AMERICAN INDUSTRIAL PROPERTIES REIT INC, S-4/A, 1997-10-10

AMERICAN INDUSTRIAL PROPERTIES REIT INC
S-4/A, 1997-10-10
REAL ESTATE INVESTMENT TRUSTS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997

REGISTRATION NO. 333-31823
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------

AMENDMENT NO. 2 TO

FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------

AMERICAN INDUSTRIAL PROPERTIES REIT
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
TEXAS 6798 75-6335572
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or
organization) Classification Code Number) Identification No.)
</TABLE>

6210 N. BELTLINE ROAD, SUITE 170
IRVING, TEXAS 75063
(972) 756-6000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

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

CHARLES W. WOLCOTT
CHIEF EXECUTIVE OFFICER
AMERICAN INDUSTRIAL PROPERTIES REIT
6210 N. BELTLINE ROAD, SUITE 170
IRVING, TEXAS 75063
(972) 756-6000
(Name, address, including zip code, and telephone number, including
area code, of agent for service)

Copies to:

BRYAN L. GOOLSBY
GINA E. BETTS
STEPHEN L. SAPP
LIDDELL, SAPP, ZIVLEY, HILL & LABOON, L.L.P.
2200 ROSS AVENUE, SUITE 900
DALLAS, TEXAS 75201
(214) 220-4800

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

If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
==================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial Interest,
$0.10 par value................. 6,619,244 $15.00 $99,288,660 $30,084(3)
==================================================================================================================
</TABLE>

(1) This Registration Statement covers the maximum number of Common Shares of
the registrant that are expected to be issued in connection with the
transactions described herein.

(2) Determined pursuant to Rule 457(f)(1) (based on the average high/low sales
price on October 7, 1997).

(3) $19,850 of which was paid in connection with the initial filing.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2

AMERICAN INDUSTRIAL PROPERTIES REIT

Cross-Reference Sheet

<TABLE>
<CAPTION>
ITEM OF FORM S-4 LOCATION IN REGISTRATION STATEMENT OR PROSPECTUS
---------------- ------------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus..... Facing page of Registration Statement; Cross
Reference Sheet; outside front cover page of
Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside front cover page of Prospectus; Table of
Contents; Available Information
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information.............. Summary; Risk Factors; Pro Forma Financial
Information (Merger)
4. Terms of the Transaction................... Summary; The Special Meetings; The Merger;
Dissenters' Rights;
5. Pro Forma Financial Information............ Pro Forma Financial Information (Merger)
6. Material Contacts With the Company Being
Acquired................................... Summary; Risk Factors; The Merger; Allocation of
Consideration; Conflicts of Interest; Certain
Relationships and Related Transactions
7. Additional Information Required for
Reoffering by Persons and Parties Deemed to
be Underwriters............................ Not applicable
8. Interests of Named Experts and Counsel..... Not applicable
9. Disclosure of Commission Position on
Indemnification For Securities Act
Liabilities................................ Not applicable
10. Information With Respect to S-3
Registrants................................ Not applicable
11. Incorporation of Certain Information by
Reference.................................. Not applicable
12. Information With Respect to S-2 or S-3
Registrants................................ Not applicable
13. Incorporation of Certain Information by
Reference.................................. Not applicable
14. Information With Respect to Registrants
Other Than S-2 or S-3 Registrants.......... Available Information; Summary; Risk Factors;
Management's Discussion and Analysis of
Financial Condition and Results of Operations of
the Trust; Fiduciary Responsibility; Market
Prices and Distributions; Policies With Respect
to Certain Activities; Business of the Trust;
Executive and Trust Manager Compensation;
Security Ownership of Certain Beneficial Owners
and Management; Certain Relationships and
Related Transactions
15. Information With Respect to S-3
Companies.................................. Not applicable
16. Information With Respect to S-2 or S-3
Companies.................................. Not applicable
17. Information with Respect to Companies Other
Than S-2 or S-3 Companies.................. Not applicable
18. Information if Proxies, Consents or
Authorizations Are to be Solicited......... Summary; The Special Meetings; The Merger;
Dissenters' Rights
19. Information if Proxies, Consents or
Authorizations Are Not to be Solicited, or
in an Exchange Offer....................... Not applicable
</TABLE>
<PAGE> 3

[AIP LETTERHEAD]

, 199

Fellow Shareholders:

We cordially invite you to attend a special meeting of shareholders (the
"Special Meeting") of American Industrial Properties REIT (the "Trust") to be
held at 2200 Ross Avenue, 40th Floor, Dallas, Texas, on ,
, 199 at 9:00 a.m., Dallas time.

At this meeting, you will have an opportunity to consider and vote on the
proposed merger of the following four public partnerships (collectively, the
"RELPS") with and into the Trust pursuant to the terms of Amended and Restated
Agreements and Plans of Merger between the Trust and each of the RELPS
(collectively, the "Merger Agreement"): USAA Real Estate Income Investments I, A
California Limited Partnership ("RELP I"); USAA Real Estate Income Investments
II Limited Partnership, a Texas limited partnership ("RELP II"); USAA Income
Properties III Limited Partnership, a Delaware limited partnership ("RELP III");
and USAA Income Properties IV Limited Partnership, a Delaware limited
partnership ("RELP IV") (collectively, the "RELPS").

