MCNEIL REAL ESTATE FUND XII LTD, 10-K405, 1997-03-31

MCNEIL REAL ESTATE FUND XII LTD
10-K405, 1997-03-31
OPERATORS OF NONRESIDENTIAL BUILDINGS

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

FORM 10-K405

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 1996
--------------------------------------------------

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

For the transition period from ______________ to_____________

Commission file number 0-10743
--------

McNEIL REAL ESTATE FUND XII, LTD.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

California 94-2717957
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code (972) 448-5800
-----------------------------

Securities registered pursuant to Section 12(b) of the Act: None
- ----------------------------------------------------------

Securities registered pursuant to Section 12(g) of the Act: Limited partnership
units
- ----------------------------------------------------------

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, 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. [ X ]

228,139 of the registrant's 229,690 limited partnership units are held by
non-affiliates of this registrant. The aggregate market value of units held by
non-affiliates is not determinable since there is no public trading market for
limited partnership units and transfers of units are subject to certain
restrictions.

Documents Incorporated by Reference: See Item 14, Page 37

TOTAL OF 40 PAGES
<PAGE>
PART I

ITEM 1. BUSINESS
- ------- --------

ORGANIZATION
- ------------

McNeil Real Estate Fund XII, Ltd. (the "Partnership") was organized February 2,
1981, as a limited partnership under the provisions of the California Uniform
Limited Partnership Act. The general partner of the Partnership is McNeil
Partners, L.P. (the "General Partner"), a Delaware limited partnership, an
affiliate of Robert A. McNeil ("McNeil"). The Partnership is governed by an
amended and restated partnership agreement of limited partnership dated
September 6, 1991, as amended (the "Amended Partnership Agreement"). Prior to
September 6, 1991, Pacific Investors Corporation (the prior "Corporate General
Partner"), a wholly-owned subsidiary of Southmark Corporation ("Southmark"), and
McNeil were the general partners of the Partnership, which was governed by an
agreement of limited partnership, dated February 2, 1981 (the "Original
Partnership Agreement") as amended May 13, 1981. The principal place of business
for the Partnership and the General Partner is 13760 Noel Road, Suite 600, LB70,
Dallas, Texas, 75240.

On June 8, 1981, a Registration Statement on Form S-11 was declared effective by
the Securities and Exchange Commission whereby the Partnership offered for sale
$120,000,000 of limited partnership units ("Units"). The Units represent equity
interests in the Partnership and entitle the holders thereof to participate in
certain allocations and distributions of the Partnership. The sale of Units
closed on September 30, 1982, with 230,728 Units sold at $500 each, or gross
proceeds of $115,364,000 to the Partnership. In addition, the original general
partners purchased a total of 200 Units for $100,000. During 1993 to 1995, a
total of 948 Units were relinquished. In 1996, 152 Units were relinquished
leaving 229,828 Units outstanding at December 31, 1996. Subsequent to year end,
138 Units were relinquished, leaving 229,690 Units outstanding at January 31,
1997.

SOUTHMARK BANKRUPTCY AND CHANGE IN GENERAL PARTNER
- --------------------------------------------------

On July 14, 1989, Southmark filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Neither the Partnership, McNeil nor the
Corporate General Partner were included in the filing. Southmark's
reorganization plan became effective August 10, 1990. Under the plan, most of
Southmark's assets, which included Southmark's interests in the Corporate
General Partner, were sold or liquidated for the benefit of creditors.

In accordance with Southmark's reorganization plan, Southmark, McNeil and
various of their affiliates entered into an asset purchase agreement on October
12, 1990, providing for, among other things, the transfer of control to McNeil
or his affiliates of 34 limited partnerships (including the Partnership) in the
Southmark portfolio.

<PAGE>
On February 14, 1991, pursuant to the asset purchase agreement as amended on
that date: (a) an affiliate of McNeil purchased the Corporate General Partner's
economic interest in the Partnership; (b) McNeil became the managing general
partner of the Partnership pursuant to an agreement with the Corporate General
Partner that delegated management authority to McNeil; and (c) McNeil Real
Estate Management, Inc. ("McREMI"), an affiliate of McNeil, acquired the assets
relating to the property management and partnership administrative business of
Southmark and its affiliates and commenced management of the Partnership's
properties pursuant to an assignment of the existing property management
agreements from the Southmark affiliates.

On September 6, 1991, the limited partners approved a restructuring proposal
that provided for (i) the replacement of the Corporate General Partner and
McNeil with the General Partner; (ii) the adoption of the Amended Partnership
Agreement, which substantially alters the provisions of the Original Partnership
Agreement relating to, among other things, compensation, reimbursement of
expenses, and voting rights; and (iii) the approval of a new property management
agreement with McREMI, the Partnership's property manager.

The Amended Partnership Agreement provides for a Management Incentive
Distribution ("MID") to replace all other forms of general partner compensation
other than property management fees and reimbursement of certain costs.
Additional Units may be issued in connection with the payment of the MID
pursuant to the Amended Partnership Agreement. See Item 8 - Note 2 -
"Transactions with Affiliates". For a discussion of the methodology for
calculating and distributing the MID, see Item 13 - Certain Relationships and
Related Transactions.

Settlement of Claims:

The Partnership filed claims with the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division (the "Bankruptcy Court") against
Southmark for damages relating to improper overcharges, breach of contract and
breach of fiduciary duty. The Partnership settled these claims in 1991, and such
settlement was approved by the Bankruptcy Court.

An Order Granting Motion to Distribute Funds to Class 8 Claimants dated April
14, 1995, was issued by the Bankruptcy Court. In accordance with the Order, in
May 1995, the Partnership received in full satisfaction of its claims, $49,818
in cash, and common and preferred stock in the reorganized Southmark which
represents the Partnership's pro-rata share of Southmark assets available for
Class 8 Claimants. The Partnership sold the Southmark common and preferred stock
in May 1995 for $16,039, which combined with the cash proceeds from Southmark,
resulted in a gain on legal settlement of $65,857.

CURRENT OPERATIONS
- ------------------

General:

<PAGE>
The Partnership does not directly employ any personnel. The Partnership is
managed by the General Partner, and, in accordance with the Amended Partnership
Agreement, the Partnership reimburses affiliates of the General Partner for
certain costs incurred by affiliates of the General Partner in connection with
the management of the Partnership's business. See Item 8 - Note 2 -
"Transactions with Affiliates."

The business of the Partnership to date has involved only one industry segment.
See Item 8 - Financial Statements and Supplementary Data. The Partnership has no
foreign operations. The business of the Partnership is not seasonal.

Business Plan:

The Partnership determined to evaluate market and other economic conditions to
establish the optimum time to commence an orderly liquidation of the
Partnership's assets in accordance with the terms of the Amended Partnership
Agreement. Taking such conditions as well as other pertinent information into
account, the Partnership has determined to begin orderly liquidation of all its
assets. Although there can be no assurance as to the timing of the liquidation
due to real estate market conditions, the general difficulty of disposing of
real estate, and other general economic factors, it is anticipated that such
liquidation would result in the dissolution of the Partnership followed by a
liquidating distribution to Unit holders by December 2001. Until such time as
the Partnership's assets are liquidated, the Partnerships plan of operations is
to preserve or increase the net operating income of its assets whenever
possible, while at the same time making whatever capital expenditures are
reasonable under the circumstances in order to preserve and enhance the value of
the Partnership's assets.

Competitive Conditions:

Since the principal business of the Partnership is to own and operate real
estate, the Partnership is subject to all of the risks incident to ownership of
real estate and interests therein, many of which relate to the illiquidity of
this type of investment. These risks include changes in general or local
economic conditions, changes in supply or demand for competing properties in an
area, changes in interest rates and availability of permanent mortgage funds
which may render the sale or refinancing of a property difficult or
unattractive, changes in real estate and zoning laws, increases in real property
tax rates and Federal or local economic or rent controls. The illiquidity of
real estate investments generally impairs the ability of the Partnership to
respond promptly to changed circumstances. The Partnership competes with
numerous established companies, private investors (including foreign investors),
real estate investment trusts, limited partnerships and other entities (many of
which have greater resources than the Partnership) in connection with the sale,
financing and leasing of properties. The impact of these risks on the
Partnership, including losses from operations and foreclosures of the
Partnership's properties, is described in Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations. See Item 2 -
Properties for discussion of competitive conditions at the Partnership's
properties.

<PAGE>
Forward Looking Information:

Within this document, certain statements are made as to the expected occupancy
trends, financial condition, results of operations, and cash flows of the
Partnership for periods after December 31, 1996. All of these statements are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These statements are not
historical and involve risks and uncertainties. The Partnership's actual
occupancy trends, financial condition, results of operations, and cash flows for
future periods may differ materially due to several factors. These factors
include, but are not limited to, the Partnership's ability to control costs,
make necessary capital improvements, negotiate sales or refinancings of its
properties and respond to changing economic and competitive factors

Other Information:

The environmental laws of the Federal government and of certain state and local
governments impose liability on current property owners for the clean-up of
hazardous and toxic substances discharged on the property. This liability may be
imposed without regard to the timing, cause or person responsible for the
release of such substances onto the property. The Partnership could be subject
to such liability in the event that it owns properties having such environmental
problems. The Partnership has no knowledge of any pending claims or proceedings
against the Partnership regarding such environmental problems.

<PAGE>
ITEM 2. PROPERTIES
- ------- ----------

The following table sets forth the properties of the Partnership at December 31,
1996. The buildings and the land on which they are located are owned by the
Partnership in fee, subject in each case to a first lien deed of trust as set
forth more fully in Item 8 - Note 5 - "Mortgage Notes Payable". See also Item 8
- - Note 4 - "Real Estate Investments" and Schedule III - "Real Estate Investments
and Accumulated Depreciation and Amortization." In the opinion of management,
the properties are adequately covered by insurance.

<TABLE>
<CAPTION>
Net Basis 1996 Date
Property Description of Property Debt Property Tax Acquired
- -------- ----------- ----------- ---- ------------ --------

<S> <C> <C> <C> <C> <C>
Brendon Way (1) Apartments
Indianapolis, IN 770 units $ 9,891,890 $ 17,829,789 $ 444,108 1/82

Castle Bluff (2) Apartments
Kentwood, MI 241 units 2,360,133 4,427,466 135,249 1/82

Channingway Apartments
Columbus, OH 770 units 9,422,017 12,791,999 179,007 12/82

Lodge at
Aspen Grove
(formerly Buccaneer
Village) (3) Apartments
Denver, CO 284 units 4,604,766 5,451,038 71,591 2/82

Palisades at the
Galleria (4) Apartments
Atlanta, GA 370 units 6,713,909 10,505,263 82,535 7/82

Plaza Westlake (5)
Glendale Retail Center
Heights, IL 121,407 sq. ft. 4,228,637 3,853,518 93,142 3/82
--------------- ------------- ------------

$ 37,221,352 $ 54,859,073 $ 1,005,632
=============== ============= ============
</TABLE>
- -----------------------------------------
Total: Apartments - 2,435 units
Retail Center - 121,407 sq. ft.

(1) Brendon Way Apartments is owned by Brendon Way Fund XII Associates, a
general partnership, which is wholly-owned by the Partnership and the
General Partner.

