NATIONAL INCOME REALTY TRUST, 10-K, 1996-03-28

NATIONAL INCOME REALTY TRUST
10-K, 1996-03-28
REAL ESTATE INVESTMENT TRUSTS

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<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]*

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-9211

NATIONAL INCOME REALTY TRUST
(Exact name of registrant as specified in its charter)

CALIFORNIA 94-2537061
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

280 PARK AVENUE, EAST BUILDING, 20TH FLOOR, NEW YORK, NY 10017
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (212) 949-5000

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

NONE

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

SHARES OF BENEFICIAL INTEREST, NO PAR VALUE

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---

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

As of March 8, 1996, the registrant had 3,475,255 shares of beneficial interest
outstanding. Of the total shares outstanding, 2,318,429 were held by other than
those who may be deemed to be affiliated, for an aggregate value of $30,139,577
based on the last trade as reported by the National Association of Securities
Dealers Automated Quotations System on March 8, 1996. The basis of this
calculation does not constitute a determination by the registrant that all of
such persons or entities are affiliates of the registrant as defined in rule 405
of the Securities Act of 1933, as amended.

DOCUMENTS INCORPORATED BY REFERENCE
NONE

1
<PAGE> 2
INDEX TO
ANNUAL REPORT ON FORM 10-K

<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I

Item 1. Business 3

Item 2. Properties 5

Item 3. Legal Proceedings 15

Item 4. Submission of Matters to a Vote of Security Holders 16

PART II

Item 5. Market for Registrant's Shares of Beneficial Interest and Related
Shareholder Matters 17

Item 6. Selected Financial Data 18

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 20

Item 8. Financial Statements and Supplementary Data 29

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 65

PART III

Item 10. Trustees, Executive Officers, and Advisor of the Registrant 65

Item 11. Executive Compensation 78

Item 12. Security Ownership of Certain Beneficial Owners and Management 79

Item 13. Certain Relationships and Related Transactions 82

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 86

Signature Page 88
</TABLE>

2
<PAGE> 3
PART I

ITEM 1. BUSINESS

General

National Income Realty Trust (the "Trust" or the "Registrant") is a California
business trust that was organized pursuant to a declaration of trust dated
October 31, 1978, as amended, (the "Declaration of Trust") and which commenced
operations on March 27, 1979. The Trust elected to be treated as a Real Estate
Investment Trust ("REIT") under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended, (the "Code") and, in the opinion of the Trust's
management, has qualified for federal taxation as a REIT for each year
subsequent to December 31, 1978.

The Trust's principal offices are located at 280 Park Avenue, East Building,
20th Floor, New York, New York 10017. In the opinion of the Trust's management,
these offices are suitable and adequate for its present operations.

Business Plan and Investment Policy

The Trust's business and only industry segment is investing in real estate
through direct acquisitions and partnerships and, to a lesser extent, financing
real estate and real estate related activities through mortgage loans.
Presently, the Trust's policy is to make mortgage loans only in connection with,
or to facilitate, the sale or acquisition of real estate. Accordingly, as
existing mortgage loans are paid off, the Trust's portfolio of mortgage notes
receivable is expected to decline. At December 31, 1995, the Trust's real estate
portfolio consisted of 57 properties including 36 apartment complexes, 13
shopping centers, 4 office buildings, three parcels of land, and one single
family residence, located throughout the continental United States, with
concentrations in Florida, California, Texas, and Colorado. The Trust also held
investments in four real estate partnerships reported on the equity method
(owning 32 industrial warehouses, three office buildings, and an apartment
complex).

Due to the nature and numerous geographic locations of the Trust's properties
and the diverse profile among tenants, the Trust's business is not significantly
affected by seasonal factors.

The Trust has determined to pursue a balanced investment policy, seeking both
capital appreciation and current income. The present plan of operation is to
continue improving the quality of its properties through a consistent capital
investment program and, to the extent surplus funds and attractive investments
are available, to acquire additional moderate income, ten to thirty year old,
multifamily properties, primarily in areas where the Trust currently owns and
operates multifamily properties. The type of investments made will depend on the
availability of suitable investment opportunities. Management's objective
subsequent to consummating a property acquisition is to improve occupancy levels
and rents through capital improvements and intensive management efforts. The
Trust will also continue to seek to sell selected assets, including many of its
commercial properties, where the obtainable prices justify their disposition.

Management of the Trust

The Trust's Board of Trustees (the "Board"), elected annually by the
shareholders or appointed by the incumbent Board until the next annual
shareholder meeting, is responsible for managing the affairs of the Trust.

3
<PAGE> 4
ITEM 1. BUSINESS (Continued)

Management of the Trust (Continued)

There are currently eight members on the Board, seven of which are unaffiliated
with the Trust. The day-to-day management is performed by a contractual advisory
firm, approved by Trust shareholders and which operates under the supervision of
the Board. The duties of the advisor include, among other things, locating,
investigating, evaluating, and recommending real estate investment and sales
opportunities, as well as financing and refinancing sources for the Trust. The
advisor also serves as a consultant in connection with the business plan and
investment policy decisions made by the Board.

Tarragon Realty Advisors, Inc., ("Tarragon" or the "Advisor") has provided
advisory services to the Trust since April 1, 1994. At the annual meeting of
shareholders held on November 20, 1995, the shareholders approved the renewal of
Tarragon as the advisor under an advisory agreement dated April 1, 1995. William
S. Friedman, President, Chief Executive Officer, and Trustee of the Trust,
serves as a Director and Chief Executive Officer of Tarragon. Tarragon is owned
by Lucy N. Friedman, Mr. Friedman's wife, and John A. Doyle, who serves as a
Director and President of Tarragon and Chief Financial Officer of the Trust. The
Friedman and Doyle families together own approximately 33% of the outstanding
shares of the Trust. Substantially all of the officers of the Trust are also
officers of Tarragon.

The Trust has no employees. Employees of Tarragon provide executive and
administrative services to the Trust.

Property Management

Since April 1, 1994, Tarragon has provided property management services to the
Trust for a fee of 4.5% of the monthly gross rents collected on apartment
properties and 1.5% to 5% of the monthly gross rents collected on commercial
properties. Tarragon subcontracts with other entities for the provision of much
of the property-level management services to the Trust.

Competition

The Trust has not experienced any significant differences in competition in the
various regions of the United States in which it invests. Management believes
that ownership of properties in which the Trust invests is highly fragmented
among individuals, partnerships, public and private corporations, and other real
estate investment trusts and that no single entity or person particularly
dominates the market for such properties. At any given time, a significant
number of multifamily properties are available for purchase where the Trust's
properties are concentrated. Management believes that there is and will continue
to be a strong demand for well maintained, affordable housing in these markets
and that the factors discussed above provide a market where a sufficient number
of attractive investment opportunities will be available to allow the Trust to
implement its business plan. However, since the success of any multifamily real
estate investment is impacted by other factors outside the control of the Trust,
including general demand for apartment housing, interest rates, operating costs,
and the ability to attract and retain qualified property managers, there can be
no assurances that the Trust will be successful in the implementation of its
business plan.

Tarragon also serves as the advisor to Vinland Property Trust ("VPT"). All of
the officers of the Trust are also officers of VPT. Tarragon and the Trust
officers owe fiduciary duties to VPT as well as to the Trust. In determining to
which entity a particular investment opportunity will be allocated, Tarragon and
the Trust officers consider the respective investment objectives of each entity
and the appropriateness of a particular

4
<PAGE> 5
ITEM 1. BUSINESS (Continued)

Competition (Continued)

investment in light of each entity's existing real estate portfolio. To the
extent that any particular investment opportunity is appropriate for both
entities, such investment opportunity will be allocated to the entity which has
had uninvested funds for the longer period of time, or, if appropriate, the
investment may be shared between both entities. Tarragon periodically informs
the Board of real estate investments made by any of its affiliates, and the
Board periodically reviews the performance of such investments.

Certain Factors Associated with Real Estate and Related Investments

The Trust is subject to the risks associated with ownership, operation, and
financing of real estate. These risks include, but are not limited to, liability
for environmental hazards; changes in general or local economic conditions;
changes in interest rates and the availability of permanent mortgage financing
which may render the acquisition, sale, or refinancing of a property difficult
or unattractive and which may make debt service burdensome; changes in real
estate and zoning laws; changes in income taxes, real estate taxes, or federal
or local economic or rent controls; floods, earthquakes, and other acts of God;
and other factors beyond the control of the Trust or Tarragon. The illiquidity
of real estate investments generally may impair the ability of the Trust to
respond promptly to changing circumstances. The Trust's management believes that
some of these risks are partially mitigated by the diversification by geographic
region and property type of the Trust's real estate and mortgage notes
receivable portfolios. However, to the extent new equity investments are
concentrated in any particular region or property type, the advantages of
diversification may diminish.

ITEM 2. PROPERTIES

Details of the Trust's real estate and mortgage notes receivable portfolios at
December 31, 1995, are set forth in Schedules III and IV, respectively, to the
Consolidated Financial Statements and NOTE 2. "NOTES AND INTEREST RECEIVABLE"
and NOTE 4. "REAL ESTATE AND DEPRECIATION" of the Notes to the Consolidated
Financial Statements, all included at ITEM 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA". The discussions set forth below under the headings "Real
Estate" and "Mortgage Loans" provide certain summary information concerning the
Trust's real estate and mortgage notes receivable portfolios.

To continue to qualify for federal taxation as a REIT under the Code, the Trust
is required, among other things, to hold at least 75% of the value of its assets
in real estate assets, government securities, and cash and cash equivalents at
the close of each quarter of each taxable year. At December 31, 1995, 88% of the
Trust's assets consisted of equity investments in real estate, 5% consisted of
investments in partnerships, and 3% consisted of mortgage notes and interest
receivable. The remaining 4% of the Trust's assets at December 31, 1995, was
cash and cash equivalents, restricted cash, and other assets. It should be
noted, however, that the percentage of the Trust's assets invested in any one
category at any particular time is subject to change, and no assurance can be
given that the composition of the Trust's assets in the future will approximate
the percentages listed above.

[This space intentionally left blank.]

5
<PAGE> 6
ITEM 2. PROPERTIES (Continued)

Geographic Regions

The Trust has divided the continental United States into the following six
geographic regions.

[MAP]

[Northeast region comprised of the states of Connecticut, Delaware, Maine,
Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania,
Rhode Island, and Vermont and the District of Columbia.

Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee, and Virginia.

Southwest region comprised of the states of Arizona, Arkansas, Louisiana, New
Mexico, Oklahoma, and Texas.

Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas,
Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South
Dakota, West Virginia, and Wisconsin.

Mountain region comprised of the states of Colorado, Idaho, Montana, Nevada,
Utah, and Wyoming.

Pacific region comprised of the states of California, Oregon, and Washington.]

Real Estate

At December 31, 1995, the Trust held investments in each of the geographic
regions of the continental United States, although its multifamily properties
were concentrated in the Southeast and Southwest, as shown more specifically in
the table below.

During 1995, the Trust acquired five operating properties and one development
property, increasing its multifamily portfolio to 6,294 operating units, 569
units under development, and 300 units in a 50% owned unconsolidated
partnership. At December 31, 1995, the Trust's real estate portfolio consisted
of 57 properties, 49 of which were held for investment. The remaining eight
properties, some of which were obtained through foreclosure of collateral
securing the Trust's mortgage notes receivable, were held for sale. The carrying
value of Century Centre II Office Building located in San Mateo, California,
exceeded 10% of the Trust's total consolidated assets. All Trust properties,
except fourteen, were pledged to secure first mortgage debt totaling $142.1
million at December 31, 1995.

6
<PAGE> 7
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

Types of Real Estate Investments. The Trust's real estate consists of apartments
and commercial properties, primarily office buildings and shopping centers, or
similar properties having established income-producing capabilities. In
selecting real estate, the location, age, and type of property, gross rentals,
lease terms, financial and business standing of tenants, operating expenses,
fixed charges, land values, and physical condition are considered. The Trust may
acquire properties subject to, or assume, existing debt and may mortgage,
pledge, or otherwise obtain financing for a portion of its real estate. The
Board may alter the types of and criteria for selecting new equity investments
and for obtaining financing without a vote of shareholders to the extent such
policies are not governed by the Declaration of Trust.

Although the Trust has typically invested in developed, income-producing real
estate, the Trust intends to invest increasing amounts in major apartment
renovations and new construction or development projects either directly or in
partnership with unaffiliated partners. To the extent the Trust invests in
construction and development projects, it is subject to the business risks, such
as cost overruns and delays, associated with such higher risk activities. The
Trust purchased The Vistas at Lake Worth, an unoccupied 185-unit complex
formerly known as Woodlake Run Apartments, in Fort Worth, Texas, in December
1994 and The Regent Apartments, a vacant 304-unit property located in
Jacksonville, Florida, in September 1995. The Trust is in the process of
expanding and redeveloping these properties to a projected 569 operating units
with funds from the general working capital of the Trust at an estimated
aggregate cost of $10.1 million. During 1995, the Trust completed approximately
50% of the rehabilitation of The Regent at a cost of $1.1 million. The Trust
anticipates the rehabilitation of The Regent will be completed by the second
quarter of 1996, and the redevelopment and expansion of The Vistas will be
completed in 1997.

The following table sets forth the percentages, by property type and geographic
region, of the Trust's real estate (other than the unimproved land and a
single-family residence) at December 31, 1995.

<TABLE>
<CAPTION>
Commercial
Region Apartments Properties
------ ---------- ----------
<S> <C> <C>
Northeast 8.5% -- %
Southeast 34.9% 34.0%
Southwest 24.9% 12.2%
Midwest 10.4% 29.2%
Mountain 14.0% 3.9%
Pacific 7.3% 20.7%
----- -----
100.0% 100.0%
</TABLE>

The foregoing table is based solely on the number of operating apartment units
and amount of commercial square footage owned by the Trust and does not reflect
the value of the investments in each region.

7
<PAGE> 8
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

A summary of 1995 activity in the Trust's owned real estate portfolio is as
follows:

<TABLE>
<S> <C>
Properties owned at January 1, 1995 52
Properties/land purchased 7
Property sold (1)
Property written off . (1)
---
Properties owned at December 31, 1995 57
==
</TABLE>

The above activity does not reflect the sales of portions of the Lake Highlands
land.

The following table presents certain information relating to real estate owned
at December 31, 1995. The Trust also owns three parcels of land, a single family
residence, and two development projects (The Vistas in Fort Worth, Texas, and
The Regent in Jacksonville, Florida), which are not included in the table.

[This space intentionally left blank.]

8
<PAGE> 9
NATIONAL INCOME REALTY TRUST
REAL ESTATE SUMMARY
DECEMBER 31, 1995
(unaudited)

<TABLE>
<CAPTION>
Average Rent Per Sq. Ft.(a) Current
Number Year Ended December 31, Market
of Square ------------------------- Rent Per
Property Location Units Feet 1995 1994 1993 Sq. Foot(b)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Apartments:
- ----------
Acadian Place Baton Rouge, LA 120 143,450 $ 3.62 $ 3.70 $ 3.70 $ 5.03
Bay West Bradenton, FL 299 323,774 5.35 5.25 4.62 6.11
Bayfront Houston, TX 200 172,720 5.92 5.93 5.78 7.01
Carlyle Towers Detroit, MI 163 247,850 5.27 5.11 4.93 6.15
Cornell Los Angeles, CA 55 30,150 12.06 10.38 11.71 13.47
Creekwood North Altamonte Springs, FL 180 166,500 5.07 5.07 4.77 6.32
Cross Creek Lexington, KY 144 102,258 6.91 7.22 6.66 8.16
Diamond Loch Fort Worth, TX 138 139,354 4.96 4.84 4.56 6.12
Dunhill/Devonshire Denver, CO 480 324,000 4.75 3.66 2.27 7.49
Fenway Hall Los Angeles, CA 53 27,175 11.04 8.67 10.08 12.33
Heather Hill Temple Hills, MD 459 401,029 8.61 8.75 8.68 10.33
Huntington Green West Town, PA 80 80,240 6.46 6.47 5.71 7.72
Kirklevington Lexington, KY 126 99,080 5.97 5.99 5.83 7.82
Lake Point Memphis, TN 540 540,160 3.68 3.95 3.99 4.91
Palm Court Miami, FL 144 125,280 7.25 7.01 6.58 8.41
Park Dale Gardens Dallas, TX 224 206,640 5.04 4.54 4.16 5.80
Pheasant Pointe Sacramento, CA 215 178,666 6.68 6.64 6.45 8.31
Pinecrest Ft. Lauderdale, FL 324 226,065 11.42 11.19 10.37 13.54
Plaza Hills Kansas City, MO 66 67,464 6.61 5.91 5.51 7.35
Prado Bay Miami, FL 123 109,756 8.45 8.01 7.57 9.69
Sandstone Denver, CO 280 201,660 5.01 5.06 4.78 6.99
Spring Pines Houston, TX 136 118,430 4.93 4.69 4.53 5.87
Woodcreek Denver, CO 120 99,622 7.97 7.40 6.84 8.86
Woodcreek Jacksonville, FL 260 198,623 6.33 5.88 5.90 7.53
----- --------- ------- ------ ------ ------
SUBTOTAL OR WEIGHTED AVERAGE (e) 4,929 4,329,946 6.08 5.90 5.57 7.48
----- --------- ------- ------ ------ ------

Office Buildings:
- ----------------
Century Centre II San Mateo, CA -- 170,485 17.41 16.51 17.19 20.05
Emerson Center Atlanta, GA -- 126,979 5.47 5.36 4.65 10.50
NW O'Hare Des Plaines, IL -- 105,363 10.94 10.91 10.25 14.03
Rancho Sorrento San Diego, CA -- 147,973 4.74 7.55 6.78 7.65
----- --------- ------- ------ ------ ------
SUBTOTAL OR WEIGHTED AVERAGE (e) -- 550,800 10.02 10.46 10.18 13.37
----- --------- ------- ------ ------ ------

<CAPTION>
Economic Occupancy(c) Physical
Year Ended December 31, Occupancy
----------------------- Dec. 31,
Property Location 1995 1994 1993 1995(d)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Apartments:
- ----------
Acadian Place Baton Rouge, LA 85% 90% 93% 89%
Bay West Bradenton, FL 94% 95% 88% 96%
Bayfront Houston, TX 92% 94% 94% 91%
Carlyle Towers Detroit, MI 93% 92% 90% 93%
Cornell Los Angeles, CA 94% 84% 91% 98%
Creekwood North Altamonte Springs, FL 89% 89% 87% 90%
Cross Creek Lexington, KY 90% 93% 92% 94%
Diamond Loch Fort Worth, TX 91% 92% 91% 88%
Dunhill/Devonshire Denver, CO 77% 61% 43% 79%
Fenway Hall Los Angeles, CA 92% 83% 90% 98%
Heather Hill Temple Hills, MD 92% 93% 93% 89%
Huntington Green West Town, PA 93% 96% 91% 94%
Kirklevington Lexington, KY 91% 93% 92% 98%
Lake Point Memphis, TN 83% 90% 90% 94%
Palm Court Miami, FL 96% 97% 97% 94%
Park Dale Gardens Dallas, TX 96% 93% 91% 94%
Pheasant Pointe Sacramento, CA 90% 90% 90% 92%
Pinecrest Ft. Lauderdale, FL 90% 90% 92% 93%
Plaza Hills Kansas City, MO 96% 95% 94% 96%
Prado Bay Miami, FL 92% 89% 91% 93%
Sandstone Denver, CO 86% 89% 92% 90%
Spring Pines Houston, TX 93% 89% 90% 94%
Woodcreek Denver, CO 95% 97% 98% 96%
Woodcreek Jacksonville, FL 94% 91% 93% 97%
----- ------ ------ ------
SUBTOTAL OR WEIGHTED AVERAGE (e) 90% 89% 88% 92%
----- ------ ------ ------

Office Buildings:
- ----------------
Century Centre II San Mateo, CA 87% 91% 99% 93%
Emerson Center Atlanta, GA 55% 51% 51% 59%
NW O'Hare Des Plaines, IL 78% 75% 74% 81%
Rancho Sorrento San Diego, CA 63% 77% 75% 71%
----- ------ ------ ------
SUBTOTAL OR WEIGHTED AVERAGE (e) 72% 75% 77% 77%
----- ------ ------ ------
</TABLE>

9
<PAGE> 10
NATIONAL INCOME REALTY TRUST
REAL ESTATE SUMMARY (CONTINUED)
DECEMBER 31, 1995
(unaudited)

SUBTOTAL PRIOR TO ACQUISITIONS (e) 4,929 5,765,707 6.05 5.93 5.67 7.55
----- --------- ------ ----- ----- ------

1994 Acquisitions:
-----------------
Bryan Hill Bethany, OK 232 193,500 4.36 4.56 - 5.05
Forest Oaks Lexington, KY 154 132,460 5.49 5.62 - 6.35
Mariposa Manor Los Angeles, CA 41 19,710 9.03 7.28 - 9.60
Martins Landing Lakeland, FL 236 207,704 6.15 6.05 - 6.84
Summit on the Lake Fort Worth, TX 198 138,262 7.11 6.80 - 7.96
----- --------- ------ ----- ----- ------
SUBTOTAL OR WEIGHTED AVERAGE (e) 861 691,636 5.80 5.74 - 6.55
----- --------- ------ ----- ----- ------

1995 Acquisitions:
-----------------
Marina Park Miami, FL 90 86,850 7.10 - - 9.83
Meadowbrook Baton Rouge, LA 200 127,524 6.65 - - 7.42
Mustang Creek Arlington, TX 120 167,880 4.42 - - 5.86
Park Norton Los Angeles, CA 55 25,208 4.03 - - 9.52
Park Place Los Angeles, CA 39 15,640 2.04 - - 10.80
*K-Mart Plaza Indianapolis, IN (h) - 96,268 3.33 - - 3.33
----- --------- ------ ----- ----- ------
SUBTOTAL OR WEIGHTED AVERAGE (e) 504 519,370 5.12 - - 6.77
----- --------- ------ ----- ----- ------

ACQUISITIONS SUBTOTAL OR WEIGHTED AVERAGE (e) 1,365 1,211,006 5.59 5.74 - 6.62
----- --------- ------ ----- ----- ------

GRAND TOTAL 6,294 6,976,713 $ 5.96 $5.91 $5.67 $ 7.39
===== ========= ====== ===== ===== ======

SUBTOTAL PRIOR TO ACQUISITIONS (e) 85% 86% 86% 88%
--- --- --- ---

1994 Acquisitions:
-----------------
Bryan Hill Bethany, OK 91% 96% - 93%
Forest Oaks Lexington, KY 93% 97% - 96%
Mariposa Manor Los Angeles, CA 90% 79% - 85%
Martins Landing Lakeland, FL 96% 97% - 96%
Summit on the Lake Fort Worth, TX 95% 97% - 96%
--- --- --- ---
SUBTOTAL OR WEIGHTED AVERAGE (e) 94% 96% - 95%
--- --- --- ---

1995 Acquisitions:
-----------------
Marina Park Miami, FL 88% - - 89%
Meadowbrook Baton Rouge, LA 92% - - 95%
Mustang Creek Arlington, TX 93% - - 94%
Park Norton Los Angeles, CA 51% - - 36%
Park Place Los Angeles, CA 43% - - 41%
*K-Mart Plaza Indianapolis, IN (h) 100% - - 0%
--- --- --- ---
SUBTOTAL OR WEIGHTED AVERAGE (e) 90% - - 72%
--- --- --- ---

ACQUISITIONS SUBTOTAL OR WEIGHTED AVERAGE (e) 92% 96% - 85%
--- --- --- ---

GRAND TOTAL 86% 87% 86% 87%
=== === === ===
</TABLE>

10
<PAGE> 11
NATIONAL INCOME REALTY TRUST
REAL ESTATE SUMMARY (CONTINUED)
DECEMBER 31, 1995
(unaudited)

(b) Represents annualized market rate per square foot at December 31, 1995,
based upon scheduled rents at such time.

(c) Computed as follows: [(Annual gross potential rent less annual vacancy
losses) divided by annual gross potential rent].

(d) Represents actual physical occupancy as of the end of the last week of the
fiscal year ended December 31, 1995.

(e) The weighted average rent per square foot and economic occupancy are based
on the square footage in each property.

(f) Lease expired January 1994. At December 31, 1995, space had not been
re-leased.

(g) Lease expires September 2004. During the first quarter of 1995, K-Mart
moved out and sublet the space to two tenants.

(h) Acquired through a deed in lieu of foreclosure on December 31, 1994. For
purposes of this schedule, it has been classified as a 1995 acquisition.
K-Mart vacated the premises, and the space was sublet to the City of
Indianapolis. The City of Indianapolis ceased rent payments after the
February 1996 payment due to the condemnation of the property. See NOTE 4.
"REAL ESTATE AND DEPRECIATION" to the consolidated financial statements for
a discussion of the condemnation.

* Properties held for sale at December 31, 1995. The Trust expects to realize
amounts in excess of each of the property's respective carrying value;
however, no assurance can be provided that the Trust will be successful in
its efforts to sell these properties or that it will realize their
anticipated selling prices.

Management believes that its properties are adequately covered by liability and
casualty insurance, consistent with industry standards.