Pursuant to the Merger Agreement, the Trust is offering to issue in the
aggregate up to 4,412,829 of its Common Shares of Beneficial Interest, par value
$.10 per share ("Shares"), which will be allocated among the RELPS which approve
and participate in the proposed merger in exchange for limited partnership units
("Units") in the RELPS in accordance with the respective Net Asset Value (as
defined in the Merger Agreement) of each RELP. Based upon Net Asset Value, each
Unit in RELP I will be converted into the right to receive 15.90 Shares, each
Unit in RELP II will be converted into the right to receive 28.63 Shares, each
Unit in RELP III will be converted into the right to receive 16.60 Shares and
each Unit in RELP IV will be converted into the right to receive 15.14 Shares
(collectively, the "Exchange Ratios"). The currently outstanding Shares of the
Trust will remain outstanding. Cash will be issued in lieu of fractional Shares
(based on $13.125 per Share). Upon consummation of the merger, substantially all
of the properties owned by the RELPS will be owned by the Trust, and such
properties will continue to be managed and leased by an affiliate of USAA Real
Estate Company. The officers and Trust Managers of the Trust prior to the merger
will continue to serve after the merger. The terms of the proposed merger,
including the methods for valuing the Units and the Shares and determining the
Exchange Ratios, are explained in detail in the accompanying Joint Proxy
Statement/Prospectus. I urge you to read it carefully.

The disinterested members of the Board of Trust Managers of the Trust are
of the opinion that the proposed merger will be beneficial to the Trust's
shareholders. The Board has received a written opinion from Prudential
Securities Incorporated that the consideration to be paid by the Trust in the
Merger is fair to the Trust from a financial point of view.

The proposed merger will be approved if it receives the affirmative vote of
two-thirds of the Shares entitled to vote at the Special Meeting. It is
especially important that your Shares be represented at the Special Meeting and
voted FOR the proposal. Even if you plan to attend the Special Meeting in
person, please complete, date, sign and promptly return the proxy in the
envelope provided or vote via facsimile at (214) 999-9323 or (214) 999-9345.
Faxed proxies will be accepted until 5:00 p.m., Dallas time, on ,
199 . Your vote is important, regardless of the number of Shares that you own.
Your promptly completing, signing and returning the proxy saves our Trust the
expense of costly proxy solicitation. Should you have any questions, please
contact The Herman Group, Inc. at (800)555-6433.

<PAGE> 4

On behalf of the Board of Trust Managers, I urge you to vote FOR approval
of the Merger Agreement and the issuance of Shares thereunder.

Sincerely,

Charles W. Wolcott
President and Chief Executive
Officer
<PAGE> 5

AMERICAN INDUSTRIAL PROPERTIES REIT
6210 N. Beltline Road, Suite 170
Irving, Texas 75063

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD , , 199

NOTICE IS HEREBY GIVEN that a special meeting of shareholders of American
Industrial Properties REIT (the "Trust") will be held at 2200 Ross Avenue, 40th
Floor, Dallas, Texas, on , , 199 at 9:00 a.m., Dallas time
(the "Special Meeting"), for the following purposes:

1. To approve and adopt Amended and Restated Agreements and Plans of
Merger, each dated as of June 30, 1997 (the "Merger Agreement"), by and
between the Trust and each of the following four public partnerships
(collectively, the "RELPS"): USAA Real Estate Income Investments I, A
California Limited Partnership ("RELP I"), USAA Real Estate Income
Investments II Limited Partnership ("RELP II"), USAA Income Properties III
Limited Partnership ("RELP III") and USAA Income Properties IV Limited
Partnership ("RELP IV"), pursuant to which: (i) the RELPS would merge with
and into the Trust; and (ii) the Trust would issue in the aggregate up to
4,412,829 of its Common Shares of Beneficial Interest, par value $.10 per
share ("Shares"), which will be allocated among the RELPS which approve and
participate in the proposed merger in exchange for limited partnership
units in the RELPS (collectively, "Units") as follows: each Unit in RELP I
will be converted into the right to receive 15.90 Shares, each Unit in RELP
II will be converted into the right to receive 28.63 Shares, each Unit in
RELP III will be converted into the right to receive 16.60 Shares and each
Unit in RELP IV will be converted into the right to receive 15.14 Shares,
with cash in lieu of the issuance of any fractional share interest.

2. To approve the postponement or adjournment of the Special Meeting
for any reason, including for the solicitation of additional votes, if
necessary.

3. To transact such other business as properly may come before such
meeting or any adjournments thereof.

Only those shareholders of the Trust of record at the close of business on
, 199 will be entitled to notice of and to vote at the Special
Meeting and any adjournments thereof. The Merger Agreement and the issuance of
Shares thereunder will be approved if it receives the affirmative vote of the
holders of two-thirds of the votes entitled to be cast at the Special Meeting.

By Order of the Board of Trust
Managers

Marc A. Simpson
Vice President, Chief Financial
Officer,
Treasurer and Secretary

IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. PLEASE
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID
ENVELOPE OR VOTE VIA FACSIMILE SO THAT YOUR SHARES WILL BE REPRESENTED AT THE
MEETING. SHAREHOLDERS ATTENDING THE MEETING MAY VOTE PERSONALLY ON ALL MATTERS
THAT ARE CONSIDERED, IN WHICH EVENT THE SIGNED PROXIES ARE REVOKED.

Dallas, Texas
, 199
<PAGE> 6

[RELP I LETTERHEAD]

, 199

Fellow Partners:

We cordially invite you to attend a special meeting of limited partners
(the "Special Meeting") of USAA Real Estate Income Investments I, A California
Limited Partnership (the "Partnership") to be held at the Four Seasons Resort at
Las Colinas, Irving, Texas, on , , 199 at 9:00 a.m., Dallas
time.

