

<PAGE> 103

INDEPENDENT AUDITORS' REPORT

Palace REIT:

We have audited the accompanying balance sheet of Palace REIT as of February 28,
1998. This balance sheet is the responsibility of the trust's management. Our
responsibility is to express an opinion on this balance sheet 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 balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and the significant estimates made by management, as
well as evaluating the overall balance sheet presentation. We believe that our
audit of the balance sheet provides a reasonable basis for our opinion.

In our opinion, the balance sheet presents fairly, in all material respects, the
financial position of Palace REIT as of February 28, 1998, in conformity with
generally accepted accounting principles.

Las Vegas, Nevada
February 28, 1998

F-8
<PAGE> 104

PALACE REIT

BALANCE SHEET
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
<TABLE>

<S> <C>
Cash $ 1,000
=======

Shareholders' equity:
Common stock, par value $.005, 100,000,000 shares authorized, 141,260 shares outstanding 706

Additional paid in capital 294

Total shareholders' equity $ 1,000
=======

</TABLE>

See notes to balance sheet.

F-9
<PAGE> 105

PALACE REIT

NOTES TO BALANCE SHEET
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------

1. FORMATION OF THE COMPANY

Palace REIT (the "Company"), a Texas trust, was formed in January 1998 to
issue through a public offering 4,290,000 shares of beneficial interest
and to simultaneously acquire, through contribution and with the proceeds
of such offering, eight office and industrial properties (the
"Properties") from affiliates of an individual and his wife. Upon
completion of the offering the Company will own, operate, and manage such
properties through a subsidiary, Palace Operating Partnership, L.P. The
owners of the Properties will receive an ownership interest in Palace
Operating Partnership, L.P. (which interests are redeemable, at the option
of the holder, for 415,312 Common Shares of beneficial interest in the
Company beginning on the first anniversary of the closing of the offering)
and the net proceeds of the public offering, net of offering cost and
$50,000 to be retained by the Company for working capital.

2. INCOME TAXES

It is the intent of the Company to qualify as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986, as amended. As a
REIT, the Company generally will not be subject to federal income tax to
the extent that it distributes at least 95 percent of its REIT taxable
income to its shareholders. REIT's are subject to a number of
organizational and operational requirements. If the Company fails to
qualify as a REIT in any taxable year, the Company will be subject to
federal income tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate tax rates.

3. SHAREHOLDERS' EQUITY AND BENEFICIAL INTEREST

The Company is authorized to issue up to 100,000,000 Common Shares of
$0.005 par value stock and 10,000,000 Preferred Shares of $0.005 par value
stock.

The Company has established an Incentive Share Plan (the "Plan") to enable
trust managers, executive officers, and employees to participate in the
ownership of the Company. Five percent of the Company's equity securities
are reserved for issuance under the Plan.

The Company will enter into employment agreements with certain of its
executive officers and has sold 141,260 Common Shares to certain of its
executive officers and a trust manager at a price substantially less than
the expected public offering price.

<PAGE> 106

INDEPENDENT AUDITORS' REPORT

Palace Properties:

We have audited the accompanying combined balance sheets of the Palace
Properties (the "Properties") as of December 31, 1997 and 1996, and the related
combined statements of operations, changes in owners' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These combined
financial statements are the responsibility of the Properties' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.

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

In our opinion, the combined financial statements present fairly, in all
material respects, the financial position of Palace Properties at December 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.

Las Vegas, Nevada
February 28, 1998

<PAGE> 107

PALACE PROPERTIES

COMBINED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

MARCH 31, DECEMBER 31,
1998 1997 1996
ASSETS (UNAUDITED)
<S> <C> <C> <C>
REAL ESTATE (Notes 3 and 8):
Land $ 3,070,875 $ 3,070,875 $ 2,925,875
Buildings and improvements 29,043,533 28,971,990 26,168,962
Projects under development 811,339 299,919 70,539
------------ ------------ ------------

32,925,747 32,342,784 29,165,376
Less accumulated depreciation and amortization (2,757,641) (2,547,695) (1,688,018)
------------ ------------ ------------

Real estate - net 30,168,106 29,795,089 27,477,358
------------ ------------ ------------

CASH AND CASH EQUIVALENTS 646,023 372,678 138,114
------------ ------------ ------------

RECEIVABLES:
Accounts receivable - net 546,048 750,792 403,542
Accounts receivable - related parties (Note 4) 277,500 111,000
------------ ------------ ------------

Receivables - net 823,548 861,792 403,542

DEFERRED COSTS - NET (Note 2) 653,902 717,419 703,382

PREPAID EXPENSES 243,917 323,015 280,218
------------ ------------ ------------

TOTAL ASSETS $ 32,535,496 $ 32,069,993 $ 29,002,614
============= ============= ============

LIABILITIES AND OWNERS' EQUITY

LIABILITIES:
Mortgage notes and loans payable - related
parties (Note 3) $ 20,593,047 $ 20,208,048 $ 20,510,657
Accounts payable and accrued expenses 644,705 730,688 290,415
Tenants' security deposits 173,525 174,390 160,611
Other liabilities 150,073 26,501
------------ ------------ ------------

Total liabilities 21,411,277 21,263,199 20,988,184

OWNERS' EQUITY 11,124,219 10,806,794 8,014,430
------------ ------------ ------------

TOTAL LIABILITIES AND OWNERS' EQUITY $ 32,535,496 $ 32,069,993 $ 29,002,614
============ ============ ============

</TABLE>

See notes to combined financial statements.

F-12

<PAGE> 108

PALACE PROPERTIES

COMBINED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------

THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
1998 1997 1997 1996 1995
(UNAUDITED)
REVENUES:
<S> <C> <C> <C> <C> <C>
Lease rentals (Note 4) $ 2,311,801 $ 2,289,655 $ 9,875,522 $ 9,638,280 $ 4,945,110
Lease rentals - related
parties (Note 4) 251,640 65,178 402,720 158,400 26,400
Miscellaneous 5,707 1,895 10,513 10,125 4,486
----------- ----------- ----------- ----------- -----------

Total revenues 2,569,148 2,356,728 10,288,755 9,806,805 4,975,996
----------- ----------- ----------- ----------- -----------

EXPENSES:
Operation and maintenance 437,077 419,700 1,592,383 1,637,568 888,835
Interest expense - related
parties 418,730 436,520 1,778,723 1,119,130 330,124
Real estate taxes 180,210 177,795 712,242 728,270 289,071
Electricity, water, and gas
utilities 439,569 461,746 1,793,141 1,766,996 932,515
Management fee (Note 5) 192,458 185,017 711,026 848,036 370,426
General and administrative 132,227 145,434 575,182 505,741 344,339
Depreciation and amortization 277,358 272,690 1,115,261 1,035,291 596,039
Loss on disposal of tenant
improvements 152,063
----------- ----------- ----------- ----------- -----------
Total expenses 2,077,629 2,098,902 8,277,958 7,793,095 3,751,349

NET INCOME $ 491,519 $ 257,826 $ 2,010,797 $ 2,013,710 $ 1,224,647
=========== =========== =========== =========== ===========
</TABLE>

See notes to combined financial statements.

F-13

<PAGE> 109

PALACE PROPERTIES

COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>

<S> <C>
BALANCE, JANUARY 1, 1995 $ 9,484,165
Distributions (467,718)
Contributions 10,671,897
Net income 1,224,647
------------

BALANCE, DECEMBER 31, 1995 20,912,991
Distributions (16,827,949)
Contributions 1,915,678
Net income 2,013,710
------------

BALANCE, DECEMBER 31, 1996 8,014,430
Distributions (1,169,194)
Contributions 1,950,761
Net income 2,010,797
------------

BALANCE, DECEMBER 31, 1997 10,806,794
Distributions (Unaudited) (174,094)
Net income (Unaudited) 491,519
------------

BALANCE, MARCH 31, 1998 (Unaudited) $ 11,124,219
============

</TABLE>

See notes to combined financial statements.

F-14

<PAGE> 110

PALACE PROPERTIES

COMBINED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------

THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
1998 1997 1997 1996 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 491,519 $ 257,826 $ 2,010,797 $ 2,013,710 $ 1,224,647
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 277,358 272,690 1,115,261 1,035,291 596,039
Loss on disposal of tenant improvements 152,063
Changes in operating assets and liabilities:
Receivables 38,244 (49,002) (458,250) (79,727) (266,169)
Deferred costs (3,895) (64,628) (268,653) (598,755) (107,788)
Prepaid expenses 79,098 84,519 (42,797) (52,081) (118,210)
Accounts payable and accrued expenses (85,983) 338,902 440,273 (231,274) 311,719
Other liabilities (150,938) (42,580) 137,351 (212,671) (19,339)
------------ ------------ ------------ ------------ ------------
Net cash provided by operating activities 645,403 797,727 2,933,982 2,026,556 1,620,899
------------ ------------ ------------ ------------ ------------

CASH FLOWS FROM INVESTING
ACTIVITIES - Additions to real estate (582,963) (2,271,117) (3,033,377) (1,110,181) (3,173,647)
------------ ------------ ------------ ------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to owners (174,094) (150,050) (1,169,194) (16,827,949) (467,718)
Capital contributions 2,259,000 1,805,761 1,915,678 2,336,977
Proceeds from notes payable 384,999 98,548 16,387,053
Repayment of notes payable (302,608) (2,726,455)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities 210,905 2,207,498 333,959 (1,251,673) 1,869,259
------------ ------------ ------------ ------------ ------------

NET INCREASE (DECREASE) IN CASH 273,345 734,108 234,564 (335,298) 316,511

CASH AND CASH EQUIVALENTS -
BEGINNING OF YEAR 372,678 138,114 138,114 473,412 156,901
------------ ------------ ------------ ------------ ------------

CASH AND CASH EQUIVALENTS -
END OF YEAR $ 646,023 $ 872,222 $ 372,678 $ 138,114 $ 473,412
============ ============ ============ ============ ============

SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 416,824 $ 412,972 $ 1,736,149 $ 1,117,982 $ 257,576
============ ============ ============ ============ ============

SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Property contributed by owners $ $ $ 145,000 $ $ 8,334,920
============ ============ ============ ============ ============
Notes payable assumed with property
acquired and repaid $ $ $ $ 4,159,005 $
============ ============ ============ ============ ============
</TABLE>

See notes to combined financial statements.

F-15

<PAGE> 111

PALACE PROPERTIES

NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS--The Palace Properties (not a legal entity) represent a
combination of eight office and industrial properties (the "Properties")
as described below. The Properties are located in the states of Texas,
Florida, Nevada, and Mississippi. The Properties are owned 100 percent by
various Sub-chapter S Corporations, which are commonly owned and
controlled.

Palace Properties represents those real estate operations that will be
sold or contributed to a newly formed Real Estate Investment Trust
("REIT"), Palace REIT (the "Company").

Those properties owned and operated at December 31, 1997, are as follows:

PROPERTY ADDRESS
<S> <C>
Office:
Florida Sunrise Tower ("Sunrise") 3111 University Drive, Coral Springs, Florida
Ten Conoco Plaza ("Conoco") 10 Desta Drive, Midland, Texas
Heritage Center ("Heritage") 500 North Loraine Street, Midland, Texas
Claydesta Center ("Claydesta") One Desta Drive, Midland, Texas

Industrial:
Caballo ("Caballo") 6780 Caballo Road, Las Vegas, Nevada
Escondido ("Escondido") 6620 Escondido, Las Vegas, Nevada
Polaris ("Polaris") 5425 Polaris Avenue, Las Vegas, Nevada
D'Iberville ("D'Iberville") 4120 Brodie Road, D'Iberville, Mississippi
</TABLE>

Heritage and Claydesta were acquired on February 14, 1996, and August 16,
1995, respectively. Escondido and D'Iberville were developed by the owner,
and operations began in August 1995 and October 1997, respectively.
Polaris is currently under development and is expected to be completed in
April 1998. The owners began operating all other properties prior to 1995.
The accompanying combined financial statements include the operations of
the Properties for the periods presented or from the date of acquisition
or inception as applicable.

All significant intercompany accounts and transactions have been
eliminated in combination.

The following table indicates the corporate owner of each of the
properties and the related ownership percentage. Each of the corporate
owners shown are wholly owned by one individual and his wife and,
accordingly, are commonly owned and controlled.

F-16
<PAGE> 112

PROPERTY CORPORATE OWNER PERCENT OWNED

<S> <C> <C>
Sunrise Florida Sunrise, Ltd. 100.00 %
Conoco Nobody, Inc. 100.00 %
Heritage Heritage Loraine, Inc. 100.00 %
Claydesta Southpark, Ltd. 100.00 %
Caballo Southpark, Ltd. 100.00 %
Escondido Escondido, Inc. 100.00 %
Polaris Polaris Warehouse, Inc. 100.00 %
D'Iberville Imperial Warehouse, Inc. 33.25 %
D'Iberville Bayview Investments 66.75 %
</TABLE>

UNAUDITED INTERIM FINANCIAL INFORMATION--The combined financial statements
for the three months ended March 31, 1998 and 1997, are unaudited, but
include all adjustments (consisting of normal recurring adjustments) which
management considers necessary for a fair presentation. The operating
results and cash flows for the three month periods ended March 31, 1998
and 1997, are not necessarily indicative of the results that will be
achieved for the full fiscal year or for future periods.

REAL ESTATE--Management periodically assesses the recoverability of the
recorded value of its properties and related assets by comparing their
carrying value to the undiscounted cash flows expected to be generated by
such assets. The Properties policy is to recognize impairment losses when
such estimated cash flows are not sufficient to recover the recorded
value.

Expenditures for ordinary maintenance and repairs are expensed to
operations as incurred. Significant renovations and improvements which
improve and/or extend the useful life of the asset are capitalized and
depreciated over their estimated useful life. Interest and other direct
costs incurred during periods of construction are capitalized as a
component of building costs. Depreciation is calculated on the
straight-line method over the estimated useful lives of assets, which are
as follows:
<TABLE>
<CAPTION>

TERM

<S> <C>
Buildings and improvements Primarily 39 years
Tenant improvements Term of related leases
</TABLE>

CONCENTRATION OF RISK--A significant portion of the Properties' revenues
are obtained from office properties located in the state of Texas. In
addition, the Properties also derive a significant portion of their
revenues from leases to companies in the oil industry.

DEFERRED COSTS--Deferred financing costs are amortized on the
straight-line method over the terms of the loans, which approximates the
interest method. Deferred leasing costs are amortized on the straight-line
method over the terms of the related lease agreements.

RENTAL REVENUE--Rental revenue is recorded on the straight-line method
over the terms of the related lease agreements. As a result, $414,481,
$275,888, and $35,225 of non-cash rents were recorded as rental revenue
during the years ended December 31, 1997, 1996, and 1995, respectively,
and are included in accounts receivable. As of December 31, 1997 and 1996,
the balance of the accounts receivable relating to the straight-lining of
rental revenue is $725,594 and $311,113, respectively.

Revenues from two major tenants each exceeded 10 percent of the
Properties' total revenues for the years ended December 31, 1997 and 1996.
Such revenues were approximately $1,529,000 and $1,193,000, and $1,094,000
and $1,010,000 for each of the two tenants for the years ended December
31, 1997 and 1996.

F-17
<PAGE> 113

For the year ended December 31, 1995, revenues from one major tenant
exceeded 10 percent of the Properties' total revenues. Such revenues were
$962,000, for this major tenant for the year ended December 31, 1995.

ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE--The Company provides an
allowance for doubtful accounts against the portion of accounts receivable
which is determined to be uncollectible. Accounts receivable in the
combined balance sheets are shown net of an allowance for doubtful
accounts of $46,241 and $42,553 as of December 31, 1997 and 1996,
respectfully.

NEW ACCOUNTING PRONOUNCEMENTS--The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income, which is effective for fiscal years
beginning after December 15, 1997. This statement requires businesses to
disclose comprehensive income and its components in their financial
statements. Management intends to comply with the disclosure requirements
of this statement in the year ending December 31, 1998.

FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, which is effective for fiscal years beginning after
December 15, 1997. This statement redefines how operating segments are
determined and requires qualitative disclosure of certain financial and
descriptive information about a company's operating segments. The Company
will adopt SFAS No. 131 in the year ending December 31, 1998. Management
has not finalized its analysis of which operating segments it will report
on to comply with SFAS No. 131.

INCOME TAXES--The Properties pay no income taxes, and the income or loss
from the Properties is included on the income tax returns of the owners.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--The
preparation of the combined financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect amounts reported in the combined
financial statements and accompanying notes. Significant estimates used by
the Properties include the estimated useful lives for depreciable and
amortizable assets and costs, and the estimated allowance for doubtful
accounts receivable. Actual results could differ from those estimates.

2. DEFERRED COSTS

Deferred costs consist of the following as of December 31:
<TABLE>
<CAPTION>

1997 1996

<S> <C> <C>
Financing costs $ 318,039 $ 318,039
Leasing costs 951,826 683,172
--------- ----------
1,269,865 1,001,211
Less accumulated amortization 552,446 297,829
--------- ----------

Total $ 717,419 $ 703,382
========= ==========
</TABLE>

F-18
<PAGE> 114

3. MORTGAGE NOTES AND LOANS PAYABLE - RELATED PARTIES

The following is a summary of mortgage notes and loans payable as of
December 31:

1997 1996
<S> <C> <C>
Loans payable - affiliate; interest at 12% per annum payable
monthly, principal payable on demand $ 314,068 $ 210,657

Mortgage notes payable to owners; interest at Prime or LIBOR plus 1.25% at
borrowers option (8.5% per annum at December 31, 1997) with principal and
interest payable
semi-annually through May 31, 2001 19,893,980 20,300,000
----------- -----------

Total $20,208,048 $20,510,657
=========== ===========
</TABLE>

The owners have entered into a mortgage note agreement (the "Agreement")
with commercial lenders providing a maximum loan of $30,000,000 (the
"Loan"). The owners loaned the proceeds of the Loan to various properties.
The Loan is collateralized by a first mortgage on the individual
properties of Claydesta, Heritage, and Conoco with a net book value of
$15,453,208 at December 31, 1997. The terms of the Loan are identical to
those of the Mortgage Notes payable to the owners, discussed above.

Aggregate maturities of mortgage notes and loans payable at December 31,
1997, are due in future years as follows:

YEAR ENDING DECEMBER 31, AMOUNT

<S> <C>
1998 $ 923,098
1999 1,082,720
2000 1,691,750
2001 16,510,480
----------

Total $ 20,208,048
============
</TABLE>

4. FUTURE MINIMUM LEASE INCOME

The Properties have entered into lease agreements with lease terms ranging
from one year to forty-five years. The leases generally provide for
tenants to share in increases in operating expenses and real estate taxes
in excess of specified base amounts.

F-19
<PAGE> 115

The total future minimum rentals to be received under such noncancelable
operating leases executed as of December 31, 1997, exclusive of tenant
reimbursements and contingent rentals, are as follows:

YEAR ENDING DECEMBER 31, AMOUNT

<S> <C>
1998 $ 10,088,070
1999 7,881,558
2000 5,479,636
2001 4,665,701
2002 3,489,228
Thereafter 23,325,376
------------

Total $ 54,929,569
============
</TABLE>

Certain industrial properties are leased to affiliates of the Properties
with remaining lease terms of up to ten years. Future minimum rentals
include amounts to be received from affiliates totaling $6,518,160.

5. MANAGEMENT FEES

The three properties located in Texas are managed by an unaffiliated third
party for fees which include three percent of monthly rents collected plus
expenses incurred. In addition, they receive a three percent commission on
all new leases. Such amounts are reflected in the statement of operations
as management fees.

In connection with the leasing and management of the Properties, other
entities under control of the owners have provided certain services for
the benefit of the Properties which were not charged to the Properties.
Such amounts incurred were estimated to be $16,000, $16,000, and $14,000
for the years ended December 31, 1997, 1996, and 1995, respectively. The
Properties have recognized such expenses in the statements of operations
for each applicable year and have recorded such amounts as contributions
to owners' equity.

6. FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Properties in
estimating its fair value disclosures for financial instruments:

MORTGAGE NOTES PAYABLE--The carrying amount of the Properties' variable
rate borrowings approximates fair value based on the current rate offered
the Properties for similar types of borrowing arrangements.

OTHER--The carrying amount of all other financial instruments approximates
their fair value due to their short term nature.

7. COMMITMENTS AND CONTINGENCIES

One of the Properties has a $50,000 bank letter of credit which expires on
December 31, 1998. There were no short-term borrowings outstanding on the
letter of credit at December 31, 1997 and 1996.

The Properties are defendants in legal actions arising during the normal
course of business. Management believes that the ultimate outcome of those
actions will not materially affect the Properties' combined financial
position, results of operations, or cash flows.

F-20
<PAGE> 116

8. REAL ESTATE AND ACCUMULATED DEPRECIATION

Real estate and accumulated depreciation, by property, consists of the
following at December 31, 1997:
<TABLE>
<CAPTION>

COSTS CAPITALIZED SUBSEQUENT
INITIAL COSTS TO ACQUISITION/CONSTRUCTION

BUILDING AND BUILDING AND
LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
<S> <C> <C> <C> <C> <C>
Office:
Sunrise $ $ 745,421 $ 5,492,677 $ $ 3,265,657
Conoco 4,022,920 767,085 2,240,411 428,347
Heritage 4,410,000 165,792 3,993,213 65,854
Claydesta 11,461,060 949,316 7,385,604 290,956

Industrial:
Caballo 113,745 1,244,004
Escondido 122,949 2,890,267 29,067 20,000
Polaris 32,500 299,919
D'Iberville 145,000 1,655,000
------------ ----------- ------------ -------- -----------

Total $ 19,893,980 $ 3,041,808 $ 25,201,095 $ 29,067 $ 4,070,814
============ =========== ============ ======== ===========

GROSS AMOUNT
DATE OF
BUILDING AND ACCUMULATED ACQUISITION /
LOCATION LAND IMPROVEMENTS TOTAL DEPRECIATION (1) CONSTRUCTION

Office:
Sunrise $ 745,421 $ 8,758,334 $ 9,503,755 $ 1,416,290 12/29/92
Conoco 767,085 2,668,758 3,435,843 209,435 07/12/94
Heritage 165,792 4,059,067 4,224,859 209,797 02/14/96
Claydesta 949,316 7,676,560 8,625,876 414,138 08/16/95

Industrial:
Caballo 113,745 1,244,004 1,357,749 108,640 07/13/94
Escondido 152,016 2,910,267 3,062,283 177,857 08/21/95
Polaris 32,500 299,919 332,419 07/22/96
D'Iberville 145,000 1,655,000 1,800,000 11,538 10/01/97
----------- ------------ ------------ -----------

Total $ 3,070,875 $ 29,271,909 $ 32,342,784 $ 2,547,695
=========== ============ ============ ===========

</TABLE>

(1) Depreciable lives range from primarily thirty-nine years for buildings
and improvements, to the term of related leases for tenant
improvements.

F-21
<PAGE> 117

The following table reconciles the historical cost of the Palace Properties
from January 1, 1995, to December 31, 1997.

1997 1996 1995

<S> <C> <C> <C>
Balance, beginning of year $ 29,165,376 $ 24,108,257 $ 12,599,690
Additions, during year - Acquisition,
improvements, etc. 3,177,712 5,269,186 11,508,567
Deductions during year - Write-off of
tenant improvements (304) (212,067)
------------ ------------ ------------

Balance, end of year $ 32,342,784 $ 29,165,376 $ 24,108,257
============ ============ ============
</TABLE>

The following table reconciles the accumulated depreciation from January 1,
1995, to December 31, 1997.

1997 1996 1995

<S> <C> <C> <C>
Balance, beginning of year $ 1,688,018 $ 925,857 $ 329,818
Additions, during year - Depreciation and
amortization for the year 860,645 822,165 596,039
Deductions during year - Accumulated
depreciation of written-off tenant improvements (968) (60,004)
----------- ----------- ---------

Balance, end of year $ 2,547,695 $ 1,688,018 $ 925,857
============ ============ =========
</TABLE>

9. UNAUDITED INTERIM INFORMATION

The Properties borrowed additional amounts under the mortgage note
agreement from the owners in the amount of $384,999 to fund development
costs related to the Polaris property.

F-22
<PAGE> 118

No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offer contained herein, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company, the Company's Trust Managers or any of the Underwriters. This
Prospectus does not constitute an offer of any securities other than those to
which it relates or an offer to sell, or a solicitation of an offer to buy, to
any person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that the information
contained herein is correct as of any time subsequent to the date hereof.

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

TABLE OF CONTENTS

<S> <C>
Prospectus Summary.....................................................................................................
Risk Factors...........................................................................................................
The Company............................................................................................................
Use of Proceeds........................................................................................................
Distribution Policy....................................................................................................
Capitalization.........................................................................................................
Dilution...............................................................................................................
Selected Financial Information.........................................................................................
Management's Discussion and Analysis
of Financial Condition and Results of Operations..................................................................
Properties.............................................................................................................
Policies with Respect to Certain Activities............................................................................
Management.............................................................................................................
Certain Relationships and Related Transactions.........................................................................
Partnership Agreement..................................................................................................
Principal Shareholders.................................................................................................
Description of Shares of Beneficial Interest...........................................................................
Certain Provisions of the Texas REIT Act and of the Company's
Charter and Bylaws................................................................................................
Shares Available for Future Sale.......................................................................................
Federal Income Tax Consequences........................................................................................
ERISA Considerations...................................................................................................
Underwriting...........................................................................................................
Legal Matters..........................................................................................................
Experts................................................................................................................
Additional Information.................................................................................................
Glossary...............................................................................................................
Index to Financial Statements.......................................................................................F-1
</TABLE>

Until , 1998 all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.

4,290,000 SHARES

PALACE REIT

COMMON SHARES OF
BENEFICIAL INTEREST

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

PROSPECTUS
----------------

MORGAN KEEGAN & COMPANY, INC.

__________, 1998

<PAGE> 119

PART II. INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table itemizes the expenses incurred by the
Company in connection with the offering of the Common Shares being registered.
All of the amounts shown are estimates except the Securities and Exchange
Commission registration fee, the NASD fee and the Nasdaq Stock Market listing
fee.

Item Amount
- ---- ------
<S> <C>
Registration Fee - Securities and Exchange Commission $ 23,000
NASD Fee 8,000
NASDAQ Stock Market Entry Fee 55,000
Transfer Agent's and Registrar's Fees 5,000
Printing and Engraving Fees 134,000
Legal Fees and Expenses (other than Blue Sky) 125,000
Accounting Fees and Expenses 128,000
Blue Sky Fees and Expenses (including fees of counsel) 15,000
Miscellaneous Expenses 100,000
----------
TOTAL $ 593,000

</TABLE>

ITEM 32. SALES TO SPECIAL PARTIES

Not applicable.

ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES

On February 11, 1998, an aggregate of 141,260 Common Shares
were sold by the Company to Messrs. Merker, Lorentzen and Fishman in connection
with the formation of the Company. This issuance of Common Shares was effected
in reliance upon an exemption from registration under Section 4(2) of the
Securities Act as a transaction not involving a public offering.

On March 11, 1998, the Operating Partnership agreed to issue
an aggregate of 415,312 OP Units to Bayview Investments, Inc., Imperial
Speedway, Inc. and Polaris Warehouse, Inc. in exchange for certain of the
Properties, subject to the completion of the Offering and certain other
conditions. This issuance will be effected in reliance upon an exemption from
registration under Section 4(2) of the Securities Act as a transaction not
involving a public offering.

ITEM 34. INDEMNIFICATION OF TRUST MANAGERS AND OFFICERS

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

The Texas REIT Act further provides that, except to the extent
otherwise permitted by the Texas REIT

II-1

<PAGE> 120

Act, a person may not be indemnified in respect of a proceeding in which the
person is found liable on the basis that personal benefit was improperly
received by him or in which the person is found liable to the REIT.
Indemnification pursuant to Subsection (B) of Section 9.20 of the Texas REIT Act
is limited to reasonable expenses actually incurred and may not be made in
respect of any proceeding in which the person has been found liable for willful
or intentional misconduct in the performance of his duty to the REIT.

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

The Company's Charter provides for indemnification by the
Company of its Trust Managers and officers to the fullest extent permitted by
the Texas REIT Act.

The Company has entered into indemnification agreements
requiring the Company to indemnify its Trust Managers and officers, and advance
expenses, to the maximum extent permitted by Texas law.

The Company intends to maintain Trust Manager and officer
liability insurance.

The Company has agreed to indemnify the Underwriters against
certain liabilities, losses and expenses including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.

ITEM 35. TREATMENT OF PROCEEDS FROM COMMON SHARES BEING REGISTERED

Not applicable.

ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS

a. FINANCIAL STATEMENTS

Pro forma Combined Balance Sheet - Palace REIT Pro forma
Combined Statement of Operations - Palace REIT Notes to Pro
forma Combined Financial Statements - Palace REIT Independent
Auditors' Report - Palace REIT Balance Sheet - Palace REIT
Notes to Balance Sheet - Palace REIT Independent Auditors'
Report - Palace Properties Combined Financial Statements -
Palace Properties
Combined Balance Sheets
Combined Statements of Operations
Combined Statements of Changes in Owners' Equity
Combined Statements of Cash Flows
Notes to Combined Financial Statements - Palace Properties

b. EXHIBITS

<TABLE>

<S> <C>
** 1.1 Underwriting Agreement.
* 3.1 First Amended and Restated Declaration of Trust.
* 3.2 Bylaws.
** 4.1 Form of Common Share Certificate.

</TABLE>

II-2

<PAGE> 121

<TABLE>

<S> <C>
** 5.1 Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.,
regarding the legality of the Common Shares.
** 8.1 Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.,
regarding tax matters.
* 10.1 First Amended and Restated Agreement of Limited Partnership
of the Operating Partnership.
10.2 Employment Contract by and between the Company and David. R.
Merker.
10.3 Employment Contract by and between the Company and Arthur F.
Lorentzen, Jr.
* 10.4 Employee and Trust Manager Incentive Share Plan of the
Company.
10.5 Form of Contribution and Exchange Agreement dated as
of_______________ , 1998, by and among the Prior Owners and
the Operating Partnership and the Company.
10.6 Form of Purchase and Sale Agreement dated as of _______,
1998, by and among the Prior Owners and the Operating
Partnership and the Company.
10.7 Right of First Refusal Agreement dated as of March 6, 1998,
by and between the Company, the Operating Partnership, Neva
Properties, Ltd., Natex, Ltd., Ralph Engelstad, Ltd.,
Anywhere, Ltd., Who, Ltd., Smith Tower, Ltd., and Las Vegas
Motor Speedway, Inc.
* 10.8 Form of Indemnification Agreement.
** 10.9 Employment Contract by and between the Company and Deborah
J. Pierce.
* 23.1 Independent Auditors' Consent, Deloitte & Touche LLP.
** 23.2 Consent of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
Included in response to items 5.1 and 8.1.
24.1 Power of Attorney.
*27.1 Financial Data Schedule.
- ------------------
</TABLE>

* Filed herewith.
** To be filed by amendment.

ITEM 37. UNDERTAKINGS

(a) The undersigned registrant hereby undertakes to provide to
the representatives of the Underwriters at the closing
specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by
the representatives of the Underwriters to permit prompt
delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to Trust Managers, officers,
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a Trust Manager,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such Trust Manager, officer or controlling
person in connection with the securities being registered,
the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the
final adjudication of such issue.

II-3

<PAGE> 122

(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule
424(b)(1) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it
was declared effective.

(2) For purposes of determining any liability under the
Securities Act, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering
thereof.

II-4

<PAGE> 123

SIGNATURES

Pursuant to the requirements of the Securities Act Palace REIT
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on April 30, 1998.

PALACE REIT

/s/ David R. Merker
----------------------------------------------
By: David R. Merker, Chief Executive Officer

Pursuant to the requirements of the Securities Act, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

Name Title Date

<S> <C> <C>
/s/ David R. Merker Chairman of the Board, Chief April 30, 1998
-------------------------------- Executive Officer and Trust
David R. Merker Manager
(principal executive officer)

/s/ Arthur F. Lorentzen, Jr. President, Chief Operating
-------------------------------- Officer and Trust Manager April 30, 1998
Arthur F. Lorentzen, Jr. (interim principal financial and
accounting officer)

/s/ Edward M. Fishman Trust Manager April 30, 1998
--------------------------------
Edward M. Fishman

-------------------------------- Trust Manager ________, 1998
John F. Cook

-------------------------------- Trust Manager ________, 1998
Stephen P. Laffey

</TABLE>

II-5

<PAGE> 124

EXHIBIT INDEX

EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
** 1.1 Underwriting Agreement.
* 3.1 First Amended and Restated Declaration of Trust.
* 3.2 Bylaws.
** 4.1 Form of Common Share Certificate.
** 5.1 Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., regarding
the legality of the Common Shares.
** 8.1 Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., regarding
tax matters.
* 10.1 First Amended and Restated Agreement of Limited Partnership of the
Operating Partnership.
10.2 Employment Contract by and between the Company and David. R. Merker.
10.3 Employment Contract by and between the Company and Arthur F.
Lorentzen, Jr.
* 10.4 Employee and Trust Manager Incentive Share Plan of the Company.
10.5 Form of Contribution and Exchange Agreement dated as of _______,
1998, by and among the Prior Owners and the Operating Partnership
and the Company.
10.6 Form of Purchase and Sale Agreement dated as of ______________ ,
1998, by and among the Prior Owners and the Operating Partnership
and the Company.
10.7 Right of First Refusal Agreement dated as of March 6, 1998, by and
between the Company, the Operating Partnership, Neva Properties,
Ltd., Natex, Ltd., Ralph Engelstad, Ltd., Anywhere, Ltd., Who, Ltd.,
Smith Tower, Ltd., and Las Vegas Motor Speedway, Inc.
* 10.8 Form of Indemnification Agreement.
** 10.9 Employment Contract by and between the Company and Deborah J.
Pierce.
* 23.1 Independent Auditors' Consent, Deloitte & Touche LLP.
** 23.2 Consent of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. Included in
response to items 5.1 and 8.1.
24.1 Power of Attorney.
*27.1 Financial Data Schedule.

</TABLE>

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

* Filed herewith.
** To be filed by amendment.

<PAGE> 1
EXHIBIT 3.1

FIRST AMENDED AND RESTATED
DECLARATION OF TRUST
OF
PALACE REIT

The undersigned, acting as the Trust Managers of a real estate
investment trust organized under the Texas Real Estate Investment Trust Act, as
amended (the "Texas REIT Act"), hereby adopt the following First Amended and
Restated Declaration of Trust for such trust, which replaces in its entirety
the previously enacted Declaration of Trust, which First Amended and Restated
Declaration of Trust was adopted by the shareholders of the Trust on April 28,
1998, pursuant to the affirmative vote of the holders of at least two-thirds of
the outstanding shares of beneficial interest in the Trust.

ARTICLE ONE

The name of the trust (the "Trust") is "Palace REIT." An assumed name
certificate setting forth such name has been filed in the manner prescribed by
law.

ARTICLE TWO

The Trust is formed pursuant to the Texas REIT Act and has the
following as its purpose:

To purchase, hold, lease, manage, sell, exchange, develop,
subdivide and improve real property and interests in real
property, and in general, to carry on any other business and
do any other acts in connection with the foregoing and to have
and exercise all powers conferred by the laws of the State of
Texas upon real estate investment trusts formed under the
Texas REIT Act, and to do any or all of the things hereinafter
set forth to the same extent as natural persons might or could
do. The term "real property" and the term "interests in real
property" for the purposes stated herein shall not include
severed mineral, oil or gas royalty interests.

ARTICLE THREE

The address of the Trust's principal office and place of business is
8117 Preston Road, Suite 440, Dallas, Texas 75225.

ARTICLE FOUR

The street address of the Trust's registered office is 8117 Preston
Road, Suite 440, Dallas, Texas 75225. The name of the Trust's registered agent
at that address is Edward M. Fishman.
<PAGE> 2
ARTICLE FIVE

The names and business addresses of the Trust Managers adopting this
First Amended and Restated Declaration of Trust (the "Declaration of Trust")
are as follows:

<TABLE>
<CAPTION>
Name Mailing Address
---- ---------------
<S> <C>
David R. Merker 3535 Las Vegas Boulevard South
Las Vegas, Nevada 89109

Arthur F. Lorentzen, Jr. 3535 Las Vegas Boulevard South
Las Vegas, Nevada 89109

Edward M. Fishman 8117 Preston Road, Suite 440, L.B. 16
Dallas, Texas 75225

Stephen P. Laffey 50 North Front Street, 15th Floor
Memphis, Tennessee 38103

John F. Cook 3535 Las Vegas Boulevard South
Las Vegas, Nevada 89109
</TABLE>

ARTICLE SIX

The period of the Trust's duration is perpetual. The Trust may be
sooner terminated by the vote of the holders of at least a majority of the
outstanding voting Shares (as defined in Article Seven).

ARTICLE SEVEN

The aggregate number of shares of beneficial interest which the Trust
shall have authority to issue is 100,000,000 common shares, $0.005 par value
per share ("Common Shares"), and 10,000,000 preferred shares, $0.005 par value
per share ("Preferred Shares"). All of the Common Shares shall be equal in all
respects to every other such Common Share, and shall have no preference,
conversion, exchange or preemptive rights.