11
<PAGE> 12
NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS SECURED BY OWNED PROPERTIES
DECEMBER 31, 1995
(in thousands)
(unaudited)

<TABLE>
<CAPTION>
Stated Balance
Original Balance Interest Maturity Due at
Name of Property Amount Dec 31, 1995 Rate (A) Date Maturity
- ---------------- -------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Residential
- -----------
Acadian Place ........ $ 600 $ 567 9.75% Apr-97 $ 549
Bay West ............. 5,100 4,984 8.89% Jan-19 --
Bayfront ............. 2,086 2,050 8.99% Jul-00 1,953
Bryan Hill/Meadowbrook 3,500 3,500 9.00% May-96 3,500
Carlyle Towers ....... 4,500 4,194 9.47% Mar-99 3,640
Cornell .............. 1,623 1,524 8.75% Jan-99 1,467
Creekwood North ...... 5,200 2,154 9.50% May-96 2,096
Cross Creek .......... 2,000 1,984 9.78% Feb-00 1,882
Diamond Loch ......... 2,200 1,801 10.00% Aug-96 1,750
Fenway Hall .......... 1,375 1,334 8.75% Oct-98 1,287
Forest Oaks .......... 2,000 2,000 9.50% Mar-96 2,000
Heather Hills ........ 16,790 15,952 9.25% May-22 --
Kirklevington ........ 2,470 2,463 9.00% Nov-99 2,367
Lake Point ........... 7,165 7,076 9.36% Oct-01 6,466
Marina Park .......... 2,500 2,493 9.00% May-98 2,347
Mariposa Manor ....... 784 775 8.00% Apr-02 700
Martins Landing ...... 5,000 5,000 7.65% Dec-05 4,014
Mustang Creek ........ 2,680 2,665 8.48% May-96 2,654
Palm Court ........... 3,000 2,970 9.67% Dec-04 2,525
Park Dale Gardens .... 3,000 2,985 8.30% Jul-05 2,448
Park Norton .......... 564 561 6.12% Jun-05 474
Pheasant Pointe ...... 6,200 5,818 9.75% Oct-97 5,682
Pinecrest ............ 9,250 8,334 7.61% May-98 7,970
Plaza Hills .......... 1,145 1,115 11.00% Dec-96 1,084
Prado Bay ............ 3,000 2,963 9.22% Nov-99 2,675
Sandstone ............ 995 689 9.50% Nov-96 653
Summit on the Lake ... 5,500 3,617 8.63% Sep-07 2,398
Woodcreek (CO) ....... 3,000 2,913 9.47% Mar-99 2,754
Woodcreek (FL) ....... 3,800 3,769 9.73% Feb-05 3,203
------- ------ ----- -------
107,027 98,250 9.01%(B) 70,538
------- ------ ----- -------
</TABLE>

- ---------------------
(A) For loans with variable interest rates, the rate in effect at December 31,
1995, is presented.
(B) Represents weighted average interest rate at December 31, 1995.

12
<PAGE> 13
NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS SECURED BY OWNED PROPERTIES (Continued)
DECEMBER 31, 1995
(in thousands)
(unaudited)

<TABLE>
<CAPTION>
Stated Balance
Original Balance Interest Maturity Due at
Name of Property Amount Dec 31, 1995 Rate (A) Date Maturity
- ---------------- -------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Office Buildings
- ----------------
Century Centre II ...... $ 21,000 $ 21,000 7.47% Nov-98 $ 21,000
Emerson Center ......... 2,900 2,910 8.75% May-99 2,808
Emerson Center .........(B) 1,218 1,029 -- May-99 841
Northwest O'Hare ....... 2,000 981 7.75% Nov-98 676
Northwest O'Hare ....... 415 263 8.75% Feb-01 159
Rancho Sorrento ........ 3,550 3,018 9.00% Aug-00 2,414
-------- -------- ----- --------
31,083 29,201 7.79%(C) 27,898
-------- -------- ----- --------

Shopping Centers
- ----------------
Emerson Center ......... 1,250 1,235 9.50% Jul-99 1,193
K-Mart - Charlotte ..... 1,360 1,308 10.25% Oct-98 1,258
K-Mart - Indianapolis .. 2,540 1,740 9.75% Sep-06 --
K-Mart - Temple Terrace 1,750 1,108 8.50% May-05 --
K-Mart - Temple Terrace 347 334 10.75% Oct-98 322
K-Mart - Thomasville ... 1,300 861 9.63% Sep-05 --
K-Mart - Thomasville ... 290 279 10.75% Oct-98 269
Midland Plaza .......... 305 296 9.00% Oct-98 283
Midway Mills ........... 4,200 4,196 8.65% Dec-05 3,455
Northside Center ....... 3,100 1,983 9.00% Nov-05 --
Southgate .............. 2,263 1,346 8.00% Oct-03 982
-------- -------- ----- --------
18,705 14,686 9.12%(C) 7,762
-------- -------- ----- --------

Total ......................... $156,815 $142,137 8.78%(C) $106,198
======== ======== ===== ========
</TABLE>

(A) For loans with variable interest rates, the rate in effect at December 31,
1995, is presented.

(B) Represents non-interest bearing unsecured debt associated with the property
payable from 30% of Excess Cash Flow, as defined, of the property or funds
from the sale or refinance of the property.

13
<PAGE> 14
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

Partnership Properties. The Trust and Continental Mortgage and Equity Trust
("CMET") own Sacramento Nine ("SAC 9") as tenants-in-common which consists of
two office buildings in the vicinity of Sacramento, California. The Trust has a
70% undivided interest in the earnings, losses, and distributions of SAC 9.
Under the terms of the agreement, unanimous consent is required of both the
Trust and CMET for any material changes in the operations of the properties,
including sales, refinancings, and changes in property management. The Trust, as
a noncontrolling partner, accounts for its investment in SAC 9 using the equity
method.

The Trust and CMET are also partners in Income Special Associates ("ISA"), a
general partnership in which the Trust has a 40% interest in earnings, losses,
and distributions. ISA in turn owns a 100% interest in Indcon, L.P., formerly
known as Adams Properties Associates, which owned 32 industrial warehouses that
collateralized mortgage debt totaling $23.5 million as of December 31, 1995. The
Trust, as a noncontrolling partner, accounts for its investment in ISA using the
equity method. During the first quarter of 1996, all but seven of the warehouses
were sold for $39.4 million.

On July 1, 1993, the Trust made an additional capital contribution to English
Village Partners, L.P. ("English Village") of $464,000 to increase its limited
partnership ownership interest to 49% and to acquire a 1% general partnership
interest in the partnership, which owns a 300-unit apartment complex. The Trust,
as a noncontrolling partner, accounts for its investment in English Village
using the equity method.

In June 1995, the Trust acquired a 50% economic interest in the ownership of an
office building located at 801 Pennsylvania Avenue, Washington, D.C. (the
"Property"). This interest was acquired through the purchase of a first lien
mortgage note with a face value of $8.5 million (the "Note") for $500,000 in
cash and a $2.5 million promissory note, which bore interest at the Prime Rate
plus 1% per annum and was repaid in September 1995. In accordance with the terms
of the Note, the Trust's $3.0 million investment, as well as any additional
advances made to the Property, is to be repaid from Property cash flow after
operating expenses at the rate of 11% per annum. The $5.5 million remaining
balance of the Note plus accrued interest may be satisfied by payment of 50% of
all funds available after Property operating expenses plus 50% of the proceeds
from any sale and any refinancing. The Note is nonrecourse to all parties and is
secured only by the Property. The Trust accounts for this investment under the
equity method.

The following table sets forth certain information relating to the Trust's
partnerships' properties as of December 31, 1995.

<TABLE>
<CAPTION>
Average Rent Economic
Property Square Per Square Foot (a) Occupancy (b)
Partnership Location Footage 1995 1994 1995 1994
- ----------- -------- --------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Sacramento Nine Rancho Cordova, CA 105,249 $ 10.98 $ 10.19 100% 100%
801 Pennsylvania Washington, D.C. 58,952 11.86 (c) 60% (c)
Indcon, L.P. Various locations 3,082,654 2.00 1.91 95% 93%
English Village Memphis, TN 364,680 4.62 4.19 96% 95%
</TABLE>

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

(a) Amounts represent rental revenue per square foot on an annual basis. Rental
revenue is equal to gross potential rent after giving effect to all rental
losses including bad debts, vacancies, and discounts and concessions. Gross
potential rent equals actual lease rates on leased units/space and market
rates on vacant units/space.
(b) Computed as follows: [(Annual gross potential rent less annual vacancy
losses) divided by annual gross potential rent].
(c) The Trust acquired its interest in 801 Pennsylvania in 1995.

14
<PAGE> 15
ITEM 2. PROPERTIES (Continued)

Mortgage Loans

At December 31, 1995, the Trust held six mortgage loans with an aggregate
outstanding balance of $12.3 million secured by income-producing properties
located throughout the United States, one mortgage loan with an outstanding
balance of $249,000 secured by a retirement center in Tucson, Arizona, and three
mortgage loans with an aggregate outstanding balance of $201,000 secured by
single-family residences located in the Southwest region of the United States.
These loans together with accrued interest, net of reserves, represented 2.9% of
the Trust's assets at such time.

A summary of activity in the Trust's mortgage notes receivable portfolio during
1995 is as follows:

<TABLE>
<S> <C>
Loans in mortgage portfolio at January 1, 1995 ....... 11
Loans paid in full ................................... (1)
---
Loans in mortgage portfolio at December 31, 1995 ..... 10
===
</TABLE>

The Trust's policy, at present, is to make mortgage loans only in connection
with, or to facilitate, the sale or acquisition of real estate or the collection
of an existing note receivable. Accordingly, as existing mortgages are paid off,
the Trust's portfolio of mortgage notes receivable is expected to continue to
decline.

ITEM 3. LEGAL PROCEEDINGS

The Trust is a party to various claims and routine litigation arising in the
ordinary course of business. Management of the Trust does not believe that the
results of these claims and litigation, individually or in the aggregate, will
have a material adverse effect on its business or financial position. Also, see
ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT" for a
description of the results of the Olive modification.

[This space intentionally left blank.]

15
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On November 20, 1995, at the annual meeting of shareholders, the shareholders of
the Trust (i) elected eight Trustees of the Trust, (ii) approved the Trust's
Advisory Agreement with Tarragon, (iii) approved the Trust's Share Option and
Incentive Plan, and (iv) approved the Trust's Independent Trustee Share Option
Plan. Proxies for such annual meeting were solicited pursuant to Regulation 14A
under the Securities Exchange Act of 1934 (the "1934 Act"), and there was no
solicitation in opposition to the nominees for Trustee. The following is a brief
description of each matter considered at the annual meeting of shareholders and
the number of votes cast for, against, or withheld, as well as the number of
abstentions and broker non-votes as to each such matter, including a separate
tabulation with respect to each nominee for election as a Trustee.

<TABLE>
<CAPTION>
Matter Voted Upon Shares Voting
- ---------------------------------- ------------------------------
(1) Election of Trustees

Shares Authority
Name Voted for Withheld
- ---------------------------------- ------------------------------
<S> <C> <C>
Irving E. Cohen 2,368,755 67,293

William S. Friedman 2,367,927 68,121

Sally Hernandez-Pinero 2,367,927 68,121

Dan L. Johnston 2,369,528 66,520

Lance Liebman 2,370,406 65,642

L. G. Schafran 2,371,257 64,797

Raymond V. J. Schrag 2,370,870 65,178

Carl B. Weisbrod 2,368,719 67,329

<CAPTION>
Votes Cast
-----------------------------------
For Against Abstention
--------- ---------- ----------

(2) Approval of the Trust's Advisory
Agreement with Tarragon 1,924,499 107,002 74,276

(3) Approval of the Trust's Share Option
and Incentive Plan 1,638,820 144,339 76,680

(4) Approval of the Trust's Independent
Trustee Share Option Plan 1,704,269 137,195 70,933
</TABLE>

See NOTE 9. "SHARE OPTIONS" to the Consolidated Financial Statements for a
further description of matters involving the Trust's Share Option and Incentive
Plan and the Trust's Independent Trustee Share Option Plan, and see "THE
ADVISOR" under ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE
REGISTRANT" for additional information concerning the Advisory Agreement.

16
<PAGE> 17
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND RELATED
SHAREHOLDER MATTERS

The Trust's shares of beneficial interest, no par value (the "Shares" and each a
"Share"), are traded in the over-the-counter market on the National Association
of Securities Dealers Automated Quotation ("NASDAQ") System under the symbol
"NIRTS". The following table sets forth the high and low bid quotations of the
Shares as reported by the NASDAQ system for the periods indicated, which consist
of the last two fiscal years and the quarter ending for which this report is
filed, all after giving retroactive effect to the 10% share distributions in
September 1994 and September 1995. Over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down, or commissions, and may
not necessarily represent actual transactions.

<TABLE>
<CAPTION>
1995 1994
------------------ ------------------
High Low High Low
------- ------- ------- -------
<S> <C> <C> <C> <C>
First Quarter $10 5/8 $10 1/2 $10 1/2 $10
Second Quarter 10 5/8 10 1/2 10 3/8 10
Third Quarter 10 5/8 8 3/4 10 3/8 9 3/8
Fourth Quarter 11 10 3/4 10 1/2 10 1/2
</TABLE>

For the first quarter of 1996 through March 8, 1996, both the high and low bid
quotations, as well as the closing bid price, of the Shares, as reported by the
NASDAQ system were $13.00, and there were 6,506 holders of record.

Cash distributions paid to shareholders in 1995 and 1994 were as follows
(restated to give effect to the 1995 and 1994 share distributions):

<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
First Quarter $ .17 $ .12
Second Quarter .18 .14
Third Quarter .18 .14
Fourth Quarter .20 .16
</TABLE>

[This space intentionally left blank.]

17
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA

Income ................................ $ 45,240 $ 40,135 $ 36,357 $ 30,047 $ 28,137
Expense ............................... (46,214) (40,915) (40,370) (38,361) (33,890)
----------- ----------- ----------- ----------- -----------

(Loss) before gains on sales
of real estate and investments
and extraordinary gain ........... (974) (780) (4,013) (8,314) (5,753)
Gain on sale of real estate ........... 533 385 945 -- 462
Gain on sale of investments ........... 412 141 -- -- --
----------- ----------- ----------- ----------- -----------
(Loss) from continuing
operations ....................... (29) (254) (3,068) (8,314) (5,291)
Extraordinary gain .................... 737 -- 8,888 -- 2,170
----------- ----------- ----------- ----------- -----------
Net income (loss) ..................... $ 708 $ (254) $ 5,820 $ (8,314) $ (3,121)
=========== =========== =========== =========== ===========

EARNINGS PER SHARE DATA (1)

(Loss) from continuing
operations ....................... $ -- $ (.07) $ (.80) $ (2.00) $ (1.22)
Extraordinary gain .................... .21 -- 2.33 -- .50
----------- ----------- ----------- ----------- -----------
Net income (loss) ..................... $ .21 $ (.07) $ 1.53 $ (2.00) $ (.72)
=========== =========== =========== =========== ===========

Distributions (2) ..................... $ .73 $ .56 $ .16 $ -- $ 1.59

Weighted average shares (3) ........... 3,439,191 3,599,811 3,807,164 4,146,674 4,336,208

<CAPTION>
December 31,
---------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA

Real estate ................................ $ 195,675 $ 185,358 $ 172,634 $ 167,205 $ 163,583
Notes and interest receivable .............. 12,662 16,271 19,394 30,611 28,870
Investments in partnerships ................ 10,780 11,026 11,804 12,583 17,027
Total assets ............................... 222,038 217,040 199,486 205,517 202,097
Notes, debentures, and
interest payable ...................... 144,497 138,316 114,351 123,263 108,939
Shareholders' equity ....................... 69,627 73,360 78,174 74,927 84,933

Book value per share ....................... $ 20.53 $ 22.81 $ 22.94 $ 20.31 $ 21.57
</TABLE>

(1) Share and per share data have been restated to give effect to 10% share
distributions declared in September 1995, September 1994, and July 1993.
(2) Distributions in 1995, 1994, and 1991 represented returns of capital. 1993
distributions were taxable to shareholders as ordinary income.
(3) Represents the weighted average shares of beneficial interest used in the
computation of earnings per share.

18
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA (Continued) (Dollars in thousands, except per
share data)

<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OTHER DATA

Net income (loss) $ 708 $ (254) $ 5,820 $(8,314) $(3,121)
Gain on sale of real estate (533) (385) (945) -- (462)
Gain on sale of investments (412) (141) -- -- --
Extraordinary gain (737) -- (8,888) -- (2,170)
Equity (income) loss (770) (105) 34 (204) 171
Depreciation 5,959 4,992 4,639 3,982 3,842
Provision for losses (425) -- 1,390 2,400 --
Funds from operations-
equity affiliates 1,652 1,191 884 969 1,194
------- ------- ------- ------- -------

FUNDS FROM OPERATIONS (1) $ 5,442 $ 5,298 $ 2,934 $(1,167) $ (546)
======= ======= ======= ======= =======

FUNDS FROM OPERATIONS
PER SHARE (2) $ 1.58 $ 1.47 $ .77 $ (.28) $ (.13)
======= ======= ======= ======= =======
</TABLE>

(1) Funds from operations ("FFO"), as defined by the National Association of
Real Estate Investment Trusts ("NAREIT"), equals net income (loss)
(computed in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sales of property,
plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. "Funds from operations -
equity affiliates" is calculated to reflect funds from operations in the
same manner. The amortization of deferred financing costs and prepaid
leasing commissions is not considered in the Trust's calculation. FFO does
not represent cash flow from operating activities and should not be
considered as an alternative to net income as an indicator of the Trust's
operating performance or to cash flow as a measure of liquidity or the
ability to pay dividends.

(2) Per share data have been restated to give effect to 10% share distributions
declared in September 1995, September 1994, and July 1993.

[This space intentionally left blank.]

19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the accompanying Notes thereto.

Introduction

National Income Realty Trust (the "Trust") invests in real estate through
acquisitions, leases, and partnerships and, to a lesser extent, in mortgages
secured by real estate. The Trust was organized on October 31, 1978, and
commenced operations on March 27, 1979. At December 31, 1995, the Trust's real
estate portfolio included 57 properties (8 held for sale) located throughout the
United States, with concentrations in the Southeast and Southwest. These
properties consisted of 36 apartment complexes, 13 shopping centers, 4 office
buildings, three parcels of land, and one single-family residence. All of the
Trust's real estate, except for fourteen properties, is pledged to secure first
mortgage notes payable. The Trust's current policy is to make mortgage loans
only in connection with, and to facilitate, the sale or acquisition of real
estate. Accordingly, as existing mortgages are paid off, the Trust's portfolio
of mortgage notes receivable is expected to decline.

The Trust's objective is to maximize the long term value of its real estate
portfolio with an emphasis on increasing operating income and future cash
distributions to shareholders. Management focuses on both the appreciation of
the existing real estate portfolio, through intensive management and capital
improvements, and enlarging the portfolio with highly selective and
opportunistic acquisitions concentrated on older, undermanaged, and
underperforming multifamily projects in geographic locations where the Trust
presently owns properties. In addition to raising capital through operating
income, the Trust intends to generate capital through mortgage refinancings and
selective disposition of certain assets.

Liquidity and Capital Resources

Cash and cash equivalents aggregated $1.7 million at December 31, 1995, compared
with $3.5 million at December 31, 1994. The Trust's principal sources of cash
have been property operations, collections of mortgage notes receivable, and
external sources, such as property sales and refinancings, as more fully
discussed in the paragraphs below. The Trust expects these sources will continue
to be sufficient to meet projected cash requirements, including debt service
obligations, property maintenance and improvements, and continuation of regular
distributions.

Operating Activities

The Trust's cash flow from property operations (rentals collected less payments
for property operating expenses) increased from $14.4 million in 1993 to $14.7
million in 1994 and to $17.6 million in 1995, primarily due to properties
acquired by the Trust during 1994 and 1995. Additionally, during the first half
of 1994, approximately $1.0 million of prior year real estate taxes were paid.

Investing Activities

The Trust purchased five properties in 1994 and six properties in 1995,
increasing the Trust's multifamily portfolio by 1,324 operating units and 569
projected construction units to total 6,863 units at December 31, 1995,
including 41 operating units related to a 1994 foreclosure. The aggregate
purchase price for the 1994 acquisitions was $16.2 million, the cash portion of
which was $3.0 million. The remainder of the purchase price was financed through
first mortgage debt. The aggregate purchase price for the 1995 acquisitions was

20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

Investing Activities (Continued)

$11.0 million, the cash portion of which was $3.8 million. The balance of the
purchase price was financed through new first mortgage financing or assumption
of existing first mortgage debt. No properties were purchased in 1993.

During 1995, portions of the Lake Highlands land in Dallas, Texas, were sold for
net cash proceeds of $790,000.

In July 1995, the Trust purchased a tract of land adjacent to the K-Mart
Shopping Center in Kansas City, Missouri, for $125,000. Simultaneously with the
purchase, the Trust sold the K-Mart Shopping Center and the tract of land,
keeping a small portion of the undeveloped land, for $1.8 million. The Trust
received net cash proceeds of $856,000, including a $414,000 discounted payoff
of the K-Mart lease, after the first lien payoff $1.1 million and other related
closing costs.

The Trust made real estate improvements totaling $8.0 million to its properties
during 1995, including $1.1 million on the construction of The Regent
Apartments. During the fourth quarter of 1995, effective January 1, 1995, the
Trust recorded an adjustment of $800,000 due to a clarification of the Trust's
capitalization policy. It was determined during this period that, in addition to
the Trust's policy of capitalizing planned renovations and individual projects
which exceed $10,000, the Trust also had several properties undergoing a
repositioning process ("Repositioning"). Repositioning was defined as projects
with planned extensive unit upgrades and exterior improvements which, once
completed, will enable the property to command higher market rents, thereby
increasing the property value. All Repositioning expenditures are capitalized to
the carrying value of the property and depreciated over a term of ten years.
Projected construction costs for development properties including The Vistas at
Lake Worth and The Regent aggregate $6.0 million for 1996 and $3.0 million for
1997. The Trust anticipates capital improvement expenditures on its other
properties during 1996 to total approximately $5.7 million.

In September 1995, the Trust received $3.6 million as payment in full on the
note receivable secured by a first lien mortgage on the Greentree Village
Shopping Center. The Trust received $1.8 million as payment in full on three
notes receivable and other principal payments in 1994 and $2.4 million as
payment in full on three notes receivable and other principal payments in 1993.
The Trust expects mortgage note collections to decline as existing mortgage
loans are paid in full and does not anticipate funding future mortgage loans,
except in connection with, or to facilitate, the sale or acquisition of real
estate.

In June 1994, the Trust sold 15,000 shares of beneficial interest of Continental
Mortgage and Equity Trust ("CMET") for $210,000. In January and February 1995,
the Trust sold its remaining 39,500 shares of beneficial interest of CMET for
$593,000 in cash.

In June 1995, the Trust acquired a 50% economic interest in the ownership of an
office building in Washington, D.C., through the purchase of a first lien
mortgage note with a face value of $8.5 million (the "Note") for $500,000 in
cash and a $2.5 million promissory note which was repaid in September 1995. In
accordance with the terms of the agreement, the Trust's $3.0 million investment
is to be repaid from cash flow after operating expenses at the rate of 11% per
annum. The remaining $5.5 million balance of the Note plus accrued interest

21
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

Investing Activities (Continued)

may be satisfied by payment of 50% of all funds available after property
operating expenses plus 50% of the proceeds from any sale and any refinancing.
The Trust intends to refinance the property as soon as the lease up is
completed.

The Trust and CMET are partners in Income Special Associates ("ISA"), a general
partnership in which the Trust has a 40% interest in earnings, losses, and
distributions. ISA in turn owns a 100% interest in Indcon, L.P. ("Indcon"),
which owned 32 industrial warehouses at December 31, 1995. In May 1994, Indcon
sold a warehouse for $4.4 million, receiving $2.2 million in cash, and
distributed to the Trust its share of the proceeds in the amount of $871,000.
All but seven of Indcon's remaining properties were sold during the first
quarter of 1996. The disposition resulted in a gain of approximately $241,000
and the receipt of $14.2 million in net cash proceeds, of which the Trust's
portions were $96,000 and $5.7 million, respectively.

During 1993, Sacramento Nine ("SAC 9"), a tenancy-in-common in which the Trust
owns a 70% interest, sold three of its office buildings for $2.5 million in
cash, of which the Trust's share was $1.7 million.

Financing Activities

During 1995, the Trust obtained first mortgage financing totaling $18.0 million
on five Trust properties and received net cash proceeds of $4.5 million after
the payoff of $12.2 million in existing mortgage debt. These mortgage loans bear
interest at rates ranging from 7.65% to 9.78% per annum and mature from 2000 to
2005. The Trust also obtained short term financing totaling $5.5 million which
was used in the payoff of three mortgage loans totaling $6.4 million. These
short term mortgage loans bear interest at rates between 9% and 9.5% per annum
and mature in 1996. Additionally, in September 1995, the Trust paid $2.4 million
in satisfaction of the note payable which financed the acquisition of the 801
Pennsylvania Avenue investment. The Trust also extended or paid off mortgage
loans, scheduled to mature in 1995, totaling $5.0 million and made other
principal payments totaling $2.3 million.

During 1994, the Trust obtained first mortgage financing on seven Trust
properties totaling $26.9 million, receiving net cash proceeds of $9.4 million
after the payoff of $15.8 million in existing debt ($7.0 million of which would
have matured during 1994). These mortgage loans bear interest at rates ranging
from 8.89% to 11.0% per annum and mature from 1996 to 2019. In addition, the
Trust made other mortgage note payments of $4.1 million during 1994, including
the first mortgage principal payoffs of $143,000 secured by the Stewart Square
Shopping Center and $940,000 secured by the Mountain View Shopping Center, both
in Las Vegas, Nevada.

Mortgage principal payments totaling $16.0 million are due in 1996. It is the
Trust's intention to either pay the mortgage loans when due or extend the due
dates.

Based on the performance of the Trust's properties, the Trust's Board of
Trustees (the "Board") voted in July 1993 to resume the payment of regular
quarterly distributions to shareholders. Cash distributions paid to shareholders
totaled $2.5 million, $2.1 million, and $617,000 in 1995, 1994, and 1993,
respectively. The Trust also paid a 10% share distribution in each of 1995,
1994, and 1993.

22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

Financing Activities (Continued)

During 1995, 1994, and 1993, the Trust repurchased 123,500, 192,000, and 280,038
of its shares of beneficial interest at a total cost of $1.4 million, $2.3
million, and $2.4 million, respectively. In May 1994, the Trust's Board
authorized the repurchase up to 300,000 additional shares of beneficial interest
of which 182,702 have been purchased to date.

Two partnerships in which the Trust holds interests obtained first mortgage
financing during 1995. The Trust received distributions totaling $3.0 million
representing its share of the net refinancing proceeds.