Pursuant to the Merger Agreement, the Trust is offering to issue 15.90
Common Shares of Beneficial Interest, $0.10 par value (the "Shares"), of the
Trust in exchange for each Unit you hold in the Partnership. The currently
outstanding Shares of the Trust will remain outstanding. Cash will be issued in
lieu of fractional Shares (based on $13.125 per Share). Upon consummation of the
merger, all of the properties owned by the Partnership will be owned by the
Trust, and such properties will continue to be managed and leased by an
affiliate of USAA Real Estate Company. The officers and Trust Managers of the
Trust prior to the merger will continue to serve after the merger. The terms of
the proposed merger are explained in detail in the accompanying Joint Proxy
Statement/Prospectus. I urge you to read it carefully.

The General Partner of the Partnership is of the opinion that the proposed
merger will be beneficial to the limited partners. The General Partner has
received a written opinion from Houlihan Lokey Howard & Zukin as to the fairness
to the limited partners, from a financial point of view, of the consideration to
be received by the limited partners.

The proposed merger will be approved if it receives the affirmative vote of
the holders of a majority of the Units entitled to vote at the Special Meeting.
It is especially important that your Units be represented at the Special Meeting
and voted FOR the proposal. Even if you plan to attend the Special Meeting in
person, please complete, date, sign and promptly return the proxy in the
envelope provided or vote via facsimile at (210) 498-6214. Faxed proxies will be
accepted until 5:00 p.m., Dallas time, on , 199 . Your vote is
important, regardless of the number of Units that you own. Should you have any
questions, please contact Randal R. Seewald at (800) 531-8876.

On behalf of the General Partner, I urge you to vote FOR approval of the
proposals.

Sincerely,

Edward B. Kelley
Chairman of the Board, President and
Chief Executive Officer of
USAA Investors I, Inc.
<PAGE> 7

USAA REAL ESTATE INCOME INVESTMENTS I,
A CALIFORNIA LIMITED PARTNERSHIP
8000 Robert F. McDermott Fwy.
IH 10 West, Suite 600
San Antonio, Texas 78230-3884

NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS

TO BE HELD , , 199

NOTICE IS HEREBY GIVEN that a special meeting of limited partners of USAA
Real Estate Income Investments I, A California Limited Partnership (the
"Partnership") will be held at the Four Seasons Resort at Las Colinas, Irving,
Texas, on , , 199 at 9:00 a.m., Dallas time (the
"Special Meeting"), for the following purposes:

1. To (i) approve and adopt an Amended and Restated Agreement and Plan
of Merger dated as of June 30, 1997 (the "Merger Agreement"), by and
between American Industrial Properties REIT (the "Trust") and the
Partnership pursuant to which the Partnership would merge with and into the
Trust and each Unit in the Partnership would be converted into the right to
receive 15.90 Common Shares of Beneficial Interest, $0.10 par value, of the
Trust, with cash in lieu of fractional shares; and (ii) amend the Agreement
of Limited Partnership of the Partnership to authorize the following: (a)
the merger of the Partnership with and into the Trust, whether or not the
Trust would be regarded as an affiliate of the General Partner; and (b)
such other actions as may be necessary under or contemplated by the Merger
Agreement or the Joint Proxy Statement/Prospectus, irrespective of any
provision in the Agreement of Limited Partnership of the Partnership which
might otherwise prohibit such actions.

2. To approve the postponement or adjournment of the Special Meeting
for any reason, including for the solicitation of additional votes, if
necessary.

3. To transact such other business as properly may come before such
meeting or any adjournments thereof.

Only those limited partners of record at the close of business on
, 199 will be entitled to notice of and to vote at the Special
Meeting and any adjournments thereof. The proposed amendments and the Merger
Agreement, will be approved if they receive the affirmative vote of the holders
of a majority of the votes entitled to be cast at the Special Meeting.

By Order of the General Partner

Randal R. Seewald
Vice President, Secretary and
Legal Counsel of USAA Investors I,
Inc.

IT IS IMPORTANT THAT YOUR UNITS BE REPRESENTED AT THE MEETING. PLEASE SIGN,
DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID
ENVELOPE OR VOTE VIA FACSIMILE SO THAT YOUR UNITS WILL BE REPRESENTED AT THE
MEETING. LIMITED PARTNERS ATTENDING THE MEETING MAY VOTE PERSONALLY ON ALL
MATTERS THAT ARE CONSIDERED, IN WHICH EVENT THE SIGNED PROXIES ARE REVOKED.

San Antonio, Texas
, 199
<PAGE> 8

[RELP II LETTERHEAD]

, 199

Fellow Partners:

We cordially invite you to attend a special meeting of limited partners
(the "Special Meeting") of USAA Real Estate Income Investments II Limited
Partnership (the "Partnership") to be held at the Four Seasons Resort at Las
Colinas, Irving, Texas, on , , 199 at 9:00 a.m., Dallas
time.

At the Special Meeting, you will have an opportunity to consider and vote
on the proposed merger of the Partnership with and into American Industrial
Properties REIT (the "Trust") pursuant to the terms of an Amended and Restated
Agreement and Plan of Merger between the Trust and the Partnership (the "Merger
Agreement") and to amend the Partnership's Agreement of Limited Partnership to
authorize the merger and to allow the sale of the Partnership's interest in the
joint venture which owns Sequoia Plaza I Building to USAA Real Estate Company
("Realco") or an affiliate of Realco. The limited partners of USAA Real Estate
Income Investments I, A California Limited Partnership, USAA Income Properties
III Limited Partnership and USAA Income Properties IV Limited Partnership are
being asked to vote on similar proposals to merge with and into the Trust.

