MCNEIL REAL ESTATE FUND XII LTD, 10-K405, 1999-03-31

MCNEIL REAL ESTATE FUND XII LTD
10-K405, 1999-03-31
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, 1998
-------------------------------------------------

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

For the transition period from ______________ to_____________

Commission file number 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 ]

228,114.5 of the registrant's 229,666 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 38

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 1997, a
total of 1,238 Units were relinquished. In 1998, 24 Units were relinquished
leaving 229,666 Units outstanding at December 31, 1998.

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:

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. At December 31, 1998, the Partnership
owned five income-producing properties as described in Item 2 - Properties.

<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:

As previously announced, the Partnership has retained PaineWebber, Incorporated
("PaineWebber") as its exclusive financial advisor to explore alternatives to
maximize the value of the Partnership, including, without limitation, a
transaction in which limited partnership interests in the Partnership are
converted into cash. The Partnership, through PaineWebber, provided financial
and other information to interested parties as part of an auction process and
until early March 1999 was conducting discussions with one bidder in an attempt
to reach a definitive agreement with respect to a sale transaction. In early
March 1999, because the Partnership had been unable to conclude negotiations for
a transaction with such bidder, the Partnership terminated such discussions and
commenced discussions with respect to a sale transaction with another
well-financed bidder who had been involved in the original auction process.
During the last full week of March, the Partnership entered into a 45 day
exclusivity agreement with such party. It is possible that the General Partner
and its affiliates will receive non-cash consideration for their ownership
interests in connection with any such transaction. There can be no assurance
regarding whether any such agreement will be reached nor the terms thereof.

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, 1998. 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

Environmental Matters:

Environmental laws create potential liabilities that may affect property owners.
The environmental laws of Federal and certain state governments, for example,
impose liability on current and certain past owners of property from which there
is a release or threat of release of hazardous substances. This liability
includes costs of investigation and remediation of the hazardous substances and
natural resource damages. Liability for costs of investigation and remediation
is strict and may be imposed irrespective of whether the property owner was at
fault, although there are a number of defenses. Both governments and third
parties may seek recoveries under these laws.

Third parties also may seek recovery under the common law for damages to their
property or person, against owners of property from which there has been a
release of hazardous and other substances.

The presence of contamination or the failure to remediate contaminations may
adversely affect the owner's ability to sell or lease real estate or to borrow
using the real estate as collateral.

In connection with the proposed sale transaction as more fully described above,
Phase I environmental site assessments have been completed for each property
owned by the Partnership. Such environmental assessments performed on the
properties have not revealed any environmental liability that the Partnership
believes would have a material adverse effect on the Partnership's business,
assets, or results of operations. The Partnership has not been notified by any
governmental authority of any non-compliance, liability or other claim in
connection with any of its properties except for the Lodge at Aspen Grove, as
more fully described below. There can be no assurances, however, that
environmental liabilities have not developed since such environmental
assessments were prepared, or that future uses or conditions (including, without
limitation, changes in applicable environmental laws and regulations) will not
result in imposition of environmental liability.

<PAGE>
The Partnership has become aware of the presence of certain solvent based
contamination in ground water under a portion of the Lodge at Aspen Grove. The
source of the contamination is related to a documented release of solvents from
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. CDOT has submitted a corrective action plan to the Colorado
Department of Public Health and Environment and implementation of the plan is
ongoing. 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.

ITEM 2. PROPERTIES
- ------- ----------

The following table sets forth the properties of the Partnership at December 31,
1998. The buildings and the land on which they are located are owned by the
Partnership in fee, subject in each case (with the exception of Plaza Westlake,
which is unencumbered by mortgage indebtedness) 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 1998 Date
Property Description of Property Debt Property Tax Acquired
- -------- ----------- ------------- ------ ------------ --------

Brendon Way (1) Apartments
<S> <C> <C> <C> <C> <C>
Indianapolis, IN 770 units $ 8,548,237 $ 17,439,594 $ 448,565 1/82

Castle Bluff (2) Apartments
Kentwood, MI 241 units 2,041,895 4,354,014 139,545 1/82

Lodge at
Aspen Grove (3) Apartments
Denver, CO 284 units 4,239,519 5,348,590 72,898 2/82

Palisades at the
Galleria (4) Apartments
Atlanta, GA 370 units 5,803,373 10,307,093 158,811 7/82

Plaza Westlake (5)
Glendale Retail Center
Heights, IL 120,370 sq. ft. 3,661,654 - 98,136 3/82
--------------- ------------- ------------

$ 24,294,678 $ 37,449,291 $ 917,955
=============== ============= ============
</TABLE>
- -----------------------------------------

Total: Apartments - 1,665 units
Retail Center - 120,370 sq. ft.

<PAGE>
(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.

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

<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------- ------------- -------------- ------------- ------------
Brendon Way
<S> <C> <C> <C> <C> <C>
Occupancy Rate............ 91% 83% 82% 86% 90%
Rent Per Square Foot...... $6.45 $5.85 $5.97 $6.12 $6.05

Castle Bluff
Occupancy Rate............ 96% 95% 97% 96% 98%
Rent Per Square Foot...... $7.83 $7.56 $7.55 $7.28 $6.92

Lodge at Aspen Grove
Occupancy Rate............ 97% 96% 97% 94% 95%
Rent Per Square Foot...... $8.97 $8.75 $8.14 $7.92 $7.42

Palisades at the Galleria
Occupancy Rate............ 98% 96% 96% 97% 99%
Rent Per Square Foot...... $7.64 $7.35 $7.39 $6.97 $6.65

Plaza Westlake
Occupancy Rate............ 100% 97% 100% 98% 99%
Rent Per Square Foot...... $9.61 $8.04 $8.60 $7.75 $7.73
</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.

<PAGE>
Competitive Conditions
- ----------------------

Brendon Way
- -----------

The occupancy rate at Brendon Way increased 8% in 1998. The property's occupancy
is currently just above the average Indianapolis sub-market occupancy rate of
90%. Rental rates at Brendon Way are just below the rates offered by
competitors. Brendon way continues to do minor renovations that have improved
the curb appeal of the property, however, the lack of funds to complete a major
renovation of the aging property creates a challenge for the property to stay
competitive.

