CORPORATE PROPERTY ASSOCIATES 4, 10-K405, 1998-03-26

CORPORATE PROPERTY ASSOCIATES 4
10-K405, 1998-03-26
OPERATORS OF NONRESIDENTIAL BUILDINGS

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

FORM 10-K

(Mark One)

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

For the quarterly period ended DECEMBER 31, 1997

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

For the transition period from to

Commission file number 0-11982

CORPORATE PROPERTY ASSOCIATES 4, A CALIFORNIA LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)

CALIFORNIA 13-3126150
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (212) 492-1100

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

Title of each class Name of each exchange on which registered

NONE NONE

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

SUBSIDIARY PARTNERSHIP UNITS
(Title of Class)

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.

[X] Yes [ ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) 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]

Aggregate market value of the voting stock held by non-affiliates of
Registrant: There is no active market for Subsidiary Partnership Units.
<PAGE> 2
PART I

Item 1. BUSINESS.

Registrant is engaged in the business of investing in commercial and
industrial real estate properties which are net leased to commercial and
industrial entities. Registrant was organized as a California limited
partnership on August 10, 1982. Effective January 1, 1998, the General Partner
of Registrant is Carey Diversified LLC ("Carey Diversified"). Carey Corporate
Property, Inc. and William P. Carey were formerly Corporate General Partner and
Individual General Partner, respectively. Carey Diversified is also the General
Partner of Corporate Property Associates ("CPA(R):1"), Corporate Property
Associates 2 ("CPA(R):2"), Corporate Property Associates 3, ("CPA(R):3"),
Corporate Property Associates 5 ("CPA(R):5"), Corporate Property Associates 6 -
a California limited partnership ("CPA(R):6"), Corporate Property Associates 7 -
a California limited partnership ("CPA(R):7"), Corporate Property Associates 8,
L.P., a Delaware limited partnership ("CPA(R):8") and Corporate Property
Associates 9, L.P., a Delaware limited partnership ("CPA(R):9). Registrant has
entered into an agreement with Carey Management LLC ("Carey Management")
pursuant to which Carey Management performs a variety of management services for
Registrant.

Registrant's operations consist of the investment in and the leasing of
industrial and commercial real estate. Registrant assumed the operation of a
hotel business in August 1992 in connection with the eviction of a tenant. In
1996, Registrant transferred ownership of a hotel property in Kenner, Louisiana
for an interest in the operating partnership of a real estate investment trust.
See Selected Financial Data in Item 6 for a summary of Registrant's operations.
Also see the material contained in the Prospectus under the heading INVESTMENT
OBJECTIVES AND POLICIES.

The properties owned by Registrant are described in Item 2.
Registrant's entire net proceeds from the public offering, less any return of
capital and a working capital reserve have been fully invested in net leased
commercial and industrial real estate since March 12, 1984, the date of
Registrant's final real estate acquisition.

For the year ended December 31, 1997, revenues from properties occupied
by lease obligors which accounted for 10% or more of leasing revenues of
Registrant were as follows: Hughes Markets, Inc. ("Hughes"), 49%, Simplicity
Manufacturing Inc. ("Simplicity"), 20% and Brodart Co. ("Brodart"), 13%. No
other property owned by Registrant accounted for 10% or more of its total
leasing revenues during 1997. See Note 9 to the Financial Statements in Item 8.

Five of Registrant's seven real estate properties are leased to
corporate tenants under long-term net leases. A net lease generally requires
tenants to pay all operating expenses relating to the leased properties
including maintenance, real estate taxes, insurance and utilities which under
other forms of leases are often paid by the lessor. Lessees are required to
include Registrant as an additional insured party on all insurance policies
relating to the leased properties. In addition, substantially all of the net
leases include indemnification provisions which require the lessees to indemnify
Registrant and the General Partners for liabilities on all matters related to
the leased properties. Registrant's lease with Petrocon Engineering, Inc.
("Petrocon") for the property in Beaumont, Texas is not a net lease and
Registrant absorbs a portion of the property operating expenses. The property
located in Salisbury, North Carolina is currently vacant. Registrant believes
that the insurance and indemnity provided on its behalf by its lessees at its
net leased properties provides adequate coverage for property damage and any
liability claims which may arise against Registrant's ownership interests. In
addition to the insurance and indemnification provisions of the leases,
Registrant has contingent property and liability insurance on its leased
properties. To the extent that any lessees are not financially able to satisfy
indemnification obligations which exceed insurance reimbursements, Registrant
may incur the costs necessary to repair property and settle liabilities. For
properties not subject to net leases, Registrant also has primary property and
liability insurance coverages which Management believes to be adequate.
Presently, there are no claims pending for property damages or liability claims
known to Registrant that would have a material adverse effect on Registrant's
financial condition or liquidity even in the event that a lessee is unable to
fulfill its indemnity obligation to the Registrant.

As described above, lessees other than Petrocon retain the obligation
for the operating expenses of their leased properties so that, other than rental
income, there are no significant operating data (i.e. expenses) reportable on
Registrant's leased properties. In addition, the Petrocon lease includes
escalation provisions which pass through certain increases in operating expenses
to Petrocon. As discussed in Registrant's Management's Discussion and Analysis
in Item 7, Registrant's leases generally provide for

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<PAGE> 3
periodic rent increases during the initial lease term which are either stated
and negotiated at the inception of the lease or based on formulas indexed to
increases in the Consumer Price Index ("CPI"). As described below, Registrant's
leases with Hughes and a subsidiary of Continental Casualty Company
("Continental") expire in April 1998 and October 1998, respectively. As describe
below, a lease for the Hughes Property will go into effect when Hughes vacates.
The subsidiary of Continental and registrant are discussing a short-term
extension with the existing renewal option being deferred until the end of such
short-term extension. The lease with Petrocon expires in November 1999. All of
Registrant's other leases expire between 2003 and 2008 and provide for multiple
renewal terms of generally five years per renewal term. During 1997, Simplicity
notified Registrant of their intention to exercise a purchase option which is
exercisable in April 1998 at the greater of fair market value, as defined in the
lease, or $9,684,000.

Since Registrant's objective has been to invest in properties which are
occupied by a single corporate tenant and subject to long-term leases backed by
the credit of the corporate lessee, Registrant's properties have not been
generally subject to the competitive conditions of local and regional real
estate markets. In selecting its real estate investments, Registrant's strategy
has been to identify properties which included operations of material importance
to the lessee so that the lessee would be more likely to extend its lease beyond
the initial term or exercise a purchase option if such option was provided for
in the lease agreement. As Registrant's properties in Beaumont, Texas and
Salisbury, North Carolina have been subject to short-term leases with one
tenant, the properties are subject to current market conditions. The Beaumont
property is currently leased at rates the General Partner believes to be at
market and Registrant does not expect rentals to significantly change in the
event that further lease extension's are executed. The Salisbury property is
currently being remarketed. Registrant's lease with Continental expires in
October 1998. Continental elected to extend its lease in 1993 and has a renewal
option which it can exercise at the end of its current term. Because Registrant
may be affected by the financial condition of its lessees rather than the
competitive conditions of the real estate marketplace, Registrant's strategy has
been to diversify its investments among tenants, property types and industries
in addition to achieving geographical diversification.

Registrant's lease with Hughes for a dairy processing and distribution
facility in Los Angeles, California expires April 1998. Hughes is obligated to
pay Registrant a lump sum of approximately $2,913,000 in April 1998. Such lump
sum payment is supported by an irrevocable letter of credit. On June 20, 1997,
Registrant and CPA(R):3 entered into a net lease agreement for the Los Angeles
property with Copeland Beverage Group, Inc. ("Copeland"). Copeland's right of
possession of the property and the date which it will be required to commence
paying rent will be the date on or after April 30, 1998 that Hughes vacates the
property. The Copeland lease has an initial term of nine years and provides for
annual rent of $1,800,000 of which the Registrant's share is $1,498,320. The
lease has rent increases every three years based on a formula indexed to the
CPI.

Registrant voluntarily contracted for Phase I environmental reviews of
all of its properties in 1993. Registrant believes, based on the results of such
reviews and Phase II environmental reviews on certain of its properties in 1994,
that its properties are in substantial compliance with Federal and state
environmental statutes and regulations. Phase II reviews were only performed on
certain properties based on the recommendations of the Phase I reviews. Portions
of certain properties have been subject to a limited degree of contamination,
principally in connection with either leakage from underground storage tanks or
surface spills from facility activities. In many instances, tenants are actively
engaged in the remediation process and addressing identified conditions. For
those conditions which were identified, Registrant advised its tenants of such
findings and of their obligations to perform any required remediation. Tenants
are generally subject to environmental statutes and regulations regarding the
discharge of hazardous materials and any related remediation obligations. In
addition, Registrant's leases generally require tenants to indemnify Registrant
from all liabilities and losses related to the leased properties. Accordingly,
Management believes that the ultimate resolution of any environmental matters
will not have a material adverse effect on Registrant's financial condition,
liquidity or results of operations.

On October 16, 1997, Registrant distributed a Consent Solicitation
Statement/Prospectus to the Limited Partners that described a proposal to
consolidate Registrant with the other CPA(R) Partnerships. Proposals that each
of the nine CPA(R) limited partnerships be merged with a corresponding
subsidiary partnership of Carey Diversified, of which Carey Diversified is the
general partner, were approved by the Limited Partners of all nine of the CPA(R)
limited partnerships. Each limited partner had the option of either

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<PAGE> 4
exchanging his or her limited partnership interest for an interest in Carey
Diversified ("Listed Shares") or to retain a limited partnership interest in the
subsidiary partnership ("Subsidiary Partnership Units"). On January 1, 1998,
2,986 holders representing 83,339 of the 85,528 limited partnership units
exchanged such units for 2,747,687 Listed Shares with 56 holders of the
remaining 2,189 limited partnership units exchanging such units for Subsidiary
Partnership Units. The former General Partners received 21,729 Listed Shares for
their interest in their share of the appreciation in Registrant properties.

The Listed Shares are listed on the New York Stock Exchange. The
Subsidiary Partnership Units provide substantially the same economic interest
and legal rights as those of a limited partnership unit in Registrant prior to
the Consolidation, but are not listed on a securities exchange. A liquidating
distribution to holders of Subsidiary Partnership Units will be made after an
appraisal of Registrant's properties. The date of such an appraisal is to be no
later than December 31, 1998.

Registrant does not have any employees. Carey Management, an affiliate
of the General Partner of Registrant, performs accounting, secretarial and
transfer services for Registrant. Chase Mellon Shareholder Services, Inc.
performs certain transfer services for Registrant and The Chase Manhattan Bank
performs certain banking services for Registrant. In addition, Registrant has
entered into an agreement with Carey Management pursuant to which Carey
Management provides certain management services for Registrant.

Registrant's management company has responsibility for maintaining
Registrant's books and records. An affiliate of the management company services
the computer systems used in maintaining such books and records. In its
preliminary assessment of Year 2000 issues, the affiliate believes that such
issues will not have a material effect on Registrant's operations; however, such
assessment has not been completed. Registrant relies on its bank and transfer
agent for certain computer related services and has initiated discussions to
determine whether they are addressing Year 2000 issues that might affect
Registrant.

-3-
<PAGE> 5
Item 2. PROPERTIES.

Registrant's properties are as follows:

<TABLE>
<CAPTION>
LEASE TYPE OF OWNERSHIP
OBLIGOR TYPE OF PROPERTY LOCATION INTEREST
- --------------- ---------------- -------- -----------------

<S> <C> <C> <C>
HUGHES MARKETS, Land and Dairy Los Angeles, Ownership of an
INC. Processing/ California 83.24% interest
Distribution in land and
Facilities buildings

SIMPLICITY Land and Manufac- Port Washington, Ownership of land
MANUFACTURING, turing/Product Wisconsin and buildings (1)
INC. Testing Buildings
- 2 locations

CONTINENTAL Land and Office, College Station, Ownership of land
CASUALTY COMPANY Manufacturing Texas and buildings
and Warehouse
Buildings

BRODART CO. Land and Manufac- Williamsport, Ownership of land
turing, Distribution Pennsylvania and buildings (1)
and Office Buildings
- 2 locations

(2) Land and Warehouse/ Salisbury, Ownership of land
Distribution Center North Carolina and buildings

PETROCON Land and Office Beaumont, Texas Ownership of land
ENGINEERING, Building and building
INC. and OLMSTEAD
KIRK PAPER COMPANY

WINN-DIXIE Land and Supermarket Leeds, Alabama Ownership of land
STORES, INC. and building
</TABLE>

(1) These properties are encumbered by mortgage notes payable.
(2) This property is currently vacant.