Pursuant to the Merger Agreement, the Trust is offering to issue 28.63
Common Shares of Beneficial Interest, $0.10 par value ("Shares"), of the Trust
in exchange for each Unit you hold in the Partnership. The currently outstanding
Shares of the Trust will remain outstanding. Cash will be issued in lieu of
fractional Shares (based on $13.125 per Share). Upon consummation of the merger,
substantially all of the properties owned by the Partnership will be owned by
the Trust, and such properties will continue to be managed and leased by an
affiliate of Realco. The officers and Trust Managers of the Trust prior to the
merger will continue to serve after the merger. The terms of the proposed merger
are explained in detail in the accompanying Joint Proxy Statement/Prospectus. I
urge you to read it carefully.

The proposal will be approved if it receives the affirmative vote of the
holders of a majority of the Units entitled to vote at the Special Meeting. It
is especially important that your Units be represented at the Special Meeting
and voted FOR the proposals. Even if you plan to attend the Special Meeting in
person, please complete, date, sign and promptly return the proxy in the
envelope provided or vote via facsimile at (210) 498-6214. Faxed proxies will be
accepted until 5:00 p.m., Dallas time, on , 199 . Your vote is
important, regardless of the number of Units that you own. Should you have any
questions, please contact Randal R. Seewald at (800) 531-8876.

On behalf of the General Partner, I urge you to vote FOR approval of the
proposal.

Sincerely,

Edward B. Kelley
Chairman of the Board, President and
Chief Executive Officer of
USAA Investors II, Inc.
<PAGE> 9

USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP
8000 Robert F. McDermott Fwy.
IH 10 West, Suite 600
San Antonio, Texas 78230-3884

NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS

TO BE HELD , , 199

NOTICE IS HEREBY GIVEN that a special meeting of limited partners of USAA
Real Estate Income Investments II Limited Partnership (the "Partnership") will
be held at the Four Seasons Resort at Las Colinas, Irving, Texas, on ,
, 199 at 9:00 a.m., Dallas time (the "Special Meeting"), for the
following purposes:

1. To (i) approve and adopt an Amended and Restated Agreement and Plan
of Merger dated as of June 30, 1997 (the "Merger Agreement"), by and
between American Industrial Properties REIT (the "Trust") and the
Partnership pursuant to which the Partnership would merge with and into the
Trust and each Unit in the Partnership would be converted into the right to
receive 28.63 Common Shares of Beneficial Interest, $0.10 par value, of the
Trust, with cash in lieu of fractional shares; and (ii) amend the Agreement
of Limited Partnership of the Partnership to authorize the following: (a)
the merger of the Partnership with and into the Trust, whether or not the
Trust would be regarded as an affiliate of the General Partner; (b) the
sale to USAA Real Estate Company, or to an affiliate of the same, of the
Partnership's interest in the joint venture which owns the Sequoia Plaza I
Building; and (c) such other actions as may be necessary under or
contemplated by the Merger Agreement or the Joint Proxy
Statement/Prospectus, irrespective of any provision in the Agreement of
Limited Partnership of the Partnership which might otherwise prohibit such
action.

2. To approve the postponement or adjournment of the Special Meeting
for any reason, including for the solicitation of additional votes, if
necessary.

3. To transact such other business as properly may come before such
meeting or any adjournments thereof.

Only those limited partners of record at the close of business on
, 199 will be entitled to notice of and to vote at the Special
Meeting and any adjournments thereof. The proposed amendments and consequently
the Merger Agreement will be approved if they receive the affirmative vote of
the holders of a majority of the votes entitled to be cast at the Special
Meeting.

By Order of the General Partner

Randal R. Seewald
Vice President, Secretary and
Legal Counsel of USAA Investors II,
Inc.

San Antonio, Texas
, 199
<PAGE> 10

[RELP III LETTERHEAD]

, 199

Fellow Partners:

We cordially invite you to attend a special meeting of limited partners
(the "Special Meeting") of USAA Income Properties III Limited Partnership (the
"Partnership") to be held at the Four Seasons Resort at Las Colinas, Irving,
Texas, on , , 199 at 9:00 a.m., Dallas time.

At the Special Meeting, you will have an opportunity to consider and vote
on the proposed merger of the Partnership with and into American Industrial
Properties REIT (the "Trust") pursuant to the terms of an Amended and Restated
Agreement and Plan of Merger between the Trust and the Partnership (the "Merger
Agreement") and to amend the Partnership's Agreement of Limited Partnership to
authorize the merger and the sale of the Curlew Crossing property by the
Partnership to USAA Real Estate Company ("Realco") or an affiliate of Realco.
The limited partners of USAA Real Estate Income Investments I, A California
Limited Partnership, USAA Real Estate Income Investments II Limited Partnership
and USAA Income Properties IV Limited Partnership are being asked to vote on
similar proposals to merge with and into the Trust.