(2) Castle Bluff Apartments is owned by Castle Bluff Fund XII Associates,
L.P. which is wholly-owned by the Partnership and the General Partner.

(3) Lodge at Aspen Grove is owned by Buccaneer Fund XII, Ltd. which is
wholly-owned by the Partnership.

(4) Palisades at the Galleria Apartments is owned by Palisades Fund
XII Associates, L.P. which is wholly-owned by the Partnership.

(5) Plaza Westlake is owned by Plaza Westlake Fund XII, Ltd. which is
wholly-owned by the Partnership.
<PAGE>

The following table sets forth the properties' occupancy rate and rent per
square foot for each of the last five years:

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------- ------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Brendon Way
Occupancy Rate............ 82% 86% 90% 90% 85%
Rent Per Square Foot...... $ 5.97 $ 6.12 $ 6.05 $ 5.60 $ 5.68

Castle Bluff
Occupancy Rate............ 97% 96% 98% 93% 93%
Rent Per Square Foot...... $ 7.55 $ 7.28 $ 6.92 $ 6.62 $ 6.37

Channingway
Occupancy Rate............ 88% 86% 89% 91% 89%
Rent Per Square Foot...... $ 6.35 $ 5.88 $ 5.88 $ 5.75 $ 5.46

Lodge at Aspen Grove
Occupancy Rate............ 97% 94% 95% 96% 97%
Rent Per Square Foot...... $ 8.14 $ 7.92 $ 7.42 $ 7.00 $ 6.25

Palisades at the Galleria
Occupancy Rate............ 96% 97% 99% 98% 92%
Rent Per Square Foot...... $ 8.69 $ 8.20 $ 7.83 $ 7.04 $ 6.22

Plaza Westlake
Occupancy Rate............ 100% 98% 99% 100% 85%
Rent Per Square Foot...... $ 8.60 $ 7.75 $ 7.73 $ 7.92 $ 7.84

</TABLE>
Occupancy rate represents all units leased divided by the total number of units
for residential properties and square footage leased divided by total square
footage for other properties as of December 31 of the given year. Rent per
square foot represents all revenue, except interest, derived from the property's
operations divided by the leasable square footage of the property.

Competitive Conditions at Properties

Brendon Way is competing in an increasingly soft market with many lease
incentives available to renters. The property's occupancy is currently below the
average sub-market occupancy rate of 90%. Rental rates at Brendon Way are
averaging $.60 per square foot, which is comparable to the rates offered by
competitors in the Indianapolis sub-market in which Brendon Way is located.
Minor renovations have improved the curb appeal of the property. The lack of
funds to complete a major renovation of the aging property creates a challenge
for Brendon Way to stay competitive.

Castle Bluff is in a highly competitive market with the occupancy rates running
between 94% and 99%. Castle Bluff is currently competing in a robust economy.
The Kentwood, Michigan property has done some renovations to remain aggressive
in the market and anticipates raising the rental rates to $.68 per square foot.

<PAGE>
Channingway is located in an area east of Columbus, Ohio with a sub-market of
28,355 apartment units. The property is currently below the market average
occupancy rate of 94% and monthly rental rates are slightly lower than market.
In 1997, the property will continue to cure the deferred maintenance items to
add value and marketability to the community.

Since 1992, the rental rates at Lodge at Aspen Grove have increased by 30% due
to improved market conditions. The market maintains a strong occupancy level at
96%. The Denver economy is still expanding and creating job growth that is
fueling new construction. During 1996, 4,600 units were added to the
metropolitan area.

Occupancy rates at Palisades at the Galleria have remained strong since the 1991
renovation program began. The $3 million renovation program included new
interiors, signage, exterior painting, asphalt and upgrading the clubhouse. The
Atlanta sub-market continues to maintain average occupancy rates running between
90% and 92%. Due to increased multi-family construction and road construction in
the area, the property may experience a slight decline in the occupancy rate
during 1997.

Plaza Westlake enters 1997 with an occupancy rate of 100%, well above the market
average of 89%. Plaza Westlake is located in Glendale Heights, Illinois in a
high traffic area with a proven anchor. Construction of a new 80,000 square foot
strip center is currently underway with plans to build an additional 15,000
square foot retail building in the vicinity of Plaza Westlake.

The following schedule shows lease expirations for the Partnership's commercial
property for 1997 through 2006:

Number of Annual % of Gross
Expirations Square Feet Rent Annual Rent
----------- ----------- -------- -----------

Plaza Westlake
- --------------
1997 3 5,963 $ 65,308 7%
1998 4 27,984 260,264 30%
1999 5 73,295 375,114 44%
2000 2 3,690 48,619 6%
2001 3 9,438 111,138 13%
2002-2006 - - - -

No residential tenant leases 10% or more of the available rental space. The
following schedule reflects information on commercial tenants occupying 10% or
more of the leasable square feet for the commercial property:

Nature of
Business Square Footage Lease
Use Leased Annual Rent Expiration
- ---------- -------------- ----------- ----------

Plaza Westlake

Entertainment 17,584 $ 149,464 1998
Retail 68,020 310,857 1999

<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------

The Partnership is not party to, nor are any of the Partnership's properties the
subject of, any material pending legal proceedings, other than ordinary, routine
litigation incidental to the Partnership's business.

James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger,
Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners L.P.,
McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert A. McNeil,
Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil Real Estate
Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI,
Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real Estate Fund XIV, Ltd.,
McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real
Estate Fund XXI, L.P., McNeil Real Estate Fund XXII, L.P., McNeil Real Estate
Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund
XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., et al. - Superior Court of
the State of California for the County of Los Angeles, Case No. BC133799 (Class
and Derivative Action Complaint).

The action involves purported class and derivative actions brought by limited
partners of each of the fourteen limited partnerships that were named as nominal
defendants as listed above (as defined in this Section, the "Partnerships").
Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate
Management, Inc. and three of their senior officers and/or directors (as defined
in this Section, collectively, the "Defendants") breached their fiduciary duties
and certain obligations under the respective Amended Partnership Agreement.
Plaintiffs allege that Defendants have rendered such Units highly illiquid and
artificially depressed the prices that are available for Units on the resale
market. Plaintiffs also allege that Defendants engaged in a course of conduct to
prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating
purportedly false, misleading and inadequate information. Plaintiffs further
allege that Defendants acted to advance their own personal interests at the
expense of the Partnerships' public unit holders by failing to sell Partnership
properties and failing to make distributions to unitholders.

On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint.
Plaintiffs are suing for breach of fiduciary duty, breach of contract and an
accounting, alleging, among other things, that the management fees paid to the
McNeil affiliates over the last six years are excessive, that these fees should
be reduced retroactively and that the respective Amended Partnership Agreements
governing the Partnerships are invalid. On January 7, 1997, the Court ordered
consolidation with three other similar actions.

The Partnerships filed a demurrer to the complaint and a motion to strike on
February 14, 1997, seeking to dismiss the complaint in all respects. The
demurrer is pending. The Partnerships deny that there is any merit to
Plaintiff's allegations and intend to vigorously defend this action.

For a discussion of the Southmark bankruptcy, see Item 1 - Business.

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

None.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP AND
- ------- ------------------------------------------------------------
RELATED SECURITY HOLDER MATTERS
-------------------------------

(A) There is no established public trading market for limited partnership
units, nor is one expected to develop.

(B) Title of Class Number of Record Unit Holders

Limited partnership units 13,674 as of January 31, 1997

(C) No distributions were made to the limited partners in 1996 or 1995,
and none are anticipated in 1997. The Partnership accrued distributions
for the MID of $924,117 and $1,044,865 for the benefit of the General
Partner for the years ended December 31, 1996 and 1995, respectively.
Total MID distributions of $3,512,412 remain unpaid as of December 31,
1996. See Item 8 - Note 2 - "Transactions with Affiliates." The
Partnership anticipates making additional distributions to the General
Partner for the contingent MID in 1997. See Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations
for a discussion of distributions and the likelihood that they will be
resumed to the limited partners.

<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------

The following table sets forth a summary of certain financial data for the
Partnership. This summary should be read in conjunction with the Partnership's
financial statements and notes thereto appearing in Item 8.

<TABLE>
<CAPTION>
Statements of Years Ended December 31,
Operations 1996 1995 1994 1993 1992
- ------------------ ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Rental revenue............... $ 16,327,181 $ 17,533,914 $ 21,295,696 $ 24,228,119 $ 23,603,862
Total revenue................ 18,046,806 21,195,706 27,701,373 32,481,572 24,837,444
Gain on disposition of
real estate.................. 1,506,169 3,427,513 6,307,885 8,193,880 714,048
Income (loss) before
extraordinary item........... 391,871 1,183,425 3,220,934 4,178,756 (3,917,231)
Extraordinary gain on
extinguishment of debt, net.. - 1,304,587 246,149 - 79,639
Net income (loss)............ 391,871 2,488,012 3,467,083 4,178,756 (3,837,592)

Net income (loss) per limited
partnership unit:
Income (loss) before
extraordinary item........... $ (7.12) $ 4.89 $ 13.27 $ 17.20 $ (16.11)
Extraordinary gain on
extinguishment of debt....... - 5.25 1.01 - .33
------------- ------------ ----------- ----------- ------------
Net income (loss)............ $ (7.12) $ 10.14 $ 14.28 $ 17.20 $ (15.78)
============= ============ =========== =========== ============

As of December 31,
Balance Sheets 1996 1995 1994 1993 1992
- -------------- -------------- -------------- --------------- --------------- ---------

Real estate investments, net... $ 37,221,352 $ 39,098,068 $ 40,915,017 $ 52,304,839 $ 65,885,322
Assets held for sale........... - 3,164,323 12,724,693 11,421,936 7,484,189
Total assets................... 42,666,935 52,112,866 60,189,348 72,830,100 78,455,373
Mortgage notes payable......... 54,859,073 59,160,426 68,152,522 79,867,507 90,732,765
Partners' deficit.............. (18,381,430) (17,849,184) (19,292,331) (21,594,865) (24,581,787)
</TABLE>

See Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations. The following properties have been sold during the five
years ended December 31, 1996.

Property Date Sold
-------- ---------

Millwood Park October 1996
Lamar Plaza July 1995
Sundance Apartments June 1995
Fox Run Apartments December 1994
Village East Apartments November 1994
Cedar Mill Crossing Apartments December 1993
Valley Fair Shopping Center May 1992

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

FINANCIAL CONDITION
- -------------------

The Partnership was formed to acquire, operate and ultimately dispose of a
portfolio of income-producing real properties. As of December 31, 1996, the
Partnership owned six properties. All of the Partnership properties are subject
to mortgage notes.

During 1996, the Partnership sold one property. This sale resulted in net cash
proceeds to the Partnership of $1,252,142.

RESULTS OF OPERATIONS
- ---------------------

1996 compared to 1995

Revenue:

Total Partnership revenues decreased in 1996 by $3,148,900 or 15% as compared to
the same period in 1995. Rental revenue decreased by $1,206,733 or 7% while
interest income increased $45,034. In 1996, the Partnership incurred a gain on
disposition of real estate totaling $1,506,169, while in 1995, gains on legal
settlement and disposition of real estate totaled $3,493,370.