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<PAGE> 6
The material terms of Registrant's leases with its significant tenants
are summarized in the following table:

<TABLE>
<CAPTION>
Partnership's
Share of Current
Current Annual Rent/Income
Lease Rents/Operating Square Per Lease Renewal Ownership
Obligor Income Footage Sq.Ft.(1) Expiration Terms Interest Terms of Purchase Option
- ----------- ---------------- ------- ---------- ---------- ------- --------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Simplicity
Manufacturing
Inc.(2) $1,996,710 419,676 $4.76 03/03 YES 100% The greater of
fair market value
of the property at
purchase date or
$9,684,000 with fair
market value not to be
in excess of $12,000,000
Hughes
Markets,
Inc. 1,119,298 390,000 10.34 04/98 NO 83.24% N/A
interest;
remaining
interest owned
by Corporate
Property
Associates 3

Brodart, Co.(2) 1,344,764 521,231 2.58 06/08 YES 100% N/A

Continental
Casualty
Company 771,666 97,567 7.91 10/98 YES 100% N/A

Petrocon
Engineering
Inc. 281,184 42,880 6.56 11/99 YES 100% N/A

Winn-Dixie
Stores, Inc. 144,713 25,600 5.65 03/04 YES 100% N/A
</TABLE>

(1) Represents rate for rent per square foot on an annualized basis when
combined with rents applicable to tenants-in-common.
(2) These properties are encumbered by limited recourse mortgages.

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<PAGE> 7
Item 3. LEGAL PROCEEDINGS.

As of the date hereof, Registrant is not a party to any material
pending legal proceedings.

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

Information with respect to matters submitted to a vote of security
holders during the fourth quarter of the year ended December 31, 1997 is hereby
incorporated by reference to page 23 of Registrant's Annual Report contained in
Appendix A.

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Information with respect to Registrant's common equity is hereby
incorporated by reference to page 23 of Registrant's Annual Report contained in
Appendix A.

Item 6. SELECTED FINANCIAL DATA.

Selected Financial Data are hereby incorporated by reference to page 1
of Registrant's Annual Report contained in Appendix A.

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

Management's Discussion and Analysis are hereby incorporated by
reference to pages 2 to 4 of Registrant's Annual Report contained in Appendix A.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The following financial statements and data are hereby incorporated by
reference to pages 5 to 18 of Registrant's Annual Report contained in Appendix
A:

(i) Report of Independent Accountants.
(ii) Balance Sheets as of December 31, 1996 and 1997.
(iii) Statements of Income for the years ended December 31, 1995, 1996 and 1997.
(iv) Statements of Partners' Capital for the years ended December 31, 1995,
1996 and 1997.
(v) Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997.
(vi) Notes to Financial Statements.

Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

NONE

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<PAGE> 8
PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Registrant has no officers or directors. The directors and executive
officers of the General Partner, Carey Diversified LLC, are as follows:

<TABLE>
<CAPTION>
Has Served as a
Director and/or
Name Age Positions Held Officer Since (1)
---- --- -------------- -----------------

<S> <C> <C> <C>
Francis J. Carey 72 Chairman of the Board 1/98
Chief Executive Officer
Director

William Polk Carey 67 Chairman of the Executive Committee 1/98
Director

Steven M. Berzin 47 Vice Chairman 1/98
Chief Legal Officer
Director

Gordon F. DuGan 31 President 1/98
Chief Acquisitions Officer
Director

Donald E. Nickelson 64 Chairman of the Audit Committee 1/98
Director

Eberhard Faber, IV 61 Director 1/98

Barclay G. Jones III 37 Director 1/98

Lawrence R. Klein 77 Director 1/98

Charles C. Townsend, Jr. 69 Director 1/98

Reginald Winssinger 55 Director 1/98

Claude Fernandez 45 Executive Vice President 1/98
- Financial Operations

John J. Park 33 Executive Vice President 1/98
Chief Financial Officer
Treasurer

H. Augustus Carey 40 Senior Vice President 1/98
Secretary

Samantha K. Garbus 29 Vice President - Asset Management 1/98

Susan C. Hyde 29 Vice President - Shareholder Services 1/98

Robert C. Kehoe 37 Vice President - Accounting 1/98

Edward V. LaPuma 24 Vice President - Acquisitions 1/98
</TABLE>

William Polk Carey and Francis J. Carey are brothers. H. Augustus Carey
is the nephew of William Polk Carey and the son of Francis J. Carey.

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<PAGE> 9
A description of the business experience of each officer and director
of the Corporate General Partner is set forth below:

Francis J. Carey, Chairman of the Board, Chief Executive Officer and
Director, was elected President and a Managing Director of W. P. Carey & Co.
("W.P. Carey") in April 1987, having served as a Director since its founding in
1973. Prior to joining the firm full-time, he was a senior partner in
Philadelphia, head of the Real Estate Department nationally and a member of the
executive committee of the Pittsburgh based firm of Reed Smith Shaw & McClay,
counsel for Registrant, the General Partners, the CPA(R) Partnerships, W.P.
Carey and some of its affiliates. He served as a member of the Executive
Committee and Board of Managers of the Western Savings Bank of Philadelphia from
1972 until its takeover by another bank in 1982 and is former chairman of the
Real Property, Probate and Trust Section of the Pennsylvania Bar Association.
Mr. Carey served as a member of the Board of Overseers of the School of Arts and
Sciences of the University of Pennsylvania from 1983 through 1990. He has also
served as a member of the Board of Trustees of the Investment Program
Association since 1990 and on the Business Advisory Council of the Business
Council for the United Nations since 1994. He holds A.B. and J.D. degrees from
the University of Pennsylvania.

Gordon F. DuGan, President, Chief Acquisitions Officer and Director,
was elected Executive Vice President and a Managing Director of W.P. Carey in
June 1997. Mr. Dugan rejoined W.P. Carey as Deputy Head of Acquisitions in
February 1997. Mr. Dugan was until September 1995 a Senior Vice President in the
Acquisitions Department of W.P. Carey. Mr. Dugan joined W.P. Carey as Assistant
to the Chairman in May 1988, after graduating from the Wharton School at the
University of Pennsylvania where he concentrated in Finance. From October 1995
until February 1997, Mr. Dugan was Chief Financial Officer of Superconducting
Core Technologies, Inc., a Colorado-based wireless communications equipment
manufacturer.

Steven M. Berzin, Vice Chairman, Chief Legal Officer and Director, was
elected Executive Vice President, Chief Financial Officer, Chief Legal Officer
and a Managing Director of W.P. Carey in July 1997. From 1993 to 1997, Mr.
Berzin was Vice President - Business Development of General Electric Capital
Corporation in the office of the Executive Vice President and, more recently, in
the office of the President, where he was responsible for business development
activities and acquisitions. From 1985 to 1992, Mr. Berzin held various
positions with Financial Guaranty Insurance Company, the last two being Managing
Director, Corporate Development and Senior Vice President and Chief Financial
Officer. Mr. Berzin associated with the law firm of Cravath, Swaine & Moore from
1978 to 1985 and from 1976 to 1977, he served as law clerk to the Honorable
Anthony M. Kennedy, then a United States Circuit Judge. Mr. Berzin received a
B.A. and M.A. in Applied Mathematics from Harvard University, a B.A. in
Jurisprudence and an M.A. from Oxford University and a J.D. from Harvard Law
School.

Donald E. Nickelson, Chairman of the Audit Committee and Director,
serves as Chairman of the Board and a Director of Greenfield Industries, Inc.
and a Director of Allied Healthcare Products, Inc. Mr. Nickelson is
Vice-Chairman and a Director of the Harbor Group, a leverage buy-out firm. He is
also a Director of Sugen Corporation and D.T.I. Industries, Inc. and a Trustee
of mainstay Mutual Fund Group. From 1986 to 1988, Mr. Nickelson was President of
PaineWebber Incorporated; from 1988 to 1990, he was President of the PaineWebber
Group; and from 1980 to 1993 a Director. Prior to 1986, Mr. Nickelson served in
various capacities with affiliates of PaineWebber Incorporated and its
predecessor firm. From 1988 to 1989, Mr. Nickelson was a Director of a diverse
group of corporations in the manufacturing, service and retail sectors,
including Wyndham Baking Co., Inc., Hoover Group, Inc., Peebles, Inc. and Motor
Wheel Corporation. He is a former Chairman of National Car Rentals, inc. Mr.
Nickelson is also a former Director of the Chicago Board Options Exchange and is
the former Chairman of the Pacific Stock Exchange.

William Polk Carey, Chairman of the Executive Committee and Director,
has been active in lease financing since 1959 and a specialist in net leasing of
corporate real estate property since 1964. Before founding W.P. Carey in 1973,
he served as Chairman of the Executive Committee of Hubbard, Westervelt &
Mottelay (now Merrill Lynch Hubbard), head of Real Estate and Equipment
Financing at Loeb Rhoades & Co. (now Lehman Brothers), head of Real Estate and
Private Placements, Director of Corporate Finance and Vice Chairman of the
Investment Banking Board of duPont Glore Forgan Inc. A graduate of the
University of Pennsylvania's Wharton School of Finance and Commerce, Mr. Carey
is a Governor of the National Association of Real Estate Investment Trusts
(NAREIT). He also serves on the boards of The Johns Hopkins University, The
James A. Baker III Institute for Public Policy at Rice University, Templeton
College of

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<PAGE> 10
Oxford University and other educational and philanthropic institutions. He
founded the Visiting Committee to the Economics Department of the University of
Pennsylvania and co-founded with Dr. Lawrence R. Klein the Economics Research
Institute at that University. Mr. Carey is also a Director of CPA(R):10, CIP(TM)
and CPA(R):12.

Eberhard Faber IV, is currently a Director of PNC Bank, N.A., Chairman
of the Board and Director of the newspaper Citizens Voice, a Director of
Ertley's Motorworld, Inc., Vice-Chairman of the Board of King's College and a
Director of Geisinger Wyoming Valley Hospital. Mr. Faber served as Chairman and
Chief Executive Officer of Eberhard Faber, Inc., from 1973 to 1987. Mr. Faber
also served as the Director of the Philadelphia Federal Reserve Bank, including
service as the Chairman of its Budget and Operations Committee from 1980 to
1986. Mr. Faber has served on the boards of several companies, including First
Eastern bank from 1980 to 1993.

Barclay G. Jones III, Executive Vice President, Managing Director, and
head of the Investment Department. Mr. Jones joined W.P. Carey as Assistant to
the President in July 1982 after his graduation from the Wharton School of the
University of Pennsylvania, where he majored in Finance and Economics. He was
elected to the Board of Directors of W.P. Carey in April 1992. Mr. Jones is also
a Director of the Wharton Business School Club of New York.

Lawrence R. Klein, Director, is Benjamin Franklin Professor of
Economics Emeritus at the University of Pennsylvania, having joined the faculty
of Economics and the Wharton School in 1958. He holds earned degrees from the
University of California at Berkeley and Massachusetts Institute of Technology
and has been awarded the Nobel Prize in Economics as well as over 20 honorary
degrees. Founder of Wharton Econometric Forecasting Associates, Inc., Dr. Klein
has been counselor to various corporations, governments, and government agencies
including the Federal Reserve Board and the President's Council of Economic
Advisers.

Charles C. Townsend, Jr., Director, currently is an Advisory Director
of Morgan Stanley & Co., having held such position since 1979. Mr. Townsend was
a Partner and a Managing Director of Morgan Stanley & Co. from 1963 to 1978 and
served as Chairman of Morgan Stanley Realty Corporation from 1977 to 1982. Mr.
Townsend holds a B.S.E.E. from Princeton University and an M.B.A. from Harvard
University. Mr. Townsend serves as Director of CIP(TM) and CPA(R)14.