Unless otherwise specified, the term "Shares" in this Declaration of
Trust shall be deemed to refer to the Common Shares and, solely to the extent
specifically required by law or as specifically provided in any resolution or
resolutions of the Trust Managers providing for the issue of any particular
series of Preferred Shares, to the Preferred Shares. For purposes of Articles
Ten and Nineteen (other than paragraph (j) of Article Nineteen of this
Declaration of Trust), the term Shares shall be deemed to refer to both the
Common Shares and the Preferred Shares and, for purposes of

<PAGE> 3
such Articles Ten and Nineteen (other than paragraph (j) of Article Nineteen),
the number of outstanding Shares shall be deemed to be equal to the value of
the Trust's outstanding Shares as determined from time to time by resolution of
the Trust Managers, such determination to include an allocation of relative
value among the Common Shares and any outstanding series of Preferred Shares.

The Trust may issue one or more series of Preferred Shares, each such
series to consist of such number of shares as shall be determined by resolution
of the Trust Managers creating such series. Each series of Preferred Shares
shall have such designations, preferences, conversion, exchange or other
rights, participations, voting powers, options, restrictions, limitations,
special rights or relations, limitations as to dividends, qualifications or
terms, or conditions of redemption thereof, as shall be stated and expressed by
the Trust Managers in the resolution or resolutions providing for the issuance
of such series of Preferred Shares pursuant to the authority to do so which is
hereby expressly vested in the Trust Managers.

Except as otherwise specifically provided in any resolution or
resolutions of the Trust Managers providing for the issue of any particular
series of Preferred Shares, the number of shares of any such series so set
forth in such resolution or resolutions may be increased or decreased (but not
below the number of shares of such series then outstanding) by a resolution or
resolutions likewise adopted by the Trust Managers.

Except as otherwise specifically provided in any resolution or
resolutions of the Trust Managers providing for the issue of any particular
series of Preferred Shares, Preferred Shares redeemed or otherwise acquired by
the Trust shall assume the status of authorized but unissued Preferred Shares
and shall be unclassified as to series and may thereafter, subject to the
provisions of this Article Seven and to any restrictions contained in any
resolution or resolutions of the Trust Managers providing for the issuance of
any such series of Preferred Shares, be reissued in the same manner as other
authorized but unissued Preferred Shares.

Except as otherwise specifically provided in any resolution or
resolutions of the Trust Managers providing for the issue of any particular
series of Preferred Shares, holders of Preferred Shares shall have no
preemptive rights.

Except as otherwise specifically required by law or this Declaration
of Trust or as specifically provided in any resolution or resolutions of the
Trust Managers providing for the issuance of any particular series of Preferred
Shares, the exclusive voting power of the Trust shall be vested in the Common
Shares of the Trust. Each Common Share entitles the holder thereof to one vote
at all meetings of the shareholders of the Trust.

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<PAGE> 4
ARTICLE EIGHT

The Trust shall issue Shares for consideration consisting of any
tangible or intangible benefit to the Trust, including cash, promissory notes,
services performed, contracts for services to be performed, or other securities
of the Trust, such consideration to be determined by the Trust Managers.

ARTICLE NINE

The Trust Managers shall manage all money and/or property received for
the issuance of Shares for the benefit of the shareholders of the Trust.

ARTICLE TEN

The Trust will not commence business until it has received for the
issuance of Shares consideration of at least $1,000 value.

ARTICLE ELEVEN

The Trust shall not engage in any activities beyond the scope of the
purpose of a real estate investment trust formed pursuant to the Texas REIT
Act, as such purpose is set forth in Article Two hereof.

ARTICLE TWELVE

Cumulative voting for the election of Trust Managers is prohibited.

ARTICLE THIRTEEN

(a) The affirmative vote of the holders of not less than 80% of
the outstanding Shares of the Trust, including the affirmative vote of the
holders of not less than 50% of the outstanding Shares not owned, directly or
indirectly, by any "Related Person" (as hereinafter defined), shall be required
for the approval or authorization of any "Business Combination" (as hereinafter
defined); provided, however, that the 50% voting requirement referred to above
shall not be applicable if the Business Combination is approved by the
affirmative vote of the holders of not less than 90% of the outstanding Shares;
provided further, that neither the 80% voting requirement nor the 50% voting
requirement referred to above shall be applicable if:

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<PAGE> 5
(i) The Trust Managers of the Trust by a vote of not less than
80% of the Trust Managers then holding office (A) have expressly approved in
advance the acquisition of Shares of the Trust that caused the Related Person
to become a Related Person or (B) have expressly approved the Business
Combination prior to the date on which the Related Person involved in the
Business Combination shall have become a Related Person; or

(ii) The Business Combination is solely between the Trust and
another entity, 100% of the voting stock, shares or comparable interests of
which is owned directly or indirectly by the Trust; or

(iii) The Business Combination is proposed to be consummated
within one year after the consummation of a Fair Tender Offer (as hereinafter
defined) by the Related Person in which Business Combination the cash or Fair
Market Value (as hereinafter defined) of the property, securities or other
consideration to be received per Share by all remaining holders of Shares in
the Business Combination is not less than the price offered in the Fair Tender
Offer; or

(iv) All of conditions (A) through (D) of this subparagraph (iv)
shall have been met: (A) if and to the extent permitted by law, the Business
Combination is a merger or consolidation, consummation of which is proposed to
take place within one year of the date of the transaction pursuant to which
such person became a Related Person and the cash or Fair Market Value of the
property, securities or other consideration to be received per Share by all
remaining holders of Shares in the Business Combination is not less than the
Fair Price (as hereinafter defined); (B) the consideration to be received by
such holders is either cash or, if the Related Person shall have acquired the
majority of its holdings of Shares for a form of consideration other than
cash, in the same form of consideration with which the Related Person acquired
such majority; (C) after such person has become a Related Person and prior to
consummation of such Business Combination: (1) there shall have been no
reduction in the annual rate of dividends, if any, paid per Share on the Shares
(adjusted as appropriate for recapitalizations and for Share splits, reverse
Share splits and Share dividends) except any reduction in such rate that is
made proportionately with any decline in the Trust's net income for the period
for which such dividends are declared and except as approved by a majority of
the Continuing Trust Managers (as hereinafter defined), and (2) such Related
Person shall not have received the benefit, directly or indirectly (except
proportionately as a shareholder), of any loans, advances, guarantees, pledges
or other financial assistance or any tax credits or other tax advantages
provided by the Trust prior to the consummation of such Business Combination
(other than in connection with financing a Fair Tender Offer); and (D) a proxy
statement that conforms in all respects with the provisions of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and the rules and
regulations thereunder (or any subsequent provisions replacing the Exchange Act
or the rules or regulations thereunder) shall be mailed to holders of Shares at
least 45 days prior to the consummation of the Business Combination for the
purpose of soliciting shareholder approval of the Business Combination; or

(v) The "Rights" (as hereinafter defined) shall have become
exercisable.

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(b) If a person has become a Related Person and within one year
after the date (the "Acquisition Date") of the transaction pursuant to which
the Related Person became a Related Person (x) a Business Combination meeting
all of the requirements of subparagraph (iv) of the proviso to paragraph (a) of
this Article Thirteen regarding the applicability of the 80% voting requirement
shall not have been consummated and (y) a Fair Tender Offer shall not have been
consummated and (z) the Trust shall not have been dissolved and liquidated,
then, in such event the beneficial owner of each Share (not including Shares
beneficially owned by the Related Person) (each such beneficial owner being
hereinafter referred to as a "Holder") shall have the right (individually a
"Right" and collectively the "Rights"), which may be exercised subject to the
provisions of paragraph (d) of this Article Thirteen, commencing at the opening
of business on the one-year anniversary of the Acquisition Date and continuing
for a period of 90 days thereafter, subject to extensions as provided in
paragraph (d) of this Article Thirteen (the "Exercise Period"), to sell to the
Trust on the terms set forth herein one Share upon exercise of such Right.
Within five business days after the commencement of the Exercise Period the
Trust shall notify the Holders of the commencement of the Exercise Period,
specifying therein the terms and conditions for exercise of the Rights. During
the Exercise Period, each certificate representing Shares beneficially owned by
a Holder (a "Certificate") shall also represent the number of Rights equal to
the number of Shares represented thereby and the surrender for transfer of any
Certificate shall also constitute the transfer of the Rights represented by
such Shares. At 5:00 P.M., Dallas, Texas time, on the last day of the Exercise
Period, each Right not exercised shall become void, all rights in respect
thereof shall cease as of such time and the Certificates shall no longer
represent Rights.

(c) The purchase price for a Share upon exercise of an
accompanying Right shall be equal to the then-applicable Fair Price paid by the
Related Person (plus, as an allowance for interest, an amount equal to the
prime rate of interest as published in the Wall Street Journal and as in effect
from time to time from the Acquisition Date until the date of the payment for
such Share but less the amount of any cash and the Fair Market Value of any
property or securities distributed with respect to such Shares as dividends or
otherwise during such time period), pursuant to the exercise of the Right
relating thereto. In the event the Related Person shall have acquired any of
its holdings of Shares for a form of consideration other than cash, the value
of such other consideration shall be the Fair Market Value thereof.

(d) Notwithstanding the foregoing in paragraph (b) of this
Article Thirteen, the Exercise Period will be deferred in the event (a
"Deferral Event") that the Trust is otherwise prohibited under applicable law
from repurchasing Shares pursuant to the Rights. In the event the Exercise
Period is deferred, or if at any time the Trust reasonably anticipates that a
Deferral Event will exist, the Trust will, as soon as reasonably practicable,
notify the Holders. If at the end of any fiscal quarter during which the
Deferral Event ceases to exist, notice shall be given to the Holders of the
commencement of the deferred Exercise Period, which Exercise Period shall
commence no sooner than 15 days nor more than 45 days from the date of such
notice and which shall continue in effect for a period of time equal in
duration to the previously unexpired portion of the Exercise Period.
Notwithstanding any other provision of this Declaration of Trust to the
contrary, during the Exercise Period (including during the existence of any
Deferral Event), neither the Trust nor any subsidiary

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<PAGE> 7
may declare or pay any dividend or make any distribution on its Shares or to
its shareholders (other than dividends or distributions payable in its Shares
or, in the case of any subsidiary, dividends payable to the Trust) or purchase,
redeem or otherwise acquire or retire for value, or permit any subsidiary to
purchase or otherwise acquire for value, any Shares of the Trust if, upon
giving effect to such dividend, distribution, purchase, redemption, or other
acquisition or retirement, the aggregate amount expended for all such purposes
(the amount expended for such purposes, if other than in cash, to be determined
by a majority of the Continuing Trust Managers, whose determination shall be
conclusive) would prejudice the ability of the Trust to satisfy its maximum
obligation to purchase Shares upon exercise of the Rights.

(e) Rights may be exercised upon surrender to the Trust's
principal transfer agent (the "Transfer Agent") at its principal office of the
Certificate or Certificates evidencing the Shares to be tendered for purchase
by the Trust, together with the form on the reverse thereof completed and duly
signed in accordance with the instructions thereon. In the event that a Holder
shall tender a Certificate which represents greater than the number of Shares
which the Holder elects to require the Trust to purchase upon exercise of the
Rights, the Holder shall designate on the reverse side of such Certificate the
number of Shares to be sold from such Certificate. The Transfer Agent shall
thereupon issue a new Certificate or Certificates for the balance of the number
of Shares not sold to the Trust, which new Certificate or Certificates shall
also represent Rights for an equivalent number of Shares.

(f) For the purposes of this Article:

(i) The term "Business Combination" shall mean: (A) any
merger or consolidation, if and to the extent permitted by law, of the Trust or
a subsidiary, with or into a Related Person; (B) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition, of all or any Substantial Part
(as hereinafter defined) of the assets of the Trust and its subsidiaries (taken
as a whole) (including, without limitation, any voting securities of a
subsidiary) to or with a Related Person; (C) the issuance or transfer by the
Trust or a subsidiary (other than by way of a pro rata distribution to all
shareholders) of any securities of the Trust or a subsidiary of the Trust to a
Related Person; (D) any reclassification of securities (including any reverse
Share split) or recapitalization by the Trust, the effect of which would be to
increase the voting power (whether or not currently exercisable) of the Related
Person; (E) the adoption of any plan or proposal for the liquidation or
dissolution of the Trust proposed by or on behalf of a Related Person which
involves any transfer of assets, or any other transaction, in which the Related
Person has any direct or indirect interest (except proportionately as a
shareholder); (F) any series or combination of transactions having, directly or
indirectly, the same or substantially the same effect as any of the foregoing;
and (G) any agreement, contract or other arrangement providing, directly or
indirectly, for any of the foregoing.

(ii) The term "Continuing Trust Manager" shall mean (A)
any Trust Manager of the Trust who is not affiliated with a Related Person and
who was a Trust Manager immediately prior to the time that the Related Person
became a Related Person, and (B) any other Trust Manager who is not affiliated
with the Related Person and is recommended either by a majority of the persons

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<PAGE> 8
described in clause (A) of this subparagraph (ii) or by persons described in
this clause (B) who are then Trust Managers of the Trust to succeed a person
described in either the said clause (A) or clause (B) as a Trust Manager of the
Trust.

(iii) The term "Fair Market Value" shall mean: (A) in the
case of securities, the highest closing sale price during the 30-day period
immediately preceding the date in question of such security on the Composite
Tape for New York Stock Exchange-Listed Stocks, or, if such security is not
quoted on the Composite Tape on the New York Stock Exchange, or, if such
security is not listed on such exchange, on the principal United States
securities exchange registered under the Exchange Act on which such security is
listed, or, if such security is not listed on any such exchange, the highest
closing sale price (or if not available, the closing bid quotation) with
respect to such security during the 30-day period preceding the date in
question on the National Association of Securities Dealers, Inc. Automated
Quotation System or any system then in use, or if no such sale price or
quotation is available, the fair market value on the date in question of such
security as reasonably determined by an independent appraiser selected by a
majority of the Continuing Trust Managers (or, if there are no Continuing Trust
Managers, by the investment banking firm most recently retained by the Trust)
in good faith; and (B) in the case of property other than cash or stock, the
fair market value of such property on the date in question as reasonably
determined by an independent appraiser selected by a majority of the Continuing
Trust Managers (or, if there are no Continuing Trust Managers, by the
investment banking firm most recently retained by the Trust) in good faith. In
each case hereunder in which an independent appraiser is to be selected to
determine Fair Market Value, (1) in the event (x) there are no Continuing Trust
Managers, and (y) the investment banking firm most recently retained by the
Trust is unable or elects not to serve as such appraiser, or (2) in the event
there are Continuing Trust Managers that do not select an independent appraiser
within ten days of a request for such appointment made by a Related Person,
such independent appraiser may be selected by such Related Person.

(iv) The term "Fair Price" shall mean the highest
per-share price (which, to the extent not paid in cash, shall equal the Fair
Market Value of any other consideration paid), with appropriate adjustments for
recapitalizations and for share splits, reverse share splits and share
dividends, paid by the Related Person in acquiring any of its holdings of
Shares.

(v) The term "Fair Tender Offer" shall mean a bona fide
tender offer for all Shares outstanding (and owned by persons other than a
Related Person if the tender offer is made by the Related Person), whether or
not such offer is conditional upon any minimum number of Shares being tendered,
in which the aggregate amount of cash or the Fair Market Value of any
securities or other property to be received by all holders who tender their
Shares for each Share so tendered shall be at least equal to the then
applicable Fair Price paid by a Related Person or paid by the person making the
tender offer if such person is not a Related Person. In the event that at the
time such tender offer is commenced the terms and conduct thereof are not
directly regulated by Section 14(d) or 13(e) of the Exchange Act and the
general rules and regulations promulgated thereunder, then the terms of such
tender offer regarding the time such offer is held open and regarding
withdrawal rights shall conform in all respects with such terms applicable to
tender offers

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<PAGE> 9
regulated by either of such sections of the Exchange Act. A Fair Tender Offer
shall not be deemed to be "consummated" until Shares are purchased and payment
in full has been made for all duly tendered Shares.

(vi) The term "Related Person" shall mean and include any
individual, corporation, partnership or other "person" (as defined in Section
13(d)(3) of the Exchange Act), and the "Affiliates" and "Associates" (as
defined in Rule 12b-2 of the Exchange Act) of any such individual, corporation,
partnership or other person which individually or together is the "Beneficial
Owner" (as defined in Rule 13d-3 of the Exchange Act) in the aggregate of more
than 50% of the outstanding Shares, other than the Trust or any employee
benefit plan(s) sponsored by the Trust.

(vii) The term "Substantial Part" shall mean more than 35%
of the book value of the total assets of the Trust and its subsidiaries (taken
as a whole) as of the end of the fiscal year ending prior to the time the
determination is being made.

(viii) Any person (as such term is defined in paragraph (f)
(vi)) that has the right to acquire any Shares pursuant to any agreement, or
upon the exercise of conversion rights, warrants or options, or otherwise,
shall be deemed a Beneficial Owner of such Shares for purposes of determining
whether such person, individually or together with its Affiliates and
Associates, is a Related Person.

(ix) For purposes of paragraph (a)(iii) of this Article
Thirteen, the term "other consideration to be received" shall include, without
limitation, Shares retained by the Trust's existing public shareholders in the
event of a Business Combination in which the Trust is the surviving entity.

(g) The affirmative vote of the holders of not less than 80% of
the outstanding Shares, including the affirmative vote of the holders of not
less than 50% of the outstanding Shares not owned, directly or indirectly, by
any Related Person (such 50% voting requirement shall not be applicable if such
amendment, alteration, change, repeal or rescission is approved by the
affirmative vote of not less than 90% of the outstanding Shares) shall be
required to amend, alter, change, repeal or rescind, or adopt any provisions
inconsistent with, this Article Thirteen.

(h) The provisions of this Article Thirteen shall be subject to
all valid and applicable laws, including, without limitation, the Texas REIT
Act, and, in the event this Article Thirteen or any of the provisions hereof
are found to be inconsistent with or contrary to any such valid laws, such laws
shall be deemed to control, and this Article Thirteen shall be regarded as
modified accordingly, and, as so modified, to continue in full force and
effect.

ARTICLE FOURTEEN

The Trust Managers may from time to time declare, and the Trust may
pay, dividends or distributions on its outstanding Shares in cash, in property
or in its Shares, except that no dividend

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or distribution shall be declared or paid when (i) the Trust is unable to pay
its debts as they become due in the usual course of its business, or when the
payment of such dividend or distribution would result in the Trust being unable
to pay its debts as they become due in the usual course of business, or (ii)
the amount of the dividend or distribution exceeds the surplus of the Trust,
except as set forth in the Texas REIT Act.

ARTICLE FIFTEEN

Upon resolution adopted by the Trust Managers, the Trust shall be
entitled to purchase or redeem, directly or indirectly, its own Shares, subject
to any limitations of the Texas REIT Act.

ARTICLE SIXTEEN

(a) In this Article:

(i) "Indemnitee" means: (A) any present or former Trust
Manager or officer of the Trust; (B) any person who while serving in any of the
capacities referred to in clause (A) hereof served at the Trust's request as a
trust manager, director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another real estate investment trust
or foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise; and (C) any
person nominated or designated by (or pursuant to authority granted by) the
Trust Managers or any committee thereof to serve in any of the capacities
referred to in clauses (A) or (B) hereof.

(ii) "Official Capacity" means: (A) when used with
respect to a Trust Manager, the office of Trust Manager of the Trust; and (B)
when used with respect to a person other than a Trust Manager, the elective or
appointive office of the Trust held by such person or the employment or agency
relationship undertaken by such person on behalf of the Trust, but in each case
does not include service for any other real estate investment trust or foreign
or domestic corporation or any partnership, joint venture, sole proprietorship,
trust, employee benefit plan or other enterprise.

(iii) "Proceeding" means any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative, any appeal in such an action, suit or proceeding,
and any inquiry or investigation that could lead to such an action, suit or
proceeding.

(b) The Trust shall indemnify every Indemnitee against all
judgments, penalties (including excise and similar taxes), fines, amounts paid
in settlement and reasonable expenses actually incurred by the Indemnitee in
connection with any Proceeding in which he or she was, is or is threatened to
be named defendant or respondent, or in which he or she was or is a witness
without being named a defendant or respondent, by reason, in whole or in part,
of his or her serving or having

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served, or having been nominated or designated to serve, in any of the
capacities referred to in paragraph (a)(i) of this Article Sixteen, to the
fullest extent that indemnification is permitted by Texas law. An Indemnitee
shall be deemed to have been found liable in respect of any claim, issue or
matter only after the Indemnitee shall have been so adjudged by a court of
competent jurisdiction after exhaustion of all appeals therefrom. Reasonable
expenses shall include, without limitation, all court costs and all fees and
disbursements of attorneys for the Indemnitee.

(c) Without limitation of paragraph (b) of this Article Sixteen
and in addition to the indemnification provided for in paragraph (b) of this
Article Sixteen, the Trust shall indemnify every Indemnitee against reasonable
expenses incurred by such person in connection with any proceeding in which he
or she is a witness or a named defendant or respondent because he or she served
in any of the capacities referred to in paragraph (a)(i) of this Article
Sixteen.

(d) Reasonable expenses (including court costs and attorneys'
fees) incurred by an Indemnitee who was or is a witness or was, is or is
threatened to be made a named defendant or respondent in a Proceeding shall be
paid or reimbursed by the Trust at reasonable intervals in advance of the final
disposition of such Proceeding after receipt by the Trust of a written
undertaking by or on behalf of such Indemnitee to repay the amount paid or
reimbursed by the Trust if it shall ultimately be determined that he or she is
not entitled to be indemnified by the Trust as authorized in this Article
Sixteen. Such written undertaking shall be an unlimited obligation of the
Indemnitee but need not be secured and it may be accepted without reference to
financial ability to make repayment. Notwithstanding any other provision of
this Article Sixteen, the Trust may pay or reimburse expenses incurred by an
Indemnitee in connection with his or her appearance as a witness or other
participation in a Proceeding at a time when he or she is not named a defendant
or respondent in the Proceeding.

(e) The indemnification provided by this Article Sixteen shall (i)
not be deemed exclusive of, or to preclude, any other rights to which those
seeking indemnification may at any time be entitled under the Trust's Bylaws,
any law, agreement or vote of shareholders or disinterested Trust Managers, or
otherwise, or under any policy or policies of insurance purchased and
maintained by the Trust on behalf of any Indemnitee, both as to action in his
or her Official Capacity and as to action in any other capacity, (ii) continue
as to a person who has ceased to be in such capacity by reason of which he or
she was an Indemnitee with respect to matters arising during the period he or
she was in such capacity, and (iii) inure to the benefit of the heirs,
executors and administrators of such a person.

(f) The provisions of this Article Sixteen (i) are for the
benefit of, and may be enforced by, each Indemnitee of the Trust, the same as
if set forth in their entirety in a written instrument duly executed and
delivered by the Trust and such Indemnitee and (ii) constitute a continuing
offer to all present and future Indemnitees. The Trust, by its adoption of
this Declaration of Trust, (x) acknowledges and agrees that each Indemnitee has
relied upon and will continue to rely upon the provisions of this Article
Sixteen in becoming, and serving in any of the capacities referred to in
paragraph (a)(i) of this Article Sixteen, (y) waives reliance upon, and all
notice of acceptance of,

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such provisions by such Indemnitees and (z) acknowledges and agrees that no
present or future Indemnitee shall be prejudiced in his or her right to enforce
the provisions of this Article Sixteen in accordance with their terms by any
act or failure to act on the part of the Trust.

(g) No amendment, modification or repeal of this Article Sixteen
or any provision of this Article Sixteen shall in any manner terminate, reduce
or impair the right of any past, present or future Indemnitees to be
indemnified by the Trust, nor the obligation of the Trust to indemnify any such
Indemnitees, under and in accordance with the provisions of this Article
Sixteen as in effect immediately prior to such amendment, modification or
repeal with respect to claims arising from or relating to matters occurring, in
whole or in part, prior to such amendment, modification or repeal, regardless
of when such claims may be asserted.

(h) If the indemnification provided in this Article Sixteen is
either (i) insufficient to cover all costs and expenses incurred by any
Indemnitee as a result of such Indemnitee being made or threatened to be made a
defendant or respondent in a Proceeding by reason of his or her holding or
having held a position named in paragraph (a)(i) of this Article Sixteen or
(ii) not permitted by Texas law, the Trust shall indemnify, to the fullest
extent that indemnification is permitted by Texas law, every Indemnitee with
respect to all costs and expenses incurred by such Indemnitee as a result of
such Indemnitee being made or threatened to be made a defendant or respondent
in a Proceeding by reason of his or her holding or having held a position named
in paragraph (a)(i) of this Article Sixteen.

(i) The indemnification provided by this Article Sixteen shall be
subject to all valid and applicable laws, including, without limitation, the
Texas REIT Act, and, in the event this Article Sixteen or any of the provisions
hereof or the indemnification contemplated hereby are found to be inconsistent
with or contrary to any such valid laws, such laws shall be deemed to control
and this Article Sixteen shall be regarded as modified accordingly, and, as so
modified, to continue in full force and effect.

ARTICLE SEVENTEEN

No Trust Manager or officer of the Trust shall be liable to the Trust
for any act, omission, loss, damage or expense arising from the performance of
his or her duties under the Trust save only for his or her own willful
misfeasance or malfeasance or negligence. In discharging their duties to the
Trust, Trust Managers and officers of the Trust shall be entitled to rely upon
experts and other matters as provided in the Texas REIT Act and the Trust's
Bylaws.

This Article Seventeen shall be deemed to incorporate by reference any
future amendments to applicable law that further limit or eliminate the
personal liability of a Trust Manager or officer of the Trust.

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Any repeal or modification of all or part of this Article Seventeen by
the shareholders of the Trust shall not adversely affect any right or
protection of a Trust Manager or officer of the Trust existing at the time of
such repeal or modification.

ARTICLE EIGHTEEN

The number of Trust Managers may be increased from time to time by the
affirmative vote of the majority of the Trust Managers or decreased by the
unanimous vote of the Trust Managers. Each Trust Manager shall serve until his
or her successor is elected and qualified or until his or her death,
retirement, resignation or removal.

A Trust Manager may be removed by the vote of the holders of
two-thirds of the outstanding Shares at a special meeting of the shareholders
called for such purpose pursuant to the Trust's Bylaws.

ARTICLE NINETEEN

(a) Beginning with the date of the Initial Public Offering and
prior to the Restriction Termination Date, no Person may actually, beneficially
or constructively own Shares of any class or series with an aggregate value in
excess of 9.8% of the aggregate value of all outstanding Shares of such class
or series of Shares or more than 9.8% of the number of outstanding Shares of
any class or series of Shares (the limitation on the ownership of outstanding
Shares is referred to in this Article Nineteen as the "Ownership Limit," and
the 9.8% threshold is referred to in this Article Nineteen as the "Percentage
Limit"), and no Securities (as hereinafter defined) shall be accepted,
purchased or in any manner acquired by any Person if such issuance or transfer
would result in that Person's ownership of Shares exceeding the Percentage
Limit. For purposes of determining if the Ownership Limit is exceeded by a
Person, Convertible Securities (as hereinafter defined) owned by such Person
shall be treated as if the Convertible Securities owned by such Person had been
converted into Shares as of the date on which there occurs a determination as
to whether the Ownership Limit has been exceeded. The Ownership Limit shall
not apply (i) to the acquisition of Securities of the Trust by an underwriter
in a public offering of Securities of the Trust, or in any transaction
involving the issuance of Securities by the Trust, in which a majority of the
Trust Managers determines that the underwriter or other Person or party
initially acquiring such Securities will timely distribute such Securities to
or among others so that, following such distribution, none of such Securities
will be Excess Securities (as hereinafter defined), or (ii) to the acquisition
of Securities pursuant to an exception made pursuant to paragraph (h) hereof.

(b) Nothing in this Article Nineteen shall preclude the settlement
of any transaction in Securities entered into through the facilities of the New
York Stock Exchange. If any Securities are accepted, purchased or in any
manner acquired by any Person resulting in a violation of paragraph (a) or (e)
hereof, such issuance or transfer shall be valid only with respect to such
amount of

13
<PAGE> 14
Securities issued or transferred as does not result in a violation of paragraph
(a) or (e) hereof, and such acceptance, purchase or acquisition shall be void
ab initio with respect to the amount of Securities that results in a violation
of paragraph (a) or (e) hereof (the "Excess Securities"), and the intended
transferee of such Excess Securities shall acquire no rights in such Excess
Securities except as set forth in paragraph (d) below.

(c) Each shareholder shall, within ten days of demand by the
Trust, disclose to the Trust in writing such information with respect to his,
her or its ownership of Shares as the Trust Managers in their discretion deem
necessary or appropriate in order that the Trust may fully comply with all
provisions of the Internal Revenue Code of 1986, as amended (together with any
successor statute, the "Code") relating to REITs and all regulations, rulings
and cases promulgated or decided thereunder (the "REIT Provisions") and to
comply with the requirements of any taxing authority or governmental agency.
All Persons who actually, beneficially or constructively own in excess of 5%
(or such lower percentage as required pursuant to Treasury Regulations under
the Code) of the Shares must disclose in writing such ownership information to
the Trust no later than January 31 of each year.

(d) The Excess Securities, and the owners thereof, shall have the
following characteristics, rights and powers:

(i) Upon any purported purchase, sale, exchange,
acquisition, disposition or other transfer or upon any change in the capital
structure of the Trust (including any redemption of Securities) that results in
Excess Securities pursuant to paragraph (a) or (e) of this Article Nineteen,
such Excess Securities shall be deemed to have been transferred to a trust
("Beneficial Trust") for registration in the name of the Trustee (as
hereinafter defined) for the exclusive benefit of the Charitable Beneficiary
(as hereinafter defined) to whom an interest in such Excess Securities may
later be transferred pursuant to paragraph (d)(v) hereof. Such transfer to a
Beneficial Trust shall be effective as of the close of business on the business
day prior to the date of the transfer or other change in the capital structure
of the Trust. The Trust shall name a Trustee and Charitable Beneficiary of
each Beneficial Trust within five days after discovery of the existence
thereof. Any such Excess Securities so held in a Beneficial Trust shall be
issued and outstanding shares of the Trust. The Purported Record Transferee
(as hereinafter defined) (or Purported Beneficial Transferee (as hereinafter
defined), if applicable) shall have no rights in such Excess Securities except
as provided in this paragraph (d).

(ii) The Trustee, as record holder of the Excess
Securities, shall be entitled to receive all dividends and distributions as may
be declared by the Board of Trust Managers on such Excess Securities, and shall
hold such dividends or distributions in trust for the benefit of the Charitable
Beneficiary. The Purported Record Transferee (or Purported Beneficial
Transferee, if applicable) with respect to the Excess Securities shall repay to
the Trustee the amount of any dividends or distributions received by it that
(A) are attributable to any Excess Securities and (B) the record date of which
was on or after the date on which such shares became Excess Securities. The
Trust shall take all measures that it determines are reasonably necessary to
recover the amount of any

14
<PAGE> 15
such dividend or distribution paid to the Purported Record Transferee (or
Purported Beneficial Transferee, if applicable), including, if necessary,
withholding any portion of future dividends or distributions payable on Excess
Securities beneficially owned or constructively owned by the Person who, but
for the provisions of paragraph (d)(i), would constructively own or
beneficially own the Excess Securities; and, as soon as reasonably practicable
following the Trust's receipt or withholding thereof, shall pay over to the
Trustee for the benefit of the Charitable Beneficiary the dividends so received
or withheld, as the case may be.

(iii) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of, or any distribution of the assets of
the Trust (other than a dividend), the Trustee of each Beneficial Trust shall
be entitled to receive, ratably with each other holder of Securities of the
same class or series, that portion of the assets of the Trust which is
available for distribution to the holders of such class and series of
Securities. The Trustee shall distribute to the Purported Record Transferee
the amounts received upon such liquidation, dissolution or winding up, or
distribution, provided, however, that the Purported Record Transferee shall not
be entitled to receive amounts pursuant to paragraph (d)(iii) hereof in excess
of, in the case of a purported transfer in which the Purported Record
Transferee gave value for Securities and which transfer resulted in the
transfer of Excess Securities to the Beneficial Trust, the price per share or
security, if any, that such Purported Record Transferee paid for the Securities
and, in the case of a transfer in which the Purported Record Transferee did not
give value for such Securities (e.g., if the Securities were received through a
gift or devise) and which transfer resulted in the transfer of Excess
Securities to the Beneficial Trust, the price per share or security equal to
the Market Price (as hereinafter defined) on the date of such transfer. Any
remaining amount in such Beneficial Trust shall be distributed to the
Charitable Beneficiary.

(iv) The Trustee shall be entitled to vote all Excess
Securities. Any vote by a Purported Record Transferee as a holder of Shares or
Securities prior to the discovery by the Trust that the Securities are Excess
Securities shall, subject to applicable law, be rescinded and shall be void ab
initio with respect to such Excess Securities, and the Purported Record
Transferee shall be deemed to have given, as of the close of business on the
business day prior to the date of the purported transfer that results in the
transfer to the Beneficial Trust of Excess Securities under paragraph (d)(i)
hereof, an irrevocable proxy to the Trustee to vote the Excess Securities in
the manner in which the Trustee, in its sole and absolute discretion, desires.

(v) The Trustee shall have the exclusive and absolute
right to designate a Permitted Transferee (as hereinafter defined) of any
Excess Securities. In an orderly fashion so as not materially and adversely to
affect the Market Price of the Excess Securities, the Trustee shall designate
any Person as Permitted Transferee; provided, however, that (A) the Permitted
Transferee so designated purchases for valuable consideration (whether in a
public or private sale), at a price as set forth in paragraph (d)(vii) hereof,
the Excess Securities and (B) the Permitted Transferee so designated may
acquire such Excess Securities without such acquisition resulting in a transfer
to a Beneficial Trust and the redesignation of such Securities so acquired as
Excess Securities under paragraph (d)(i) hereof. Upon the designation by the
Trustee of a Permitted Transferee in accordance

15
<PAGE> 16
with the provisions of paragraph (a) or (e) hereof, the Trustee of a Beneficial
Trust shall (w) cause to be transferred to the Permitted Transferee that number
of Excess Securities acquired by the Permitted Transferee, (x) cause to be
recorded on the books of the Trust that the Permitted Transferee is the holder
of record of such number of Securities, (y) cause the Excess Securities to be
canceled, and (z) distribute to the Charitable Beneficiary any and all amounts
held with respect to the Excess Securities after making that payment to the
Purported Record Transferee pursuant to paragraph (d)(vi) hereof.

(vi) Any Purported Record Transferee shall be entitled
(following discovery of the Excess Securities and subsequent designation of the
Permitted Transferee in accordance with paragraph (d)(v) hereof, to receive
from the Trustee upon the sale or other disposition of such Excess Securities
the lesser of (A) in the case of (1) a purported transfer in which the
Purported Record Transferee (or Purported Beneficial Transferee, if applicable)
gave value for Securities and which transfer resulted in the transfer of Excess
Securities to the Beneficial Trust, the price per share, if any, such Purported
Record Transferee (or Purported Beneficial Transferee, if applicable) paid for
the Securities, or (2) a transfer in which the Purported Record Transferee (or
Purported Beneficial Transferee, if applicable) did not give value for such
Securities (e.g., if the Securities were received through a gift or devise) and
which transfer resulted in the transfer of Excess Securities to the Beneficial
Trust, the price per share equal to the Market Price on the date of such
transfer, and (B) the price per share received by the Trustee of the Beneficial
Trust from the sale or other disposition of such Excess Securities in
accordance with paragraphs (d)(v) or (d)(vii) hereof. Any amounts received by
the Trustee in respect of such Excess Securities and in excess of such amounts
to be paid the Purported Record Transferee pursuant to paragraph (d)(vi) hereof
shall be distributed to the Charitable Beneficiary in accordance with the
provisions of paragraph (d)(v) hereof. Each Charitable Beneficiary and
Purported Record Transferee (and Purported Beneficial Transferee, if different)
waives any and all claims that each may have against the Trustee and the
Beneficial Trust arising out of the disposition of the Excess Securities,
except for claims arising out of the gross negligence or willful misconduct of,
or any failure to make payments in accordance with this paragraph (d) by such
Trustee or the Trust

(vii) Excess Securities shall be deemed to have been
offered for sale to the Trust, or its designee, at a price per share equal to
the lesser of (A) the price per share in the transaction that created such
Excess Securities (or, in the case of devise or gift, the Market Price at the
time of such devise or gift) and (B) the Market Price on the date the Trust, or
its designee, accepts such offer. The Trust shall have the right to accept
such offer for a period of ninety days after the later of (y) the date of the
transfer which resulted in such Excess Securities and (z) the date the Trust
determines in good faith that a transfer resulting in Excess Securities has
occurred, if the Trust does not receive a notice of such transfer pursuant to
paragraph (d)(v) hereof.