Results of Operations

1995 COMPARED TO 1994. The Trust reported a substantial improvement in 1995 net
operating results from a $254,000 net loss incurred in 1994 to $708,000 net
income recorded in 1995. The underlying reasons for this improvement are more
fully discussed in the following paragraphs.

Net rental income (rental revenue less property operating expenses) increased
from $16.2 million in 1994 to $18.1 million in 1995.

Multifamily Properties

The Trust's multifamily portfolio, which accounted for 66% of the Trust's
real estate portfolio and included 6,294 operating units at December 31,
1995, reported an increase in net rental income of $2.0 million, or 17%,
for 1995 as compared to 1994. Of this increase, $1.9 million is related to
properties acquired in 1994 and 1995. For multifamily properties held in
both years, net rental income increased $107,000 due to increased rental
revenue from higher rental rates, which was partially offset by increased
operating expenses and rental losses, including discounts and concessions
and bad debt expense, related to the Trust's continued efforts to improve
physical occupancy rates. Overall, both physical and economic occupancy
levels have remained relatively stable for multifamily properties held in
both years.

Commercial Properties

The Trust's commercial portfolio included 1.5 million square feet at
December 31, 1995. The K-Mart Shopping Center in Indianapolis, Indiana,
was a new addition to the Trust's commercial portfolio in December 1994
and contributed an additional $278,000 to 1995 net rental income, while
the sale of the K-Mart Shopping Center in Kansas City, Missouri, in July
1995 caused a $105,000 decrease in net rental income. Commercial
properties held in both years reported an overall decrease in net rental
income of $250,000 principally due to higher economic vacancies and
increased operating expenses related to continued efforts to increase
physical occupancy levels, which have remained relatively stable.

Interest revenue decreased from $1.7 million in 1994 to $1.1 million in 1995. Of
this decrease, $524,000 is attributable to the Alder Creek mortgage note
receivable, the balance of which was settled in 1994. Additionally, a $94,000
decrease resulted from the payoff of the Greentree mortgage note receivable in
September 1995.

23
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

Equity in income of partnerships increased from $105,000 in 1994 to $770,000 in
1995, mainly due to the Trust's investment in ISA, in which the Trust holds a
40% interest. Indcon, L.P., ("Indcon") in which ISA holds an effective 100%
interest, reported increases in rental income due to higher rental rates and
increases in common area cost recovery income. This partnership also experienced
decreases in certain expenses such as depreciation, insurance, and real estate
taxes. Effective October 1, 1995, Indcon ceased depreciation on a majority of
its properties, increasing the Trust's equity income by $134,000, in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121 - "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" due to an impending sale of these properties which was consummated in the
first quarter of 1996.

Interest expense increased from $10.5 million for 1994 to $12.3 million for
1995. Of this increase, $1.4 million resulted from interest expense associated
with mortgage loans obtained or assumed in connection with 1994 and 1995
property acquisitions. In addition, first mortgage financing obtained on
properties held during 1994 and 1995 increased mortgage loans by $16.5 million
and the related interest expense by $1.0 million in 1995. These increases were
slightly offset by decreases totaling $356,000 related to the sale of K-Mart
Shopping Center in Kansas City, Missouri, in 1995, the payoff of the mortgage
loan secured by Mountain View Shopping Center in 1994, the settlement of
litigation involving the note payable secured by Pepperkorn Office Building in
May 1995, and interest capitalized to the carrying values of three development
properties.

Depreciation expense increased from $5.0 million in 1994 to $6.0 million in
1995, due to the depreciation of properties acquired over the past two years and
the additional depreciation of capital improvements made to Trust properties
during 1994 and 1995 of $2.1 million and $8.0 million, respectively.

Advisory fees to Basic Capital Management, Inc., ("BCM") were $468,000 for the
first quarter of 1994. Advisory fees to Tarragon Realty Advisors, Inc.,
("Tarragon") were $909,000 for the last three quarters 1994 and $1,037,000
during calendar 1995. The Trust changed advisors from BCM to Tarragon effective
April 1, 1994. Under the BCM advisory agreement, the Trust paid a monthly
advisory fee equal to .0625% of the Trust's average gross asset value and an
incentive fee equal to 7.5% per annum of the Trust's net income. The initial
Tarragon advisory agreement called for a $100,000 base fee, which was eliminated
in the 1995 agreement, and a monthly incentive fee equal to 16% per annum of
adjusted funds from operations, as defined in the advisory agreement and
approved by the Board. For a detailed discussion of the advisory agreements, see
ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT - The
Advisor".

General and administrative expenses increased from $1.9 million in 1994 to $2.1
million in 1995 primarily due to increased trustees fees related to a revised
fee structure effected in 1995 (see ITEM 11. "EXECUTIVE COMPENSATION") and fees
related to the annual shareholder meeting. No such meeting was held in 1994.

The Trust reported a provision for loss credit of $425,000 during 1995. This
credit consists of a provision for loss of $275,000, recorded in June 1995, due
to the sale of the K-Mart Shopping Center in Kansas City, Missouri, in July
1995. Also, in May 1995, the litigation involving the Trust's acquisition of the
Pepperkorn Office Building in Manitowoc, Wisconsin, was resolved, and, as a
result of the court's judgment, the Trust reversed a previously recorded
allowance for estimated loss of $700,000 with a corresponding credit to
provision for losses. See NOTE 4. "REAL ESTATE AND DEPRECIATION" in the notes to
the Consolidated Financial Statements for a more detailed discussion.

24
<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

In May 1994, the Trust reported a gain on the sale of real estate of $385,000
related to the sale of a warehouse by Indcon. The Trust reported gains totaling
$533,000 on the sales of portions of the Lake Highlands land in Dallas, Texas,
during 1995. The Trust also recognized gains on sales of investments of $141,000
during 1994 and $412,000 during 1995 attributable to the sale of the shares of
beneficial interest of CMET.

An extraordinary gain of $67,000 was recorded during the third quarter of 1995
related to the discounted settlement of the $2.5 million note payable which
financed the acquisition of the investment in an office building located in
Washington, D.C. In November and December 1995, the Trust recorded extraordinary
gains of $110,000 and $560,000, respectively, related to the negotiated
discounted payoffs of the mortgage notes payable secured by Bryan Hill
Apartments and Forest Oaks Apartments. For further discussion, see NOTE 7.
"NOTES, DEBENTURES, AND INTEREST PAYABLE".

1994 COMPARED TO 1993. For the year ended December 31, 1994, the Trust's
operating loss significantly decreased from $4.0 million in 1993 to $780,000 in
1994. The underlying factors contributing to this decrease are discussed in the
following paragraphs. In addition, primarily due to a 1993 extraordinary gain of
$8.9 million, the Trust reported net income of $5.8 million for the year ended
December 31, 1993, as compared with a net loss of $254,000 for the year ended
December 31, 1994.

Net rental income increased from $14.7 million for the year ended December 31,
1993, to $16.2 million for the year ended December 31, 1994.

Multifamily Properties

An increase in net rental income of $2.1 million, or 22%, is attributable
to the Trust's multifamily portfolio, which accounted for 62% of its real
estate portfolio and included 5,790 operating units as of December 31,
1994. Of this increase, $1.1 million relates to four operating properties
purchased and one property acquired through foreclosure in 1994 and two
properties acquired in 1993 through foreclosure. Multifamily properties
held in both years reported an overall increase in net rental income of
$964,000 resulting chiefly from increased rental revenue due to higher
rental rates. Additionally, overall occupancy levels increased for
multifamily properties held in both years.

Commercial Properties

The Trust's commercial portfolio, which included 1.6 million square feet
as of December 31, 1994, reported a decrease in net rental income of
$389,000, principally due to increased vacancy losses and operating
expenses due to 1994 repair and maintenance expenditures in an effort to
upgrade the properties and improve occupancy levels, which were lower than
those reported in 1993.

Interest income increased from $1.6 million for the year ended December 31,
1993, to $1.7 million for the year ended December 31, 1994. Interest income
related to the Alder Creek mortgage note receivable increased $354,000 primarily
due to the 1994 settlement of this note balance. This increase was partially
offset by a decrease of $208,000 related to the payoff or foreclosure of three
notes receivable in each of 1993 and 1994.

25
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

Interest expense increased from $9.8 million for the year ended December 31,
1993, to $10.5 million for the year ended December 31, 1994. Of this increase,
$739,000 is due to the mortgage debt associated with the properties acquired
during 1993 and 1994. Additionally, the refinancing of properties held in both
1994 and 1993 increased notes payable by a total of $12.7 million and interest
expense by $384,000. Partially offsetting these increases was a $200,000
decrease in the interest expense on the mortgage secured by the Pinecrest
Apartments due to a reduction in the variable interest rate during 1993. The
Trust also ceased accruing interest on the mortgage note secured by the
Pepperkorn Office Building in April 1994 due to pending litigation, accounting
for a $151,000 decrease in interest expense.

During 1993, the Trust recorded provisions for losses totaling $1.4 million on
one of the Trust's properties held for sale and one of the Trust's first lien
mortgage notes.

In 1993, the Trust issued a $1.0 million convertible subordinated debenture to
John A. Doyle, Chief Financial Officer of the Trust, in exchange for his 10%
participation in the profits of the Consolidated Capital Properties II ("CCP
II") assets, which were acquired in November 1992. This participation was
granted as consideration for Mr. Doyle's services to the Trust in connection
with the acquisition of the CCP II portfolio. See NOTE 7. "NOTES, DEBENTURES,
AND INTEREST PAYABLE."

Depreciation expense increased from $4.6 million for the year ended December 31,
1993, to $5.0 million for the year ended December 31, 1994. Of this increase,
$184,000 relates to the two properties acquired through foreclosure in 1993 and
six of the properties acquired during 1994, two of which were also acquired
through foreclosure. Depreciation expense also increased due to improvements
made to Trust properties of $2.8 million in 1993 and $2.1 million in 1994.

Advisory fees to BCM were $468,000 for the first three months of 1994 and $1.5
million in 1993. Advisory fees to Tarragon were $909,000 during April through
December 1994. Under the BCM advisory agreement, the Trust paid a monthly fee
equal to .0625% per month of the average gross asset value of the Trust. In
addition, the Trust paid BCM an incentive fee equal to 7.5% per annum of the
Trust's net income for each year during which BCM provided services. Under the
Tarragon advisory agreement, the Trust paid a base annual advisory fee of
$100,000 plus an incentive fee equal to 16% per annum of adjusted funds from
operations, as defined in the advisory agreement dated February 15, 1994.

General and administrative expenses increased from $1.8 million for the year
ended December 31, 1993, to $1.9 million for the year ended December 31, 1994.
This increase is due to an increase in advisor cost reimbursements during 1994
as compared to 1993. Partially offsetting this increase is a reduction in legal
fees related to the Olive litigation, as more fully discussed in NOTE 15.
"COMMITMENTS AND CONTINGENCIES".

For the year ended December 31, 1994, the Trust reported a gain on sale of real
estate of $385,000 related to the sale of a warehouse by Indcon in May 1994. In
addition, the Trust recognized a gain on the sale of investments of $141,000
related to the sale of the 15,000 shares of beneficial interest of CMET.

26
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

For the year ended December 31, 1993, the Trust recognized gains on sales of
real estate of $851,000 related to the sale of three office buildings by SAC 9
and $94,000 on the sale of the Plaza Jardin Office Building, one of the CCP II
assets.

Also during 1993, the Trust recorded an extraordinary gain on the forgiveness of
debt of $8.9 million related to the discounted purchase of the second lien
mortgage secured by Century Centre II Office Building, which was purchased by
the Trust for $300,000 as part of a bankruptcy Plan of Reorganization.

Allowance for Estimated Losses and Provisions for Losses

The Trust's management, on a quarterly basis, reviews the carrying values of the
Trust's mortgage loans and properties held for sale. Generally accepted
accounting principles require that the carrying value of a mortgage loan or a
property held for sale cannot exceed its cost or its estimated fair value. In
those instances in which estimates of fair value of the collateral securing the
Trust's mortgage loans or properties held for sale are less than the carrying
values thereof at the time of evaluation, an allowance for loss is provided by a
charge against operations. The evaluation of the carrying values of the mortgage
loans is based on management's review and evaluation of the collateral
properties securing the mortgage loans. The review of collateral properties and
properties held for sale generally includes selective site inspections, a review
of the property's current rents compared to market rents, a review of the
property's expenses, a review of maintenance requirements, discussions with the
manager of the property, and a review of the surrounding area. Future quarterly
reviews could cause the Trust's management to adjust current estimates of fair
value.

The Trust's management also evaluates the Trust's properties held for investment
for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. This evaluation generally
consists of a review of the property's cash flow and current and projected
market conditions, as well as any changes in general and local economic
conditions. If an impairment loss exists based on the results of this review, a
loss is recognized by a charge against current earnings and a corresponding
reduction in the respective asset's carrying value. The amount of this
impairment loss is equal to the amount by which the carrying value of the
property exceeds its estimated fair value.

Environmental Matters

Under various federal, state, and local environmental laws, ordinances, and
regulations, the Trust may be potentially liable for removal or remediation
costs (including governmental fines and injuries to persons and property), as
well as certain other potential costs relating to hazardous or toxic substances
where property-level managers have arranged for the removal, disposal, or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the air,
and third parties may seek recovery from the Trust for personal injury
associated with such materials.

The Trust's management is not aware of any environmental liability relating to
the above matters that would have a material adverse effect on the Trust's
business, assets, or results of operations.

27
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Tax Matters

For the years ended December 31, 1995, 1994, and 1993, the Trust elected, and in
the opinion of the Trust's management qualified, to be taxed as a Real Estate
Investment Trust ("REIT") as defined under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"). The Code requires a REIT
to distribute at least 95% of its REIT taxable income plus 95% of its net income
from foreclosure property, as defined in Section 857 of the Code, on an annual
basis to shareholders.

[This space intentionally left blank.]

28
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----
Reports of Independent Public Accountants ............................ 30

Consolidated Balance Sheets -
December 31, 1995 and 1994 ......................................... 32

Consolidated Statements of Operations -
Years Ended December 31, 1995, 1994, and 1993 ...................... 33

Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1995, 1994, and 1993 ...................... 34

Consolidated Statements of Cash Flows -
Years Ended December 31, 1995, 1994, and 1993 ...................... 35

Notes to Consolidated Financial Statements ........................... 38

Schedule III - Real Estate and Accumulated Depreciation .............. 57

Schedule IV - Mortgage Loans on Real Estate .......................... 62

All other schedules are omitted because they are not required, are not
applicable, or the information required is included in the Consolidated
Financial Statements or the notes thereto.

29
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Trustees of National Income Realty Trust

We have audited the accompanying consolidated balance sheets of National Income
Realty Trust and subsidiaries as of December 31, 1995 and 1994, and the related
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended December 31, 1995. These financial statements and
the schedules referred to below are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and schedules 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 and schedules. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Income Realty Trust
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Supplemental Schedules III and IV are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

Arthur Andersen LLP

Dallas, Texas
March 15, 1996

30
<PAGE> 31
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Trustees of National Income Realty Trust

We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of National Income Realty Trust and
subsidiaries for the year ended December 31, 1993. We have also audited the
schedules listed in the accompanying index. These financial statements and
schedules are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audit.

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

In our opinion, the consolidated statements referred to above present fairly, in
all material respects, the consolidated results of the operations of National
Income Realty Trust and subsidiaries and their cash flows for the year ended
December 31, 1993, in conformity with generally accepted accounting principles.

Also, in our opinion, the schedules referred to above present fairly, in all
material respects, the information set forth therein.

BDO Seidman

Dallas, Texas
March 25, 1994

31
<PAGE> 32
NATIONAL INCOME REALTY TRUST
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
--------- ---------
Assets (dollars in thousands)
<S> <C> <C>
Real estate
Held for investment, net of accumulated depreciation
($44,750 in 1995 and $38,532 in 1994) ............... $ 189,086 $ 178,537
Held for sale, net of accumulated depreciation
($397 in 1995 and $895 in 1994) ..................... 6,589 6,821
--------- ---------
195,675 185,358
Less - allowance for estimated losses ........................ -- (700)
--------- ---------
195,675 184,658
Notes and interest receivable
Performing ................................................ 11,685 15,038
Nonperforming, nonaccruing ................................ 977 1,233
--------- ---------
12,662 16,271
Less - allowance for estimated losses ........................ (6,274) (6,274)
--------- ---------
6,388 9,997

Investments in partnerships .................................. 10,780 11,026
Cash and cash equivalents .................................... 1,674 3,484
Restricted cash .............................................. 2,329 3,222
Investment in marketable equity securities of affiliate ...... -- 593
Other assets (including $11 in 1995 and $82 in 1994 due
from affiliates) .......................................... 5,192 4,060
--------- ---------
$ 222,038 $ 217,040
========= =========
Liabilities and Shareholders' Equity

Liabilities
Notes, debentures, and interest payable (including
$1.0 million in 1995 and 1994 to affiliates) .............. $ 144,497 $ 138,316
Other liabilities (including $818 in 1995 and $133 in 1994
due to affiliates) ........................................ 7,914 5,364
--------- ---------
152,411 143,680
Commitments and contingencies
Shareholders' equity
Shares of beneficial interest, no par value; authorized
shares, unlimited; 3,390,727 and 3,216,267 shares
outstanding (after deducting 450,857 and 287,875
shares held in treasury) .................................. 10,181 9,657
Paid-in capital .............................................. 276,716 275,178
Accumulated distributions in excess of
accumulated earnings ...................................... (217,270) (211,887)
Unrealized gains on marketable equity securities ............. -- 412
--------- ---------
69,627 73,360
--------- ---------
$ 222,038 $ 217,040
========= =========
</TABLE>

The accompanying notes are an integral part of these
Consolidated Financial Statements.

32
<PAGE> 33
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------
1995 1994 1993
------------ ------------ ------------
(dollars in thousands, except per share)

<S> <C> <C> <C>
Income
Rentals......................................................... $ 43,381 $ 38,309 $ 34,825
Interest ....................................................... 1,089 1,721 1,566
Equity in income (losses) of partnerships....................... 770 105 (34)
------------ ------------ ------------
45,240 40,135 36,357

Expenses
Property operations (including $330 in 1995,
$397 in 1994, and $360 in 1993 to affiliates).................. 25,279 22,085 20,147
Interest........................................................ 12,306 10,538 9,815
Depreciation.................................................... 5,959 4,992 4,639
Provision for losses............................................ (425) - 1,390
Profit participation buyout..................................... - - 1,000
Advisory fee to affiliate....................................... 1,037 909 -
Advisory fee to prior advisor................................... - 468 1,537
General and administrative (including $960 in 1995,
$1,022 in 1994, and $627 in 1993 to affiliates)................ 2,058 1,923 1,842
------------ ------------ ------------
46,214 40,915 40,370
------------ ------------ ------------
(Loss) before gains on sales of real estate and
investments and extraordinary gain (974) (780) (4,013)
Gain on sale of real estate..................................... 533 385 945
Gain on sale of investments..................................... 412 141 -
------------ ------------ ------------
(Loss) from continuing operations................................. (29) (254) (3,068)
Extraordinary gain.............................................. 737 - 8,888
------------ ------------ ------------
Net income (loss)............................................... $ 708 $ (254) $ 5,820
============ ============ ============

Earnings per share
(Loss) from continuing operations................................. $ - $ (.07) $ (.80)
Extraordinary gain................................................ .21 - 2.33
------------ ------------ ------------
Net income (loss)................................................. $ .21 $ (.07) $ 1.53
============ ============ ============

Weighted average shares of beneficial interest
used in computing earnings per share............................ 3,439,191 3,599,811 3,807,164
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these
Consolidated Financial Statements.

33
<PAGE> 34
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
Accumulated Unrealized
Shares of Distributions Gains on
Beneficial Interest in Excess of Marketable
-------------------- Paid-in Accumulated Equity Shareholders'
Shares Amount Capital Earnings Securities Equity
--------- ------- -------- ------------ ---------- -------------
(dollars in thousands)

<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993............................. 3,132,625 $ 9,407 $273,896 $(208,376) $ - $74,927

Repurchase of shares of beneficial interest.......... (280,038) (840) (1,568) - - (2,408)
Cash distributions ($0.16 per share)................. - - - (617) - (617)
Share distributions.................................. 273,529 820 2,187 (3,007) - -
Unrealized gains on marketable
equity securities................................. - - - - 452 452
Net income........................................... - - - 5,820 - 5,820
--------- ------- -------- --------- ----- -------
Balance, December 31, 1993........................... 3,126,116 9,387 274,515 (206,180) 452 78,174

Repurchase of shares of beneficial interest.......... (192,000) (576) (1,771) - - (2,347)
Cash distributions ($0.56 per share)................. - - - (2,173) - (2,173)
Share distributions.................................. 282,151 846 2,434 (3,280) - -
Unrealized gains on marketable
equity securities................................. - - - - 101 101
Realized gains on marketable equity
securities........................................ - - - - (141) (141)
Net (loss)........................................... - - - (254) - (254)
--------- ------- -------- --------- ----- -------
Balance, December 31, 1994........................... 3,216,267 9,657 275,178 (211,887) 412 73,360

Repurchase of shares of beneficial interest.......... (123,500) (370) (1,069) - - (1,439)
Cash distributions ($0.73 per share)................. - - - (2,590) - (2,590)
Share distributions.................................. 297,960 894 2,607 (3,501) - -
Realized gains on marketable equity
securities........................................ - - - - (412) (412)
Net income........................................... - - - 708 - 708
--------- ------- -------- --------- ----- -------
Balance, December 31, 1995........................... 3,390,727 $10,181 $276,716 $(217,270) $ - $69,627
========= ======= ======== ========= ===== =======
</TABLE>

The accompanying notes are an integral part of these
Consolidated Financial Statements.

34
<PAGE> 35
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1995 1994 1993
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Rentals collected........................................ $ 42,763 $ 38,402 $ 35,105
Interest collected....................................... 1,062 1,587 1,515
Interest paid............................................ (12,638) (9,900) (9,253)
Payments for property operations (including
$330 in 1995, $397 in 1994, and $360
in 1993 to affiliates)................................ (25,179) (23,703) (20,685)
General and administrative expenses paid
(including $890 in 1995, $1,022 in 1994,
and $627 in 1993 to affiliates)........................ (2,159) (1,877) (1,737)
Advisory fee paid to affiliate........................... (1,022) (860) -
Advisory fee paid to prior advisor....................... - (342) (1,537)
Deferred borrowing costs................................. (777) (1,455) (185)
Other.................................................... - - 397
-------- -------- --------

Net cash provided by operating activities.............. 2,050 1,852 3,620
-------- -------- --------

Cash Flows from Investing Activities
Acquisition of real estate .............................. (3,786) (3,006) -
Proceeds from sale of real estate........................ 1,646 - 410
Real estate improvements................................. (8,022) (2,052) (2,835)
Collections on notes receivable.......................... 3,609 1,841 2,431
Fundings of notes receivable............................. - - (329)
Proceeds from sale of investments........................ 593 210 -
Acquisition of partnership interest...................... (462) - -
Distributions from partnerships' investing
activities............................................... - 871 1,746
Net distributions from (contributions to)
partnerships........................................... 986 727 (151)
-------- -------- --------

Net cash provided by (used in) investing activities...... (5,436) (1,409) 1,272
-------- -------- --------
</TABLE>

The accompanying notes are an integral part of these
Consolidated Financial Statements.

35
<PAGE> 36
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
1995 1994 1993
--------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities
Payments on notes payable.................................... $ (23,571) $ (19,904) $ (4,782)
Proceeds from notes payable.................................. 23,500 26,913 1,961
Repair escrow receipts (deposits), net....................... 1,214 (545) (61)
Payments to prior advisor.................................... - (132) -
Distributions to shareholders................................ (2,486) (2,098) (617)
Repurchase of shares of beneficial interest.................. (1,439) (2,347) (2,408)
Borrowings on margin account................................. 785 94 325
Advances from affiliates..................................... 563 - -
Distributions from partnerships'
financing activities....................................... 3,010 - -
--------- ---------- -----------
Net cash provided by (used in)
financing activities....................................... 1,576 1,981 (5,582)
--------- ---------- -----------
Net increase (decrease) in cash and
cash equivalents........................................... (1,810) 2,424 (690)

Cash and cash equivalents, beginning of year.................... 3,484 1,060 1,750
--------- ---------- -----------

Cash and cash equivalents, end of year.......................... $ 1,674 $ 3,484 $ 1,060
========= ========== ===========

Reconciliation of net income (loss) to net cash
provided by operating activities
Net income (loss).......................................... $ 708 $ (254) $ 5,820
Gain on sale of real estate................................ (533) (385) (945)
Gain on sale of investments................................ (412) (141) -
Extraordinary gain......................................... (737) - (8,888)
Depreciation and amortization.............................. 6,499 5,357 4,660
Provision for losses....................................... (425) - 1,390
Profit participation buyout................................ - - 1,000
Equity in (income) losses of partnerships.................. (770) (105) 34
Changes in other assets and other liabilities, net of
effects of noncash investing and financing activities:
(Increase) in interest receivable....................... (7) (134) (25)
(Increase) decrease in other assets..................... (1,962) (1,734) 659
Increase (decrease) in other liabilities................ 353 (1,179) (236)
(Decrease) increase in interest payable................. (664) 427 151
--------- ---------- -----------

Net cash provided by operating activities.................. $ 2,050 $ 1,852 $ 3,620
========= ========== ===========
</TABLE>

The accompanying notes are an integral part of these
Consolidated Financial Statements.

36
<PAGE> 37
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------
1995 1994 1993
------- -------- -------
(dollars in thousands)
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Changes in assets and liabilities in connection with the acquisition or
foreclosure of real estate:

Real estate................................................ $11,024 $ 19,585 $10,080
Mortgage notes and accrued interest receivable............. - (750) (5,698)
Allowance for estimated losses............................. - - 2,067
Other assets............................................... 525 851 202
Mortgage debt and accrued interest payable................. (7,556) (16,611) (6,651)
Other liabilities.......................................... (208) (69) -
------- -------- -------
Cash paid.................................................. $ 3,785 $ 3,006 $ -
======= ======== =======

Mortgage debt released in connection with
litigation settlement...................................... $ 1,020 $ - $ -

Foreclosure of wraparound mortgage note and
concurrent sale, with buyer assuming
underlying note payable.................................... $ - $ - $ 3,410
</TABLE>

The accompanying notes are an integral part of these
Consolidated Financial Statements.