Pursuant to the Merger Agreement, the Trust is offering to issue 16.60
Common Shares of Beneficial Interest, $0.10 par value ("Shares"), of the Trust
in exchange for each Unit you hold in the Partnership. The currently outstanding
Shares of the Trust will remain outstanding. Cash will be issued in lieu of
fractional Shares (based on $13.125 per Share). Upon consummation of the merger,
substantially all of the properties owned by the Partnership will be owned by
the Trust, and such properties will continue to be managed and leased by an
affiliate of Realco. The officers and Trust Managers of the Trust prior to the
merger will continue to serve after the merger. The terms of the proposed merger
are explained in detail in the accompanying Joint Proxy Statement/Prospectus. I
urge you to read it carefully.

The proposal will be approved if it receives the affirmative vote of a
majority of the Units entitled to vote at the Special Meeting. It is especially
important that your Units be represented at the Special Meeting and voted FOR
the proposals. Even if you plan to attend the Special Meeting in person, please
complete, date, sign and promptly return the proxy in the envelope provided or
vote via facsimile at (210) 498-6214. Faxed proxies will be accepted until 5:00
p.m., Dallas time, on , 199 . Your vote is important, regardless of
the number of Units that you own. Should you have any questions, please contact
Randal R. Seewald at (800) 531-8876.

On behalf of the General Partner, I urge you to vote FOR approval of the
proposal.

Sincerely,

Edward B. Kelley
Chairman of the Board, President and
Chief Executive Officer of
USAA Properties III, Inc.
<PAGE> 11

USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
8000 Robert F. McDermott Fwy.
IH 10 West, Suite 600
San Antonio, Texas 78230-3884

NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS

TO BE HELD , , 199

NOTICE IS HEREBY GIVEN that a special meeting of limited partners of USAA
Income Properties III Limited Partnership (the "Partnership") will be held at
the Four Seasons Resort at Las Colinas, Irving, Texas, on ,
, 199 at 9:00 a.m., Dallas time (the "Special Meeting"), for the
following purposes:

1. To (i) approve and adopt an Amended and Restated Agreement and Plan
of Merger dated as of June 30, 1997 (the "Merger Agreement"), by and
between American Industrial Properties REIT and the Partnership pursuant to
which the Partnership would merge with and into the Trust and each Unit in
the Partnership will be converted into the right to receive 16.60 Common
Shares of Beneficial Interest, $0.10 par value, of the Trust, with cash in
lieu of fractional shares; and (ii) amend the Agreement of Limited
Partnership of the Partnership to authorize the following: (a) the merger
of the Partnership with and into the Trust, whether or not the Trust would
be regarded as an affiliate of the General Partner; (b) the sale of the
Curlew Crossing property by the Partnership to USAA Real Estate Company;
and (c) such other actions as may be necessary under or contemplated by the
Merger Agreement or the Joint Proxy Statement/Prospectus, irrespective of
any provision in the Agreement of Limited Partnership of the Partnership
which might otherwise prohibit such actions.

2. To approve the postponement or adjournment of the Special Meeting
for any reason, including for the solicitation of additional votes, if
necessary.

3. To transact such other business as properly may come before such
meeting or any adjournments thereof.

Only those limited partners of record at the close of business on
, 199 will be entitled to notice of and to vote at the Special
Meeting and any adjournments thereof. The proposed amendments and the Merger
Agreement will be approved if they receive the affirmative vote of the holders
of a majority of the votes entitled to be cast at the Special Meeting.

By Order of the General Partner

Randal R. Seewald
Vice President, Secretary and
Legal Counsel of USAA Properties
III, Inc.

San Antonio, Texas
, 199
<PAGE> 12

[RELP IV LETTERHEAD]

, 199

Fellow Partners:

We cordially invite you to attend a special meeting of limited partners
(the "Special Meeting") of USAA Income Properties IV Limited Partnership (the
"Partnership") to be held at the Four Seasons Resort at Las Colinas, Irving,
Texas, on , , 199 at 9:00 a.m., Dallas time.

At the Special Meeting, you will have an opportunity to consider and vote
on the proposed merger of the Partnership with and into American Industrial
Properties REIT (the "Trust") pursuant to the terms of the Amended and Restated
Agreement and Plan of Merger between the Trust and the Partnership (the "Merger
Agreement"). The limited partners of USAA Real Estate Income Investments I, A
California Limited Partnership, USAA Real Estate Income Investments II Limited
Partnership and USAA Income Properties III Limited Partnership are being asked
to vote on similar proposals to merge with and into the Trust.

Pursuant to the Merger Agreement, the Trust is offering to issue 15.14
Common Shares of Beneficial Interest, $0.10 par value ("Shares"), of the Trust
in exchange for each Unit you hold in the Partnership. The currently outstanding
Shares of the Trust will remain outstanding. Cash will be issued in lieu of
fractional Shares (based on $13.125 per Share). Upon consummation of the merger,
all of the properties owned by the Partnership will be owned by the Trust, and
such properties will continue to be managed and leased by an affiliate of USAA
Real Estate Company. The officers and Trust Managers of the Trust prior to the
merger will continue to serve after the merger. The terms of the proposed merger
are explained in detail in the accompanying Joint Proxy Statement/Prospectus. I
urge you to read it carefully.

On behalf of the General Partner, I urge you to vote FOR approval of the
proposals.