(v) Any sale, transfer, gift, assignment, devise or other
disposition of Shares or of any interest in Shares, including a "transfer"
resulting from a change in the capital structure of the Trust or the grant of
an option to acquire Shares or any interest therein (collectively, a
"transfer") that, if effective, would result in (i) a violation of the
Ownership Limit shall be void ab initio as to the

16
<PAGE> 17
Shares that would cause such violation, (ii) the Shares of the Trust being
owned by less than 100 persons (determined without reference to any rules of
attribution) shall be void ab initio as to the Shares which would otherwise be
beneficially owned by the transferee, (iii) the Trust being "closely held"
within the meaning of Section 856(h) of the Code, shall be void ab initio as to
the transfer of the Shares that would cause the Trust to be "closely held"
within the meaning of Section 856(h) of the Code, (iv) the Trust owning,
directly or indirectly, 10% or more of the ownership interest in any tenant or
subtenant of the Trust's real property within the meaning of Section
856(d)(2)(B) of the Code and the Treasury Regulations thereunder, shall be void
ab initio, or (v) the disqualification of the Trust as a REIT shall be void ab
initio as to the transfer of the Shares that would cause the Trust to be
disqualified as a REIT, and, in the case of each of clauses (i), (ii), (iii),
(iv) and (v) of this paragraph (e), the intended transferee shall acquire no
rights in such Shares except as set forth in paragraph (d) above.

(f) For purposes of this Article Nineteen:

(i) The term "Charitable Beneficiary" means, with
respect to any Beneficial Trust, one or more organizations described in each of
Section 170(b)(1)(A) (other than clauses (vii) or (viii) thereof) and Section
170(c)(2) of the Code that are named by the Trustee as the beneficiary or
beneficiaries of such Beneficial Trust, in accordance with the provisions of
paragraph (d)(i) hereof.

(ii) The term "Convertible Securities" means any
securities of the Trust that are convertible into Shares.

(iii) The term "individual" means any natural person as
well as those organizations treated as natural persons under Section 542(a) of
the Code.

(iv) The term "Initial Public Offering" means the sale of
shares pursuant to the Trust's first effective registration statement for such
shares filed under the Securities Act of 1933, as amended.

(v) The term "Market Price" means the average of the
last reported sales price of Common Shares reported on the New York Stock
Exchange on the five trading days immediately preceding the relevant date, or
if the Common Shares are not then traded on the New York Stock Exchange, the
last reported sales price of the Common Shares on the five trading days
immediately preceding the relevant date as reported on any exchange or
quotation system over which the Common Shares may be traded, or if the Common
Shares are not then traded over any exchange or quotation system, then the
market price of the Common Shares on the relevant date as determined in good
faith by the Board of Trust Managers.

(vi) The term "ownership" (including "own" or "owns") of
Shares means beneficial ownership. Beneficial ownership for this purpose shall
be defined to include actual ownership by a Person, as well as constructive
ownership by such Person after application of

17
<PAGE> 18
principles in accordance with or by reference to Sections 318, 544 or 856 of
the Code or Section 13(d) of the Exchange Act.

(vii) The term "Permitted Transferee" means any Person
designated as a Permitted Transferee in accordance with the provisions of
subparagraph (v) of subsection (d) of this Article Nineteen.

(viii) The term "Person" includes an individual,
corporation, partnership, association, joint stock company, limited liability
company, trust, unincorporated association or other entity and also includes a
"group," as that term is defined in Section 13(d)(3) of the Exchange Act.

(ix) The term "Purported Beneficial Transferee" means,
with respect to any purported transfer that results in Excess Securities, the
purported beneficial transferee for whom the Purported Record Transferee would
have acquired Securities of the Trust if such transfer had been valid under
paragraph (a) or (e) of this Article Nineteen.

(x) The term "Purported Record Transferee" means, with
respect to any purported transfer which results in Excess Securities, the
Person who would have been the record holder of the Securities of the Trust if
such transfer had been valid under paragraph (a) or (e) of this Article
Nineteen.

(xi) The term "REIT" means a "real estate investment
trust," as defined in Section 856 of the Code and applicable Treasury
Regulations.

(xii) The term "Restriction Termination Date" means the
first day after the date of the Initial Public Offering on which the Board of
Trust Managers and the shareholders determine that it is no longer in the best
interests of the Trust to attempt to, or continue to, qualify as a REIT.

(xiii) The term "Securities" means Shares and Convertible
Securities.

(g) If any of the restrictions on transfer set forth in this
Article Nineteen are determined to be void, invalid or unenforceable by virtue
of any legal decision, statute, rule or regulation, then the intended
transferee of any Excess Securities may be deemed, at the option of the Trust,
to have acted as an agent on behalf of the Trust in acquiring the Excess
Securities and to hold the Excess Securities on behalf of the Trust.

(h) The Percentage Limit set forth in paragraph (a) hereof shall
not apply to Securities which the Trust Managers in their sole discretion may
exempt from the Percentage Limit while owned by a Person who has provided the
Trust with evidence and assurances acceptable to the Trust Managers, in their
sole discretion, that the qualification of the Trust as a REIT would not be
jeopardized thereby. The Trust Managers, in their sole discretion, may at any
time revoke any exception pursuant to this paragraph (h) in the case of any
Person, and upon such revocation, the provisions of paragraph (a) hereof shall
immediately become applicable to such Person and all

18
<PAGE> 19
Securities which such Person may own. A decision to exempt or refuse to exempt
from the Percentage Limit the ownership of certain designated Securities, or to
revoke an exemption previously granted, shall be made by the Trust Managers in
their sole discretion, based on any reason whatsoever, including, but not
limited to, the preservation of the Trust's qualification as a REIT.

(i) Subject to the provisions of the first sentence of paragraph
(b) hereof, nothing herein contained shall limit the ability of the Trust to
impose or to seek judicial or other imposition of additional restrictions if
deemed necessary or advisable to protect the Trust and the interests of its
security holders by preserving the Trust's status as a qualified REIT under the
Code.

(j) All Persons who own 5% or more of the Trust's outstanding
Shares (or such lower percentage as required pursuant to Treasury Regulations)
during any taxable year of the Trust shall file with the Trust an affidavit
setting forth the number of Shares during such taxable year (i) owned directly
(held of record by such Person or by a nominee or nominees of such Person) and
(ii) constructively owned (within the meaning of Section 544 of the Code or
considered beneficially owned for purposes of Section 13(d) of the Exchange
Act) by the Person filing the affidavit. The affidavit to be filed with the
Trust shall set forth all the information required to be reported (i) in
returns of shareholders under Section 1.857-9 of the Treasury Regulations or
similar provisions of any successor Treasury Regulations and (ii) in reports to
be filed under Section 13(d) of the Exchange Act. The affidavit or an
amendment to a previously filed affidavit shall be filed with the Trust
annually within 60 days after the close of the Trust's taxable year. A Person
shall have satisfied the requirements of this paragraph (j) if the person
furnishes to the Trust the information in such person's possession after such
person has made a good faith effort to determine the Shares it owns and to
acquire the information required by Treasury Regulations Section 1.857-9 or
similar provisions of any successor regulation.

ARTICLE TWENTY

The Board of Trust Managers shall use its best efforts to cause the
Trust to qualify for U.S. federal income tax treatment in accordance with the
provisions of the Code applicable to REITs. In furtherance of the foregoing,
the Board of Trust Managers shall use its best efforts to take such actions as
are necessary, and may take such actions as it deems desirable (in its sole
discretion) to preserve the status of the Trust as a REIT.

ARTICLE TWENTY-ONE

This Declaration of Trust may be amended from time to time by the
affirmative vote of the holders of at least two-thirds of the outstanding
voting Shares, except that (i) Article Eleven hereof (relating to the
prohibition against engaging in non-real estate investment trust businesses);
(ii) Article Thirteen hereof (relating to the approval of Business
Combinations); (iii) Article Eighteen hereof (relating to the number and
removal of Trust Managers); (iv) Article Nineteen hereof (relating

19
<PAGE> 20
to Share ownership requirements); and (v) this Article Twenty-One may not be
amended or repealed, and provisions inconsistent therewith and herewith may not
be adopted, except by the affirmative vote of the holders of at least 80% of
the outstanding voting Shares.

ARTICLE TWENTY-TWO

Special meetings of the shareholders for any purpose or purposes,
unless otherwise prescribed by law or by the Declaration of Trust, may be
called by the Trust Managers, any officer of the Trust or the holders of at
least 5% of all of the shares entitled to vote at such meeting.

ARTICLE TWENTY-THREE

If any provision of this Declaration of Trust or any application of
any such provision is determined to be invalid by any federal or state court
having jurisdiction over the issue, the validity of the remaining provisions
shall not be affected and other applications of such provision shall be
affected only to the extent necessary to comply with the determination of such
court. In lieu of such illegal, invalid or unenforceable provision, there
shall be added automatically as a part of this Declaration of Trust, a legal,
valid and enforceable provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible, and the parties hereto request the
court or any arbitrator to whom disputes relating to this Declaration of Trust
are submitted to reform the otherwise illegal, invalid or unenforceable
provision in accordance with this Article Twenty-Three.

20
<PAGE> 21
IN WITNESS WHEREOF, the undersigned Trust Managers do hereby execute
this Declaration of Trust as of the 28th day of April, 1998.

/s/ David R. Merker
----------------------------
DAVID R. MERKER

/s/ Arthur F. Lorentzen
----------------------------
ARTHUR F. LORENTZEN, JR.

/s/ Edward M. Fishman
----------------------------
EDWARD M. FISHMAN

/s/ Stephen P. Laffey
----------------------------
STEPHEN P. LAFFEY

/s/ John F. Cook
----------------------------
JOHN F. COOK

<PAGE> 1
EXHIBIT 3.2

BYLAWS

PALACE REIT
<PAGE> 2
INDEX

<TABLE>
<S> <C>
ARTICLE I Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 Principal Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE II Meetings of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.1 Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.2 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.3 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.4 Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.5 Business at Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.6 Voting Lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.7 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.8 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.9 Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.10 Voting of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.11 Voting of Shares by Certain Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.12 Election of Trust Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.13 Telephone Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.14 Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.15 Inspectors and Voting Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

ARTICLE III Trust Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.1 Powers and Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.2 Number and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.3 Election and Term of Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.4 Nomination of Trust Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.5 Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.6 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.7 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.8 Bond Not Required; Time Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.9 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.10 Execution of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

ARTICLE IV Meetings of the Trust Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.1 Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.2 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.3 Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.4 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.5 Quorum and Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.6 Presumption of Assent to Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.7 Telephone Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.8 Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.9 Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.10 Interest of Trust Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.11 Right of Trust Managers and Officers to Own Shares
or Other Property and to Engage in Other Business . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.12 Transactions Between Trust Managers and the Trust . . . . . . . . . . . . . . . . . . . . . 10
Section 4.13 Persons Dealing with Trust Managers or Officers . . . . . . . . . . . . . . . . . . . . . . 10
Section 4.14 Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 4.15 Liability of Trust Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
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<TABLE>
<S> <C>
ARTICLE V Committees of the Trust Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.1 Membership and Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.2 Minutes and Rules of Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.3 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.4 Telephone Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.5 Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

ARTICLE VI Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 6.1 Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 6.2 Election, Term of Office and Qualification . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.3 Subordinate Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.4 Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.5 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.6 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.7 The Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.8 The Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.9 The President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.10 The Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.11 The Chief Operating Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.12 The Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.13 Assistant Secretaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.14 The Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.15 Assistant Treasurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.16 Treasurer's Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 6.17 Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 6.18 Execution of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

ARTICLE VII Trust Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.1 Share Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.2 Lost Certificates, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.3 Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.4 Ownership of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.5 Closing of Transfer Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.6 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.7 Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

ARTICLE VIII General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 8.1 General Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 8.2 Limited Liability of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 8.3 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 8.4 Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 8.5 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 8.6 Checks, Notes, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 8.7 Examination of Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 8.8 Voting of Voting Securities Held by the Trust . . . . . . . . . . . . . . . . . . . . . . . 17
Section 8.9 Number, Gender, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

ARTICLE IX Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 9.1 Amendment of Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

ARTICLE X Subject to All Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 10.1 Subject to All Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
<PAGE> 4
PALACE REIT

BYLAWS

ARTICLE I

OFFICES

SECTION 1.1 PRINCIPAL OFFICE. The principal office of the Trust
shall be in the City of Las Vegas, Nevada, or at such other location as the
Trust Managers may from time to time determine.

SECTION 1.2 OTHER OFFICES. The Trust may also have offices at
such other places, both within and without the State of Texas, as the Trust
Managers may from time to time determine or the business of the Trust may
require.

ARTICLE II

MEETINGS OF SHAREHOLDERS

SECTION 2.1 PLACE OF MEETINGS. The Trust Managers may designate
any place, either within or without the State of Texas, as the place of meeting
for any annual meeting or for any special meeting called by the Trust Managers.
A waiver of notice signed by all shareholders entitled to vote at a meeting may
designate any place, either within or without the State of Texas, as the place
for the holding of such meeting. If no designation is made, or if a special
meeting be otherwise called, the place of meeting shall be the principal office
of the Trust.

SECTION 2.2 ANNUAL MEETING. The annual meeting of shareholders
shall be held at such time, on such day and at such place as may be designated
by the Trust Managers. At the annual meeting, the shareholders shall, subject
to Section 2.5 and Section 3.3 of these Bylaws, elect Trust Managers and
transact such other business as may properly be brought before the meeting.
Failure to hold the annual meeting at the designated time shall not cause the
dissolution of the Trust.

SECTION 2.3 SPECIAL MEETINGS. Special meetings of the
shareholders for any purpose or purposes, unless otherwise prescribed by law or
by the Declaration of Trust, may be called by the Trust Managers, any officer
of the Trust or the holders of at least five percent (5%) of all of the shares
entitled to vote at the meetings. Business transacted at all special meetings
shall be confined to the purpose or purposes stated in the notice of special
meeting.

SECTION 2.4 NOTICE OF MEETINGS. Written or printed notice of all
meetings of shareholders stating the place, day and hour thereof, and in the
case of a special meeting the purpose or purposes for which the meeting is
called, shall be personally delivered or mailed, not less than ten (10) days
nor more than fifty (50) days prior to the date of the meeting, to the
shareholders of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the United States Mail
addressed to the
<PAGE> 5
shareholder at his address as it appears on the share transfer books of the
Trust and the postage shall be prepaid. Personal delivery of any such notice
to any officer of a corporation or association, or to any member of a
partnership, shall constitute delivery of such notice to such corporation,
association or partnership.

SECTION 2.5 BUSINESS AT ANNUAL MEETING. No business may be
transacted at an annual meeting of shareholders, other than business that is
either (a) specified in the notice of meeting (or any supplement thereto) given
by or at the direction of the Trust Managers (or any duly authorized committee
thereof), (b) otherwise properly brought before the annual meeting by or at the
direction of the Trust Managers (or any duly authorized committee thereof) or
(c) otherwise properly brought before the annual meeting by any shareholder of
the Trust (i) who is a shareholder of record on the date of the giving of the
notice provided for in this Section 2.5 and on the record date for the
determination of shareholders entitled to vote at such annual meeting, and (ii)
who complies with the notice procedures set forth in this Section 2.5.

In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a shareholder, such shareholder
must have given timely notice thereof in proper written form to the Secretary
of the Trust. To be timely, a shareholder's notice to the Secretary must be
delivered to or mailed and received at the principal office of the Trust not
less than sixty (60) days nor more than ninety (90) days prior to the date of
the applicable annual meeting of shareholders, provided, however, that in the
event that less than seventy (70) days' notice or prior public disclosure of
the date of the meeting be given or made, notice by the shareholder to be
timely must be so received not later than the close of business on the tenth
(10th) day following the day on which such notice of the date of the applicable
annual meeting was mailed or such public disclosure of the date of such annual
meeting was made, whichever first occurs. For purposes of this Section 2.5,
the date of a public disclosure shall include, but not be limited to, the date
on which such disclosure is made in a press release reported by the Dow Jones
News Services, the Associated Press or any comparable news service or in a
document publicly filed by the Trust with the Securities and Exchange
Commission pursuant to Sections 13, 14 or 15(d) (or the rules and regulations
promulgated thereunder) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act").

To be in proper written form, a shareholder's notice to the Secretary
must set forth as to each matter such shareholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of such shareholder, (iii) the
number of shares of the Trust that are owned beneficially or of record by such
shareholder, (iv) a description of all arrangements or understandings between
such shareholder and any other person or persons (including their names) in
connection with the proposal of such business by such shareholder and any
material interest of such shareholder in such business, and (v) a
representation that such shareholder intends to appear in person or by proxy at
the annual meeting to bring such business before the meeting.

No business shall be conducted at the annual meeting of shareholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 2.5; provided, however, that, once
business has been properly brought before the annual meeting in accordance with
such procedures, nothing in this Section 2.5 shall be deemed to preclude
discussion by any shareholder of any such business. If the presiding officer
of an annual meeting determines that business was not properly brought before
the annual meeting in accordance with the foregoing procedures, the presiding
officer shall declare to the meeting that the business was not properly brought
before the meeting and such business shall not be transacted at such meeting.

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SECTION 2.6 VOTING LISTS. The officer or agent having charge of
the share transfer books for shares of the Trust shall make available for
inspection by shareholders, at least ten (10) days before each meeting of the
shareholders, a complete list of shareholders entitled to vote at such meeting
or any adjournment thereof, arranged in alphabetical order, with the address of
each and the number of shares held by each. The list shall be kept on file at
the registered office of the Trust and shall be subject to inspection by any
shareholder at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting and shall be
subject to the inspection of any shareholder for the duration of the meeting.
The original share transfer books shall be prima facie evidence as to who are
the shareholders entitled to examine such list or transfer books or to vote at
any meeting of shareholders. Failure to comply with this Section 2.6 with
respect to any meeting of shareholders shall not affect the validity of any
action taken at such meeting.

SECTION 2.7 QUORUM. The holders of a majority of the shares
entitled to vote, present in person or represented by proxy, shall constitute a
quorum at all meetings of the shareholders for the transaction of business,
except as otherwise provided by law or by the Declaration of Trust. If,
however, such quorum shall not be present or represented at any meeting of the
shareholders, the shareholders entitled to vote at such meeting, present in
person or represented by proxy, shall have the power to adjourn the meeting
from time to time without notice other than announcement at the meeting until a
quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally convened. The
shareholders present at a duly organized meeting at which a quorum was present
may continue to transact business until adjournment notwithstanding the
withdrawal of enough shareholders to leave less than a quorum present, provided
that there remain at such meeting the holder or holders of at least one-third
(1/3) of the shares issued and outstanding and entitled to vote thereat,
present in person or represented in the manner specified above. A holder of a
share shall be treated as being present at a meeting if the holder of such
share is (i) present in person at the meeting, or (ii) represented at the
meeting by a valid proxy, whether the instrument granting such proxy is marked
as casting a vote or abstaining, is left blank or does not empower such proxy
to vote with respect to some or all matters to be voted upon at the meeting.

SECTION 2.8 ORGANIZATION. (a) The Chairman of the Board, if one
shall be elected, shall preside at all meetings of the shareholders. In the
absence of the Chairman of the Board or should one not be elected, the
following officers shall preside in order of priority: President, Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, Vice
President-Legal, or Secretary. If no such officer is available, the meeting
shall be adjourned until such an officer is available to preside over the
meeting. The presiding officer shall set the agenda for the meeting, shall
conduct all aspects of the meeting and shall establish and interpret the rules
of order for the conduct of the meeting.

(b) The Secretary of the Trust shall act as secretary at all
meetings of the shareholders. In his absence, an Assistant Secretary shall so
act and in the absence of all of these officers, the presiding officer may
appoint any person to act as secretary of the meeting.

SECTION 2.9 PROXIES. (a) At any meeting of the shareholders,
every shareholder entitled to vote at such meeting shall be entitled to vote in
person or by proxy executed in writing by such shareholder or by his duly
authorized attorney-in-fact. Proxies shall be filed with the Secretary or
Trust Managers immediately after the meeting has been called to order.

(b) No proxy shall be valid after eleven (11) months from the date
of its execution unless such proxy otherwise provides.

3
<PAGE> 7
(c) Each proxy shall be revocable unless the proxy form
conspicuously states that the proxy is irrevocable and the proxy is coupled
with an interest as defined in Article 2.29 of the Texas Business Corporation
Act.

(d) In the event that any instrument in writing shall designate
two (2) or more persons to act as proxies, a majority of such persons present
at the meeting or, if only one shall be present, then that one, shall have and
may exercise all of the powers conferred by such written instrument upon all
the persons so designated unless the instrument shall otherwise provide.

SECTION 2.10 VOTING OF SHARES. Except as otherwise provided by
law, the Declaration of Trust or these Bylaws, each shareholder shall be
entitled at each meeting of shareholders to one (1) vote on each matter
submitted to a vote at such meeting for each share having voting rights
registered in his name on the books of the Trust at the time of the closing of
the share transfer books (or at the record date) for such meeting. When a
quorum is present at any meeting (and notwithstanding the subsequent withdrawal
of enough shareholders to leave less than a quorum present) in accordance with
Section 2.7 of these Bylaws, the votes of holders of a majority of the shares
entitled to vote, present in person or represented by proxy, shall decide any
matter submitted to such meeting, unless the matter is one upon which by law or
by express provision of the Declaration of Trust or of these Bylaws the vote of
a greater number is required, in which case the vote of such greater number
shall govern and control the decision of such matter. In determining the
number of shares entitled to vote, shares abstaining from voting or not voted
on a matter (including elections) will not be treated as entitled to vote. The
provisions of this Section 2.10 will govern with respect to all votes of
shareholders except as otherwise provided for in these Bylaws or in the
Declaration of Trust or by some specific statutory provision superseding the
provisions contained in these Bylaws or the Declaration of Trust.

SECTION 2.11 VOTING OF SHARES BY CERTAIN HOLDERS. (a) Shares
standing in the name of another business organization may be voted by such
officer, agent or proxy as the organizational documents of such organization
may authorize or, in the absence of such authorization, as may be determined by
the governing body of such organization.

(b) Shares held by an administrator, executor, guardian or
conservator may be voted by him, either in person or by proxy, without a
transfer of such shares into his name so long as such shares forming a part of
an estate are in the possession and form a part of the estate being served by
him. Shares standing in the name of a trustee may be voted by him, either in
person or by proxy, but no trustee shall be entitled to vote shares held by him
without a transfer of such shares into his name as trustee.

(c) Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into his name if authority to do so
is contained in an appropriate order of the court by which such receiver was
appointed.

(d) A shareholder whose shares are pledged shall be entitled to
vote such shares until the shares have been transferred into the name of the
pledgee, and thereafter the pledgee shall be entitled to vote the shares so
transferred.

SECTION 2.12 ELECTION OF TRUST MANAGERS. At each election for
Trust Managers, each shareholder entitled to vote at such election shall,
unless otherwise provided by the Declaration of Trust or by applicable law,
have the right to vote the number of shares owned by him for as many persons as
there are to be elected and for whose election he has a right to vote. Unless
otherwise provided by the Declaration of Trust, no shareholder shall have the
right or be permitted to cumulate his votes on any basis.

4
<PAGE> 8
SECTION 2.13 TELEPHONE MEETINGS. Shareholders may participate in
and hold a meeting of the shareholders by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to
this Section shall constitute presence in person at such meeting, except where
a person participates in the meeting for the express purpose of objecting to
the transaction of any business on the ground that the meeting is not lawfully
called or convened.

SECTION 2.14 ACTION WITHOUT MEETING. Any action required by any
provision of law or of the Declaration of Trust or these Bylaws to be taken at
a meeting of the shareholders or any action which may be taken at a meeting of
the shareholders may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by all of the shareholders
entitled to vote with respect to the subject matter thereof, and such consent
shall have the same force and effect as a unanimous vote of the shareholders.

SECTION 2.15 INSPECTORS AND VOTING PROCEDURES. (a) The Trust
shall, in advance of any meeting of shareholders, appoint one or more
inspectors to act at the meeting and make a written report thereof. The Trust
may designate one or more persons as alternate inspectors to replace any
inspector who fails to act. If no inspector or alternate is able to act at a
meeting of shareholders, the person presiding at the meeting shall appoint one
or more inspectors to act at the meeting. Each inspector, before entering upon
the discharge of his duties, shall take and sign an oath faithfully to execute
the duties of inspector with strict impartiality and according to the best of
his ability.

(b) The inspectors shall (i) ascertain the number of shares
outstanding and the voting power of each, (ii) determine the shares represented
at a meeting and the validity of proxies and ballots, (iii) count all votes and
ballots, (iv) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors, and
(v) certify their determination of the number of shares represented at the
meeting, and their count of all votes and ballots. The inspectors may appoint
or retain other persons or entities to assist the inspectors in the performance
of the duties of the inspectors.

(c) The date and time of the opening and closing of the polls for
each matter upon which the shareholders will vote at a meeting shall be
announced at the meeting. No ballots, proxies or votes, nor any revocations
thereof or changes thereto, shall be accepted by the inspectors after the
closing of the polls unless a court of appropriate jurisdiction, upon
application by a shareholder, shall determine otherwise.

(d) In determining the validity and counting of proxies and
ballots, the inspectors may examine and consider such records or factors as
allowed by the Texas Real Estate Investment Trust Act (the "Texas REIT Act").

ARTICLE III

TRUST MANAGERS

SECTION 3.1 POWERS AND RESPONSIBILITIES. The business and
affairs of the Trust shall be managed under the direction of its Trust Managers
who may exercise all such powers of the Trust and do all such lawful acts and
things as are not by statute, the Declaration of Trust or these Bylaws directed
or required to be exercised or done by the shareholders. The enumeration of
any specific power or authority herein shall not be construed as limiting the
aforesaid powers or the general powers or authority or any other specified
power or authority conferred herein upon the Trust Managers.

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SECTION 3.2 NUMBER AND QUALIFICATION. There shall at all times
be no less than three (3) nor more than ten (10) Trust Managers who, subject to
Section 3.3 below, shall be elected by the shareholders. Subject to any
limitations specified by law or in the Declaration of Trust, the number of
Trust Managers may be fixed from time to time by resolution adopted by a
majority of the Trust Managers. No decrease in the number of Trust Managers
shall have the effect of shortening the term of any incumbent Trust Manager. A
majority of the Trust Managers shall be natural persons. Trust Managers need
not be shareholders, must be at least eighteen (18) years of age, must not be
subject to any legal disability and need not be residents of the State of
Texas.

SECTION 3.3 ELECTION AND TERM OF OFFICE. The Trust Manager
nominees who have not been previously elected as Trust Managers by the
shareholders of the Trust shall be elected at the annual meeting of the
shareholders (except as provided in Section 3.7) by the affirmative vote of the
holders of two-thirds (2/3) of the outstanding shares of the Trust. At all
times as the Board of Trust Managers shall consist of three (3) or more Trust
Managers, the Trust Managers shall be divided, with respect to the time for
which they severally hold office, into three (3) classes, as nearly equal in
number as possible, with the term of office of the first class to expire at the
first annual meeting of shareholders held after such division into classes, the
term of office of the second class to expire at the second annual meeting of
shareholders held after such division into classes, and the term of office of
the third class to expire at the third annual meeting of shareholders held
after such division into classes. At each annual meeting of shareholders
commencing with the first annual meeting held after such division into classes,
Trust Managers elected to succeed those Trust Managers whose terms expire shall
be elected for a term of office to expire at the third (3rd) succeeding annual
meeting of shareholders after their election. Trust Managers who have been
previously elected as Trust Managers by the shareholders of the Trust shall be
re-elected at the third (3rd) succeeding annual meeting of the shareholders
after their election by the affirmative vote of the holders of a majority of
the shares of the Trust present in person or represented by proxy at such
meeting; provided, however, that any Trust Manager that has been previously
elected as a Trust Manager by the shareholders who is not re-elected by such
majority vote at such third (3rd) succeeding annual meeting shall nevertheless
remain in office until his successor is elected and qualified. Each Trust
Manager shall hold office for the three year term for which he is elected and
until his successor is elected and qualified, or until his death, resignation
or removal in the manner provided in these Bylaws.

SECTION 3.4 NOMINATION OF TRUST MANAGERS. Only persons who are
nominated in accordance with the following procedures shall be eligible for
election as Trust Managers of the Trust. Nominations of persons for election
as Trust Managers may be made at any annual meeting of shareholders (a) by or
at the direction of the Trust Managers (or any duly authorized committee
thereof) or (b) by any shareholder of the Trust (i) who is a shareholder of
record on the date of the giving of the notice provided for in this Section 3.4
and on the record date for the determination of shareholders entitled to vote
at such annual meeting, and (ii) who complies with the notice procedures set
forth in this Section 3.4.

In addition to any other applicable requirements, for a nomination to
be made by a shareholder, such shareholder must have given timely notice
thereof in proper written form to the Secretary of the Trust. To be timely, a
shareholder's notice to the Secretary must be delivered to or mailed and
received at the principal offices of the Trust not less than sixty (60) days
nor more than ninety (90) days prior to the date of the applicable annual
meeting of shareholders; provided, however, that in the event that less than
seventy (70) days' notice or prior public disclosure of the date of the meeting
is given or made, notice by the shareholder to be timely must be so received
not later than the close of business on the tenth (10th) day following the day
on which such notice of the date of the applicable annual meeting was mailed or
such public disclosure of the date of such annual meeting was made, whichever
first occurs. For purposes of this Section 3.4, the date of a public
disclosure shall include, but not be limited to, the date on which such
disclosure is made in a press

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release reported by the Dow Jones News Services, the Associated Press or any
comparable national news service or in a document publicly filed by the Trust
with the Securities and Exchange Commission pursuant to Sections 13, 14 or
15(d) (or the rules and regulations promulgated thereunder) of the Exchange
Act.

To be in proper written form, a shareholder's notice to the Secretary
must set forth (a) as to each person whom the shareholder proposes to nominate
for election as a Trust Manager (i) the name, age, business address and
residence address of the person, (ii) the principal occupation or employment of
the person, (iii) the number of shares of the Trust that are owned beneficially
or of record by the person, and (iv) any other information relating to the
person that would be required to be disclosed in a proxy statement or other
filings required to be made in connection with solicitation of proxies for
election of Trust Managers pursuant to Section 14 of the Exchange Act, and (b)
as to the shareholder giving the notice (i) the name and record address of such
shareholder, (ii) the number of shares of the Trust that are owned beneficially
or of record by such shareholder, (iii) a description of all arrangements or
understandings between such shareholder and each proposed nominee and any other
person or persons (including their names) pursuant to which the nomination(s)
are to be made by such shareholders, (iv) a representation that such
shareholder intends to appear in person or by proxy at the meeting to nominate
the persons named in the notice, and (v) any other information relating to such
shareholder that would be required to be disclosed in a proxy statement or
other filings required to be made in connection with solicitations of proxies
for election of Trust Managers pursuant to Section 14 of the Exchange Act and
the rules and regulations promulgated thereunder. Such notice must be
accompanied by a written consent of each proposed nominee to being named as a
nominee and to serve as a Trust Manager if elected.

No person shall be eligible for election as a Trust Manager of the
Trust unless nominated in accordance with the procedures set forth in this
Section 3.4. If the presiding officer of the meeting determines that a
nomination was not made in accordance with the foregoing procedures, the
presiding officer shall declare to the meeting that the nomination was
defective and such defective nomination shall be disregarded.

SECTION 3.5 RESIGNATION. Any Trust Manager may resign at any
time by giving written notice to the remaining Trust Managers. Such
resignation shall take effect at the time specified therein, and unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective. A Trust Manager judged incompetent or for whom
a guardian or conservator has been appointed, shall be deemed to have resigned
as of the date of such adjudication or appointment.

SECTION 3.6 REMOVAL. A Trust Manager may be removed at any time
with or without cause by the vote of holders of shares representing two-thirds
(2/3) of the total votes authorized to be cast by shares then outstanding and
entitled to vote thereon. Upon the resignation or removal of any Trust
Manager, or his otherwise ceasing to be a Trust Manager, he shall execute and
deliver such documents as the remaining Trust Managers shall require for the
conveyance of any Trust property held in his name, shall account to the
remaining Trust Managers as they require for all property which he holds as
Trust Manager and shall thereupon be discharged as Trust Manager. Upon the
incapacity or death of any Trust Manager, his legal representative shall
perform the acts set forth in the preceding sentence and the discharge
mentioned therein shall run to such legal representative and to the
incapacitated Trust Manager or the estate of the deceased Trust Manager, as the
case may be.

SECTION 3.7 VACANCIES. If there is an increase in the number of
Trust Managers or if any or all of the Trust Managers cease to be Trust
Managers hereunder, whether by reason of resignation, removal, incapacity,
death or otherwise, such event shall not terminate the Trust or affect its
continuity. Until vacancies are filled, the remaining Trust Manager or Trust
Managers may exercise the powers of the Trust Managers

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hereunder. Vacancies may be filled by successor Trust Managers either
appointed by a majority of the remaining Trust Managers or elected by the vote
of the holders of at least two-thirds of the outstanding shares at an annual or
special meeting of the shareholders. Any Trust Manager elected to fill a
vacancy shall hold office until the next annual meeting for the election of
Trust Managers. The election of a successor Trust Manager shall be considered
an amendment to the Declaration of Trust.

SECTION 3.8 BOND NOT REQUIRED; TIME COMMITMENT. Unless otherwise
required by law, no Trust Manager shall be required to give bond, surety or
security in any jurisdiction for the performance of his duties or obligations
to the Trust. No Trust Manager shall be required to devote his entire time to
the business and affairs of the Trust.

SECTION 3.9 COMPENSATION. Trust Managers shall receive
compensation for their services to the Trust as may be determined from time to
time by the Trust Managers. The Trust Managers may delegate to any committee
the power to fix from time to time the compensation of Trust Managers.
Officers of the Trust who also serve as Trust Managers shall not receive
compensation for their service as Trust Managers.

SECTION 3.10 EXECUTION OF DOCUMENTS. Each Trust Manager and any
one of them is authorized to execute on behalf of the Trust any document or
instrument of any nature whatsoever, provided that the execution by the Trust
of any such document or instrument shall have been previously authorized by
such action of the Trust Managers as may be required by statute, the
Declaration of Trust or these Bylaws.

ARTICLE IV

MEETINGS OF THE TRUST MANAGERS

SECTION 4.1 PLACE OF MEETINGS. The Trust Managers of the Trust
may hold their meetings, both regular and special, either within or without the
State of Texas.

SECTION 4.2 ANNUAL MEETING. The annual meeting of the Trust
Managers shall be held immediately following the adjournment of the annual
meeting of the shareholders and no notice of such meeting shall be necessary to
the Trust Managers in order to legally constitute the meeting, provided a
quorum shall be present, or they may meet at such time and place as shall be
fixed by the consent in writing of all of the Trust Managers.

SECTION 4.3 REGULAR MEETINGS. Regular meetings of the Trust
Managers, in addition to the annual meetings referred to in Section 4.2, may be
held without notice at such time and place as shall from time to time be
determined by the Trust Managers.

SECTION 4.4 SPECIAL MEETINGS. Special meetings of the Trust
Managers may be called by the Chairman of the Board, if one shall be elected,
or by the President, if a Chairman of the Board is not elected, on three (3)
business day's notice (oral or written) to each Trust Manager. Special
meetings shall be called by the Chairman of the Board (if one shall be
elected), the President or the Secretary on like notice on the written request
of any Trust Manager. Neither the purpose of, nor the business to be
transacted at, any special meeting of the Trust Managers need be specified in
the notice or waiver of notice of such meeting. Attendance of a Trust Manager
at a meeting shall constitute a waiver of notice of such meeting except where a
Trust Manager attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business on the grounds
that the meeting is not lawfully called or convened.

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SECTION 4.5 QUORUM AND ACTION. At all meetings of the Trust
Managers, the presence of a majority of the Trust Managers shall be necessary
and sufficient to constitute a quorum for the transaction of business and the
act of a majority of the Trust Managers at any meeting at which a quorum is
present shall be the act of the Trust Managers unless the act of a greater
number is required by law, the Declaration of Trust or these Bylaws. If a
quorum shall not be present at any meeting of Trust Managers, the Trust
Managers present may adjourn the meeting from time to time without notice other
than announcement at the meeting until a quorum shall be present.

SECTION 4.6 PRESUMPTION OF ASSENT TO ACTION. A Trust Manager who
is present at a meeting of the Trust Managers at which action on any Trust
matter is taken shall be presumed to have assented to the action taken unless
his dissent shall be entered in the minutes of the meeting or unless he shall
file his written dissent to such action with the Secretary of the meeting
before the adjournment thereof or shall forward such dissent by registered mail
to the Secretary of the Trust immediately after the adjournment of the meeting.
Such right to dissent shall not apply to a Trust Manager who voted in favor of
such action.

SECTION 4.7 TELEPHONE MEETINGS. Trust Managers may participate
in and hold a meeting of the Trust Managers by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other. Participation in a meeting pursuant to this
Section 4.7 shall constitute presence in person at such meeting, except where a
person participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.

SECTION 4.8 ACTION WITHOUT MEETING. Any action required or
permitted to be taken at a meeting of the Trust Managers may be taken without a
meeting if a consent in writing, setting forth the action so taken, is signed
by all the Trust Managers, and such consent shall have the same force and
effect as a unanimous vote at a meeting.

SECTION 4.9 MINUTES. The Trust Managers shall keep regular
minutes of their proceedings. The minutes shall be placed in the minute book
of the Trust.

SECTION 4.10 INTEREST OF TRUST MANAGERS. With respect to the
actions of the Trust Managers, Trust Managers who have any direct or indirect
interest in connection with any matter being acted upon may be counted for all
quorum purposes under this Article IV.