Castle Bluff
- ------------

Castle Bluff is in a highly competitive market with the occupancy rates running
at 95%. Castle Bluff is currently competing in a robust economy. During 1998,
1,009 construction permits for apartments were issued. The Kentwood, Michigan
property has done some renovations to remain aggressive in the market and
anticipates raising the rental rates by 2% in 1999.

Lodge at Aspen Grove
- --------------------

The Lodge at Aspen Grove finished 1998 slightly above the market occupancy rate
of 96%. The Denver economy is still expanding and creating job growth that is
fueling construction of new apartments. During 1998, approximately 5,600 new
units were added to the area. A rental increase of 3% is budgeted in 1999.

Palisades at the Galleria
- -------------------------

The occupancy rate at Palisades at the Galleria increased in 1998 by 2%. The
road construction in the area is scheduled to be completed in the spring of
1999. This should increase additional development in the area. During 1998,
approximately 10,000 units were added to the Atlanta area. A rental increase of
4% is budgeted for 1999.

Plaza Westlake
- --------------

Plaza Westlake finished 1998 with an occupancy rate of 100%, well above the
market average of 90%. Plaza Westlake is located in Glendale Heights, Illinois,
in a high traffic area with a proven anchor. During 1999, leases occupying
71,678 square feet or 60% of the shopping center will expire. It is anticipated
that all but 1,625 square feet will be renewed. Planned improvements for 1999
include curb and sidewalk replacement and landscaping.

<PAGE>
The following schedule shows lease expirations for the Partnership's commercial
property for 1999 through 2008:

<TABLE>
<CAPTION>
Number of Annual % of Gross
Expirations Square Feet Rent Annual Rent
----------- ------------ ------------ -----------
Plaza Westlake
<C> <C> <C> <C> <C>
1999 4 71,678 $ 357,045 40%
2000 2 3,690 53,390 6%
2001 4 11,055 132,159 15%
2002 2 4,757 50,558 5%
2003 6 11,606 143,301 16%
2004 - - - -%
2005 1 17,584 161,069 18%
2006-2008 - - - -%
</TABLE>

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:

<TABLE>
<CAPTION>
Nature of
Business Square Footage Lease
Use Leased Annual Rent Expiration
- ---------- -------------- ----------- ----------
Plaza Westlake

<S> <C> <C> <C>
Retail 68,020 $ 310,857 1999
Entertainment 17,584 $ 161,069 2005

</TABLE>

<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, except for the following:

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 XXIII, 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., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and
Regency North Associates, L.P., - 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 limited partnerships that were named as nominal
defendants as listed above (the "Partnerships"). Plaintiffs allege that McNeil
Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of
their senior officers and/or directors (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.

Defendants filed a demurrer to the consolidated and amended complaint and a
motion to strike on February 14, 1997, seeking to dismiss the consolidated and
amended complaint in all respects. A hearing on Defendant's demurrer and motion
to strike was held on May 5, 1997. The Court granted Defendants' demurrer,
dismissing the consolidated and amended complaint with leave to amend. On
October 31, 1997, the Plaintiffs filed a second consolidated and amended
complaint. The case was stayed pending settlement discussions. A Stipulation of
Settlement dated September 15, 1998 has been signed by the parties. Preliminary
Court approval was received on October 6, 1998. A hearing for Final Approval of
Settlement, initially scheduled for December 17, 1998, has been continued to May
25, 1999.

<PAGE>
Because McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil
Midwest Properties I, L.P. and Regency North Associates, L.P. would be part of
the transaction contemplated in the settlement and Plaintiffs claim that an
effort should be made to sell the McNeil Partnerships, Plaintiffs have included
allegations with respect to McNeil Real Estate Fund XXIII, L.P., Hearth Hollow
Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P.
in the third consolidated and amended complaint.

Plaintiff's counsel intends to seek an order awarding attorney's fees and
reimbursements of their out-of-pocket expenses. The amount of such award is
undeterminable until final approval is received from the court. Fees and
expenses shall be allocated amongst the Partnerships on a pro rata basis, based
upon tangible asset value of each such partnership, less total liabilities,
calculated in accordance with the Amended Partnership Agreements for the quarter
most recently ended.

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

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 11,530 as of February 1, 1999

(C) Cash distributions of $1,001,344 were made to the limited partners in
1998. No distributions were made to the limited partners in 1997. The
Partnership accrued distributions for the MID of $777,083 and $855,907
for the benefit of the General Partner for the years ended December 31,
1998 and 1997, respectively. Total MID distributions of $4,153,766
remain unpaid as of December 31, 1998. See Item 8 - Note 2 -
"Transactions with Affiliates." 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 - Financial
Statements and Supplementary Data.

<TABLE>
<CAPTION>
Statements of Years Ended December 31,
Operations 1998 1997 1996 1995 1994
- ------------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Rental revenue ................... $ 13,557,960 $ 15,427,506 $ 16,327,181 $ 17,533,914 $ 21,295,696
Total revenue .................... 23,372,730 15,542,127 18,046,806 21,195,706 27,701,373
Gain on disposition of
real estate ..................... 9,568,850 -- 1,506,169 3,247,513 6,307,885
Income (loss) before
extraordinary item .............. 8,581,958 (1,506,270) 391,871 1,183,425 3,220,934
Extraordinary gain on
extinguishment of debt, net -- -- -- 1,304,587 246,149
Net income (loss) ................ 8,581,958 (1,506,270) 391,871 2,488,012 3,467,083

Net income (loss) per limited
partnership unit:
Income (loss) before
extraordinary item .............. $ 33.73 $ (6.23) $ (7.12) $ 4.89 $ 13.27
Extraordinary gain on
extinguishment of debt .......... -- -- -- 5.25 1.01
------------ ------------ ------------ ------------ ------------
Net income (loss) ................ $ 33.73 $ (6.23) $ (7.12) $ 10.14 $ 14.28
============ ============ ============ ============ ============

Distributions per limited
partnership unit................ $ 4.36 $ -- $ -- $ -- $ --
============ ============ ============ ============ ============

As of December 31,
Balance Sheets 1998 1997 1996 1995 1994
- -------------- -------------- ------------ ------------ ------------- ------------

Real estate investments, net..... $ 24,294,678 $ 26,133,281 $ 37,221,352 $ 39,098,068 $ 40,915,017
Assets held for sale............. -- 9,303,533 -- 3,164,323 12,724,693
Total assets..................... 29,708,036 40,517,097 42,666,935 52,112,866 60,189,348
Mortgage notes payable........... 37,449,291 54,200,372 54,859,073 59,160,426 68,152,522
Partners' deficit................ (13,940,076) (20,743,607) (18,381,430) (17,849,184) (19,292,331)
</TABLE>

<PAGE>
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, 1998.