37
<PAGE> 38
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements of National Income Realty
Trust, subsidiaries, and the consolidated partnerships (the "Trust") have been
prepared in conformity with generally accepted accounting principles ("GAAP"),
the most significant of which are described in NOTE 1. "SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES". The preparation of financial statements in accordance with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The Notes to the Consolidated Financial Statements
(the "Notes") are an integral part of the Consolidated Financial Statements. The
data presented in the Notes are as of December 31 of each year and for the year
then ended, unless otherwise indicated. Dollar amounts in tables are in
thousands, except per share amounts.

Certain balances for 1994 and 1993 have been reclassified to conform to the 1995
presentation.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Trust business. National Income Realty Trust and its
subsidiaries ("NIRT") is a California business trust organized on October 31,
1978. The Trust was formed to invest in real estate, including commercial and
apartment properties, and, to a lesser extent, to finance real estate through
mortgage notes. Since 1991, the Trust has sought only to make equity
investments, and, accordingly, its mortgage note receivable portfolio represents
a diminishing portion of the Trust's assets.

Basis of consolidation. The Consolidated Financial Statements include the
accounts of NIRT and partnerships which it controls. All significant
intercompany transactions and balances have been eliminated.

Real estate and depreciation. Real estate is carried at the lower of cost or
estimated fair value. Foreclosed real estate is initially recorded at new cost,
defined as the lower of the Trust's note receivable carrying amount or the fair
value of the collateral property less estimated costs of sale. The Trust
capitalizes property improvements and major rehabilitation projects which
increase the value of the respective property and have useful lives greater than
one year, except for individual expenditures less than $10,000 which are not
part of a planned renovation project. Depreciation is provided for by the
straight-line method over the estimated useful lives of the assets, which range
from 5 to 40 years.

During the fourth quarter of 1995, effective January 1, 1995, the Trust refined
its capitalization policy. It was determined that, in addition to the Trust's
policy of capitalization of planned renovations and individual projects which
exceed $10,000, the Trust also had several properties undergoing a repositioning
process ("Repositioning"). Repositioning was defined as projects with planned
extensive unit upgrades and exterior improvements which, once completed, will
enable the property to command higher market rents, thereby increasing the
property value. All Repositioning expenditures are capitalized to the carrying
value of the property and depreciated over a term of ten years.

The Trust's management evaluates the Trust's properties held for investment for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. This evaluation generally
consists of a review of the properties' cash flow and current and projected
market conditions, as well as any changes in general and local economic
conditions. If an impairment loss exists based on the results of this review, a
loss is recognized by a charge against current earnings and a corresponding
reduction in the respective asset's carrying value. The amount of this
impairment loss is equal to the amount by which the

38
<PAGE> 39
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

carrying value of the property exceeds the estimated fair value.

At least annually, all properties held for sale are reviewed by the Trust's
management, and a determination is made if the held for sale classification
remains appropriate. The following are among the factors considered in
determining that a change in classification to held for investment is
appropriate: (i) the property has been held for at least one year; (ii) Trust
management has no intent to dispose of the property within the next twelve
months; (iii) the property is a "qualifying asset" as defined in the Internal
Revenue Code of 1986, as amended (the "Code"); (iv) property improvements have
been funded; and (v) the Trust's financial resources are such that the property
can be held long-term.

Allowance for estimated losses. Valuation allowances are provided for estimated
losses on mortgage notes receivable and properties held for sale to the extent
that the investment in the notes or properties exceeds the Trust's estimate of
fair value of the collateral securing the notes or the properties. The
provisions for losses are based on estimates, and actual losses may vary from
current estimates. Such estimates are reviewed periodically. Any additional
provision determined to be necessary or the reversal of any existing allowance
no longer required is recorded by a charge or credit to current earnings.

Notes receivable and interest income. Effective January 1, 1995, the Trust
adopted, as required, Statement of Financial Accounting Standards ("SFAS") No.
114 - "Accounting by Creditors for Impairment of a Loan", and SFAS No. 118 -
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures". There was no cumulative effect nor any impact on the Trust's
financial position as a result of the adoptions.

Interest recognition on notes receivable. Interest income is recognized on the
Trust's notes receivable according to the contractual loan terms. However,
accrued but unpaid interest income is recognized only to the extent the fair
value of the underlying collateral exceeds the carrying value of the receivable.
Notes receivable are considered nonperforming when they become 60 days or more
delinquent. Interest income is recognized on these notes to the extent of cash
received. A loan is considered impaired when, based on current information and
events, it is probable that the Trust will be unable to collect all amounts due
according to the contractual terms of the loan agreement. The Trust's policy
with respect to interest income recognition on impaired loans is determined
based on whether the loan is performing or nonperforming and the associated
Trust policies with respect to these categories.

Cash equivalents. The Trust considers all highly liquid debt instruments
purchased with maturities of three months or less to be cash equivalents.

Restricted cash. Restricted cash represents escrow accounts, generally held by
the lenders of certain of the Trust's mortgage notes payable, for taxes,
insurance, and property repairs.

Other assets. Other assets consist primarily of tenant accounts receivable,
deferred borrowing costs, and prepaid leasing commissions. Deferred borrowing
costs are amortized on the straight-line method (which approximates the
effective interest method) over the related loans terms, and such amortization
is included in interest expense. Prepaid leasing commissions are amortized on
the straight-line method over the related lease terms, and such amortization is
included in property operating expenses.

39
<PAGE> 40
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue recognition on the sale of real estate. Sales of real estate are
recorded when and to the extent permitted by SFAS No. 66. Until the requirements
of SFAS No. 66 for full profit recognition have been met, transactions are
accounted for using the deposit, installment, cost recovery, or financing
method, whichever is appropriate.

Investment in noncontrolled partnerships. The Trust uses the equity method to
account for investments in partnerships it does not control. Under the equity
method, the Trust's initial investment is increased by the Trust's proportionate
share of the partnership's operating income and additional advances and
decreased by the Trust's proportionate share of the partnership's operating
losses and distributions received.

Marketable equity securities. Marketable equity securities are considered to be
available-for-sale and are carried at fair value, defined as year end closing
market value. Net unrealized holding gains and losses are reported as a separate
component of shareholders' equity.

Earnings per share. Income (loss) per share of beneficial interest (the "Shares"
and each a "Share") is computed based upon the weighted average number of Shares
outstanding during each year. Share and per share data have been restated to
give effect to 10% share distributions declared in September 1994 and September
1995.

Fair value of financial instruments. The carrying value of the Trust's cash and
cash equivalents approximates fair value. The Trust uses the following
assumptions in estimating the fair value of its notes receivable and notes
payable. For performing notes receivable, the fair value is estimated by
discounting future expected cash flows using current interest rates for similar
loans. For nonperforming notes receivable or notes receivable for which
foreclosure of the collateral property is probable, the estimated fair value of
the Trust's interest in the collateral property is used. For notes payable, the
fair value is estimated by discounting future expected cash flows using current
rates for mortgages with similar terms and maturities. The estimated fair values
presented do not purport to present amounts to be ultimately realized by the
Trust, which may vary significantly from the estimated fair values presented.

Recent Accounting Pronouncements. In March 1995, the Financial Accounting
Standards Board (the "FASB") issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amounts. SFAS No. 121 also requires long-lived assets expected to be
disposed of to be carried at the lower of carrying amount or fair value less
cost to sell, and depreciation is not to be taken with respect to such assets.
The Trust will adopt SFAS No. 121 in the first fiscal quarter of 1996 and, based
on current circumstances, does not believe the effect of adoption will be
material.

The Trust estimates that if SFAS No. 121 had been adopted effective January 1,
1995, its depreciation would have been reduced by $141,000 and net income
increased by like amount for 1995, and no additional provisions for losses for
either impairment of its properties held for investment or declines in estimated
fair value less cost to sell of its properties held for sale would have been
required.

40
<PAGE> 41
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

In October 1995, the FASB issued SFAS No. 123, "Accounting and Disclosure of
Stock-Based Compensation", which requires stock option disclosures based on
their fair value at the date of the grant. The recognition of compensation cost
for new and modified options may also be based on these fair values. SFAS No.
123 is effective for fiscal years beginning after December 15, 1995. The Trust
is still evaluating the effects of adoption of this statement, but management
anticipates that, if any compensation costs related to share options are
incurred, such costs will be recorded using the guidance provided by the
Accounting Principles Board's Opinion No. 25 ("APB No. 25"). Under APB No. 25,
compensation costs related to stock options issued pursuant to compensatory
plans are measured based on the difference between the quoted market price of
the stock at the measurement date (ordinarily the date of grant) and the
exercise price and should be charged to expense over the periods during which
the grantee performs the related services. All share options issued to date by
the Trust have exercise prices equal to the market price of the shares at the
date of grant. See NOTE 9. "SHARE OPTIONS".

[This space intentionally left blank.]

41
<PAGE> 42
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2. NOTES AND INTEREST RECEIVABLE

Notes and interest receivable consisted of the following at December 31:

<TABLE>
<CAPTION>
1995 1994
--------------------------------------------- -----------------------------------------------
Non- Non-
Performing performing Performing performing
--------------------- ---------- ---------------------- ----------
Impaired Unimpaired Impaired Total Impaired Unimpaired Impaired Total
-------- ---------- ---------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notes receivable $ 9,183 $ 2,618 $ 943 $ 12,744 $ 8,944 $ 6,170 $ 1,199 $ 16,313
Accrued interest -- 36 34 70 2 74 34 110
Deferred gain -- (152) -- (152) -- (152) -- (152)
------- ------- ----- -------- ------- ------- ------- --------

Recorded investment 9,183 2,502 977 12,662 8,946 6,092 1,233 16,271
Allowance for
estimated losses (5,297) -- (977) (6,274) (5,041) -- (1,233) (6,274)
------- ------- ----- -------- ------- ------- ------- --------

Net carrying value $3,886 $ 2,502 $ -- $ 6,388 $ 3,905 $ 6,092 $ -- $ 9,997
======= ======= ===== ======== ======= ======= ======= ========

Estimated fair value $8,660 $ 2,717 $ -- $ 11,377 $ 8,216 $ 6,398 $ -- $ 14,614
======= ======= ===== ======== ======= ======= ======= ========
</TABLE>

Impaired notes receivable. For the years ended December 31, 1995, 1994, and
1993, the Trust's average recorded investment in impaired loans was $10.2
million, $11.0 million, and $10.8 million, respectively. Interest income
recognized on impaired loans for these periods was $338,000, $402,000, and
$458,000, respectively. There were no impaired loans as of December 31, 1995 and
1994, without related allowances for estimated losses.

Nonperforming notes receivable. For 1995, 1994, and 1993, unrecognized interest
income on nonperforming notes totaled $452,000, $470,000, and $654,000,
respectively. Recognized interest income on nonperforming notes receivable,
recorded to the extent of cash received, amounted to $555,000 and $215,000
during 1994 and 1993, respectively. No interest income was recognized on
nonperforming notes receivable during 1995.

Notes receivable at December 31, 1995, mature from 1996 through 2016, with
interest rates ranging from 5.7% to 18% per annum. They are generally
nonrecourse and collateralized by real estate. Scheduled principal maturities of
$11.5 million are due in 1996, including $10.1 million related to two mortgage
notes receivable that were settled or modified in January 1996, as more fully
discussed below, and $943,000 which represents the principal balance of the
nonperforming loan in the table above.

In January 1995, the Trust agreed to a modification of the terms of a $1.6
million first mortgage note, secured by 4.5 acres of land and improvements, a
177,397 square foot shopping center, subject to a ground lease, in Dallas,
Texas. In accordance with the modified terms, the Trust released a portion of
the land securing the loan (approximately 15,000 square feet), and, in exchange,
the ground lease was terminated. Additionally, the interest rate was increased
from 15% to 18% per annum, and the maturity date was shortened 20 months from
September 1997 to January 1996. In January 1996, the Trust agreed to a second
modification of the mortgage loan whereby the borrower paid the Trust $100,000
in cash, as additional collateral, and the maturity date was extended to July
1996. The borrower is entitled to a further extension of three months upon
another cash collateral payment of $100,000. The modifications resulted in no
gain or loss to the Trust.

42
<PAGE> 43
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)

In September 1995, the $3.6 million note receivable secured by a first lien
mortgage on the Greentree Village Shopping Center, originally scheduled to
mature in May 1996, was paid in full.

In October 1995, the Trust and the borrower on the $8.6 million first lien
mortgage receivable, which matured in December 1995, negotiated a settlement
whereby the borrower agreed to relinquish the collateral property, a 342,000
square foot shopping center in Jackson, Mississippi, through a deed in lieu of
foreclosure. The Trust took possession of the property in January 1996. As the
estimated fair value of the property exceeded the Trust's net carrying value of
the mortgage note, the Trust recognized no loss in excess of amounts previously
provided.

During 1994, in accordance with the discounted settlement of the Alder Creek
note receivable, a nonperforming first mortgage loan with a carrying value of
$856,000 and a legal balance of $1.5 million at such date, the Trust received
cash payments totaling $1.3 million and released all collateral securing the
mortgage loan.

NOTE 3. ALLOWANCE FOR ESTIMATED LOSSES

Activity in the allowance for estimated losses was as follows:

<TABLE>
<CAPTION>
Mortgage
Notes Real Estate
Receivable Held for Sale Total
---------- ------------- -------
<S> <C> <C> <C>
Balance January 1, 1993 $ 7,250 $ 4,990 $12,240
Provisions for losses 690 700 1,390
Reclassification 770 (770) --
Amounts charged off (1,730) (794) (2,524)
------- ------- -------
Balance December 31, 1993 6,980 4,126 11,106

Reclassification to
other assets (179) -- (179)
Reclassification (527) 527 --
Amounts charged off -- (3,953) (3,953)
------- ------- -------
Balance December 31, 1994 6,274 700 6,974

Provisions for losses -- (425) (425)
Amounts charged off -- (275) (275)
------- ------- -------
Balance December 31, 1995 $ 6,274 $ -- $ 6,274
======= ======= =======
</TABLE>

The 1995 provision for loss credit was comprised of the reversal of a $700,000
allowance, provided in 1993 against the Pepperkorn Office Building, and a
provision for loss of $275,000 recorded to reduce the carrying value of the
K-Mart Shopping Center in Kansas City, Missouri, to the net sales proceeds
received in July 1995. See NOTE 4. "REAL ESTATE AND DEPRECIATION" for detailed
discussions of the related transactions.

Amounts charged off in 1994 relate primarily to the Lake Highland Apartments in
Dallas, Texas. Due to a 1993 zoning change, the Trust ceased operations and
demolished the complex. The $3.9 million carrying value of the property was
subsequently charged against previously established reserves.

43
<PAGE> 44
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4. REAL ESTATE AND DEPRECIATION

After a review of the Trust's real estate portfolio, Stewart Square Shopping
Center and Mountain View Shopping Center were reclassified from properties held
for sale to properties held for investment in the third quarter of 1995, and the
K-Mart shopping centers in Thomasville, Georgia, and Charlotte, North Carolina,
were reclassified from properties held for investment to properties held for
sale during the fourth quarter of 1995.

During 1995 and 1994, the Trust purchased nine operating multifamily properties
comprising 1,324 units, as presented below, and two development multifamily
properties comprising 569 projected units and, in connection with these
acquisitions, paid Tarragon Realty Advisors, Inc., ("Tarragon"), the Trust's
advisor since April 1, 1994, real estate acquisition fees totaling $382,000.
These properties are located in the same geographical areas where the Trust
currently operates and were acquired in separate transactions.

<TABLE>
<CAPTION>
Cost of Acquisition
Date -------------------
Property Location Acquired Units Cash Debt
-------- -------- -------- ----- ------ -------
<S> <C> <C> <C> <C> <C>
1995 Acquisitions
- -----------------
Park Place Los Angeles, CA Feb - 95 39 $ 380 $ --
Marina Park North Miami, FL Apr - 95 90 993 2,500
Mustang Creek Arlington, TX May - 95 120 830 2,680
Park Norton Los Angeles, CA Jun - 95 55 154 564
The Regent Jacksonville, FL Sep - 95 -- 1,480 --
Meadowbrook Baton Rouge, LA Oct - 95 200 -- 1,813
----- ------ -------
504 3,837 7,557
----- ------ -------

1994 Acquisitions
- -----------------
Summit on the Lake Fort Worth, TX Mar - 94 198 776 3,711
Bryan Hill Bethany, OK Nov - 94 232 301 2,216
Forest Oaks Lexington, KY Nov - 94 154 95 3,329
Martins Landing Lakeland, FL Nov - 94 236 990 4,571
The Vistas Fort Worth, TX Dec - 94 -- 844 --
----- ------ -------
820 3,006 13,827
----- ------ -------

1,324 $6,843 $21,384
===== ====== =======
</TABLE>

Also, in connection with obtaining the above listed loans of $2.7 million and
$564,000 to finance the acquisition of Mustang Creek and Park Norton, the Trust
paid Tarragon mortgage brokerage fees totaling $32,440.

The Trust intends to rehabilitate and expand The Vistas, formerly known as the
Woodlake Run Apartments, to include 265 operating units for approximately $8.0
million of development costs, with completion estimated in 1997. The Regent
Apartments is also under development at a total estimated cost of $2.1 million,
of which $1.1 million was incurred in 1995, with completion of 304 operating
units expected by the second quarter of 1996. Interest costs capitalized to the
carrying values of development properties under construction during 1995,
including Park Place, Park Norton, The Vistas, and The Regent, totaled $187,000.

The Trust purchased Pepperkorn Office Building located in Manitowoc, Wisconsin,
("Pepperkorn") in July 1991 for $1.1 million, paying $130,000 in cash and
financing the remainder through a $1.0 million promissory note. Concurrently
with the acquisition, the former owner and primary tenant (the "Seller") signed
a lease at another one of the Trust's properties, the Lakeview Mall, also
located in Manitowoc, Wisconsin. In 1993, the State of Wisconsin commenced
eminent domain proceedings to acquire Pepperkorn, and the Trust recorded a
provision for loss of $700,000 equal to the amount by which the carrying value
of the property exceeded the

<PAGE> 45

NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)

proposed condemnation award. Consequently, the terms of the acquisition, lease,
and the initial condemnation proceeds offered by the State of Wisconsin have
been in litigation since 1993. In May 1995, the court found, among other things,
the $1.0 million promissory note executed by the Trust and the Seller's lease at
Lakeview Mall were unenforceable. Accordingly, the note balance was offset
against the carrying value of the property, the net rent receivable, and the
condemnation award of approximately $164,000. As a result, the Trust reversed
the $700,000 allowance during the second quarter of 1995 with a corresponding
credit to earnings. The condemnation award is currently under appeal, and,
although the Trust anticipates a successful outcome, there is no assurance that
additional condemnation proceeds will be awarded.

During 1995, the Trust sold portions of the Lake Highlands land in Dallas,
Texas, for an aggregate cash purchase price of $885,000 in cash. The Trust
received total net cash proceeds of $790,000 after closing costs and recorded
gains related to the sales totaling $533,000.

In July 1995, the Trust purchased a tract of land adjacent to its K-Mart
Shopping Center in Kansas City, Missouri, for $125,000. Simultaneously with the
purchase, the Trust sold the K-Mart Shopping Center and the tract of land,
keeping a small portion of the undeveloped land, for $1.8 million. The Trust
received net cash proceeds of $856,000, including a $414,000 discounted payoff
of the K-Mart lease, after the first lien payoff of $1.1 million and other
related closing costs. In June 1995, the Trust recorded a provision for loss of
$275,000 to account for the excess carrying value of the property over the
related sales price.

In November 1995, the City of Indianapolis (the "City") initiated condemnation
proceedings against the Trust's K-Mart Shopping Center, which the Trust acquired
in December 1994 through a deed in lieu of foreclosure of collateral securing a
mortgage note receivable, as noted below. The shopping center was vacant upon
acquisition, although leased to K-Mart under a net lease expiring in 1999. The
lease was assigned by K-Mart to the City in September 1995. In February 1996,
the City offered preliminary condemnation proceeds of $1.6 million which the
Trust rejected in light of the appraisals prepared for the City which exceed
$2.0 million. In March 1996, the Trust ceased payments on the $1.7 million
mortgage note secured by the shopping center. Management does not anticipate
incurring a loss as a result of the condemnation.

During 1994, the Trust acquired two properties through deeds in lieu of
foreclosure of collateral securing two mortgage notes receivable, Mariposa Manor
Apartments in Los Angeles, California, and the K-Mart Shopping Center in
Indianapolis, Indiana. These properties were acquired subject to senior
underlying debt totaling $2.6 million.

[This space intentionally left blank.]

45
<PAGE> 46
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5. EQUITY METHOD INVESTMENTS IN PARTNERSHIPS

The Trust's equity method investments in partnerships consisted of the following
at December 31:

<TABLE>
<CAPTION>
1995 1994
-------- ---------
<S> <C> <C>
Sacramento Nine ("SAC 9")......................... $ (162) $ 2,179
Income Special Associates ("ISA")................. 8,636 8,670
801 Pennsylvania Avenue........................... 2,898 -
Other ........................................ (592) 177
-------- ---------
$ 10,780 $ 11,026
======== =========
</TABLE>

The Trust and Continental Mortgage and Equity Trust ("CMET") own SAC 9, a
tenancy-in-common which currently owns two office buildings in the vicinity of
Sacramento, California. The Trust has a 70% undivided interest in the earnings,
losses, and distributions of SAC 9. Under the terms of the ownership agreement,
unanimous consent is required of both the Trust and CMET for any material
changes in the operations of the properties, including sales, refinancings, and
changes in property management. The Trust, as a noncontrolling partner, accounts
for its investment in SAC 9 under the equity method.

In August 1995, SAC 9 obtained first mortgage financing in the amount of $3.5
million secured by a previously unencumbered office building. Net financing
proceeds of $3.4 million were distributed, of which the Trust's proportionate
share equaled $2.4 million. This nonrecourse mortgage loan accrues interest
based on a variable rate, currently 8.59% per annum, calls for monthly principal
and interest payments calculated on a 20-year amortization, and matures
September 2000. In connection with the financing, SAC 9 paid a mortgage
brokerage fee of $35,000 to Tarragon.

In June 1993, SAC 9 sold two of its office buildings in separate transactions
for an aggregate sales price of $3.3 million, the cash portion of which was $2.4
million, and recognized gains totaling $1.2 million. The Trust's share of the
cash proceeds and the gains were $1.7 million and $810,000, respectively.

The Trust and CMET are also partners in ISA, a general partnership in which the
Trust has a 40% interest in earnings, losses, and distributions. ISA in turn
owns a 100% interest in Indcon, L.P. ("Indcon"), which owned 32 industrial
warehouses that collateralized mortgage debt totaling $23.5 million at December
31, 1995. The Trust, as a noncontrolling partner, accounts for its investment in
ISA using the equity method.

In September 1995, Indcon entered into negotiations to sell a majority of its
warehouses and, in anticipation of the impending sale, negotiated a modification
of its mortgage note payable pursuant to which the maturity date was accelerated
from April 2012 to December 1996, and the yield maintenance prepayment premium,
based on the outstanding principal loan balance over the remaining term of
approximately 17 years, was eliminated. In connection with the modification,
Indcon paid a fee of $1.2 million to the lender. The Trust's portion of the fee
was $460,000, of which $390,000 was advanced in October 1995. The sale closed in
the first quarter of 1996, and Indcon received net cash proceeds of $14.2
million and recognized a gain on the sale of approximately $241,000. The Trust
received $5.7 million in cash and recognized a gain on the sale of $96,000 as
its proportionate respective share of each.

46
<PAGE> 47
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5. EQUITY METHOD INVESTMENTS IN PARTNERSHIPS (Continued)

In May 1994, Indcon sold a warehouse located in Dallas, Texas, for $4.4 million
in cash. Indcon received net cash of $2.2 million, of which the Trust's share
was $871,000, after the payoff of the existing first mortgage. A gain on the
sale of $962,000 was recognized, of which the Trust's share was $385,000. In
connection with the sale, a brokerage commission of $26,100 was paid to
Tarragon.

The Trust also holds a 49% limited partner interest and a 1% general partner
interest in English Village Partners, L.P., (the "Partnership") which owns a
300-unit apartment complex located in Memphis, Tennessee ("English Village").
The Trust, as a noncontrolling partner, accounts for its investment in the
Partnership under the equity method. In November 1995, the Partnership
refinanced the mortgage debt secured by English Village, increasing the first
mortgage loan balance to $6.2 million. This nonrecourse loan accrues interest at
7.56% per annum, calls for monthly payments of principal and interest totaling
$46,064, and matures in December 2005. Net refinancing proceeds were $1.3
million, of which the Trust's portion was $619,000.

In June 1995, the Trust acquired a 50% economic interest in the ownership of an
office building located at 801 Pennsylvania Avenue, Washington, D.C. (the
"Property"). This interest was acquired through the purchase of a first lien
mortgage note with a face value of $8.5 million (the "Note") for $500,000 in
cash and a $2.5 million promissory note, which bore interest at the Prime Rate
plus 1% per annum and was paid at a $67,000 discount in September 1995. In
accordance with the terms of the Note, the Trust's $3.0 million investment, as
well as any additional advances made to the Property, is to be repaid from
Property cash flow after operating expenses at the rate of 11% per annum. The
$5.5 million remaining balance of the Note plus accrued interest may be
satisfied by payment of 50% of all funds available after Property operating
expenses plus 50% of the proceeds from any sale and any refinancing. The Note is
nonrecourse to all parties and is secured only by the Property.