SECTION 4.11 RIGHT OF TRUST MANAGERS AND OFFICERS TO OWN SHARES OR
OTHER PROPERTY AND TO ENGAGE IN OTHER BUSINESS. Any Trust Manager or officer
of the Trust may acquire, own, hold and dispose of shares of the Trust for his
individual account, and may exercise all rights of a shareholder to the same
extent and in the same manner as if he were not a Trust Manager or officer of
the Trust. Except as provided specifically to the contrary in a written
agreement with the Trust, any Trust Manager or officer of the Trust may, in a
capacity other than that of Trust Manager or officer of the Trust, have
business interests and engage in business activities similar to or in addition
to those relating to the Trust, which interests and activities may be similar
to and competitive with those of the Trust and may include the acquisition,
syndication, holding, management, development, operation or disposition, for
his own account or for the account of others, of interests in mortgages,
interests in real property, or interests in entities engaged in the real estate
business. Except as provided specifically to the contrary in a written
agreement with the Trust, each Trust Manager and officer of the Trust shall be
free of any obligation to present to the Trust any investment opportunity which
comes to him in any capacity other than solely as Trust Manager or agent of the
Trust, even if such opportunity is of a character which, if presented to the
Trust, could be exploited by the Trust. Subject to the provisions

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of Article III hereof, any Trust Manager or officer of the Trust may be a
trustee, officer, director, shareholder, partner, member, advisor or employee
of, or otherwise have a direct or indirect interest in any person who may be
engaged to render advice or services to the Trust, and may receive compensation
from such person as well as compensation as Trust Manager or officer or
otherwise hereunder.

SECTION 4.12 TRANSACTIONS BETWEEN TRUST MANAGERS AND THE TRUST.
Except as otherwise provided by the Declaration of Trust or these Bylaws, and
in the absence of fraud, a contract, act or other transaction, between the
Trust and any other person, or in which the Trust is interested, shall be valid
and no Trust Manager or officer of the Trust shall have any liability as a
result of entering into any such contract, act or transaction, even though (a)
one or more of the Trust Managers, directly or indirectly is interested in or
connected with, or is a trustee, partner, director, shareholder, member,
employee, officer or agent of such other person, or (b) one or more of the
Trust Managers, individually or jointly with others, is a party to, or directly
or indirectly is interested in, or connected with, such contract, act or
transaction, provided that (i) such interest or connection is disclosed in
reasonable detail or known to the Trust Managers and thereafter the Trust
Managers authorize or ratify such contract, act or other transaction by
affirmative vote of a majority of the Trust Managers who are not interested in
the transaction or (ii) such interest or connection is disclosed in reasonable
detail or known to the shareholders, and thereafter such contract, act or
transaction is approved by shareholders holding a majority of the shares then
outstanding and entitled to vote thereon.

SECTION 4.13 PERSONS DEALING WITH TRUST MANAGERS OR OFFICERS. Any
act of the Trust Managers or officers of the Trust purporting to be done in
their capacity as such shall, as to any person dealing with such Trust Managers
or officers, conclusively be deemed to be within the purposes of the Trust and
within the powers of the Trust Managers or officers. No person dealing with
the Trust Managers or any of them or with the officers of the Trust or any of
them, shall be bound to see to the application of any funds or property passing
into their hands or control. The receipt of the Trust Managers or any of the
officers of the Trust of money or other consideration shall be binding upon the
Trust.

SECTION 4.14 RELIANCE. Trust Managers and officers of the Trust
shall not be liable for any claims or damages that may result from their acts
in the discharge of any duty imposed or power conferred upon them by the Trust,
if, in the exercise of ordinary care, they acted in good faith and in reliance
upon the written opinion of an attorney for the Trust. In discharging their
duties, Trust Managers and officers of the Trust, when acting in good faith and
exercising ordinary care, may rely upon financial statements of the Trust,
stated in a written report by an independent certified public accountant, to
fairly present the financial position of the Trust. The Trust Managers and
officers of the Trust may rely upon any instrument or other document reasonably
believed by them to be genuine.

SECTION 4.15 LIABILITY OF TRUST MANAGERS. No Trust Manager of the
Trust shall be liable to the Trust for any act, omission, loss, damage or
expense arising from the performance of his duty under the Trust, except to the
extent specifically required by statute, the Declaration of Trust or these
Bylaws.

ARTICLE V

COMMITTEES OF THE TRUST MANAGERS

SECTION 5.1 MEMBERSHIP AND AUTHORITIES. The Trust Managers, by
resolution adopted by a majority of the Trust Managers, may designate one (1)
or more Trust Managers to constitute a Compensation Committee, Audit Committee
and such other committees as the Trust Managers may determine, each of which

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committees to the extent provided in such resolution shall have and may
exercise all of the authority of the Trust Managers in the business and affairs
of the Trust, except in those cases where the authority of the Trust Managers
is specifically denied to the Audit Committee, Compensation Committee or such
other committee or committees by the Trust Managers, applicable law, the
Declaration of Trust or these Bylaws. Neither the Audit Committee,
Compensation Committee nor any other such committee shall have the power to
alter or to repeal any resolution adopted by the Trust Managers. The
designation of an Executive Committee or other committee and the delegation
thereto of authority shall not operate to relieve the Trust Managers, or any
member thereof, of any responsibility imposed upon him by law. The members of
each such committee shall serve at the pleasure of the Trust Managers.

SECTION 5.2 MINUTES AND RULES OF PROCEDURE. Each committee
designated by the Trust Managers shall keep regular minutes of its proceedings
and report the same to the Trust Managers when required. Subject to the
provisions of these Bylaws, the members of any committee may fix such
committee's own rules of procedure.

SECTION 5.3 VACANCIES. The Trust Managers shall have the power
at any time to fill vacancies in, to change the membership of, or to dissolve,
any committee.

SECTION 5.4 TELEPHONE MEETINGS. Members of any committee
designated by the Trust Managers may participate in or hold a meeting by use of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other. Participation in a
meeting pursuant to this Section 5.4 shall constitute presence in person at
such meeting, except where a person participates in the meeting for the express
purpose of objecting to the transaction of any business on the grounds that the
meeting is not lawfully called or convened.

SECTION 5.5 ACTION WITHOUT MEETING. Any action required or
permitted to be taken at a meeting of any committee designated by the Trust
Managers may be taken without a meeting if a consent in writing, setting forth
the action so taken, is signed by all the members of the committee, and such
consent shall have the same force and effect as a unanimous vote at a meeting.

ARTICLE VI

OFFICERS

SECTION 6.1 NUMBER. The officers of the Trust shall include a
President and a Secretary. The Trust Managers may also elect a Chairman of the
Board, a Chief Executive Officer, one (1) or more Vice Presidents, a Chief
Operating Officer, a Treasurer, one (1) or more Assistant Secretaries and one
(1) or more Assistant Treasurers. One (1) person may hold any two (2) or more
of these offices.

SECTION 6.2 ELECTION, TERM OF OFFICE AND QUALIFICATION. The
Trust Managers shall elect officers, none of whom need be a Trust Manager,
except for the Chairman of the Board, if one shall be elected, at any time and
from time to time as they deem necessary. Each officer so elected shall hold
office until his successor shall have been duly elected and qualified or until
his death, resignation or removal in the manner hereinafter provided.

SECTION 6.3 SUBORDINATE OFFICERS. The Trust Managers may appoint
such other officers and agents as it shall deem necessary who shall hold their
offices for such terms, have such authority and perform

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such duties as the Trust Managers may from time to time determine. The Trust
Managers may delegate to any committee or officer the power to appoint any such
subordinate officer or agent. No subordinate officer appointed by any
committee or superior officer as aforesaid shall be considered as an officer of
the Trust, the officers of the Trust being limited to the officers elected or
appointed as such by the Trust Managers.

SECTION 6.4 RESIGNATION. Any officer may resign at any time by
giving written notice thereof to the Trust Managers or to the President or
Secretary of the Trust. Any such resignation shall take effect at the time
specified therein and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.

SECTION 6.5 REMOVAL. Any officer elected or appointed by the
Trust Managers may be removed by the Trust Managers at any time with or without
cause by majority vote of the entire Board of Trust Managers. Any other
officer may be removed at any time with or without cause by the Trust Managers
or by any committee or superior officer upon whom such power of removal may be
conferred by the Trust Managers. The removal of any officer shall be without
prejudice to the contract rights, if any, of the person so removed. Election
or appointment of an officer or agent shall not of itself create any contract
rights.

SECTION 6.6 VACANCIES. A vacancy in any office shall be filled
for the unexpired portion of the term by the Trust Managers, but in case of a
vacancy occurring in an office filled by a committee or superior officer in
accordance with the provisions of Section 6.3, such vacancy may be filled by
such committee or superior officer.

SECTION 6.7 THE CHAIRMAN OF THE BOARD. The Chairman of the
Board, if one shall be elected, shall preside at all meetings of the
shareholders and Trust Managers and shall be an ex officio member of all
standing committees. The Chairman of the Board may sign, with any other proper
officer, certificates for shares of the Trust and any deeds, bonds, mortgages,
contracts and other documents which the Trust Managers have authorized to be
executed, except where required by law to be otherwise signed and executed and
except where the signing and execution thereof shall be expressly delegated by
the Trust Managers or these Bylaws, to some other officer or agent of the
Trust. In addition, the Chairman of the Board shall perform whatever duties
and shall exercise all powers that are given to him by the Trust Managers.

SECTION 6.8 THE CHIEF EXECUTIVE OFFICER. The Chief Executive
Officer, if one shall be elected, shall have general and active management of
the business of the Trust and shall have the general supervision and direction
of all other officers of the Trust with full power to see that their duties are
properly performed and shall see that all orders and resolutions of the Trust
Managers are carried into effect. He may sign, with any other proper officer,
certificates for shares of the Trust and any deeds, bonds, mortgages, contracts
and other documents which the Trust Managers have authorized to be executed,
except where required by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Trust Managers or these Bylaws to some other officer or agent of the Trust. In
addition, the Chief Executive Officer shall perform whatever duties and shall
exercise all powers that are given to him by the Trust Managers.

SECTION 6.9 THE PRESIDENT. If no Chief Executive Officer shall
be elected, the President shall be the chief executive officer of the Trust and
shall have the powers and duties of the Chief Executive Officer as set forth in
Section 6.8. In the absence of the Chief Executive Officer, if one shall be
elected, the President shall preside at all meetings of the shareholders and
Trust Managers, and the President shall have the general and active management
of the business of the Trust and shall see that all orders and resolutions of
the Board of Trust Managers are carried into effect. He may sign, with any
other proper officer, certificates for shares

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of the Trust and any deeds, bonds, mortgages, contracts and other documents
which the Trust Managers have authorized to be executed, except where required
by law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Trust Managers or these
Bylaws to some other officer or agent of the Trust. In addition, the President
shall perform whatever duties and shall exercise whatever powers given to him
by the Trust Managers or by the Chairman of the Board, if one shall be elected.

SECTION 6.10 THE VICE PRESIDENTS. The Vice Presidents shall
perform such duties as are given to them by these Bylaws and as may from time
to time be assigned to them by the Trust Managers, by the Chief Executive
Officer, if one shall be elected, or by the President, if a Chief Executive
Officer is not elected, and may sign, with any other proper officer,
certificates for shares of the Trust. At the request of the President, or in
his absence or disability, the Vice President designated by the President (or
in the absence of such designation, the senior Vice President), shall perform
the duties and exercise the powers of the President.

SECTION 6.11 THE CHIEF OPERATING OFFICER. The Chief Operating
Officer shall perform such duties as are given to him or her by these Bylaws
and as may from time to time be assigned to him or her by the Trust Managers,
by the Chief Executive Officer, if one shall be elected, or by the President,
if a Chief Executive Officer is not elected.

SECTION 6.12 THE SECRETARY. The Secretary, when available, shall
attend all meetings of the Trust Managers and all meetings of the shareholders
and record all votes and the minutes of all proceedings in a book to be kept
for that purpose and shall perform like duties for the standing committees when
required. The Secretary shall give, or cause to be given, notice of all
meetings of the shareholders and of the Trust Managers as required by law or
these Bylaws, be custodian of the Trust records and have general charge of the
share books of the Trust and shall perform such other duties as may be
prescribed by the Trust Managers, by the Chief Executive Officer, if one shall
be elected, or by the President, if a Chief Executive Officer is not elected,
under whose supervision he shall be. The Secretary may sign, with any other
proper officer, certificates for shares of the Trust and shall keep in safe
custody the seal of the Corporation, and, when authorized by the Trust
Managers, affix the same to any instrument requiring it and, when so affixed,
it shall be attested by his signature or by the signature of the Treasurer or
an Assistant Secretary.

SECTION 6.13 ASSISTANT SECRETARIES. The Assistant Secretaries
shall perform such duties as are given to them by these Bylaws or as may from
time to time be assigned to them by the Trust Managers or by the Secretary. At
the request of the Secretary, or in his absence or disability, the Assistant
Secretary designated by the Secretary (or in the absence of such designation
the senior Assistant Secretary), shall perform the duties and exercise the
powers of the Secretary.

SECTION 6.14 THE TREASURER. The Treasurer shall have the custody
and be responsible for all Trust funds and securities and shall keep full and
accurate accounts of receipts and disbursements in books belonging to the Trust
and shall deposit all monies and other valuable effects in the name and to the
credit of the Trust in such depositories as may be designated by the Trust
Managers. The Treasurer shall disburse the funds of the Trust as may be
ordered by the Trust Managers, taking proper vouchers for such disbursements,
and shall render to the Chief Executive Officer, if one shall be elected, the
President and the Trust Managers, at the regular meetings of the Trust
Managers, or whenever they may require it, an account of all his transactions
as Treasurer and of the financial condition of the Trust. The Treasurer may
sign, with any other proper officer, certificates for shares of the Trust.

SECTION 6.15 ASSISTANT TREASURERS. The Assistant Treasurers shall
perform such duties as are given to them by these Bylaws or as may from time to
time be assigned to them by the Trust Managers or by

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the Treasurer. At the request of the Treasurer, or in his absence or
disability, the Assistant Treasurer designated by the Treasurer (or in the
absence of such designation, the senior Assistant Treasurer), shall perform the
duties and exercise the powers of the Treasurer.

SECTION 6.16 TREASURER'S BOND. If required by the Trust Managers,
the Treasurer and any Assistant Treasurer shall give the Trust a bond in such
sum and with such surety or sureties as shall be satisfactory to the Trust
Managers for the faithful performance of the duties of his office and for the
restoration to the Trust, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property
of whatever kind in his possession or under his control belonging to the Trust.

SECTION 6.17 SALARIES. The salary or other compensation of
officers shall be fixed from time to time by the Trust Managers. The Trust
Managers may delegate to any committee or officer the power to fix from time to
time the salary or other compensation of subordinate officers and agents
appointed in accordance with the provisions of Section 6.3.

SECTION 6.18 EXECUTION OF DOCUMENTS. Each officer of the Trust
and any one of them is authorized to execute on behalf of the Trust any
document or instrument of any nature whatsoever, provided that the execution by
the Trust of any such document or instrument shall have been previously
authorized by such action of the Trust Managers as may be required by statute,
the Declaration of Trust or these Bylaws.

ARTICLE VII

TRUST SHARES

SECTION 7.1 SHARE CERTIFICATES. (a) The certificates
representing shares of beneficial interests of the Trust shall be in such form,
not inconsistent with statutory provisions and the Declaration of Trust, as
shall be approved by the Trust Managers. The certificates shall be signed by
the Chairman of the Board, if one shall be elected, the Chief Executive
Officer, if one shall be elected, the President or a Vice President and a
Secretary or Assistant Secretary, or such other or additional officers as may
be prescribed from time to time by the Trust Managers. The signatures of such
officer or officers upon a certificate may be facsimiles if the certificate is
countersigned by a transfer agent or registered by a registrar, either of which
is other than the Trust itself or an employee of the Trust. In case any
officer who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer before such certificate is
issued, it may be issued with the same effect as if he were such officer at the
date of its issuance.

(b) In the event the Trust has limited or denied the preemptive
right of shareholders, there shall be set forth on the face or back of the
certificates, which the Trust shall issue to represent beneficial interests,
such legends or statements, if any, as shall be required by applicable law or
the Declaration of Trust or as may be approved by the Trust Managers.

(c) All certificates shall be consecutively numbered and the name
of the person owning the shares represented thereby, with the number of such
shares and the date of issue, shall be entered on the Trust's books.

(d) All certificates surrendered to the Trust shall be canceled,
and, except as provided in Section 7.2 with respect to lost, destroyed or
mutilated certificates, no new certificate shall be issued until the former
certificate for the same number of shares has been surrendered and canceled.

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SECTION 7.2 LOST CERTIFICATES, ETC. The Trust Managers may
direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Trust alleged to have
been lost or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost or destroyed. In
authorizing such issue of a new certificate or certificates, the Trust Managers
may, in their discretion and as a condition precedent to the issue thereof,
require the owner of such lost or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as the Trust
Managers shall require and/or indemnify the Trust as the Trust Managers may
prescribe.

SECTION 7.3 TRANSFER OF SHARES. Subject to any restrictions upon
transfer, upon surrender to the Trust or the transfer agent of the Trust of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer and satisfaction of the Trust
that the requested transfer complies with the provisions of applicable state
and federal laws and regulations, the Declaration of Trust and any agreements
to which the Trust is a party, the Trust shall issue a new certificate to the
person entitled thereto, cancel the old certificate and record the transaction
upon its books.

SECTION 7.4 OWNERSHIP OF SHARES. The Trust shall be entitled to
treat and recognize the holder of record of any share or shares as the holder
in fact thereof and, accordingly, shall not be bound to recognize any equitable
or other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of the State of Texas.

SECTION 7.5 CLOSING OF TRANSFER BOOKS. For the purpose of
determining shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or entitled to receive a distribution
by the Trust (other than a distribution involving a purchase or redemption by
the Trust of its own shares) or a share dividend, or in order to make a
determination of shareholders for any other proper purpose, the Trust Managers
may provide that the share transfer books shall be closed for a stated period
but not to exceed, in any case, sixty (60) days. If the share transfer books
shall be closed for the purpose of determining shareholders entitled to notice
of or to vote at a meeting of shareholders, such books shall be closed for at
least ten (10) days immediately preceding such meeting. In lieu of closing the
share transfer books, the Trust Managers may fix in advance a date as the
record date for any such determination of shareholders, such date in any case
to be not more than sixty (60) days and, in case of a meeting of shareholders,
not less than ten (10) days prior to the date on which the particular action
requiring such determination of shareholders is to be taken, and the
determination of shareholders on such record date shall apply with respect to
the particular action requiring the same notwithstanding any transfer of shares
on the books of the Trust after such record date.

SECTION 7.6 DIVIDENDS. The Trust Managers may, from time to
time, declare, and the Trust may pay, dividends on its outstanding shares in
the manner and upon the terms and conditions provided by the Declaration of
Trust and by law, such dividends to be paid in cash or in property or in shares
of beneficial interests of the Trust, except no dividends shall be paid when
the Trust is insolvent or when the payment thereof would render the Trust
insolvent.

SECTION 7.7 RESERVES. By resolution the Trust Managers may
create such reserve or reserves of the Trust as the Trust Managers from time to
time, in their absolute discretion, determine to be proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing
or maintaining any property of the Trust, or for such other purpose as the
Trust Managers shall determine to be beneficial to the interest of the Trust.
The Trust Managers may modify or abolish any such reserve in the manner in
which it was created.

15
<PAGE> 19
ARTICLE VIII

GENERAL PROVISIONS

SECTION 8.1 GENERAL POLICIES. The Trust intends to make
investments that are consistent with the applicable requirements of the
Internal Revenue Code of 1986, as amended, and the Texas REIT Act, as amended,
and related regulations with respect to the composition of the Trust's
investments and the derivation of its income.

SECTION 8.2 LIMITED LIABILITY OF SHAREHOLDERS. A shareholder
shall not be personally or individually liable in any manner whatsoever for any
debt, act, omission or obligation incurred by the Trust or the Trust Managers.
A shareholder shall be under no obligation to the Trust or to its creditors
with respect to such shares other than the obligation to pay to the Trust the
full amount of the consideration for which such shares were issued or to be
issued. Upon the payment of such consideration, such shares shall be fully
paid and non-assessable by the Trust.

SECTION 8.3 WAIVER OF NOTICE. (a) Whenever, under the provisions
of applicable law or of the Declaration of Trust or of these Bylaws, any notice
is required to be given to any shareholder or Trust Manager, a waiver thereof
in writing signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be equivalent to the giving of
such notice.

(b) Attendance of a Trust Manager at a meeting shall constitute a
waiver of notice of such meeting except where a Trust Manager attends a meeting
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business on the grounds that the meeting is not lawfully
called or convened.

SECTION 8.4 SEAL. If one be adopted, the Trust seal shall have
inscribed thereon the name of the Trust and shall be in such form as may be
approved by the Trust Managers. Said seal shall be kept in the custody of the
Secretary and may be used by causing it or a facsimile of it to be impressed or
affixed or in any manner reproduced.

SECTION 8.5 FISCAL YEAR. The fiscal year of the Trust shall be
fixed by resolution of the Trust Managers.

SECTION 8.6 CHECKS, NOTES, ETC. All checks or demands for money
and notes of the Trust shall be signed by such officer or officers or such
other person or persons as the Trust Managers may from time to time designate.
The Trust Managers may authorize any officer or officers or such other person
or persons to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the Trust, and such authority may be general or
confined to specific instances.

SECTION 8.7 EXAMINATION OF BOOKS AND RECORDS. The Trust Managers
shall determine from time to time whether, and if allowed, when and under what
conditions and regulations the accounts and books of the Trust (except such as
may by statute be specifically opened to inspection) or any of them shall be
open to inspection by the shareholders, and the shareholders' rights in this
respect are and shall be restricted and limited accordingly.

SECTION 8.8 VOTING OF VOTING SECURITIES HELD BY THE TRUST.
Unless otherwise ordered by the Trust Managers, the President, acting on behalf
of the Trust, shall have full power and authority to attend and

16
<PAGE> 20
to act and to vote at any meeting of holders of voting securities of any person
in which the Trust may hold voting securities and at any such meeting, shall
possess and may exercise any and all of the rights and powers incident to the
ownership of such voting securities which, as the owner thereof, the Trust
might have possessed and exercised, if present. The Trust Managers by
resolution from time to time may confer like powers upon any other person or
persons.

SECTION 8.9 NUMBER, GENDER, ETC. Whenever the singular number is
used in these Bylaws and when required by the context, the same shall include
the plural, and the masculine gender shall include the feminine and neuter
genders. The term "person," as used herein and as the context requires shall
mean and include individuals, corporations, limited partnerships, general
partnerships, joint stock companies or associations, joint ventures,
associations, limited liability companies, companies, trusts, banks, trust
companies, land trusts, business trusts, or other entities and governments and
agencies and political subdivisions thereof.

ARTICLE IX

AMENDMENTS

SECTION 9.1 AMENDMENT OF BYLAWS. Except as otherwise provided by
applicable law or the Declaration of Trust, the power to alter, amend or repeal
these Bylaws or to adopt new Bylaws shall be vested in the Trust Managers and
(to the extent not inconsistent with the Texas REIT Act and the Declaration of
Trust and specified in the notice of the meeting) the shareholders. Such
action to amend the Bylaws may be taken (i) with respect to all Bylaw
provisions, by the affirmative vote of a majority of the Trust Managers, or
(ii)(a) with respect to Section 2.5, Section 3.3, Section 3.4, Section 3.6,
Section 3.7 or Article IX of these Bylaws, by the affirmative vote of the
holders of two-thirds (2/3) of the Trust's outstanding shares, or (b) with
respect to all other Bylaws, by the affirmative vote of the holders of a
majority of the Trust's outstanding shares.

ARTICLE X

SUBJECT TO ALL LAWS

SECTION 10.1 SUBJECT TO ALL LAWS. The provisions of these Bylaws
shall be subject to all valid and applicable laws, including, without
limitation, the Texas REIT Act as now or hereafter amended, and in the event
that any of the provisions of these Bylaws are found to be inconsistent with or
contrary to any such valid laws, the latter shall be deemed to control and
these Bylaws shall be deemed modified accordingly, and, as so modified, shall
continue in full force and effect.

<PAGE> 1
EXHIBIT 10.1

FIRST AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP
OF
PALACE OPERATING PARTNERSHIP, L.P.
<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C> <C>
Article 1. Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Continuation of Partnership; Partnership Interests . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Number of Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Article 2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Article 3. Capitalization And Withdrawal of Withdrawing Partner . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.1 Prior Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.2 Issuance and Redemption of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.3 Additional Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.4 Capital Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.5 Interest on and Return of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.6 Negative Capital Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.7 Limit on Contributions and Obligations of Partners . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.8 Redemption and Repurchase of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Article 4. Principal Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Article 5 Purpose and Powers of Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.1 Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.2. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.3 REIT Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Article 6. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Article 7. Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.1 Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.2 Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.3 Special Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.4 Curative Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.5 Tax Allocations: Code Section 704(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Article 8. Cash Available for Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
8.1 Operating Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
8.2 Capital Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8.3 Consent to Allocations and Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8.4 Right to Limit Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>

i
<PAGE> 3
<TABLE>
<S> <C> <C>
Article 9. Management of Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.1 General Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.2 Limitations on Power and Authority of Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.3 Limited Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.4 Liability of General Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.5 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.6 Other Activities of Partners and Agreements with Related Parties . . . . . . . . . . . . . . . . . . 26
9.7 Other Matters Concerning the General Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.8 Partner Exculpation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.9 General Partner Expenses and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Article 10. Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Article 11. Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
11.1 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.2 Books of Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.3 Method of Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.4 Section 754 Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.5 Tax Matters Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.6 Administrative Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Article 12. Transfers of Partnership Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Article 13. Admission of New Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Article 14. Termination, Liquidation and Dissolution of Partnership . . . . . . . . . . . . . . . . . . . . . . 33
14.1 Termination Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
14.2 Method of Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
14.3 Date of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
14.4 Reconstitution Upon Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
14.5 Death, Legal Incompetency, Etc. of a Limited Partner . . . . . . . . . . . . . . . . . . . . . . . . 35

Article 15. Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Article 16. Amendment of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Article 17. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
17.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
17.2 Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
17.3 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
17.4 Duplicate Originals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
17.5 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
17.6 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>

ii
<PAGE> 4
<TABLE>
<S> <C> <C>
17.7 Other Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
17.8 General Partner with Interest as Limited Partner . . . . . . . . . . . . . . . . . . . . . . . . . . 38
17.9 Legal Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
17.10 Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
17.11 Prior Agreements Superseded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
17.12 No Third Party Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
17.13 Purchase for Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
17.14 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
17.15 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
</TABLE>

Schedule A - Partners, Capital Accounts and Partnership Interests

iii
<PAGE> 5
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
PALACE OPERATING PARTNERSHIP, L.P.

THIS FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP (this
"Agreement") has been executed and delivered as of the 11th day of March, 1998,
by Palace REIT, a Texas real estate investment trust (the "General Partner" or
the "Company"), David R. Merker (the "Withdrawing Partner") and those persons
and entities identified as "Limited Partners" in Schedule A (the "Limited
Partners"), (the General Partner and each Limited Partner being a "Partner" and
collectively, the "Partners").

RECITALS

A. The General Partner and the Withdrawing Partner are parties to
that certain Agreement of Limited Partnership of Palace Operating Partnership,
L.P. dated as of March 9, 1998 (the "Prior Partnership Agreement") and, in
accordance therewith, have been doing business as a Delaware limited
partnership (the "Partnership") under the name "Palace Operating Partnership,
L.P."

B. The Partners deem it to be in the best interest of the
Partnership to amend and restate the Prior Partnership Agreement and desire to
continue the Partnership in accordance with the Delaware Revised Uniform
Limited Partnership Act as amended (the "Act") and this Agreement.

THEREFORE, in consideration of the mutual covenants contained in this
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Partners agree as follows:

Article 1. Partnership.

1.1 Continuation of Partnership; Partnership Interests.
The General Partner and the Limited Partners hereby continue the Partnership as
a Delaware limited partnership according to all of the terms and provisions of
this Agreement and otherwise in accordance with the Act. The General Partner
is the sole general partner and the Limited Partners are the sole limited
partners of the Partnership. All Partnership profits, losses, and distributive
shares of tax items accruing prior to the date of this Agreement shall be
allocated in accordance with, and the respective rights and obligations of the
Partners with respect to the period prior to the date of this Agreement shall
be governed by, the Prior Partnership Agreement. No Partner has any interest
in any Partnership property and the interest of all Partners in the Partnership
are, for all purposes, personal property.

1.2 Name. The Partnership name shall be "Palace
Operating Partnership, L.P.," but the General Partner may from time to time
change the name of the Partnership or may adopt such trade or fictitious names
as it may determine.

<PAGE> 6
1.3 Number of Partners. Unless the General Partner
determines that the Partnership will not be classified as a publicly traded
partnership for federal income tax purposes, the Partnership shall not at any
time have more than 100 partners (including as partners those persons
indirectly owning an interest in the Partnership through a partnership, limited
liability company, S corporation or grantor trust (such entity, a "flow through
entity"), but only if substantially all of the value of such person's interest
in the flow through entity is attributable to the flow through entity's
interest (direct or indirect) in the Partnership).

Article 2. Definitions.

2.1 As used in this Agreement, the following terms shall
have the meanings set forth respectively after each:

"Act" shall mean the Delaware Revised Uniform Limited Partnership Act,
as amended from time to time, and any successor statute.

"Adjusted Capital Account" shall mean, at any time, the then balance
in the Capital Account of a Partner as determined by the General Partner, after
giving effect to the following adjustments:

(i) add to such Capital Account any amounts that
such Partner is deemed obligated to restore as described in the
penultimate sentences of Regulations Section 1.704-2(g)(1) and
Regulations Section 1.704-2(i)(5), or any successor provisions; and

(ii) subtract from such Capital Account the items
described in Regulations Sections 1.704- 1(b)(2)(ii)(d)(4), (5) and
(6).

"Adjusted Capital Account Deficit" shall mean, with respect to any
Partner, the deficit balance, if any, in that Partner's Adjusted Capital
Account.

"Agreement" shall mean this First Amended and Restated Agreement of
Limited Partnership, as it may be amended from time to time.

"Bankruptcy" of a Partner shall mean (a) the filing by a Partner of a
voluntary petition seeking liquidation, reorganization, arrangement or
readjustment, in any form, of its debts under Title 11 of the United States
Code (or corresponding provisions of future laws) or any other federal or state
insolvency law, or a Partner's filing an answer consenting to or acquiescing in
any such petition, (b) the making by a Partner of any assignment for the
benefit of its creditors or the admission by a Partner in writing of its
inability to pay its debts as they mature, or (c) the expiration of sixty (60)
days after the filing of any involuntary petition seeking liquidation,
reorganization, arrangement or readjustment of its debts under Title 11 of the
United States Code (or corresponding provisions of future laws) or any other
Federal or state insolvency law, provided that the same shall not have been
vacated, set aside or stayed within such 60-day period.

<PAGE> 7
"Business Day" means any day other than Saturday or Sunday during
which national banks located in Dallas, Texas are customarily open for
business.

"Capital Account" shall mean the capital account maintained by the
Partnership for each Partner as described in Section 3.4 below. The Capital
Account balance of each Partner who is a Partner as of the effective date of
this Agreement shall be set forth opposite such Partner's name on Schedule A
hereto.

"Capital Cash Flow" shall have the meaning provided in Section 8.2
below.

"Capital Cash Flow Preference Units" shall have the meaning set forth
in Section 8.2.

"Capital Contribution" shall mean, when used in respect of a Partner,
if applicable, the initial capital contribution of such Partner as set forth in
Section 3.1 below, and any other amounts of money or the fair market value of
other property contributed by such Partner to the capital of the Partnership
with respect to the Partner's interest in the Partnership, including the
Capital Contribution made by any predecessor holder of the Partnership Interest
of such Partner.

"Cash Amount" means an amount of cash equal to the value of the REIT
Shares Amount on the date of receipt by the General partner of a Notice of
Redemption. The value of the REIT Shares Amount, as determined hereunder shall
be based upon the Market Price.

"Code" shall mean the Internal Revenue Code of 1986, as the same may
be amended from time to time, and any successor statute.

"Common Share" means a common share of beneficial interest in the
Company.

"Company" means Palace REIT, a Texas real estate investment trust and
the General Partner of the Partnership.

"Contributing Partner" shall have the meaning provided in clause (v)
of Section 3.2(B) below.

"Declaration of Trust" shall mean the Declaration of Trust of the
Company, as amended from time to time.

"Depreciation" shall mean for any fiscal year or portion thereof, an
amount equal to the depreciation, amortization or other cost recovery deduction
allowable with respect to an asset for such period for Federal income tax
purposes, except that if the Gross Asset Value of an asset differs from its
adjusted basis for Federal income tax purposes at the beginning of such period,
Depreciation shall be an amount that bears the same relationship to such
beginning Gross Asset Value as the depreciation, amortization or cost recovery
deduction in such period for Federal income tax purposes bears to the beginning
adjusted tax basis; provided, however, that if the adjusted basis for Federal

3
<PAGE> 8
income tax purposes of an asset at the beginning of such period is zero,
Depreciation shall be determined with reference to such beginning Gross Asset
Value using any reasonable method selected by the General Partner.

"Determination Date" shall have the meaning set forth in Section
3.2(B) or, as applicable, Section 3.2(C).

"Exchange Date" shall have the meaning provided in Section 3.2(F).

"General Partner" means Palace REIT, a Texas real estate investment
trust sometimes also referred to in this Agreement as the "Company."

"FPAA" shall have the meaning provided in Section 11.6.

"Gross Asset Value" means, with respect to any Partnership asset, the
asset's adjusted basis for Federal income tax purposes, except as follows:

(i) The initial Gross Asset Value of any asset
contributed by a Partner to the Partnership shall be the gross fair
market value of such asset, as determined by the General Partner;

(ii) The Gross Asset Value of all Partnership assets shall
be adjusted to equal their respective gross fair market values, as
determined by the General Partner, as of the following times: (a) the
acquisition of an additional interest in the Partnership by any new or
existing Partner in exchange for more than a de minimis Capital
Contribution; (b) the distribution by the Partnership to a Partner of
more than a de minimis amount of Partnership property as consideration
for an interest in the Partnership; and (c) the liquidation of the
Partnership within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to
clauses (a) and (b) above shall be made only if the General Partner
reasonably determines that such adjustments are necessary or
appropriate to reflect the relative economic interests of the Partners
in the Partnership;

(iii) The Gross Asset Value of any Partnership asset
distributed to any Partner shall be adjusted to equal the gross fair
market value of such asset on the date of distribution as determined
by the General Partner; and

(iv) The Gross Asset Value of Partnership assets shall be
increased (or decreased) to reflect any adjustments to the adjusted
basis of such assets pursuant to Code Section 734(b) or Code Section
743(b), but only to the extent that such adjustments are taken into
account in determining Capital Accounts pursuant to Regulations
Section 1.704-1(b)(2)(iv)(m) and paragraph (vi) of the definition of
Profits and Losses and Section 7.3(G) below; provided, however, that
Gross Asset Value shall not be adjusted pursuant to this paragraph
(iv) to the extent the General Partner determines that an adjustment
pursuant to

4
<PAGE> 9
paragraph (ii) above is necessary or appropriate in connection with a
transaction that would otherwise result in an adjustment pursuant to
this paragraph (iv).

If the Gross Asset Value of an asset has been determined or adjusted pursuant
to paragraphs (i), (ii) or (iv) above, such Gross Asset Value shall thereafter
be adjusted by the Depreciation taken into account with respect to such asset
for purposes of computing Profits and Losses.

"IRS" shall have the meaning set forth in Section 11.6.

"Issuance Date" means with respect to OP Units owned by a Partner, the
date upon which such OP Units are issued to such Partner (and with respect to
Preference Units, shall have the meaning set forth in the applicable Preference
Unit Term Sheet).

"Limited Partner" shall mean any Person (i) whose name is set forth as
a Limited Partner on Schedule A attached hereto or who has become a Limited
Partner pursuant to the terms and conditions of this Agreement, and (ii) who
holds a partnership interest. "Limited Partners" means all such persons.

"Majority-in-Interest of the Limited Partners" shall mean, as of any
given time, Limited Partners who own more than fifty percent (50%) of the
Percentage Interests in the Partnership held by Limited Partners.

"Market Price" means (a) the average, for the most recent ten (10)
consecutive trading days for the Common Shares preceding the date of receipt by
the General Partner of the Notice of Redemption, of the last reported sales
price per share of the Common Shares at the close of trading on each such date
as reported in the Wall Street Journal, or (b) in the event that the Common
Shares have not traded for at least ten (10) consecutive trading days, then the
average as aforesaid over the most recent number of dates that Common Shares
have traded.

"Nonrecourse Deductions" has the meaning set forth in Regulations
Section 1.704-2(c).

"Nonrecourse Liability" has the meaning set forth in Regulations
Section 1.752-1(a)(2).

"Notice of Redemption" means a written notice delivered by a Redeeming
Partner to the Partnership (with a copy to the General Partner) under Section
3.2(C), pursuant to which the Redeeming Partner exercises the Redemption Right
with respect to all or a portion of its OP Units in accordance with the
provisions of Section 3.2(C).

"Operating Cash Flow" shall have the meaning provided in Section 8.1.

"OP Units" are units of Partnership Interest more particularly
described in Section 3.2.

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<PAGE> 10
"OP Unit Value" shall mean, as of any given time, the number of OP
Units into which a Preference Unit is convertible (whether or not the
conversion can then be effected), or the value of the Preference Unit expressed
in OP Units if the Preference Unit is not convertible into OP Units, as
provided for in the applicable Preference Unit Term Sheet or Other Securities
Term Sheet.

"Other Securities" shall have the meaning set forth in clause (iv) of
Section 3.2(B).