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

Channingway April 1998
Millwood Park October 1996
Lamar Plaza July 1995
Sundance Apartments June 1995
Fox Run Apartments December 1994
Village East Apartments November 1994

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, 1998, the
Partnership owned five properties. All of the Partnership properties, except
Plaza Westlake, are subject to mortgage notes.

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

1998 compared to 1997

Revenue:

Total Partnership revenue increased $7,830,603 in 1998 as compared to 1997.
Rental revenue decreased by $1,869,546 in 1998 while interest income increased
$131,299. The Partnership also recognized a gain of $9,568,850 on the sale of
Channingway Apartments. No such gain was recognized in 1997.

Rental revenue in 1998 was $13,557,960 as compared to $15,427,506 in 1997. The
decrease of $1,869,546 can be attributed to the sale of Channingway Apartments
in April 1998. Excluding the revenues from Channingway Apartments, rental
revenue increased $981,250 or 6% due to an increase in occupancy rates at all
the Partnership's properties. Interest income increased $131,299 in 1998 as
compared to 1997 due to an increase in cash balances invested in interest
bearing accounts.

Expenses:

Total expenses decreased $2,257,625 in 1998 as compared to 1997. Excluding the
expenses from Channingway Apartments, total expenses increased $589,075
primarily due to increases in general and administrative, personnel expenses and
repairs and maintenance. All other expenses remained comparable.

<PAGE>
General and administrative expenses increased $365,540 for the year ended
December 31, 1998 compared to the same period last year. The increase was mainly
due to the costs incurred to explore alternatives to maximize the value of the
Partnership. The increase was partially offset by decreases attributable to
investor services. During 1997, charges for investor services were provided by a
third party vendor. Beginning in 1998, these services are provided by affiliates
of the General Partner. As a result, general and administrative - affiliates
increased by $51,782 in 1998.

1997 compared to 1996

Revenue:

Total Partnership revenue decreased by $2,504,679 or 14% in 1997 as compared to
1996. This decrease can be attributed to sale of Millwood in 1996. Excluding the
effects of the Millwood sale, rental revenue increased $138,097 in 1997 compared
to the same period in 1996. Rental rates increased at four of the Partnerships
properties but this was offset by a decrease in the average occupancy rate for
the year at all of the Partnership's properties. Interest income in 1997
decreased by $98,835 or 46% as compared the same period last year due to smaller
average cash balances being invested in interest bearing accounts. The
Partnership also recorded a $1,506,169 gain on disposition of asset as a result
of the sale of Millwood during 1996. No such gain was recorded in 1997.

Expenses:

Partnership expenses decreased by $606,538 or 3% for the year ended 1997 as
compared to 1996. The effects from the sale of Millwood in 1996 were declines of
$252,161 for interest, $65,877 for property taxes, $158,205 for personnel
expenses, $144,940 for utilities, $199,849 for repairs and maintenance, $50,915
for property management fees and $111,963 for other property operating expenses.

In addition to the sale of Millwood, other factors affected the level of
expenses reported by the remaining properties. Interest expense - affiliates
decreased by $50,980 or 95% in 1997 as compared to 1996. This decrease is due to
the repayment of affiliate advances in 1996.

Property taxes increased $162,332 or 15% for the year ended December 31, 1997
(excluding the effects of the sale of Millwood Park) as compared to the same
period in 1996. This increase can be attributed to a tax refund received in 1996
which reduced the tax expense for that year. No such refund was received in
1997.

Repairs and maintenance increased $268,606 or 14% in 1997 (excluding the effects
of the sale of Millwood Park) compared to the same period in 1996. The increase
is attributable to a $300,410 increase in appliances and floor covering
replacements during 1997. Such expenditures during 1996 were large enough to
qualify for capitalization under the Partnership's capitalization policy. These
expenditures in 1997 did not qualify for capitalization and were, accordingly,
expensed.

General and administrative expenses increased $35,529 or 21%. The increase is
attributable to charges for investor services which, beginning in 1997, were
provided by a third party vendor instead of by affiliates of the General
Partner.

<PAGE>
General and administrative - affiliate expenses decreased $120,070 or 35% in
1997 as compared to the same period last year. This decrease is due to a
decrease in the percentage of the Partnership's portion of reimbursable costs
and to costs of investor services discussed above.

LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------

At December 31, 1998, the Partnership held cash and cash equivalents of
$2,135,190, up $711,532 from the balance at the end of 1997.

The Partnership has experienced positive cash flow from operations of $4,182,957
for the three years ended December 31, 1998. The Partnership also sold a
property in 1998 and 1996 and received $24,092,251 in proceeds from these sales.
Over the last three years the Partnership has used cash to fund $5,360,711 in
additions to real estate investments, $16,481,349 to retire mortgage notes
related to the sold properties, $3,709,068 to pay off a mortgage note, $35,665
for additions to deferred borrowing costs, $1,419,339 for the repayment of
advances from affiliates, $3,202,187 for the payment of the MID and $1,001,344
for distributions to the limited partners.

The Partnership generated $1,887,502 through operating activities in 1998 as
compared to $2,111,743 in 1997. The decrease of $224,241 can be attributed the
sale of Channingway Apartments in April 1998.

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 on
its remaining five properties. The Partnership has budgeted an additional $1.2
million of capital improvements for 1999, to be funded from property operations
and cash reserves.

At December 31, 1998, the Partnership held cash and cash equivalents of
$2,135,190. 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 1999 will be sufficient to fund
the Partnership's budgeted capital improvements for 1999 and to repay the
current portion of the Partnership's mortgage notes.