Set forth below are summarized financial data for all partnerships the Trust
accounts for under the equity method (unaudited):
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
Real estate, net of accumulated depreciation
($22,235 in 1995 and $20,222 in 1994)........... $ 51,345 $ 50,152
Other assets....................................... 6,176 5,046
Notes payable...................................... (32,798) (30,199)
Other liabilities.................................. (490) (435)
-------- --------
Partners' capital $ 24,233 $ 24,564
======== ========

<CAPTION>
For the Years Ended December 31,
---------------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Rentals ....................................... $ 9,889 $ 8,917 $ 8,556
Depreciation.................................... (2,013) (2,541) (2,119)
Property operations............................. (3,290) (3,585) (3,520)
Interest ....................................... (3,202) (3,059) (3,448)
------- ------- -------
Income (loss) before gain on sale of real estate 1,384 (268) (531)
Gain on sale of real estate..................... -- 962 1,216
------- ------- -------
Net income ..................................... $ 1,384 $ 694 $ 685
======= ======= =======
</TABLE>

<PAGE> 48

NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. INVESTMENTS IN MARKETABLE SECURITIES

At December 31, 1993, the Trust owned 54,500 shares of beneficial interest of
CMET, purchased through open market transactions, at a total cost to the Trust
of $250,000. In June 1994, the Trust sold 15,000 of these shares for $210,000
and recorded a $141,000 gain on the disposition. During the first quarter of
1995, the Trust sold the remaining 39,500 shares for $593,000 and recognized a
$412,000 gain on the sale.

NOTE 7. NOTES, DEBENTURES, AND INTEREST PAYABLE

Notes, debentures, and interest payable consisted of the following at December
31:

<TABLE>
<CAPTION>
1995 1994
---------------------------- ----------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Notes and debentures payable................... $ 148,768 $ 143,137 $ 131,326 $ 136,247
========== ==========
Interest payable............................... 1,363 2,107
Unamortized discounts.......................... (3) (38)
---------- ----------
$ 144,497 $ 138,316
========== ==========
</TABLE>

Notes payable at December 31, 1995, bear interest at rates ranging from 6.12% to
11.00% per annum and mature from 1996 through 2022. These notes are generally
nonrecourse and are collateralized by deeds of trust on real estate with an
aggregate carrying value of $180.5 million.

During 1994 and 1995, the Trust obtained long term first mortgage financing on
twelve Trust properties, including Martins Landing as discussed below, totaling
$44.9 million, receiving net cash proceeds of $13.9 million after the payoff of
$28.0 million in existing debt. The remainder of the financing proceeds was used
to fund escrows for replacements and repairs and to pay the associated closing
costs. These nonrecourse mortgage loans bear interest at rates ranging from
7.65% to 11% per annum and mature between 1996 and 2019. In connection with
these financings, the Trust paid commissions of $103,000 to Basic Capital
Management, Inc., ("BCM") the Trust's former advisor, and $263,000 to Tarragon
based upon the new $44.9 million in mortgage loans.

At December 31, 1995, scheduled principal payments on notes and debentures
payable are due as follows:

<TABLE>
<S> <C>
1996 ................................................. $ 15,968
1997 ................................................. 8,401
1998 ................................................. 37,486
1999 ................................................. 20,453
2000 ................................................. 7,813
Thereafter................................................ 53,016
----------
$ 143,137
==========
</TABLE>

48
<PAGE> 49
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7. NOTES, DEBENTURES, AND INTEREST PAYABLE (Continued)

In September 1995, the Trust negotiated a $2.7 million discounted payoff of the
$3.2 million mortgage loan secured by Forest Oaks Apartments in Lexington,
Kentucky, originally scheduled to mature in January 1996. In exchange for the
discounted payoff of the Forest Oaks mortgage loan, the Trust agreed to pay the
full balance of the $4.5 million mortgage loan, originally scheduled to mature
February 2023, secured by Martins Landing Apartments located in Lakeland,
Florida. In December 1995, the Trust obtained short term financing in the amount
of $2.0 million, secured by Forest Oaks, and a $5.0 million ten year first
mortgage, secured by Martins Landing. The $6.7 million proceeds of these
financings, along with general working capital of the Trust, were used to
satisfy the mortgage payoffs, and, in December 1995, the Trust recognized an
extraordinary gain of $560,000 due to the forgiveness of debt.

Also in September 1995, the Trust entered into a Loan Sale Agreement (the
"Agreement") with the U. S. Department of Housing and Urban Development ("HUD")
for the discounted purchase of two mortgage loans for $3.9 million, secured
separately by Bryan Hill Apartments located in Bethany, Oklahoma, acquired in
November 1994, and Meadowbrook Apartments, a 200-unit complex in Baton Rouge,
Louisiana. The Trust paid $3.5 million of the purchase price with funds obtained
in November 1995 through interim financing, which is secured by first mortgage
liens against both properties, bears interest at 9% per annum, and matures in
May 1996. The balance was paid through the application of existing escrow
accounts and general working capital of the Trust. In November 1995,
simultaneously with the final payment to HUD, the Trust recognized an
extraordinary gain of $110,000 in connection with the purchase of the $2.2
million Bryan Hill mortgage. Through the discounted purchase of the mortgage
loan secured by Meadowbrook Apartments, effective October 1, 1995, the Trust
acquired control of the property and recorded the acquisition as of the same
date. The Trust paid a mortgage brokerage fee of $35,000 to Tarragon for
services provided in connection with obtaining the interim financing.

During 1994, the Trust paid in full the mortgage loans totaling $1.1 million
secured separately by Stewart Square Shopping Center and Mountain View Shopping
Center, both in Las Vegas, Nevada.

In December 1993, the Trust issued Mr. John A. Doyle, Chief Financial Officer of
the Trust, a $1.0 million convertible subordinated debenture, in exchange for
his participation interest, as consideration for his services to the Trust in
connection with the 1992 acquisition of the Consolidated Capital Properties II
("CCP II"). CCP II's assets included cash of $1.6 million, four apartment
complexes, a partnership interest, a note receivable participation, and a note
receivable. This debenture bears interest at 6% per annum and matures in
December 1999. In January 1996, Mr. Doyle converted the debenture into 93,076
Shares.

In 1993, the Trust acquired the $7.5 million second mortgage secured by Century
Center II Office Building for $300,000. In addition, the first lien holder
retroactively reduced the interest rate on the debt owed by the Trust. The Trust
recognized an extraordinary gain of $8.9 million in connection with the debt
modification and discounted debt purchase.

NOTE 8. DISTRIBUTIONS TO SHAREHOLDERS

The Trust paid cash distributions in 1993, 1994, and 1995 of $617,000, $2.2
million, and $2.6 million, respectively. The Trust reported to the Internal
Revenue Service that distributions paid in 1993 were taxable to shareholders as
ordinary income, and 1994 and 1995 distributions represented returns of capital.

49
<PAGE> 50
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8. DISTRIBUTIONS TO SHAREHOLDERS (Continued)

Additionally, in September 1993, 1994, and 1995, the Trust paid 10% share
distributions which resulted in the Trust issuing 273,529 Shares, 282,151
Shares, and 297,960 Shares, respectively.

NOTE 9. SHARE OPTIONS

In November 1995, pursuant to the shareholders' approval of the Independent
Trustee Share Option Plan (the "Trustee Plan"), the Trust issued options to each
Independent Trustee to purchase up to 3,000 Shares at an exercise price equal to
the market price on the grant date. The options expire on the earlier of the
first anniversary of the date on which a Trustee ceases to be a Trustee of the
Trust or ten years from the date of grant ("Termination Date") and are
exercisable at any time between the date of grant and the Termination Date. In
addition, for each year such Trustee continues to serve as a Trustee, he (she)
will be awarded an option covering 1,000 Shares on January 1 of each year.
Accordingly, in January 1996, each Independent Trustee was issued additional
options to purchase up to 1,000 Shares at an exercise price equal to the market
price on the grant date. These options have the same Termination Date as the
options granted in November 1995. The Trustee Plan provides for a total of
60,000 Shares.

Pursuant to the approval of the Trust's Share Option and Incentive Plan (the
"Incentive Plan") at the November shareholder meeting, on January 1, 1996, the
Trust issued options to certain Officers and key employees of the Trust covering
55,700 shares. All options were issued with an exercise price equal to the
market price on the grant date, are exercisable beginning one year after the
date of grant, and expire in five years on December 31, 2000. The Incentive Plan
provides for a total of 300,000 Shares, and all grants are determined by a
committee comprised of two Trustees including Messrs. William S. Friedman and
Carl B. Weisbrod (Chairman of the Board) and Mr. Doyle.

NOTE 10. ADVISORY AGREEMENT

Although the Trust's Board of Trustees (the "Board") is directly responsible for
managing the affairs of the Trust and setting the policies which guide it, the
day-to-day operations of the Trust are performed by a contractual advisory firm
under the supervision of the Board. The duties of the advisor include, among
other things, locating, investigating, evaluating, and recommending real estate
and mortgage note investment and sales opportunities, as well as financing and
refinancing sources for the Trust. The advisor also serves as a consultant in
connection with the business plan and investment policy decisions made by the
Board.

On February 10, 1994, the Board selected Tarragon to replace BCM as the Trust's
advisor. Since April 1, 1994, Tarragon has provided advisory services to the
Trust under an advisory agreement, approved by the Board and ratified by the
shareholders on November 20, 1995. Mr. Friedman, President, Chief Executive
Officer, and Trustee of the Trust, serves as a Director and Chief Executive
Officer of Tarragon. Tarragon is owned by Lucy N. Friedman, Mr. Friedman's wife,
and Mr. Doyle, who serves as a Director and President of Tarragon and Chief
Financial Officer of the Trust. The Friedman and Doyle families together own
approximately 33% of the outstanding shares of the Trust.

BCM served as the Trust's advisor from March 1989 to March 31, 1994. Mr.
Friedman was President of BCM until May 1, 1993. BCM is beneficially owned by a
trust for the benefit of the children of Mr. Gene E. Phillips,

50
<PAGE> 51
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10. ADVISORY AGREEMENT (Continued)

who served as a Trustee of the Trust until December 31, 1992. BCM resigned as
advisor to the Trust effective March 31, 1994.

The provisions of the Trust's Initial Advisory Agreement ("Initial Advisory
Agreement") with Tarragon were substantially the same as those of the BCM
advisory agreement. Under the Initial Advisory Agreement, the Trust paid
Tarragon an annual base advisory fee of $100,000 plus an incentive advisory fee
equal to 16% of the Trust's adjusted funds from operations before deduction of
the advisory fee. Adjusted funds from operations is defined as funds from
operations ("FFO"), as defined by the National Association of Real Estate
Investment Trusts ("NAREIT"), plus any loss due to the write-down or sale of any
real property or mortgage loan acquired prior to January 1, 1989. FFO represents
net income (loss), computed in accordance with GAAP, excluding gains (or losses)
from debt restructuring and sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Additionally, Tarragon could receive commissions of 1% based upon (i)
acquisition cost of real estate, (ii) mortgage loans acquired, and (iii)
mortgage loans obtained or refinanced and a 10% incentive sales commission based
on gains from the sale of real estate.

The BCM advisory agreement provided for an advisory fee comprised of a gross
asset fee of .0625% per month of the average gross asset value of the Trust
(total assets less allowance for amortization, depreciation, or depletion and
valuation reserves) and an incentive fee (annual net income fee) equal to 7.5%
per annum of the Trust's net income. In addition, BCM could receive commissions
of up to 1% based upon acquisition cost of real estate; commissions of 1% based
upon (i) mortgage loans acquired and (ii) mortgage loans obtained or refinanced;
and a 10% incentive sales commission based on gains from the sale of real
estate.

At the March 1995 Board meeting, a majority of the Trustees approved a new
revised form of advisory agreement, effective April 1, 1995, which was approved
by the shareholders at the November 20, 1995, annual shareholder meeting. In
addition to technical changes designed to clarify the responsibilities and
rights of Tarragon, the new agreement eliminated the $100,000 annual base fee,
the incentive sales compensation, and mortgage loan acquisition commissions.
Moreover, it provides that real estate brokerage commissions shall be payable to
Tarragon and its affiliates only following specific Board approval for each
transaction rather than pursuant to a general agreement.

Employees of Tarragon render services to the Trust, as the Trust has no
employees. In accordance with the terms of the advisory agreements, certain
services provided by the advisor, including, but not limited to, accounting,
legal, investor relations, data processing, and the related departmental
overhead, are reimbursed directly by the Trust.

Under the advisory agreements (as required by the Trust's Declaration of Trust),
all or a portion of the annual advisory fee must be refunded by the advisor to
the Trust if Operating Expenses, as defined, exceed certain specified
limitations based on the book value, net asset value, and net income of the
Trust during such fiscal year. The operating expenses of the Trust did not
exceed such limitation in 1993, 1994, or 1995.

For additional information regarding compensation paid to Tarragon, see ITEM 10.
"TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT - The Advisor".

51
<PAGE> 52
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11. PROPERTY MANAGEMENT

From February 1, 1990, through March 31, 1994, affiliates of BCM provided, under
contracts approved by the Board, property management services to the Trust for a
fee of 5% or less of the monthly gross rents collected on the properties under
management. Carmel Realty Services, Ltd., ("Carmel, Ltd.") provided such
property management services. In many cases, Carmel, Ltd., subcontracted with
other entities for the provision of the property-level management services to
the Trust at various rates (generally 4%). The general partner of Carmel, Ltd.,
is BCM. The limited partners of Carmel, Ltd., are (i) Syntek West, Inc. ("SWI"),
of which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips, and (iii) a
trust for the benefit of the children of Mr. Phillips. During 1993, Carmel,
Ltd., subcontracted the property-level management and leasing of several of the
Trust's commercial properties to Carmel Realty Services, Inc., which is owned by
SWI.

NOTE 12. RELATED PARTY TRANSACTIONS

Fees and cost reimbursements to Tarragon and BCM for 1995, 1994, and 1993 were
as follows:

<TABLE>
<CAPTION>
Tarragon BCM
----------------- -----------------
1995 1994 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Fees
Advisory $1,037 $ 909 $ 468 $1,537
Real estate and mortgage
brokerage commissions 445 268 103 21
Property management and
leasing commissions* 330 285 112 360
------ ------ ------ ------
$1,812 $1,462 $ 683 $1,918
====== ====== ====== ======

Cost reimbursements $ 960 $ 882 $ 140 $ 627
====== ====== ====== ======
</TABLE>

Other liabilities at December 31, 1995, include non-interest bearing cash
advances of $300,000 and $263,000 from Lucy N. Friedman, 50% stockholder of
Tarragon and a principal shareholder of the Trust, and Tarragon, respectively.
Such advances were made to the Trust on a short term basis to facilitate the
negotiated discounted payoffs of the mortgage loans secured by Bryan Hill,
Meadowbrook, and Forest Oaks. In connection with the discounted payoffs, the
Trust realized extraordinary gains on debt forgiveness totaling $670,000. The
Trust repaid the advances in the first quarter of 1996. The remaining $255,000
due to affiliates at December 31, 1995, represents accrued mortgage brokerage
commissions, advisory fees, and cost reimbursements to Tarragon which were paid
in January 1996.

- ---------------------
* Net of property management fees paid to subcontractors.

52
<PAGE> 53
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13. INCOME TAXES

For the years 1995, 1994, and 1993, the Trust has elected and qualified to be
treated as a Real Estate Investment Trust ("REIT"), as defined in Sections 856
through 860 of the Code, and, as such, will not be taxed for federal income tax
purposes on that portion of its taxable income which is distributed to
shareholders, provided that at least 95% of its REIT taxable income, plus 95% of
its taxable income from foreclosure property as defined in Section 857 of the
Code, is distributed. See NOTE 8. "DISTRIBUTIONS TO SHAREHOLDERS." As a result
of the Trust's election to be treated as a REIT for income tax purposes and of
its intention to distribute its taxable income, no deferred tax asset or
liability or related valuation allowance was recorded.

No provision has been made for federal income taxes because the Trust believes
it has qualified as a REIT and expects that it will continue to do so.

The Trust's basis in its net assets for tax purposes differs from that for
financial statement purposes, principally due to the accounting for gains and
losses on property sales, the difference in the allowance for estimated losses,
depreciation on owned properties, and investments in partnerships. At December
31, 1995, the Trust's tax basis in its net assets exceeded its basis for
financial statement purposes by $46.9 million. As a result, aggregate future
income for income tax purposes will be less than such amount for financial
statement purposes, and the Trust will be able to maintain its REIT status
without distributing 95% of its financial statement income. Additionally, at
December 31, 1995, the Trust had a tax net operating loss carryforward of $39.1
million expiring through 2007.

NOTE 14. RENTALS UNDER OPERATING LEASES

The Trust's rental operations include the leasing of office buildings and
shopping centers. The leases thereon expire at various dates through 2010. The
following is a schedule of future minimum rentals on non-cancelable operating
leases as of December 31, 1995:

<TABLE>
<S> <C>
1996 .................................................. $ 9,116
1997 .................................................. 7,794
1998 .................................................. 6,525
1999 .................................................. 4,817
2000 .................................................. 3,513
Thereafter ............................................ 6,741
---------
$ 38,506
=========
</TABLE>

NOTE 15. COMMITMENTS AND CONTINGENCIES

Olive Litigation. In February 1990, the Trust, together with CMET, Income
Opportunity Realty Trust ("IORT"), and Transcontinental Realty Investors, Inc.
("TCI"), three real estate entities with, at the time, the same officers,
directors or trustees, and advisor as the Trust, entered into a settlement of a
class and derivative action entitled Olive, et. al. v. National Income Realty
Trust, et. al., relating to the operation and management of each of the
entities. On April 23, 1990, the court granted final approval of the terms of
the original settlement.

53
<PAGE> 54
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)

On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification"), which settled subsequent
claims of breaches of the settlement which were asserted by the plaintiffs and
modified certain provisions of the April 1990 settlement. The Modification was
preliminarily approved by the court on July 1, 1994, and final court approval
was entered on December 12, 1994. The effective date of the Modification was
January 11, 1995.

The Modification provided for, among other things, the addition of at least
three new unaffiliated members to the Trust's Board of Trustees and set forth
new requirements for the approval of any transactions with affiliates over the
next five years. In accordance with the procedures set forth in the
Modification, Irving E. Cohen, Lance Liebman, Sally Hernandez-Pinero, and L. G.
Schafran were appointed to the Board. In addition, BCM, Mr. Phillips, and Mr.
Friedman agreed to pay a total of $1.2 million to the Trust, CMET, IORT, and
TCI, of which the Trust's share is $150,000. As of December 31, 1995, the Trust
has collected $111,000 of this amount.

Under the Modification, the Trust, CMET, IORT, TCI, and their shareholders
released the defendants from any claims relating to the plaintiffs' allegations.
The Trust, CMET, IORT, and TCI also agreed to waive any demand requirement for
the plaintiffs to pursue claims on behalf of each of them against certain
persons or entities. The Modification also requires that any shares of the Trust
held by Messrs. Phillips and Friedman or their affiliates shall be (i) voted in
favor of the reelection of all current Board members that stand for reelection
during the two calendar years following the effective date of the Modification
and (ii) voted in favor of all new Board members appointed pursuant to the terms
of the Modification that stand for reelection during the three calendar years
following the effective date of the Modification.

The Modification also terminated a number of the provisions of the Stipulation
of Settlement, including the requirement that the Trust, CMET, IORT, and TCI
maintain a Related Party Transaction Committee and a Litigation Committee of
their respective Boards. The court will retain jurisdiction to enforce the
Modification.

Other litigation. The Trust is also party to various claims and routine
litigation arising in the ordinary course of business. Management of the Trust
does not believe that the results of such claims and litigation, individually or
in the aggregate, will have a material adverse effect on its business or
financial position.

[This space intentionally left blank.]

54
<PAGE> 55
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. QUARTERLY RESULTS OF OPERATIONS

The following is a tabulation of the quarterly results of operations for the
years ended December 31, 1995 and 1994 (unaudited):

<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ----------- ----------- -----------
1995
- ----------------------------------------
<S> <C> <C> <C> <C>
Income .................................. $ 10,978 $ 11,217 $ 11,218 $ 11,827
Expenses ................................ (11,315) (11,204) (11,889) (11,806)
---------- ----------- ----------- -----------
Income (loss) before gain on sale of
real estate and investments and
extraordinary gain .................... (337) 13 (671) 21
Gain on sale of real estate ............. -- 110 -- 423
Gain on sale of investments ............. 412 -- -- --
---------- ----------- ----------- -----------
Income (loss) from continuing operations 75 123 (671) 444
Extraordinary gain ...................... -- -- 67 670
---------- ----------- ----------- -----------
Net income (loss) ....................... $ 75 $ 123 $ (604) $ 1,114
========== =========== =========== ===========
Earnings per share
Income (loss) from continuing operations $ .02 $ .04 $ (.20) $ .13
Extraordinary gain ...................... -- -- .02 .20
---------- ----------- ----------- -----------
Net income (loss) ....................... $ .02 $ .04 $ (.18) $ .33
========== =========== =========== ===========

Weighted average shares (1) ............. 3,488,027 3,456,326 3,414,879 3,398,781
========== =========== =========== ===========
</TABLE>

The Trust recorded an extraordinary gain of $67,000 during the third quarter of
1995 related to the discounted settlement of the note payable which financed the
acquisition of the investment in an office building located in Washington, D.C.
In November and December 1995, the Trust recorded extraordinary gains of
$110,000 and $560,000, respectively, related to the negotiated discounted
payoffs of the mortgage notes payable secured by Bryan Hill Apartments and
Forest Oaks Apartments. For further discussion, see NOTE 7. "NOTES, DEBENTURES,
AND INTEREST PAYABLE".

- --------------------
(1) Represents weighted average shares of beneficial interest used in computing
earnings per share. Share and per share amounts have been restated to give
effect to the September 1995 10% share distribution.

55
<PAGE> 56
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. QUARTERLY RESULTS OF OPERATIONS (Continued)

<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ----------- ---------- -----------
1994
- -----------------------------------------------------
<S> <C> <C> <C> <C>
Income ........................................... $ 9,587 $ 9,843 $ 10,231 $ 10,474
Expenses ........................................... (9,821) (10,297) (10,413) (10,384)
---------- ----------- ---------- -----------
Income (loss) before gains on sale of
real estate and investments........................ (234) (454) (182) 90
Gain on sale of real estate.......................... - 385 - -
Gain on sale of investments.......................... - 141 - -
---------- ----------- ---------- -----------
Net income (loss).................................... $ (234) $ 72 $ (182) $ 90
========== =========== ========== ===========
Earnings per share
Net income (loss).................................... $ (.06) $ .02 $ (.05) $ .03
========== =========== ========== ===========

Weighted average shares (1) 3,674,063 3,607,962 3,575,602 3,543,318
========== =========== ========== ===========
</TABLE>

- ---------------------
(1) Represents weighted average shares of beneficial interest used in computing
earnings per share. Share and per share amounts have been restated to give
effect to the September 1994 and 1995 10% share distributions.

[This space intentionally left blank.]