"Other Securities Term Sheet" shall have the meaning provided in
clause (f) of Section 3.2(B).

"Partner Nonrecourse Debt" has the meaning set forth in Regulations
Section 1.704-2(b)(4).

"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in
Regulations Section 1.704-2(i).

"Partner Nonrecourse Deductions" has the meaning set forth in
Regulations Section 1.704-2(i).

"Partners" shall mean, collectively, the General Partner and the
Limited Partners, or any additional or successor partners of the Partnership
admitted to the Partnership in accordance with the terms of this Agreement.
References to a Partner shall be to any one of the Partners.

"Partnership Interest" shall mean the ownership interest of a Partner
in the Partnership at any particular time, including the right of such Partner
to any and all benefits to which such Partner may be entitled as provided in
this Agreement, and to the extent not inconsistent with this Agreement, under
the Act, together with the obligations of such Partner to comply with all of
the terms and provisions of this Agreement and the Act.

"Partnership Minimum Gain" has the meaning set forth in Regulations
Sections 1.704-2(b)(2) and 1.704-2(d).

"Percentage Interest" shall mean, as to each Partner, the quotient
(expressed as a percentage) arrived at by dividing (i) the sum of (A) the OP
Unit Value of any Preference Units held by that Partner and (B) the number of
OP Units held by that Partner, by (ii) the sum of (A) the OP Unit Value of all
Preference Units issued and outstanding at the time and (B) the total number of
OP Units issued and outstanding at the time. The respective Percentage
Interests of the Partners as of the date of this Agreement are set forth in
Schedule A attached to this Agreement.

"Person" means any individual, partnership, corporation, trust,
limited liability company or other entity.

"Preference Units" are units of Partnership Interest more particularly
described in Section 3.2(A).

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<PAGE> 11
"Preference Unit Term Sheet" shall have the meaning provided in clause
(e) of Section 3.2(B).

"Prior Partnership Agreement" has the meaning set forth in Recital A.

"Profits" and "Losses" shall mean for each fiscal year or portion
thereof, an amount equal to the Partnership's items of taxable income or loss
for such year or period, determined by the General Partner in accordance with
Section 703(a) of the Code with the following adjustments:

(i) any income which is exempt from Federal income tax
and not otherwise taken into account in computing Profits or Losses
shall be added to taxable income or loss;

(ii) any expenditures of the Partnership described in Code
Section 705(a)(2)(B) or treated as Section 705(a)(2)(B) expenditures
under Regulations Section 1.704-1(b)(2)(iv)(i) and not otherwise taken
into account in computing Profits or Losses, will be subtracted from
taxable income or loss;

(iii) in the event that the Gross Asset Value of any
Partnership asset is adjusted pursuant to the definition of Gross
Asset Value contained in this Section 2, the amount of such adjustment
shall be taken into account as gain or loss from the disposition of
such asset for purposes of computing Profits and Losses;

(iv) gain or loss resulting from any disposition of
Partnership assets with respect to which gain or loss is recognized
for Federal income tax purposes shall be computed by reference to the
Gross Asset Value of the property disposed of, notwithstanding that
the adjusted tax basis of such property differs from its Gross Asset
Value;

(v) in lieu of the depreciation, amortization and other
cost recovery deductions taken into account in computing such taxable
income or loss, there shall be taken into account Depreciation for
such fiscal year or other period;

(vi) to the extent an adjustment to the adjusted tax basis
of any Partnership asset pursuant to Code Section 734(b) or Code
Section 743(b) is required pursuant to Regulations Section
1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining
Capital Accounts as a result of a distribution other than in complete
liquidation of a Partner's Partnership Interest, the amount of such
adjustment shall be treated as an item of gain (if the adjustment
increases the basis of the asset) or loss (if the adjustment decreases
the basis of the asset) from the disposition of the asset and shall be
taken into account for purposes of computing Profits or Losses; and

(vii) any items specially allocated pursuant to Section 7.3
or Section 7.4 shall not be considered in determining Profits or
Losses.

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<PAGE> 12
"Recapitalization" shall have the meaning provided in Section 3.2(E).

"Record Date" shall have the meaning provided in Section 9.1.

"Redeeming Partner" shall have the meaning provided in Section 3.2(C).

"Redemption Amount" means either the Cash Amount or the REIT Shares
Amount as determined pursuant to Section 3.2 hereof.

"Redemption Right" shall have the meaning provided in Section 3.2(C).

"Regulations" shall mean the Income Tax Regulations, including
Temporary Regulations, promulgated under the Code, as such regulations may be
amended from time to time (including corresponding provisions of succeeding
regulations).

"REIT" shall have the meaning provided in Section 5.3.

"REIT Requirements" shall have the meaning provided in Section 5.3.

"REIT Shares Amount" means a number of Common Shares equal to the
number of OP Units offered for redemption by a Redeeming Partner, as adjusted
pursuant to Sections 3.2(E) and (F).

"Residual Operating Cash Flow Preference Units" shall have the meaning
provided in Section 8.1.

"Rights" shall have the meaning provided in Section 3.2(F).

"Specified Redemption Date" means with respect to a Redeeming Partner,
the date that is ten Business Days after receipt by the General Partner of the
Notice of Redemption from such Partner.

"TMP" shall have the meaning provided in Section 11.5.

"Transfer" shall have the meaning provided in Section 12(B).

"Transferee" shall have the meaning provided in Section 12(B).

"Units" has the meaning set forth in Section 3.2(A).

Article 3. Capitalization And Withdrawal of Withdrawing Partner.

3.1 Prior Capital. The initial capital contributions to
the Partnership were made by the General Partner and the Withdrawing Partner
and consisted of $990.00 and $10.00,

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<PAGE> 13
respectively. As of the effective date of this Agreement the Withdrawing
Partner has withdrawn from the Partnership and no longer has any interest in
the Partnership. As of the effective date hereof, the Limited Partners have
made contributions of cash and/or property to the Partnership, and the amount
of such cash contributions and the Gross Asset Value of such in-kind Capital
Contributions are reflected in the Capital Account balance of each such Partner
as set forth opposite such Partner's name on the attached Schedule A.

3.2 Issuance and Redemption of Units.

A. The interest of a Partner in the Partnership is
referred to as being evidenced by one or more "Units." Units may be
either "OP Units" or "Preference Units":

(i) An "OP Unit" is a unit of Partnership
Interest that, as more particularly provided for below in
Section 3.2(C), may be redeemed for the Redemption Amount.

(ii) A "Preference Unit" is a unit of Partnership
Interest having such rights, preferences and other privileges,
variations and designations as may be determined by the
General Partner in its sole and absolute discretion (but not
in violation of the provisions of Section 3.2(B) or the terms
of any other Preference Unit(s) Term Sheets). There may be
more than one series or class of Preference Units having
differing terms and conditions, but all Preference Units
within a given series or class shall have the same rights,
preferences and other privileges, variations and designations.
With respect to each series or class of Preference Units, the
General Partner may also, in its discretion, determine and
fix, among other terms and conditions, any of the following:
(a) the series to which such Preference Units shall belong,
(b) the distribution rate therefor, (c) the price at and the
terms and conditions on which such Preference Units may be
redeemed, (d) the amount payable in respect of such Preference
Units in the event of involuntary or voluntary liquidation,
(e) the terms and conditions on which such Preference Units
may be converted and the securities into which such Preference
Units may be converted (and/or the valuation of such
Preference Units as measured in OP Units), if such Preference
Units are issued with the privilege of conversion, and (f) the
number of such Preference Units to be issued as a part of such
series. Once determined and fixed as herein provided,
however, the terms and conditions of a particular series or
class of Preference Units may not be changed without the
written consent of the holders of at least 67%of the
Preference Units within the class or series (or such greater
percentage as may be provided for in the applicable Preference
Unit Term Sheet or Other Securities Term Sheet, as the case
may be).

The aggregate total of all Units outstanding as of the date of this Agreement
is 415,312 (assuming full conversion of all outstanding Preference Units into
OP Units). As of the date of this Agreement, each Partner is deemed to hold
Units as shown on Schedule A.

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<PAGE> 14
B. From time to time hereafter, subject to and in
accordance with the provisions of this Section 3.2(B), the General
Partner shall cause the Partnership to issue additional Units as
follows:

(i) OP Units to the Company upon the issuance by
the Company of additional Common Shares (other than in
exchange for OP Units) and the contribution of the net
proceeds thereof as a Capital Contribution to the Partnership
as provided for in Section 3.3(B) below it being understood,
however, that the Company may issue Common Shares in
connection with share option plans, dividend reinvestment
plans, restricted share plans or other benefit or compensation
plans (for example, shares issued in lieu of fees or
compensation) without receiving any proceeds and that the
issuance of such Common Shares shall nonetheless entitle the
Company to receive additional OP Units pursuant to this clause
(i);

(ii) OP Units to Partners (including itself) that
hold Preference Units that are convertible into OP Units, upon
the exercise of such conversion in accordance with the terms
and conditions of the Preference Unit Term Sheet or Other
Securities Term Sheet applicable thereto;

(iii) OP Units to Partners holding OP Units
(including itself) if and to the extent of each such Partner's
participation in any reinvestment program contemplated by
Section 3.3(C) below;

(iv) Preference Units to the Company upon the
issuance by the Company of securities other than Common Shares
whether debt or equity securities ("Other Securities") and the
contribution of the net proceeds thereof as a Capital
Contribution to the Partnership as provided for in Section
3.3(B) below; and

(v) in all other cases, OP Units and/or
Preference Units, as determined by the General Partner, in its
discretion, to existing or newly-admitted Partners (including
itself), in exchange for the contribution by a Partner (the
"Contributing Partner") of Capital Contributions to the
Partnership.

Issuance of OP Units as aforesaid shall be in accordance with the following:

(a) the number of OP Units issued to the Company under
clause (i) of this Section 3.2(B) shall be equal to the number of
Common Shares issued;

(b) the number of OP Units issued to a Partner under
clause (ii) of this Section 3.2(B) shall be as provided for in the
Preference Unit Term Sheet or the Other Securities Term Sheet pursuant
to which the Preference Units being converted exist;

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<PAGE> 15
(c) the number of OP Units issued to a Limited Partner
under clause (iii) of this Section 3.2(B) shall be as provided for in
the applicable reinvestment program; and

(d) the number of OP Units issued to a Contributing
Partner under clause (v) of this Section 3.2(B) shall be equal to the
quotient (rounded to the nearest whole number) arrived at by dividing
(x) the initial Gross Asset Value of the property contributed as
additional Capital Contributions (net of any debt to which such
property is subject or assumed by the Partnership in connection with
such contribution) by (y) the Market Price (as hereinafter defined).

For purposes of this Section 3.2(B) only, the "Determination Date" shall mean
the trading date, preceding the issuance of the OP Units, selected by the
General Partner, in its discretion, based on the particular facts and
circumstances surrounding the proposed issuance of the OP Units in question.

Issuance of Preference Units as aforesaid shall be in accordance with the
following:

(e) Preference Units issued pursuant to clause (v) of
this Section 3.2(B) shall have the terms and conditions specified in
an agreement (a "Preference Unit Term Sheet") executed by and between
the Partnership (at the direction or in the discretion of the General
Partner) and the Contributing Partner. The number of Preference Units
issued to a Contributing Partner under clause (v) of this Section
3.2(B) shall be equal to the quotient (rounded to the nearest whole
number) arrived at by dividing (x) the Initial Gross Asset Value of
the property contributed as additional capital contributions (net of
any debt to which such property is subject or assumed by the
Partnership in connection with such contribution) by (y) an amount
provided for in the Preference Unit Term Sheet; and

(f) Preference Units issued pursuant to clause (iv) of
this Section 3.2(B) shall have economic terms substantially identical
to those of the applicable Other Securities and such other terms and
conditions, all of which are specified in an agreement (an "Other
Securities Term Sheet") executed between the Partnership and the
Company and such Other Securities Term Sheet shall thereupon be a part
of this Agreement.

Units may also be issued to some or all of the Partners holding Preference
Units if and to the extent of such Partner's participation in any reinvestment
program contemplated by Section 3.3(C). Upon the issuance of additional OP
Units and/or Preference Units in accordance with the provisions of this Section
3.2(B), each recipient of such Units shall either execute this Agreement or a
joinder to this Agreement (which joinder, as to Preference Units, may be a part
of any applicable Preference Unit Term Sheet or Other Securities Term Sheet)
and, as applicable, the Percentage Interest of all of the Partners shall
thereupon be appropriately adjusted by the General Partner; provided however,
in no event shall any additional Preference Units or OP Units be issued
(pursuant to this Section 3.2(B) or otherwise) to the extent that the effect of
such issuance would be to reduce the General Partner's Percentage Interest
(including any interest held by the General Partner or the Company as a Limited
Partner) to fifty percent (50%) or less, unless the General Partner shall in
its sole discretion determine that such issuance of Preference Units or OP
Units is appropriate.

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<PAGE> 16
C. Subject to the provisions of Section 3.2(E), on or
after the date which is one (1) year after the Issuance Date, each
Limited Partner shall have the right (the "Redemption Right") to
require the Partnership to redeem on a Specified Redemption Date all or
a portion of the OP Units held by such Limited Partner at a redemption
price equal to and in the form of the Redemption Amount. The
Redemption Right shall be exercised pursuant to a Notice of Redemption
delivered to the Partnership (with a copy to the General Partner) by
the Limited Partner who is exercising the Redemption Right (the
"Redeeming Partner"); provided, however, that the Partnership shall not
be obligated to satisfy such Redemption Right if the Company and/or the
General Partner elects to purchase the OP Units subject to the Notice
of Redemption pursuant to Section 3.2(D); and provided, further, that
no Limited Partner may deliver to the General Partner more than four
(4) Notices of Redemption during each calendar year. In addition to
the restrictions on redemption set forth in Section 3.2(E), a Limited
Partner may not exercise the Redemption Right for less than one
thousand (1,000) OP Units or, if such Limited Partner holds less than
one thousand (1,000) OP Units, all of the OP Units held by such
Partner. Notwithstanding the foregoing provisions of this Section
3.2(C), the Company and the General Partner agree to use their best
efforts to cause the closing of the acquisition of redeemed OP Units
hereunder to occur as quickly as reasonably possible. The Redeeming
Partner shall have no right, with respect to any OP Units so redeemed,
to receive any distribution paid with respect to OP Units if the Record
Date for such distribution is on or after the Specified Redemption
Date.

D. Notwithstanding the provisions of Section 3.2(C), a
Limited Partner that exercises the Redemption Right shall be deemed to
have offered to sell the OP Units described in the Notice of
Redemption to the General Partner and the Company, and either of the
General Partner or the Company (or both or any designee thereof) may,
in their sole and absolute discretion, elect to purchase directly and
acquire such OP Units by paying to the Redeeming Partner either the
Cash Amount, or, the REIT Shares Amount, as elected by the General
Partner or the Company or any designee thereof (each in its sole and
absolute discretion), on the Specified Redemption Date, whereupon the
General Partner and/or the Company or any designee thereof shall
acquire the OP Units offered for redemption by the Redeeming Partner
and shall be treated for all purposes of this Agreement as the owner
of such OP Units. If the General Partner and/or the Company or any
designee thereof shall elect to exercise their right to purchase OP
Units under this Section 3.2(D) with respect to a Notice of
Redemption, they shall so notify the Redeeming Partner within five
Business Days after the receipt by the General Partner of such Notice
of Redemption. Unless the General Partner and/or the Company or any
designee thereof (each in its sole and absolute discretion) shall
exercise its right to purchase OP Units from the Redeeming Partner
pursuant to this Section 3.2(D), neither the General Partner nor the
Company or any designee thereof shall have any obligation to the
Redeeming Partner or the Partnership with respect to such Redeeming
Partner's exercise of such Redemption Right. In the event that the
General Partner or the Company or any designee thereof shall exercise
its right to purchase OP Units with respect to the exercise of a
Redemption Right in the manner described in the first sentence of this
Section 3.2(D), the Partnership shall have no obligation to pay any
amount to the Redeeming

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<PAGE> 17
Partner with respect to such Redeeming Partner's exercise of such
Redemption, and each of the Redeeming Partner, the Partnership, and
the General Partner or the Company or any designee thereof, as the
case may be, shall treat the transaction between the General Partner
or the Company or any designee thereof, as the case may be, and the
Redeeming Partner for federal income tax purposes as a sale of the
Redeeming Partner's OP Units to the General Partner or the Company or
any designee thereof. Each Redeeming Partner agrees to execute such
documents as the General Partner may reasonably require in connection
with the issuance of Common Shares upon exercise of the Redemption
Right.

E. The Company shall at all times reserve and keep
available out of its authorized but unissued Common Shares, solely for
the purpose of effecting the exchange of OP Units for Common Shares,
such number of Common Shares as shall from time to time be sufficient
to effect the redemption of all outstanding OP Units not owned by the
Company, and any Preference Units not owned by the Company that are
convertible into OP Units (whether or not the conversion can then be
effected). No Limited Partner shall, by virtue of being the holder of
one or more OP Units and/or Preference Units be deemed to be a
shareholder of or have any other interest in the Company. In the
event of any change in the outstanding Common Shares of the Company or
its successor by reason of any share dividend, split,
recapitalization, merger, consolidation, combination, exchange of
shares or other similar corporate change other than the issuance of
Rights, as further described in Section 3.2(F) (a "Recapitalization"),
the number of OP Units held by each Partner shall be adjusted upward
or downward to equal such number of Common Shares of the Company (or
as applicable, the Common Shares or equivalent class of securities of
the successor thereto) as would have been held by the Partner
immediately following the Recapitalization if such Partner had held a
number of Common Shares equal to such number of OP Units immediately
prior to such Recapitalization. In the event the Company or the
General Partner or any designee thereof acquires OP Units pursuant to
such Section 3.2(D), the General Partner shall record the transfer on
the books of the Partnership so that the Company or the General
Partner or any designee thereof, as applicable, is thereupon the owner
and holder of such OP Units. Notwithstanding the foregoing provisions
of this Section 3.2, a Limited Partner shall not have the right to
exercise a Redemption Right if, upon payment of the REIT Shares Amount
to such Limited Partner, (i) the Company would, as a result thereof,
no longer qualify (or it would be reasonably possible in the judgement
of the General Partner that the Company no longer would qualify) as a
real estate investment trust under the Code; or (ii) the payment of
such REIT Shares Amount to the Limited Partner would constitute or be
reasonably possible in the judgment of the General Partner to
constitute a violation of applicable federal or state securities laws
or would violate any applicable provisions of the organizational
documents of the Company (including without limitation any
restrictions on ownership of securities of the Company set forth in
the Declaration of Trust or Bylaws of the Company). In either such
event, to the extent the consequences described in (i) or (ii) could
be eliminated by reasonable action of the General Partner or the
Company without any material detriment to the General Partner or the
Company and at the expense of such Limited Partner(s) requesting such
exchange, the Company or the General Partner shall take all such
reasonable action to effect the exchange of OP Units for Common Shares
by such Limited Partner(s) as herein provided.

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<PAGE> 18
F. In the event that a Redeeming Partner exercises the
Redemption Right, and the Company or the General Partner or any
designee thereof elects to make the payment of the REIT Shares Amount
to the Redeeming Partner referenced in accordance with the first
sentence of Section 3.2(D), and in the event that the Company issues
to all of its holders of Common Shares as of a certain record date
rights, options, warrants or convertible or exchangeable securities
entitling such shareholders to subscribe for or purchase Common Shares
or any other securities or property (collectively, "Rights"), with the
record date for such Rights issuance falling within the period
starting on the date that the Company receives the Redemption Notice
from the Redeeming Partner and ending on the day immediately preceding
the date upon which the Company, the General Partner or their designee
delivers the Common Shares to the Redeeming Partner in exchange for
such Redeeming Partner's OP Units (the date upon which such exchange
occurs being referred to herein as the "Exchange Date"), which Rights
will not be distributed before the Exchange Date, then the amount
payable by the Company, the General Partner or their designee to the
Redeeming Partner in exchange for its OP Units under this Section 3.2
shall also include such Rights that the Redeeming Partner would have
received if it had been the owner of the Common Shares to be delivered
by the Company to the Redeeming Partner prior to the record date for
the issuance of the Rights (as the same may be expressed for any
purpose hereunder in a number of OP Units or Common Shares as
determined by the General Partner).

3.3 Additional Funds.

A. No Partner shall be assessed or, except as otherwise
provided in this Agreement, required to contribute additional funds or
other property to the Partnership. Any additional funds or other
property required by the Partnership, as determined by the General
Partner in its sole discretion, may, at the option of the General
Partner and without an obligation to do so (except as provided for in
Section 3.3(B) below), be contributed by the General Partner or any
other Partner (provided such other Partner is willing to do so and the
General Partner consents thereto, each in its sole and absolute
discretion) as additional Capital Contributions. If and as the
General Partner or any other Partner makes additional Capital
Contributions to the Partnership, each such Partner shall receive
additional OP Units and/or Preference Units as provided for in Section
3.2(B) above. The General Partner shall also have the right (but not
the obligation) to raise any additional funds required for the
Partnership in accordance with the provisions of Section 9.7(E) below
and/or by causing the Partnership to borrow the necessary funds from
third parties on such terms and conditions as the General Partner
shall deem appropriate in its sole discretion. If the General Partner
elects to cause the Partnership to borrow the additional funds, or if
the Partnership issues a guaranty, indemnity or similar undertaking in
connection with the indebtedness of the Company as aforesaid, in any
such case one or more of the Partnership's assets may be encumbered to
secure the loan or undertaking. Except as provided for in Section
3.3(C) below, no Limited Partner shall have the right to make
additional Capital Contributions to the Partnership without the prior
written consent of the General Partner.

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<PAGE> 19
B. Except for (i) the capitalization of any wholly-owned
entity of the General Partner which is the general partner of a
partnership having the Partnership as a limited partner, (ii) the net
proceeds generated by the issuance of Other Securities that evidence
debt (and are not equity securities) that are loaned by the Company to
the Partnership, and (iii) where the Company determines that the net
proceeds generated by the issuance of Common Shares or Other
Securities (whether for debt or equity) are retained by the Company
for a valid business reason consistent with the purposes of the
Partnership and such retention does not materially adversely affect
the Limited Partners, the net proceeds of any and all funds raised by
or through the Company through the issuance of Common Shares or Other
Securities shall be contributed to the Partnership as additional
Capital Contributions, and in such event the Company shall be issued
additional Units pursuant to Section 3.2(B) above.

C. If the General Partner creates and administers a
reinvestment program in substantial conformance with a dividend
reinvestment program which may be available from time to time to
holders of the Common Shares, each Limited Partner holding OP Units
shall have the right to reinvest any or all cash distributions payable
to it from time to time pursuant to this Agreement by having some or
all (as the Limited Partner elects) of such distributions contributed
to the Partnership as additional Capital Contributions, and in such
event the Partnership shall issue to each such Limited Partner
additional OP Units pursuant to clause (iii) of Section 3.2(B) above,
or the General Partner, in its sole discretion, may elect to cause
distributions with respect to which a Limited Partner has elected
reinvestment to be contributed to the Company in exchange for the
issuance of Common Shares. At the option of the General Partner, such
a program may also be made available with respect to Preference Units.

3.4 Capital Accounts. A separate capital account
("Capital Account") shall be maintained for each Partner.

A. To each Partner's Capital Account there shall be
added such Partner's Capital Contributions, such Partner's
distributive share of Profits and any items in the nature of income or
gain which are specially allocated pursuant to Section 7.3, Section
7.4 or Section 14.2(C) hereof, and the amount of any Partnership
liabilities assumed by such Partner or which are secured by any
Partnership property distributed to such Partner.

B. From each Partner's Capital Account there shall be
subtracted the amount of cash and the Gross Asset Value of any
Partnership property distributed to such Partner pursuant to any
provision of this Agreement, such Partner's distributive share of
losses and any items in the nature of expenses or losses which are
specially allocated pursuant to Section 7.3, Section 7.4 or Section
14.2(C) hereof, and the amount of any liabilities of such Partner
assumed by the Partnership or which are secured by any property
contributed by such Partner to the partnership.

15
<PAGE> 20
C. In the event all or a portion of a Partnership
Interest is transferred in accordance with the terms of this Agreement
(including a transfer of OP Units in exchange for Common Shares,
pursuant to Section 3.2(D)), the transferee shall succeed to the
Capital Account of the transferor to the extent it relates to the
transferred Partnership Interest.

D. In determining the amount of any liability for
purposes of Sections 3.4(A) and 3.4(B) above, there shall be taken
into account Code Section 752(c) and any other applicable provisions
of the Code and Regulations.

E. This Section 3.4 and the other provisions of this
Agreement relating to the maintenance of Capital Accounts are intended
to comply with Regulations Section 1.704-1(b), and shall be
interpreted and applied in a manner consistent with such Regulations.
In the event the General Partner shall determine that it is prudent to
modify the manner in which the Capital Accounts, or any debits or
credits thereto (including, without limitation, debits or credits
relating to liabilities which are secured by contributed or
distributed property or which are assumed by the Partnership, or the
Partners) are computed in order to comply with such Regulations, the
General Partner may make such modification, provided that it is not
likely to have a material effect on the amounts distributed to any
Partner pursuant to Section 14.2 upon the liquidation of the
Partnership. The General Partner also shall (i) make any adjustments
that are necessary or appropriate to maintain equality between the
Capital Accounts of the Partners and the amount of Partnership capital
reflected on the Partnership's balance sheet, as computed for book
purposes, in accordance with Regulations Section 1.704-1(b)(2)(iv)(g),
and (ii) make any appropriate modifications in the event unanticipated
events might otherwise cause this Agreement not to comply with
Regulations Section 1.704-1(b).

3.5 Interest on and Return of Capital.

A. No Partner shall be entitled to any interest on its
Capital Account or on its Capital Contributions to the Partnership.

B. Except as expressly provided for in this Agreement,
no Partner shall have the right to demand or to receive the return of
all or any part of his Capital Contributions to the Partnership and
there shall be no priority of one Partner over the other as to the
return of capital contributions or withdrawals or distributions of
profits and losses. No Partner shall have the right to demand or
receive property other than cash in return for the contributions of
such Partner to the Partnership.

3.6 Negative Capital Accounts. Subject to the provisions
of any guarantee or other written agreement between a Partner and the
Partnership, no Partner shall be required to pay to the Partnership any deficit
or negative balance which may exist in its Capital Account.

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3.7 Limit on Contributions and Obligations of Partners.
Except as provided in Sections 3.1, 3.2 and 3.3 (or the provisions of any
guarantee or other written agreement between a Partner and the Partnership) no
Partner shall be required to make any additional advances or contributions to
or on behalf of the Partnership or to endorse any obligations of the
Partnership.

3.8 Redemption and Repurchase of Units. Notwithstanding
any other provision of this Agreement which may be contrary to this Section
3.8, in the event of the proposed repurchase or redemption for cash by the
Company of (i) Common Shares or (ii) Other Securities with respect to which the
Company had previously been issued Preference Units pursuant to Section
3.2(B)(iv) of this Agreement, then, in such event, the Partnership shall
provide cash to the Company concurrently with such repurchase or redemption or
for such purpose equal to the proposed repurchase or redemption price, and one
OP Unit owned by the General Partner (or, in the case of redemption or
repurchase by the Company of Other Securities contemplated by clause (ii)
above, one Preference Unit owned by the General Partner which had been issued
with respect to such Other Securities) shall be canceled with respect to each
Common Share (or share of Other Securities) so repurchased or redeemed.

Article 4. Principal Office. The principal office of the
Partnership shall be located at 3535 Las Vegas Boulevard South, Las Vegas,
Nevada 89109, or at such other place as the General Partner may designate after
giving written notice of such designation to the other Partners.

Article 5. Purpose and Powers of Partnership.

5.1 Purposes. The purposes of the Partnership shall be
to acquire, purchase, own, operate, manage, develop, redevelop, invest in,
finance, refinance, sell, lease and otherwise deal with commercial properties
and assets related thereto, and interests therein, whether directly or
indirectly, alone or in association with others. The purposes of the
Partnership include, but are not limited to:

(A) acquiring, developing, operating, leasing and
managing commercial properties and conducting any other lawful
business relating thereto;

(B) financing, mortgaging, exchanging, selling,
encumbering or otherwise disposing of all or any part of a
commercial property or any interest therein;

(C) constructing, reconstructing, altering,
modifying and subtracting from or adding to a commercial
property or any part thereof;

(D) organizing and holding interests in
corporations, partnerships, limited liability companies and
other entities owning or otherwise having an interest in,
whether directly or indirectly, one or more commercial
properties; and

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(E) in general, the making of any investments or
expenditures, the borrowing and lending of money and the
taking of any and all actions which are incidental or related
to any of the purposes recited above.

It is agreed that each of the foregoing is an ordinary part of the
Partnership's business and affairs. Property may be acquired subject
to, or by assuming, the liens, encumbrances, and other title
exceptions which affect such Property. The Partnership may also be a
partner (general or limited) in partnerships (general or limited), a
venturer in joint ventures, a shareholder in corporations, a member in
limited liability companies or an investor in any other type of
business entity created to accomplish all or any of the foregoing.

5.2. Powers. The Partnership purposes may be accomplished
by taking any action which is not prohibited under the Act and which is related
to the acquisition, ownership, development, improvement, operation, management,
financing, leasing, exchanging, selling or otherwise encumbering or disposing
of all or any portion of the assets of the Partnership, or any interest
therein.

5.3 REIT Requirements. Each Limited Partner understands
and acknowledges that the General Partner has elected to be treated as a real
estate investment trust ("REIT") under Code Section 856. Each Limited Partner
further understands and acknowledges that in order to maintain its status as a
REIT, the General Partner must comply with numerous and complex rules and
regulations set forth in the Code and the Regulations, many of which are
applied on a quarterly and/or annual basis (the "REIT Requirements"), and that
the management and operation of the Partnership will have a material effect on
the ability of the General Partner to continue to maintain its status as a
REIT. Accordingly, notwithstanding any other provision of this Agreement or
any non-mandatory provision of the Act, the Partnership shall not take any
action which (or fail to take any action, the omission of which) (i) could
adversely affect the ability of the General Partner to qualify or continue to
qualify as a REIT, (ii) could subject the General Partner to any additional
taxes under Code Section 857 or Code Section 4981 or other potentially adverse
consequences under the Code, or (iii) otherwise could cause the General Partner
to violate the REIT Requirements. In addition, notwithstanding any other
provision of this Agreement or any non-mandatory provision of the Act, any
action of the General Partner on behalf of the Partnership or any decision of
the General Partner to refrain from acting on behalf of the Partnership,
undertaken in the General Partner's business judgement that such action or
omission is necessary or advisable in order (i) to protect the ability of the
General Partner to continue to qualify as a REIT or (ii) to avoid the General
Partner incurring any taxes under Section 857 or Section 4981 of the Code, is
expressly authorized under this Agreement and is deemed approved by all of the
Limited Partners.

Article 6. Term. The term of the Partnership shall continue
until the Partnership is terminated upon the occurrence of an event described
in Section 14.1 below.

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Article 7. Allocations.

7.1 Profits.

A. After giving effect to the allocations set forth in
Sections 7.3, 7.4 and 14.2(C), Profits for any fiscal year shall be
allocated (i) first to the General Partner until the cumulative
Profits allocated to the General Partner under this Section 7.1(A)(i)
equal the cumulative Losses allocated to the General Partner under
Section 7.2(B), and (ii) second among the Partners in proportion to
their respective Percentage Interests.

B. In the event that the Partnership issues additional
Units to the General Partner or any Limited Partner pursuant to
Section 3.2 hereof, the General Partner shall make such revisions to
this Section 7.1 as it determines are necessary to reflect the terms
of the issuance of such additional Units, including, but not limited
to, making special allocations of Profits and Losses and other
Partnership items to certain classes of Units.

7.2 Losses.

A. After giving effect to the special allocations set
forth in Sections 7.3, 7.4, and 14.2(C), Losses for any fiscal year
shall be allocated among the Partners in proportion to their
respective Percentage Interests.

B. The Losses allocated pursuant to Section 7.2(A) above
shall not exceed the maximum amount of Losses that can be so allocated
without causing any Limited Partner to have an Adjusted Capital
Account Deficit at the end of any fiscal year. All Losses in excess
of the limitations set forth in this Section 7.2(B) shall be allocated
to the General Partner.

C. In the event that the Partnership issues additional
Units to the General Partner or any Limited Partner pursuant to
Section 3.2 hereof, the General Partner shall make such revisions to
this Section 7.2 as it determines are necessary to reflect the terms
of the issuance of such additional Units, including, but not limited
to, making special allocations of Profits and Losses and other
Partnership items to certain classes of Units.

7.3 Special Allocations. The following special
allocations shall be made in the following order:

A. Minimum Gain Chargeback. Except as otherwise
provided in Regulations Section 1.704-2(f), notwithstanding any other
provision of this Article 7, if there is a net decrease in Partnership
Minimum Gain during any fiscal year, each Partner shall be specially
allocated items of Partnership income and gain for such fiscal year
(and, if necessary, subsequent fiscal years) in an amount equal to
such Partner's share of the net decrease in Partnership Minimum Gain,
determined in accordance with Regulations Section 1.704-2(g). The
items to be so allocated shall be determined in accordance with
Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section
7.3(A) is intended to comply with the

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<PAGE> 24
minimum gain chargeback requirement in Section 1.704-2(f) of the
Regulations and shall be interpreted consistently therewith.

B. Partner Minimum Gain Chargeback. Except as otherwise
provided in Regulations Section 1.704-2(i)(4), notwithstanding any
other provision of this Article 7, if there is a net decrease in
Partner Nonrecourse Debt Minimum Gain attributable to a Partner
Nonrecourse Debt during any Partnership fiscal year, each Partner who
has a share of the Partner Nonrecourse Debt Minimum Gain attributable
to such Partner Nonrecourse Debt, determined in accordance with
Regulations Section 1.704-2(i)(5), shall be specially allocated items
of Partnership income and gain for such fiscal year (and, if
necessary, subsequent fiscal years) in an amount equal to such
Partner's share of the net decrease in Partner Nonrecourse Debt
Minimum Gain attributable to such Partner Nonrecourse Debt, determined
in accordance with Regulations Section 1.704-2(i)(4). The items to be
so allocated shall be determined in accordance with Regulations
Sections 1.704-2(i)(4) and 1.704-2(i)(2). This Section 7.3(B) is
intended to comply with the minimum gain chargeback requirement in
Regulations Section 1.704-2(i)(4) and shall be interpreted
consistently therewith.

C. Qualified Income Offset. In the event any Partner
unexpectedly receives any adjustments, allocations, or distributions
described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), Section
1.704-1(b)(2)(ii)(d)(5), or Section 1.704-1(b)(2)(ii)(d)(6), items of
Partnership income and gain shall be specially allocated to each such
Partner in an amount and manner sufficient to eliminate, to the extent
required by the Regulations, the Adjusted Capital Account Deficit of
such Partner as quickly as possible, provided that an allocation
pursuant to this Section 7.3(C) shall be made only if and to the
extent that such Partner would have an Adjusted Capital Account
Deficit after all other allocations provided for in this Article 7
have been tentatively made, as if this Section 7.3(C) were not in this
Agreement.

D. Gross Income Allocation. In the event any Partner
has a deficit Capital Account at the end of any Partnership fiscal
year which is in excess of the sum of (i) the amount such Partner is
obligated to restore pursuant to any provision of this Agreement, and
(ii) the amount such Partner is deemed to be obligated to restore
pursuant to the penultimate sentences of Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5), each such Partner shall be specially
allocated items of Partnership income and gain in the amount of such
excess as quickly as possible, provided that an allocation pursuant to
this Section 7.3(D) shall be made only if and to the extent that such
Partner would have a deficit Capital Account after all other
allocations provided for in this Article 7 have been made as if
Section 7.3(C) hereof and this Section 7.3(D) were not in the
Agreement.

E. Preferential Gross Income Allocations. If and to the
extent Partners receive distributions from the Partnership (other than
distributions pursuant to Section 14.2(C) in final liquidation of the
Partnership), each such Partner shall be allocated an equal amount of
Partnership gross income prior to any allocations of Profit and Loss
pursuant to Sections 7.1

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and 7.2 above. For purposes of this Section 7.3(E), any payment with
respect to a Preference Unit that, under the applicable Preference
Unit Term Sheet or Other Securities Term Sheet, as the case may be,
constitutes a payment in redemption of such Preference Unit (and a
return of the Partner's Capital Contribution with respect to such
Preference Unit) shall not result in a special allocation of gross
income to the Partner receiving such payments under this Section
7.3(E), except to the extent such payment is specifically attributable
to accrued and unpaid preferred distributions with respect to such
Preference Unit provided for in such Preference Unit Term Sheet or
Other Securities Term Sheet.

F. Nonrecourse Deductions. Nonrecourse Deductions for
any fiscal year shall be allocated among the Partners in accordance
with their respective Percentage Interests.

G. Partner Nonrecourse Deductions. Any Partner
Nonrecourse Deductions for any fiscal year shall be specially
allocated to the Partner who bears the economic risk of loss with
respect to the Partner Nonrecourse Debt to which such Partner
Nonrecourse Deductions are attributable, in accordance with
Regulations Section 1.704-2(i)(1).