Reginald Winssinger, Director, is currently Chairman of the Board and
Director of Horizon Real Estate Group, Inc. Mr. Winssinger has managed
portfolios of diversified real estate assets exceeding $500 million throughout
the United States for more than 20 years. Mr. Winssinger is active in the
planning and development of major land parcels and has developed 20 commercial
properties. Mr. Winssinger is a native of Belgium with more than 25 years of
real estate practice, including 10 years based in Brussels, overseeing
appraisals, construction and management. Mr. Winssinger holds a B.S. in
Geography from the University of California at berkeley and received a degree in
Appraisal and Survey in Belgium. Mr. Winssinger presently serves as Honorary
Belgium Consul to the State of Arizona, a position he has held since 1991.

Claude Fernandez, Executive Vice President - Financial Operations,
joined W.P. Carey in 1983. Previously associated with Coldwell Banker, Inc. for
two years and with Arthur Andersen & Co., he is a Certified Public Accountant.
Mr. Fernandez received a B.S. degree in accounting from New York University in
1975 and his M.B.A. in Finance from Columbia University Graduate School of
Business in 1981.

John J. Park, Executive Vice President, Chief Financial Officer and
Treasurer, joined W.P. Carey as an Investment Analyst in December 1987. Mr. Park
received his undergraduate degree from Massachusetts Institute of Technology and
his M.B.A. in Finance from New York University.

H. Augustus Carey, Senior Vice President and Secretary, returned to
W.P. Carey in 1988 and is President of W.P. Carey's broker-dealer subsidiary.
Mr. Carey previously worked for W.P. Carey from 1979 to 1981 as Assistant to the
President. Prior to rejoining W.P. Carey, Mr. Carey served as a loan officer of
the North American Department of Kleinwort Benson Limited in London, England. He
received an A.B. from Amherst College in 1979 and an M.Phil. in Management
Studies from Oxford University in 1984. Mr. Carey is a trustee of the Oxford
Management Centre Associates Council.

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<PAGE> 11
Samantha K Garbus, Vice President - Director of Asset Management,
became a Second Vice President of W.P. Carey in April 1995 and a Vice President
in April 1997. Ms. Garbus joined W. P. Carey as a Property Management Associate
in January 1992. Ms. Garbus received a B.A. in History from Brown University in
May 1990 and an M.B.A. from the Stern School of New York University in January
1997.

Susan C. Hyde, Vice President - Director of Shareholder Services,
joined W. P. Carey in 1990, became a Second Vice President in April 1995 and a
Vice President in April 1997. Ms. Hyde graduated from Villanova University in
1990 where she received a B.S. in Business Administration with a concentration
in Marketing and a B.A. in English.

Robert C. Kehoe, Vice President - Accounting, joined W.P. Carey as a
Senior Accountant in 1987. Mr. Kehoe became a Second Vice President of W. P.
Carey in April 1992 and a Vice President in July 1997. Prior to joining the
company, Mr. Kehoe was associated with Deloitte, Haskins & Sells for three years
and was Manager of Financial Controls at CBS Educational and Professional
Publishing for two years. Mr. Kehoe received a B.S. in Accounting from Manhattan
College in 1982 and an M.B.A. in Finance from Pace University in 1993.

Edward V. LaPuma, Vice President - Acquisitions, joined W. P. Carey as
an Assistant to the Chairman in July 1995, became a Second Vice President in
July 1996 and a Vice President in April 1997. A graduate of the University of
Pennsylvania, Mr. LaPuma received a B.A. in Global Economic Strategies from The
College of Arts and Sciences and a B.S. in Economics with a Concentration in
Finance from the Wharton School.

Item 11. EXECUTIVE COMPENSATION.

Until January 1, 1998, under the Amended Agreement of Limited
Partnership of Registrant (the "Agreement"), 5% of Distributable Cash From
Operations, as defined, was payable to the former Corporate General Partner and
1% of Distributable Cash From Operations was payable to the former Individual
General Partner. The former Corporate General Partner and the former Individual
General Partner received $223,737 and $44,748, respectively, from Registrant as
their share of Distributable Cash From Operations during the year ended December
31, 1997. As owner of 200 Limited Partnership Units, the former Corporate
General Partner received cash distributions of $15,104 during the year ended
December 31, 1997. See Item 6 for the net ,income allocated to the General
Partners under the Agreement. Registrant is not required to pay, and has not
paid, any remuneration to the officers or directors of the former Corporate
General Partner, W.P. Carey or any other affiliate of Registrant during the year
ended December 31, 1997.

In the future, a special limited partner, Carey Management LLC, will
receive 5% of Distributable Cash From Operations, and William Polk Carey, the
former Individual General Partner will receive, as a special limited partner, 1%
of Distributable Cash From Operations and each will be allocated the same
percentage of the profits and losses of Registrant.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

As of December 31, 1997, no person owned of record, or was known by
Registrant to own beneficially more than 5% of the Registrant.

The following table sets forth as of March 20, 1998 certain information
as to the ownership by directors and executive officers of securities of the
General Partner of Registrant:

-10-
<PAGE> 12
<TABLE>
<CAPTION>
Number of Listed
Name of Shares and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
- -------------- ---------------- -------------------- --------
<S> <C> <C> <C>

Listed Shares William Polk Carey
Francis J. Carey
Steven M. Berzin
Gordon F. DuGan
Donald E. Nickelson
Eberhard Faber IV
Barclay G. Jones III
Lawrence R. Klein
Charles C. Townsend, Jr.
Reginald Winssinger
John J. Park
Claude Fernandez
H. Augustus Carey
Susan K. Garbus
Susan C. Hyde
Robert C. Kehoe
Edward V. LaPuma

All executive officers
and directors as a
group (17 persons)
</TABLE>

In connection with Consolidation of Registrant into Carey Diversified
LLC, effective January 1, 1998, no officer or director, other than William Polk
Carey, owns a direct interest in Registrant. William Polk Carey owns a 1%
interest in Registrant as a special limited partner and has a controlling
interest in Carey Management LLC which owns a 5% interest in Registrant as a
special limited partner. Effective January 1, 1998, Carey Diversified owns an
approximate 92% interest in Registrant.

There exists no arrangement, known to Registrant, the operation of
which may at a subsequent date result in a change of control of Registrant.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

For a description of transactions and business relationships between
Registrant and its affiliates and their directors and officers, see Notes 2 and
3 to the Financial Statements in Item 8. Michael B. Pollack and Senior Vice
President, is a partner of Reed Smith Shaw & McClay which is engaged to perform
legal services for Registrant. Mr. Pollack was the Secretary, until July 1997,
of the former Corporate General Partner.

No officer or director of the Corporate General Partner or any other
affiliate of Registrant or any member of the immediate family or associated
organization of any such officer or director was indebted to Registrant at any
time since the beginning of Registrant's last fiscal year.

-11-
<PAGE> 13
PART IV

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

(a) 1. FINANCIAL STATEMENTS:

The following financial statements are filed as a part of this
Report:

Report of Independent Accountants.

Balance Sheets, December 31, 1996 and 1997.

Statements of Income, for the years ended December 31, 1995, 1996 and 1997.

Statements of Partners' Capital, for the years ended December 31, 1995, 1996
and 1997.

Statements of Cash Flows, for the years ended December 31, 1995, 1996 and
1997.

Notes to Financial Statements.

The financial statements are hereby incorporated by reference to pages 5 to
18 of Registrant's Annual Report contained in Appendix A.

(a) 2. FINANCIAL STATEMENT SCHEDULE:

The following schedule is filed as a part of this Report:

Schedule III - Real Estate and Accumulated Depreciation as of December 31,
1997.

Notes to Schedule III.

Schedule III and notes thereto are hereby incorporated by reference to pages
19 to 21 of Registrant's Annual Report contained in Appendix A.

Financial Statement Schedules other than those listed above are
omitted because the required information is given in the Financial Statements,
including the Notes thereto, or because the conditions requiring their filing do
not exist.

-12-
<PAGE> 14
(a) 3. EXHIBITS:

The following exhibits are filed as part of this Report. Documents
other than those designated as being filed herewith are incorporated herein by
reference.

<TABLE>
<CAPTION>
Exhibit Method of
No. Description Filing
- ------- ----------- -------------------

<S> <C> <C>
3.1 Amended Agreement of Limited Partnership of Exhibit 3(B) to Regis-
Registrant dated as of September 30, 1982. tration Statement (Form
S-11) No. 2-79041

4.1 $4,500,000 Promissory Note dated December 30, Exhibit 4(B)(1) to Post-
1982 from Registrant to The Mutual Benefit Effective Amendment No. 1
Life Insurance Company. to Registration Statement
(Form S-11) No. 2-79041

4.2 Mortgage and Security Agreement dated Exhibit 4(B)(4) to Post-
December 30, 1982 between Registrant and Effective Amendment No. 1
The Mutual Benefit Life Insurance Company. to Registration Statement
(Form S-11) No. 2-79041

4.3 Assignment of Lessor's and Landlord's Exhibit 4(B)(5) to Post-
Interest in Leases, Rents and Profits Effective Amendment No. 1
dated December 30, 1982 from Registrant to Registration Statement
to The Mutual Benefit Life Insurance (Form S-11) No. 2-79041
Company.

4.4 $8,000,000 Promissory Note dated March 3, Exhibit 4.1 to Form 8-K
1983 from Registrant to Sunkist Service filed March 17, 1983
Company.

4.5 Mortgage with Assignment of Leases and Exhibit 4.3 to Form 8-K
Rents and Security Agreement dated as of filed March 17, 1983
March 3, 1983 from Registrant to Sunkist
Service Company.

4.6 Assignment of Lease and Rents dated Exhibit 4.4 to Form 8-K
March 3, 1983 from Registrant to Sunkist filed March 17, 1983
Service Company.

4.12 $3,800,000 Promissory Note dated July 1, Exhibit 4.1 to Form 8-K
1983 from Registrant to CP 4 Corp. dated July 14, 1983

4.13 Mortgage and Security Agreement dated Exhibit 4.2 to Form 8-K
July 1, 1983 from Registrant to CP 4 Corp. dated July 14, 1983

4.14 Assignment of Leases, Rents and Profits Exhibit 4.3 to Form 8-K
dated July 1, 1983 from Registrant to dated July 14, 1983
CP 4 Corp.

4.15 $2,750,000 Promissory Note dated Exhibit 4.1 to Form 8-K
August 11, 1983 from Registrant to FCA dated November 2, 1983
American Mortgage Corporation ("FCA").

4.16 Deed of Trust, Mortgage with Assignments of Leases Exhibit 4.2 to Form 8-K
and Rents and Security Agreements dated as of dated November 2, 1983
August 11, 1983 from Registrant to Harry M. Roberts, Jr.,
as trustee for FCA.
</TABLE>

-13-
<PAGE> 15
<TABLE>
<CAPTION>
Exhibit Method of
No. Description Filing
- ------- ----------- -------------------

<S> <C> <C>
4.17 Assignment of Lease and Rents dated Exhibit 4.3 to Form 8-K
August 11, 1983 from Registrant to FCA. dated November 2, 1983

4.18 $4,300,000 Promissory Note dated Exhibit 4.4 to Form 8-K
October 17, 1983 from Registrant to dated November 2, 1983
Bankers Life Company ("Bankers").

4.19 Deed of Trust dated October 17, 1983 Exhibit 4.5 to Form 8-K
from Registrant to Howard T. Ayres, Jr., dated November 2, 1983
as trustee for Bankers.

4.20 Collateral Assignment of Lease and Exhibit 4.6 to Form 8-K
Agreement dated October 17, 1983 from dated November 2, 1983
Registrant, as assignor, ARC Automation
Services, Inc. ("ARC"), as lessee, and
American Express Insurance Services,
Inc. ("American Express"), as guarantor,
to Bankers, as assignee.

4.21 $3,500,000 Deed of Trust Note dated Exhibit 4.21 to Form 10-K
December 14, 1983 from Registrant to dated March 31, 1984
Mellon Bank, N.A. ("Mellon").