56
<PAGE> 57
SCHEDULE III

NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO TRUST SUBSEQUENT AT END OF YEAR
---------------------- TO ACQUISITION -----------------------------------
BUILDINGS AND -------------- BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL(B)
- ----------- ------------ ------ ------------- -------------- ------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT

Apartments
- ----------
Acadian Place......... $ 567 $ 897 $ 2,608 $ 891 $ 897 $ 3,499 $ 4,396
Baton Rouge, LA
Bay West.............. 4,984 891 3,566 230 891 3,796 4,687
Bradenton, FL
Bayfront.............. 2,050 457 2,052 449 457 2,501 2,958
Houston, TX
Bryan Hill............ 3,500(C) 447 1,803 78 447 1,881 2,328
Bethany, OK
Carlyle Towers........ 4,194 559 5,939 281 559 6,220 6,779
Southfield, MI
Cornell .............. 1,524 822 1,183 92 822 1,275 2,097
Los Angeles, CA
Creekwood North....... 2,154 532 2,127 272 532 2,399 2,931
Altamonte Springs, FL
Cross Creek........... 1,984 221 883 33 221 916 1,137
Lexington, KY
Diamond Loch.......... 1,801 380 2,791 671 380 3,462 3,842
North Richland Hills, TX
Dunhill/Devonshire.... - 429 1,718 4 173 1,978 2,151
Denver, CO
Fenway Hall........... 1,334 461 1,460 - 461 1,460 1,921
Los Angeles, CA
Forest Oaks........... 2,000 691 2,685 66 691 2,751 3,442
Lexington, KY
Heather Hills......... 15,952 643 14,562 4,945 765 19,385 20,150
Temple Hills, MD
Huntington Green...... - 446 1,336 112 446 1,448 1,894
West Town, PA
Kirklevington......... 2,463 490 1,961 178 490 2,139 2,629
Lexington, KY
Lake Point............ 7,076 2,075 6,225 1,072 2,075 7,297 9,372
Memphis, TN
Marina Park........... 2,493 657 2,625 341 657 2,966 3,623
North Miami, FL
Mariposa Manor........ 775 225 901 7 225 908 1,133
Los Angeles, CA

<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
ACCUMULATED DATE OF DATE OF OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ----------- ------------ ------------ -------- -------------
<S> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT

Apartments
- ----------
Acadian Place......... $1,036 1922 Mar-84 5 - 40 years
Baton Rouge, LA
Bay West.............. 366 1974 Nov-92 5 - 40 years
Bradenton, FL
Bayfront.............. 747 1971 Feb-87 5 - 40 years
Houston, TX
Bryan Hill............ 51 1970 Nov-94 5 - 40 years
Bethany, OK
Carlyle Towers........ 1,298 1970 Nov-88 5 - 40 years
Southfield, MI
Cornell .............. 185 1929 Apr-90 5 - 40 years
Los Angeles, CA
Creekwood North....... 155 1973 Nov-92 5 - 40 years
Altamonte Springs, FL
Cross Creek........... 81 1966 Nov-92 5 - 40 years
Lexington, KY
Diamond Loch.......... 906 1978 Oct-85 5 - 40 years
North Richland Hills, TX
Dunhill/Devonshire.... 475 1969 Mar-89 5 - 40 years
Denver, CO
Fenway Hall........... 210 1929 Apr-90 5 - 40 years
Los Angeles, CA
Forest Oaks........... 86 1971 Nov-94 5 - 40 years
Lexington, KY
Heather Hills......... 6,588 1976 May-86 5 - 40 years
Temple Hills, MD
Huntington Green...... 128 1963 Mar-93 5 - 40 years
West Town, PA
Kirklevington......... 191 1975 Nov-92 5 - 40 years
Lexington, KY
Lake Point............ 452 1974 May-93 5 - 40 years
Memphis, TN
Marina Park........... 49 1974 Apr-95 5 - 40 years
North Miami, FL
Mariposa Manor........ 31 1924 Sep-94 5 - 40 years
Los Angeles, CA
</TABLE>

57
<PAGE> 58
SCHEDULE III
(Continued)

NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)

Apartments (Continued)
- ----------
Martins Landing....... $ 5,000 1,038 $ 4,201 $ 108 $1,038 $ 4,309 $ 5,347
Lakeland, FL
Meadowbrook........... (C) 307 1,230 23 307 1,253 1,560
Baton Rouge, LA
Mustang Creek......... 2,665 718 2,872 132 718 3,004 3,722
Arlington, TX
Palm Court............ 2,970 599 2,393 273 599 2,666 3,265
North Miami, FL
Park Dale Gardens..... 2,985 354 1,416 322 531 1,561 2,092
Dallas, TX
Park Norton........... 561 144 576 287 144 863 1,007
Los Angeles, CA
Park Place............ - 76 304 189 76 493 569
Los Angeles, CA
Pheasant Pointe....... 5,818 810 8,073 196 789 8,290 9,079
Sacramento, CA
Pinecrest............. 8,334 3,612 8,427 5,238 3,612 13,665 17,277
Ft. Lauderdale, FL
Plaza Hills........... 1,115 253 1,195 261 253 1,456 1,709
Kansas City, MO
Prado Bay............. 2,963 614 3,482 704 614 4,186 4,800
North Bay Village, FL
The Regent............ - 303 1,212 1,172 303 2,384 2,687
Jacksonville, FL
Sandstone............. 689 619 1,444 1,028 619 2,472 3,091
Denver, CO
Spring Pines.......... - 371 1,486 35 371 1,521 1,892
Houston, TX
Summit on the Lake.... 3,617 895 3,582 190 895 3,772 4,667
Ft. Worth, TX
Woodcreek............. 2,913 913 3,193 (635) 690 2,781 3,471
Denver, CO
Woodcreek............. 3,769 472 4,977 1,118 451 6,116 6,567
Jacksonville, FL
Vistas at Lake Worth.. - 752 92 314 752 406 1,158
Ft. Worth, TX

Apartments (Continued)
- ----------
Martins Landing....... $ 120 1973 Nov-94 5 - 40 years
Lakeland, FL
Meadowbrook........... 8 1968 Oct-95 5 - 40 years
Baton Rouge, LA
Mustang Creek......... 48 1974 May-95 5 - 40 years
Arlington, TX
Palm Court............ 437 1971 Oct-89 5 - 40 years
North Miami, FL
Park Dale Gardens..... 167 1975 Dec-91 5 - 40 years
Dallas, TX
Park Norton........... - 1924 Jun-95 5 - 40 years
Los Angeles, CA
Park Place............ - 1929 Sep-95 5 - 40 years
Los Angeles, CA
Pheasant Pointe....... 2,257 1985 Sep-86 5 - 40 years
Sacramento, CA
Pinecrest............. 1,714 1965 Jul-90 5 - 40 years
Ft. Lauderdale, FL
Plaza Hills........... 288 1967 Oct-91 5 - 40 years
Kansas City, MO
Prado Bay............. 619 1966 Oct-90 5 - 40 years
North Bay Village, FL
The Regent............ - 1972 Sep-95 N/A
Jacksonville, FL
Sandstone............. 328 1969 Mar-90 5 - 40 years
Denver, CO
Spring Pines.......... 365 1964 Feb-88 5 - 40 years
Houston, TX
Summit on the Lake.... 160 1986 Mar-94 5 - 40 years
Ft. Worth, TX
Woodcreek............. 960 1980 Aug-86 5 - 40 years
Denver, CO
Woodcreek............. 1,906 1975 Nov-86 5 - 40 years
Jacksonville, FL
Vistas at Lake Worth.. - 1970 Dec-94 N/A
Ft. Worth, TX
</TABLE>

<PAGE> 59
SCHEDULE III
(Continued)

NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO TRUST SUBSEQUENT AT END OF YEAR
---------------------- TO ACQUISITION -------------------------
BUILDINGS AND -------------- BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL(B)
- ----------- ------------ ------ ------------- -------------- ------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT (Continued)

Office Buildings
- ----------------

Century Centre II..... $ 21,000 $ 7,098 $ 29,869 $ (5,598) $ 5,321 $ 26,048 $ 31,369
San Mateo, CA

Emerson Center........ 3,939(D) 131 8,781 (834) 1,048 7,030 8,078
Atlanta, GA

NW O'Hare............. 1,244 1,990 7,965 (2,535) 1,104 6,316 7,420
Des Plaines, IL

Rancho Sorrento....... 3,018 1,251 12,901 (1,584) 968 11,600 12,568
San Diego, CA

Shopping Centers
- ----------------

Emerson Center........ 1,235 - 363 - - 363 363
Atlanta, GA
K-Mart Plaza.......... 1,442 689 1,608 - 689 1,608 2,297
Temple Terrace, FL
Lakeview Mall......... - 513 2,050 612 341 2,834 3,175
Manitowoc, WI
Midland Plaza......... 296 321 748 - 321 748 1,069
Midland, MI
Midway Mills.......... 4,196 588 2,365 1,406 1,227 3,132 4,359
Carrollton, TX
Mountain View......... - 118 578 227 140 783 923
Las Vegas, NV
Northside Mall........ 1,983 1,591 3,712 50 1,591 3,762 5,353
Gainesville, FL
Southgate............. 1,346 578 2,430 82 602 2,488 3,090
Waco, TX
Stewart Square........ - 294 1,460 588 294 2,048 2,342
Las Vegas, NV -------- ------- ---------- ----------- -------- ---------- ----------

137,949 39,335 181,410 13,091 37,597 196,239 233,836
-------- ------- ---------- ----------- -------- ---------- ----------

Office Buildings
- ----------------

Century Centre II..... $ 8,270 1986 Nov-86 5 - 40 years
San Mateo, CA

Emerson Center........ 3,442 1974 Jul-86 5 - 40 years
Atlanta, GA

NW O'Hare............. 2,948 1972 Apr-86 5 - 40 years
Des Plaines, IL

Rancho Sorrento....... 4,075 1980 May-86 5 - 40 years
San Diego, CA

Shopping Centers
- ----------------

Emerson Center........ 86 1974 Jul-86 5 - 40 years
Atlanta, GA
K-Mart Plaza.......... 163 1979 Dec-91 5 - 40 years
Temple Terrace, FL
Lakeview Mall......... 905 1968 Apr-87 5 - 40 years
Manitowoc, WI
Midland Plaza......... 76 1976 Dec-91 5 - 40 years
Midland, MI
Midway Mills.......... 804 1986 Oct-91 5 - 40 years
Carrollton, TX
Mountain View......... 208 1971 Oct-87 5 - 40 years
Las Vegas, NV
Northside Mall........ 407 1977 Dec-91 5 - 40 years
Gainesville, FL
Southgate............. 316 1959 Jul-91 5 - 40 years
Waco, TX
Stewart Square........ 638 1971 Oct-87 5 - 40 years
Las Vegas, NV ----------
44,750
----------
</TABLE>

59
<PAGE> 60
SCHEDULE III
(Continued)

NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO TRUST SUBSEQUENT AT END OF YEAR
---------------------- TO ACQUISITION -------------------------
BUILDINGS AND -------------- BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL(B)
- ----------- ------------ ------ ------------- -------------- ------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>

PROPERTIES HELD FOR SALE

Shopping Centers
- ----------------

K-Mart Plaza...... $ 1,308 $ 571 $ 1,333 $ 12 $ 571 $ 1,345 $ 1,916
Charlotte, NC
K-Mart Plaza...... 1,740 451 1,808 - 451 1,808 2,259
Indianapolis, IN
K-Mart Plaza...... 1,140 497 1,159 - 497 1,159 1,656
Thomasville, GA
Times Square...... - 125 499 33 125 532 657
Lubbock, TX

Other
- -----

Snyder Residence.. - - 39 - - 39 39
Gilbert, AZ

Land
- ----

Orangeburg, SC.... - 123 - - 123 - 123
Dallas, TX........ - 737 3,782 (4,483)(E) 36 - 36
Kansas City, MO... - 802 1,871 (2,373) 300 - 300
-------- ------- --------- -------- ------- -------- --------
4,188 3,306 10,491 (6,811) 2,103 4,883 6,986
-------- ------- --------- -------- ------- -------- --------
$142,137 $42,641 $ 191,901 $ 6,280 $39,700 $201,122 $240,822
======== ======= ========= ======== ======= ======== ========

Shopping Centers
- ----------------

K-Mart Plaza...... $ 135 1977 Dec-91 5 - 40 years
Charlotte, NC
K-Mart Plaza...... 50 1974 Dec-94 5 - 40 years
Indianapolis, IN
K-Mart Plaza...... 117 1974 Dec-91 5 - 40 years
Thomasville, GA
Times Square...... 93 1985 Jul-89 5 - 40 years
Lubbock, TX

Other
- -----

Snyder Residence.. 2 - - -
Gilbert, AZ

Land
- ----

Orangeburg, SC.... - - Jun-89 -
Dallas, TX........ - - Jun-86 -
Kansas City, MO... - - Dec-91 -
--------
397
--------
$ 45,147
========
</TABLE>

(A) Represents property improvements and write-down of properties due to
permanent impairment.

(B) The aggregate cost for federal income tax purposes is $243,397.

(D) Includes $1,029 of unsecured debt associated with the property.

(E) Basis charged against allowance previously provided.

60
<PAGE> 61
SCHEDULE III
(Continued)

NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION

<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of Real Estate

Balance at January 1,.................................................. $ 224,785 $ 208,462 $ 198,449
---------- --------- ---------

Additions
Acquisitions and improvements..................................... 20,025 18,253 2,903
Foreclosures...................................................... - 3,384 10,118
Deductions
Sales............................................................. (2,598) - (1,056)
Write-off of Pepperkorn Office Building........................... (1,390) - -
Write-downs due to permanent impairment........................... - (5,314) (1,952)
---------- --------- ---------

Balance at December 31,................................................ $ 240,822 $ 224,785 $ 208,462
========== ========= =========

Reconciliation of Accumulated Depreciation

Balance at January 1,.................................................. $ 39,427 $ 35,828 $ 31,244

Additions
Depreciation...................................................... 5,959 4,992 4,639
Deductions
Sale of real estate............................................... (166) - (55)
Write-off of Pepperkorn Office Building........................... (73) - -
Write-off due to permanent impairment............................. - (1,393) -
---------- --------- ---------

Balance at December 31,................................................ $ 45,147 $ 39,427 $ 35,828
========== ========= =========
</TABLE>

61
<PAGE> 62
SCHEDULE IV

NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
December 31, 1995
(dollars in thousands)

<TABLE>
<CAPTION>
Interest Maturity
Description Rate Date Periodic Payment Terms
----------- -------- -------- ----------------------
<S> <C> <C> <C>
FIRST MORTGAGE LOANS

Jackson Square 5.70% Dec-95 Monthly payments of the lesser of
$8.0 million mortgage $39,583 or net cash flow. The Trust
loan secured by a accepted a deed in lieu of foreclosure
shopping center in of the collateral property in January 1996.
Jackson, MS.

Sherwood Trust 15.00% Sep-97 Monthly payments of interest only at 12%
$1.4 million mortgage to through January 1995; monthly payments
loan secured by 4.5 18.00% of interest only at 18% through maturity.
acres of land in Dallas,
TX.

Casa Bonita 18.00% Jun-88 Monthly payments of interest only.
$1 million mortgage
loan secured by
apartments in Paris, TX.

Pioneer Office Bldg. 7.50% Apr-97 Monthly payments of interest at 7.5%
$550,000 mortgage to through April 1994; 8.5% through April
loan secured by office 9.50% 1995; 9.5% thereafter to maturity.
building in Milwaukee,
WI.

Other Residential 7.50% Nov-07 Monthly payments of principal
3 mortgage loans to to and interest.
secured by single- 11.00% Nov-16
family homes located
in AZ.

<CAPTION>
Carrying Principal Amount
Prior Face Amount Amount Subject to Delinquent
Description Liens of Mortgage of Mortgage(1) Principal or Interest
----------- ----- ----------- -------------- ---------------------
<S> <C> <C> <C> <C>
FIRST MORTGAGE LOANS

Jackson Square $- $8,000 $8,568 $ -
$8.0 million mortgage
loan secured by a
shopping center in
Jackson, MS.

Sherwood Trust - 1,400 1,576 -
$1.4 million mortgage
loan secured by 4.5
acres of land in Dallas,
TX.

Casa Bonita - 1,000 943 943
$1 million mortgage
loan secured by
apartments in Paris, TX.

Pioneer Office Bldg. - 550 550 -
$550,000 mortgage
loan secured by office
building in Milwaukee,
WI.

Other Residential - 220 201 -
3 mortgage loans
secured by single-
family homes located
in AZ.
</TABLE>

62
<PAGE> 63
SCHEDULE IV
(Continued)

NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
December 31, 1995
(dollars in thousands)

<TABLE>
<CAPTION>
Interest Maturity
Description Rate Date Periodic Payment Terms
----------- -------- -------- ----------------------
<S> <C> <C> <C>
WRAPAROUND MORTGAGE LOANS

K-Mart, Fairbault 7.58% Jan-03 Monthly payments of principal and
$2.6 million mortgage interest.
loan secured by shopping
center in Fairbault, MN.

JUNIOR MORTGAGE LOANS

Villa Maria 12.00% Apr-96 Monthly principal and interest payments
$230,000 mortgage to of $5,000.
loan secured by 14.00%
retirement center
in Tucson, AZ.

PARTICIPATION INTEREST

Creekwood 9.50% May-96 Monthly principal and interest payments
$1 million participation to of $4,525 through November 1995;
in note secured by 10.25% beginning December 1995, monthly
apartments in principal and interest payments of $5,723.
Altamonte Springs, FL.

Interest receivable

Deferred gains

Allowance for estimated losses

K-Mart, Fairbault $ 955 $ 2,624 $ 266 $ -
$2.6 million mortgage
loan secured by shopping
center in Fairbault, MN.

JUNIOR MORTGAGE LOANS

Villa Maria 1,975 230 249 -
$230,000 mortgage
loan secured by
retirement center
in Tucson, AZ.

PARTICIPATION INTEREST

Creekwood 1,763 1,000 391 -
$1 million participation
in note secured by
apartments in
Altamonte Springs, FL.
------ ----------- ------- ----
$4,693 $ 15,024 12,744 $943
====== =========== ====
Interest receivable 70

Deferred gains (152)
-------
12,662
Allowance for estimated losses (6,274)
-------
$ 6,388
=======
</TABLE>

(1) The aggregate cost for federal income tax purposes is $12,779.

<PAGE> 64
SCHEDULE IV
(Continued)

NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE

<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Balance at January 1,................................... $ 16,313 $ 19,416 $ 30,765

Additions
Fundings and acquisitions of notes receivable...... - - 329
Amortization of discount........................... - - 7
Accrued interest shortfall and participation....... 40 50 47
Deductions
Collections of principal........................... (3,609) (1,841) (2,431)
Foreclosures....................................... - (727) (9,301)
Other.............................................. - (585)(1) -
--------- --------- ----------

Balance at December 31,................................. $ 12,744 $ 16,313 $ 19,416
========= ========= ==========
</TABLE>

(1) Note receivable carrying value in excess of sales price. Remaining amount
reclassed to other assets.

64
<PAGE> 65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT

Trustees

The affairs of National Income Realty Trust (the "Trust" or the "Registrant")
are managed and controlled by a Board of Trustees (the "Board"), presently
consisting of eight members. The Trustees are elected at the annual meeting of
shareholders or appointed by the incumbent Board and serve until the next annual
meeting of shareholders or until a successor has been elected or approved.

In May 1994, the Trust, together with Continental Mortgage and Equity Trust
("CMET"), Income Opportunity Realty Trust ("IORT"), and Transcontinental Realty
Investors, Inc. ("TCI"), entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification"), which settled subsequent
claims of breaches of the settlement which were asserted by plaintiffs and
modified certain provisions of a 1990 settlement of the action styled Olive, et.
al. v. National Income Realty Trust, et. al. (the "Olive Case"). The original
settlement, approved April 23, 1990, by the Court, related to the operation and
management of each of the entities. The Modification was approved by the Court
on December 12, 1994, and became effective January 11, 1995.

The Modification provided for, among other things, the resignation of certain
trustees, the addition of at least three new, unaffiliated members to be
appointed to the Board and set forth new requirements for approval of any
transactions with affiliates over the next five years. Under the Modification,
the Trust, the other entities, and their shareholders released the defendants
from any claims relating to the plaintiffs' allegations. The Trust and other
entities also agreed to waive any demand requirement for plaintiffs to pursue
claims on behalf of each of them against certain persons or entities. The
Modification also requires that any shares of the Trust held by William S.
Friedman or his affiliates shall be voted (i) in favor of the re-election of all
current Board members that stand for re-election during the two calendar years
following January 11, 1995, and (ii) in favor of all new Board members appointed
pursuant to the terms of the Modification that stand for re-election during the
three calendar years following January 11, 1995. The Modification also
terminated a number of provisions of the original Stipulation of Settlement,
including the requirement that the Trust or the other entities maintain a
Related Party Transaction Committee and a Litigation Committee of the Board (see
"Board Committees" below).

Pursuant to the requirements (and in anticipation of the effectiveness) of the
Modification, the Trust did not hold an Annual Meeting of Shareholders in 1994,
John A. Doyle (a Trustee since February 1994) resigned as a Trustee on April 22,
1994, Ted P. Stokely (a Trustee since April 1990) resigned as a Trustee in
August 1994, A. Bob Jordan (a Trustee since October 1992) resigned as a Trustee
in June 1994, Bennett B. Sims (a Trustee since April 1990) resigned as a Trustee
in August 1994, Geoffrey C. Etnire ( a Trustee since January 1993) ceased to be
a Trustee on March 9, 1995, and Willie K. Davis (a Trustee since October 1988)
retired as a Trustee effective March 31, 1995. Carl B. Weisbrod (a Trustee since
February 1994) was elected Chairman of the Board on March 9, 1995, to replace
Mr. Friedman, who remains as President, Chief Executive Officer, and Trustee of
the

65
<PAGE> 66
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)

Trustees (Continued)

Trust. During the period from May 1994 to March 9, 1995, the Board appointed
four new, independent Trustees to replace a number of those who resigned, and
the number of members of the Board was reduced from ten at December 31, 1993, to
eight at March 31, 1995. Independent Trustees appointed are Irving E. Cohen
(June 2, 1994), Sally Hernandez-Pinero (May 19, 1994), Lance Liebman (March 9,
1995), and L. G. Schafran (March 9, 1995). Messrs. Friedman, Dan L. Johnston,
Raymond V. J. Schrag, and Weisbrod have continued as Trustees. All of the
Trustees listed below were re-elected as members of the Board at the annual
meeting of shareholders held on November 20, 1995.

The current Trustees are listed below, together with their ages, terms of
service, all positions and offices with the Trust and Tarragon Realty Advisors,
Inc. ("Tarragon"), the Trust's advisor since April 1, 1994, their principal
occupations, business experience, and directorships with other companies during
the last five years or more. The designation "Affiliated", when used below with
respect to a Trustee, means that the Trustee is an officer, director, or
employee of Tarragon or an officer or employee of the Trust. The designation
"Independent", when used below with respect to a Trustee, means that the Trustee
is neither an officer or employee of the Trust nor a director, officer, or
employee of Tarragon, although the Trust may have certain business or
professional relationships with such Trustee as discussed in ITEM 13. "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS - Certain Business Relationships."

IRVING E. COHEN: Age 49, Trustee (since June 1994) (Independent).

Managing Director (since 1996), The Brookhill Group, a real estate
development company; Managing Director (since 1994), CPR Group, a real
estate consulting company; Managing Partner (1990 to 1994), Fuller
Corporate Realty Partners, a New York City real estate asset management
entity; Director of Real Estate Consulting Services for Price Waterhouse
(1989 to 1990); Special Advisor (1988 to 1989) and Trustee (1985 to 1989),
Mellon Participating Mortgage Trust, a mortgage real estate investment
trust ("REIT"); and Executive Vice President, E.F. Hutton Properties, Inc.
(1983 to 1987).

WILLIAM S. FRIEDMAN: Age 52, Trustee (Affiliated).

Trustee (since March 1988), Chief Executive Officer (since December 1993),
President (since December 1988), Acting Chief Financial Officer (May 1990
to February 1991), Treasurer (August to September 1989), and Acting
Principal Financial and Accounting Officer (December 1988 to August 1989)
of the Trust and Vinland Property Trust ("VPT"); Trustee or Director
(March 1988 to February 1994), Chief Executive Officer (December 1993 to
February 1994), President (December 1988 to February 1994), Acting Chief
Financial Officer (May 1990 to February 1991), Treasurer (August to
September 1989), and Acting Principal Accounting Officer (December 1988 to
August 1989) of CMET, IORT, and TCI; Director and Chief Executive Officer
(since December 1990) of Tarragon; President (February 1989 to May 1993)
and Director (February to December 1989) of Basic Capital Management, Inc.
("BCM"), the advisor to the Trust (March 1989 to March 1994); General
Partner (1987 to March 1994) of Syntek Asset Management, L.P., ("SAMLP")
which is the General Partner of National Realty, L.P., ("NRLP") and
National Operating, L.P. ("NOLP"); Director and President (March 1989 to
February 1994) and Secretary (March 1989 to December 1990) of Syntek Asset
Management, Inc., ("SAMI"), the Managing General Partner of SAMLP and a
corporation owned by

66
<PAGE> 67
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)

Trustees (Continued)

BCM; President (1982 to October 1990) of Syntek Investment Properties,
Inc., ("SIPI"), which has invested in, developed, and syndicated real
estate through its subsidiaries and other related entities since 1973;
Director and President (1982 to October 1990) of Syntek West, Inc.
("SWI"); Vice President (1984 to October 1990) of Syntek Finance
Corporation; Director (1981 to December 1992), President (July 1991 to
December 1992), Vice President and Treasurer (January 1987 to July 1991),
and Acting Chief Financial Officer (May 1990 to February 1991) of American
Realty Trust, Inc. ("ART"); practicing Attorney (since 1971) with the Law
Offices of William S. Friedman; Director and Treasurer (November 1989 to
February 1991) of Carmel Realty Services, Inc. ("CRSI"); Limited Partner
(January 1991 to December 1992) of Carmel Realty Services, Ltd. ("Carmel,
Ltd.").

SALLY HERNANDEZ-PINERO: Age 43, Trustee (since May 1994) (Independent).

Of Counsel (since October 1994), Kalkines, Arky, Zall and Bernstein, New
York City; Chairwoman (February 1992 to April 1994) New York City Housing
Authority; Deputy Mayor (January 1990 to February 1992) for Finance and
Economic Development, City of New York; Commissioner/Chairwoman of the
Board of Directors (February 1988 to December 1989) Financial Services
Corporation of New York City; Director (since July 1994) of Consolidated
Edison; Director (since April 1994) of Dime Savings Bank; Attorney at Law
(since 1978).

DAN L. JOHNSTON: Age 57, Trustee (April 1990 to June 1990 and since February
1991) (Independent).

Attorney in solo practice, New York, New York (1991 to 1994 and since
August 1995); Director (1992) of the Complex Drug Investigation and
Prosecution Project for the Jefferson Institute for Justice Studies; Chief
Counsel, Subcommittee on Criminal Justice, U.S. House of Representatives
(June 1990 to January 1991); Executive Director (1986 to 1990) of
Prosecuting Attorneys' Research Council, a nationwide organization of
metropolitan prosecutors which acts to further research to improve the
prosecutorial function; Consultant (February 1985 to June 1990) to the
Edna McConnell Clark Foundation, which supports efforts of District
Attorneys to reduce jail and prison overcrowding; Member (October 1987 to
June 1990) of the Civilian Complaint Review Board of the New York City
Police Department; Director or Trustee (April 1990 to June 1990 and from
February 1991 to January 1995) of CMET, IORT, and TCI; and Trustee
(December 1992 to May 1995) of VPT.

LANCE LIEBMAN: Age 54, Trustee (since March 1995) (Independent).

Dean and Lucy G. Moses Professor of Law (since 1991) Columbia Law School,
New York City; Professor of Law (1976 to 1991) and Associate Dean (1981 to
1984) Harvard Law School; Lecturer on Law (1990) Tokyo University Law
Faculty, Japan; Director (since 1991) of Greater New York Insurance Co.
(both mutual and stock companies); Director (since 1995) of Power Control
Technology, Inc.; author of numerous articles published in a number of
legal periodicals and seven books; Attorney at Law (since 1967).

67
<PAGE> 68
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)

Trustees (Continued)

L. G. SCHAFRAN: Age 57, Trustee (since March 1995) (Independent).

Managing General Partner (since 1984) L. G. Schafran & Associates, a real
estate investment and development firm in New York City; Director,
Publicker Industries, Inc. (since 1986), an Old Greenwich, Connecticut,
NYSE listed holding company that operates through subsidiaries in
manufacturing services; Director, Capsure Holdings Corp. (since 1986), a
Chicago, Illinois, NYSE listed property and casualty insurer; Director,
Oxigene, Inc. (since March 1993), a U.S. and Swedish pharmaceutical
developer; Director, Glasstech, Inc. (1) (since January 1995), Perrysberg,
Ohio, manufacturer of glass bending and tempering equipment; and Director
(since December 1993), Member (since September 1994), and Chairman (since
December 1994) of the Executive Committee of The Dart Group Corporation, a
Landover, Maryland, NYSE listed holding company engaged with other
publicly traded subsidiaries in discount automotive parts and accessories
(Trak Auto Corporation), discount bookstores (Crown Bookstores), discount
supermarkets, beverages, and real estate, and; Chairman (since January
1996) Delta-Omega Technologies, Inc., a Broussard, Louisiana manufacturer
and distributor of environmentally safe line foams and industrial cleaners
and degreasers.