During 1998, the Partnership was faced with a mortgage maturity at Channingway
of approximately $12.3 million. On April 7, 1998, the Partnership sold its
investment interest in the property. With the proceeds from the sale of
Channingway, the Partnership paid off the mortgage note payable on Plaza
Westlake in the amount of $3,709,068 and made distributions to the limited
partners in the amount of $1,001,344.

<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 $5.36 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, 1998, $835,455, $(75,314) and $2,027,598, respectively, of net
income (loss) was allocated to the General Partner. The limited partners
received allocations of net income (loss) of $7,746,503, $(1,430,956) and
$(1,635,727), respectively, for the three year period ended December 31, 1998.

During 1998, the Partnership paid its first distribution to the limited partners
since 1986 in the amount of $1,001,344. The distribution was funded from the
sale of Channingway Apartments. The General Partner will continue to monitor the
cash reserves, and working capital needs to determine when cash flows will
support additional distributions to the limited partners. A distribution of
$773,083 for the MID has been accrued by the Partnership for the year ended
December 31, 1998 for the General Partner.

<PAGE>
YEAR 2000 DISCLOSURE
- ---------------------

State of readiness
- ------------------

The year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in major systems failure or
miscalculations.

Management has assessed its information technology ("IT") infrastructure to
identify any systems that could be affected by the year 2000 problem. The IT
used by the Partnership for financial reporting and significant accounting
functions was made year 2000 compliant during recent systems conversions. The
software utilized for these functions are licensed by third party vendors who
have warranted that their systems are year 2000 compliant.

Management is in the process of evaluating the mechanical and embedded
technological systems at the various properties. Management has inventoried all
such systems and queried suppliers, vendors and manufacturers to determine year
2000 compliance. Management will complete assessment of findings by May 1, 1999.
In circumstances of non-compliance management will work with the vendor to
remedy the problem or seek alternative suppliers who will be in compliance.
Management believes that the remediation of any outstanding year 2000 conversion
issues will not have a material or adverse effect on the Partnership's
operations. However, no estimates can be made as to the potential adverse impact
resulting from the failure of third party service providers and vendors to be
year 2000 compliant.

Cost
- ----

The cost of IT and embedded technology systems testing and upgrades is not
expected to be material to the Partnership. Because all the IT systems have been
upgraded over the last three years, all such systems were compliant, or made
compliant at no additional cost by third party vendors. Management anticipates
the costs of assessing, testing, and if necessary replacing embedded technology
components will be less than $50,000. Such costs will be funded from operations
of the Partnership.

Risks
- -----

Ultimately, the potential impact of the year 2000 issue will depend not only on
the corrective measures the Partnership undertakes, but also on the way in which
the year 2000 issue is addressed by government agencies and entities that
provide services or supplies to the Partnership. Management has not determined
the most likely worst case scenario to the Partnership. As management studies
the findings of its property systems assessment and testing, management will
develop a better understanding of what would be the worst case scenario.
Management believes that progress on all areas is proceeding and that the
Partnership will experience no adverse effect as a result of the year 2000
issue. However, there is no assurance that this will be the case.

<PAGE>
Contingency plans
- -----------------

Management is developing contingency plans to address potential year 2000
non-compliance of IT and embedded technology systems. Management believes that
failure of any IT system could have an adverse impact on operations. However,
management believes that alternative systems are available that could be
utilized to minimize such impact. Management believes that any failure in the
embedded technology systems could have an adverse impact on that property's
performance. Management will assess these risks and develop plans to mitigate
possible failures by June, 1999.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- ----------------------------------------------------------

Not Applicable.

<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....................................... 16

Balance Sheets at December 31, 1998 and 1997................................... 17

Statements of Operations for each of the three years in the period
ended December 31, 1998..................................................... 18

Statements of Partners' Deficit for each of the three years in the
period ended December 31, 1998.............................................. 19

Statements of Cash Flows for each of the three years in the period
ended December 31, 1998..................................................... 20

Notes to Financial Statements.................................................. 22

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, 1998 and 1997, and
the related statements of operations, partners' deficit and cash flows for each
of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, 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 19, 1999

<PAGE>
McNEIL REAL ESTATE FUND XII, LTD.

BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
------------ -------------

ASSETS
- -------

Real estate investments:
<S> <C> <C>
Land ...................................................... $ 4,534,618 $ 4,534,618
Buildings and improvements ................................ 59,614,889 58,352,857
------------ ------------
64,149,507 62,887,475
Less: Accumulated depreciation and amortization .......... (39,854,829) (36,754,194)
------------ ------------
24,294,678 26,133,281

Asset held for sale .......................................... -- 9,303,533

Cash and cash equivalents .................................... 2,135,190 1,423,658
Cash segregated for security deposits ........................ 320,540 456,356
Accounts receivable .......................................... 198,842 165,311
Prepaid expenses and other assets ............................ 103,546 139,468
Escrow deposits .............................................. 1,295,584 1,350,788
Deferred borrowing costs, net of accumulated
amortization of $491,761 and $767,891 at
December 31, 1998 and 1997, respectively .................. 1,359,656 1,544,702
------------ ------------
$ 29,708,036 $ 40,517,097
============ ============
LIABILITIES AND PARTNERS' DEFICIT
- ---------------------------------

Mortgage notes payable ....................................... $ 37,449,291 $ 54,200,372
Accounts payable ............................................. -- 9,996
Accrued expenses and deferred rental income .................. 252,497 277,958
Accrued interest ............................................. 255,330 378,010
Accrued property taxes ....................................... 684,333 932,545
Deferred gain - land condemnation ............................ 297,754 297,754
Deferred gain - fire damage .................................. 50,880 --
Advances from Southmark ...................................... 42,177 39,839
Advances from affiliates - General Partner ................... 34,746 32,136
Payable to affiliates - General Partner ...................... 4,255,518 4,573,052
Security deposits ............................................ 325,586 519,042
------------ ------------
43,648,112 61,260,704
------------ ------------