4.22 Deed of Trust and Security Agreement Exhibit 4.22 to Form 10-K
dated December 14, 1983 between dated March 31, 1984
Registrant and John H. Noblitt, as
trustee for Mellon.

4.23 Assignment of Rentals and Leases dated Exhibit 4.23 to Form 10-K
December 14, 1983 from Registrant to dated March 31, 1984
Mellon.

4.24 Agreement for Sale and Sale of Property and Exhibit 4.1 to Form 10-K
Escrow Instructions, dated October 17, 1986, dated November 6, 1986
by and between Registrant and CPA(R):3,
collectively as Seller, and Kraft, Inc.
("Kraft"), as Purchaser.

4.25 Agreement for Sale and Sale of Property and Exhibit 4.2 to Form 10-K
Escrow Instructions, dated October 17, 1986, dated November 6, 1986
by and between Registrant and CPA(R):3,
collectively as Seller, and Hughes Markets,
Inc. ("Hughes"), as Purchaser.

4.26 Letter Agreement dated October 17, 1986 from Exhibit 4.3 to Form 8-K
Registrant and CPA(R):3, and agreed to and dated November 6, 1986
accepted by Kraft and Hughes.

4.27 Guaranty made as of October 21, 1986 by Exhibit 4.4 to Form 8-K
Hughes, as Guarantor, to Registrant and dated November 6, 1986
CPA(R):3.

10.3 Real Estate Purchase Agreement dated Exhibit 10.1 to Form 8-K
January 19, 1983 between Allis-Chalmers filed March 17, 1983
Corporation, as seller and Gibson
Realty, Inc., as purchaser.
</TABLE>

-14-
<PAGE> 16
<TABLE>
<CAPTION>
Exhibit Method of
No. Description Filing
- ------- ----------- -------------------

<S> <C> <C>
10.4 Assignment of Real Estate Purchase Exhibit 10.2 to Form 8-K
Agreement dated March 3, 1983 from Gibson filed March 17, 1983
Realty, Inc., as assignor, to Registrant,
as assignee.

10.5 Lease Agreement dated March 3, 1983 Exhibit 10.3 to Form 8-K
between Registrant, as landlord, and filed March 17, 1983
Simplicity Manufacturing, Inc. as
tenant, for two properties in Port
Washington, Wisconsin.

10.6 Management Agreement between Registrant Exhibit 10(B) to Amendment
and Carey Corporate Property Management, No. 2 to Registration
Inc. Statement (Form S-11)
No. 2-79041

10.7 Support Agreement among Registrant, Exhibit 10(C) to Amendment
Fourth Carey Corporate Property, Inc. No. 2 Registration
and W.P. Carey & Co., Inc. Statement (Form S-11)
No. 2-79041

10.8 Lease Agreement dated June 1, 1983 between Exhibit 10.1 to Form 8-K
Registrant and CPA(R):3, as landlord, and dated June 22, 1983
Knudsen Corporation, as tenant.

10.9 Agreement dated June 1, 1983 between Exhibit 10.2 to Form 8-K
Registrant and CPA(R):3, as landlord, and dated June 22, 1983
Knudsen, as tenant.

10.11 Lease Agreement dated July 1, 1983 between Exhibit 10.1 to Form 8-K
Registrant, as landlord, and Broco, as dated July 14, 1983
tenant.

10.13 Lease Agreement dated October 17, 1983 Exhibit 10.2 to Form 8-K
between Registrant, as landlord, and dated November 2, 1983
ARC, as tenant.

10.15 Purchase Agreement dated February 23, 1983 Exhibit 10.15 to Form 10-K
between J.D.N. Enterprises, Inc. and dated March 31, 1984
Winn-Dixie Montgomery, Inc. ("Winn-Dixie").

10.16 Assignment of Purchase Agreement dated Exhibit 10.16 to Form 10-K
March 7, 1984 from Winn-Dixie to dated March 31, 1984
Registrant.

10.18 Lease Agreement dated March 7, 1984 Exhibit 10.18 to Form 10-K
between Registrant, as landlord, and dated March 31, 1984
Winn-Dixie, as tenant.

10.19 Lease Guaranty dated March 7, 1984 Exhibit 10.19 to Form 10-K
from Winn-Dixie, Stores, Inc. to dated March 31, 1984
Registrant.

10.20 Second Amendment of Lease entered into as of Exhibit 10.1 to Form 8-K
October 21, 1986, by and between Registrant dated November 6, 1986
and CPA(R):3, collectively as Landlord, and
Santee Dairies, Inc., as Tenant.
</TABLE>

-15-
<PAGE> 17
<TABLE>
<CAPTION>
Exhibit Method of
No. Description Filing
- ------- ----------- -------------------

<S> <C> <C>
10.21 Lease Agreement dated June 14, 1988 Exhibit 10.1 to Form 8-K
by and between Registrant and CPA(R);8, dated June 29, 1988
together, as Landlord, and Integra,
as Tenant.

28.1 Exchange and Conveyance of Property Deed Exhibit 28.1 to Form 8-K
dated June 14, 1988 from Integra, as dated June 29, 1988
Transferor, to Registrant, as Transferee.

28.2 Bill of Sale dated June 14, 1988 from Exhibit 28.2 to Form 8-K
Integra, as Seller, to Registrant and dated June 29, 1988
CPA(R):8, together, as Purchaser.

28.3 Seller/Lessee's Certificate dated June 14, Exhibit 28.3 to Form 8-K
1988 from Integra, as Seller, to Registrant dated June 29, 1988
and CPA(R):8, together, as Purchaser.

28.4 Prospectus of Registrant Exhibit 28.4 to Form 10-K/A
dated October 28, 1982. dated September 24, 1993

28.5 Supplement dated December 2, 1982 Exhibit 28.5 to Form 10-K/A
to Prospectus dated October 28, 1982. dated September 24, 1993

28.6 Supplement dated January 11, 1983 Exhibit 28.6 to Form 10-K/A
to Prospectus dated October 28, 1982. dated September 24, 1993

28.7 Supplement dated May 25, 1983 Exhibit 28.7 to Form 10-K/A
to Prospectus dated October 28, 1982. dated September 24, 1993

28.8 Press release dated June 30, 1993 Exhibit 28.1 to Form 8-K
announcing the suspension of secondary dated July 12, 1993
market sales of Limited Partnership Units.
</TABLE>

(b) REPORTS ON FORM 8-K

The Registrant filed a report on Form 8-K dated January 1, 1998
pursuant to item 5 - Other Events (EX-99.1 Press Release From W.P. Carey & Co.,
Inc. (December 17, 1997)).

-16-
<PAGE> 18
SIGNATURES

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

CORPORATE PROPERTY ASSOCIATES 4
(a California limited partnership)
BY: CAREY DIVERSIFIED LLC

03/24/98 BY: /s/ John J. Park
- ------------------ -------------------------------------------------
Date John J. Park
Executive Vice President, Chief Financial Officer
and Treasurer
(Principal Financial 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.

BY: CAREY DIVERSIFIED LLC

03/24/98 BY: /s/ Francis J. Carey
- ------------------ -------------------------------------------------
Date Francis J. Carey
Chairman of the Board, Chief Executive Officer
and Director
(Principal Executive Officer)

03/24/98 BY: /s/ William P. Carey
- ------------------ -------------------------------------------------
Date William P. Carey
Chairman of the Executive Committee and Director

03/24/98 BY: /s/ Steven M. Berzin
- ------------------ -------------------------------------------------
Date Steven M. Berzin
Vice Chairman, Chief Legal Officer and Director

03/24/98 BY: /s/ Gordon F. DuGan
- ------------------ -------------------------------------------------
Date Gordon F. DuGan
President, Chief Acquisitions Officer and
Director

03/24/98 BY: /s/ Donald E. Nickelson
- ------------------ -------------------------------------------------
Date Donald E. Nickelson
Chairman of the Audit Committee and Director

03/24/98 BY: /s/ Eberhard Faber IV
- ------------------ -------------------------------------------------
Date Eberhard Faber IV
Director

03/24/98 BY: /s/ Barclay G. Jones, III
- ------------------ -------------------------------------------------
Date Barclay G. Jones, III
Director

03/24/98 BY: /s/ Dr. Lawrence R. Klein
- ------------------ -------------------------------------------------
Date Dr. Lawrence R. Klein
Director

03/24/98 BY: /s/ Charles C. Townsend, Jr.
- ------------------ -------------------------------------------------
Date Charles C. Townsend, Jr.
Director

03/24/98 BY: /s/ Reginald Winssinger
- ------------------ -------------------------------------------------
Date Reginald Winssinger
Director

03/24/98 BY: /s/ Claude Fernandez
- ------------------ -------------------------------------------------
Date Claude Fernandez
Executive Vice President - Financial Operations
(Principal Accounting Officer)

-17-
<PAGE> 19
APPENDIX A TO FORM 10-K

CORPORATE PROPERTY ASSOCIATES 4,
A CALIFORNIA LIMITED PARTNERSHIP

1997 ANNUAL REPORT
<PAGE> 20
SELECTED FINANCIAL DATA

(In thousands except per unit amounts)

OPERATING DATA:

Revenues $ 9,253 $ 8,443 $ 8,062 $ 9,322 $10,225

Income before
extraordinary item (1): 4,741 4,443 8,679 6,914 5,608

Income before extraordinary
item allocated:
To General Partners 284 266 879 415 337
To Limited Partners 4,457 4,177 7,800 6,499 5,271
Per unit 52.08 48.81 91.16 75.95 61.63

Distributions attributable (2):
To General Partners 292 293 323 268 345
To Limited Partners 4,570 4,590 8,667 4,193 5,409
Per unit 53.41 53.64 101.29(3) 49.00 63.24

Payment of mortgage
principal (4) 806 1,168 1,158 898 769

BALANCE SHEET DATA:

Total assets 57,497 56,108 48,508 42,067 37,815

Long-term
obligations (5) 26,418 24,999 18,540 9,796 2,877
</TABLE>

(1) Net income for 1993 includes an extraordinary gain on the extinguishment
debt of $345,000.
(2) Includes distributions attributable to the fourth quarter of each fiscal
year payable in the following fiscal year less distributions in the first
fiscal quarter attributable to the prior year. The distribution attributable
to the fourth quarter of 1997 was paid to Limited Partners in December 1997.
(3) The 1995 figure includes a $50 per Unit special distribution to the Limited
Partners.
(4) Represents scheduled mortgage principal amortization paid.
(5) Represents mortgage obligations due after more than one year.

-1-
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS

Net income for the year ended December 31, 1997 decreased by
$1,306,000 as compared to the net income for the year ended December 31, 1996.
This decrease was due to the noncash charge of $2,316,000 on the writedown of
the Simplicity Manufacturing, Inc. property in connection with Simplicity's
exercise of its purchase option. Excluding the effect of the writedown, earnings
for 1997 would have reflected an increase of $1,010,000, or 15%. The increase in
earnings, as adjusted, was due to an increase in lease revenues (rental income
and interest from direct financing leases), a decrease in interest expense and
an increase in income from equity investment was offset by a decrease in hotel
operating income.

The increase in lease revenues was due to the May 1996 lease
extension agreement with Hughes Markets, Inc. Under the extension agreement,
annual cash basis rent for the dairy processing facility in Los Angeles,
California increased, starting in May 1996, by $1,843,000 for the two-year
extension term with Hughes having an obligation to pay a lump sum rental payment
of $2,913,000 at the end of the term. In 1997, cash basis rents from Hughes
Markets increased by $614,000 as compared with 1996 with the remaining $486,000
of increase due to a full year's straight-line adjustment related to the lump
sum to be paid by Hughes in April 1998. The decrease in interest expense was due
to the satisfaction of mortgage loans in 1996 as well as the prepayment, in the
first quarter of 1997, of a loan cross-collateralized by three properties. The
Partnership's limited recourse mortgage debt now consists of loans on the
properties leased to Brodart Co. and the Simplicity property. As a result of
exchanging an interest in a hotel property for an equity interest in the
operating partnership of a publicly-traded real estate investment trust,
American General Hospitality Corporation, earnings from such investment
decreased by $437,000. As more fully described below, Management believes that
this transaction has substantially increased the liquidity of the Partnership by
acquiring an equity ownership interest which is freely exchangable to a
marketable security, and eliminating the need to use the Partnership's resources
to maintain and upgrade a hotel property on an ongoing basis.