The decrease in rental revenue is due to the loss of revenue generated by
Sundance and Lamar Plaza, which were sold in June and July of 1995, and Millwood
Park, which was sold in October of 1996. See Item 8 - Note 6 - "Dispositions of
Properties". This decrease was partially offset by the increase in rental
revenue at four of the Partnership's properties.

Expenses:

Partnership expenses decreased by $2,357,346 for the year ended 1996 as compared
to 1995 primarily due to the sales of Sundance and Lamar Plaza in 1995 and
Millwood Park in 1996. The effects from these transactions were declines of
$807,431 for interest, $623,094 for depreciation, $73,719 for property taxes,
$185,004 for personnel expenses, $97,043 for utilities, $133,406 for repairs and
maintenance, $84,924 for property management fees, and $137,026 for other
operating expenses.

In addition to the sales of Sundance, Lamar Plaza, and Millwood Park, other
factors affected the level of expenses reported by the remaining properties.
Interest expense - affiliates decreased by $107,231 or 67% due to the to the
repayment of affiliate advances of $235,146 in October 1995 and $1,419,339 in
May 1996.

Property tax expense decreased by $77,316 or 7% (excluding the effects of the
sales noted above) due to the successful appeal of prior year real estate taxes
at Channingway and Palisades at the Galleria.

Utilities expense increased by $109,328 or 9% (excluding the effects of the
sales noted above) in 1996 compared to 1995 due the increase in costs of gas and
oil rates with the largest increase occurring at Brendon Way.

<PAGE>
General and administrative expenses increased $70,648 or 71% in 1996 as compared
to the same period last year. This increase is due to legal and professional
fees relating to the land condemnation at Palisades and the sale of Millwood
Park.

General and administrative - affiliate expenses decreased $103,237 or 23% for
the year ended 1996 as compared to 1995. This decrease is due to a decrease in
the percentage of the Partnership's portion of reimbursable costs which is based
on the number of properties owned.

General and administrative - affiliates expense decreased by $103,237 or 23% for
the period ended 1996 as compared to 1995. The decrease is due to the reduction
of overhead expenses allocable to the Partnership.

1995 compared to 1994

Revenue:

Total Partnership revenues decreased in 1995 by $6,505,667 or 23% as compared to
the same period in 1994. Rental revenue decreased by $3,761,782 or 18% while
interest income increased $91,507. In 1994 the Partnership incurred gains on
involuntary conversion and disposition of real estate totaling $6,328,762, while
in 1995 gains on legal settlement and disposition of real estate totaled
$3,493,370.

Rental revenue for the year ended 1995 was $17,533,914 as compared to
$21,295,696 in 1994. The decrease of $3,761,782 is due to the loss in rental
revenue generated by Village East and Fox Run, which were sold in November and
December of 1994 and Sundance and Lamar Plaza, which were sold in June and July
of 1995. This decrease was partially offset by the increase in rental revenue at
six of the Partnership's properties.

Interest income increased by $91,507 as compared to the same period in 1994.
This increase is due to larger average cash balances being invested in
interest-bearing accounts.

Expenses:

Partnership expenses decreased by $4,468,158 for the year ended 1995 as compared
to 1994 primarily due to the sales of Fox Run and Village East in 1994 and
Sundance and Lamar Plaza in 1995. The effects from these transactions were
declines of $1,596,275 for interest, $798,669 for depreciation, $222,028 for
property taxes, $524,486 for personnel expenses, $350,785 for utilities,
$543,305 for repairs and maintenance, $204,565 for property management fees, and
$261,979 for other operating expenses.

In addition to the sales of Fox Run, Village East, Sundance, and Lamar Plaza,
other factors affected the level of expenses reported by the remaining
properties. Interest expense - affiliates increased by $22,025 or 16% due to an
increase in the prime rate used to calculate interest expense on the advances.

General and administrative expenses decreased $64,728 or 39% in 1995 compared to
1994 due to a reduction in legal and consulting fees and tax preparation.

General and administrative - affiliate expenses decreased $61,078 or 12% for the
year ended 1995 as compared to 1994. This decrease is due to a decrease in the
percentage of the Partnership's portion of reimbursable costs which is based on
the number of properties owned.

<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------

At December 31, 1996, the Partnership held cash and cash equivalents of
$1,768,249, down $4,023,114 from 1995.

The Partnership has experienced positive cash flow from operations of $4,710,750
for the three years ended December 31, 1996. During 1995, the Partnership
received net cash proceeds of $5,017,966 for the refinancing of Millwood Park,
Lodge at Aspen Grove, Palisades at the Galleria and Plaza Westlake. The
Partnership also sold five properties in the last three years and has received
$13,389,214 in proceeds along with insurance proceeds of $40,441 from the 1994
fire at Brendon Way and $6,000 in advances from affiliates. Over the last three
years the Partnership has used cash to fund $5,864,082 in additions to real
estate investments, $9,300,638 to retire mortgage notes related to the sold
properties, $4,275,336 in principal payments, $718,260 for additions to deferred
borrowing costs, $4,464,284 for the repayment of advances and mortgage loans
from affiliates and $2,510,551 for the payment of the MID.

Cash provided from operating activities declined $2,239,870 in 1996 as compared
to 1995. This decrease can be attributed to the sale of three properties in the
past two years and the increase in cash paid to affiliates and property taxes
paid.

The Partnership generated cash from operating activities of $2,423,582 in 1995
as compared to $2,103,456 in 1994. This increase can be attributed to the
decrease in the amount paid to affiliates during 1995, which consisted of
repayment of accrued interest and MID and a decrease in property taxes paid.

The Partnership continues to invest substantial sums into improvements at its
properties. A total of $5,864,082 of improvements have been added to the
Partnership's properties over the past three years. An additional $1.87 million
of improvements have been budgeted for 1997.

Short-term liquidity:

The Partnership expended considerable resources during the past three years to
restore its properties to good operating condition. These expenditures have been
necessary to maintain the competitive position of the Partnership's aging
properties in each of their markets. The capital improvements made during the
past three years have enabled the Partnership to increase its rental revenues
and reduce certain of its repairs and maintenance expenses. The Partnership has
budgeted an additional $1.87 million of capital improvements for 1997, to be
funded from property operations and cash reserves.

At December 31, 1996, the Partnership held cash and cash equivalents of
$1,768,249. The General Partner considers this level of cash reserves to be
adequate to meet the Partnership's operating needs. The General Partner
anticipates using reserves to repay the affiliate payables. The General Partner
believes that anticipated operating results for 1997 will be sufficient to fund
the Partnership's budgeted capital improvements for 1997 and to repay the
current portion of the Partnership's mortgage notes.

<PAGE>
Long-term liquidity:

The Partnership's working capital needs have been supported by advances from
affiliates during the past several years. Some of that support was provided on a
short-term basis to meet monthly operating requirements, with repayment
occurring as funds became available; other advances were longer term in nature
due to lack of funds for repayment. Additionally, the General Partner has
allowed the Partnership to defer payment of MID and reimbursements until such
time as the Partnership's cash reserves allow payments. During 1994, the
Partnership began to make repayments to the General Partner for advances and
accrued MID. The Partnership will continue to make such payments as is allowed
by cash reserves and cash flows of the Partnership. However, the Partnership
will not be able to repay the General Partner all payables outstanding in the
foreseeable future. The General Partner will continue to defer the unpaid sums
until the Partnership's cash reserves allow such payments.

For the long-term, property operations will remain the primary source of funds.
In this regard, the General Partner expects that the $5.86 million of capital
improvements made by the Partnership during the past three years will yield
improved cash flow from property operations in the future. If the Partnership's
cash position deteriorates, the General Partner may elect to defer certain of
the capital improvements, except where such improvements are expected to
increase the competitiveness or marketability of the Partnership's properties.

Income allocation and distributions:

Terms of the Amended Partnership Agreement specify that income before
depreciation is allocated to the General Partner to the extent of MID paid in
cash. Depreciation is allocated in the ratio of 95:5 to the limited partners and
the General Partner, respectively. Therefore, for the three year period ended
December 31, 1996, $2,027,598, $156,482 and $173,354, respectively, of net
income was allocated to the General Partner. The limited partners received
allocations of net income (loss) of $(1,635,727), $2,331,530 and $3,293,729 for
the three year period ended December 31, 1996, respectively.

With the exception of the MID, distributions to partners have been suspended
since 1986 as part of the General Partner's policy of maintaining adequate cash
reserves. Distributions to the limited partners will remain suspended for the
foreseeable future. The General Partner will continue to monitor the cash
reserves and working capital needs of the Partnership to determine when cash
flows will support distributions to the limited partners. A distribution of
$924,117 for the MID has been accrued by the Partnership for the year ended
December 31, 1996 for the General Partner.

<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- --------------------------------------------
<TABLE>
<CAPTION>
Page
Number
INDEX TO FINANCIAL STATEMENTS
- -----------------------------
Financial Statements:

<S> <C>
Report of Independent Public Accountants....................................... 15

Balance Sheets at December 31, 1996 and 1995................................... 16

Statements of Operations for each of the three years in the period
ended December 31, 1996..................................................... 17

Statements of Partners' Deficit for each of the three years in the
period ended December 31, 1996.............................................. 18

Statements of Cash Flows for each of the three years in the period
ended December 31, 1996..................................................... 19

Notes to Financial Statements.................................................. 21

Financial Statement Schedule -
Schedule III - Real Estate Investments and Accumulated
Depreciation and Amortization............................................ 33

</TABLE>

All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of
McNeil Real Estate Fund XII, Ltd.:

We have audited the accompanying balance sheets of McNeil Real Estate Fund XII,
Ltd. (a California limited partnership) as of December 31, 1996 and 1995, and
the related statements of operations, partners' deficit and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements and the schedule referred to below are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of McNeil Real Estate Fund XII,
Ltd. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, 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 schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.

/s/ Arthur Andersen LLP

Dallas, Texas
March 10, 1997

<PAGE>
McNEIL REAL ESTATE FUND XII, LTD.

BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
-----------------------------------
1996 1995
--------------- ----------------
<S> <C> <C>
ASSETS
- ------
Real estate investments:
Land..................................................... $ 6,079,334 $ 6,280,580
Buildings and improvements............................... 75,302,352 73,318,763
-------------- -------------
81,381,686 79,599,343
Less: Accumulated depreciation and amortization......... (44,160,334) (40,501,275)
-------------- -------------
37,221,352 39,098,068

Asset held for sale......................................... - 3,164,323

Cash and cash equivalents................................... 1,768,249 5,791,363
Cash segregated for security deposits....................... 433,750 316,665
Accounts receivable......................................... 242,360 206,847
Prepaid expenses and other assets........................... 138,853 149,212
Escrow deposits............................................. 1,167,732 1,459,480
Deferred borrowing costs, net of accumulated
amortization of $617,954 and $476,661 at
December 31, 1996 and 1995, respectively................. 1,694,639 1,926,908
-------------- -------------
$ 42,666,935 $ 52,112,866
============== =============
LIABILITIES AND PARTNERS' DEFICIT
- ---------------------------------
Mortgage notes payable...................................... $ 54,859,073 $ 59,160,426
Accounts payable............................................ 16,402 86,164
Accrued expenses............................................ 142,099 146,379
Accrued interest............................................ 383,990 411,489
Accrued property taxes...................................... 837,798 935,318
Deferred gain - land condemnation........................... 297,754 -
Advances from Southmark..................................... 37,472 35,147
Advances from affiliates - General Partner.................. 29,494 1,474,968
Payable to affiliates - General Partner..................... 3,941,378 7,196,483
Security deposits and deferred rental income................ 502,905 515,676
-------------- -------------
61,048,365 69,962,050
-------------- -------------

Commitments and Contingencies

Partners' deficit:
Limited partners - 240,000 limited partnership units
authorized; 229,828 and 229,980 limited partnership
units issued and outstanding at
December 31, 1996 and 1995, respectively............... (9,148,979) (7,513,252)
General Partner.......................................... (9,232,451) (10,335,932)
-------------- -------------
(18,381,430) (17,849,184)
-------------- -------------
$ 42,666,935 $ 52,112,866
============== =============
</TABLE>

See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XII, LTD.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1996 1995 1994
-------------- -------------- ---------------
<S> <C> <C> <C>
Revenue:
Rental revenue.......................... $ 16,327,181 $ 17,533,914 $ 21,295,696
Interest................................ 213,456 168,422 76,915
Gain on dispositions of real estate..... 1,506,169 3,427,513 6,307,885
Gain on involuntary conversion.......... - - 20,877
Gain on legal settlement................ - 65,857 -
------------- ------------- --------------
Total revenue......................... 18,046,806 21,195,706 27,701,373
------------- ------------- --------------

Expenses:
Interest................................ 5,112,770 6,204,096 7,642,760
Interest - affiliates................... 53,622 160,853 138,828
Depreciation and amortization........... 3,659,059 4,019,174 4,619,944
Property taxes.......................... 1,071,510 1,222,545 1,515,606
Personnel expenses...................... 1,842,298 2,077,845 2,696,563
Repairs and maintenance................. 2,185,251 2,321,887 2,956,539
Property management fees -
affiliates............................ 811,532 877,423 1,067,967
Utilities............................... 1,359,246 1,346,961 1,729,864
Other property operating expenses....... 1,043,379 1,232,640 1,437,705
General and administrative.............. 169,797 99,149 163,877
General and administrative -
affiliates............................ 346,471 449,708 510,786
------------- ------------- --------------
Total expenses........................ 17,654,935 20,012,281 24,480,439
------------- ------------- --------------

Income before extraordinary item........... 391,871 1,183,425 3,220,934
Extraordinary gain on extinguishment
of debt, net............................ - 1,304,587 246,149
------------- ------------- --------------
Net income................................. $ 391,871 $ 2,488,012 $ 3,467,083
============= ============= ==============

Net income allocable to limited
partners................................ $ (1,635,727) $ 2,331,530 $ 3,293,729
Net income allocable to General
Partner................................ 2,027,598 156,482 173,354
------------- ------------- --------------
Net income................................. $ 391,871 $ 2,488,012 $ 3,467,083
============= ============= ==============

Net income per limited partnership unit:
Income before extraordinary item........ $ (7.12) $ 4.89 $ 13.27
Extraordinary gain on extinguishment
of debt............................... - 5.25 1.01
------------- ------------- --------------
Net income.............................. $ (7.12) $ 10.14 $ 14.28
============= ============= ==============
</TABLE>

See accompanying notes to financial statements.

<PAGE>
McNEIL REAL ESTATE FUND XII, LTD.

STATEMENTS OF PARTNERS' DEFICIT

For the Years Ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
Total
General Limited Partners'
Partner Partners Deficit
---------------- ---------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1993.............. $ (8,456,354) $ (13,138,511) $ (21,594,865)

Net income................................ 173,354 3,293,729 3,467,083

Management Incentive Distribution......... (1,164,549) - (1,164,549)
-------------- -------------- --------------

Balance at December 31, 1994.............. (9,447,549) (9,844,782) (19,292,331)

Net income................................ 156,482 2,331,530 2,488,012

Management Incentive Distribution......... (1,044,865) - (1,044,865)
-------------- -------------- --------------

Balance at December 31, 1995.............. (10,335,932) (7,513,252) (17,849,184)

Net income................................ 2,027,598 (1,635,727) 391,871

Management Incentive Distribution......... (924,117) - (924,117)
-------------- -------------- --------------

Balance at December 31, 1996.............. $ (9,232,451) $ (9,148,979) $ (18,381,430)
============== ============== ==============
</TABLE>

See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XII, LTD.

STATEMENTS OF CASH FLOWS

Increase (Decrease) in Cash and Cash Equivalents

<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
Cash flows from operating activities:
<S> <C> <C> <C>
Cash received from tenants..................... $ 16,089,650 $ 17,504,409 $ 21,232,256
Cash received from legal settlement............ - 65,857 -
Cash paid to suppliers......................... (6,855,751) (7,527,222) (8,698,900)
Cash paid to affiliates........................ (3,126,674) (1,102,197) (1,809,129)
Interest received.............................. 213,456 168,422 76,915
Interest paid.................................. (4,985,617) (5,428,928) (6,643,256)
Interest paid to affiliates.................... (79,757) (264,854) (470,490)
Property taxes paid............................ (1,071,595) (991,905) (1,583,940)
------------- ------------- -------------
Net cash provided by operating activities......... 183,712 2,423,582 2,103,456
------------- ------------- -------------

Cash flows from investing activities:
Additions to real estate investments........... (2,249,348) (1,646,416) (1,968,318)
Proceeds from disposition of
real estate investments...................... 5,210,430 45,000 8,133,784
Land condemnation escrow....................... 499,000 - -
Insurance proceeds from fire................... - - 40,441
------------- ------------- -------------
Net cash provided by (used in)
investing activities........................... 3,460,082 (1,601,416) 6,205,907
------------- ------------- -------------

Cash flows from financing activities:
Principal payments on mortgage
notes payable................................ (343,065) (2,489,684) (1,442,587)
Net proceeds from refinancing of
mortgage notes payable....................... - 5,017,966 -
Principal addition to mortgage note payable
from release of capital improvements
escrow....................................... 300,000 - -
Retirement of mortgage notes due to
dispositions of real estate.................. (3,958,288) - (5,342,350)
Deferred borrowing costs paid.................. (35,665) (637,704) (44,891)
Repayment of mortgage loans from
affiliate.................................... - - (1,603,135)
Advances from affiliates - General
Partner...................................... - - 6,000
Repayment of advances from
affiliates - General Partner................. (1,419,339) (235,146) (1,206,664)
Management Incentive Distribution.............. (2,210,551) - (300,000)
------------- ------------- -------------
Net cash provided by (used in) financing
activities..................................... (7,666,908) 1,655,432 (9,933,627)
-------------- ------------- --------------

Net increase (decrease) in cash and
cash equivalents............................. (4,023,114) 2,477,598 (1,624,264)

Cash and cash equivalents at
beginning of year............................ 5,791,363 3,313,765 4,938,029
------------- ------------- -------------

Cash and cash equivalents at end of year.......... $ 1,768,249 $ 5,791,363 $ 3,313,765
============= ============= =============
</TABLE>

See discussion of noncash investing and financing activities in Notes 6 and 7.

See accompanying notes to financial statements.

<PAGE>
McNEIL REAL ESTATE FUND XII, LTD.

STATEMENTS OF CASH FLOWS

Reconciliation of Net Income to Net Cash Provided by
Operating Activities

<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------
1996 1995 1994
------------- -------------- --------------
<S> <C> <C> <C>
Net income................................. $ 391,871 $ 2,488,012 $ 3,467,083
------------- ------------- -------------

Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization........... 3,659,059 4,019,174 4,619,944
Amortization of discounts on
mortgage notes payable................ - 217,857 308,183
Amortization of deferred
borrowing costs....................... 152,327 170,772 226,604
Net interest added to advances
from Southmark........................ 2,325 2,457 2,035
Net interest added to advances
from affiliates - General Partner..... - 27,726 131,727
Gain on disposition of real estate...... (1,506,169) - (6,307,885)
Gain on involuntary conversion.......... - (3,427,513) (20,877)
Extraordinary gain on extinguish-
ment of debt.......................... - (1,304,587) (246,149)
Changes in assets and liabilities:
Cash segregated for security
deposits............................ (117,085) (13,229) 44,550
Accounts receivable................... (35,513) 110,712 64,178
Prepaid expenses and other
assets.............................. 10,359 109,456 30,607
Escrow deposits....................... (166,824) (263,246) 608,375
Accounts payable...................... (69,762) (134,177) (427,528)
Accrued expenses...................... (4,280) (343) 98,033
Accrued interest...................... (53,634) 252,355 (705)
Accrued property taxes................ (97,520) (26,141) (186,427)
Payable to affiliates - General
Partner............................. (1,968,671) 224,934 (230,376)
Security deposits and deferred
rental income....................... (12,771) (30,637) (77,916)
------------- ------------- --------------

Total adjustments................. (208,159) (64,430) (1,363,627)
-------------- ------------- --------------

Net cash provided by operating
activities............................ $ 183,712 $ 2,423,582 $ 2,103,456
============= ============= ==============
</TABLE>

See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XII, LTD.

NOTES TO FINANCIAL STATEMENTS
December 31, 1996

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------

Organization
- ------------

The Partnership is engaged in diversified real estate activities, including the
ownership, operation and management of residential and commercial real estate
and other real estate related assets. The Partnership has determined to evaluate
market and other economic conditions to establish the optimum time to commence
an orderly liquidation of the Partnership's assets in accordance with the terms
of the Amended Partnership Agreement. At December 31, 1996, the Partnership
owned six income-producing properties as described in Note 4 - Real Estate
Investments.

Basis of Presentation
- ---------------------

The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"). The preparation of financial
statements in conformity 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.

<PAGE>
The Partnership's financial statements include the accounts of the following
listed tier partnerships. These single asset tier partnerships were formed to
accommodate the refinancing of the respective property. The Partnership's and
the General Partner's ownership interest in each tier partnership is detailed
below. The Partnership retains effective control of each tier partnership. The
General Partner's minority interest is not presented as it is either negative or
immaterial.

% of Ownership Interest
Tier Partnership Partnership General Partner
---------------- ----------- ---------------

Limited Partnerships:
Buccaneer Fund XII, Ltd. (a)(c) 100% -%
Castle Bluff Fund XII Associates, L.P. (b) 99 1
Millwood Park Fund XII, Ltd. (a)(c) 100 -
Palisades Fund XII Associates, L.P. (a)(c) 100 -
Plaza Westlake Fund XII, Ltd. (a)(b) 100 -

General Partnerships:
Brendon Way Fund XII Associates (b) 99 1

(a) The general partner of these partnerships is a corporation whose stock is
100% owned by the Partnership.

(b) Included in financial statements for years ended December 31, 1996, 1995 and
1994.

Real Estate Investments
- -----------------------

Real estate investments are generally stated at the lower of depreciated cost or
fair value. Real estate investments are reviewed for impairment whenever events
or changes in circumstances indicate that their carrying amounts may not be
recoverable. When the carrying value of a property exceeds the sum of all
estimated future cash flows, an impairment loss is recognized. At such time, a
write-down is recorded to reduce the basis of the property to its estimated
recoverable amount.

The Partnership's method of accounting for real estate investments is in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS 121"), which the Partnership adopted effective January 1, 1996. The
adoption of SFAS 121 did not have a material impact on the accompanying
financial statements.