Commitments and Contingencies

Partners' deficit:
Limited partners - 240,000 limited partnership units
authorized; 229,666 and 229,690 limited partnership
units issued and outstanding at December 31, 1998
and 1997, respectively .................................. (3,834,776) (10,579,935)
General Partner ........................................... (10,105,300) (10,163,672)
------------ ------------
(13,940,076) (20,743,607)
------------ ------------
$ 29,708,036 $ 40,517,097
============ ============
</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,
-----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Revenue:
<S> <C> <C> <C>
Rental revenue .................... $ 13,557,960 $ 15,427,506 $ 16,327,181
Interest .......................... 245,920 114,621 213,456
Gain on dispositions of real estate 9,568,850 -- 1,506,169
------------ ------------ ------------
Total revenue ................... 23,372,730 15,542,127 18,046,806
------------ ------------ ------------

Expenses:
Interest .......................... 3,933,339 4,828,851 5,112,770
Interest - affiliates ............. 2,610 2,642 53,622
Depreciation and amortization ..... 3,123,624 3,582,171 3,659,059
Property taxes .................... 987,674 1,167,965 1,071,510
Personnel expenses ................ 1,534,834 1,746,287 1,842,298
Repairs and maintenance ........... 1,881,530 2,254,008 2,185,251
Property management fees -
affiliates ...................... 672,292 768,159 811,532
Utilities ......................... 1,070,524 1,243,260 1,359,246
Other property operating expenses . 735,296 1,023,327 1,043,379
General and administrative ........ 570,866 205,326 169,797
General and administrative -
affiliates ...................... 278,183 226,401 346,471
------------ ------------ ------------
Total expenses .................. 14,790,772 17,048,397 17,654,935
------------ ------------ ------------

Net income (loss) .................... $ 8,581,958 $ (1,506,270) $ 391,871
============ ============ ============

Net income (loss) allocable to
limited partners .................. $ 7,746,503 $ (1,430,956) $ (1,635,727)
Net income (loss) allocable to
General Partner .................. 835,455 (75,314) 2,027,598
------------ ------------ ------------
Net income (loss) .................... $ 8,581,958 $ (1,506,270) $ 391,871
============ ============ ============

Net income (loss) per limited
partnership unit .................. $ 33.73 $ (6.23) $ (7.12)
============ ============ ============

Distribution per limited partnership
unit .............................. $ 4.36 $ -- $ --
============ ============ ============

</TABLE>

See accompanying notes to financial statements.

<PAGE>
McNEIL REAL ESTATE FUND XII, LTD.

STATEMENTS OF PARTNERS' DEFICIT

For the Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
Total
General Limited Partners'
Partner Partners Deficit
------------- ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995 .......... $(10,335,932) $ (7,513,252) $(17,849,184)

Net income (loss) ..................... 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)

Net loss .............................. (75,314) (1,430,956) (1,506,270)

Management Incentive Distribution ..... (855,907) -- (855,907)
------------ ------------ ------------

Balance at December 31, 1997 .......... (10,163,672) (10,579,935) (20,743,607)

Net income ............................ 835,455 7,746,503 8,581,958

Distributions to limited partners ..... -- (1,001,344) (1,001,344)

Management Incentive Distribution ..... (777,083) -- (777,083)
------------ ------------ ------------

Balance at December 31, 1998 .......... $(10,105,300) $ (3,834,776) $(13,940,076)
============ ============ ============

</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,
-------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Cash flows from operating activities:
<S> <C> <C> <C>
Cash received from tenants ..................... $ 13,522,570 $ 15,462,328 $ 16,089,650
Cash paid to suppliers ......................... (5,751,105) (6,379,022) (6,855,751)
Cash paid to affiliates ........................ (1,053,456) (1,218,793) (3,126,674)
Interest received .............................. 245,920 114,621 213,456
Interest paid .................................. (3,868,635) (4,682,527) (4,985,617)
Interest paid to affiliates .................... -- -- (79,757)
Property taxes paid ............................ (1,207,792) (1,184,864) (1,071,595)
------------ ------------ ------------
Net cash provided by operating activities ......... 1,887,502 2,111,743 183,712
------------ ------------ ------------

Cash flows from investing activities:
Additions to real estate investments and
assets held for sale ......................... (1,313,730) (1,797,633) (2,249,348)
Proceeds from disposition of
real estate .................................. 18,881,821 -- 5,210,430
Land condemnation escrow ....................... -- -- 499,000
------------ ------------ ------------
Net cash provided by (used in)
investing activities ........................... 17,568,091 (1,797,633) 3,460,082
------------ ------------ ------------

Cash flows from financing activities:
Principal payments on mortgage
notes payable ................................ (518,952) (658,701) (343,065)
Principal addition to mortgage note payable
from release of capital improvements
escrow ....................................... -- -- 300,000
Retirement of mortgage note payable ............ (3,709,068) -- --
Retirement of mortgage notes due to
dispositions of real estate .................. (12,523,061) -- (3,958,288)
Deferred borrowing costs paid .................. -- -- (35,665)
Repayment of advances from
affiliates - General Partner ................. -- -- (1,419,339)
Management Incentive Distribution .............. (991,636) -- (2,210,551)
Distributions to limited partners .............. (1,001,344) -- --
------------ ------------ ------------
Net cash used in financing activities ............. (18,744,061) (658,701) (7,666,908)
------------ ------------ ------------

Net increase (decrease) in cash and
cash equivalents ............................. 711,532 (344,591) (4,023,114)

Cash and cash equivalents at
beginning of year ............................ 1,423,658 1,768,249 5,791,363
------------ ------------ ------------

Cash and cash equivalents at end of year .......... $ 2,135,190 $ 1,423,658 $ 1,768,249
============ ============ ============
</TABLE>

See discussion of noncash investing and financing activities in Notes 2, 6 and
10.