Net Income for the year ended December 31, 1996 decreased by
$1,765,000 as compared with the year ended December 31, 1995, primarily due to a
gain, in 1995, of $3,330,000 on the sale of real estate. The increase in income
before gains on sale of $1,565,000 as compared with 1995 was primarily due to an
increase in lease revenues and a decrease in interest expense.

The increase in lease revenues in 1996 was attributable to the May
1996 lease extension agreement with Hughes Markets, as described above. Of the
increased revenues reported from the Hughes lease in 1996, $1,314,000 was due to
the increases in rents received and $971,000 was due to the recognition of a
straight-line adjustment required under generally accepted accounting principles
for the lump sum payment. On both a reporting and a cash flow basis, the
increase from the Hughes lease more than offset the loss of $1,048,000 of lease
revenues earned in 1995 from the Genesco, Inc. lease which property was sold in
June 1995. The decrease in interest expense was due to the transfer of the debt
obligation on the hotel property in July 1996, the continuing principal
amortization of other mortgage debt, the payment of the loan on the Genesco
property in June 1995, and the $4,500,000 partial prepayment of the loan
cross-collateralized by the Winn-Dixie Stores, Inc., Family Dollar Stores, Inc.
and Continental Casualty Company properties in November 1996. Of the $584,000
decrease in interest expense, $263,000 was due to satisfaction of the Genesco
loan in 1995 and $144,000 was due to the decrease from the transfer of the loan
on the hotel property in July 1996 as interest was incurred on that loan for the
entire year in 1995.

In July 1996, the Partnership exchanged its ownership interests in
a hotel property in Kenner, Louisiana for 427,008 units in American General
Hospitality Operating Partnership L.P. at which time the Partnership transferred
the hotel operation to the Operating Partnership. Management's expectation was
that the exchange would eliminate the uncertainty and fluctuation in cash flow
related to operating a single hotel as the Operating Partnership owns a
diversified portfolio of hotel properties and continues to acquire properties.
On an annualized basis, distributions from this investment, at current
distribution rates, approximate $710,000. The Partnership has the right to
exchange its 427,008 units on a one-for-one basis for shares of common stock of
American General Hospitality Corporation. American General Hospitality
Corporation is a publicly-traded real estate investment trust and the common
stock would be freely transferable on conversion. The quoted market value of a
share of AGH common stock at December 31, 1997 was $26 3/4 resulting in an
aggregate value of

-2-
<PAGE> 22
approximately $11,422,000. The carrying value of this investment as of December
31, 1997 was approximately $3,969,000.

The Partnership's lease with Family Dollar expires in March 1998.
Family Dollar has indicated that it does not intend to exercise its renewal
option. Annual rent from the Family Dollar lease is currently $562,000. The
Partnership estimates the annual carrying costs for insurance, real estate and
maintenance and security would be approximately $80,000. In addition to the lump
sum rental payment due from Hughes in April 1998, a rent increase is scheduled
in 1998 on the lease with Brodart and Simplicity. As noted, the Partnership
expects to sell the Simplicity property pursuant to Simplicity's purchase option
at which time the Simplicity mortgage will be paid from sales proceeds. When the
Simplicity mortgage is paid off, the trend of decreasing interest expense is
expected to continue. After the Simplicity property is sold, only the Brodart
properties will be encumbered by mortgage debt.

The Partnership's leases with two tenants for an office building
in Beaumont, Texas are not net leases and, therefore, the Partnership pays real
estate taxes, insurance and maintenance costs; however, the lease includes
certain escalation provisions so that as certain operating costs increase, a
portion of such increases are passed through to the tenants. The property is
fully leased under a series of short-term leases with remaining terms of between
one and four years. Annual rents are currently $314,000. The Partnership's lease
with Continental for an office property in College Station, Texas expires in
October 1998. Continental has had discussions with the Partnership regarding its
lease and is evaluating whether it will exercise its option to renew the lease
for an additional five years. The Partnership and Continental are discussing the
possibility of entering into a short-term extension of approximately one year
with the renewal option exercisable at that time. Annual cash flow from the
Continental lease is $772,000.

The lease with Hughes Markets for a dairy processing facility in
Los Angeles, California is scheduled to expire in April 1998 when a final lump
sum payment of $2,913,000 will be received. The Partnership has entered into a
lease with Copeland Beverage Group, Inc. which will go into effect as soon as
Hughes Markets vacates the property. Annual rent from Copeland Beverage Group
will approximate the rent that was received from Hughes Markets prior to the
two-year extension. As a result of the Copeland Beverage lease, the Partnership
will not need to use any funds from the Hughes Market's final rental payment to
retrofit the facility or to pay carrying costs during a period of vacancy as had
been anticipated.

The Partnership's leases are primarily net leases and long-term in
nature and, as such, inflation and changing prices have not unfavorably affected
the Partnership's revenue and net income nor have they had an impact on the
continuing operations of the Partnership's properties. Substantially all of the
Partnership's net leases have either periodic mandated rent increases, periodic
rent increases based on formulas indexed to increases in the Consumer Price
Index or sales overrides which have the potential to increase the future rentals
from the Partnership's current tenants.

FINANCIAL CONDITION

The Partnership's cash balances decreased by $2,405,000 to
$2,264,000 at December 31, 1997. The decrease in cash balances was due to the
prepayment of $2,450,000 of the cross-collateralized mortgage loan in the first
quarter of 1997. Cash flow from operations when combined distributions from the
equity investment in the American General Hospitality Operating Partnership
totaled $7,497,000 and was sufficient to pay distributions to partners of
$6,728,000 and scheduled principal payment installments of $724,000.
Distributions paid included a distribution paid in December 1997. The
distribution paid in December 1997 reflects an exchange transaction which
occurred on January 1, 1998. The majority of the Partnership's Limited Partners
and its General Partners approved a consolidation by merger with a subsidiary
limited partnership of Carey Diversified LLC, as proposed in the Consent
Solicitation Statement/Prospectus of Carey Diversified dated October 16, 1997.
The December 1997 distribution of $26.34 per limited partnership unit
($2,253,000) was intended to (a) distribute funds in order to adjust the net
assets of the Partnership with the estimate of Total Exchange values, as defined
in the Consent Solicitation Statement/Prospectus, of the assets and (b) pay the
January distribution. In connection with the merger, 2,986 Limited Partnership
Unitholders owning 83,339 Limited Partnership units elected to exchange their
limited partnership units for interests in Carey Diversified.

Limited Partners owning 2,189 Limited Partnership Units who did
not elect to receive interests in Carey Diversified elected to retain a limited
partnership interest in the Partnership as Subsidiary Partnership

-3-
<PAGE> 23
Unitholders. Subsidiary Partnership Units have economic interests and legal
rights in the Partnership that are substantially similar to Limited Partnership
Units and represent a direct ownership interest in the Partnership. The holders
of Subsidiary Partnership Units will be paid a pro rata share of any
distribution paid by the Partnership to Carey Diversified. The Partnership will
continue to pay distributions on a quarterly basis until liquidating
distributions are made, as described in the Consent Solicitation
Statement/Prospectus. The objective with respect to Subsidiary Partnership Units
will be to pay distributions as if the Consolidation never had occurred based
upon the net cash flows generated by the Partnership.

As a real estate investment trust, American General Hospitality
Corporation has an obligation to distribute 95% of its taxable income in order
to retain its special Federal income tax status. Since American General
Hospitality Corporation owns a majority of the Operating Partnership limited
partnership units, the Operating Partnership may be expected to distribute a
significant portion of its cash flow so that American General Hospitality
Corporation can meet the tax distribution objective. Accordingly, with the
exchange of the hotel operation in 1996, the Partnership achieved its objective
of eliminating fluctuation in cash flow that resulted from operating a hotel. In
addition, with the option to exchange operating partnership units for American
General Hospitality shares, the Partnership has the opportunity to sell its
interests at a readily determinable fair value.

Simplicity has exercised its option to purchase its leased
property. Pursuant to the option, the sale is scheduled to close by no later
than April 1998 at an exercise price of the greater of $9,684,000 or the fair
market value of the property capped at $12,000,000. The Partnership expects to
realize no less than $5,362,000 before any transaction costs and after paying
the outstanding debt on the mortgage loan on the property. Annual cash flow from
the property (rents, net of debt service on the mortgage loan) is $934,000. The
mortgage loan will be paid in connection with the property sale. In connection
with Family Dollar's vacating the Salisbury, North Carolina warehouse property,
the Partnership estimates that it will use $875,000 to fund improvements to the
property.

Except for the property in Salisbury, North Carolina, the
Partnership's properties are currently leased to corporate tenants, which leases
are subject to environmental statutes and regulations regarding the discharge of
hazardous materials and related remediation obligations. The Partnership
generally structures a lease to require the tenant to comply with all laws. In
addition, substantially all of the Partnership's net leases include provisions
that require tenants to indemnify the Partnership from all liabilities and
losses related to their operations at the leased properties. If the Partnership
undertakes to clean up or remediate any of its properties, the General Partner
believes that in most cases the Partnership will be entitled to reimbursement
from tenants for such costs. In the event that the Partnership absorbs a portion
of such costs, the General Partner believes such expenditures will not have a
material adverse effect on the Partnership's financial condition, liquidity or
results of operations.

In 1994, the Partnership voluntarily conducted Phase II
environmental reviews of certain of its properties based on the results of Phase
I environmental reviews conducted in 1993. The Partnership believes, based on
the results of such reviews, that its properties are in substantial compliance
with Federal and state environmental statutes and regulations. Portions of
certain properties have been documented as having a limited degree of
contamination, principally in connection with surface spills from facility
activities. For those conditions that were identified, the Partnership advised
the affected tenants of the Phase I findings and of their obligations, if any,
to perform required remediation.

In June 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in full set general purpose
financial statements. SFAS No. 130 is required to be adopted by 1998. The
Partnership is currently evaluating the impact, if any, of SFAS No. 130.

The Partnership's management company has responsibility for
maintaining the Partnership's books and records and servicing the computer
systems used in maintaining such books and records. In its preliminary
assessment of Year 2000 issues, the management company believes that such issues
will not have a material effect on the Partnership's operations; however such
assessment has not been completed. The Partnership relies on its bank and
transfer agent for certain computer-related services and has initiated
discussions to determine whether they are addressing Year 2000 issues that might
affect the Partnership.

-4-
<PAGE> 24
REPORT of INDEPENDENT ACCOUNTANTS

To the Partners of
Corporate Property Associates 4,
a California limited partnership

We have audited the accompanying balance sheets of Corporate
Property Associates 4, a California limited partnership, as of December 31, 1996
and 1997, and the related statements of income, partners' capital and cash flows
for each of the three years in the period ended December 31, 1997. We have also
audited the financial statement schedule included on pages 19 to 21 of this
Annual Report. These financial statements and financial statement schedule are
the responsibility of the General Partners. Our responsibility is to express an
opinion on these financial statements and financial statement 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 the General Partners, 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 Corporate Property
Associates 4, a California limited partnership, as of December 31, 1996 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the Schedule of
Real Estate and Accumulated Depreciation as of December 31, 1997, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the financial information required to
be included therein pursuant to Securities and Exchange Commission Regulation
S-X Rule 12-28.