RAYMOND V.J. SCHRAG: Age 50, Trustee (since October 1988) (Independent).

Attorney, Law Offices of Raymond V. J. Schrag in New York, New York (since
January 1995); attorney, Law Offices of Paul J. Schrag in New York, New
York (since 1975); Trustee (1986 to December 1989) of Hidden Strength
Mutual Funds; Trustee (October 1988 to May 1995) of VPT; and Director or
Trustee (October 1988 to August 1994) of CMET, IORT, and TCI.

CARL B. WEISBROD: Age 51, Chairman of the Board (since March 1995) and Trustee
(since February 1994) (Independent).

President (since 1994), Alliance for Downtown New York, Inc.; Trustee
(February 1994 to May 1995) of VPT; President and Chief Executive Officer
(April 1990 to 1994) of New York City Economic Development Corporation;
President (May 1987 to April 1990) of 42nd Street Development Project,
Inc., a subsidiary of the New York State Urban Development Corporation;
Executive Director (March 1986 to May 1987) of Department of City Planning
of the City of New York; and Executive Director (July 1984 to March 1986)
of City Volunteer Corps of the City of New York.

LITIGATION AND CLAIMS INVOLVING MR. FRIEDMAN RELATED TO SOUTHMARK CORPORATION

Separation of Messrs. Phillips and Friedman from Southmark. Until January 1989,
Mr. Friedman was an executive officer and director of Southmark Corporation
("Southmark"), serving as Vice Chairman of the Board (since 1982), Director
(since 1980), and Secretary (since 1984) of Southmark. As a result of a deadlock
on Southmark's Board of Directors, Mr. Friedman and Gene E. Phillips (who served
as Trustee of the Trust until December 31, 1992) reached a series of related
agreements (later modified) with Southmark on January 17,

- -----------------
(1) On May 24, 1993, Glasstech, Inc., filed a voluntary petition under Chapter
11 of The United States Bankruptcy Code for the District of Delaware. An
Order confirming a plan of reorganization became effective January 3, 1995,
which is the same day Mr. Schafran became a director of Glasstech, Inc.

68
<PAGE> 69
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)

Trustees (Continued)

1989 (collectively, the "Separation Agreement"), whereby Messrs. Friedman and
Phillips resigned their positions with Southmark and certain of Southmark's
subsidiaries and affiliates. Southmark filed a voluntary petition in bankruptcy
under Chapter 11 of the United States Bankruptcy Code on July 14, 1989.
Subsequent to the filing of the Southmark bankruptcy, several lawsuits were
filed against Southmark, its former officers and directors (including Mr.
Friedman), and others, alleging, among other things, that such persons and
entities misrepresented the financial condition of Southmark. Mr. Friedman
denies all of such allegations. Those lawsuits in which Mr. Friedman was also a
defendant during the last five years are summarized below. THE TRUST IS NOT A
DEFENDANT IN ANY OF THESE LAWSUITS.

In Burt v. Grant Thornton, Gene E. Phillips and William S. Friedman,
the plaintiff, a purchaser of Southmark preferred stock, alleged that the
defendants disseminated false or misleading corporate reports, financial
analysis, and news releases in order to induce the public to continue investing
in Southmark. Grant Thornton served as independent certified public accountants
to Southmark and, for fiscal 1988 and 1989, to the Trust. The plaintiff sought
actual damages in the amount of less than $10,000, treble damages, and punitive
damages in an unspecified amount plus attorneys' fees and costs. This case was
settled in October 1993 for a nominal payment.

Consolidated actions entitled Salsitz v. Phillips et al.,
purportedly brought as class actions on behalf of purchasers of Southmark
securities during specified periods, were pending before the United States
District Court for the Northern District of Texas. Mr. Friedman entered into a
settlement agreement with the plaintiffs, which was approved by the court in
October 1993.

Mr. Friedman also served as a director of Pacific Standard Life
Insurance Company ("PSL"), a wholly-owned subsidiary of Southmark, from October
1984 to January 1989. In a proceeding brought by the California Insurance
commissioner (the "Commissioner"), a California Superior Court appointed a
conservator for PSL on December 11, 1989. On October 12, 1990, the Commissioner
filed suit against the former directors of PSL (including Mr. Friedman) seeking
damages of $12 million and additional punitive damages. Such lawsuit alleged,
among other things, that the defendants knowingly and willfully conspired among
themselves to breach their duties as directors of PSL to benefit Southmark. Such
suit further alleged that PSL's board of directors failed to convene meetings
and delegated to Mr. Phillips authority to make decisions regarding loans,
investments, and other transfers and exchanges of PSL assets. In August 1993,
five former directors of PSL, including Mr. Friedman, settled this lawsuit
without admitting any liability (the "PSL Settlement"). At that time, a judgment
was entered securing certain payments agreed to be made by Mr. Friedman and
other individuals. After making two of the scheduled payments, the payment due
in November 1994 was not made. After discussions and additional litigation,
effective December 13, 1995, the Commissioner and Messrs. Phillips and Friedman
entered into a modification of the PSL Settlement (the "PSL Modification")
pursuant to which the $4,450,000 balance of the original payments is to be paid
over a ten-year period. Mr. Friedman's liability terminates when the
Commissioner has received an aggregate of $1.2 million under the PSL
Modification. Tarragon has guaranteed 80% of each of Mr. Friedman's scheduled
payments under the PSL Modification. Tarragon and Mr. Friedman have entered into
an agreement that Tarragon may offset any amounts paid under such guaranty
against salary and other compensation due Mr. Friedman.

69
<PAGE> 70
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)

Trustees (Continued)

One of Southmark's principal businesses was real estate syndication, and,
from 1981 through 1987, Southmark raised over $500 million in investments from
limited partners in several hundred limited partnerships. Seven lawsuits were
filed by investors alleging breach of fiduciary duties on the part of
Mr.Friedman and others. Two cases were settled in July and October 1993, for
nominal payments. In one case, all claims were dismissed by the Court, and the
defendants (including Mr. Friedman) were awarded sanctions against plaintiff's
counsel. The other four cases were voluntarily dismissed by the plaintiffs
without payment of any kind by the defendants.

San Jacinto Savings Association. On November 30, 1990, San Jacinto
Savings Association ("SJSA"), a savings institution that had been owned by
Southmark since 1983, was placed under conservatorship of the Resolution Trust
Corporation ("RTC") by federal banking authorities. The Office of Thrift
Supervision ("OTS") also conducted a formal investigation of SJSA and its
affiliates. During late November 1994, Mr. Friedman entered into certain
agreements with the RTC and OTS settling all claims relating to (i) his
involvement with SJSA and (ii) any guarantor arrangement of Mr. Friedman as to
other financial institutions taken over by the RTC. Pursuant to such
arrangements, Mr. Friedman and certain other respondents (including Mr.
Phillips) agreed to pay restitution over a ten year period in the amount of $20
million. Mr. Friedman's liability terminates when the respondents as a group
shall have paid a total of $4 million out of the total requirement. Mr. Friedman
also consented to an order prohibiting him from participating in the conduct of
the affairs of an insured depository institution without the prior written
approval of the Director of OTS and agreed to submit certain information to the
OTS on a periodic basis. Such arrangements constitute an order limiting Mr.
Friedman from engaging in a type of business practice.

Board Committees

The Board held six meetings and acted by written consent two times during 1995.
For such year, no incumbent Trustee attended fewer than 75% of the aggregate of
(i) the total number of meetings held by the Board during the period for which
he had been a Trustee and (ii) the total number of meetings held by all
committees of the Board on which he served during the periods that he served.

The Board has an Audit Committee, an Advisory Review Committee, and an Option
Committee. The Audit Committee, consisting of three Independent trustees,
Messrs. Schrag (Chairman), Johnston, and Weisbrod, reviews the Trust's operating
and accounting procedures. This committee met one time during 1995. The Advisory
Review Committee, established in March 1995, monitors actions taken by the
Advisor which have the potential for a conflict of interest, in particular
decisions relating to the allocation of investment opportunities among the Trust
and the other entities affiliated with the Advisor. The committee consists of
Mr. Weisbrod (Chairman), Ms. Hernandez-Pinero, and Mr. Cohen and met two times
during 1995. The Option Committee was formed in 1995 for purposes of authorizing
options under the Share Option and Incentive Plan, approved at the November 1995
shareholder meeting. This committee is comprised of three members including
Messrs. Friedman and Weisbrod and Mr. John A. Doyle, Chief Financial Officer of
the Trust.

Until February 1995, the Board had a Related Party Transaction Committee, which
reviewed and made recommendations to the Board with respect to transactions
involving the Trust and any other party or parties related to or affiliated with
the Trust, any of its Trustees, or any of their affiliates, and a Litigation
Committee, which reviewed litigation involving Messrs. Friedman and Phillips.
Such committees were disbanded in

70
<PAGE> 71
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)

Board Committees (Continued)

February 1995, and their responsibilities assumed by the Independent Trustees.
Messrs. Johnston (Chairman), Davis, Etnire, Schrag, Sims, and Stokely, all of
whom were Independent Trustees, were the members of the Related Party
Transaction Committee, while Messrs. Johnston (Chairman), Etnire, Jordan,
Schrag, Sims, and Stokely comprised the Litigation Committee. During 1995,
neither the Related Party Transaction Committee nor the Litigation Committee
met. The Board does not have Nominating or Compensation Committees.

Executive Officers

The following persons currently serve as executive officers of the Trust:
William S. Friedman, President and Chief Executive Officer; and John A. Doyle,
Chief Financial Officer. Their positions with the Trust are not subject to a
vote of shareholders. The age, terms of service, all positions and offices with
the Trust or Tarragon, other principal occupations, business experience, and
directorships with other companies during the last five years or more of Mr.
Friedman are set forth above. Corresponding information regarding Mr. Doyle is
set forth below.

JOHN A. DOYLE: Age 38, Chief Financial Officer (since May 1995)

Executive Vice President (February 1994 to May 1995), Chief Operating
Officer (May 1995 to January 1996), and Chief Financial Officer (since May
1995) of the Trust and VPT; Trustee (since February 1994) of VPT;
Director, President, Chief Operating Officer, and 50% shareholder (since
February 1994) of Tarragon; President and Chairman of the Board (since
December 1993) of Investors General Acquisition Corp., which owns 100% of
the shares of Investor General, Inc.; Director, President, and Chief
Executive Officer (since June 1992) of Garden Capital Incorporated;
Director (October 1993 to February 1995) of Home State Holdings; Director
and Chief Operating Officer (October 1990 to December 1991) of ConCap
Equities, Inc.; President, Chief Executive Officer, Chief Operating
Officer, and sole Director (April 1989 to October 1990) of Consolidated
Capital Equities Corporation ("CCEC"); and Certified Public Accountant
(since 1985).

Officers

Although not executive officers of the Trust, the following persons currently
serve as officers of the Trust. Their positions with the Trust are not subject
to a vote of shareholders. Their ages, terms of services, all positions and
offices with the Trust and Tarragon, other principal occupations, business
experience, and directorships with other companies during the last five years or
more are set forth below:

BRUCE SCHNITZ: Age 46, Chief Operating Officer.

Chief Operating Officer (since January 1996) of the Trust, VPT, and
Tarragon; President and Chief Executive Officer (1993-1994) of McNeil
Acquisition Corporation; President, Chief Operating Officer, and Director
(1991-1993), McNeil Real Estate Management, Inc.; Executive Vice President
(1989-1991) Southmark Corporation; President and Chief Executive Officer
(1986-1991) Southmark Public Syndications; Senior Vice President,
Acquisition/Disposition (1979-1986) Robert A. McNeil Corporation.

71
<PAGE> 72
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)

Officers (Continued)

JOHN C. STRICKLIN: Age 49, Executive Vice President.

Executive Vice President (since May 1995), Senior Vice President - Real
Estate (May 1994 to April 1995), and Vice President (February 1994 to April
1994) of the Trust and VPT; Senior Vice President (since February 1994) of
Tarragon; Vice President (June 1992 to January 1994) of CRSI; Real Estate
Broker (June 1989 to May 1992) with Carmel, Ltd.

CHRIS W. CLINTON: Age 49, Senior Vice President - Asset Management.

Senior Vice President - Asset Management (since May 1995), and Senior Vice
President - Commercial Asset Management (March 1994 to April 1995) of the
Trust and VPT; Senior Vice President (since March 1994) of Tarragon; Vice
President (October 1988 to March 1994) of the Trust, ART, CMET, IORT, VPT,
TCI, and BCM.

R.W. LOCKHART: Age 50, Senior Vice President - Asset Management.

Senior Vice President - Asset Management (since May 1995) of the Trust and
VPT; Senior Vice President (since March 1994) of Tarragon; Independent
Consultant (March 1992 to February 1994); Senior Vice President (July 1989
to March 1992) of BCM and CRSI.

TODD C. MINOR: Age 37, Senior Vice President - Mortgage Servicing and Financing.

Senior Vice President - Mortgage Servicing and Financing (since May 1995)
and Senior Vice President - Finance (March 1994 to April 1995 and from July
1993 to January 1994) of the Trust and VPT; Senior Vice President (since
March 1994) of Tarragon; Senior Vice President - Finance (July 1993 to
March 1994) of BCM, ART, CMET, IORT, and TCI; Vice President (January 1989
to July 1993) of BCM and (April 1991 to July 1993) of the Trust, ART, CMET,
IORT, VPT, and TCI.

KATIE JACKSON: Age 34, Vice President - Chief Accounting Officer.

Vice President - Chief Accounting Officer (since March 1994) of the Trust
and VPT; Vice President and Chief Accounting Officer (since March 1994) and
Treasurer (since May 1995) of Tarragon; Accounting Manager for BCM (October
1990 to March 1994); and Certified Public Accountant (since 1988).

IVAN ROTH: Age 60, Treasurer.

Treasurer (since February 1994) and Chief Financial Officer (February 1994
to April 1995) of the Trust and VPT; Treasurer (February 1994 to December
1994) of Tarragon; Treasurer and Chief Financial Officer (1978 to 1992) of
Servico, Inc. (1); and Certified Public Accountant (since 1968).

In addition to the foregoing officers, the Trust has other officers who are not
listed herein.

- ------------------
(1) On September 19, 1990, Servico, Inc. filed a voluntary petition under
Chapter 11 of the United States Bankruptcy Code and was reorganized effective
August 5, 1992.

72
<PAGE> 73
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Under the securities laws of the United States, the Trust's Trustees, officers,
and any persons holding more than ten percent of the Trust's shares of
beneficial interest are required to report their ownership of the Trust's shares
and any changes in that ownership to the Securities and Exchange Commission (the
"Commission"). Specific due dates for these reports have been established, and
the Trust is required to report any failure to file by these dates during fiscal
1995. All of these filing requirements were satisfied by its Trustees, officers,
and ten percent holders, except as noted below. In making these statements, the
Trust has relied on the written representations of its incumbent Trustees, and
officers, its ten percent holders, and copies of the reports that they have
filed with the Commission. The following reports filed under Section 16(a) of
the Securities Exchange Act of 1934 during or with respect to the year ended
December 31, 1995, were not filed on a timely basis: Initial Forms 3 of Messrs.
Schafran and Cohen, and Mrs. Hernandez-Pinero, and Forms 4 for Messrs. Cohen,
Johnston, Liebman, Schafran, Schrag, and Weisbrod and Mrs. Hernandez-Pinero for
the options granted to each of them by the Trust on November 20, 1995.

The Advisor

Although the Trust's Board is directly responsible for managing the affairs of
the Trust and for setting the policies which guide it, the day-to-day operations
of the Trust are performed by a contractual advisory firm under the supervision
of the Trust's Board. The duties of the advisor include, among other things,
locating, investigating, evaluating, and recommending real estate and mortgage
note investment and sales opportunities, as well as financing and refinancing
sources for the Trust. The advisor also serves as a consultant in connection
with the business plan and investment policy decisions made by the Trust's
Board.

CCEC, the sponsor and original advisor of the Trust, was replaced as advisor on
August 1, 1988, by Consolidated Advisors, Inc. ("CAI"), the parent of CCEC. On
December 2, 1988, CCEC filed a petition seeking reorganization under Chapter 11
of the United States Bankruptcy Code in the United States District Court for the
Northern District of Texas. Mr. Friedman was a director of CCEC and CAI from
March 1988 through January 1989. Mr. Doyle was President, Chief Executive
Officer, Chief Operating Officer, and sole director of CCEC from April 1989
through October 1990. Southmark was a controlling shareholder of The
Consolidated Companies, the parent of CAI, from March 1988 through February
1989.

BCM served as the Trust's advisor from March 1989 through March 1994. Mr.
Friedman served as President of BCM until May 1, 1993. BCM is beneficially owned
by a trust for the benefit of the children of Mr. Phillips, who served as a
Trustee of the Trust until December 7, 1992. BCM also serves as advisor to CMET,
IORT, TCI, and ART and served as advisor to VPT until February 28, 1994. Certain
Trustees of the Trust were also Trustees of CMET, IORT, and TCI but have since
resigned their positions. Mr. Friedman, President of the Trust, also serves as
President of VPT. BCM also performs certain administrative functions for NRLP
and NOLP, the operating partnership of NRLP, on a cost-reimbursement basis. Mr.
Friedman resigned from his positions with CMET, IORT, and TCI in February 1994,
from his position as an executive officer and director of ART in December 1992,
and from his position with NRLP in March 1994 to concentrate his attention on
the Trust, VPT, and Tarragon.

Tarragon has provided advisory services to the Trust since April 1, 1994. At the
annual meeting of shareholders held on November 20, 1995, the shareholders
approved the renewal of Tarragon as the Trust's advisor under an advisory
agreement dated April 1, 1995. Mr. Friedman serves as a Director and Chief
Executive Officer of

73
<PAGE> 74
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)

The Advisor (Continued)

Tarragon. Tarragon is owned by Lucy N. Friedman, Mr. Friedman's wife, and Mr.
Doyle, who serves as a Director and President of Tarragon and Chief Financial
Officer of the Trust. The Friedman and Doyle families own approximately 33% of
the outstanding shares of the Trust.

The provisions of the Trust's Initial Advisory Agreement ("Initial Advisory
Agreement") with Tarragon were substantially the same as those of the BCM
advisory agreement. Under the Initial Advisory Agreement, the Trust paid
Tarragon an annual base advisory fee of $100,000 plus an incentive advisory fee
equal to 16% of the Trust's adjusted funds from operations before deduction of
the advisory fee. Adjusted funds from operations is defined as funds from
operations ("FFO"), as defined by the National Association of Real Estate
Investment Trusts ("NAREIT"), plus any loss due to the write-down or sale of any
real property or mortgage loan acquired prior to January 1, 1989. FFO represents
net income (loss), computed in accordance with generally accepted accounting
principles ("GAAP"), excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. Additionally, Tarragon could
receive commissions of 1% based upon (i) acquisition cost of real estate, (ii)
mortgage loans acquired, and (iii) mortgage loans obtained or refinanced and a
10% incentive sales commission based on gains from the sale of real estate.

A majority of the Board approved certain revisions to the Initial Advisory
Agreement which was approved by the shareholders at the November 1995 annual
meeting. The Initial Advisory Agreement was replaced, effective April 1, 1995,
with the revised advisory agreement. The revised advisory agreement is very
similar to the initial advisory agreement but eliminates the $100,000 annual
base fee, incentive sales compensation, and mortgage loan acquisition
commissions and makes various technical changes designed to further clarify the
responsibilities of Tarragon. In addition, the revised advisory agreement
provides that real estate commissions shall be payable to Tarragon and its
affiliates only following specific approval by the Board of Trustees for each
transaction rather than pursuant to a general agreement.

The following table sets forth the changes or alterations in compensation
payable to the advisor under the BCM advisory agreement and the Tarragon
advisory agreement's during the periods indicated:

Gross asset fee .0625% per month (.75% None None
per annum) of the
average "Gross Asset Value"

Incentive advisory fee 7.5% per annum of "Net 16% per annum of 16% per annum of
Income" "Adjusted Funds "Adjusted Funds
from Operations" from Operations"
</TABLE>

74
<PAGE> 75
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)

The Advisor (Continued)

Mortgage brokerage The lesser of (i) 1% of The lesser of (i) 1% of The lesser of (i) 1% of
and refinancing fees the amount of the loan or the amount of the loan or the amount of the loan or
amount refinanced or amount refinanced or amount refinanced or
(ii) a fee which is (ii) a fee which is (ii) a fee which is
reasonable and fair reasonable and fair reasonable and fair
under the under the under the
circumstances circumstances circumstances

Mortgage or loan The lesser of (i) 1% of The lesser of (i) 1% of None
acquisition fees the amount of the the amount of the
mortgage or loan mortgage or loan
purchased or (ii) a fee purchased or (ii) a fee
which is reasonable which is reasonable
and fair under the and fair under the
circumstances circumstances

Real estate brokerage None - included in None - included in Subject to approval by the
commissions "Incentive Sales "Incentive Sales Board, may pay if the
Compensation" below Compensation" below Advisor or affiliate acts as
the broker upon purchase or
sale, in amounts not to exceed
customary fees charged
by nationally recognized
real estate brokers for
normal,similar transactions

Incentive sales Fee equal to 10% of Fee equal to 10% of None
compensation the amount by which the amount by which
aggregate sales aggregate sales
consideration for all consideration for all
real property sold which real property sold which
exceeds the results of a exceeds the results of a
formula, as defined formula, as defined
</TABLE>

75
<PAGE> 76
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)

The Advisor (Continued)

<TABLE>
<CAPTION>
COMPENSATION
DESCRIPTION ADVISOR; EFFECTIVE DATES OF ADVISORY AGREEMENT
- ------------ -----------------------------------------------------------------------------------------
BCM TARRAGON TARRAGON
------------------- ------------------- ------------------
DEC 1992 - MAR 1994 APR 1994 - MAR 1995 APR 1995 - PRESENT
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Third-party mortgage Advisor to pay Trust Advisor to pay Trust Advisor shall pay to
placement fees 1/2 of any compensation 1/2 of any compensation Trust all compensation
received from third received from third received from third
parties for origination, parties for origination, parties for origination,
placement or placement or placement or
brokerage of any loan brokerage of any loan brokerage of any loan
made by the Trust, but made by the Trust, but made by the Trust
Advisor compensation Advisor compensation
retained shall not retained shall not
exceed lesser of (i) 2% exceed lesser of (i) 2%
of amount of loan of amount of loan
committed or (ii) a fee committed or (ii) a fee
which is reasonable which is reasonable
and fair under the and fair under the
circumstances circumstances
</TABLE>

Also, if the Trust were to request that the advisor or an affiliate of the
advisor render services to the Trust other than those required by the advisory
agreement, the advisor or the affiliate of the advisor would be separately
compensated for such additional services on terms to be agreed upon from time to
time. In the past, the Trust had hired Carmel, Ltd., an affiliate of BCM, to
provide property management services for the Trust's properties. Since April 1,
1994, Tarragon has provided property management services for the Trust's
properties. The Trust also engaged, on a non-exclusive basis, CRSI, also an
affiliate of BCM, to perform brokerage services for the Trust until March 31,
1994.

The advisor is required to formulate and submit annually for approval by the
Board a budget and business plan for the Trust containing a twelve-month
forecast of operations and cash flow, a general plan for asset sales or
acquisitions, lending, foreclosure, and borrowing activity, and other
investments, and the advisor is required to report quarterly to the Board on the
Trust's performance against the business plan. In addition, all transactions or
investments made by the Trust shall require prior approval by the Board unless
they are explicitly provided for in the approved business plan or are made
pursuant to authority expressly delegated to the advisor by the Board. Prior
approval of the Board is also required for retention of all consultants and
third party professionals, other than legal counsel.

The agreements provide that the advisor shall be deemed to be in a fiduciary
relationship to the Trust's shareholders; contains guidelines for the advisor's
allocation of investment opportunities as among itself, the Trust, and other
entities it advises; and contains a broad standard governing the advisor's
liability for losses incurred by the Trust. Under the advisory agreements, none
of the advisors nor any of its shareholders, directors, officers, or employees
shall be liable to the Trust, the Trustees, or the holders of securities of the
Trust for any losses from the operations of the Trust if the advisor had
determined, in good faith, that the course of conduct which caused the loss or
liability was in the best interests of the Trust and the loss or liability was
not the result of negligence or misconduct by the advisor. In no event will the
directors, officers, or employees of the advisor be personally liable for any
action unless it was the result of willful misfeasance, bad faith, gross

76
<PAGE> 77
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)

The Advisor (Continued)

negligence, or reckless disregard of duty.

Employees of Tarragon render services to the Trust, as the Trust has no
employees. In accordance with the terms of the advisory agreements, certain
services provided by the advisor including, but not limited to, accounting,
legal, investor relations, data processing, and the related departmental
overhead are reimbursed directly by the Trust.

As required by the Declaration of Trust, all or a portion of the annual advisory
fee must be refunded by the advisor to the Trust if the Operating Expenses of
the Trust, as defined, exceed certain specified limits based on book value, net
asset value, and net income during such fiscal year. The operating expenses of
the Trust did not exceed such limitation in 1993, 1994, or 1995.

The Declaration of Trust requires shareholder approval for any renewal of the
advisory agreement.

The advisory agreement may only be assigned with the prior consent of the Trust.

The directors and principal officers of Tarragon are set forth below:

WILLIAM S. FRIEDMAN: Director and Chief Executive Officer

JOHN A. DOYLE: Director and President

BRUCE SCHNITZ: Chief Operating Officer

JOHN C. STRICKLIN: Executive Vice President

CHRIS W. CLINTON: Senior Vice President - Commercial Portfolio

ROBERT W. LOCKHART: Senior Vice President - Residential Portfolio

TODD C. MINOR: Senior Vice President - Financing

KATIE JACKSON: Vice President; Chief Accounting Officer and Treasurer

Tarragon has provided property management services to the Trust since April 1,
1994, for a fee of 4.5% of the monthly gross rents collected on apartment
properties and 1.5% to 5% of the monthly gross rents collected on commercial
properties. Tarragon subcontracts with other entities for the provision of much
of the property-level management services to the Trust.