H. Section 754 Adjustments. To the extent an adjustment
to the adjusted tax basis of any Partnership asset pursuant to Code
Section 734(b) or Code Section 743(b) is required, pursuant to
Regulations Section 1.704-1(b)(2)(iv)(m)(2) or Regulations Section
1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining
Capital Accounts as the result of a distribution to a Partner in
complete liquidation of his interest in the Partnership, the amount of
such adjustment to Capital Accounts shall be treated as an item of
gain (if the adjustment increases the basis of the asset) or loss (if
the adjustment decreases such basis) and such gain or loss shall be
specifically allocated to the Partners in accordance with their
respective Percentage Interests in the event that Regulations Section
1.704-1(b)(2)(iv)(m)(2) applies, or the Partner to whom such
distribution was made in the event that Regulations Section
1.704-1(b)(2)(iv)(m)(4) applies.

7.4 Curative Allocations. The allocations set forth in
Sections 7.2(B), 7.3(A), 7.3(B), 7.3(C), 7.3(D), 7.3(F), 7.3(G), and 7.3(H)
above (the "Regulatory Allocations") are intended to comply with certain
requirements of the Regulations under Sections 704(b) and 514(c)(9)(E) of the
Code. It is the intent of the Partners that, to the extent possible, all
Regulatory Allocations shall be offset either with other Regulatory Allocations
or with special allocations of other items of Partnership income, gain, loss,
or deduction pursuant to this Section 7.4. Therefore, notwithstanding any
other provision of this Article 7 (other than the Regulatory Allocations), the
General Partner shall make such offsetting special allocations of Partnership
income, gain, loss, or deduction in whatever manner it determines appropriate
so that, after such offsetting allocations are made, each Partner's Capital
Account balance is, to the extent possible, equal to the Capital Account
balance such Partner would have had if the Regulatory Allocations were not part
of the Agreement and all Partnership items were allocated pursuant to Section
7.1(A)(ii) and 7.2(A) (subject, however, to Section 7.3(E) above). In
exercising its discretion under this Section 7.4, the General Partner shall
take into account future Regulatory Allocations under Section 7.3(A) and 7.3(B)
that, although not

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yet made, are likely to offset other Regulatory Allocations previously made
under Sections 7.3(F) and 7.3(G).

7.5 Tax Allocations: Code Section 704(c).

A. Income, gain, loss, and deduction with respect to any
property contributed to the capital of the Partnership shall, solely
for tax purposes, be allocated among the Partners so as to take
account of any variation between the adjusted basis of such property
to the Partnership for Federal income tax purposes and its initial
Gross Asset Value in accordance with any permissible method or methods
under Code Section 704(c) and the Regulations thereunder.

B. In the event the Gross Asset Value of any Partnership
asset is adjusted pursuant to the definition of "Gross Asset Value"
contained in Article 2 above, subsequent allocations of income, gain,
loss and deduction with respect to such asset shall take account of
any variation between the adjusted basis of such asset for Federal
income tax purposes and its Gross Asset Value in the same manner or
manners permitted under Code Section 704(c) and the Regulations
thereunder.

C. Any elections or other decisions relating to such
allocations shall be made by the General Partner using any permissible
manner under the Code or the Regulations that the General Partner may
elect in its sole discretion. Allocations pursuant to this section
7.5 are solely for purposes of Federal, state, and local taxes and
shall not affect, or in any way be taken into account in computing,
any Partner's Capital Account or share of Profits, Losses, other
items, or distributions pursuant to any provision in this Agreement.

Article 8. Cash Available for Distribution.

8.1 Operating Cash Flow. As used in this Agreement,
"Operating Cash Flow" shall mean and be defined as all cash receipts of the
Partnership from whatever source (but excluding Capital Cash Flow and excluding
the proceeds of any Capital Contributions to the Partnership) during the period
in question in excess of all items of Partnership expense (other than non-cash
expenses such as depreciation) and other cash needs of the Partnership,
including, without limitation, amounts paid by the Partnership as principal on
debts and advances, during such period, capital expenditures and any reserves
(as determined by the General Partner) established or increased during such
period. In the discretion of the General Partner, reserves may include cash
held for future acquisitions. Operating Cash Flow shall be distributed to or
for the benefit of the Partners of record as of the applicable Record Date not
less frequently than annually, and shall be distributed, first to those
Partners holding Preference Units to the extent of the respective priorities
(if any) established by the applicable Preference Unit Term Sheets and Other
Securities Term Sheets; and then the balance pro rata among the Partners
holding OP Units and the Partners holding Preference Units which, based on the
provision of the applicable Preference Unit Term Sheets and Other Securities
Term Sheets, entitle such Partners to participate in such distributions on a
pari passu basis with the

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holders of OP Units (the "Residual Operating Cash Flow Preference Units"), to
each Partner based on the quotient (expressed as a percentage) arrived at by
dividing (i) the sum of the OP Unit Value of any Residual Operating Cash Flow
Preference Units held by that Partner and the number of OP Units held by that
Partner by (ii) the sum of the OP Unit Value of all Residual Operating Cash
Flow Preference Units issued and outstanding at the time and the total number
of OP Units issued and outstanding at the time. Notwithstanding the foregoing,
the General Partner reserves the right to pro-rate distributions of Operating
Cash Flow to incoming Limited Partners who were admitted during the applicable
period (but excluding any incoming Partners who received Units from an existing
Limited Partner) and who held Units as of the applicable Record Date but held
such Units for less than the entire period with respect to which the Operating
Cash Flow distribution is to be paid, based on the number of days such Units
were outstanding during the applicable period, or any other method of
pro-ration deemed equitable by the General Partner and, in such event, the
amount of the distribution payable to all other Partners shall be adjusted
accordingly.

8.2 Capital Cash Flow. As used in this Agreement,
"Capital Cash Flow" shall mean and be defined as collectively (a) gross
proceeds realized in connection with the sale of any assets of the Partnership,
(b) gross financing or refinancing proceeds, (c) gross condemnation proceeds
(excluding condemnation proceeds applied to restoration of remaining property)
and (d) gross insurance proceeds (excluding rental insurance proceeds or
insurance proceeds applied to restoration of property), less (a) closing costs,
(b) the cost to discharge any Partnership financing encumbering or otherwise
associated with the asset(s) in question, (c) the establishment of reserves (as
determined by the General Partner, and which may include cash held for future
acquisitions), and (d) other expenses of the Partnership then due and owing.
Subject to Section 14.2 below, if applicable, Capital Cash Flow shall be
distributed to or for the benefit of the Partners of record as of the
applicable Record Date not less frequently than annually and shall be
distributed: first to the Partners holding Preference Units to the extent of
the respective priorities (if any) established by the applicable Preference
Unit Term Sheets and Other Securities Term Sheets; and then the balance pro
rata among those Partners holding OP Units and those Partners holding
Preference Units which, based on the provisions of the applicable Preference
Unit Term Sheets and Other Securities Term Sheets, entitle such Partners to
participate in such distributions on a pari passu basis with the holders of OP
Units (the "Capital Cash Flow Preference Units"), to each Partner based on the
quotient (expressed as a percentage) arrived at by dividing (i) the sum of the
OP Unit Value of any Capital Cash Flow Preference Units held by that Partner
and the number of OP Units held by that Partner by (ii) the sum of the OP Unit
Value of all Capital Cash Flow Preference Units issued and outstanding at the
time and the total number of OP Units issued and outstanding at the time.
Notwithstanding the foregoing, the General Partner reserves the right to
pro-rate distributions of Capital Cash Flow to incoming Limited Partners who
were admitted during the applicable period (but excluding any incoming Partners
who received Units from an existing Limited Partner) and who held Units as of
the applicable Record Date but held such Units for less than the entire period
with respect to which the Capital Cash Flow distribution is to be paid, based
on the number of days such Units were outstanding during the applicable period,
or any other method of pro-ration deemed equitable by the General Partner and,
in such event, the amount of the distribution payable to all other Partners
shall be adjusted accordingly.

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8.3 Consent to Allocations and Distributions. Each of
the Partners hereby consents to the allocations and distributions provided for
in this Agreement.

8.4 Right to Limit Distributions. The right of any
Partner to receive distributions of any nature pursuant to the terms of this
Agreement shall be subject to the terms of any agreement between such Partner
and the Partnership limiting, restricting or providing rights of set-off with
respect to such distributions.

Article 9. Management of Partnership.

9.1 General Partner. The General Partner shall be the
sole manager of the Partnership business, and shall have the right and power to
make all decisions and take any and every action with respect to the property,
the business and affairs of the Partnership and shall have all the rights,
power and authority generally conferred by law, or necessary, advisable or
consistent with accomplishing the purposes of the Partnership. All such
decisions or actions made or taken by the General Partner hereunder shall be
binding upon all of the Partners and the Partnership. The powers of the
General Partner to manage the Partnership business shall include, without
limitation, the power and authority to, directly or indirectly:

(i) operate any business normal or customary for the
owner of or investor in commercial property of the
type held by the Partnership;

(ii) perform any and all acts necessary or appropriate to
the operation of the Partnership's assets, including,
but not limited to, preparing, negotiating, executing
and delivering leases and rental agreements with
regard to real and personal property owned by the
Partnership, preparing applications for rezoning,
preparing objections to rezoning of other property
and establishing bank accounts in the name of the
Partnership;

(iii) improve, renovate and/or perform construction
activities with regard to the properties owned by the
Partnership and to retain such contractors,
subcontractors and other persons or entities as may
be required in connection with such activities;

(iv) procure and maintain such insurance as may be
available in such amounts and covering such risks as
are deemed appropriate by the General Partner;

(v) take and hold all real, personal and mixed property
of the Partnership in the name of the Partnership or
in the name of a nominee;

(vi) negotiate, execute and deliver agreements on behalf
of and in the name of the Partnership;

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(vii) borrow money (whether on a secured or unsecured
basis), finance and refinance the assets of the
Partnership or any part thereof or interest therein,
and in connection therewith, issue notes, bonds,
securities and other undertakings and evidences of
indebtedness and documents related thereto
(including, without limitation, guaranties,
indemnities and similar undertakings to support loans
obtained or debt securities issued by the Company);

(viii) coordinate all accounting and clerical functions of
the Partnership and employ such accountants, lawyers,
property managers, leasing agents and other
management or service personnel as may from time to
time be required to carry on the business of the
Partnership;

(ix) acquire any assets, and encumber, sell, assign,
transfer, ground lease or otherwise dispose of any or
all of the assets of the Partnership, or any part
thereof or interest therein including, without
limitation, by way of any Unit dividend, split,
recapitalization, merger, consolidation, combination,
exchange of Units or other similar Partnership
organizational change;

(x) organize one or more partnerships, corporations,
limited liability companies or other business
entities which are controlled, directly or
indirectly, by the Partnership and make any capital
contributions (in cash or in kind) required pursuant
to the organizational documents or subscription
agreements relating to any such partnerships,
corporations, limited liability companies or other
business entities; and

(xi) establish the date (the "Record Date") for the
purpose of making any proper determination in
connection with, but not limited to, the following
matters: (a) which Partners are entitled to receive
distributions, (b) consent to any matter for which
the consent of Partners is permitted or required
under any provision hereof, or (c) otherwise when
Partners are allocated rights hereunder.

9.2 Limitations on Power and Authority of Partners.
Notwithstanding the powers of the General Partner set forth in Section 9.1
above, the General Partner shall not have the right or power to do any of the
following unless any such action is approved by a Majority-in-Interest of the
Limited Partners:

(a) do any act in contravention of this Agreement, or any
amendment hereto;

(b) do any act which would make it impossible to carry on
the ordinary business of the Partnership, except to the extent that
such act is specifically permitted by the terms hereof (it being
understood and agreed that a sale of any or all of the assets of the

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<PAGE> 30
Partnership, for example, would be an ordinary part of the
Partnership's business and affairs and is specifically permitted
hereby); or

9.3 Limited Partners. The Limited Partners shall have no
right or authority to act for or to bind the Partnership and no Limited Partner
shall participate in the conduct or control of the Partnership's affairs or
business.

9.4 Liability of General Partner. The General Partner
shall not be liable or accountable, in damages or otherwise, to the Partnership
or to any other Partner for any error of judgment or for any mistakes of fact
or law or for anything which it may do or refrain from doing hereafter in
connection with the business and affairs of the Partnership except (i) in the
case of fraud, willful misconduct (such as an intentional breach of fiduciary
duty or an intentional breach of this Agreement) or gross negligence, and (ii)
for other breaches of this Agreement, but the liability of the General Partner
under this clause (ii) shall be limited to its interest in the Partnership as
more particularly provided for in Section 9.8. The General Partner shall not
have any personal liability for the return of any Limited Partner's Capital
Contributions.

9.5 Indemnity. The Partnership shall indemnify and shall
hold the General Partner (and the trustees, managers, officers and directors
thereof) harmless from any liability, loss, cost or damage, including without
limitation reasonable legal fees and court costs, incurred by it by reason of
anything it may do or refrain from doing hereafter for and on behalf of the
Partnership or in connection with its business or affairs; provided, however,
that the Partnership shall not be required to indemnify the General Partner (or
any officer, trustee, manager or director thereof) for any liability, loss,
cost or damage which it might incur as a result of its fraud, willful
misconduct or gross negligence in the performance of its duties hereunder. In
addition, the General Partner shall be entitled to reimbursement from the
Partnership for any amounts paid by it in satisfaction of indemnification
obligations owed by the General Partner to present or former officers,
trustees, managers or directors of the General Partner or its predecessors, as
provided for in or pursuant to the Declaration of Trust and Bylaws of the
General Partner. The right of indemnification set forth in this Section 9.5
shall be in addition to any rights to which the person or entity seeking
indemnification may otherwise be entitled and shall inure to the benefit of the
successors and assigns of any such person or entity. No Partner shall be
personally liable with respect to any claim for indemnification pursuant to
this Section 9.5, but such claim shall be satisfied solely out of assets of the
Partnership.

9.6 Other Activities of Partners and Agreements with
Related Parties. The General Partner shall devote its full-time efforts in
furtherance of the Partnership business, it being expressly understood that,
except for (i) the Company's ownership of any wholly-owned subsidiary or other
entity of the Company which is a partner of a partnership having the
Partnership as a partner, (ii) the issuance of debt or equity securities or
other borrowing where the net proceeds thereof are loaned or contributed to the
Partnership, and (iii) activities incidental to the Company's status and
existence as a real estate investment trust, the General Partner shall conduct
all of its activities

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exclusively through the Partnership and shall not conduct or engage in any way
in any other material business activities. Except as may otherwise be agreed
to in writing, each Limited Partner, and its affiliates, shall be free to
engage in, to conduct or to participate in any business or activity whatsoever,
including, without limitation, the acquisition, development, management and
exploitation of real and personal property (other than property of the
Partnership), without any accountability, liability or obligation whatsoever to
the Partnership or to any other Partner, even if such business or activity
competes with or is enhanced by the business of the Partnership. The General
Partner, in the exercise of its power and authority under this Agreement, may
contract and otherwise deal with or otherwise obligate the Partnership to
entities in which the General Partner or any one or more of the managers,
trustees, officers, directors or shareholders of the General Partner may have
an ownership or other financial interest, whether direct or indirect.

9.7 Other Matters Concerning the General Partner.

A. The General Partner shall be protected in relying,
acting or refraining from acting on any resolution, certificate,
statement, instrument, opinion, report, notice, request, consent,
order, bond, debenture, or other paper or document believed by it to
be genuine and to have been executed or presented by the proper party
or parties.

B. The General Partner may exercise any of the powers
granted or perform any of the duties imposed by this Agreement either
directly or through agents. The General Partner may consult with
counsel, accountants, appraisers, management consultants, investment
bankers and other consultants selected by it, each of whom may serve
as consultants for the Partnership. An opinion by any consultant on a
matter which the General Partner believes to be within its
professional or expert competence shall be full and complete
protection as to any action taken or omitted by the General Partner
based on the opinion and actions taken or omitted in accordance
therewith. The General Partner shall not be responsible for the
misconduct, negligence, acts or omissions of any consultant or
contractor of the Partnership or of the General Partner, and shall
assume no obligation other than to use due care in the selection of
all consultants and contractors.

C. No mortgagee, grantee, creditor or any other person
dealing with the Partnership shall be required to investigate the
authority of the General Partner or secure the approval of or
confirmation by any Limited Partner of any act of the General Partner
in connection with the conduct of any ordinary or extraordinary
Partnership business.

D. The General Partner may retain such persons or
entities as it shall determine (including the General Partner or any
entity in which the General Partner shall have an interest or with
which it is affiliated) to provide services to or on behalf of the
Partnership. The General Partner shall be entitled to reimbursement
from the Partnership for its out-of-pocket expenses (including,
without limitation, amounts paid or payable to the General Partner or
any entity in which the General Partner shall have an interest or with
which it is affiliated) incurred in connection with Partnership
business. Such expenses shall be deemed to include without limitation
those expenses required in connection with the administration of the
Partnership such as the maintenance of Partnership books and records,
management

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of the Partnership property and assets and preparation of information
respecting the Partnership needed by the Partners in the preparation
of their individual tax returns.

E. The General Partner may loan to the Partnership the
net proceeds of loans obtained or debt securities issued by the
Company so long as the terms of such loan to the Partnership are
substantially equivalent to the corresponding loan obtained or debt
securities issued by the Company.

9.8 Partner Exculpation. Except for fraud, willful
misconduct and gross negligence, no Partner shall have any personal liability
whatsoever, whether to the Partnership or to any other Partner, for the debts
or liabilities of the Partnership or its obligations hereunder, and the full
recourse of any Partner shall be limited to the interest of that Partner in the
Partnership. To the fullest extent permitted by law, no trustee, manager,
officer, director or shareholder of the General Partner shall be liable to the
Partnership for money damages except for (i) active and deliberate dishonesty
established by a final judgment or (ii) actual receipt of an improper benefit
or profit in money, property or services. Without limitation of the foregoing,
and except for fraud, willful misconduct and gross negligence, no property or
assets of any Partner, other than its interest in the Partnership, shall be
subject to levy, execution or other enforcement procedures for the satisfaction
of any judgment (or other judicial process) in favor of any other Partners and
arising out of, or in connection with, this Agreement. This Agreement is
executed by the trustees, managers, trust managers, members, officers or
partners of each Partner solely as trustees, managers, members, officers or
partners of the same and not in their own individual capacities. No advisor,
trustee, manager, trust manager, member, director, officer, partner, employee,
beneficiary, shareholder, participant or agent of any Partner (or of any
partner of a Partner) shall be personally liable in any matter or to any extent
under or in connection with this Agreement, and the Partnership, each Partner
and their respective successors and assigns shall look solely to the interest
of the other Partner in the Partnership for the payment of any claim or for any
performance hereunder.

9.9 General Partner Expenses and Liabilities. All costs
and expenses incurred by the Company in connection with its activities as the
General Partner hereunder, all costs and expenses incurred by the Company in
connection with its continued existence, qualification as a real estate
investment trust under the Code and otherwise, and all other liabilities
incurred or suffered by the General Partner in connection with the pursuit of
its business and affairs as contemplated hereunder and in connection herewith,
shall be paid (or reimbursed to the Company, if paid by the Company) by the
Partnership unless and to the extent that any such costs were paid by the
Company in connection with the issuance of additional shares of beneficial
interest of the Company as contemplated by Section 3.3(B) above.

Article 10. Banking. The funds of the Partnership shall be kept
in accounts designated by the General Partner and all withdrawals therefrom
shall be made on such signature or signatures as shall be designated by the
General Partner.

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Article 11. Accounting.

11.1 Fiscal Year. The fiscal year and taxable year of the
Partnership (the "fiscal year") shall end on the last day of December of each
year, unless another fiscal year end is selected by the General Partner.

11.2 Books of Account. The Partnership books of account
shall be maintained at the principal office designated in Article 4 or at such
other locations and by such person or persons as may be designated by the
General Partner. The Partnership shall pay the expense of maintaining its
books of account. Each Partner shall have, during reasonable business hours
and upon reasonable prior notice, access to the books of the Partnership and in
addition, at its expense, shall have the right to copy such books. The General
Partner, at the expense of the Partnership, shall cause to be prepared and
distributed to the Partners annual financial data sufficient to reflect the
status and operations of the Partnership and its assets and to enable each
Partner to file its federal income tax return.

11.3 Method of Accounting. The Partnership books of
account shall be maintained and kept, and its income, gains, losses and
deductions shall be accounted for, in accordance with generally accepted
accounting principles, consistently applied, or such other method of accounting
as may be adopted hereafter by the General Partner. All elections and options
available to the Partnership for Federal or state income tax purposes shall be
taken or rejected by the Partnership in the sole discretion of the General
Partner.

11.4 Section 754 Election. In case of a distribution of
property made in the manner provided in Section 734 of the Code (or any similar
provision enacted in lieu thereof), or in the case of a transfer of any
interest in the Partnership permitted by this Agreement made in the manner
provided in Section 743 of the Code (or any similar provision enacted in lieu
thereof), the General Partner, on behalf of the Partnership, will file an
election under Section 754 of the Code (or any similar provision enacted in
lieu thereof) in accordance with the procedures set forth in the applicable
Regulations.

11.5 Tax Matters Partner. The General Partner is hereby
designated the Tax Matters Partner (hereinafter referred to as the "TMP") of
the Partnership and shall have all rights and obligations of the TMP under the
Code. The Partnership shall reimburse the TMP for any and all out-of-pocket
costs and expenses (including attorneys' and accountants' fees) incurred or
sustained by it in its capacity as TMP. The Partnership shall indemnify,
defend and hold the TMP harmless from and against any loss, liability, damage,
cost or expense (including attorneys' and accountants' fees) sustained or
incurred as a result of any act or decision concerning the Partnership tax
matters and within the scope of its responsibility as TMP.

11.6 Administrative Adjustments. If the TMP receives
notice of a Final Partnership Administrative Adjustment (the "FPAA") or if a
request for an administrative adjustment made by the TMP is not allowed by the
United States Internal Revenue Service (the "IRS") and the IRS does not notify
the TMP of the beginning of an administrative proceeding with respect to the
Partnership's taxable year to which such request relates (or if the IRS so
notifies the TMP but fails

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to mail a timely notice of an FPAA), the TMP may, but shall not be obligated
to, petition a court for readjustment of partnership items. In the case of
notice of an FPAA, if the TMP determines that the United States District Court
or Claims Court is the most appropriate forum for such a petition, the TMP
shall notify each person who was a Partner at any time during the Partnership's
taxable year to which the IRS notice relates of the approximate amount by which
its tax liability would be increased (based on such assumptions as the TMP may
make) if the treatment of partnership items on his return was made consistent
with the treatment of partnership items on the Partnership's return, as
adjusted by the FPAA. Unless each such person deposits with the TMP, for
deposit with IRS, the approximate amount of his increased tax liability,
together with a written agreement to make additional deposits if required to
satisfy the jurisdictional requirements of the court, within thirty days after
the TMP's notice to such person, the TMP shall not file a petition in such
court. Instead, the TMP may, but shall not be obligated to, file a petition in
the United States Tax Court.

Article 12. Transfers of Partnership Interests.

A. General Partner. The General Partner may not transfer
its interest in the Partnership without the consent of a
Majority-in-Interest of the Limited Partners unless (1) the transfer
of such interest is to an affiliate of the General Partner, or (2) the
transfer of such interest is pursuant to or in connection with a
Recapitalization and either (a) the Recapitalization has been approved
by the consent of a Majority-in-Interest of the Limited Partners, or
(b) an appropriate adjustment to the number of OP Units held by each
Partner has been made in accordance with Section 3.2(E).

B. Limited Partner.

(i) No Limited Partner or substituted Limited
Partner shall, without the prior written consent of the
General Partner (which consent may be given or withheld in the
sole discretion of the General Partner), sell, assign,
distribute or otherwise transfer (a "Transfer") all or any
part of his interest in the Partnership, except (w) by
operation of law, testamentary disposition, gift (outright or
in trust) or by sale, in each case to or for the benefit of
his parent(s), spouse or descendants, (x) pledges or other
collateral transfers effected by a Limited Partner to secure
the repayment of a loan or other obligation; provided however,
that each such pledgee shall agree in writing, concurrent with
such pledge or other collateral transfer, to (i) subordinate
its rights with respect to the pledged interest to any and all
rights granted by the pledging Limited Partner to the
Partnership, whether or not such rights constitute perfected
security interests in favor of the Partnership, including,
without limitation, any rights to withhold, restrict or offset
distributions in respect of such pledged interest under the
terms of any agreement between the Partnership and the
pledging Limited Partner, and (ii) to defer the exercise of
its rights as a secured creditor to realize upon the
collateral in the case of an event of default until the
expiration of one-year from the Issuance Date with regard to
the OP Units which constitute such collateral, (y) the
exchange of OP Units for Common Shares of the Company,
pursuant to Section

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<PAGE> 35
3.2(C) above, and (z) the distribution of OP Units or
Preference Units by a Limited Partner to any of its direct or
indirect constituent partners or owners. Notwithstanding the
foregoing, each such transfer shall be subject to compliance
with restrictions on transferability contained in the
Declaration of Trust and Bylaws of the Company and/or any
applicable agreement executed by the transferor as well as
compliance with applicable Federal and state securities laws,
and no transfer by a Limited Partner of OP Units or Preference
Units may be made if such transfer would result in the
Partnership being treated as an association taxable as a
corporation or if such transfer is effectuated through an
"established securities market" or a "secondary market (or the
substantial equivalent thereof)" within the meaning of Section
7704 of the Code; the General Partner reserves the right to
require an opinion of counsel regarding such matters in form
and substance reasonably acceptable to the General Partner as a
condition to any such Transfer. Neither the conversion of a
Preference Unit into one or more OP Units nor the redemption of
an OP Unit in accordance with Section 3.2 constitutes a
Transfer. A Limited Partner shall notify the General Partner
of any Transfer of beneficial interest or other interest which
occurs without a transfer of record ownership, as well as any
pledge or other collateral transfer. No part of the interest
of a Limited Partner shall be subject to the claims of any
creditor, any spouse for alimony or support, or to legal
process, and may not be voluntarily or involuntarily alienated
or encumbered except as may be specifically provided for in
this Agreement. A Limited Partner shall not be permitted to
retire or withdraw from the Partnership except as expressly
permitted by this Agreement.

(ii) An assignee, legatee, distributee or other
transferee (whether by conveyance, operation of law or
otherwise)(including any pledgee upon realization of its
rights as a secured creditor) (a "Transferee") of all or any
portion of a Limited Partner's interest in the Partnership
shall be entitled to receive Profits, Losses and distributions
hereunder attributable to such interest acquired by reason of
such Transfer, from and after the effective date of the
Transfer of such interest; provided, however, anything in this
Agreement to the contrary notwithstanding, (a) except as
provided in Section 12(B)(i) no Transfer by a Limited Partner
shall be effective until such Transfer has been consented to
by the General Partner; (b) without the prior written consent
of the General Partner, no Transferee shall be considered a
substituted Limited Partner except as provided in Section
12(B)(i)(w) and (z) and, in any event, until such Transferee
shall have agreed to be bound by the terms of this Agreement
and shall have executed a counterpart hereof; (c) the
Partnership and the General Partner shall be entitled to treat
the transferor of such interest as the absolute owner thereof
in all respects, and shall incur no liability for the
allocation of Profits and Losses or distributions which are
made to such transferor until such time as the written
instrument of Transfer has been received by the General
Partner and the "effective date" of the Transfer has passed,
and (d) the General Partner shall have the right to require
any such transferor to exchange the OP Units to which such
interest

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<PAGE> 36
relates for Common Shares or cash, pursuant to Section 3.2(C)
above. The "effective date" of any transfer shall be the last
day of the month set forth on the written instrument of
Transfer or such other date consented to in writing by the
General Partner as the "effective date."

(iii) Notwithstanding anything to the contrary
contained in this Section 12(B), (a) in the event that a
Limited Partner pursuant to the dissolution and liquidation of
such Limited Partner distributes all or any portion of its
interest in the Partnership, the partners, shareholders or
members (as the case may be) in such Limited Partner receiving
such interest shall become substituted Limited Partners, and
shall (upon agreeing to be bound by the terms of this
Agreement and executing a counterpart hereof and/or any
Preference Unit Term Sheet or Other Securities Term Sheet)
succeed to the rights, interests and obligations of such
Limited Partner in the Partnership, in proportion to their
respective interests in such Limited Partner, and (b) no
Transfer shall be effective to the extent that such Transfer
would, in the opinion of the General Partner (y) by treating
the interest in the Partnership so transferred as if it had
been exchanged for Common Shares in accordance with Section
3.2(C) above, violate the limitations on ownership of Common
Shares contained in the Declaration of Trust and/or Bylaws of
the Company, or (z) violate any State or Federal securities
laws.

C. Admission Adjustments. The General Partner shall,
when necessary, cause this Agreement to be amended from time to time
(and shall cause Schedule A to be revised), to reflect the admission
or withdrawal of Partners, and the issuance, conversion and redemption
of any Preference Units and/or OP Units (including the corresponding
adjustment to Percentage Interests).

D. General Partner's Percentage Interest.
Notwithstanding any other provision of this Agreement to the contrary,
no sale, exchange, assignment, or other transfer or issuance of a
Partnership Interest by or to any Partner shall be effective, if the
effect of such transaction would be to cause the General Partner's
Percentage Interest (including any interest held by the General
Partner or the Company as a Limited Partner) to decrease to a level of
fifty percent (50%) or less, unless the General Partner shall in its
sole discretion provide its prior written consent to any such sale,
exchange, assignment or other transfer or issuance.

E. Transfers to Lenders. Notwithstanding any other
provision of this Agreement to the contrary, no transfer of any Units
may be made to a lender to the Partnership or any person who is
related (within the meaning of Section 1.752-4(b) of the Regulations)
to any lender to the Partnership whose loan constitutes a Nonrecourse
Liability, without the consent of the General Partner, which consent
may be given or withheld by the General Partner in its sole and
absolute discretion, provided that as a condition to such consent
being granted the lender will be required to enter into an arrangement
with the Partnership and the General Partner to exchange or redeem for
the Cash Amount or the REIT Shares Amount any Units

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in which a security interest is held simultaneously with the time at
which such lender would be deemed to be a partner in the Partnership
for purposes of allocating liabilities to such lender under Section
752 of the Code.

Article 13. Admission of New Partners. The General Partner shall
admit to the Partnership as limited partners those persons and entities who
are not already Partners and who receive OP Units and/or Preference Units in
accordance with the provisions of this Agreement.

Article 14. Termination, Liquidation and Dissolution of
Partnership.

14.1 Termination Events. The Partnership shall be
dissolved and its affairs wound up in the manner hereinafter provided upon the
earliest to occur of the following events:

A. December 31, 2097; or

B. the sale of all or substantially all of the assets of
the Partnership;

C. the agreement of those Partners holding at least
sixty-seven percent (67%) of the Percentage Interests of all of the
Partners, determining that the Partnership should be dissolved; or

D. subject to Section 14.4 below, the entry of a final
judgment, order or decree of a court of competent jurisdiction
adjudicating as bankrupt either the Partnership or the General
Partner, and the expiration without appeal of the period, if any,
allowed by applicable law to appeal therefrom.

14.2 Method of Liquidation. Upon the happening of any of
the events specified in Section 14.1 above, the General Partner (or if there be
no General Partner, a liquidating trustee selected by a Majority-in-Interest of
the Limited Partners) shall immediately commence to wind up the Partnership's
affairs and shall liquidate the assets of the Partnership as promptly as
possible, unless the General Partner, or the liquidating trustee, shall
determine that an immediate sale of Partnership assets would cause undue loss
to the Partnership, in which event the liquidation may be deferred for a
reasonable time. The Partners shall continue to share Operating Cash Flow,
Capital Cash Flow, Profits and Losses during the period of liquidation in the
same proportions as before dissolution (subject to Section 14.2(C) below). The
proceeds from liquidation of the Partnership, including repayment of any debts
of Partners to the Partnership, shall be applied in the following order:

A. Debts of the Partnership, including repayments of
principal and interest on loans and advances made by the General
Partner pursuant to Sections 3.3 and/or 9.7 above; then

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<PAGE> 38
B. to the establishment of any reserves deemed necessary
or appropriate by the General Partner, or by the person(s) winding up
the affairs of the Partnership in the event there is no remaining
General Partner of the Partnership, for any contingent or unforeseen
liabilities or obligations of the Partnership. Such reserves
established hereunder shall be held for the purpose of paying any such
contingent or unforeseen liabilities or obligations and, at the
expiration of such period as the General Partner, or such person(s)
deems advisable, the balance of such reserves shall be distributed in
the manner provided hereinafter in this Section 14.2 as though such
reserves had been distributed contemporaneously with the other funds
distributed hereunder; and then

C. To the Partners in accordance with their respective
Capital Account balances, after giving effect to all contributions,
distributions and allocations for all periods. In connection
therewith, income, gain and loss of the Partnership (and to the extent
necessary to achieve the purposes hereof, items of gross income and
deduction) with respect to the sale or other disposition of all or
substantially all of the Partnership's assets and/or the Partnership's
operations in connection therewith (whether or not attributable to the
taxable year in which the distribution pursuant to this Section
14.2(C) is to be made or a preceding taxable year) shall be allocated
among the Partners so that each Partner's Capital Account shall equal,
after taking into account the prior balance (positive or negative) in
such Partner's Capital Account and the effect of such allocation, the
amount that such Partner would be entitled to receive if the
Partnership were to make a distribution to the Partners pursuant to
the provisions of Section 8.2 hereof in an amount equal to the
remaining liquidation proceeds to be distributed under this Section
14.2(C).

14.3 Date of Termination. The Partnership shall be
terminated when all notes received in connection with such disposition have
been paid and all of the cash or property available for application and
distribution under Section 14.2 above (including reserves) shall have been
applied and distributed in accordance therewith.

14.4 Reconstitution Upon Bankruptcy.

A. Notwithstanding any dissolution of the Partnership
under clause (d) of Section 14.1 above, if the Partnership is
reconstituted as set forth in this Section 14.4, then the business of
the Partnership shall be continued with the Partnership's property and
the Partnership's assets shall not be liquidated.

B. If the Partnership is dissolved by reason of the
bankruptcy of the General Partner, a successor general partner may be
admitted within 90 days after the dissolution, effective as of the
date of dissolution, as the General Partner hereunder, with the
written consent of a Majority-in-Interest of the Limited Partners.
Upon the admission of such successor general partner, without any
further consent or approval of any other Partner, the Partnership
shall be reconstituted as a successor limited partnership.

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C. If the Partnership is dissolved by reason of the
bankruptcy of the Partnership in a proceeding for the reorganization
(and not the liquidation) of the Partnership, then, with the consent
of the Company and a Majority-in-Interest of the Limited Partners, the
Partnership may be reconstituted within 90 days after dissolution,
effective as of the date of dissolution, whereupon the Partnership
shall be reconstituted as a successor limited partnership.

D. The successor limited partnership reconstituted in
accordance with the foregoing provisions of this Section 14.4 shall
continue the business of the Partnership with the Partnership's
property. The Percentage Interests of the Partners in the successor
limited partnership shall be in proportion to their respective
Percentage Interests in the dissolved Partnership. Such successor
limited partnership shall be governed by the terms and provisions of
this Agreement and references in this Agreement to the Partnership or
to the Partners or their rights and obligations shall be understood to
comprehend such successor limited partnership and the Partners thereof
and their rights and obligations.

14.5 Death, Legal Incompetency, Etc. of a Limited Partner.
The death, legal incompetency, insolvency, dissolution or bankruptcy of a
Limited Partner shall not dissolve or terminate the Partnership. Upon the
death or incapacity of an individual Limited Partner, such individual Limited
Partner's interest in the Partnership shall be transferred either by will, the
laws of intestacy or otherwise to the legal representative or successor of such
individual Limited Partner.

Article 15. Power of Attorney. Each Limited Partner hereby
irrevocably constitutes and appoints the General Partner, with full power of
substitution, its true and lawful attorney, for him and in his name, place and
stead and for his use and benefit, to sign, swear to, acknowledge, file and
record:

(i) this Agreement, and subject to Article 16 below,
amendments to this Agreement;

(ii) any certificates, instruments and documents
(including assumed and fictitious name certificates)
as may be required by, or may be appropriate under,
the laws of the State of Delaware, the State of
Texas, the State of Nevada or any other State or
jurisdiction in which the Partnership is doing or
intends to do business, in order to discharge the
purposes of the Partnership or otherwise in
connection with the use of the name or names used by
the Partnership;

(iii) any other instrument which may be required to be
filed or recorded by the Partnership on behalf of the
Partners under the laws of any State or by any
governmental agency in order for the Partnership to
conduct its business;

(iv) any documents which may be required to effect the
continuation of the Partnership, the admission of a
substitute or additional Partner, the

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<PAGE> 40
dissolution and termination of the Partnership or the
amendment and restatement of Schedule A, provided such
continuation, admission, dissolution and termination
or amendment and restatement of Schedule A, is not in
violation of any provision of this Agreement; and

(v) any documents which may be required or desirable to
have the General Partner appointed, and act as, the
"Tax Matters Partner" as described in the Code.

The foregoing grant of authority is a special power of attorney coupled with an
interest, is irrevocable and shall survive the death or incapacity of any
individual Limited Partner, and shall survive the delivery of any assignment by
a Limited Partner of the whole or any portion of his interest in the
Partnership.

Article 16. Amendment of Agreement.