/s/ Coopers & Lybrand L.L.P.
New York, New York
March 24, 1998

-5-
<PAGE> 25
CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership

BALANCE SHEETS

December 31, 1996 and 1997

ASSETS:

Real estate leased to others:
Accounted for under the
operating method:
Land $ 4,294,809 $ 4,294,809
Buildings 22,770,152 22,770,152
----------- ------------
27,064,961 27,064,961
Accumulated depreciation 13,487,845 14,323,681
----------- ------------
13,577,116 12,741,280
Net investment in direct financing leases 18,193,555 6,156,977
----------- ------------
Real estate leased to others 31,770,671 18,898,257
Assets held for sale 9,684,000
Cash and cash equivalents 4,668,645 2,263,717
Accrued interest and rents receivable, net
of reserve for uncollected rent of $74,155 in 1997 269,543 114,382
Other assets, net of accumulated amortization of
$399,342 in 1996 and $290,786 in 1997 1,358,488 2,885,532
Equity investment 3,999,632 3,968,792
----------- ------------

Total assets $42,066,979 $ 37,814,680
=========== ============

LIABILITIES:

Mortgage notes payable $10,699,799 $ 7,526,047
Accrued interest payable 82,827 59,185
Accounts payable and accrued expenses 288,509 323,892
Accounts payable to affiliates 146,447 1,177,502
Prepaid rental income 46,800 46,800
----------- ------------

Total liabilities 11,264,382 9,133,426
----------- ------------

Commitments and contingencies

PARTNERS' CAPITAL:

General Partners 210,626 (723,067)
Limited Partners (85,528 Limited
Partnership Units issued
and outstanding) 30,591,971 29,404,321
----------- ------------
Total partners' capital 30,802,597 28,681,254
----------- ------------

Total liabilities and
partners' capital $42,066,979 $ 37,814,680
=========== ============
</TABLE>

The accompanying notes are an integral part of the financial statements.

-6-
<PAGE> 26
CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership

STATEMENTS of INCOME

For the years ended December 31, 1995, 1996 and 1997

Revenues:
Rental income $3,260,022 $ 5,546,662 $ 6,546,496
Interest income from direct financing leases 4,362,928 3,310,601 3,304,893
Other interest income 254,935 370,765 189,579
Other income 183,768 94,345 184,395
---------- ----------- -----------
8,061,653 9,322,373 10,225,363
---------- ----------- -----------
Expenses:
Interest on mortgages 2,098,857 1,515,248 847,596
Depreciation 1,149,525 921,702 835,836
General and administrative 454,000 447,901 605,854
Property expense 327,528 551,785 662,411
Amortization 113,835 90,529 31,037
Writedown to fair value 2,316,000
---------- ----------- -----------
4,143,745 3,527,165 5,298,734
---------- ----------- -----------
Income before income from equity
investments and gain on sale 3,917,908 5,795,208 4,926,629

Hotel operating income 1,430,580 853,262
Income from equity investment 265,056 681,316
---------- ----------- -----------

Income before gain on sale 5,348,488 6,913,526 5,607,945

Gain on sale of real estate 3,330,098
---------- ----------- -----------

Net income $8,678,586 $ 6,913,526 $ 5,607,945
========== =========== ===========

Net income allocated to:
Individual General Partner $ 205,754 $ 69,135 $ 56,079
========== =========== ===========

Corporate General Partner $ 672,659 $ 345,676 $ 280,398
========== =========== ===========

Limited Partners $7,800,173 $ 6,498,715 $ 5,271,468
========== =========== ===========

Net income per Limited
Partnership Unit
(85,568 Units outstanding in 1995, and
85,548 weighted average Limited
Partnership Units in 1996 and 85,528
weighted average Limited Partnership
Units in 1997): $ 91.16 $ 75.97 $ 61.63
========== =========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

-7-
<PAGE> 27
CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership

STATEMENTS of PARTNERS' CAPITAL

For the years ended December 31, 1995, 1996 and 1997

<TABLE>
<CAPTION>
Partners' Capital Accounts
-------------------------------------------------
Limited
Partners'
General Limited Amount Per
Total Partners Partners Unit (a)
----- -------- -------- --------

<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ 28,785,583 $(486,282) $ 29,271,865 $ 342

Distributions (9,102,501) (330,070) (8,772,431) (102)

Net income, 1995 8,678,586 878,413 7,800,173 91
------------ --------- ------------ -----

Balance, December 31, 1995 28,361,668 62,061 28,299,607 331

Distributions (4,452,597) (266,246) (4,186,351) (49)

Purchase of Limited Partner Units (20,000) (20,000)

Net income, 1996 6,913,526 414,811 6,498,715 76
------------ --------- ------------ -----

Balance, December 31, 1996 30,802,597 210,626 30,591,971 358

Distributions (6,871,534) (412,416) (6,459,118) (76)

Accrued preferred distribution (857,754) (857,754)

Net income, 1997 5,607,945 336,477 5,271,468 62
------------ --------- ------------ -----

Balance, December 31, 1997 $ 28,681,254 $(723,067) $ 29,404,321 $ 344
============ ========= ============ =====
</TABLE>

(a) Based on weighted average Units issued and outstanding during all periods.

The accompanying notes are an integral part of the financial statements.

-8-
<PAGE> 28
CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership

STATEMENTS of CASH FLOWS
For the years ended December 31, 1995, 1996 and 1997

<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----

<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,678,586 $ 6,913,526 $ 5,607,945
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,263,360 1,012,231 866,873
Straight line adjustments and other noncash income 9,808 (945,667) (1,408,305)
Equity income in excess of distributions received (147,800)
Gain on sale of real estate (3,330,098)
Writedown to fair value 2,316,000
Provision for uncollected rents 74,155
Net change in operating assets and liabilities (522,176) 335,351 9,053
------------ ------------ ------------
Net cash provided by operating activities 6,099,480 7,167,641 7,465,721
------------ ------------ ------------

Cash flows from investing activities:
Equity distributions in excess of equity income 30,840
Proceeds from sale of real estate 15,200,000
Purchase of equity investment and related costs (198,969)
Additional capitalized costs (246,658) (8,182)
------------ ------------ ------------
Net cash provided by (used in)
investing activities 14,953,342 (207,151) 30,840
------------ ------------ ------------

Cash flows from financing activities:
Distributions to partners (9,102,501) (4,452,597) (6,727,737)
Payments of mortgage principal (1,158,193) (898,319) (723,752)
Prepayments of mortgages payable (5,722,508) (4,500,000) (2,450,000)
Purchase of Limited Partner Units (20,000)
------------ ------------ ------------
Net cash used in financing activities (15,983,202) (9,870,916) (9,901,489)
------------ ------------ ------------

Net increase (decrease) in cash and
cash equivalents 5,069,620 (2,910,426) (2,404,928)

Cash and cash equivalents, beginning of year 2,509,451 7,579,071 4,668,645
------------ ------------ ------------

Cash and cash equivalents, end of year $ 7,579,071 $ 4,668,645 $ 2,263,717
============ ============ ============

Supplemental disclosure of noncash investing and financing activities:

Accrued preferred distribution $ 857,754
===========
</TABLE>

In July 1996, the Partnership exchanged its interest in a hotel property and
related assets and liabilities for 427,008 units in the operating partnership of
a publicly-traded real estate investment trust. The assets and liabilities
transferred are as follows:

<TABLE>
<S> <C>
Real estate, net of accumulated depreciation $ 6,981,597
Mortgage note payable (3,388,764)
Other assets and liabilities transferred, net 60,030
------------
Equity investment $ 3,652,863
============
</TABLE>

The accompanying notes are an integral part of the financial statements.

-9-
<PAGE> 29
CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership

NOTES to FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

USE OF ESTIMATES:

The preparation of financial statements in conformity with generally
accepted accounting principles 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. The most significant estimates relate to the assessment
of recoverability of real estate assets. Actual results could
differ from those estimates.

REAL ESTATE LEASED TO OTHERS:

Real estate is generally leased to others on a net lease basis. In a
net lease the tenant is generally responsible for all operating
expenses relating to the property, including property taxes,
insurance, maintenance, repairs, renewals and improvements.

Corporate Property Associates 4 (the "Partnership") diversifies its
real estate investments among various corporate tenants engaged
in different industries and by property type throughout the
United States.

The leases are accounted for under either the direct financing or
operating methods. Such methods are described below:

Direct financing method - Leases accounted for under the
direct financing method are recorded at their net
investment (Note 5). Unearned income is deferred and
amortized to income over the lease terms so as to produce
a constant periodic rate of return on the Partnership's
net investment in the lease.

Operating method - Real estate is recorded at cost, rental
revenue is recognized on a straight-line basis over the
term of the leases and expenses (including depreciation)
are charged to operations as incurred.

The Partnership assesses the recoverability of its real estate
assets, including residual interests, based on projections of
cash flows over the life of such assets. In the event that such
cash flows are insufficient, the assets are adjusted to their
estimated fair value.

Substantially all of the Partnership's leases provide for either
scheduled rent increases, periodic rent increases based on
formulas indexed to increases in the Consumer Price Index or
sales overrides.

ASSETS HELD FOR SALE:

Assets held for sale are accounted for at the lower of cost or fair
value, less estimated costs to sell.

DEPRECIATION:

Depreciation is computed using the straight-line method over the
estimated useful lives of components of the particular
properties, which range from 10 to 40 years.

Continued

-10-
<PAGE> 30
CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership

NOTES to FINANCIAL STATEMENTS, Continued

CASH EQUIVALENTS:

The Partnership considers all short-term, highly-liquid investments
that are both readily convertible to cash and have a maturity of
generally three months or less at the time of purchase to be cash
equivalents. Items classified as cash equivalents include
commercial paper and money market funds. Substantially all of the
Partnership's cash and cash equivalents at December 31, 1996 and
1997 were held in the custody of three financial institutions.

OTHER ASSETS:

Included in other assets are deferred rental income, deferred
charges and deferred costs of Consolidation (Note 15). Deferred
rental income is the aggregate difference for operating leases
between scheduled rents which vary during the lease term and
income recognized on a straight-line basis. Deferred costs
incurred in connection with mortgage note refinancings are
amortized over the terms of the mortgages. Deferred costs of
Consolidation represent certain costs related to a Consolidation
transaction which have been capitalized. Such Consolidation costs
will be included in the revaluation of assets subsequent to
December 31, 1997.

EQUITY INVESTMENT:

The Partnership's interest in American General Hospitality Operating
Partnership, L.P. is accounted for under the equity method; i.e.
at cost, increased by the Partnership's share of earnings or loss
and reduced by distributions received (see Note 11).

INCOME TAXES:

A partnership is not liable for Federal income taxes as each partner
recognizes his proportionate share of the partnership income or
loss in his tax return. Accordingly, no provision for income
taxes is recognized for financial statement purposes.

RECLASSIFICATIONS:

Certain 1995 and 1996 amounts have been reclassified to conform with
the 1997 presentation.

2. PARTNERSHIP AGREEMENT:

The Partnership was organized on August 10, 1982 under the Uniform
Limited Partnership Act of the State of California for the
purpose of engaging in the business of investing in and leasing
industrial and commercial real estate. the Partnership will
terminate on December 31, 2020, or sooner, in accordance with the
terms of the Amended Agreement of Limited Partnership (the
"Agreement").

Continued

-11-
<PAGE> 31
CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership

NOTES to FINANCIAL STATEMENTS, Continued

Through December 31, 1997, the Agreement provided that the General
Partners were allocated 6% (1% to the Individual General Partner,
William Polk Carey and 5% to the Corporate General Partner, Carey
Corporate Property, Inc.), and the Limited Partners were
allocated 94% of the profits and losses as well as distributions
of Distributable Cash From Operations, as defined. The partners
are also to receive net proceeds from the sale of Partnership
properties as defined in the Agreement. Effective January 1,
1998, as a result of the merger (Note 15) of the Partnership with
a subsidiary partnership of Carey Diversified LLC ("Carey
Diversified"), Carey Diversified is the sole general partner of
the Partnership. Carey Diversified and the holders of Subsidiary
Partnership Units are allocated 94% of the profits and losses and
distributable cash, and two special limited partners, Carey
Management LLC ("Carey Management") and William Polk Carey, are
allocated 5% and 1% of the profits and losses and distributable
cash, respectively.

In connection with the merger with Carey Diversified and the listing
on the New York Stock Exchange, a division of W.P. Carey & Co.,
Inc. ("W.P. Carey ), an affiliate of the Corporate General
Partner satisfied the provisions for receiving a subordinated
preferred return of $857,754, which was measured based upon the
cumulative proceeds arising from the sale of the Partnership's
assets. Such amount has been included in accounts payable to
affiliates as of December 31, 1997. The preferred return, paid in
January 1998, was subject to provisions that limited such payment
until a specified cumulative return to limited partners was
achieved. The Exchange Value of a Limited Partnership Unit to a
Listed Share of Carey Diversified was included in calculating the
cumulative return.