Improvements and betterments are capitalized and expensed through depreciation
charges. Repairs and maintenance are charged to operations as incurred.

Assets Held for Sale
- --------------------

Assets held for sale are stated at the lower of depreciated cost or fair value
less costs to sell. Depreciation on these assets ceases at the time they are
placed on the market for sale.

<PAGE>

Depreciation and Amortization
- -----------------------------

Buildings and improvements are depreciated using the straight-line method over
the estimated useful lives of the assets, ranging from 3 to 25 years. Tenant
improvements are amortized over the terms of the related tenant lease using the
straight-line method.

Cash and Cash Equivalents
- -------------------------

Cash and cash equivalents include cash on hand and cash on deposit with
financial institutions with original maturities of three months or less.
Carrying amounts for cash and cash equivalents approximate fair value.

Escrow Deposits
- ---------------

The Partnership is required to maintain escrow accounts in accordance with the
terms of various mortgage indebtedness agreements. These escrow accounts are
controlled by the mortgagee and are used for payment of property taxes, hazard
insurance, capital improvements and/or property replacements. Carrying amounts
for escrow deposits approximate fair value.

Deferred Borrowing Costs
- ------------------------

Loan fees and other related costs incurred to obtain long-term financing on real
property are capitalized and amortized using a method that approximates the
effective interest method over the terms of the related mortgage notes payable.
Amortization of deferred borrowing costs is included in interest expense on the
Statements of Operations.

Discounts on Mortgage Notes Payable
- -----------------------------------

Discounts on mortgage notes payable are being amortized over the remaining terms
of the related mortgage notes using the effective interest method. Amortization
of discounts on mortgage notes payable is included in interest expense on the
Statements of Operations.

Rental Revenue
- --------------

The Partnership leases its residential properties under short-term operating
leases. Lease terms generally are less than one year in duration. Rental revenue
is recognized as earned.

The Partnership leases its commercial property under non-cancelable operating
leases. Certain leases provide concessions and/or periods of escalating or free
rent. Rental revenue is recognized on a straight-line basis over the term of the
related leases. The excess of the rental revenue recognized over the contractual
rental payments is recorded as accrued rent receivable and included in accounts
receivable on the Balance Sheets.

<PAGE>
Income Taxes
- ------------

No provision for Federal income taxes is necessary in the financial statements
of the Partnership because, as a partnership, it is not subject to Federal
income tax, and the tax effect of its activities accrues to the partners.

Allocation of Net Income and Net Loss
- -------------------------------------

The Amended Partnership Agreement provides for net income of the Partnership for
both financial statement and income tax purposes to be allocated as indicated
below. For allocation purposes, net income and net loss of the Partnership are
determined prior to deductions for depreciation.

a) first, 5% of all deductions for depreciation shall be allocated to
the General Partner and 95% to the limited partners;

b) then, net income in an amount equal to the cumulative amount paid to
the General Partner for the Management Incentive Distribution ("MID")
for which no previous income allocations have been made, shall be
allocated to the General Partner; provided, however, that if all or a
portion of such payment consists of limited partnership units
("Units"), the amount of net income allocated shall be equal to the
amount of cash the General Partner would have otherwise received; and

c) then, any remaining net income shall be allocated to achieve the ratio
of 5% to the General Partner and 95% to the limited partners.

The Amended Partnership Agreement also provides that net losses, other than
those arising from a sale or refinancing, shall be allocated 5% to the General
Partner and 95% to the limited partners. Net losses arising from a sale or
refinancing shall be allocated 1% to the General Partner and 99% to the limited
partners.

Federal income tax law provides that the allocation of loss to a partner will
not be recognized unless the allocation is in accordance with a partner's
interest in the partnership or the allocation has substantial economic effect.
Internal Revenue Code Section 704(b) and accompanying Treasury Regulations
establish criteria for allocations of Partnership deductions attributable to
debt. The Partnership's tax allocations for 1996, 1995 and 1994 have been made
in accordance with these provisions.

Distributions
- -------------

Pursuant to the Amended Partnership Agreement and at the discretion of the
General Partner, distributions during each taxable year shall be made as
follows:

(a) first, to the General Partner, an amount equal to the MID; and

(b) any remaining distributable cash, as defined, shall be distributed 100%
to the limited partners.

<PAGE>
No distributions were made to the limited partners in 1996, 1995 or 1994. The
Partnership paid or accrued distributions of $924,117, $1,044,865 and $1,164,549
for the benefit of the General Partner for the years ended December 31, 1996,
1995 and 1994, respectively. These distributions are the MID pursuant to the
Amended Partnership Agreement.

Net Income (Loss) Per Limited Partnership Unit

Net income (loss) per Unit is computed by dividing net income (loss) allocated
to the limited partners by the weighted average number of Units outstanding. Per
Unit information has been computed based on 229,828, 229,980 and 230,594 Units
outstanding in 1996, 1995 and 1994.

Reclassifications
- -----------------

Certain reclassifications have been made to prior period amounts to conform with
the current year presentation.

NOTE 2 - TRANSACTIONS WITH AFFILIATES
- -------------------------------------

The Partnership pays property management fees equal to 5% of the gross rental
receipts of the Partnership's properties to McNeil Real Estate Management, Inc.
("McREMI"), an affiliate of the General Partner, for providing property
management services for the Partnership's residential and commercial properties
and leasing services for its residential properties. McREMI may also choose to
provide leasing services for the Partnership's commercial property, in which
case McREMI will receive property management fees from the commercial property
equal to 3% of the property's gross rental receipts plus leasing commissions
based on the prevailing market rate for such services where the property is
located.

The Partnership reimburses McREMI for its costs, including overhead, of
administering the Partnership's affairs.

Under terms of the Amended Partnership Agreement, the Partnership is paying the
MID to the General Partner. The maximum MID is calculated as 1% of the tangible
asset value of the Partnership. The maximum MID percentage decreases subsequent
to 1999. Tangible asset value is determined by using the greater of (i) an
amount calculated by applying a capitalization rate of 9% to the annualized net
operating income of each property or (ii) a value of $10,000 per apartment unit
for residential property and $50 per gross square foot for commercial property
to arrive at the property tangible asset value. The property tangible asset
value is then added to the book value of all other assets excluding intangible
items.

MID will be paid to the extent of the Entitlement Amount, and may be paid (i) in
cash, unless there is insufficient cash to pay the distribution in which event
any unpaid portion not taken in Units will be deferred and is payable, without
interest, from the first available cash and/or (ii) in Units. A maximum of 50%
of the MID may be paid in Units. The number of Units issued in payment of the
MID is based on the greater of $50 per unit or the net tangible asset value, as
defined, per Unit. No Units were issued in payment of the MID in 1996, 1995 or
1994.

<PAGE>
During 1991, the Partnership amended its capitalization policy and began
capitalizing certain costs of improvements and betterments which under policies
of prior management had been expensed when incurred. The purpose of the
amendment was to more properly recognize items which were capital in nature. The
effect of the amendment standing alone was evaluated at the time the change was
made and determined not to be material to the financial statements of the
Partnership in 1991, nor was it expected to be material in any future year.
However, the amendment can have a material effect on the calculation of the
Entitlement Amount which determines the amount of MID earned. Capital
improvements are excluded from cash flow, as defined. The majority of base
period cash flow was measured under the previous capitalization policy, while
incentive period cash flow is determined using the amended policy. Under the
amended policy, more items are capitalized, and cash flow increases. The
amendment of the capitalization policy did not materially affect the MID for
1996, 1995 or 1994 because the Entitlement Amount was sufficient to pay MID
notwithstanding the amendment to the capitalization policy.

Any amount of the MID that is paid to the General Partner in Units will be
treated as if cash is distributed to the General Partner and is then contributed
to the Partnership by the General Partner. The MID represents a return of equity
to the General Partner for increasing cash flow, as defined, and accordingly is
treated as a distribution.

Compensation and reimbursements paid or accrued for the benefit of the General
Partner or its affiliates are as follows:

For the Years Ended December 31,
-----------------------------------
1996 1995 1994
---------- ---------- -----------

Property management fees - affiliates...... $ 811,532 $ 877,423 $ 1,067,967
Charged to interest expense:
Interest expense on affiliate
loans and advances.................... 53,622 160,853 138,828
Charged to general and
administrative - affiliates:
Partnership administration.............. 346,471 449,708 510,786
--------- --------- ----------
$1,211,625 $1,487,984 $ 1,717,581
========= ========= ==========

Charged to General Partner's deficit:
MID..................................... $ 924,117 $1,044,865 $ 1,164,549
========= ========= ==========

Payable to affiliates - General Partner at December 31, 1996 and 1995 consisted
primarily of accrued property management fees, MID and cost reimbursements and
are due and payable from operations. The General Partner has waived the
collection terms of the MID until the Partnership has an adequate level of cash
reserves. In 1996 and 1994, the Partnership paid $2,210,551 and $300,000,
respectively, from cash reserves for the MID.

<PAGE>
The total advances from affiliates at December 31, 1996 and 1995 consist of the
following:

1996 1995
--------- -------------
Advances from General Partner- revolving
credit facility $ - $ 1,419,339
Advances purchased by General Partner 27,903 27,903
Accrued interest payable 1,591 27,726
-------- ------------
$ 29,494 $ 1,474,968
======== ============

The advances are unsecured, due on demand and accrue interest at the prime
lending rate of the Bank of America plus 1%. The prime lending rate was 8.25%
and 8.5% at December 31, 1996 and 1995, respectively.

NOTE 3 - TAXABLE LOSS
- ---------------------

McNeil Real Estate Fund XII, Ltd. is a partnership and is not subject to Federal
and state income taxes. Accordingly, no recognition has been given to income
taxes in the accompanying financial statements of the Partnership since the
income or loss of the Partnership is to be included in the tax returns of the
individual partners. The tax returns of the Partnership are subject to
examination by Federal and state taxing authorities. If such examinations result
in adjustments to distributive shares of taxable income or loss, the tax
liability of the partners could be adjusted accordingly.

The Partnership's net assets and liabilities for financial reporting purposes
exceeded the net assets and liabilities for tax purposes by $3,627,641 in 1996,
$1,939,981 in 1995 and $8,345,846 in 1994.