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

STATEMENTS OF CASH FLOWS

Reconciliation of Net Income (Loss) to Net Cash Provided by
Operating Activities

<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Net income (loss) ................................ $ 8,581,958 $(1,506,270) $ 391,871
----------- ----------- -----------

Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation and amortization ................. 3,123,624 3,582,171 3,659,059
Amortization of deferred
borrowing costs ............................. 185,046 149,937 152,327
Net interest added to advances
from Southmark .............................. 2,338 2,367 2,325
Net interest added to advances
from affiliates - General Partner ........... 2,610 2,642 --
Gain on dispositions of real estate ........... (9,568,850) -- (1,506,169)
Changes in assets and liabilities:
Cash segregated for security
deposits .................................. 135,816 (22,606) (117,085)
Accounts receivable ......................... 36,620 77,049 (35,513)
Prepaid expenses and other
assets .................................... 35,922 (615) 10,359
Escrow deposits ............................. 55,204 (183,056) (166,824)
Accounts payable ............................ (9,996) (6,406) (69,762)
Accrued expenses and deferred
rental income ............................. (25,461) 135,859 (4,280)
Accrued interest ............................ (122,680) (5,980) (53,634)
Accrued property taxes ...................... (248,212) 94,747 (97,520)
Payable to affiliates - General
Partner ................................... (102,981) (224,233) (1,968,671)
Security deposits ........................... (193,456) 16,137 (12,771)
----------- ----------- -----------

Total adjustments ....................... (6,694,456) 3,618,013 (208,159)
----------- ----------- -----------

Net cash provided by operating
activities .................................. $ 1,887,502 $ 2,111,743 $ 183,712
=========== =========== ===========
</TABLE>

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

NOTES TO FINANCIAL STATEMENTS
December 31, 1998

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

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

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 for the years ended December 31, 1998, 1997 and 1996.
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 both negative and immaterial.

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

Limited Partnerships:
Buccaneer Fund XII, Ltd.* 100% -%
Castle Bluff Fund XII Associates, L.P. 99 1
Palisades Fund XII Associates, L.P.* 100 -
Plaza Westlake Fund XII, Ltd.* 100 -

General Partnerships:
Brendon Way Fund XII Associates 99 1

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

Adoption of Recent Accounting Pronouncements
- --------------------------------------------

The Partnership has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 requires an enterprise to report financial information about its
reportable operating segments, which are defined as components of a business for
which separate financial information is evaluated regularly by the chief
decision maker in allocating resources and assessing performance. The
Partnership does not prepare such information for internal use, since it
analyzes the performance of and allocates resources for each property
individually. The Partnership's management has determined that it operates one
line of business and it would be impracticable to report segment information.
Therefore, the adoption of SFAS 131 has no impact on the Partnership's financial
statements.

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 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". 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 fair value.

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

<PAGE>
Asset Held for Sale
- -------------------

The asset held for sale was stated at the lower of depreciated cost or fair
value less costs to sell. Depreciation on this asset ceased at the time it was
placed on the market for sale.

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.

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 1998, 1997 and 1996 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>
Cash distributions of $1,001,344 were made to the limited partners in 1998. No
distributions were made to the limited partners in 1997 or 1996. The Partnership
paid or accrued distributions of $777,083, $855,907 and $924,117 for the benefit
of the General Partner for the years ended December 31, 1998, 1997 and 1996,
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 229,666, 229,690 and 229,828 Units
outstanding in 1998, 1997 and 1996.

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. 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. The maximum MID percentage decreases to .75% in
2000, .50% in 2001 and .25% thereafter.

The MID will be paid to the extent of the lesser of the Partnership's excess
cash flow, as defined, or net operating income, as defined (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 1998, 1997 or 1996.

<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
1998, 1997 or 1996 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:

<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Property management fees - affiliates ....... $ 672,292 $ 768,159 $ 811,532
Charged to interest expense:
Interest expense on affiliate
loans and advances ..................... 2,610 2,642 53,622
Charged to general and
administrative - affiliates:
Partnership administration ............... 278,183 226,401 346,471
---------- ---------- ----------
$ 953,085 $ 997,202 $1,211,625
========== ========== ==========

Charged to General Partner's deficit:
MID ...................................... $ 777,083 $ 855,907 $ 924,117
========== ========== ==========
</TABLE>

Payable to affiliates - General Partner at December 31, 1998 and 1997 consisted
primarily of accrued property management fees, MID and cost reimbursements and
are due and payable from operations. In 1998 and 1996, the Partnership paid MID
of $991,636 and $2,210,551, respectively, from cash reserves.

The General Partner has waived the collection terms of reimbursable expenses and
MID, and has elected for the Partnership to pay limited partner distributions
before the payment of such amounts.

<PAGE>
The total advances from affiliates at December 31, 1998 and 1997 consist of the
following:

1998 1997
----------- ------------
Advances purchased by General Partner $ 27,903 $ 27,903
Accrued interest payable 6,843 4,233
---------- ------------
$ 34,746 $ 32,136
========== ============

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 7.75%
and 8.5% at December 31, 1998 and 1997, respectively.

NOTE 3 - TAXABLE INCOME (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 assets and liabilities for tax purposes exceeded the net
assets and liabilities for financial reporting purpose by $6,645,214 in 1998.

The Partnership's net assets and liabilities for financial reporting purposes
exceeded the net assets and liabilities for tax purposes by $6,645,214 in 1998,
$1,664,332 in 1997 and $3,627,641 in 1996.

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

The basis and accumulated depreciation of the Partnership's real estate
investments held at December 31, 1998 and 1997 are set forth in the following
tables:

<TABLE>
<CAPTION>
Accumulated
Buildings and Depreciation Net Book
1998 Land Improvements and Amortization Value
---- -------------- ------------ ---------------- ---------------

Brendon Way
<S> <C> <C> <C> <C>
Indianapolis, IN $ 1,067,661 $ 22,428,849 $ (14,948,273) $ 8,548,237
Castle Bluff
Kentwood, MI 239,839 5,557,019 (3,754,963) 2,041,895
Lodge at Aspen Grove
Denver, CO 996,813 9,735,213 (6,492,507) 4,239,519
Palisades at the Galleria
Atlanta, GA 774,721 15,080,153 (10,051,501) 5,803,373
Plaza Westlake
Glendale Heights, IL 1,455,584 6,813,655 (4,607,585) 3,661,654
------------- ------------- ------------- -------------
$ 4,534,618 $ 59,614,889 $ (39,854,829) $ 24,294,678
============= ============= ============= =============

Buildings and Depreciation Net Book
1997 Land Improvements and Amortization Value
---- -------------- ------------ ---------------- ---------------

Brendon Way $ 1,067,661 $ 21,895,901 $ (13,766,450) $ 9,197,112
Castle Bluff 239,839 5,450,627 (3,476,090) 2,214,376
Lodge at Aspen Grove 996,813 9,579,207 (6,001,667) 4,574,353
Palisades at the Galleria 774,721 14,701,750 (9,252,855) 6,223,616
Plaza Westlake 1,455,584 6,725,372 (4,257,132) 3,923,824
------------- -------------- ------------- -------------
$ 4,534,618 $ 58,352,857 $ (36,754,194) $ 26,133,281
============= ============== ============= =============
</TABLE>

On August 1, 1997, the General Partner placed Channingway Apartments on the
market for sale. Channingway Apartments was classified as such at December 31,
1997 with a net book value of $9,303,553. On April 7, 1998 the Partnership sold
Channingway Apartments. See Note 6.