3. TRANSACTIONS WITH RELATED PARTIES:

The Partnership's ownership interest in certain properties are
jointly held with affiliates as tenants-in-common. The
Partnership has an 83.24% undivided ownership interest in a
property which is jointly held. The Partnership accounts for its
assets and liabilities relating to its tenants-in-common
interests on a proportional basis.

Under the Agreement, a division of W.P. Carey was also entitled to
receive a property management fee and reimbursement of certain
expenses incurred in connection with the Partnership's
operations. General and administrative expense reimbursements
consist primarily of the actual cost of personnel needed in
providing administrative services necessary for the operation of
the Partnership. Effective January 1, 1998, the fees and
reimbursements are payable to Carey Management, an affiliate of
Carey Diversified. Property management fees and general and
administrative expense reimbursements are summarized as follows:

<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----

<S> <C> <C> <C>
Property management fee $ 91,564 $210,254 $269,670
General and administrative
expense reimbursements 95,644 148,728 257,007
-------- -------- --------
$187,208 $358,982 $526,677
======== ======== ========
</TABLE>

During 1995, 1996 and 1997, fees aggregating $28,683, $68,895 and
$79,922, respectively, were incurred for legal services performed
by a firm in which the Secretary, until July 1997, of the
Corporate General Partner and other affiliates is a partner.

Continued

-12-
<PAGE> 32
CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership

NOTES to FINANCIAL STATEMENTS, Continued

The Partnership is a participant in an agreement with W.P. Carey and
certain affiliates for the purpose of leasing office space used
for the administration of the real estate entities and W.P. Carey
and for sharing the associated costs. Pursuant to the terms of
the agreement, the Partnership's share of rental, occupancy and
leasehold improvement costs is based on adjusted gross revenues
as defined. Expenses incurred in 1995, 1996 and 1997 were
$130,986, $72,775 and $66,325, respectively.

4. REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE OPERATING METHOD:

Scheduled future minimum rents, exclusive of renewals, under
noncancellable operating leases amount to approximately
$5,252,000 in 1998; and $272,000 in 1999; $181,000 in 2000;
$183,000 in both 2001 and 2002 and aggregate approximately
$6,253,000 through 2004.

Contingent rents were approximately $195,000 in 1995 and $91,000 in
1996. No contingent rents were realized in 1997.

5. NET INVESTMENT IN DIRECT FINANCING LEASES:

Net investment in direct financing leases is summarized as follows:

<TABLE>
<CAPTION>
December 31,
------------
1996 1997
---- ----

<S> <C> <C>
Minimum lease payments
receivable $26,038,257 $14,665,250
Unguaranteed residual value 13,382,979 1,382,979
----------- -----------
39,421,236 16,048,229
Less: Unearned income 21,227,681 9,891,252
----------- -----------
$18,193,555 $ 6,156,977
=========== ===========
</TABLE>

Scheduled future minimum rents, exclusive of renewals, under a
noncancellable direct financing lease amount to approximately
$921 in each of the years 1998 to 2002; and aggregate
approximately $14,665,000 through 2008.

Contingent rents were approximately $990,000 in 1995 and $726,000 in
1996 and $424,000 in 1997.

6. MORTGAGE NOTES PAYABLE:

The Partnership's mortgage loans are limited recourse obligations
and are collateralized by lease assignments and by real property.
The encumbered properties have an aggregate gross amount of
$15,840,977. As of December 31, 1997, mortgage notes payable bear
interest at rates varying from 7.6% to 10.52% per annum and
mature from 1998 to 2004.

Continued

-13-
<PAGE> 33
CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership

NOTES to FINANCIAL STATEMENTS, Continued

Scheduled principal payments during each of the next five years
following December 31, 1997 and thereafter are as follows:

<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1998 $ 4,648,768
1999 191,389
2000 206,669
2001 223,168
2002 240,985
Thereafter 2,015,068
-----------
Total $ 7,526,047
===========
</TABLE>

Interest paid was $2,156,609, $1,568,508 and $871,238 for 1995, 1996
and 1997, respectively.

7. DISTRIBUTIONS TO PARTNERS:

Distributions are declared and paid to partners quarterly and are
summarized as follows:

<TABLE>
<CAPTION>
Distributions Paid Limited
Year Ending and Payable to Distributions Paid to Partners' Per
December 31, General Partners Limited Partners Unit Amount
------------ ---------------- --------------------- -------------
<S> <C> <C> <C>

1995:
Quarterly
distributions $286,854 $4,494,031 $ 52.52

Special
distribution 43,216 4,278,400 50.00
-------- ---------- -------
$330,070 $8,772,431 $102.52
======== ========== =======

1996 $266,246 $4,186,351 $ 48.93
======== ========== =======
1997 $412,416 $6,459,118 $ 75.52
======== ========== =======
</TABLE>

Distributions for 1997 include distributions of $2,252,808 to Limited
Partners $143,796 to General Partners declared in December 1997.

Continued

-14-
<PAGE> 34
CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership

NOTES to FINANCIAL STATEMENTS, Continued

8. INCOME FOR FEDERAL TAX PURPOSES:

Income for financial statement purposes differs from income for
Federal income tax purposes because of the difference in the
treatment of certain items for income tax purposes and financial
statement purposes. A reconciliation of accounting differences is
as follows:

<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----

<S> <C> <C> <C>
Net income per Statements of Income $ 8,678,586 $ 6,913,526 $ 5,607,945
Excess tax depreciation (1,242,601) (877,624) (642,564)
Excess tax gain related to sale of property 9,318,375
Cash receipts on operating and direct financing
leases greater (less) than income recognized 9,808 (945,667) (1,408,305)
Writedown to net realizable value 2,316,000
Other (221,282) (40,470) 125,328
------------ ----------- -----------

Income reported for
Federal income tax purposes $ 16,542,886 $ 5,049,765 $ 5,998,404
============ =========== ===========
</TABLE>

9. INDUSTRY SEGMENT INFORMATION:

The Partnership's operations consist of the investment in and the
leasing of industrial and commercial real estate.

In 1995, 1996 and 1997, the Partnership earned its total leasing
revenues (rental income plus interest income from direct
financing leases) from the following lease obligors:

<TABLE>
<CAPTION>
1995 % 1996 % 1997 %
---- --- ---- --- ---- ---

<S> <C> <C> <C> <C> <C> <C>
Hughes Markets, Inc. $1,443,715 19% $3,714,792 42% $4,814,594 49%
Simplicity Manufacturing, Inc. 1,996,710 26 1,996,710 22 1,996,710 20
Brodart Co. 1,318,708 17 1,313,891 15 1,308,183 13
Continental Casualty Company 755,614 10 759,849 9 759,849 8
Family Dollar Stores, Inc. 547,200 7 556,800 6 561,600 6
Petrocon Engineering, Inc. 368,780 5 370,508 4 265,740 3
Winn-Dixie Stores, Inc. 144,713 2 144,713 2 144,713 1
Genesco, Inc. 1,047,510 14
---------- --- ---------- --- ---------- ---
$7,622,950 100% $8,857,263 100% $9,851,389 100%
========== === ========== === ========== ===
</TABLE>

Continued

-15-
<PAGE> 35
CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership

NOTES to FINANCIAL STATEMENTS, Continued

10. GAIN ON SALE OF REAL ESTATE:

On June 30, 1995, the Partnership sold a property to Genesco, Inc.
the lessee, for $15,200,000. The Partnership recognized a gain on
the sale of $3,330,098, net of certain costs. In connection with
the sale, the Partnership paid off the limited recourse mortgage
loan on the property for $5,722,508.

The Partnership used a portion of the net proceeds of $9,477,492 to
pay a special distribution to Limited Partners of $4,278,400 ($50
per Limited Partnership Unit) and $43,216 to the Individual
General Partner. The special distribution was declared and paid
in July 1995.

11. INVESTMENT IN AMERICAN GENERAL HOSPITALITY OPERATING PARTNERSHIP

The Partnership and Corporate Property Associates 8 ("CPA(R):8"), an
affiliate, purchased a hotel property in Kenner, Louisiana, in
June 1988 as tenants-in-common with 46.383% and 53.617%
interests, respectively. The Partnership and CPA(R):8 assumed
operating control of the hotel in 1992 after evicting the lessee
due to its financial difficulties. On July 30, 1996, the
Partnership and CPA(R):8 completed a transaction with American
General Hospitality Operating Partnership L.P. (the "Operating
Partnership"), the operating partnership of a newly-formed real
estate investment trust, American General Hospitality
Corporation, ("AGH"), in which the Partnership and CPA(R):8
received 920,672 limited partnership units (of which the
Partnership's share was 427,008 units) in exchange for the hotel
property and its operations. In connection with the transfer, the
Partnership and CPA(R):8 paid a cash contribution of $391,221 (of
which the Partnership's share was $181,460) and the Operating
Partnership assumed the mortgage loan obligation collateralized
by the hotel property (of which the Partnership's share was
$3,388,764).

The exchange of the hotel property for limited partnership units
was as a nonmonetary exchange for tax and financial reporting
purposes, and is being accounted for under the equity method.
The Partnership has the right to convert its Operating
Partnership Units to shares of common stock in AGH on a
one-for-one basis at any time. The conversion of Operating
Partnership Units to shares of common stock would be a taxable
exchange. As AGH has registered such shares, the Partnership
would have the right to sell the shares after conversion.

As of September 30, 1997, the unaudited consolidated financial
statements of AGH reported total assets of $562,013,000 and
shareholders' equity of $284,629,000 and for the nine months then
ended, revenues of $43,439,000, income before minority interest
of $19,771,000 and net income of $17,212,000. As of December
31,1997, AGH's quoted per share fair value was $26 3/4 resulting
in an aggregate fair value for the investment in the Operating
Partnership of approximately $11,422,000, if converted.

Summarized operating results of the Partnership's share of the hotel
operation through the date of disposal (July 30,1996) are as
follows:

<TABLE>
<CAPTION>
1995 1996
---- ----

<S> <C> <C>
Revenues $ 3,834,671 $ 2,314,569
Fees paid to hotel management company (112,713) (83,062)
Other operating expenses (2,291,378) (1,378,245)
----------- -----------

Hotel operating income $ 1,430,580 $ 853,262
=========== ===========
</TABLE>

Continued

-16-
<PAGE> 36
CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership

NOTES to FINANCIAL STATEMENTS, Continued

12. ASSETS HELD FOR SALE

In March 1997, Simplicity Manufacturing, Inc. ("Simplicity")
notified the Partnership that it was exercising its option to
purchase the Property it leases from the Partnership in Port
Washington, Wisconsin on April 1, 1998. The option price is the
greater of $9,684,000 or the fair market value of the property,
as unencumbered by the lease, up to a maximum of $12,000,000. At
the time the option was exercised, Management concluded that the
exercise price would not be in excess of the minimum exercise
price of $9,684,000. Accordingly, the Partnership recognized a
noncash charge of $2,316,000 on the writedown of the property to
its estimated fair value.

After paying the limited recourse mortgage loan collateralized by
the Simplicity property, the Partnership expects to realize cash
proceeds of no less than $5,362,000 before any transaction costs.
Annual cash flow from the property (rent less mortgage debt
service on the property) is $934,000.

13. ENVIRONMENTAL MATTERS:

Based on the results of Phase I environmental reviews performed in
1993, the Partnership voluntarily conducted Phase II
environmental reviews on certain of its properties in 1994. The
Partnership believes, based on the results of Phase I and Phase
II reviews, that its properties are in substantial compliance
with Federal and state environmental statutes and regulations.
Portions of certain properties have been documented as having a
limited degree of contamination, principally in connection with
surface spills from facility activities. For the conditions that
were identified, the Partnership has advised the affected tenants
of the Phase II findings and of their obligations to perform
required remediation.