A. Each Limited Partner, by his execution of or joinder
in this Agreement, hereby irrevocably appoints the General Partner
with power of substitution, as his true and lawful attorney coupled
with an interest, in his name, place and stead to amend this Agreement
in any respect other than:

(i) to enlarge the obligation of any Partner to
make contributions to the capital of the Partnership; or

(ii) except as otherwise provided for in this
Agreement or as required by law, to modify the allocation of
Profits or Losses or distributions among the Partners as
provided for in Articles 7 and 8 above, respectively; or

(iii) to amend Article 1 or Section 3.2, 9.2, or
12; or

(iv) to amend this Section 16.

B. With respect to amendments regarding Sections
16(A)(ii) or 16(A)(iii), this Agreement may be amended with the
written consent of the Company and those Limited Partners holding not
less than 67% of the aggregate of Percentage Interests held by all
Limited Partners.

Notwithstanding the foregoing, the terms and conditions of a
particular series of Preference Units may not be changed without the written
consent of the holders of at least 67% of the Preference Units within the class
or series (or such greater percentage as may be provided for in the applicable
Preference Unit Term Sheet or Other Securities Term Sheet, as the case may be).

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<PAGE> 41
C. With respect to amendments regarding Section
16(A)(i), this Agreement may be amended only with the written consent
of the General Partner and any Partner adversely affected by such
amendment. With respect to amendments regarding Section 16(A)(iv)
this Agreement may be amended only with the written consent of all
Partners.

In the event this Agreement shall be amended pursuant to this Article
16, the General Partner shall cause this Agreement to be amended to reflect the
amendment.

Article 17. Miscellaneous.

17.1 Notices. Any notice, election or other communication
provided for or required by this Agreement shall be in writing and shall be
deemed to have been given when delivered by hand or by telecopy or other
facsimile transmission, the first business day after sent by overnight courier
(such as Federal Express), or on the second business day after deposit in the
United States Mail, certified or registered, return receipt requested, postage
prepaid, properly addressed to the Partner to whom such notice is intended to
be given at the address for the Partner set forth on Schedule A of this
Agreement, or at such other address as such person may have previously
furnished in writing to the Partnership and each Partner with copies to:

Palace REIT
3535 Las Vegas Boulevard South
Las Vegas, Nevada 89109

Attention: David R. Merker

17.2 Modifications. Except as otherwise provided in this
Agreement, no change or modification of this Agreement, nor any waiver of any
term or condition in the future, shall be valid or binding upon a Partner
unless such change or modification shall be in writing and signed by such
Partner.

17.3 Successors and Assigns. Any person acquiring or
claiming an interest in the Partnership, in any manner whatsoever, shall be
subject to and bound by all of the terms, conditions and obligations of this
Agreement to which his predecessor-in-interest was subject or bound, without
regard to whether such a person has executed a counterpart hereof or any other
document contemplated hereby. No person, including the legal representative,
heir or legatee of a deceased Partner, shall have any rights or obligations
greater than those set forth in this Agreement, and no person shall acquire an
interest in the Partnership or become a Partner thereof except as expressly
permitted by and pursuant to the terms of this Agreement. Subject to the
foregoing, and the provisions of Article 12 above, this Agreement shall be
binding upon and inure to the benefit of the Partners and their respective
successors, assigns, heirs, legal representatives, executors and
administrators.

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17.4 Duplicate Originals. For the convenience of the
Partners, any number of counterparts hereof may be executed, and each such
counterpart shall be deemed to be an original instrument, and all of which
taken together shall constitute one agreement.

17.5 Construction. The titles of the Articles, Sections
and subsections herein have been inserted as a matter of convenience of
reference only and shall not control or affect the meaning or construction of
any terms or provisions herein.

17.6 Governing Law. This Agreement shall be governed by
the laws of the State of Delaware. Except to the extent the Act is
inconsistent with the provisions of this Agreement, the provisions of such Act
shall apply to the Partnership.

17.7 Other Instruments. The parties hereto covenant and
agree that they will execute such other and further instruments and documents
as, in opinion of the General Partner, are or may become necessary or desirable
to effectuate and carry out the Partnership as provided for by this Agreement.

17.8 General Partner with Interest as Limited Partner. If
the General Partner ever has an interest as a Limited Partner in the
Partnership, the General Partner shall, with respect to such interest, enjoy
all of the rights and be subject to all of the obligations and duties of a
Limited Partner.

17.9 Legal Construction. In case any one or more of the
provisions contained in this Agreement shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality
or unenforceability shall not affect any other provision hereof and this
Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.

17.10 Gender. Whenever the context shall so require, all
words herein in any gender shall be deemed to include the masculine, feminine
or neuter gender, all singular words shall include the plural, and all plural
words shall include the singular.

17.11 Prior Agreements Superseded. This Agreement
supersedes any prior understandings or written or oral agreements amongst the
Partners, or any of them, respecting the within subject matter and contains the
entire understanding amongst the Partners with respect thereto.

17.12 No Third Party Beneficiary. The terms and provisions
of this Agreement are for the exclusive use and benefit of General Partner and
the Limited Partners and shall not inure to the benefit of any other person or
entity.

17.13 Purchase for Investment. Each Partner represents,
warrants and agrees that it has acquired and continues to hold its interest in
the Partnership for its own account for investment only and not for the purpose
of, or with a view toward, the resale or distribution of all or any part

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thereof, nor with a view toward selling or otherwise distributing such interest
or any part thereof at any particular time or under any predetermined
circumstances. Each Partner further represents and warrants that it is a
sophisticated investor, able and accustomed to handling sophisticated financial
matters for itself, particularly real estate investments, and that it has a
sufficiently high net worth that it does not anticipate a need for the funds it
has invested in the Partnership in what it understands to be a highly
speculative and illiquid investment.

17.14 Waiver. No consent or waiver, express or implied, by
any Partner to or of any breach or default by any other Partner in the
performance by such other Partner of its obligations hereunder shall be deemed
or construed to be a consent to or waiver of any other breach or default in the
performance by such other Partner of the same or any other obligations of such
Partner hereunder. Failure on the part of any Partner to complain of any act
or failure to act on the part of any other Partner or to declare any other
Partner in default, irrespective of how long such failure continues, shall not
constitute a waiver by such Partner of its rights hereunder.

17.15 Time of Essence. Time is hereby expressly made of
the essence with respect to the performance by the parties of their respective
obligations under this Agreement.

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<PAGE> 44
IN WITNESS WHEREOF, this Agreement has been executed and sworn to as
of the day and year first above written by the General Partner and the
undersigned Limited Partners.

GENERAL PARTNER:

PALACE REIT, a Texas real estate investment trust

By: /s/ David R. Merker
---------------------------------------------
Name: David R. Merker
-----------------------------------------
Title: Chief Executive Officer
-----------------------------------------

LIMITED PARTNERS:

PALACE REIT, a Texas real estate investment trust

By: /s/ David R. Merker
--------------------------------------------
Name: David R. Merker
-----------------------------------------
Title: Chief Executive Officer
-----------------------------------------

BAYVIEW INVESTMENTS, INC., a Nevada
corporation

By: /s/ Ralph Engelstad
--------------------------------------------
Name: Ralph Engelstad
-----------------------------------------
Title: President
-----------------------------------------

IMPERIAL WAREHOUSE, INC., a Nevada
corporation

By: /s/ Ralph Engelstad
--------------------------------------------
Name: Ralph Engelstad
-----------------------------------------
Title: President
-----------------------------------------

POLARIS WAREHOUSE, INC., a Nevada
corporation

By: /s/ Ralph Engelstad
--------------------------------------------
Name: Ralph Engelstad
-----------------------------------------
Title: President
-----------------------------------------

40
<PAGE> 45
AGREED AND CONSENTED: WITHDRAWING PARTNER:

/s/ David R. Merker
-------------------------------------
DAVID R. MERKER

41
<PAGE> 46
SCHEDULE A

Partners, Capital Accounts and Partnership Interests

<TABLE>
<CAPTION>
Agreed
Preference Capital Percentage
Name and Address of Partners OP Units Units Account Interest
---------------------------- -------- ----- ------- --------
<S> <C> <C> <C> <C>
General Partner:

Palace REIT
3535 Las Vegas Boulevard South
Las Vegas, Nevada 89109 0 0 990.00

Limited Partners:

Palace REIT
3535 Las Vegas Boulevard South
Las Vegas, Nevada 89109 0

Bayview Investments, Inc.
3535 Las Vegas Boulevard South
Las Vegas, NV 89109 184,906 0

Imperial Warehouse, Inc.
514 South Third Street
Las Vegas, Nevada 89101 92,107 0

Polaris Warehouse, Inc.
3535 Las Vegas Boulevard South
Las Vegas, NV 89109 138,299 0
</TABLE>

The remainder of Schedule A to be completed upon conclusion of the initial
public offering of Palace REIT.

<PAGE> 1
EXHIBIT 10.4

EMPLOYEE AND TRUST MANAGER INCENTIVE
SHARE PLAN
OF
PALACE REIT

1. PURPOSE OF THE PLAN AND DEFINITIONS

1.1 Purpose. The purposes of this Employee and Trust Manager
Incentive Share Plan (the "Plan") of Palace REIT (the "Trust") are to:

(a) furnish incentive to individuals chosen to receive share-based
awards because they are considered capable of responding by improving
operations and increasing profits;

(b) encourage selected persons to accept or continue employment
with the Trust; and

(c) increase the interest of Trust Managers in the Trust's welfare
through their participation in the growth in value of the Trust's Shares.

To accomplish these purposes, this Plan provides a means whereby Employees,
Trust Managers and other enumerated persons may receive Awards.

1.2 Definitions. For purposes of this Plan, the following terms
have the following meanings:

"Affiliate" means a parent or subsidiary entity, to be
interpreted in accordance with the comparable terms "parent" and "subsidiary"
corporation in the applicable provisions (currently Section 424) of the Code at
the time this definition is being applied.

"Award" means any award under this Plan, including any grant
of Options, Restricted Shares, Share Appreciation Rights, Dividend Equivalent
Rights or Trust Manager Shares.

"Award Agreement" means, with respect to each Award, the
written agreement executed by the Trust and the Participant or other written
document approved by the Committee setting forth the terms and conditions of
the Award.

"Board" means the Board of Trust Managers of the Trust.

"Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor statute.

"Commission" means the Securities and Exchange Commission and
any successor agency.

"Committee" has the meaning given it in Section 4.1.

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<PAGE> 2
"Common Shares" or "Shares" means common shares of beneficial
interest of the Trust, no par value.

"Declaration of Trust" means the then operative declaration of
trust adopted by the shareholders of the Trust.

"Dividend Equivalent Right" means an Award of rights pursuant
to Section 9.

"Effective Date" has the meaning given it in Section 19.

"Employee" has the meaning ascribed to it for purposes of
Section 3401(c) of the Code and the Treasury Regulations adopted under that
Section, and it includes an officer or a Trust Manager who is also an employee
of the Trust.

"Employment Termination" means that a Participant has ceased,
for any reason and with or without cause, to be an Employee or Trust Manager
of, or a consultant to, the Trust or any Affiliate of the Trust. However, the
term "Employment Termination" shall not include a Non-Employee Trust Manager
ceasing to be a Trust Manager or a transfer of a Participant from the Trust to
an Affiliate or vice versa, or from one Affiliate to another, or a leave of
absence duly authorized by the Trust unless the Committee has provided
otherwise.

"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and any successor statute.

"Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor statute.

"Exercise Notice" has the meaning given it in Section 6.1(h).

"Executive Officer" means an eligible person who, as of the
earlier of: (i) the date an Award is vested, (ii) the date restrictions with
respect to an Award lapse or (iii) the date a payment is made pursuant to an
Award Agreement, is a "covered employee" as defined in Section 1.162-27(c)(2)
of the Treasury Regulations and any successor Treasury Regulation adopted under
Section 162(m).

"Grant Date" has the meaning given it in Section 6.1(d).

"Incentive Share Option" or "ISO" means any Option intended to
be and designated as an "incentive stock option" within the meaning of Section
422 of the Code, and any successor provision.

"Non-Employee Trust Manager" means a person who qualifies as a
"Non-Employee Director" as defined in Rule 16b-3 and an "outside director" as
defined in Treasury Regulation Section 1.162-27(e)(3) and any successor
Treasury Regulation.

2
<PAGE> 3
"Non-Qualified Share Option" or "NQO" means any Option that is
not an Incentive Share Option.

"Option" means an option granted under Section 5.

"Participant" means an eligible person who is granted an
Award.

"Plan" means this Employee and Trust Manager Incentive Share
Plan.

"Restricted Shares" means an Award granted under Section 7.

"Retainer" has the meaning given it in Section 10.

"Rule 16b-3" means Rule 16b-3 adopted under Section 16(b) of
the Exchange Act or any successor rule, as it may be amended from time to time,
and references to paragraphs or clauses of Rules 16b-3 refer to the
corresponding paragraphs or clauses of Rule 16b-3 as it exists at the Effective
Date or the comparable paragraph or clause of Rule 16b-3 or successor rule, as
that paragraph or clause may thereafter be amended.

"Section 16(b)" means Section 16(b) under the Exchange Act.

"Securities Act" means the Securities Act of 1933, as amended
from time to time, and any successor statute.

"Share Appreciation Right" means an Award granted under
Section 8.

"Ten Percent Shareholder" means any person who, at the time
this definition is being applied, owns, directly or indirectly (or is treated
as owning by reason of attribution rules currently set forth in Code Section
424 or any successor statute), shares of the Trust constituting more than 10%
of the total combined voting power of all classes of outstanding shares of the
Trust or of any Affiliate of the Trust.

"Trust" has the meaning given it in Section 1.1.

"Trust Manager" means a person elected or appointed and
serving as a trust manager of the Trust in accordance with the Declaration of
Trust and the Texas Real Estate Investment Trust Act.

"Trust Manager Option" has the meaning given it in Section 5.3.

"Trust Manager Shares" means Shares issued to a Non-Employee
Trust Manager under Section 10.

3
<PAGE> 4
2. ELIGIBLE PERSONS

Every person who, at or as of the Grant Date, is (a) a full-time
Employee of the Trust or of an Affiliate of the Trust, (b) a Trust Manager of
the Trust or a trust manager of an Affiliate of the Trust, or (c) someone whom
the Committee designates as eligible for an Award (other than for Incentive
Share Options) because the person (i) performs bona fide consulting or advisory
services for the Trust or an Affiliate of the Trust pursuant to a written
agreement (other than services in connection with the offer or sale of
securities in a capital-raising transaction), and (ii) has a direct and
significant effect on the financial development of the Trust or an Affiliate of
the Trust, shall be eligible to receive Awards hereunder. Trust Managers of
the Trust who are not full-time Employees are only eligible to receive Trust
Manager Options under Section 5.3 and Trust Manager Shares under Section 10.

3. SHARES SUBJECT TO THIS PLAN

The total number of Shares that may be issued under Awards is an
amount of Shares equal to 5% of the Trust's outstanding Shares on a
fully-diluted basis, with such amount of Shares not to exceed 500,000. Such
Shares may consist, in whole or in part, of authorized and unissued Common
Shares or Shares reacquired in private transactions or open market purchases,
but all Shares issued under the Plan, regardless of their source, shall be
counted against the Share limitation. Any Shares that are retained by the
Trust upon exercise or settlement of an Award in order to satisfy the exercise
price in whole or in part, or to pay withholding taxes due with respect to such
exercise or settlement, shall be treated as issued to the Participant and will
thereafter not be available under the Plan. Any Shares subject to unexercised
portions of Options granted under the Plan which shall have been terminated,
been cancelled or expired may again be subject to Options hereunder. The number
of Shares reserved for issuance under this Plan is subject to adjustment in
accordance with the provisions for adjustment in this Plan. Notwithstanding
the foregoing, no downward adjustment in the number of Shares available for
issuance under this Plan will be made as a result of decreases in the number
Shares outstanding that do not constitute changes in the capitalization of the
Company that affect all shareholders.

4. ADMINISTRATION

4.1 Committee. This Plan shall be administered by a committee
(the "Committee") appointed by the Board. The Committee shall be constituted
so that, so long as Shares are registered under Section 12 of the Exchange Act,
each member of the Committee shall be a Non-Employee Trust Manager. The number
of persons that shall constitute the Committee shall be determined from time to
time by a majority of all the members of the Board; provided, however, the
Committee shall not consist of fewer than two persons. Notwithstanding the
foregoing, this Plan shall be administered by the Board prior to the formation
of the Committee and during that period, the Board shall have all authority
granted to the Committee under this Plan.

4.2 Duration, Removal, Etc. The members of the Committee shall
serve at the pleasure of the Board, which shall have the power, at any time and
from time to time, to remove members from or add members to the Committee.
Removal from the Committee may be with or without cause. Any individual
serving as a member of the Committee shall have the right to resign from the

4
<PAGE> 5
Committee by giving at least three days' prior written notice to the Board.
The Board, and not the remaining members of the Committee, shall have the power
and authority to fill vacancies on the Committee, however caused. The Board
shall promptly fill any vacancy that causes the number of members of the
Committee to be fewer than two or, so long as Shares are registered under
Section 12 of the Exchange Act, any other minimum number that Rule 16b-3
promulgated under the Exchange Act may require from time to time (unless the
Board expressly determines not to have Awards under the Plan comply with Rule
16b-3).

4.3 Meetings and Actions of Committee. The Board shall designate
which of the Committee members shall be the chairperson of the Committee. If
the Board fails to designate a chairperson for the Committee, the members of
the Committee shall elect one of the Committee members as chairperson, who
shall act as chairperson until he or she ceases to be a member of the Committee
or until the Board (or the Committee) elects a new chairperson. The Committee
shall hold its meetings at those times and places as the chairperson of the
Committee may determine. At all meetings of the Committee, a quorum for the
transaction of business shall be required, and a quorum shall be deemed present
if at least a majority of the members of the Committee is present. At any
meeting of the Committee, each member shall have one vote. All decisions and
determinations of the Committee shall be made by the majority vote of all of
its members present, at a meeting at which a quorum is present, and a unanimous
vote of the members of the Committee shall be required if the Committee is
comprised of only two members; provided, however, that any decision or
determination reduced to writing and signed by all members of the Committee
shall be as fully effective as if it had been made at a meeting that was duly
called and held. The Committee may make any rules and regulations for the
conduct of its business that are not inconsistent with this Plan, the
Declaration of Trust, the Bylaws of the Trust or Rule 16b-3 (so long as it is
applicable).

4.4 Committee's Powers. Subject to the express provisions of this
Plan and Rule 16b-3 (so long as it is applicable), the Committee shall have the
authority, in its sole discretion: (a) to adopt, amend and rescind
administrative and interpretive rules and regulations relating to the Plan; (b)
to determine the eligible persons to whom, and the time or times at which,
Awards shall be granted; (c) to determine the number of Shares that shall be
the subject of each Award; (d) to determine the terms and provisions of each
Award Agreement (which need not be identical) and any amendments thereto,
including provisions defining or otherwise relating to (i) the period or
periods and extent of exercisability of any Option or Share Appreciation Right,
(ii) the extent to which the transferability of Shares issued or transferred
pursuant to any Award is restricted, (iii) the effect of Employment Termination
on an Award, and (iv) the effect of approved leaves of absence (consistent with
any applicable Treasury Regulations); (e) to accelerate the time of
exercisability of any Option, Dividend Equivalent Right or Share Appreciation
Right; (f) to construe the respective Award Agreements and the Plan; (g) to
make determinations of the fair market value of Shares; (h) to waive any
provision, condition or limitation set forth in an Award Agreement; (i) to
delegate its duties under the Plan to such agents as it may appoint from time
to time, provided, however, that the Committee may not delegate its duties with
respect to making or exercising discretion with respect to Awards to eligible
persons if such delegation would cause Awards not to qualify for the exemptions
provided by Rule 16b-3 (so long as it is applicable, and unless the Board
expressly determines not to have Awards under the Plan comply with Rule 16b-3);
and (j) to make all other determinations, perform all other acts and exercise
all other powers and authority necessary or advisable for administering the
Plan, including the delegation of those ministerial acts and

5
<PAGE> 6
responsibilities as the Committee deems appropriate. Subject to Rule 16b-3 (so
long as it is applicable), the Committee may correct any defect, supply any
omission or reconcile any inconsistency in the Plan, in any Award or in any
Award Agreement in the manner and to the extent it deems necessary or desirable
to implement the Plan, and the Committee shall be the sole and final judge of
that necessity or desirability. The determinations of the Committee on the
matters referred to in this Section 4.4 shall be final and conclusive.
Notwithstanding any provision in this Plan to the contrary, Awards will be made
to Non-Employee Trust Managers only under Sections 5.3 and 10 of this Plan. In
addition, notwithstanding any provision of this Plan to the contrary, the
Committee may not in any manner exercise discretion under the Plan with respect
to any Awards made to Non-Employee Trust Managers.

4.5 Term of Plan. No Awards shall be granted under this Plan
after 10 years from the Effective Date of this Plan.

5. GRANT OF OPTIONS

5.1 Written Agreement. Each Option shall be evidenced by an Award
Agreement. The Award Agreement shall specify whether each Option it evidences
is a NQO or an ISO.

5.2 Annual $100,000 Limitation on ISOs. To the extent that the
aggregate "fair market value" of Shares with respect to which ISOs first become
exercisable by a Participant in any calendar year exceeds $100,000, taking into
account ISOs granted under this Plan and any other plan of the Trust or any
Affiliate of the Trust, the Options covering such additional Shares becoming
exercisable in that year shall cease to be ISOs and thereafter be NQOs. For
this purpose, the "fair market value" of Shares subject to Options shall be
determined as of the date the Options were granted. In reducing the number of
Options treated as ISOs to meet this $100,000 limit, the most recently granted
Options shall be reduced first.

5.3 Annual Grants to Non-Employee Trust Managers. On the last day
of each calendar year beginning with the last day of 1998, each Non-Employee
Trust Manager who is then a member of the Board shall automatically be granted
a NQO to purchase 1,000 Shares (each such Option is referred to herein as a
"Trust Manager Option"). The exercise price of Trust Manager Options shall be
the fair market value of the Shares subject to such Option on the date the
Option is granted. Each Trust Manager Option shall be fully exercisable upon
the date of grant and continuing, unless sooner terminated as provided in this
Plan, for 10 years after the date it is granted. If, for any reason other than
death or permanent and total disability, a Non-Employee Trust Manager ceases to
be a member of the Board, each Trust Manager Option held by that Non-Employee
Trust Manager on the date that the Non-Employee Trust Manager ceases to be a
member of the Board may be exercised in whole or in part at any time within one
year after the date of such termination or until the expiration of the Trust
Manager Option, whichever is earlier. If a Non-Employee Trust Manager dies or
becomes permanently and totally disabled (within the meaning of Section
422(c)(6) of the Code) while a member of the Board (or within the period that
the Trust Manager Options remain exercisable after the Non-Employee Trust
Manager ceases to be a member of the Board), each Trust Manager Option then
held by that Non-Employee Trust Manager may be exercised, in whole or in part,
by the Non-Employee Trust Manager, by the Non-Employee Trust Manager's personal
representative or by the person to whom the Non-Employee Trust Manager
transferred the Trust Manager Option by will or

6
<PAGE> 7
the laws of descent and distribution, at any time within two years after the
date of death or permanent and total disability of the Non-Employee Trust
Manager or until the expiration date of the Trust Manager Option, whichever is
earlier. Each Trust Manager Option shall be evidenced by an Award Agreement.

6. CERTAIN TERMS AND CONDITIONS OF OPTIONS AND OTHER AWARDS

Each Option shall be designated as an ISO or a NQO and shall be
subject to the terms and conditions set forth in Section 6.1. Notwithstanding
the foregoing, the Committee may provide for different terms and conditions in
any Award Agreement or amendment thereto as provided in Section 4.4.

6.1 All Awards. All Options and other Awards shall be subject to
the following terms and conditions:

(a) Changes in Capital Structure. If the number of outstanding
Shares is increased by means of a share dividend payable in Shares, a share
split or other subdivision or by a reclassification of Shares, then, from and
after the record date for such dividend, subdivision or reclassification, the
number and class of Shares subject to this Plan (including without limitation
its Sections 3, 5.3 and 10) and each outstanding Award shall be increased in
proportion to such increase in outstanding Shares and the then-applicable
exercise price of each outstanding Award shall be correspondingly decreased.
If the number of outstanding Shares is decreased by means of a share split or
other subdivision or by a reclassification of Shares, then, from and after the
record date for such split, subdivision or reclassification, the number and
class of Shares subject to this Plan (including without limitation its Sections
3, 5.3 and 10) and each outstanding Award shall be decreased in proportion to
such decrease in outstanding Shares and the then-applicable exercise price of
each outstanding Award shall be correspondingly increased.

(b) Certain Corporate Transactions. This Section 6.1(b) addresses
the impact of certain corporate transactions on outstanding Awards other than
Awards granted to Non-Employee Trust Managers (except to the extent provided in
Section 6.1(c)) and other than transactions requiring adjustments in accordance
with Section 6.1(a). In the case of any reclassification or change of
outstanding Shares issuable upon exercise of an outstanding Award or in the
case of any consolidation or merger of the Trust with or into another entity
(other than a merger in which the Trust is the surviving entity and which does
not result in any reclassification or change in the then-outstanding Shares) or
in the case of any sale or conveyance to another entity of the property of the
Trust as an entirety or substantially as an entirety, then, as a condition of
such reclassification, change, consolidation, merger, sale or conveyance, the
Trust or such successor or purchasing entity, as the case may be, shall make
lawful and adequate provision whereby the holder of each outstanding Award
shall thereafter have the right, on exercise of such Award, to receive the kind
and amount of securities, property and/or cash receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of securities issuable upon exercise of such Award immediately
before such reclassification, change, consolidation, merger, sale or
conveyance. Such provision shall include adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section
6.1(a). Notwithstanding the foregoing, if such a transaction occurs, in lieu
of causing such rights to be substituted for outstanding Awards, the Committee
may,

7
<PAGE> 8
upon 20 days' prior written notice to Participants in its sole discretion: (i)
shorten the period during which Awards are exercisable, provided they remain
exercisable, to the extent otherwise exercisable, for at least 20 days after
the date the notice is given, or (ii) cancel an Award upon payment to the
Participant in cash, with respect to each Award to the extent then exercisable,
of an amount which, in the sole discretion of the Committee, is determined to
be equivalent to the amount, if any, by which the fair market value (at the
effective time of the transaction) of the consideration that the Participant
would have received if the Award had been exercised before the effective time
exceeds the exercise price of the Award. The actions described in this Section
6.1(b) may be taken without regard to any resulting tax consequences to the
Participant. The fourth sentence of this Section 6.1(b) shall not apply to any
Award held by a person then subject to Section 16(b) if such Award has not been
outstanding for at least six months.

(c) Special Rule For Non-Employee Trust Managers. In the case of
any of the transactions described in the second sentence of Section 6.1(b),
that second sentence and the third sentence, but not the fourth sentence, of
Section 6.1(b) shall apply to any outstanding Options granted to Non-Employee
Trust Managers under Section 5.3.

(d) Grant Date. Each Award Agreement shall specify the date as of
which it shall be effective (the "Grant Date").

(e) Fair Market Value. For purposes of this Plan, the fair market
value of Shares shall be determined as follows:

(i) If the Shares are listed on any established stock
exchange or a national market system, including, without limitation, the Nasdaq
National Market System, its fair market value shall be the closing sales price
for the Shares, or the mean between the high bid and low asked prices if no
sales were reported, as quoted on such system or exchange (or, if the Shares
are listed on more than one exchange, then on the largest such exchange) for
the date the value is to be determined (or if there are no sales or bids for
such date, then for the last preceding business day on which there were sales
or bids), as reported in The Wall Street Journal or similar publication.

(ii) If the Shares are regularly quoted by a recognized
securities dealer but selling prices are not reported, its fair market value
shall be determined in good faith by the Committee, with reference to the
Trust's net worth, prospective earning power, dividend-paying capacity and
other relevant factors, including the goodwill of the Trust, the economic
outlook in the Trust's industry, the Trust's position in the industry and its
management, and the values of stock of other enterprises in the same or similar
lines of business.

(f) Time of Exercise; Vesting. Awards may, in the sole discretion
of the Committee, be exercisable or may vest, and restrictions may lapse, as
the case may be, at such times and in such amounts as may be specified by the
Committee in the grant of the Award.

(g) Nonassignability of Rights. No Award that is a derivative
security (as defined in Rule 16a-1(c) under the Exchange Act) shall be
transferable other than with the consent of the Committee (which consent will
not be granted in the case of ISOs unless the conditions for transfer of ISOs
specified in the Code have been satisfied) or by will or the laws of the
descent and

8
<PAGE> 9
distribution or pursuant to a qualified domestic relations order as defined by
the Code or Title I of ERISA. Awards requiring exercise shall be exercisable
only by the Participant, assignees that were approved by the Committee,
executors, administrators or beneficiaries of the Participant (who are the
permitted transferees hereunder), guardians or members of a committee for an
incompetent Participant, or similar persons duly authorized by law to
administer the estate or assets of a Participant.

(h) Notice and Payment. To the extent it is exercisable, an Award
shall be exercisable only by written or recorded electronic notice of exercise,
in the manner specified by the Committee from time to time, delivered to the
Trust or its designated agent during the term of the Award (the "Exercise
Notice"). The Exercise Notice shall: (x) state the number of Shares with
respect to which the Award is being exercised; (y) be signed by the holder of
the Award or by the person authorized to exercise the Award pursuant to Section
6.1(g); and (z) include such other information, instruments and documents as
may be required to satisfy any other condition to exercise set forth in the
Award Agreement. Except as provided below, payment in full, in cash or check,
shall be made for all Shares purchased at the time notice of exercise of an
Award is given to the Trust. The proceeds of any payment shall constitute
general funds of the Trust. At the time an Award is granted or before it is
exercised, the Committee, in the exercise of its sole discretion, may authorize
any one or more of the following additional methods of payment:

(i) for all Participants other than officers and Trust
Managers, acceptance of each such Participant's full recourse promissory note
for some or all (to the extent permitted by law) of the exercise price of the
Shares being acquired, payable on such terms and bearing such interest rate as
determined by the Committee, and secured in such manner, if at all, as the
Committee shall approve, including, without limitation, by a security interest
in the Shares which are the subject of the Award or other securities;

(ii) for all participants, delivery by each such
Participant of Shares already owned by such Participant for all or part of the
exercise price of the Award being exercised, provided that the fair market
value of such Shares is equal on the date of exercise to the exercise price of
the Award being exercised, or such portion thereof as the Participant is
authorized to pay and elects to pay by delivery of such Shares;

(iii) for all Participants, surrender by each such
Participant, or withholding by the Trust from the Shares issuable upon exercise
of the Award, of a number of Shares subject to the Award being exercised with a
fair market value equal to some or all of the exercise price of the Shares
being acquired, together with such documentation as the Committee and the
broker, if applicable, shall require; or

(iv) for all Participants, to the extent permitted by
applicable law, payment may be made pursuant to arrangements with a brokerage
firm under which that brokerage firm, on behalf of a Participant, shall pay to
the Trust the exercise price of the Award being exercised (either as a loan to
the Participant or from the proceeds of the sale of Shares issued under that
Award), and the Trust shall promptly cause the Shares being purchased under the
Award to be delivered to the brokerage firm. Such transactions shall be
effected in accordance with the procedures that the Committee may establish
from time to time.

9
<PAGE> 10
If the exercise price is satisfied in whole or in part by the delivery of
Shares pursuant to paragraph (ii) above, the Committee may issue the
Participant an additional Option, with terms identical to those set forth in
the option agreement governing the exercised Option, except for the exercise
price which shall be the fair market value used for such delivery and the
number of Shares subject to such additional Option shall be the number of
Shares so delivered.

(i) Termination of Employment. Any Award or portion thereof which
has not vested on or before the date of a Participant's Employment Termination
shall expire on the date of such Employment Termination. As to an Award or
portion thereof that has vested by the time of Employment Termination, the
Committee shall establish, in respect of each Award when granted, the effect of
an Employment Termination on the rights and benefits thereunder and in so doing
may, but need not, make distinctions based upon the cause of termination (such
as retirement, death, disability or other factors) or which party effected the
termination (the employer or the Employee). Notwithstanding any other
provision in this Plan or the Award Agreement, the Committee may decide in its
discretion at the time of any Employment Termination (or within a reasonable
time thereafter) to extend the exercise period of an Award (but not beyond the
period specified in Section 6.2(b) or 6.3(b), as applicable) and not decrease
the number of Shares covered by the Award with respect to which the Award is
exercisable or vested. A transfer of a Participant from the Trust to an
Affiliate or vice versa, or from one Affiliate to another, or a leave of
absence duly authorized by the Trust, shall not be deemed an Employment
Termination or a break in continuous employment unless the Committee has
provided otherwise.

(j) Death, Disability or Retirement. Any Award or portion thereof
which has not vested on or before the date of the Participant's death,
disability or retirement shall expire on the date of such Participant's death,
disability or retirement. As to an Award or portion thereof that has vested by
the date of death, disability or retirement of the Participant, such Awards or
portions thereof must be exercised within two years of the date of the
Participant's death, disability or retirement by the Participant or a person
authorized under this Plan to exercise such Award.

(k) Payment of Dividends Upon Exercise of Options. Upon exercise
of an Option, the Participant shall be entitled to receive a cash payment from
the Trust equal to the amount of dividends that have been paid from the Grant
Date of the Option through the date of exercise of the Option on that number of
Common Shares that is equal to the number of Common Shares being purchased upon
exercise of such Option.

(l) Other Provisions. Each Award Agreement may contain such other
terms, provisions and conditions not inconsistent with this Plan, as may be
determined by the Committee, and each ISO granted under this Plan shall include
such provisions and conditions as are necessary to qualify such Option as an
"incentive stock option" within the meaning of Section 422 of the Code, unless
the Committee determines otherwise.

(m) Withholding and Employment Taxes. At the time of exercise of
an Award, the lapse of restrictions on an Award or a disqualifying disposition
of Shares issued under an ISO (within the meaning of Section 6.3(c)), the
Participant shall remit to the Trust in cash all applicable federal and state
withholding and employment taxes. If and to the extent authorized and approved
by the Committee in its sole discretion, a Participant may elect, by means of a
form of election to be

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<PAGE> 11
prescribed by the Committee, to have Shares which are acquired upon exercise of
an Award withheld by the Trust or tender other Shares owned by the Participant
to the Trust at the time that the amount of such taxes is determined, in order
to pay the amount of such tax obligations, subject to such limitations as the
Committee determines are necessary or appropriate to comply with Rule 16b-3 in
the case of Participants who are subject to Section 16(b). For example, the
Committee may require that the election be irrevocable and that the election
not be made within six months of the acquisition of the securities to be
tendered to satisfy the tax withholding obligation (except that this limitation
shall not apply in the event that death or disability of the Participant occurs
before the expiration of the six-month period). Any Shares so withheld or
tendered shall be valued by the Trust as of the date they are withheld or
tendered. If Shares are tendered to satisfy such withholding tax obligation,
the Committee may issue the Participant an additional Option, with terms
identical to those set forth in the option agreement governing the Option
exercised, except that the exercise price shall be the fair market value used
by the Trust in accepting the tender of Shares for such purpose and the number
of Shares subject to the additional Option shall be the number of Shares
tendered by the Participant.

6.2 Terms and Condition to Which Only NQOs Are Subject. Options
granted under this Plan which are designated as NQOs shall be subject to the
following terms and conditions:

(a) Exercise Price. The exercise price of a NQO shall be
determined by the Committee; provided, however, that the exercise price of a
NQO shall not be less than the fair market value of the Shares subject to the
Option on the Grant Date or, if required by applicable state securities laws in
the case of a NQO granted to any Ten Percent Shareholder, not less than 110% of
such fair market value.

(b) Option Term. Unless an earlier expiration date is specified
by the Committee at the Grant Date, each NQO shall expire 10 years after the
Grant Date or, if required by applicable state securities laws in the case of a
NQO granted to a Ten Percent Shareholder, five years after the Grant Date.

6.3 Terms and Conditions to Which Only ISOs Are Subject. Options
granted under this Plan which are designated as ISOs shall be subject to the
following terms and conditions:

(a) Exercise Price. The exercise price of an ISO shall be
determined in accordance with the applicable provisions of the Code and shall
in no event be less than the fair market value of the Shares covered by the ISO
at the Grant Date; provided, however, that the exercise price of an ISO granted
to a Ten Percent Shareholder shall not be less than 110% of such fair market
value.

(b) Option Term. Unless an earlier expiration date is specified
by the Committee at the Grant Date, each ISO shall expire 10 years after the
Grant Date; provided, however, that an ISO granted to a Ten Percent Shareholder
shall expire no later than five years after the Grant Date.

(c) Disqualifying Dispositions. If Shares acquired by exercise of
an ISO are disposed of within two years after the Grant Date or within one year
after the transfer of the Shares to the optionee, the holder of the Shares
immediately before the disposition shall promptly notify the Trust in writing
of the date and terms of the disposition, shall provide such other information
regarding

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<PAGE> 12
the disposition as the Trust may reasonably require and shall pay the Trust any
withholding and employment taxes which the Trust in its sole discretion deems
applicable to the disposition.

(d) Termination of Employment. Notwithstanding Section 6.3(i),
all vested ISOs must be exercised within three months of the Employment
Termination of the optionee unless such Employment Termination is due to the
employee being disabled (within the meaning of Section 422 (c)(6) of the Code),
in which case the ISO shall be exercised within one year of the Employment
Termination, notwithstanding Section 6.3(j).