<PAGE>
NOTE 4 - REAL ESTATE INVESTMENTS
- --------------------------------

The basis and accumulated depreciation of the Partnership's real estate
investments held at December 31, 1996 and 1995 are set forth in the following
tables:

<TABLE>
<CAPTION>
Accumulated
Buildings and Depreciation Net Book
1996 Land Improvements and Amortization Value
---- -------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Brendon Way
Indianapolis, IN $ 1,067,661 $ 21,439,074 $ (12,614,845) $ 9,891,890
Castle Bluff
Kentwood, MI 239,839 5,329,617 (3,209,323) 2,360,133
Channingway
Columbus, OH 1,544,716 18,357,567 (10,480,266) 9,422,017
Lodge at Aspen Grove
(formerly Buccaneer Village)
Denver, CO 996,813 9,158,390 (5,550,437) 4,604,766
Palisades at the Galleria
Atlanta, GA 774,721 14,354,131 (8,414,943) 6,713,909
Plaza Westlake
Glendale Heights, IL 1,455,584 6,663,573 (3,890,520) 4,228,637
------------- --------------- ------------- -------------
$ 6,079,334 $ 75,302,352 $ (44,160,334) $ 37,221,352
============= =============== ============= =============

Accumulated
Buildings and Depreciation Net Book
1995 (a) Land Improvements and Amortization Value
-------- -------------- ---------------- ---------------- --------------

Brendon Way $ 1,067,661 $ 20,754,167 $ (11,558,721) $ 10,263,107
Castle Bluff 239,839 5,180,700 (2,974,727) 2,445,812
Channingway 1,544,716 18,036,789 (9,631,879) 9,949,626
Lodge at Aspen Grove 996,813 8,770,558 (5,149,204) 4,618,167
Palisades at the Galleria 975,967 14,101,466 (7,629,419) 7,448,014
Plaza Westlake 1,455,584 6,475,083 (3,557,325) 4,373,342
------------- --------------- ------------- -------------
$ 6,280,580 $ 73,318,763 $ (40,501,275) $ 39,098,068
============= =============== ============= =============
</TABLE>

(a) During 1994, management placed Millwood Park on the market for sale.
Therefore, at December 31, 1995, Millwood Park was recorded as an asset
held for sale. On October 3, 1996, Millwood Park was sold.

<PAGE>
The Partnership leases its commercial property under various non-cancelable
operating lease agreements. Future minimum rents to be received as of December
31, 1996, are as follows:

1997.................................... $ 840,000
1998.................................... 617,000
1999.................................... 489,000
2000.................................... 160,000
2001.................................... 37,000
Thereafter.............................. -
----------
Total............................... $ 2,143,000
==========

Future minimum rents do not include contingent rents or operating expense
reimbursements. Contingent rents and operating expense reimbursements amounted
to $147,333 in 1996, $191,814 in 1995 and $251,475 in 1994, and are included in
rental revenue on the Statements of Operations.

The Partnership's properties are encumbered by mortgage indebtedness as
discussed in Note 5.

NOTE 5 - MORTGAGE NOTES PAYABLE
- -------------------------------

The following table sets forth mortgage notes payable of the Partnership at
December 31, 1996 and 1995. All mortgage notes are secured by real estate
investments or the assets held for sale.

<TABLE>
<CAPTION>
Mortgage Annual Monthly
Lien Interest Payments/ December 31,
Property Position (a) Rates % Maturity Date (h) 1996 1995
- -------- ------------ -------- -------------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Brendon Way First 8.00 $ 133,911 05/24 $ 17,829,789 $ 18,002,757
----------- ------------

Castle Bluff First 9.25 36,926 12/24 4,427,466 4,459,417
---------- -----------

Channingway(g) First Variable (b) Variable (b) 08/98 12,791,999 12,988,079
---------- -----------

Lodge at
Aspen Grove First (c) 8.10 40,741 10/02 5,451,038 5,496,384
---------- -----------

Millwood Park First (d) 8.10 29,500 10/02 - 3,982,499
---------- -----------

Palisades at the
Galleria First (e) 8.08 78,371 10/02 10,505,263 10,593,002
---------- ----------

Plaza Westlake First (f) 9.50 37,285 01/00 3,853,518 3,638,288
---------- ----------
$54,859,073 $59,160,426
========== ==========
</TABLE>
<PAGE>
(a) The debt, except for Plaza Westlake, is non-recourse to the
Partnership.

(b) Interest on the Channingway mortgage note is adjusted annually to 2.75%
over the one year Treasury bill weekly average rate with a ceiling of
15% and a floor of 7.25%. The interest rate at December 31, 1996 and
1995 was 8.625% and 8.5%, respectively.

(d) On October 31, 1995, the Partnership refinanced the mortgage note
payable on Millwood Park. See Note 7.

(e) On October 13, 1995, the Partnership refinanced the mortgage note
payable on Palisades at the Galleria. See Note 7.

(f) On March 24, 1995, the Partnership refinanced the mortgage note payable
on Plaza Westlake. See Note 7.

(g) The mortgage encumbering one of the Partnership's properties,
Channingway, contains provisions which may give the lenders the right
to accelerate the mortgage debt as a result of the September 1991
restructuring of the Partnership. The General Partner has requested
that the lender waive its right to accelerate the mortgage debt. The
lender may require the payment of fees or additional interest as a
condition to granting such waiver. In the event the waiver is not
obtained, and the mortgage debt is accelerated, the Partnership will be
required to satisfy the outstanding mortgage debt which approximated
$12.8 million at December 31, 1996. In such event, the Partnership will
arrange alternative sources of mortgage financing. However, such
refinancing may be at an interest rate which is higher or is otherwise
on terms which are less favorable than those provided for by the
current mortgage. Furthermore, if alternative financing cannot be
obtained, the lender could foreclose on the property securing the
mortgage. Management believes the likelihood of this outcome is remote
and accordingly has not reflected this balance as currently due.

(h) Balloon payments on the mortgage notes are due as follows:

Property Balloon Payment Date
-------- --------------- ----

Channingway $ 12,293,000 08/98
Plaza Westlake 3,145,640 01/00
Lodge at Aspen Grove 5,099,378 10/02
Palisades at the Galleria 9,825,319 10/02

Principal maturities of the mortgage notes payable are as follows:

1997.................................... $ 657,499
1998.................................... 13,065,277
1999.................................... 527,927
2000.................................... 4,057,252
2001.................................... 507,477
Thereafter.............................. 36,043,641
-----------
Total $ 54,859,073
===========
<PAGE>
Based on borrowing rates currently available to the Partnership for mortgage
loans with similar terms and average maturities, the fair value of notes payable
was approximately $53,290,000 as of December 31, 1996 and $58,903,000 as of
December 31, 1995.

NOTE 6 - DISPOSITIONS OF PROPERTIES
- -----------------------------------

On October 3, 1996, the Partnership sold Millwood Park Apartments to an
unaffiliated buyer for a cash sales price of $5,327,000. Cash proceeds from this
transaction, as well as the gain on sale of Millwood Park Apartments are
detailed below.

Gain on Sale Cash Proceeds
-------------- -------------

Cash sales price..................... $ 5,327,000 $ 5,327,000
Selling costs........................ (116,570) (116,570)
Basis of deferred borrowing costs
written off...................... (115,607)
Basis of real estate sold............ (3,430,082)
Basis of escrows written off......... (158,572)
-------------

Gain on sale......................... $ 1,506,169
==============

Proceeds from disposition of
real estate......................... 5,210,430
Retirement of mortgage note.......... (3,958,288)
-----------

Net cash proceeds.................... $ 1,252,142
===========

On July 27, 1995, the Partnership sold its investment in Lamar Plaza to an
unaffiliated buyer for assumption of the first and second liens by the
purchaser. The gain on disposition is detailed below:

Gain on Sale
------------
Mortgage and accrued interest
assumed by purchaser.............. $ 4,195,215
Basis of real estate sold........... (3,030,994)
----------

Gain on disposition of real estate.. $ 1,164,221
==========

<PAGE>
On June 19, 1995 the Partnership sold its investment in Sundance to an
unaffiliated buyer for a cash sales price of $45,000 and assumption of the
first, second and third liens by the purchaser. Cash proceeds and the gain on
disposition are detailed below.

Gain on Sale Cash Proceeds
------------ -------------
Sales price......................... $ 45,000 $ 45,000
Mortgages and accrued interest
assumed by purchaser.............. 8,191,859
Basis of real estate sold........... (5,973,567)
----------

Gain on disposition of real estate.. $ 2,263,292
==========

Net cash proceeds................... $ 45,000
===========

Also related to the sale of Sundance, the Partnership recognized a $268,433 gain
on early extinguishment of debt related to the interest in net profits portion
of the debt.

On December 19, 1994, the Partnership sold its investment in Fox Run to an
unrelated third party for a cash sales price of $54,947 and assumption of the
first and second liens by the purchaser. Cash proceeds and the gain on
disposition are detailed below.

Gain on Sale Cash Proceeds
------------ -------------

Sales price........................ $ 54,947 $ 54,947
Mortgages and accrued interest
assumed by purchaser............. 5,345,732
Basis of real estate sold.......... (4,087,990)
-----------

Gain on disposition of real estate. $ 1,312,689
===========

Credit for security deposit
liability........................ (27,438)
-----------
Net cash proceeds.................. $ 27,509
===========

Also related to the sale of Fox Run Apartments, the Partnership recognized a
$246,149 gain on early extinguishment of debt related to the interest in net
profits portion of the debt.

<PAGE>
On November 18, 1994, the Partnership sold its investment in Village East to an
unaffiliated buyer for a sales price of $8,625,000. Cash proceeds from this
transaction and the gain on sale of Village East are detailed below.

Gain on Sale Cash Proceeds
------------- -------------

Sales price.......................... $ 8,625,000 $ 8,625,000
Selling costs........................ (301,919) (301,919)
Prorations........................... - (216,806)
Basis of real estate sold............ (3,327,885) -
-----------
Gain on sale......................... $ 4,995,196 -
=========== -----------
Proceeds from sale of real estate
investment......................... 8,106,275
Retirement of mortgage note assumed.. (5,342,350)
------------
Net cash proceeds.................... $ 2,763,925
============

NOTE 7 - REFINANCING OF MORTGAGE NOTES PAYABLE
- ----------------------------------------------

On October 31, 1995, the Partnership refinanced the mortgage note payable on
Millwood Park. The new loan bears an interest rate of 8.1%, requires monthly
principal and interest payments of $29,500, and will mature October 31, 2002.
Following is a summary of the transaction:

New loan proceeds......................... $ 3,982,500
Existing debt retired..................... (3,172,754)
------------
Cash proceeds from refinancing............ $ 809,746
============

The Partnership deposited $460,348 into property tax and deferred maintenance
escrows and incurred costs of $126,641 related to the refinancing. Also relating
to the refinancing, the Partnership recognized a $333,080 loss on early
extinguishment of debt due to the unamortized mortgage discount related to the
retired mortgage.

On October 20, 1995, the Partnership refinanced the mortgage note payable on
Lodge at Aspen Grove. The new loan bears an interest rate of 8.1%, requires
monthly principal and interest payments of $40,741, and will mature October 24,
2002. Following is a summary of the transaction:

New loan proceeds......................... $ 5,500,000
Existing debt retired..................... (3,398,218)
Prepayment penalty........................ (113,650)
------------
Cash proceeds from refinancing............ $ 1,988,132
============

The Partnership deposited $149,217 into property tax and deferred maintenance
escrows and incurred loan costs of $161,625 related to the refinancing. Also
relating to the refinancing, the Partnership recognized a $468,958 loss on early
extinguishment of debt due to the unamortized mortgage discount and prepayment
penalties related to the retired mortgage.

<PAGE>
On October 13, 1995, the Partnership refinanced the mortgage note payable on
Palisades at the Galleria. The new loan bears an interest rate of 8.08%,
requires monthly principal and interest payments of $78,371 and will mature
October 16, 2002. Following is a summary of the transaction:

New loan proceeds......................... $ 10,600,000
Existing debt retired..................... (8,413,974)
-------------
Cash proceeds from refinancing............ $ 2,186,026
=============

The Partnership deposited $290,726 into property tax, insurance and deferred
maintenance escrows and incurred loan costs of $252,200 related to the
refinancing.