Sincerely,

Edward B. Kelley
Chairman of the Board, President and
Chief Executive Officer of
USAA Properties IV, Inc.
<PAGE> 13

USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
8000 Robert F. McDermott Fwy.
IH 10 West, Suite 600
San Antonio, Texas 78230-3884

NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS

TO BE HELD , , 199

NOTICE IS HEREBY GIVEN that a special meeting of limited partners of USAA
Income Properties IV Limited Partnership (the "Partnership") will be held at the
Four Seasons Resort at Las Colinas, Irving, Texas, on , ,
199 at 9:00 a.m., Dallas time (the "Special Meeting"), for the following
purposes:

1. To (i) approve and adopt an Amended and Restated Agreement and Plan
of Merger dated as of June 30, 1997 (the "Merger Agreement"), by and
between American Industrial Properties REIT (the "Trust") and the
Partnership pursuant to which each Unit in the Partnership will be
converted into the right to receive 15.14 Common Shares of Beneficial
Interest, $0.10 par value ("Shares") of the Trust, with cash in lieu of
fractional shares; and (ii) amend the Agreement of Limited Partnership of
the Partnership to authorize the following: (a) the merger of the
Partnership with and into the Trust, whether or not the Trust would be
regarded as an affiliate of the General Partner; and (b) such other actions
as may be necessary under or contemplated by the Merger Agreement or the
Joint Proxy Statement/ Prospectus, irrespective of any provision in the
Agreement of Limited Partnership of the Partnership which might otherwise
prohibit such actions.

2. To approve the postponement or adjournment of the Special Meeting
for any reason, including for the solicitation of additional votes, if
necessary.

3. To transact such other business as properly may come before such
meeting or any adjournments thereof.

Only those limited partners of record at the close of business on
, 199 will be entitled to notice of and to vote at the Special
Meeting and any adjournments thereof. The proposed amendments and the Merger
Agreement will be approved if they receive the affirmative vote of the holders
of a majority of the votes entitled to be cast at the Special Meeting.

By Order of the General Partner

Randal R. Seewald
Vice President, Secretary and
Legal Counsel of USAA Properties IV,
Inc.

San Antonio, Texas
, 199
<PAGE> 14

JOINT PROXY STATEMENT/PROSPECTUS

AMERICAN INDUSTRIAL PROPERTIES REIT

4,412,829 Shares of Beneficial Interest

This Joint Proxy Statement/Prospectus is being furnished to shareholders of
American Industrial Properties REIT, a Texas real estate investment trust (the
"Trust"), and to the limited partners (collectively, "Limited Partners") holding
Units of Limited Partnership Interests ("Units") in any of the following four
public limited partnerships: USAA Real Estate Income Investments I, A California
Limited Partnership ("RELP I"); USAA Real Estate Income Investments II Limited
Partnership, a Texas limited partnership, ("RELP II"); USAA Income Properties
III Limited Partnership, a Delaware limited partnership ("RELP III"); and USAA
Income Properties IV Limited Partnership, a Delaware limited partnership ("RELP
IV," together with RELP I, RELP II and RELP III, the "RELPS" and each a "RELP").
This Joint Proxy Statement/ Prospectus is furnished in connection with the
solicitation of proxies by the Board of Trust Managers of the Trust for use at
the Special Meeting of shareholders of the Trust (including any adjournments or
postponements thereof) (the "Trust Special Meeting") and by the General Partner
of each RELP (collectively, the "General Partners") for use at the Joint Special
Meeting of Limited Partners (including any adjournments or postponements
thereof) each a "RELP Special Meeting" and, together with the Trust Special
Meeting, the "Special Meetings"), each to be held on , 199 at the
time and place set forth in the accompanying notices.

The purpose of the Special Meetings is to consider and vote upon each
Amended and Restated Agreement and Plan of Merger, dated as of June 30, 1997
(collectively, the "Merger Agreement"), between the Trust and each RELP pursuant
to which each RELP will merge with and into the Trust (collectively, the
"Merger"). The form of Merger Agreement between the Trust and each RELP is
attached to this Joint Proxy Statement/Prospectus as Annex I.

As consideration for the merger of the RELPS into the Trust, the Trust is
offering to issue in the aggregate up to 4,412,829 of its Common Shares of
Beneficial Interest, par value $.10 per share (the "Shares"), which will be
allocated to the RELPS which approve and participate in the Merger (the
"Participating RELPS") in accordance with their respective Net Asset Values (as
defined herein). Based upon Net Asset Value, each Unit in RELP I will be
converted into the right to receive 15.90 Shares, each Unit in RELP II will be
converted into the right to receive 28.63 Shares, each Unit in RELP III will be
converted into the right to receive 16.60 Shares and each Unit in RELP IV will
be converted into the right to receive 15.14 Shares. Cash will be issued in lieu
of fractional Shares (based on $13.125 per Share (the "Exchange Price")). Upon
consummation of the Merger, substantially all of the properties owned by the
Participating RELPS will be owned by the Trust, and such properties will
continue to be managed and leased by an affiliate of USAA Real Estate Company
("Realco"). The officers and Trust Managers of the Trust prior to the Merger
will continue to serve after the Merger.

The purpose of the Merger for the Trust is to strategically unite the Trust
with four entities with compatible properties in existing and new markets for
the Trust. The purpose of the Merger for the RELPS is to unite the RELPS with a
publicly-traded real estate investment trust ("REIT") with compatible
properties. This combination will allow the RELPS to take advantage of the
growth in the REIT industry and real estate markets in general. All partners in
Participating RELPS will have the opportunity to liquidate their investment
through the sale of the publicly-traded Shares or to retain their investment
indefinitely. As partners in the RELPS, which are finite life entities, partners
would be forced to liquidate their investments upon dissolution of the RELPS.