The results of operations for the asset held for sale are $59,674, $64,481 and
$(115,844) for 1998, 1997 and 1996, respectively. Results of operations are
operating revenues less operating expenses including depreciation and interest
expense.

<PAGE>
The Partnership leases its commercial property under various non-cancelable
operating lease agreements. Future minimum rents to be received as of December
31, 1998, are as follows:

1999.................................... $ 861,451
2000.................................... 543,921
2001.................................... 417,316
2002.................................... 382,845
2003.................................... 289,739
Thereafter.............................. 346,053
--------------
Total............................... $ 2,841,325
==============

Future minimum rents do not include contingent rents or operating expense
reimbursements. Contingent rents and operating expense reimbursements amounted
to $289,013 in 1998, $187,775 in 1997 and $147,333 in 1996, and are included in
rental revenue on the Statements of Operations.

The Partnership's properties, with the exception of Plaza Westlake, 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, 1998 and 1997. All mortgage notes are secured by the related real
estate investments or the asset held for sale.

<TABLE>
<CAPTION>
Mortgage Annual Monthly
Lien Interest Payments/ December 31,
Property Position (a) Rates % Maturity Date (e) 1998 1997
- -------- ------------------- ----------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Brendon Way First 8.00 $133,911 05/24 $ 17,439,594 $ 17,642,466
----------- ------------

Castle Bluff First 9.25 36,926 12/24 4,354,014 4,392,431
----------- ------------

Channingway (c) First Variable (b) Variable (b) 08/98 - 12,579,650
----------- ------------

Lodge at
Aspen Grove First 8.10 40,741 10/02 5,348,590 5,401,881
----------- ------------
Palisades at the
Galleria First 8.08 78,371 10/02 10,307,093 10,410,165
----------- -------------

Plaza Westlake (d) First 9.50 37,285 01/00 - 3,773,779
----------- -------------
$ 37,449,291 $ 54,200,372
=========== =============
</TABLE>

<PAGE>
(a) The debt, except for Plaza Westlake, is non-recourse to the
Partnership.

(b) Interest on the Channingway mortgage note was 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,
1997 was 8.5%.

(d) On October 5, 1998, the Partnership paid off the Plaza Westlake
mortgage note payable in the amount of $3,709,068.

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

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

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:

1999.................................... $ 431,322
2000.................................... 467,850
2001.................................... 507,477
2002.................................... 15,437,972
2003.................................... 363,147
Thereafter.............................. 20,241,523
-----------
Total................................. $ 37,449,291
===========

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 $39,057,000 as of December 31, 1998 and $56,219,000 as of
December 31, 1997.

<PAGE>
NOTE 6 - DISPOSITIONS OF PROPERTIES
- -----------------------------------

On April 7, 1998, the Partnership sold to an unaffiliated buyer, Channingway
Apartments, a 770 unit apartment complex, located in Columbus, Ohio, for a cash
sales price of $19,150,000. Cash proceeds from this transaction, as well as the
gain on sale are detailed below.

<TABLE>
<CAPTION>
Gain on Sale Cash Proceeds
---------------- ---------------

<S> <C> <C>
Cash sales price..................................... $ 19,150,000 $ 19,150,000

Selling costs........................................ (268,179) (268,179)
Basis of real estate sold............................ (9,312,971)
-------------

Gain on sale of real estate.......................... $ 9,568,850
============== -------------

Proceeds from sale of real estate.................... 18,881,821
Retirement of mortgage note payable.................. (12,523,061)
-------------

Net cash proceeds.................................... $ 6,358,760
=============

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
=============
</TABLE>

<PAGE>
NOTE 7 - 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:

NOTE 8 - 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 9 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------

Third parties also may seek recovery under the common law for damages to their
property or person, against owners of property from which there has been a
release of hazardous and other substances.

The presence of contamination or the failure to remediate contaminations may
adversely affect the owner's ability to sell or lease real estate or to borrow
using the real estate as collateral.

Various buildings at properties do or may contain building materials that are
the subject of various regulatory programs intended to protect human health.
Such building materials include, for example, asbestos, lead-based paint, and
lead plumbing components. The Company has implemented programs to deal with the
presence of those materials, which include, as appropriate, reduction of
potential exposure situations. The Company does not believe that the costs of
such programs are likely to have a material adverse effect. Failure to implement
such programs can result in regulatory violations or liability claims resulting
from alleged exposure to such materials.
<PAGE>
In connection with the proposed sale transaction as more fully described in Note
1 - "Organization and Summary of Significant Accounting Policies", Phase I
environmental site assessments have been completed for each property owned by
the Partnership. Such environmental assessments performed on the properties have
not revealed any environmental liability that the Partnership believes would
have a material adverse effect on the Partnership's business, assets, or results
of operations. The Partnership has not been notified by any governmental
authority of any non-compliance, liability or other claim in connection with any
of its properties except for the Lodge at Aspen Grove, as more fully described
below. There can be no assurances, however, that environmental liabilities have
not developed since such environmental assessments were prepared, or that future
uses or conditions (including, without limitation, changes in applicable
environmental laws and regulations) will not result in imposition of
environmental liability.

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 has obtained an access agreement
from the Partnership to perform its corrective action plan and monitor its
progress.