On March 24, 1995, the Partnership refinanced the mortgage note payable on Plaza
Westlake. The new loan bears an interest rate of 9.5%, requires monthly
principal and interest payments of $37,285, and will mature January 31, 2000.
Following is a summary of the transaction:

New loan proceeds......................... $ 4,000,000
Capital improvement account............... (300,000)
Existing debt retired..................... (3,365,938)
-------------
Cash proceeds from refinancing............ $ 334,062
=============

In addition, the Partnership incurred loan costs of $132,903 relating to the
refinancing.

On February 6, 1995, the Partnership paid off the interest in net profits on
Lodge at Aspen Grove for retirement of $3,588,192 of debt and accrued interest.
The debt was retired at a discounted payoff of $1,750,000, which resulted in an
extraordinary gain on extinguishment of debt of $1,838,192.

NOTE 8 - LEGAL PROCEEDINGS
- --------------------------

The Partnership is not party to, nor is any of the Partnership's properties the
subject of, any material pending legal proceedings, other than ordinary routine
litigation incidental to the Partnership's business except for the following:

<PAGE>
The action involves purported class and derivative actions brought by limited
partners of each of the fourteen limited partnerships that were named as nominal
defendants as listed above (as defined in this Section, the "Partnerships").
Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate
Management, Inc. and three of their senior officers and/or directors (as defined
in this Section, collectively, the "Defendants") breached their fiduciary duties
and certain obligations under the respective Amended Partnership Agreement.
Plaintiffs allege that Defendants have rendered such Units highly illiquid and
artificially depressed the prices that are available for Units on the resale
market. Plaintiffs also allege that Defendants engaged in a course of conduct to
prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating
purportedly false, misleading and inadequate information. Plaintiffs further
allege that Defendants acted to advance their own personal interests at the
expense of the Partnerships' public unit holders by failing to sell Partnership
properties and failing to make distributions to unitholders.

NOTE 9 - DEFERRED GAIN - LAND CONDEMNATION
- ------------------------------------------

On February 23, 1996, the Partnership was awarded $499,000 as payment for
condemnation of 6.45 acres at Palisades at the Galleria by Cobb County, Georgia.
The county required the right-of-way to this property for highway construction.
The condemnation of this parcel will not materially affect the operations of the
property. The $499,000 is being held in escrow by the mortgagee pending
completion of construction and is included with escrow deposits on the Balance
Sheet. The release of the escrow is also contingent upon the property's
compliance with a prescribed debt ratio. The Partnership has recorded a deferred
gain of $297,754, which will recognized upon receipt of the $499,000.

NOTE 10 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------

The Partnership has become aware of the existence of certain underground solvent
based contamination at a portion of the Lodge at Aspen Grove. The Partnership
understands the source of the contamination is related to underground storage
tanks located at a Colorado Department of Transportation ("CDOT") facility
nearby. The Partnership has been informed that CDOT, as the responsible party,
has agreed to remediate the property to comply with state and federal standards.
The Partnership believes that CDOT has submitted a corrective action plan to the
Colorado Department of Public Health and Environment and that implementation of
the plan is ongoing. CDOT is negotiating to obtain access agreements from
impacted landowners, including the Partnership. The Partnership is unable to
estimate impairment, if any, to the property at this time. However, due to the
existence and involvement of the responsible party, the Partnership does not
believe that this event has a material impact on the accompanying financial
statements.
<PAGE>
McNEIL REAL ESTATE FUND XII, LTD.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1996

<TABLE>
<CAPTION>
Cumulative Costs
Initial Cost (b) Write-down Capitalized
Related (b) Buildings and and Permanent Subsequent
Description Encumbrances Land Improvements Impairment To Acquisition
- ----------- --------------- -------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Apartments:

Brendon Way
Indianapolis, IN $ 17,829,789 $ 1,067,661 $ 17,490,677 $ - $ 3,948,397

Castle Bluff
Kentwood, MI 4,427,466 239,839 4,650,535 - 679,082

Channingway
Columbus, OH 12,791,999 1,544,716 16,438,004 - 1,919,563

Lodge at Aspen Grove
Denver, CO 5,451,038 996,813 8,058,534 - 1,099,856

Palisades at the
Galleria
Atlanta, GA 10,505,263 975,967 10,920,268 - 3,232,617

Retail Center:

Plaza Westlake
Glendale Heights, IL 3,853,518 1,635,485 6,222,137 (746,424) 1,007,959
-------------- -------------- -------------- ------------ -------------

$ 54,859,073 $ 6,460,481 $ 63,780,155 $ (746,424) $ 11,887,474
============== ============== ============== ============ =============

</TABLE>

(b) The initial cost and encumbrances reflect the present value of future loan
payments discounted, if appropriate, at a rate estimated to be the
prevailing interest rate at the date of acquisition.

See accompanying notes to Schedule III.

<PAGE>

McNEIL REAL ESTATE FUND XII, LTD.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1996

<TABLE>
<CAPTION>
Gross Amount at
Which Carried at Close of Period Accumulated
Buildings and Depreciation
Description Land Improvements Total (a) and Amortization
- ----------- -------------- ------------- --------------- -----------------
<S> <C> <C> <C> <C>
Apartments:

Brendon Way
Indianapolis, IN $ 1,067,661 $ 21,439,074 $ 22,506,735 $ (12,614,845)

Castle Bluff
Kentwood, MI 239,839 5,329,617 5,569,456 (3,209,323)

Channingway
Columbus, OH 1,544,716 18,357,567 19,902,283 (10,480,266)

Lodge at Aspen Grove
Denver, CO 996,813 9,158,390 10,155,203 (5,550,437)

Palisades at the
Galleria
Atlanta, GA 774,721 14,354,131 15,128,852 (8,414,943)

Retail Center:

Plaza Westlake
Glendale Heights, IL 1,455,584 6,663,573 8,119,157 (3,890,520)
-------------- -------------- ---------------- -------------
$ 6,079,334 $ 75,302,352 $ 81,381,686 $ (44,160,334)
============== ============== ================ =============
</TABLE>

(a) For Federal income tax purposes, the properties are depreciated over lives
ranging from 5-27.5 years using ACRS or MACRS methods. The aggregate cost
of real estate investments for Federal income tax purposes was
approximately $32,463,849 and accumulated depreciation was $26,814,307 at
December 31, 1996.

See accompanying notes to Schedule III.

<PAGE>

McNEIL REAL ESTATE FUND XII, LTD.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1996

Date of Date Depreciable
Description Construction Acquired lives (years)
- ----------- ------------ -------- -------------
<S> <C> <C> <C> <C>
Apartments:

Brendon Way
Indianapolis, IN 1968/73 01/82 3-25

Castle Bluff
Kentwood, MI 1976/77 01/82 3-25

Channingway
Columbus, OH 1970/75 12/82 3-25

Lodge at Aspen Grove
Denver, CO 1970 02/82 3-25

Palisades at the
Galleria
Atlanta, GA 1973 07/82 3-25

Retail Center:

Plaza Westlake
Glendale Heights, IL 1980 03/82 3-25

</TABLE>

See accompanying notes to Schedule III.

<PAGE>
McNEIL REAL ESTATE FUND XII, LTD.

Notes to Schedule III

Real Estate Investments and Accumulated Depreciation and Amortization

A summary of activity for the Partnership's real estate investments and
accumulated depreciation and amortization is as follows:

<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------
1996 1995 1994
-------------- --------------- ----------------
<S> <C> <C> <C>
Real Estate Investments:

Balance at beginning of year............... $ 79,599,343 $ 78,020,212 $ 96,194,009

Improvements............................... 1,983,589 1,579,131 1,869,162

Reclassification to assets held for sale... - - (4,916,139)

Dispositions of real estate................ (201,246) - (15,084,622)

Replacement of assets...................... - - (42,198)
------------- ------------- --------------

Balance at end of year..................... $ 81,381,686 $ 79,599,343 $ 78,020,212
============= ============= ==============

Accumulated Depreciation and Amortization:

Balance at beginning of year............... $ 40,501,275 $ 37,105,195 $ 43,889,170

Depreciation............................... 3,659,059 3,396,080 3,683,991

Reclassification to assets held for sale... - - (2,776,585)

Dispositions of real estate................ - - (7,668,747)

Replacement of assets...................... - - (22,634)
------------- ------------- --------------

Balance at end of year..................... $ 44,160,334 $ 40,501,275 $ 37,105,195
============= ============= ==============

Assets Held for Sale:

Balance at beginning of year............... $ 3,164,323 $ 12,724,693 $ 11,421,936

Reclassification to assets held for sale... - - 2,139,554

Improvements............................... 265,759 67,285 99,156

Depreciation............................... - (623,094) (935,953)

Sale ...................................... (3,430,082) (9,004,561) -
-------------- ------------- -------------

Balance at end of year..................... $ - $ 3,164,323 $ 12,724,693
============= ============= =============
</TABLE>

<PAGE>

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Neither the Partnership nor the General Partner has any directors or executive
officers. The names and ages of, as well as the positions held by, the officers
and directors of McNeil Investors, Inc., the general partner of the General
Partner, are as follows:

Other Principal Occupations and Other
Name and Position Age Directorships During the Past 5 Years
- ----------------- --- -------------------------------------

Robert A. McNeil, 76 Mr. McNeil is also Chairman of the
Chairman of the Board and Director of McNeil Real Estate
Board and Director Management, Inc. ("McREMI") which is an
affiliate of the General Partner. He has
held the foregoing positions since the
formation of such entity in 1990. Mr.
McNeil received his B.A. degree from
Stanford University in 1942 and his
L.L.B. degree from Stanford Law School
in 1948. He is a member of the State Bar
of California and has been involved in
real estate financing since the late
1940's and in real estate acquisitions,
syndications and dispositions since
1960. From 1986 until active operations
of McREMI and McNeil Partners, L.P.
began in February 1991, Mr. McNeil was a
private investor. Mr. McNeil is a member
of the International Board of Directors
of the Salk Institute, which promotes
research in improvements in health care.

Carole J. McNeil 53 Mrs. McNeil is Co-Chairman, with
Co-Chairman of the husband Robert A. McNeil, of McNeil
Board Investors, Inc. Mrs. McNeil has twenty
years of real estate experience, most
recently as a private investor from 1986
to 1993. In 1982, she founded Ivory &
Associates, a commercial real estate
brokerage firm in San Francisco, CA.
Prior to that, she was a commercial real
estate associate with the Madison
Company and, earlier, a commercial sales
associate and analyst with Marcus and
Millichap in San Francisco. In 1978,
Mrs. McNeil established Escrow Training
Centers, California's first accredited
commercial training program for title
company escrow officers and real estate
agents needing college credits to
qualify for brokerage licenses. She
began in real estate as Manager and
Marketing Director of Title Insurance
and Trust in Marin County, CA. Mrs.
McNeil serves on the International Board
of Directors of the Salk Institute.