Since March 1, 1994, Tarragon's real estate brokerage affiliate has been
available to and may act as a broker in both purchases and sales of Trust
property with commissions payable in amounts customarily charged in arm's-length
transactions by others rendering similar property acquisition services in the
same geographical location and for comparable property. Such commissions would
require approval of the Board.

77
<PAGE> 78
ITEM 11. EXECUTIVE COMPENSATION

The Trust has no employees and pays no compensation to the executive officers of
the Trust. The Trustees and executive officers of the Trust who are also
officers or employees of Tarragon are compensated by Tarragon. Such affiliated
Trustees and executive officers perform a variety of services for the Advisor,
and the amount of their compensation is determined solely by Tarragon.

The Independent Trustees are paid an annual stipend directly by the Trust, as
well as granted certain share options, as discussed below. The Independent
Trustees (i) review the business plan of the Trust to determine that it is in
the best interest of the shareholders, (ii) review the Trust's contract with the
advisor, (iii) supervise the performance of the advisor and review the
reasonableness of the compensation which the Trust pays to its advisor in terms
of the nature and quality of services performed, (iv) review the reasonableness
of the total fees and expenses of the Trust, and (v) select, when necessary, a
qualified independent real estate appraiser to appraise properties acquired by
the Trust.

During 1994, the Independent Trustees received compensation in the amount of
$6,000 per year, plus reimbursement for expenses. In addition, each Independent
Trustee received (i) $3,000 per year for each committee of the Board on which he
(she) served, (ii) $2,500 per year for each committee chairmanship, and (iii)
$1,000 per day for any special services rendered to the Trust outside of the
ordinary duties as Trustee, plus reimbursement for expenses, provided such
services are specifically requested by the Board. 1994 total fees paid to the
Independent Trustees for all services, including special service fees, totaled
$42,750: Willie K. Davis, $4,500 (a Trustee from October 1988 to March 1995);
Geoffrey C. Etnire, $6,000 (a Trustee from January 1993 to March 1995); Dan L.
Johnston, $12,000; Raymond V.J. Schrag, $7,250; Bennett B. Sims, $3,000 (a
Trustee from April 1990 to August 1994); Ted P. Stokely, $3,000 (a Trustee from
April 1990 to August 1994); and Carl Weisbrod, $7,000.

During 1995, the Independent Trustees received compensation in the amount of
$15,000 per year, plus $25,000 per year to the Chairman of the Board and
reimbursement of expenses. In addition, each Independent Trustee received (i)
$2,000 per year for each committee of the Board of Trustees on which he (she)
served, (ii) $1,000 per year for each committee chairmanship, and (iii) $1,000
per day for any special services rendered to the Trust outside of the ordinary
duties as Trustee, plus reimbursement for expenses, provided such services are
specifically requested by the Board. 1995 Independent Trustees fees totaled
$146,500 for all services, including the annual stipend, as follows: Irving E.
Cohen, $17,000; Sally Hernandez-Pinero, $17,000; Dan L. Johnston, $17,000; Lance
Liebman, $15,000; L. G. Schafran, $15,000; Raymond V. J. Schrag, $18,000; Carl
B. Weisbrod, $40,000; Willie K. Davis, $7,500.

Pursuant to the approval of the Independent Trustee Share Option Plan (the
"Trustee Plan") at the November 1995 shareholder meeting, the Trust issued
options to acquire 3,000 shares to each of the seven Independent Trustees on
November 20, 1995. The exercise price of the options is equal to the market
price on the grant date. The options expire on the earlier of the first
anniversary of the date on which a Trustee ceases to be a Trustee of the Trust
or November 20, 2005 (the "Termination Date"), and are exercisable at any time
between the date of grant and the Termination Date. In addition, for each year
such Trustee continues to serve as a Trustee, he (she) will be awarded an option
covering 1,000 shares on January 1 of each year. Accordingly, on January 1,
1996, the Trust issued additional options covering 7,000 shares (1,000 shares
each) with an exercise price equal to the market price on the date of grant and
the same Termination Date as the options granted in November 1995. The Trustee
Plan provides for a total of 60,000 shares.

Since January 1, 1993, FMS, Inc., a company of which Mr. Davis is Chairman,
President, and sole shareholder, has been providing property-level management
services for several properties owned by the Trust. In 1994 and

78
<PAGE> 79
ITEM 11. EXECUTIVE COMPENSATION (Continued)

1995, FMS, Inc., earned fees of $55,886 and $66,490, respectively, for
performing such services. The Trust believes that such fees were at least as
favorable to the Trust as those that would be paid to unaffiliated third parties
for the performance of similar services.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners. The following table sets forth
the ownership of the Trust's shares of beneficial interest, both beneficially
and of record, both individually and in the aggregate for those persons or
entities known by the Trust to be beneficial owners of more than 5% of its
shares of beneficial interest as of the close of business on March 8, 1996.

<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent of
Beneficial Owner Ownership Class (1)
------------------- ----------------- ----------
<S> <C> <C>
Lucy N. Friedman 1,053,659 (2)(3)(4)(5) 30.3%
280 Park Avenue (6)(7)(8)
East Building, 20th Floor
New York, New York 10017
</TABLE>

(1) Percentages are based upon 3,475,255 shares of beneficial interest
outstanding at March 8, 1996.

(2) Includes 15,260 shares owned by Lucy N. Friedman's husband, William S.
Friedman.

(3) Includes 687,819 shares owned by Mrs. Friedman.

(4) Does not include 8,911 shares owned by Mrs. Friedman's adult son, Ezra
Friedman, and 21,003 shares owned by Mrs. Friedman's adult daughter, Tanya
Friedman. Mrs. Friedman disclaims beneficial ownership of such shares.

(5) Includes 28,969 shares owned by a trust for the benefit of the children and
grandchildren of Samuel Friedman, deceased, William S. Friedman's father,
for which Robert A. Friedman and Gerald C. Friedman, siblings of William S.
Friedman, and Ruth Friedman, his mother, are the trustees. Mrs. Friedman
disclaims beneficial ownership of such shares.

(6) Includes 39,920 shares owned by Tarragon Capital Corporation ("TCC"), of
which Mrs. Friedman and Mr. Friedman are executive officers and directors
and 24,200 shares owned by Tarragon Partners, Ltd., of which Mrs. Friedman
and Mr. Friedman are limited partners. Mr. Friedman disclaims beneficial
ownership of such shares.

(7) Includes 11,523 shares and 11,652 shares owned by Mr. Friedman's minor sons,
Gideon and Samuel Friedman. Mr. Friedman disclaims beneficial ownership of
such shares. It also includes 220,000 shares owned by Beachwold Partners, L.
P., in which Mrs. Friedman is the general partner and her four children are
the limited partners. Mr. Friedman disclaims beneficial ownership of such
shares.

(8) Includes 14,316 shares held by William S. Friedman Grantor Trust for benefit
of the children of Mr. Friedman, of which Mrs. Friedman is the Trustee. Mrs.
Friedman disclaims beneficial interest of such shares.

79
<PAGE> 80
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(Continued)

Security Ownership of Management. The following table sets forth the ownership
of the Trust's shares of beneficial interest, both beneficial and of record,
both individually and in the aggregate for the Trustees and executive officers
of the Trust as of the close of business on March 8, 1996.

<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percent of
Name of Beneficial Owner Ownership Class (1)
------------------------ --------------------- ----------
<S> <C> <C>
William S. Friedman 1,053,659(2)(3)(4)(5) 30.3%
(6)(7)(10)(11)

John A. Doyle 96,222(8) 2.8%

Irving E. Cohen 4,521(9) *

Sally Hernandez-Pinero 4,000(12) *

Dan L. Johnston 4,105(13) *

Lance Liebman 4,550(14) *

L. G. Schafran 4,000(15) *

Raymond V.J. Schrag 9,527(16) *

Carl B. Weisbrod 4,242(17) *

All Trustees and Executive 1,184,826(2)(3)(4)(5)(6) 34.1%
Officers as a group (7)(8)(9)(10)(11)
(9 individuals) (12)(13)(14)(15)
(16)(17)
</TABLE>

- ----------------
* Less than 1%.

(1) Percentages are based upon 3,475,255 shares of beneficial interest
outstanding at March 8, 1996.

(2) Mr. Friedman owns 15,260 shares of beneficial interest personally.

(3) Includes 687,819 shares owned by Mrs. Friedman. Mr. Friedman disclaims
beneficial ownership of such shares.

(4) Does not include 8,911 shares owned by Mr. Friedman's adult son, Ezra
Friedman, and 21,003 shares owned by Mr. Friedman's adult daughter, Tanya
Friedman. Mr. Friedman disclaims beneficial ownership of such shares.

(5) Includes 28,969 shares owned by a trust for the benefit of the children and
grandchildren of Samuel Friedman, deceased, William S. Friedman's father,
for which Robert A. Friedman and Gerald C. Friedman, siblings of William S.
Friedman, and Ruth Friedman, his mother, are the trustees. Mr. Friedman
disclaims beneficial ownership of such shares.

(6) Includes 39,920 shares owned by TCC.

80
<PAGE> 81
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(Continued)

(7) Includes 24,200 shares owned by Tarragon Partners, Ltd. Mr. Friedman
disclaims beneficial ownership of such shares.

(8) Includes 93,076 shares which Mr. Doyle obtained as a result of the
conversion of his $1.0 million subordinated debenture. John A. Doyle also
owns 3,146 shares personally.

(9) Includes 521 shares owned by Irving E. Cohen directly and 4.000 shares
covered by two separate presently exercisable options.

(10) Includes 11,523 shares and 11,652 shares owned by Mr. Friedman's minor
sons, Gideon and Samuel Friedman. Mr. Friedman disclaims beneficial
ownership of such shares. It also includes 220,000 shares owned by
Beachwold Partners, L. P. Mr. Friedman disclaims beneficial ownership of
such shares.

(11) Includes 14,316 shares held by William S. Friedman Grantor Trust. Mrs.
Friedman disclaims beneficial interest of such shares.

(12) Includes 4,000 shares covered by two separate presently exercisable options
granted to Sally Hernandez-Pinero.

(13) Includes 105 shares owned by Dan L. Johnston directly and 4,000 shares
covered by two separate presently exercisable options.

(14) Includes 550 shares owned by Lance Liebman directly and 4,000 shares
covered by two separate presently exercisable options.

(15) Includes 4,000 shares covered by two separate presently exercisable options
granted to L. G. Schafran.

(16) Includes 5,527 shares owned by Raymond V. J. Schrag directly and 4,000
shares covered by two separate presently exercisable options. Does not
include 1,100 shares owned by Mr. Schrag's wife as custodian for his two
children as to which Mr. Schrag disclaims any beneficial ownership.

(17) Includes 242 shares owned by Carl B. Weisbrod and 4,000 shares covered by
two separate presently exercisable options.

[This space intentionally left blank.]

81
<PAGE> 82
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain Business Relationships

On February 10, 1994, the Trust's Board selected Tarragon to replace BCM as the
Trust's advisor effective April 1, 1994. Mr. Friedman serves as Director and
Chief Executive Officer of Tarragon. Tarragon is owned by Lucy N. Friedman, Mr.
Friedman's wife, and Mr. Doyle, who serves as President and Director of Tarragon
and Chief Financial Officer of the Trust. The Friedman and Doyle families
together own approximately 33% of the outstanding shares of the Trust.

Also on February 10, 1994, VPT's Board of Trustees selected Tarragon to replace
BCM as VPT's advisor commencing March 1, 1994. William S. Friedman also serves
as a Trustee, President, and Chief Executive Officer of VPT. John A. Doyle is
also Chief Financial Officer of VPT. VPT has the same relationship with Tarragon
as the Trust. Mr. Friedman owes fiduciary duties to VPT as well as the Trust
under applicable law.

Tarragon occupies office space at VPT's One Turtle Creek Office Complex.

From February 1, 1990, until March 31, 1994, affiliates of BCM provided property
management services to the Trust. Carmel, Ltd., provided property management
services for a fee of 5% of the monthly gross rents collected on the properties
under management. In many cases, Carmel, Ltd., subcontracted with other entities
for the property-level management services to the Trust at various rates. The
general partner of Carmel, Ltd., is BCM. The limited partners of Carmel, Ltd.,
are (i) SWI, of which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips,
and (iii) a trust for the benefit of the children of Mr. Phillips. Carmel, Ltd.,
subcontracted the property-level management and leasing of eleven of the Trust's
commercial properties and the commercial properties owned by two of the real
estate partnerships in which the Trust is a partner to Carmel Realty, which is
owned by SWI. Carmel, Ltd., resigned as property manager for the Trust's
properties effective March 31, 1994. Commencing April 1, 1994, Tarragon has
provided property management services to the Trust.

Prior to December 1, 1992, affiliates of BCM provided brokerage services to the
Trust and received brokerage commissions in accordance with the advisory
agreement. Effective December 1, 1992, the Trust engaged CRSI, on a
non-exclusive basis, to provide brokerage services for the Trust. CRSI is owned
by SWI. Such agreement terminated March 31, 1994.

From April 1992 to December 31, 1993, Mr. Stokely, a Trustee of the Trust until
August 1, 1994, was employed as a Real Estate Consultant for Eldercare, a
nonprofit corporation engaged in the acquisition of low income and elderly
housing. Eldercare has a revolving loan commitment from SWI which is owned by
Mr. Phillips and affiliated with BCM. In addition, in November 1991, the Trust
funded a $230,000 loan to Eldercare. Eldercare filed for bankruptcy protection
in October 1993.

Related Party Transactions

Historically, the Trust has engaged in and may continue to engage in business
transactions, including real estate partnerships, with related parties. Prior to
January 11, 1995, all related party transactions entered into by the Trust were
to be approved by a majority of the Trust's Board of Trustees, including a
majority of the Independent Trustees. In addition, the Related Party Transaction
Committee of the Board was to review all such transactions prior to their
submission to the Trust's Board for consideration. The Trust's management
believes that all of the related party transactions were at least as
advantageous to the Trust as could have been obtained from unrelated third
parties.

82
<PAGE> 83
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)

Related Party Transactions (Continued)

The Trust is a partner with CMET in Sacramento Nine ("SAC 9") and Income Special
Associates ("ISA"). SAC 9, which currently owns two office buildings in the
vicinity of Sacramento, California, is owned 70% by the Trust which is a
non-controlling partner. The SAC 9 tenancy-in-common agreement requires
unanimous consent of both the Trust and CMET for any material changes in the
operations of SAC 9's properties, including sales, refinancings, and property
management changes. ISA is a general partnership in which the Trust has a 40%
interest and CMET holds a 60% interest. ISA in turn owns all of Indcon, L.P.,
(formerly known as Adams Properties Associates) which owns 32 industrial
warehouse facilities. The Indcon, L.P., partnership agreement requires consent
of both the Trust and CMET for any material changes in the operations of the
partnership properties, including sales, refinancings, and changes in property
manager. Until March 9, 1995, Geoffrey C. Etnire, a Trustee of CMET, was also a
Trustee of the Trust, and, until August 1994, Messrs. Stokely and Sims, Trustees
of CMET, also served as Trustees of the Trust. Since March 9, 1995, the Trust
and CMET have no Trustee who serves on both boards.

On December 10, 1990, the Board, based on the recommendation of its Related
Party Transaction Committee, authorized the purchase of up to $1.0 million of
the shares of beneficial interest of CMET through negotiated or open market
transactions. At December 31, 1993, the Trust owned 54,500 shares of beneficial
interest of CMET which it purchased in 1990 and 1991 through open market
transactions, at a total cost to the Trust of $250,000. In June 1994, the Trust
sold 15,000 of these shares for $210,000 through open market transactions and,
as a result, recorded a $141,000 gain on sale of investments. During the first
quarter of 1995, the Trust sold the remaining 39,500 CMET shares for $592,500
and, as a result, recorded a $412,000 gain on sale of investments.

In December 1993, the Board approved the issuance of a $1 million convertible
subordinated debenture to Mr. Doyle, Chief Financial Officer of the Trust, in
exchange for his 10% participation in the profits of the Consolidated Capital
Properties II ("CCP II") assets, which the Trust had acquired in November 1992.
This participation was granted as consideration for Mr. Doyle's services to the
Trust in connection with the CCP II portfolio. The debenture bore interest at 6%
per annum, and matured December 1999. In January 1996, Mr. Doyle converted the
debenture into 93,076 Shares. Mr. Doyle also serves as Director and President
and is a 50% shareholder of Tarragon, the Trust's advisor since April 1, 1994.

In 1994, the Trust paid BCM and its affiliates $468,000 in advisory fees,
$103,000 in real estate and mortgage brokerage commissions, and $112,000 in
property management fees and leasing commissions. In addition, as provided in
the advisory agreement, BCM received cost reimbursements from the Trust of
$140,000 in 1994.

83
<PAGE> 84
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)

Restrictions on Related Party Transactions

In 1994, the Trust paid Tarragon $909,000 in advisory fees, $268,000 in real
estate and mortgage brokerage commissions, and $285,000 in property management
fees. In addition, as provided in the advisory agreement, Tarragon received cost
reimbursements from the Trust of $882,000 in 1994.

In 1995, the Trust paid Tarragon $1.0 million in advisory fees, $445,000 in real
estate and mortgage brokerage commissions, and $330,000 in property management
fees. In addition, the Trust paid Tarragon $960,000 in cost reimbursements.

The Trust's Declaration of Trust provides that:

"[t]he Trustees shall not . . . purchase, sell, or lease any Real Properties
or Mortgages to or from . . . the Advisor or any of [its] Affiliates," and
that "[t]he Trustees shall not . . . make any loan to . . . the Advisor or
any of [its] Affiliates."

Moreover, the Declaration of Trust further provides that:

"[t]he Trust shall not purchase or lease, directly or indirectly, any Real
Property or purchase any Mortgage from the Advisor or any affiliated Person,
or any partnership in which any of the foregoing may also be a general
partner, and the Trust will not sell or lease, directly or indirectly, any of
its Real Property or sell any Mortgage to any of the foregoing Persons." The
Declaration of Trust further provides that "the Trust shall not directly or
indirectly, engage in any transaction with any Trustee, officer, or employee
of the Trust or any director, officer, or employee of the Advisor . . . or of
any company or other organization of which any of the foregoing is an
Affiliate, except for . . . [among other things] transactions with . . . the
Advisor or Affiliates thereof involving loans, real estate brokerage
services, real property management services, the servicing of Mortgages, the
leasing of real or personal property, or other services, provided such
transactions are on terms not less favorable to the Trust than the terms on
which nonaffiliated parties are then making similar loans or performing
similar services for comparable entities in the same area and are not entered
into on an exclusive basis."

The Declaration of Trust defines "Affiliate" as follows:

"[A]s to any Person, any other Person who owns beneficially, directly, or
indirectly, 1% or more of the outstanding capital stock, shares, or equity
interests of such Person or of any other Person which controls, is controlled
by, or is under common control with, such Person or is an officer, retired
officer, director, employee, partner, or trustee (excluding independent
trustees not otherwise affiliated with the entity) of such Person or of any
other Person which controls, is controlled by, or is under common control
with, such Person."

As discussed in "Related Party Transactions", above, since September 1990, the
Trust has invested in shares of CMET. As of December 31, 1994, the Trust owned
39,500 shares of CMET. CMET had the same advisor as the Trust and certain of its
Trustees were also trustees of CMET at the time such shares were acquired. Under
the terms of its Declaration of Trust, as amended, the Trust is prohibited from
holding the shares of CMET beyond July 30, 1996. Prior to March 31, 1995, all
remaining 39,500 CMET shares were sold in open market transactions.

84
<PAGE> 85
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)

Restrictions on Related Party Transactions (Continued)

Prior to January 11, 1995, all related party transactions that the Trust
contemplated were to be reviewed by the Related Party Transaction Committee of
the Trust's Board of Trustees to determine whether such transactions were (i)
fair to the Trust and (ii) permitted by the Trust's governing documents. Each of
the members of the Related Party Transaction Committee was a Trustee who was not
an officer, director, or employee of the Trust's advisor, Tarragon, and was not
an officer or employee of the Trust. Such committee was disbanded in February
1995, and its responsibilities assumed by the Independent Trustees.

Pursuant to the terms of the Modification in the Olive case, which became
effective January 11, 1995, any related party transaction which the Trust may
enter into prior to April 27, 1999, with two categories of exceptions, will
require the unanimous approval of the Trust's Board of Trustees. In addition,
except for the categories noted below, certain defined related party
transactions may only be entered into in exceptional circumstances and after
determination by the Trust's Board of Trustees that the transaction is in the
best interests of the Trust and that no other opportunity exists that is as good
as the opportunity presented by such transaction. Two categories of exception
are:

(i) direct contractual agreements for services between the Trust and the
Advisor or one of its affiliates (i.e., the Advisory Agreement,
property management contracts, etc.) which require prior approval by
two-thirds of the Trustees of the Trust and, if required, approval
by a majority of the Shareholders;

(ii) joint ventures among the Trust and another party to the Modification
in the Olive case or any of their affiliates or subsidiaries and a
third party having no prior or intended future business or financial
relationship with specified persons, or any affiliate of such
persons, may be entered into on the affirmative vote of a majority
of the Trustees of the Trust.

[This space intentionally left blank.]

85
<PAGE> 86
PART IV

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

(a) The following documents are filed as part of this Report:

1. Consolidated Financial Statements

Reports of Independent Public Accountants - BDO Seidman
- Arthur Andersen LLP

Consolidated Balance Sheets - December 31, 1995 and 1994

Consolidated Statements of Operations -
Years Ended December 31, 1995, 1994, and 1993

Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1995, 1994, and 1993

Consolidated Statements of Cash Flows -
Years Ended December 31, 1995, 1994, and 1993

Notes to Consolidated Financial Statements

2. Financial Statement Schedules

Schedule III - Real Estate and Accumulated Depreciation

Schedule IV - Mortgage Loans on Real Estate

All other schedules are omitted because they are not applicable or because the
required information is shown in the Consolidated Financial Statements or the
notes thereto.

3. Exhibits

The following documents are filed as Exhibits to this report:

Exhibit
Number Description
- ------- -----------

3.1 Second Amended and Restated Declaration of Trust (incorporated by
reference to the Registrant's Current Report on Form 8-K dated August
14, 1987).

3.2 Amendment No. 1 to the Second Amended and Restated Declaration of
Trust, (incorporated by reference to the Registrant's Current Report
on Form 8-K dated July 5, 1989) reporting change in name of Trust.

86
<PAGE> 87
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)

Exhibit
Number Description
- ------- -----------

3.3 Amendment No. 2 to the Second Amended and Restated Declaration of
Trust, (incorporated by reference to the Registrant's Current Report
on Form 8-K dated March 22, 1990,) reporting deletion of liquidation
provisions.

3.4 Amendment No. 3 to the Second Amended and Restated Declaration of
Trust, (incorporated by reference to the Registrant's Current Report
on Form 8-K dated June 3, 1992) reporting the extension of the
holding period of the Trust's marketable equity securities.

3.5 Restated Trustees' Regulations dated as of April 21, 1989,
(incorporated by reference to the Registrant's Current Report on Form
8-K dated March 24, 1989).

10.1 Advisory Agreement dated April 1, 1995, between National Income
Realty Trust and Tarragon Realty Advisors, Inc. (incorporated by
reference to Exhibit No. 10.1 to the Registrant's Current Report on
Form 8-K dated April 1, 1995).

27.0 Financial Data Schedule.

(b) Reports on Form 8-K.

During the last quarter of the period covered by this report, no
reports on Form 8-K were filed on behalf of the Trust.

[This space intentionally left blank.]

87
<PAGE> 88
SIGNATURES

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

NATIONAL INCOME REALTY TRUST

Dated: March 28, 1996 By: /s/ William S. Friedman
-----------------------
William S. Friedman
President, Chief Executive Officer
and Trustee

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.

<TABLE>
<CAPTION>
Signature Capacities In Which Signed Date

<S> <C> <C>
/s/ Carl B. Weisbrod Trustee and Chairman of the Board March 28, 1996
- ---------------------------------
Carl B. Weisbrod

/s/ William S. Friedman President, Chief Executive Officer, March 28, 1996
- --------------------------------- and Trustee
William S. Friedman (Principal Executive Officer)

/s/ John A. Doyle Chief Financial Officer March 28, 1996
- --------------------------------- (Principal Financial Officer)
John A. Doyle

/s/ Katie Jackson Vice President and March 28, 1996
- --------------------------------- Chief Accounting Officer
Katie Jackson (Principal Accounting Officer)

/s/ Irving E. Cohen Trustee March 28, 1996
- ---------------------------------
Irving E. Cohen

Trustee
- ---------------------------------
Sally Hernandez-Pinero

/s/ Dan L. Johnston Trustee March 28, 1996
- ---------------------------------
Dan L. Johnston

/s/ Lance Liebman Trustee March 15, 1996
- ---------------------------------
Lance Liebman

/s/ Lawrence G. Schafran Trustee March 28, 1996
- ---------------------------------
Lawrence G. Schafran

/s/ Raymond V.J. Schrag Trustee March 28, 1996
- ---------------------------------
Raymond V. J. Schrag
</TABLE>

88
<PAGE> 89
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule

</TABLE>

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,674
<SECURITIES> 0
<RECEIVABLES> 12,662
<ALLOWANCES> (6,274)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 240,822
<DEPRECIATION> (45,147)
<TOTAL-ASSETS> 222,038
<CURRENT-LIABILITIES> 0
<BONDS> 144,497
0
0
<COMMON> 0
<OTHER-SE> 69,627
<TOTAL-LIABILITY-AND-EQUITY> 222,038
<SALES> 0
<TOTAL-REVENUES> 45,240
<CGS> 0
<TOTAL-COSTS> 25,279
<OTHER-EXPENSES> 6,996
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</TABLE>