NOTE 10 - GAIN ON INVOLUNTARY CONVERSION
- ----------------------------------------

On April 23, 1998, two units of Brendon Way Apartments was destroyed by fire
causing $80,151 in damages. The Partnership received $70,151 in insurance
proceeds and the insurance proceeds were placed in escrow until completion of
repairs. The Partnership has recorded a deferred gain and a receivable from its
mortgage company for funds which were not reimbursed as of December 31, 1998.
The deferred gain in the amount of $50,880 represents the amount of insurance
reimbursements to be received in excess of the basis of the property destroyed.
The deferred gain will be recognized when the insurance proceeds are received.

<PAGE>
McNEIL REAL ESTATE FUND XII, LTD.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1998

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

Brendon Way
<S> <C> <C> <C> <C> <C>
Indianapolis, IN $ 17,439,594 $ 1,067,661 $ 17,490,677 $ - $ 4,938,172

Castle Bluff
Kentwood, MI 4,354,014 239,839 4,650,535 - 906,484

Lodge at Aspen Grove
Denver, CO 5,348,590 996,813 8,058,534 - 1,676,679

Palisades at the
Galleria
Atlanta, GA 10,307,093 975,967 10,920,268 - 3,958,639

Retail Center:

Plaza Westlake
Glendale Heights, IL - 1,635,485 6,222,137 (746,424) 1,158,041
-------------- -------------- -------------- ------------ -------------

$ 37,449,291 $ 4,915,765 $ 47,342,151 $ (746,424) $ 12,638,015
============== ============== ============== ============ =============
</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 or refinancing.

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, 1998

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

Brendon Way
<S> <C> <C> <C> <C>
Indianapolis, IN $ 1,067,661 $ 22,428,849 $ 23,496,510 $ (14,948,273)

Castle Bluff
Kentwood, MI 239,839 5,557,019 5,796,858 (3,754,963)

Lodge at Aspen Grove
Denver, CO 996,813 9,735,213 10,732,026 (6,492,507)

Palisades at the
Galleria
Atlanta, GA 774,721 15,080,153 15,854,874 (10,051,501)

Retail Center:

Plaza Westlake
Glendale Heights, IL 1,455,584 6,813,655 8,269,239 (4,607,585)
-------------- -------------- ---------------- -------------
$ 4,534,618 $ 59,614,889 $ 64,149,507 $ (39,854,829)
============== ============= =============== ============
</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 $69,977,500
and accumulated depreciation was $56,409,014 at December 31, 1998.

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, 1998

Date of Date Depreciable
Description Construction Acquired lives (years)
- ----------- ------------ -------- -------------
Apartments:

Brendon Way
<S> <C> <C> <C>
Indianapolis, IN 1968/73 01/82 3-25

Castle Bluff
Kentwood, MI 1976/77 01/82 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,
------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Real Estate Investments:
<S> <C> <C> <C>
Balance at beginning of year ................... $ 62,887,475 $ 81,381,686 $ 79,599,343

Improvements ................................... 1,304,292 1,797,633 1,983,589

Reclassification to asset held for sale ........ -- (20,291,844) --

Replacement of assets .......................... (42,260) -- --

Dispositions of real estate .................... -- -- (201,246)
------------ ------------ ------------

Balance at end of year ......................... $ 64,149,507 $ 62,887,475 $ 81,381,686
============ ============ ============

Accumulated Depreciation and Amortization:

Balance at beginning of year ................... $ 36,754,194 $ 44,160,334 $ 40,501,275

Depreciation and amortization .................. 3,123,624 3,582,171 3,659,059

Replacement of assets .......................... (22,989) -- --

Reclassification to asset held for sale ........ -- (10,988,311) --
------------ ------------ ------------

Balance at end of year ......................... $ 39,854,829 $ 36,754,194 $ 44,160,334
============ ============ ============

Asset Held for Sale:

Balance at beginning of year ................... $ 9,303,533 $ -- $ 3,164,323

Reclassification to asset held for sale ........ -- 9,303,533 --

Improvements ................................... 9,438 -- 265,759

Depreciation ................................... -- -- --

Sale ........................................... (9,312,971) -- (3,430,082)
------------ ------------ ------------

Balance at end of year ......................... $ -- $ 9,303,533 $ --
============ ============ ============
</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, 78 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 an 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.

<PAGE>
Carole J. McNeil 55 Mrs. McNeil is Co-Chairman, with husband
Co-Chairman of the Robert A. McNeil, of McNeil Investors,
Board 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.

Ron K. Taylor 41 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.

<PAGE>
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, 1998, 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, 1998. 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.

(B) Security ownership of management.

The General Partner and the officers and directors of its general
partner, collectively, own 1,551.5 Units as of February 1, 1999, 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 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. The maximum MID percentage decreases to
.75% in 2000, .50% in 2001 and .25% thereafter.

<PAGE>
The MID will be paid to the extent of the lesser of the Partnership's excess
cash flow, as defined, or net operating income, as defined (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, 1998, the Partnership paid or accrued for the General Partner MID in the
amount of $777,083.

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,
1998, the Partnership paid or accrued $950,475 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>
PART IV

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

See accompanying index to financial statements at Item 8 - Financial Statements
and Supplementary Data.

(A) Exhibits

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

3.1 First Amended and Restated Certifi-
cate 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)

10.3 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)

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)

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

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)

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

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

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

10.18 Promissory Note, dated October 13,
1995, between Palisades Fund XII
Associates, L.P. and Fleet Real
Estate Capital, Inc. (5)

10.19 Mortgage Note, dated October 20,
1995, between Buccaneer Village Fund
XII, Ltd. and Fleet Real Estate
Capital, Inc. (5)

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

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

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

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

Buccaneer Fund XII, Ltd. Texas None

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

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.

<PAGE>
(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.

(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, 1998.

<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, 1999 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, 1999 By: /s/ Ron K. Taylor
- -------------- ----------------------------------------------
Date Ron K. Taylor
President and Director of McNeil
Investors, Inc.
(Principal Financial Officer)

March 31, 1999 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,135,190
<SECURITIES> 0
<RECEIVABLES> 198,842
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 64,149,507
<DEPRECIATION> (39,854,829)
<TOTAL-ASSETS> 29,708,036
<CURRENT-LIABILITIES> 0
<BONDS> 37,449,291
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 29,708,036
<SALES> 13,557,960
<TOTAL-REVENUES> 23,372,730
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,854,823
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,935,949
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,581,958
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,581,958
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>