<PAGE>
Other Principal Occupations and Other
Name and Position Age Directorships During the Past 5 Years
- ----------------- --- -------------------------------------

Ron K. Taylor 39 Mr. Taylor is the President and Chief
President and Chief Executive Officer of McNeil Real Estate
Executive Officer Management which is an affiliate of the
General Partner. Mr. Taylor has been in
this capacity since the resignation of
Donald K. Reed on March 4, 1997. Prior
to assuming his current
responsibilities, Mr. Taylor served as a
Senior Vice President of McREMI. Mr.
Taylor has been in this capacity since
McREMI commenced operations in 1991.
Prior to joining McREMI, Mr. Taylor
served as an Executive Vice President
for a national syndication/property
management firm. In this capacity, Mr.
Taylor had the responsibility for the
management and leasing of a 21,000,000
square foot portfolio of commercial
properties. Mr. Taylor has been actively
involved in the real estate industry
since 1983.

Each director shall serve until his successor shall have been duly elected and
qualified.

ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------

No direct compensation was paid or payable by the Partnership to directors or
officers (since it does not have any directors or officers) for the year ended
December 31, 1996, nor was any direct compensation paid or payable by the
Partnership to directors or officers of the general partner of the General
Partner for the year ended December 31, 1996. The Partnership has no plans to
pay any such remuneration to any directors or officers of the general partner of
the General Partner in the future.

See Item 13 - Certain Relationships and Related Transactions for amounts of
compensation and reimbursements paid by the Partnership to the General Partner
and its affiliates.

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

(A) Security ownership of certain beneficial owners.

No individual or group, as defined by Section 13(d)(3) of the
Securities Exchange Act of 1934, known to the Partnership is the
beneficial owner of more than 5 percent of the Partnership's
securities.

<PAGE>
(B) Security ownership of management.

The General Partner and the officers and directors of its general
partner, collectively, own 1,551 Units, which is less than 1% of the
outstanding Units.

None.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------

Under the terms of the Amended Partnership Agreement, the Partnership is paying
the MID to the General Partner. The maximum MID is calculated as 1% of the
tangible asset value of the Partnership. The maximum MID percentage decreases
subsequent to 1999. The tangible asset value is determined by using the greater
of (i) an amount calculated by applying a capitalization rate of 9% to the
annualized net operating income of each property or (ii) a value of $10,000 per
apartment unit for residential property and $50 per gross square foot for
commercial property to arrive at the property tangible asset value. The property
tangible asset value is then added to the book value of all other assets
excluding intangible items.

MID will be paid to the extent of the Entitlement Amount, and may be paid (i) in
cash, unless there is insufficient cash to pay the distribution in which event
any unpaid portion not taken in Units will be deferred and is payable, without
interest, from the first available cash and/or (ii) in Units. A maximum of 50%
of the MID may be paid in Units. The number of Units issued in payment of the
MID is based on the greater of $50 per unit or the net tangible asset value, as
defined, per Unit. For the year ended December 31, 1996, the Partnership paid or
accrued for the General Partner MID in the amount of $2,210,551.

Any amount of the MID which is paid to the General Partner in Units will be
treated as if cash is distributed to the General Partner and is then contributed
to the Partnership by the General Partner.

The Partnership pays property management fees equal to 5% of the gross rental
receipts of the Partnership's properties to McREMI, an affiliate of the General
Partner, for providing property management services for residential and
commercial properties and leasing services for the Partnership's residential
properties. The Partnership reimburses McREMI for its costs, including overhead,
of administering the Partnership's affairs. For the year ended December 31,
1996, the Partnership paid or accrued $1,158,003 in property management fees and
reimbursements.

See Item 1 - Business, Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Item 8 - Note 2 -
"Transactions with Affiliates."

<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
- -------- -----------------------------------------------------------------

See accompanying index to financial statements at Item 8.

(A) Exhibits

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

3.1 First Amended and Restated
Certificate of Limited Partnership
dated February 20, 1981. (1)

3.2 Limited Partnership Agreement
dated February 2, 1981 and amended
March 31, 1981 and May 13, 1981. (1)

3.3 Amended and Restated Partnership
Agreement, dated September 6, 1991
(Incorporated by reference to the
Quarterly Report on Form 10-Q for
the quarter ended September 30,
1991).

3.4 Amendment No. 1 to the Amended and
Restated Partnership Agreement,
dated March 28, 1994. (4)

3.5 Amendment No. 2 to the Amended and
Restated Partnership Agreement,
dated March 28, 1994. (4)

10.1 Promissory Note, dated July 13,
1988, between McNeil Real Estate
Fund XII, Ltd. and Transohio Savings
Bank. (1)

10.2 Installment Note, dated December
5, 1990, between McNeil Real Estate
Fund XII, Ltd. and The State of
Oregon, Public Employees' Retirement
Fund. (1)

10.3 Mortgage Note, dated April 25, 1989,
between Brendon Way Fund XII
Associates and American Mortgages,
Inc. (1)

10.4 Assignment and Assumption
Agreement, dated September 6, 1991,
between Pacific Investors
Corporation, Robert A. McNeil and
McNeil Partners, L.P. regarding
McNeil Real Estate Fund XII, Ltd.(2)

<PAGE>
Exhibit
Number Description
------- -----------

10.5 Assignment and Assumption
Agreement, dated September 6, 1991,
between Pacific Investors
Corporation and McNeil Partners,
L.P. regarding Brendon Way Fund XII
Associates.(2)

10.6 Assignment and Assumption Agreement,
dated September 6, 1991, between
Castle Bluff Apartments Corp. and
McNeil Partners, L.P. regarding
Castle Bluff Fund XII Associates.(2)

10.7 Property Management Agreement, dated
September 6, 1991, between McNeil
Real Estate Fund XII, Ltd. and
McNeil Real Estate Management,
Inc.(2)

10.8 Property Management Agreement,
dated September 6, 1991, between
Brendon Way Fund XII Associates and
McNeil Real Estate Management,
Inc.(2)

10.9 Property Management Agreement,
dated September 6, 1991, between
Castle Bluff Fund XII Associates and
McNeil Real Estate Management,
Inc.(2)

10.10 Asset Management Agreement, dated
September 6, 1991, between McNeil
Real Estate Fund XII, Ltd. and
McNeil Partners, L.P.(2)

10.11 Termination Agreement, dated
September 6, 1991, Southmark
Management Corporation, Southmark
Commercial Management, McNeil Real
Estate Fund XII, Ltd. and McNeil
Real Estate Management, Inc.(2)

10.12 Termination Agreement, dated
September 6, 1991, between Brendon
Way Associates Fund XII and McNeil
Real Estate Management, Inc.(2)

10.13 Termination Agreement, dated
September 6, 1991, between Castle
Bluff XII Associates, L.P. and
McNeil Real Estate Management,
Inc.(2)

<PAGE>
Exhibit
Number Description
------- -----------

10.14 Revolving Credit Agreement, dated
August 6, 1991, between McNeil
Partners, L.P. and certain
partnerships, including the
Partnership.(2)

10.15 Amended Property Management
Agreement, dated March 5, 1993,
between McNeil Real Estate Fund XII,
Ltd. and McNeil Real Estate
Management, Inc. (3)

10.16 Second Modification of Deed of Trust
Note, dated June 30, 1993, between
American Mortgages, Inc. and Brendon
Way XII Associates. (4)

10.17 Mortgage Note, dated March 24, 1995,
between Plaza Westlake Fund XII,
Ltd. and Bank One.

10.18 Promissory Note, dated October 13,
1995, between Palisades Fund XII
Associates, L.P. and Fleet Real
Estate Capital, Inc.

10.19 Mortgage Note, dated October 20,
1995, between Buccaneer Village Fund
XII, Ltd. and Fleet Real Estate
Capital, Inc.

10.20 Mortgage Note, dated October 31,
1995, between Millwood Park Fund
XII, Ltd. and Fleet Real Estate
Capital, Inc.

11. Statement regarding computation of
Net Income per limited partnership
unit (see Item 8 - Note 1
"Organization and Summary of
Significant Accounting Policies")

<PAGE>
Exhibit
Number Description
------- -----------

22. Following is a list of subsidiaries
of the Partnership:

<TABLE>
<CAPTION>
Names Under
Jurisdiction Which It Is
Name of Subsidiary Incorporation Doing Business
------------------- ------------- --------------

<S> <C> <C> <C>
Brendon Way Fund XII Indiana None
Associates

Buccaneer Fund XII, Ltd. Texas None

Castle Bluff Fund XII Georgia None
Associates, L.P.

Millwood Park Fund Texas None
Fund XII, Ltd.

Palisades Fund XII Texas None
Associates, L.P.

Plaza Westlake Fund Texas None
XII, Ltd.
</TABLE>

(1) Incorporated by reference to the
Annual Report of McNeil Real Estate
Fund XII, Ltd. (File No. 0-10743),
on Form 10-K for the period ended
December 31, 1990, as filed with the
Securities and Exchange Commission
on March 29, 1991.

(2) Incorporated by reference to the
Annual Report of McNeil Real Estate
Fund XII, Ltd. (File No. 0-10743),
on Form 10-K for the period ended
December 31, 1991, as filed with the
Securities and Exchange Commission
on March 29, 1992.

(3) Incorporated by reference to the
Annual Report of McNeil Real Estate
Fund XII, Ltd. (File No. 0-10743),
on Form 10-K for the period ended
December 31, 1992, as filed with the
Securities and Exchange Commission
on March 30, 1993.

<PAGE>
(4) Incorporated by reference to the
Annual Report of McNeil Real Estate
Fund XII, Ltd. (File No. 0-10743),
on Form 10-K for the period ended
December 31, 1993, as filed with the
Securities and Exchange Commission
on March 30, 1994.

(5) Incorporated by reference to the
Annual Report of McNeil Real Estate
Fund XII, Ltd. (File No. 0-10743),
on Form 10-K for the period ended
December 31, 1995, as filed with the
Securities and Exchange Commission
on March 29, 1996.

The Partnership has omitted instruments with respect to long-term debt
where the amount of securities authorized thereunder does not exceed
10% of the total assets of the Partnership and its subsidiaries on a
consolidated basis. The Partnership agrees to furnish a copy of each
such instrument to the Commission upon request.

(B) Reports on Form 8-K. There were no reports on Form 8-K filed during the
quarter ended December 31, 1996.

<PAGE>

McNEIL REAL ESTATE FUND XII, LTD.
A Limited Partnership

SIGNATURE PAGE

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.

McNEIL REAL ESTATE FUND XII, LTD.

By: McNeil Partners, L.P., General Partner

By: McNeil Investors, Inc., General Partner

March 31, 1997 By: /s/ Robert A. McNeil
- -------------- ----------------------------------------
Date Robert A. McNeil
Chairman of the Board and Director
(Principal Executive Officer)

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 dates indicated.

March 31, 1997 By: /s/ Ron K. Taylor
- -------------- ----------------------------------------
Date Ron K. Taylor
President and Director of McNeil
Investors, Inc.
(Principal Financial Officer)

March 31, 1997 By: /s/ Brandon K. Flaming
- -------------- ----------------------------------------
Date Brandon K. Flaming
Vice President of McNeil Investors, Inc.
(Principal Accounting Officer)

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,768,249
<SECURITIES> 0
<RECEIVABLES> 242,360
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 81,381,686
<DEPRECIATION> (44,160,334)
<TOTAL-ASSETS> 42,666,395
<CURRENT-LIABILITIES> 0
<BONDS> 54,859,073
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 42,666,935
<SALES> 16,327,181
<TOTAL-REVENUES> 18,046,806
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,488,543
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,166,392
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 391,871
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 391,871
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>