SEE "RISK FACTORS" BEGINNING ON PAGE 23 FOR CERTAIN RISKS RELATING TO
PARTICIPATION IN THE MERGER. These risks include:

- The Trust has generated losses from operations every year since 1988.

- Participating Limited Partners who become shareholders of the Trust may
not receive the same level of distributions as previously received from
the applicable RELP and may initially receive no distributions

<PAGE> 15

because the Trust currently is not paying distributions. The Trust has
not made distributions for four consecutive quarters since 1993.

- The Exchange Ratio (as defined below) is fixed. The Limited Partners will
not receive more Shares if the trading price of the Shares decreases and
the Trust will not issue fewer Shares if the trading price of the Shares
increases.

- The Merger will be a taxable transaction for each participating Limited
Partner.

- There are uncertainties relating to the capital structure of the Trust
following consummation of the Merger as a result of the possibility that
some of the RELPS may not participate in the Merger.

- The change in the nature of each Limited Partner's investment in a
Participating RELP from holding an interest in a specified portfolio of
properties in a finite life entity to holding an equity investment in an
ongoing REIT, whose portfolio of properties may be changed from time to
time without the approval of its shareholders and which does not plan to
liquidate such assets within a fixed period.

- The possibility that the Net Asset Values assigned to each of the RELPS
may not reflect the actual value of such RELP'S assets.

- The General Partners are prohibited by the Merger Agreement from
initiating, soliciting or encouraging competing proposals with the
Merger.

- The common management of the RELPS, who are also Affiliates of Realco,
has negotiated the terms of the Merger on behalf of all the RELPS. Each
RELP was not separately represented by parties independent from Realco.
Had separate representation been arranged for a RELP, the terms of the
Merger might have been more favorable to such RELP. Further, issues
unique to the value of a particular RELP might have resulted in
adjustments increasing or decreasing the number of Shares allocable to
such RELP.

- The General Partners, through wholly-owned subsidiaries, are owned and
controlled by Realco. Realco currently owns 13.74% of the Trust's
outstanding Shares and two of Realco's designees are Trust Managers. Upon
consummation of the Merger and assuming conversion of the Trust's debt to
Realco, Realco will own 17.39% of the Trust's outstanding Shares. An
Affiliate of Realco will manage and lease the former RELP properties
after the Merger. Any or all of these factors may have influenced a
General Partner's decision to recommend the Merger to its Limited
Partners.

- The Trust will be assuming all liabilities of the Participating RELPS,
including undisclosed liabilities.

- The Trust will be expanding into new regions and markets where it has
little, if any, prior experience.

- The Shares may initially trade at prices substantially below trading
prices as of the date of execution of the Merger Agreement, the date
hereof or the date of the Special Meetings.

- The cost of the Merger, both financially and in terms of the time and
effort of management required to effectuate the Merger, are expected to
be significant. The financial cost of the Merger to the Trust is expected
to be in the aggregate approximately $1,850,000.

- The proceeds of future asset sales or refinancings by the Trust generally
will be reinvested rather than distributed to shareholders to the extent
not required to be distributed to maintain REIT status.

- A majority vote of Limited Partners binds each RELP; if the Merger is
approved, Limited Partners who vote against the Merger will have their
Units converted into Shares based on the Exchange Price unless they
properly exercise dissenters' rights.

- The Board of Trust Managers of the Trust may change the investment,
acquisition and financing policies of the Trust (including policies
regarding the level of indebtedness) without a vote of the shareholders,
which could result in policies which do not reflect the interests of all
shareholders.

- The Trust will be taxed as a corporation if it fails to qualify as a
REIT.

<PAGE> 16

Based on the closing price of the Shares on the New York Stock Exchange
(the "NYSE") of $ per Share on , 199 (the "Closing Price"),
if the Merger Agreement is approved and the Merger is consummated, the total
market value of the Trust would be approximately $ and the
consideration to be received collectively by the Limited Partners would have a
market value of approximately $ . Assuming all the RELPS participate in
the Merger, based on 9,074,803 outstanding Shares, approximately 48.63% of the
Shares of the Trust expected to be outstanding after the Merger (45.87% if
Realco converts certain indebtedness of the Trust prior to December 31, 1997)
would be held by the Limited Partners. Upon consummation of the Merger and
assuming conversion of the Trust's debt to Realco, Realco will own approximately
17.39% of the Trust's outstanding Shares. For a description of the Merger
Agreement, see "The Merger."

The Merger may have the following adverse consequences for the Trust's
shareholders:

- The trading price of the Trust's Shares may increase prior to the
consummation of the Merger with no corresponding adjustment being made to
the Exchange Ratio.

- The Trust will be expanding into new regions and markets where it has
little, if any, prior experience.

- The anticipated benefits of the Merger may not be realized.

The Merger may have the following adverse consequences for the Limited
Partners:

- The trading price of the Trust's Shares may decrease prior to the
consummation of the Merger with no corresponding adjustment being made to
the Exchange Ratio.

- The Trust has not made distributions for four consecutive quarters since
1993, and there can be no assurance that the Trust will be able to make
distributions in the future.

- The General Partners are prohibited by the Merger Agreement from
initiating, soliciting or encouraging competing proposals with the
Merger.

- The Merger will be a taxable event to the Limited Partners.

- The anticipated benefits of the Merger may not be realized.