6.4 Surrender of Options. The Committee, acting in its sole
discretion, may include a provision in an option agreement allowing the
optionee to surrender the Option covered by the agreement, in whole or in part
in lieu of exercise in whole or in part, on any date that the fair market value
of the Shares subject to the Option exceeds the exercise price and the Option
is exercisable (to the extent being surrendered). The surrender shall be
effected by the delivery of the option agreement, together with a signed
statement which specifies the number of Shares as to which the optionee is
surrendering the Option, together with a request for such type of payment.
Upon such surrender, the optionee shall receive (subject to any limitations
imposed by Rule 16b-3), at the election of the Committee, payment in cash or
Shares, or a combination of the two, equal to (or equal in fair market value
to) the excess of the fair market value of the Shares covered by the portion of
the Option being surrendered on the date of surrender over the exercise price
for such Shares. The Committee, acting in its sole discretion, shall determine
the form of payment, taking into account such factors as it deems appropriate.
To the extent necessary to satisfy Rule 16b-3, the Committee may terminate an
optionee's rights to receive payments in cash for fractional Shares. Any
option agreement providing for such surrender privilege shall also incorporate
such additional restrictions on the exercise or surrender of Options as may be
necessary to satisfy the conditions of Rule 16b-3.

7. RESTRICTED SHARES.

Restricted Shares shall be subject to the following terms and
conditions:

7.1 Grant. The Committee may grant one or more Awards of
Restricted Shares to any Participant other than Non-Employee Trust Managers.
Each Award of Restricted Shares shall specify the number of Shares to be issued
to the Participant, the date of issuance and the restrictions imposed on the
Shares including the conditions of release or lapse of such restrictions.
Unless the Committee provides otherwise, the restrictions shall not lapse
earlier than six months after the date of the Award. Pending the lapse of
restrictions, certificates evidencing Restricted Shares shall bear a legend
referring to the restrictions and shall be held by the Trust. Prior to the
issuance of any Restricted Shares, the Participant receiving such Restricted
Shares shall pay to the Trust an amount of cash equal to, at a minimum, the par
value per Restricted Share multiplied by the number of Restricted Shares to be
issued. Upon the issuance of Restricted Shares, the Participant may be
required to furnish such additional documentation or other assurances as the
Committee may require to enforce restrictions applicable thereto.

7.2 Restrictions. Except as specifically provided elsewhere in
this Plan or the Award Agreement regarding Restricted Shares, Restricted Shares
may not be sold, assigned, transferred, pledged or otherwise disposed of or
encumbered, either voluntarily or involuntarily, until the

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<PAGE> 13
restrictions have lapsed and the rights to the Shares have vested. The
Committee may in its sole discretion provide for the lapse of such restrictions
in installments and may accelerate or waive such restrictions, in whole or in
part, based on service, performance or such other factors or criteria as the
Committee may determine.

7.3 Dividends. Unless otherwise determined by the Committee, cash
dividends with respect to Restricted Shares shall be paid to the recipient of
the Award of Restricted Shares on the normal dividend payment dates, and
dividends payable in Shares shall be paid in the form of Restricted Shares
having the same terms as the Restricted Shares upon which such dividend is
paid. Each Award Agreement for Awards of Restricted Shares shall specify
whether and, if so, the extent to which the Participant shall be obligated to
return to the Trust any cash dividends paid with respect to any Restricted
Shares which are subsequently forfeited.

7.4 Forfeiture of Restricted Shares. Except to the extent
otherwise provided in the governing Award Agreement, when a Participant's
Employment Termination occurs, the Participant shall automatically forfeit all
Restricted Shares still subject to restriction.

8. SHARE APPRECIATION RIGHTS

The Committee may grant Share Appreciation Rights to eligible persons
other than Non-Employee Trust Managers. A Share Appreciation Right shall
entitle its holder to receive from the Trust, at the time of exercise of the
right, an amount in cash equal to (or, at the Committee's discretion, Shares
equal in fair market value to) the excess of the fair market value (at the date
of exercise) of a Share over a specified price fixed by the Committee in the
governing Award Agreement multiplied by the number of Shares as to which the
holder is exercising the Share Appreciation Right. The specified price fixed
by the Committee shall not be less than the fair market value of the Shares at
the date of grant of the Share Appreciation Right. Share Appreciation Rights
may be granted in tandem with any previously or contemporaneously granted
Option or independent of any Option. The specified price of a tandem Share
Appreciation Right shall be the exercise price of the related Option. Any
Share Appreciation Rights granted in connection with an ISO shall contain such
terms as may be required to comply with Section 422 of the Code.

9. DIVIDEND EQUIVALENT RIGHTS

9.1 General. The Committee shall have the authority to grant
Dividend Equivalent Rights to Participants other than Non-Employee Trust
Managers upon such terms and conditions as it shall establish, subject in all
events to the following limitations and provisions of general application set
forth in this Plan. Each Dividend Equivalent Right shall entitle a holder to
receive, for a period of time to be determined by the Committee, a payment
equal to the quarterly dividend declared and paid by the Trust on one Common
Share. If the Dividend Equivalent Right relates to a specific Option, the
period shall not extend beyond the earliest of the date the Option is
exercised, the date any Share Appreciation Right related to the Option is
exercised, or the expiration date set forth in the Option.

9.2 Rights and Options. Each Dividend Equivalent Right may relate
to a specific Option granted under this Plan and may be granted to the optionee
either concurrently with the grant of such

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<PAGE> 14
Option or at such later time as determined by the Committee, or each Dividend
Equivalent Right may be granted independent of any Option.

9.3 Payments. The Committee shall determine at the time of grant
whether payment pursuant to a Dividend Equivalent Right shall be immediate or
deferred and if immediate, the Trust shall make payments pursuant to each
Dividend Equivalent Right concurrently with the payment of the quarterly
dividend to holders of Common Shares. If deferred, the payments shall not be
made until a date or the occurrence of an event specified by the Committee and
then shall be made within 30 days after the occurrence of the specified date or
event, unless the Dividend Equivalent Right is forfeited under the terms of the
Plan or applicable Award Agreement. The Committee shall also determine in its
sole discretion whether any portion of any payment shall be made in the ____ of
Common Shares.

9.4 Termination of Employment. In the event of Employment
Termination, any Dividend Equivalent Right held by such Participant on the date
of Employment Termination shall automatically be forfeited, unless otherwise
expressly provided by the Committee.

10. TRUST MANAGER SHARES

10.1 Election. The Trust intends to pay each Non-Employee Trust
Manager an annual fee in the amount set from time to time by the Board (the
"Retainer"). Each Non-Employee Trust Manager shall be entitled to receive his
or her Retainer exclusively in cash, exclusively in unrestricted Shares ("Trust
Manager Shares") or any portion in cash and Trust Manager Shares. Following the
approval of this Plan by the shareholders of the Trust, each Non-Employee Trust
Manager shall be given the opportunity, during the month in which the
Non-Employee Trust Manager first becomes a Non-Employee Trust Manager and during
each December thereafter, to elect among these choices for the balance of the
calendar year (in the case of the election made during the month the
Non-Employee Trust Manager first becomes a Non-Employee Trust Manager) and for
the ensuing calendar year (in the case of a subsequent election made during any
December). If the Non-Employee Trust Manager chooses to receive at least some
of his or her Retainer in Trust Manager Shares, the election shall also indicate
the percentage of the Retainer to be paid in Trust Manager Shares. If a
Non-Employee Trust Manager makes no election during his or her first opportunity
to make an election, the Non-Employee Trust Manager shall be assumed to have
elected to receive his or her entire Retainer in cash. If a Non-Employee Trust
Manager makes no election during any succeeding election month, the Non-Employee
Trust Manager shall be assumed to have remade the election then currently in
effect for that Non-Employee Trust Manager.

10.2 Issuance. The Trust shall make the first issuance of Trust
Manager Shares to electing Non-Employee Trust Managers on the first trading day
following the last day of the full calendar quarter following the approval of
the Plan by the Trust's shareholders. Subsequent issuances of Trust Manager
Shares shall be made on the first trading day of each subsequent calendar
quarter and shall be made to all persons who are Non-Employee Trust Managers on
that trading day except any Non-Employee Trust Manager whose Retainer is to be
paid entirely in cash. The number of Shares issuable to those Non-Employee
Trust Managers on the relevant trading date indicated above shall equal:

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<PAGE> 15
(% x R) / P
4

where:
% = the percentage of the Non-Employee Trust Manager's
Retainer that the Non-Employee Trust Manager elected
or is deemed to have elected to receive in the form
of Trust Manager Shares, expressed as a decimal;

R = the Non-Employee Trust Manager's Retainer for the
year during which the issuance occurs;

P = the fair market value of Shares determined in
accordance with Section 6.1(e).

Trust Manager Shares shall not include any fractional Shares. Fractions shall
be rounded to the nearest whole Share (with one-half being rounded upward).

11. SECURITIES LAWS

Nothing in this Plan or in any Award or Award Agreement shall require
the Trust to issue any Shares with respect to any Award if, in the opinion of
counsel for the Trust, that issuance could constitute a violation of the
Securities Act, any other law or the rules of any applicable securities
exchange or securities association then in effect. As a condition to the grant
or exercise of any Award, the Trust may require the Participant (or, in the
event of the Participant's death, the Participant's legal representatives,
heirs, legatees or distributees) to provide written representations concerning
the Participant's (or such other person's) intentions with regard to the
retention or disposition of the Shares covered by the Award and written
covenants as to the manner of disposal of such Shares as may be necessary or
useful to ensure that the grant, exercise or disposition thereof will not
violate the Securities Act, any other law or any rule of any applicable
securities exchange or securities association then in effect. The Trust shall
not be required to register any Shares under the Securities Act or register or
qualify any Shares under any state or other securities laws.

12. EMPLOYMENT OR OTHER RELATIONSHIP

Nothing in this Plan or any Award shall in any way interfere with or
limit the right of the Trust or any of its Affiliates to terminate any
Participant's employment or status as a consultant or Trust Manager at any
time, nor confer upon any Participant any right to continue in the employ of,
or as a Trust Manager or consultant of, the Trust or any of its Affiliates.

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<PAGE> 16
13. AMENDMENT, SUSPENSION AND TERMINATION OF PLAN

The Board may at any time amend, suspend or discontinue this Plan
without shareholder approval, except as required by applicable law; provided,
however, that no amendment, alteration, suspension or discontinuation shall be
made which would impair the rights of any Participant under any Award
previously granted, without the Participant's consent, except to conform this
Plan and Awards granted to the requirements of federal or other tax laws
including without limitation Section 422 of the Code and/or ERISA, or to the
requirements of Rule 16b-3. The provisions of the Plan relating to Awards for
Non-Employee Trust Managers may not be amended more than once each six months.
The Board may choose to require that the Trust's shareholders approve any
amendment to this Plan in order to satisfy the requirements of Section 422 of
the Code, Rule 16b-3 or for any other reason.

14. LIABILITY AND INDEMNIFICATION OF THE COMMITTEE

No person constituting, or member of the group constituting, the
Committee shall be liable for any act or omission on such person's part,
including but not limited to the exercise of any power or discretion given to
such member under this Plan, except for those acts or omissions resulting from
such member's gross negligence or willful misconduct. The Trust shall
indemnify each present and future person constituting, or member of the group
constituting, the Committee against, and each person or member of the group
constituting the Committee shall be entitled without further act on his or her
part to indemnity from the Trust for, all expenses (including the amount of
judgments and the amount of approved settlements made with a view to the
curtailment of costs of litigation) reasonably incurred by such person in
connection with or arising out of any action, suit or proceeding to the fullest
extent permitted by law and by the Declaration of Trust and Bylaws of the
Trust.

15. GRANTS TO PERSONS EXPECTED TO BECOME EMPLOYEES OR TRUST MANAGERS

As allowed by this Plan, the Committee may grant Awards (other than
ISOs) to persons who are expected to become Employees, Trust Managers (other
than Non-Employee Trust Managers) or consultants of the Trust. The grant shall
be deemed to have been made upon the date the grantee becomes an Employee,
Trust Manager or consultant of the Trust without further action or approval by
the Committee.

16. CERTAIN TRUST MANAGERS AND OFFICERS

All Award Agreements for Participants who are subject to Section 16(b)
shall be deemed to include such additional limitations, terms and provisions as
Rule 16b-3 then requires unless the Committee determines that any such Award
should not comply with the requirements of Rule 16b-3. All Award Agreements
relating to ISOs shall be deemed to include such additional terms and
provisions as Section 422 of the Code or any successor provision thereto then
requires under the Committee expressly determines that such Award should not
comply with such requirements.

17. SECURITIES LAW LEGENDS

Certificates of Shares and Restricted Shares, when issued, may have
the following legend and statements of other applicable restrictions endorsed
thereon:

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<PAGE> 17
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED,
TRANSFERRED OR OTHERWISE DISPOSED OF UNTIL THE HOLDER HEREOF PROVIDES
EVIDENCE SATISFACTORY TO THE ISSUER (WHICH, IN THE SOLE DISCRETION OF
THE ISSUER, MAY INCLUDE AN OPINION OF COUNSEL SATISFACTORY TO THE
ISSUER) THAT SUCH OFFER, SALE, PLEDGE, TRANSFER OR OTHER DISPOSITION
WILL NOT VIOLATE ANY APPLICABLE FEDERAL OR STATE SECURITIES LAWS.

This legend shall not be required for any Shares issued pursuant to an
effective registration statement under the Securities Act.

18. SEVERABILITY

If any provision of this Plan is held to be illegal or invalid for any
reason, that illegality or invalidity shall not affect the remaining portions
of the Plan, but such provision shall be fully severable and the Plan shall be
construed and enforced as if the illegal or invalid provision had never been
included in this Plan. Such an illegal or invalid provision shall be replaced
by a revised provision that most nearly comports to the substance of the
illegal or invalid provision. If any of the terms or provisions of this Plan or
any Award Agreement conflict with the requirements of Rule 16b-3 (as those
terms or provisions are applied to eligible persons who are subject to Section
16(b) or Section 422 of the Code (with respect to ISOs)), those conflicting
terms or provisions shall be deemed inoperative to the extent they conflict
with those requirements. With respect to ISOs, if this Plan does not contain
any provision required to be included in a plan under Section 422 of the Code,
that provision shall be deemed to be incorporated into this Plan with the same
force and effect as if it had been expressly set out in this Plan; provided,
however, that, to the extent any Option that is intended to qualify as an ISO
cannot so qualify, that Option (to that extent) shall be deemed to be a NQO for
all purposes of the Plan.

19. EFFECTIVE DATE AND PROCEDURAL HISTORY

This Plan was originally approved by the Trust's Board on February 11,
1998. It was approved in that form by the holders of the Trust's voting shares
on February 11, 1998 (the "Effective Date").

<PAGE> 1
EXHIBIT 10.8

INDEMNIFICATION AGREEMENT

This INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered
into as of the ___ day of _____________199_, by and between Palace REIT, a
Texas real estate investment trust (the "Trust"), and the undersigned trust
manager and/or officer of the Trust (the "Indemnitee").

RECITALS

WHEREAS, it is essential to the Trust to retain and attract as trust
managers and officers the most capable persons available;

WHEREAS, the Indemnitee is a trust manager and/or officer of the
Trust;

WHEREAS, both the Trust and the Indemnitee recognize the increased
risk of litigation and other claims being asserted against trust managers and
officers of companies in today's environment;

WHEREAS, the Trust's Declaration of Trust (the "Declaration of Trust")
provides that the Trust will indemnify its trust managers and officers to the
full extent permitted by law, and the Indemnitee's willingness to serve as a
trust manager and/or officer of the Trust is based in part on the Indemnitee's
reliance on such provisions; and

WHEREAS, the Texas Real Estate Investment Trust Act, as amended (the
"Texas Statute"), expressly recognizes that the indemnification provisions of
the Texas Statute are not exclusive of any other rights to which a person
seeking indemnification may be entitled under the Declaration of Trust or
Bylaws of the Trust, a resolution of the trust managers, an agreement or as
permitted or required by common law, and this Agreement is being entered into
pursuant to and in furtherance of the Declaration of Trust and Bylaws, as
permitted by the Texas Statute and as authorized by the Declaration of Trust
and the trust managers of the Trust (the "Trust Managers"); and

WHEREAS, in recognition of the Indemnitee's need for substantial
protection against personal liability in order to enhance the Indemnitee's
continued service to the Trust in an effective manner, and the Indemnitee's
reliance on the aforesaid provisions of the Declaration of Trust, and in part
to provide the Indemnitee with specific contractual assurance that the
protection promised by such provisions will be available to the Indemnitee
(regardless of, among other things, any amendment to or revocation of such
provisions or any change in the composition of the Trust Managers or any
acquisition or business combination transaction relating to the Trust), the
Trust wishes to provide in this Agreement for the indemnification of and the
advancement of expenses to the Indemnitee as set forth in this Agreement and,
to the extent insurance is maintained, for the continued coverage of the
Indemnitee under the Trust's trust managers' and officers' liability insurance
policies.

NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants and agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
<PAGE> 2
1. Indemnification.

(a) In accordance with the provisions of subsection (b) of this
Section 1, the Trust shall hold harmless and indemnify the Indemnitee against
any and all expenses, liabilities and losses (including, without limitation,
investigation expenses and expert witnesses' and attorneys' fees and expenses,
judgments, penalties, fines, ERISA excise taxes and amounts paid or to be paid
in settlement) actually incurred by the Indemnitee (net of any related
insurance proceeds or other amounts received by the Indemnitee or paid by or on
behalf of the Trust on the Indemnitee's behalf), in connection with any action,
suit, arbitration or proceeding (or any inquiry or investigation, whether
brought by or in the right of the Trust or otherwise, that the Indemnitee in
good faith believes might lead to the institution of any such action, suit,
arbitration or proceeding), whether civil, criminal, administrative or
investigative, or any appeal therefrom, in which the Indemnitee is a party, is
threatened to be made a party, is a witness or is participating (a
"Proceeding") based upon, arising from, relating to or by reason of the fact
that Indemnitee is, was, shall be or shall have been a trust manager and/or
officer of the Trust or is or was serving, shall serve, or shall have served at
the request of the Trust as a trust manager, officer, partner, trustee,
employee or agent ("Affiliate Indemnitee") of another foreign or domestic
corporation or non-profit corporation, cooperative, partnership, joint venture,
trust or other incorporated or unincorporated enterprise.

(b) In providing the foregoing indemnification, the Trust shall,
with respect to a Proceeding, hold harmless and indemnify the Indemnitee to the
fullest extent required by the Texas Statute and to the fullest extent
permitted by the Express Permitted Indemnification Provisions (as hereinafter
defined) of the Texas Statute. For purposes of this Agreement, the Express
Permitted Indemnification Provisions of the Texas Statute shall mean
indemnification as permitted by Section 9.20 of the Texas Statute or by any
amendment thereof or other statutory provisions expressly permitting such
indemnification which is adopted after the date hereof (but, in the case of any
such amendment, only to the extent that such amendment permits the Trust to
provide broader indemnification rights than said law required or permitted the
Trust to provide prior to such amendment).

(c) Without limiting the generality of the foregoing, the
Indemnitee shall be entitled to the rights of indemnification provided in this
Section 1 for any expenses, liabilities and losses actually incurred in any
Proceeding initiated by or in the right of the Trust, provided that in the
event that the Indemnitee shall have been adjudged to be liable to the Trust or
shall have been adjudged liable on the basis that personal benefit was
improperly received by the Indemnitee, indemnification (i) is limited to
reasonable expenses actually incurred by the Indemnitee in connection with the
Proceeding; and (ii) shall not be made in respect of any Proceeding in which
the person shall have been found liable for wilful or intentional misconduct in
the performance of his duty to the Trust.

(d) If the Indemnitee is entitled under this Agreement to
indemnification by the Trust for some or a portion of the Indemnified Amounts
(as hereinafter defined) but not, however, for all of the total amount thereof,
the Trust shall nevertheless indemnify the Indemnitee for the portion thereof
to which Indemnitee is entitled.

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<PAGE> 3
2. Other Indemnification Arrangements. The Texas Statute and the
Declaration of Trust permit the Trust to purchase and maintain insurance or
furnish similar protection or make other arrangements, including, without
limitation, securing indemnification obligations by granting a security
interest or other lien on the assets of the Trust and providing self insurance,
a letter of credit, guaranty or surety bond (collectively, the "Indemnity
Arrangements") on behalf of the Indemnitee against any liability asserted
against him or incurred by or on behalf of him in such capacity as a trust
manager or officer of the Trust or as an Affiliate Indemnitee, or arising out
of his status as such, whether or not the Trust would have the power to
indemnify him against such liability under the provisions of this Agreement or
under the Texas Statute, as it may then be in effect. The purchase,
establishment and maintenance of any such Indemnity Arrangement shall not in
any way limit or affect the rights and obligations of the Trust or of the
Indemnitee under this Agreement except as expressly provided herein, and the
execution and delivery of this Agreement by the Trust and the Indemnitee shall
not in any way limit or affect the rights and obligations of the Trust or the
other party or parties thereto under any such Indemnification Agreement. All
amounts payable by the Trust pursuant to this Section 2 and Section 1 hereof
are herein referred to as "Indemnified Amounts."

3. Advance Payment of Indemnified Amounts.

(a) The Indemnitee hereby is granted the right to receive in
advance of a final, nonappealable judgment or other final adjudication of a
Proceeding (a "Final Determination") the amount of any and all expenses,
including, without limitation, investigation expenses, expert witness' and
attorneys' fees and other expenses expended or incurred by the Indemnitee in
connection with any Proceeding or otherwise expended or incurred by the
Indemnitee (such amounts so expended or incurred being referred to as "Advanced
Amounts").

(b) In making any written request for the Advanced Amounts, the
Indemnitee shall submit to the Trust a schedule setting forth in reasonable
detail the dollar amount expended or incurred and expected to be expended.
Each such listing shall be supported by the bill, agreement or other
documentation relating thereto, each of which shall be appended to the schedule
as an exhibit. In addition, before the Indemnitee may receive Advanced Amounts
from the Trust, the Indemnitee shall provide to the Trust (i) a written
affirmation of the Indemnitee's good faith belief that the applicable standard
of conduct required for indemnification by the Trust has been satisfied by the
Indemnitee, and (ii) a written undertaking by or on behalf of the Indemnitee to
repay the Advanced Amounts if it shall ultimately be determined that the
Indemnitee has not satisfied any applicable standard of conduct. The written
undertaking required from the Indemnitee shall be an unlimited general
obligation of the Indemnitee but need not be secured. The Trust shall pay to
the Indemnitee all Advanced Amounts within ten (10) business days after receipt
by the Trust of all information and documentation required to be provided by
the Indemnitee pursuant to this subsection (b).

4. Procedure for Payment of Indemnified Amounts.

(a) To obtain indemnification under this Agreement, the Indemnitee
shall submit to the Trust a written request for payment of the appropriate
Indemnified Amounts, including with such request such documentation and
information as is reasonably available to the Indemnitee and

3
<PAGE> 4
reasonably necessary to determine whether and to what extent the Indemnitee is
entitled to indemnification. The Secretary of the Trust shall, promptly upon
receipt of such a request for indemnification, advise the Trust Managers in
writing that the Indemnitee has requested indemnification.

(b) The Trust shall pay the Indemnitee the appropriate Indemnified
Amounts unless it is established that the Indemnitee has not met any applicable
standard of conduct of the Express Permitted Indemnification Provisions. For
purposes of determining whether the Indemnitee is entitled to Indemnified
Amounts, in order to deny indemnification to the Indemnitee the Trust has the
burden of proof in establishing that the Indemnitee did not meet the applicable
standard of conduct. In this regard, a termination of any Proceeding by
judgment, order, settlement, conviction, pleading of nolo contendere or its
equivalent, or an entry of an order of probation prior to judgment, does not
create a presumption that the Indemnitee did not meet the requisite standard of
conduct.

(c) Any determination that the Indemnitee has not met the
applicable standard of conduct required to qualify for indemnification shall be
made either (i) by the Trust Managers by a majority vote of a quorum
consisting of trust managers who were not parties to such action, suit or
proceeding; or (ii) by independent legal counsel (who may be the outside
counsel regularly employed by the Trust), provided that the manner in which
(and, if applicable, the counsel by which) the right to indemnification is to
be determined shall be approved in advance in writing by both the highest
ranking executive officer of the Trust who is not party to such action
(sometimes hereinafter referred to as "Senior Officer") and by the Indemnitee.
In the event that such parties are unable to agree on the manner in which any
such determination is to be made, such determination shall be made by
independent legal counsel retained by the Trust especially for such purpose,
provided that such counsel be approved in advance in writing by both the said
Senior Officer and Indemnitee and provided further, that such counsel shall not
be outside counsel regularly employed by the Trust. The fees and expenses of
counsel in connection with making said determination contemplated hereunder
shall be paid by the Trust, and if requested by such counsel, the Trust shall
give such counsel an appropriate written agreement with respect to the payment
of their fees and expenses and such other matters as may be reasonably
requested by counsel.

(d) The Trust will use its best efforts to conclude as soon as
practicable any required determination pursuant to subsection (c) above and
promptly will advise the Indemnitee in writing with respect to any
determination that the Indemnitee is or is not entitled to indemnification,
including a description of any reason or basis for which indemnification has
been denied. Payment of any applicable Indemnified Amounts will be made to the
Indemnitee within ten (10) days after any determination of the Indemnitee's
entitlement to indemnification.

(e) Notwithstanding the foregoing, the Indemnitee may, at any time
after sixty (60) days after a claim for Indemnified Amounts has been filed with
the Trust (or upon receipt of written notice that a claim for Indemnified
Amounts has been rejected, if earlier) and before three (3) years after a claim
for Indemnified Amounts has been filed, petition a court of competent
jurisdiction to determine whether the Indemnitee is entitled to indemnification
under the provisions of this Agreement, and such court shall thereupon have the
exclusive authority to make such determination unless and until such court
dismisses or otherwise terminates such action without having made such
determination. The court shall, as petitioned, make an independent
determination of whether the

4
<PAGE> 5
Indemnitee is entitled to indemnification as provided under this Agreement,
irrespective of any prior determination made by the Trust Managers or
independent counsel. If the court shall determine that the Indemnitee is
entitled to indemnification as to any claim, issue or matter involved in the
Proceeding with respect to which there has been no prior determination pursuant
to this Agreement or with respect to which there has been a prior determination
that the Indemnitee was not entitled to indemnification hereunder, the Trust
shall pay all expenses (including attorneys' fees) actually incurred by the
Indemnitee in connection with such judicial determination.

5. Agreement Not Exclusive; Subrogation Rights, etc.

(a) This Agreement shall not be deemed exclusive of and shall not
diminish any other rights the Indemnitee may have to be indemnified or insured
or otherwise protected against any liability, loss or expense by the Trust, any
subsidiary of the Trust or any other person or entity under any declaration of
trust, charter, bylaws, law, agreement, policy of insurance or similar
protection, vote of shareholders or Trust Managers, disinterested or not, or
otherwise, whether or not now in effect, both as to actions in the Indemnitee's
official capacity, and as to actions in another capacity while holding such
office. The Trust's obligations to make payments of Indemnified Amounts
hereunder shall be satisfied to the extent that payments with respect to the
same Proceeding (or part thereof) have been made to or for the benefit of the
Indemnitee by reason of the indemnification of the Indemnitee pursuant to any
other arrangement made by the Trust for the benefit of the Indemnitee.

(b) In the event the Indemnitee shall receive payment from any
insurance carrier or from the plaintiff in any Proceeding against the
Indemnitee in respect of Indemnified Amounts after payments on account of all
or part of such Indemnified Amounts have been made by the Trust pursuant
hereto, the Indemnitee shall promptly reimburse to the Trust the amount, if
any, by which the sum of such payment by such insurance carrier or such
plaintiff and payments by the Trust or pursuant to arrangements made by the
Trust to Indemnitee exceeds such Indemnified Amounts; provided, however, that
such portions, if any, of such insurance proceeds that are required to be
reimbursed to the insurance carrier under the terms of its insurance policy,
such as deductible or co-insurance payments, shall not be deemed to be payments
to the Indemnitee hereunder. In addition, upon payment of Indemnified Amounts
hereunder, the Trust shall be subrogated to the rights of the Indemnitee
receiving such payments (to the extent thereof) against any insurance carrier
(to the extent permitted under such insurance policies) or plaintiff in respect
of such Indemnified Amounts and the Indemnitee shall execute and deliver any
and all instruments and documents and perform any and all other acts or deeds
which the Trust deems necessary or advisable to secure such rights. Such right
of subrogation shall be terminated upon receipt by the Trust of the amount to
be reimbursed by the Indemnitee pursuant to the first sentence of this
subsection (b).

6. Insurance Coverage. In the event that the Trust maintains
trust managers' and officers' liability insurance to protect itself and any
trust manager or officer of the Trust against any expense, liability or loss,
such insurance shall cover the Indemnitee to at least the same extent as any
other trust manager or officer of the Trust.

7. Establishment of Trust. The Trust may, in its sole
discretion, create a trust (the "Indemnification Trust") for the benefit of the
Indemnitee and, to the extent such Indemnification

5
<PAGE> 6
Trust has been created, from time to time upon written request of Indemnitee
shall fund the Indemnification Trust in an amount sufficient to satisfy any and
all Indemnified Amounts (including Advanced Amounts) which are actually paid or
which Indemnitee reasonably determines from time to time may be payable by the
Trust under this Agreement. The amount or amounts to be deposited in the
Indemnification Trust pursuant to the foregoing funding obligation shall be
determined by the independent legal counsel appointed under Section 4 hereof.
If such Indemnification Trust is established, the terms thereof shall provide
that (i) the Indemnification Trust shall not be revoked or the principal
thereof invaded without the written consent of the Indemnitee; (ii) the trustee
of the Indemnification Trust (the "Trustee") shall advance, within ten (10)
business days of a request by the Indemnitee, any and all Advanced Amounts to
the Indemnitee (and the Indemnitee hereby agrees to reimburse the
Indemnification Trust under the circumstances under which the Indemnitee would
be required to reimburse the Trust under Section 3(b)(ii) hereof); (iii) the
Trust shall continue to fund the Indemnification Trust from time to time in
accordance with the funding obligations set forth above; (iv) the Trustee shall
promptly pay to the Indemnitee all Indemnified Amounts for which the Indemnitee
shall be entitled to indemnification pursuant to this Agreement; and (v) all
unexpended funds in the Indemnification Trust shall revert to the Trust upon a
final determination by a court of competent jurisdiction in a final decision
from which there is no further right of appeal that the Indemnitee has been
fully indemnified under the terms of this Agreement. The Trustee shall be
chosen by the Indemnitee. Nothing in this Section 7 shall relieve the Trust of
any of its obligations under this Agreement.

8. Continuation of Indemnity. All agreements and obligations of
the Trust contained herein shall continue during the period the Indemnitee is a
trust manager or officer of the Trust (or is serving at the request of the
Trust as an Affiliate Indemnitee) and shall continue thereafter for a period of
ten (10) years from the date the Indemnitee ceases to serve as a trust manager
or officer of the Trust or ceases to serve as an Affiliate Indemnitee
(whichever is later).

9. Notice and Defense of Claim. Indemnitee agrees promptly to
notify the Trust in writing upon being served with any summons, citation,
subpoena, complaint, indictment, information or other document relating to any
Proceeding or matter which may be subject to indemnification or advancement of
expenses covered hereunder. Notwithstanding any other provision of this
Agreement, with respect to any such Proceeding or matter as to which Indemnitee
notifies the Trust of the commencement thereof:

(a) The Trust will be entitled to participate therein at its own
expense.

(b) Except as otherwise provided in this Section 9(b), to the
extent it desires, the Trust, jointly with any other indemnifying party
similarly notified, shall be entitled to assume the defense thereof, with
counsel reasonably satisfactory to Indemnitee. After notice from the Trust to
Indemnitee of its election to so assume the defense thereof, the Trust shall
not be liable to Indemnitee under this Agreement for any legal or other
expenses subsequently incurred by Indemnitee in connection with the defense
thereof other than reasonable costs of investigation or as otherwise provided
below. Indemnitee shall have the right to employ his own counsel in such
Proceeding or matter, but the fees and expenses of such counsel incurred after
notice from the Trust of its assumption of the defense thereof shall be at the
expense of Indemnitee unless (i) the employment of counsel by Indemnitee has
been authorized by the Trust; (ii) Indemnitee shall have reasonably

6
<PAGE> 7
concluded that there may be a conflict of interest between the Trust and
Indemnitee in the conduct of the defense of such action; or (iii) the Trust
shall not in fact have employed counsel to assume the defense of such
Proceeding or matter, in each of which cases the fees and expenses of counsel
shall be at the expense of the Trust. The Trust shall not be entitled to
assume the defense of any Proceeding or matter brought by or on behalf of the
Trust or as to which Indemnitee shall have made the conclusion provided for in
(ii) above.

(c) The Trust shall not be liable to indemnify Indemnitee under
this Agreement for any amounts paid in settlement of any Proceeding or matter
affected without its written consent. The Trust shall not settle any
Proceeding or matter in any manner that would impose any penalty or limitation
on Indemnitee without Indemnitee's written consent. Neither the Trust nor
Indemnitee will unreasonably withhold their consent to any proposed settlement.

10. Defense Counsel. Indemnitee hereby agrees that in any
Proceeding in which Indemnitee and other past or present trust managers or
officers of the Trust (or its successor) who are entitled to indemnification
from the Trust are named defendants or respondents, Indemnitee and such other
past or present trust managers or officers shall collectively select one firm
of attorneys in any jurisdiction to defend all such defendants and respondents
in such Proceeding unless counsel for Indemnitee advises that there are issues
which may raise conflicts of interest between Indemnitee and such other
persons.

11. Indemnification for Negligence. TO THE EXTENT PERMITTED BY
THEN APPLICABLE LAW AND SUBJECT TO THE PROVISIONS OF THIS AGREEMENT, THE
PARTIES HERETO RECOGNIZE AND ACKNOWLEDGE THAT INDEMNITEE MAY BE INDEMNIFIED IN
ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT IN PROCEEDINGS INVOLVING THE
NEGLIGENCE OF INDEMNITEE.

12. Successors; Binding Agreement. This Agreement shall be
binding on and shall inure to the benefit of and be enforceable by the Trust's
successors and assigns and by the Indemnitee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. The Trust shall require any successor or assignee
(whether direct or indirect, by purchase, merger, consolidation or otherwise)
to all or substantially all of the business and/or assets of the Trust, by
written agreement in form and substance reasonably satisfactory to the Trust
and to the Indemnitee, expressly to assume and agree to perform this Agreement
in the same manner and to the same extent that the Trust would be required to
perform if no such succession or assignment had taken place.

13. Enforcement. The Trust has entered into this Agreement and
assumed the obligations imposed on the Trust hereby in order to induce the
Indemnitee to act as a trust manager or officer, as the case may be, of the
Trust, and acknowledges that the Indemnitee is relying upon this Agreement in
continuing in such capacity. In the event the Indemnitee is required to bring
any action to enforce rights or to collect moneys due under this Agreement and
is successful in such action, the Trust shall reimburse the Indemnitee for all
of the Indemnitee's fees and expenses in bringing and pursuing such action.
The Indemnitee shall be entitled to the advancement of Indemnified Amounts to
the full extent contemplated by Section 3 hereof in connection with such
proceeding.

7
<PAGE> 8
14. Severability. Each of the provisions of this Agreement is a
separate and distinct agreement independent of the others, so that if any
provision hereof shall be held to be invalid or unenforceable for any reason,
such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof, which other provisions shall
remain in full force and effect, and, to the fullest extent possible, the
provisions of this Agreement (including, without limitation, each portion of
any section of this Agreement containing any such provision held to be invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held illegal, invalid or unenforceable.

15. Miscellaneous. No provisions of this Agreement may be
modified, waived or discharged unless such modification, waiver or discharge is
agreed to in writing signed by the Indemnitee and either the President and
Chief Executive Officer of the Trust or another officer of the Trust
specifically designated by the Trust Managers. No waiver by either party at
any time of any breach by the other party of, or of compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same time or at any prior or subsequent times. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Texas, without giving effect to the principles of conflicts of laws thereof.

16. Notices. For the purposes of this Agreement, notices and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid, as follows:

If to the Indemnitee:

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

If to the Trust:

3535 Las Vegas Boulevard South
Las Vegas, Nevada 89109
Attention: President

or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.

17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.

18. Effectiveness. This Agreement shall be effective as of the
date first above written.

8
<PAGE> 9
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the day and year first above written.

PALACE REIT

By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------

INDEMNITEE

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

<PAGE> 1
EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Amendment No. 1 to Registration Statement No.
333-47855 of Palace REIT on Form S-11 of our reports related to Palace REIT
dated February 28, 1998 and to Palace Properties dated February 28, 1998,
appearing in the Prospectus, which is part of this Registration Statement.

We also consent to the reference to us under the heading "Experts" in such
Prospectus.

DELOITTE & TOUCHE LLP

Las Vegas, Nevada
April 30, 1998

<ARTICLE> 5

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<PERIOD-START> JAN-01-1998
<PERIOD-END> FEB-28-1998
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<SECURITIES> 0
<RECEIVABLES> 0
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<CURRENT-ASSETS> 1,000
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