All of the Partnership's properties are subject to environmental
statutes and regulations regarding the discharge of hazardous
materials and related remediation obligations. Except for a
property in Salisbury, North Carolina which had been leased to
Family Dollar Stores, Inc., all of the Partnership's properties
are currently leased to corporate tenants. The Partnership
generally structures a lease to require the tenant to comply with
all laws. In addition, substantially all of the Partnership's net
leases include provisions which require tenants to indemnify the
Partnership from all liabilities and losses related to their
operations at the leased properties. The costs for remediation,
which are expected to be performed and paid by the affected
tenant, are not expected to be material. In the event that the
Partnership absorbs a portion of the costs to comply with
environmental statutes, the General Partner believes such
expenditures will not have a material adverse effect on the
Partnership's financial condition, liquidity or results of
operations.

14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

The carrying amounts of cash, receivables and accounts payable and
accrued expenses approximate fair value because of the short
maturity of these items.

The Partnership estimates that the fair value of mortgage notes
payable at December 31, 1996 and 1997 approximates the carrying
value of such mortgage notes at December 31, 1996 and $7,240,000
at December 31 1997. The fair value of debt instruments was
evaluated using a discounted cash flow model with discount rates
which take into account the credit of the tenants and interest
rate risk.

Continued

-17-
<PAGE> 37
CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership

NOTES to FINANCIAL STATEMENTS, Continued

15. EXCHANGE OF LIMITED PARTNERSHIP UNITS:

On October 16, 1997, Carey Diversified distributed a Consent
Solicitation Statement/Prospectus to the Limited Partners that
described a proposal to consolidate the Partnership with the
other CPA(R) Partnerships. The General Partners' proposals that
each of the nine CPA(R) limited partnerships be merged with a
corresponding subsidiary partnership of Carey Diversified, of
which Carey Diversified is the general partner, was approved by
the Limited Partners of all nine of the CPA(R) limited
partnerships. Each limited partner had the option of either
exchanging his or her limited partnership interest for an
interest in Carey Diversified ("Listed Shares") or to retain a
limited partnership interest in the subsidiary partnership
("Subsidiary Partnership Units"). On January 1, 1998, 2,986
holders owning 83,339 of the 85,528 limited partnership units
exchanged such units for 2,747,687 Listed Shares with 56 holders
of the remaining 2,189 limited partnership units exchanging such
units for Subsidiary Partnership Units. The General Partners
received 21,729 Listed Shares for their interests in their share
of the appreciation in Partnership properties.

Listed shares commenced public trading on the New York Stock
Exchange on January 21, 1998. Subsidiary Partnership Units
provide substantially the same economic interest and legal rights
as those of a limited partnership unit in the Partnership, but
are not listed on a securities exchange. A liquidating
distribution to holders of Subsidiary Partnership Units will be
made after an appraisal of the Partnership's properties which
appraisal date is to be no later than December 31, 1998.

16. ACCOUNTING PRONOUNCEMENTS:

June 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses,
gains and losses) in full set general purpose financial
statements. SFAS No. 130 and is required to be adopted by 1998.
The Partnership is currently evaluating the impact, if any, of
SFAS No. 130.

Continued

-18-
<PAGE> 38
CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership

SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION

as of December 31, 1997

Initial Cost to Cost
Partnership Capitalized Decrease In
-------------------- Subsequent to Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ------------ ---- --------- --------------- --------------

<S> <C> <C> <C> <C> <C>
Operating method:
Dairy processing,
distribution and
office facilities
leased to Hughes
Markets, Inc. $1,689,536 $ 8,073,617 $ 21,643

Office building in
Beaumont, Texas
partially leased
to Petrocon
Engineering, Inc. 510,000 4,490,000 612,462 $(4,346,960)

Office, manufacturing
and warehouse
buildings leased to
Continental Casualty
Company 1,800,000 6,710,638 105,000

Warehouse and
distribution center
leased in Salisbury,
North Carolina 291,540 5,708,460 153,179

Supermarket leased
to Winn-Dixie
Stores, Inc. 213,289 1,032,557
---------- ----------- ---------- -----------
$4,504,365 $26,015,272 $ 892,284 $(4,346,960)
========== =========== ========== ===========
</TABLE>

<TABLE>
<CAPTION>
Life On which
Gross Amount at which Carried Depreciation
Carried at Close of Period (d)(e) in Latest
--------------------------------------- Statement of
Accumulated Income
Description Land Buildings Total Depreciation (e) Date Acquired is Computed
----------- ---- --------- ----- ---------------- ------------- ------------

<S> <C> <C> <C> <C> <C> <C>
Operating method:
Dairy processing,
distribution and
office facilities
leased to Hughes
Markets, Inc. $1,711,179 $ 8,073,617 $ 9,784,796 $ 5,796,104 June 1, 1983 10-36 yrs.

Office building in
Beaumont, Texas
partially leased
to Petrocon
Engineering, Inc. 278,801 986,701 1,265,502 530,968 August 11, 30 yrs.
1983

Office, manufacturing
and warehouse
buildings leased to
Continental Casualty
Company 1,800,000 6,815,638 8,615,638 5,253,695 October 20, 15-40 yrs.
1983
Warehouse and
distribution center
leased in Salisbury,
North Carolina 291,540 5,861,639 6,153,179 2,265,158 December 16, 30 yrs.
1983
Supermarket leased
to Winn-Dixie
Stores, Inc. 213,289 1,032,557 1,245,846 477,756 March 12, 30 yrs.
---------- ----------- ----------- ----------- 1984
$4,294,809 $22,770,152 $27,064,961 $14,323,681
========== =========== =========== ===========
</TABLE>

See accompanying notes to Schedule.

-19-
<PAGE> 39
CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership

SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION

as of December 31, 1997

<TABLE>
<CAPTION>
Initial Cost to
Partnership Decrease In
-------------------- Net
Description Encumbrances Land Buildings Investment (c)
----------- ------------ ---- --------- --------------
<S> <C> <C> <C> <C>

Direct financing method:

Manufacturing,
distribution and
office buildings
leased to
Brodart Co. $3,054,518 $241,550 $ 6,141,429 $ (226,002)
========== ======== =========== ==========
</TABLE>

<TABLE>
<CAPTION>
Gross Amount at which Carried
Carried at Close of Period (d)
---------------------------------------
Description Total Date Acquired
----------- --------------------------------------- -------------
<S> <C> <C>

Direct financing method:

Manufacturing,
distribution and
office buildings
leased to
Brodart Co. $ 6,156,977 June 15, 1988
===========
</TABLE>

See accompanying notes to Schedule.

-20-
<PAGE> 40
CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership

NOTES TO SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION

(a) Consists of the cost of improvements and acquisition costs, including legal
fees, appraisal fees, title costs and other related fees.

(b) Represents writedowns of property to fair value.

(c) The decrease in net investment is due to the amortization of unearned
income producing a constant periodic rate of return on the net investment
and does not include lease payments received which may be greater or less
than such amortization.

(d) At December 31, 1997, the aggregate cost of real estate owned for Federal
income tax purposes is $49,794,901.

(e)

RECONCILIATION OF REAL ESTATE ACCOUNTED
FOR UNDER THE OPERATING METHOD

<TABLE>
<CAPTION>
December 31,
------------
1996 1997
---- ----
<S> <C> <C>
Balance at beginning
of period $27,064,561 $27,064,961
----------- -----------

Balance at close of period $27,064,961 $27,064,961
=========== ===========
</TABLE>

RECONCILIATION OF ACCUMULATED DEPRECIATION

<TABLE>
<CAPTION>
December 31,
------------
1996 1997
---- ----
<S> <C> <C>
Balance at beginning
of period $12,626,558 $13,487,845

Depreciation expense for
the period 861,287 835,836
----------- -----------

Balance at close of period $13,487,845 $14,323,681
=========== ===========
</TABLE>

-21-
<PAGE> 41
PROPERTIES

<TABLE>
<CAPTION>
LEASE TYPE OF OWNERSHIP
OBLIGOR TYPE OF PROPERTY LOCATION INTEREST
- --------------- ---------------- -------- -----------------

<S> <C> <C> <C>
HUGHES MARKETS, Land and Dairy Los Angeles, Ownership of an
INC. Processing/ California 83.24% interest
Distribution in land and
Facilities buildings

SIMPLICITY Land and Manufac- Port Washington, Ownership of land
MANUFACTURING, turing/Product Wisconsin and buildings (1)
INC. Testing Buildings
- 2 locations

CONTINENTAL Land and Office, College Station, Ownership of land
CASUALTY COMPANY Manufacturing Texas and buildings
and Warehouse
Buildings

BRODART CO. Land and Manufac- Williamsport, Ownership of land
turing, Distribution Pennsylvania and buildings (1)
and Office Buildings
- 2 locations

(2) Land and Warehouse/ Salisbury, Ownership of land
Distribution Center North Carolina and buildings

PETROCON Land and Office Beaumont, Texas Ownership of land
ENGINEERING, Building and building
INC.

WINN-DIXIE Land and Supermarket Leeds, Alabama Ownership of land
STORES, INC. and building
</TABLE>

(1) These properties are encumbered by mortgage notes payable.
(2) This property is vacant.

-22-
<PAGE> 42
MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED
UNITHOLDER MATTERS

As of December 31, 1997 there were 3,042 holders of record of the
Limited Partnership Units of the Partnership. On January 1, 1998, 2,986 holders
of Limited Partnership Units exchanged such units for interests in Carey
Diversified LLC and 56 holders exchanged such units for Subsidiary Partnership
Units. There is no established public trading market for Subsidiary Partnership
Units.

In accordance with the requirements of the Partnership's Amended
Agreement of Limited Partnership (the "Agreement") contained as Exhibit A to the
Prospectus, the Corporate General Partner expects to continue to make quarterly
distributions of Distributable Cash From Operations as defined in the Agreement.
The following table shows the frequency and amount of distributions paid per
Unit since 1994:

<TABLE>
<CAPTION>
CASH DISTRIBUTIONS PAID PER UNIT
--------------------------------
1995 1996 1997
---- ---- ----

<S> <C> <C> <C>
First quarter $ 13.43 $ 12.20 $ 12.28
Second quarter 13.44 12.22 12.29
Third quarter 63.50(a) 12.24 12.30
Fourth quarter 12.15 12.27 38.65(b)
-------- -------- --------
$ 102.52 $ 48.93 $ 75.52
======== ======== ========
</TABLE>

(a) Includes a special distribution of $50 per unit.
(b) Includes distributions of $12.31 and $26.34 per Limited Partnership Unit
paid in October 1997 and December 1997, respectively.

On October 16, 1997, the Partnership began the solicitation of
consents from limited partners to approve the merger of the Partnership with all
of the CPA(R) Partnerships into Carey Diversified LLC, a Delaware limited
liability company. Limited Partners were offered the opportunity to vote to
approve or disapprove the merger and to choose either interests ("Listed
Shares") in the Carey Diversified LLC or interests ("Subsidiary Partnership
Units") in the partnership which survived the merger. The solicitation period
ended on December 16, 1997. The results of the voting were as follows:

<TABLE>
<CAPTION>
UNITS VOTED UNITS VOTED UNITS VOTED UNITS NOT
YES NO ABSTAINING VOTING
--- -- ---------- ------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Merger of Partnership
with Carey Diversified 60,110 70.28% 2,607 3.05% 835 .98% 21,976 25.69%
</TABLE>

<TABLE>
<CAPTION>
SUBSIDIARY
LISTED SHARES PARTNERSHIP UNITS
------------- -----------------

<S> <C> <C>
Number of Units
Electing 83,339 2,189
</TABLE>

-23-

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,263,717
<SECURITIES> 0
<RECEIVABLES> 188,537
<ALLOWANCES> 74,155
<INVENTORY> 0
<CURRENT-ASSETS> 2,378,099
<PP&E> 33,221,938
<DEPRECIATION> 14,323,681
<TOTAL-ASSETS> 37,814,680
<CURRENT-LIABILITIES> 1,607,379
<BONDS> 7,526,047
0
0
<COMMON> 0
<OTHER-SE> 28,681,254
<TOTAL-LIABILITY-AND-EQUITY> 37,814,680
<SALES> 0
<TOTAL-REVENUES> 10,225,363
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,376,983
<LOSS-PROVISION> 74,155
<INTEREST-EXPENSE> 847,596
<INCOME-PRETAX> 5,607,945
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,607,945
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,607,945
<EPS-PRIMARY> 61.63
<EPS-DILUTED> 61.63

</TABLE>