This Joint Proxy Statement/Prospectus also constitutes a prospectus of the
Trust in respect of the Shares to be issued to the Limited Partners in
connection with the Merger. The outstanding Shares are, and the Shares offered
hereby will be, listed and traded on the NYSE under the symbol "IND." This Joint
Proxy Statement/Prospectus and the accompanying proxy cards are first being
mailed to shareholders of the Trust and the Limited Partners on or about
, 199 .

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

The date of this Joint Proxy Statement/Prospectus is , 199 .

<PAGE> 17

TABLE OF CONTENTS

<TABLE>
<S> <C>
AVAILABLE INFORMATION....................................... v
SUMMARY..................................................... 1
Parties to the Merger..................................... 1
Summary of Risk Factors................................... 2
The Special Meetings...................................... 4
Record Date; Votes Required; Investor Lists............... 5
The Merger................................................ 6
Dissenters' Rights........................................ 7
Conflicts of Interest..................................... 7
Reasons for the Merger and Recommendations................ 8
Fairness Opinions......................................... 10
Material Federal Income Tax Consequences.................. 11
Summary Comparison of Ownership of Units and Shares....... 11
Effective Time of the Merger.............................. 13
Management, Operations and Headquarters After the
Merger................................................. 13
Conditions to Consummation of the Merger.................. 14
Anticipated Accounting Treatment.......................... 14
Conduct of Business Pending the Merger.................... 14
Resales of Shares......................................... 14
Termination............................................... 15
Summary Historical Financial Information of the Trust..... 16
Summary Historical Financial Information of RELP I........ 17
Summary Historical Financial Information of RELP II....... 18
Summary Historical Financial Information of RELP III...... 19
Summary Historical Financial Information of RELP IV....... 20
Summary Pro Forma Financial Information of the Trust
(Merger)............................................... 21
Comparative Per Share Data................................ 22
RISK FACTORS................................................ 23
History of Losses of the Trust............................ 23
Potential Changes in Distribution Levels for Limited
Partners............................................... 23
Uncertainties at the Time of Voting as to Participation of
RELPS.................................................. 23
Fundamental Change in Nature of Investment From Finite
Life to Infinite Life.................................. 24
Fundamental Change in Nature of Investment From
Pass-Through to REIT................................... 24
Anti-Takeover Provisions.................................. 24
Potential Taxable Income to Limited Partners Without Cash
Distribution........................................... 25
Potential Challenges to Partnership Valuations............ 25
Lack of Independent Representation for Each RELP.......... 25
Conflicts of Interest of the General Partners............. 25
The Merger as a Taxable Event............................. 26
Undisclosed Liabilities That Will Be Assumed by the
Trust.................................................. 26
Expenses of the Merger.................................... 26
Majority Vote Binds Each RELP............................. 26
The Merger Will Require Limited Partners to Forego the
Alternatives to the Merger............................. 27
Trust Business Objectives Differ From RELP Business
Objectives............................................. 27
Loss of Rights by Limited Partners........................ 27
Termination Payments if Merger Fails to Occur............. 27
Significant Increase in Portfolio Size.................... 28
Future Dilution of Shareholders........................... 28
Distributions Subordinate to Payments on Debt............. 28
Share Price Fluctuations.................................. 28
Effect of Market Interest Rates on Price of the Shares.... 29
Real Estate Investment Risks.............................. 29
Effect of Economic and Real Estate Conditions.......... 29
Renewal of Leases and Reletting of Space............... 29
Market Illiquidity..................................... 29
</TABLE>

i
<PAGE> 18

Operating Risks........................................ 29
Competition............................................ 29
Geographic Diversification............................. 29
Concentration of Investment............................ 30
No Limitation on Debt..................................... 30
Changes in Policies....................................... 30
Possible Environmental Liabilities........................ 31
Risks of Development and Acquisition Activities........... 32
Uninsured and Underinsured Losses Could Result in Loss of
Value of Property...................................... 32
Costs of Compliance with Federal Laws..................... 32
Adverse Consequences of Failure to Qualify as a REIT...... 33
Uncertainties Related to Litigation....................... 33
THE SPECIAL MEETINGS........................................ 34
Trust Special Meeting..................................... 34
RELP Special Meeting...................................... 35
THE MERGER.................................................. 38
Background of the Merger.................................. 38
Background of the RELPS................................... 42
The Trust's Reasons for the Merger and Recommendation..... 43
The RELPS' Reasons for the Merger and Recommendation...... 45
Fairness Opinions......................................... 55
Exchange Ratio and Exchange for the Trust's Shares........ 64
Management and Operations After the Merger................ 65
Effective Time of the Merger.............................. 67
Headquarters.............................................. 67
Conditions to Consummation of the Merger.................. 67
Conduct of Business Pending the Merger.................... 68
Acquisition Proposals..................................... 70
Extension, Waiver and Amendment; Termination.............. 71
Effect of Termination and Abandonment..................... 72
Extension; Waiver......................................... 73
Proposed Amendments to Partnership Agreements............. 73
The Merger Expenses....................................... 74
Anticipated Accounting Treatment.......................... 74
Material Federal Income Tax Consequences.................. 74
Resales of the Trust's Shares............................. 85
DISSENTERS' RIGHTS.......................................... 85
PRO FORMA FINANCIAL INFORMATION (MERGER).................... 88
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE TRUST.................... 104
ALLOCATION OF CONSIDERATION................................. 112
Allocation Principles..................................... 112
Net Asset Values.......................................... 113
CONFLICTS OF INTEREST....................................... 114
Affiliated General Partners............................... 114
Benefits to Realco, General Partners and Affiliates....... 114
Trust Managers and Officers............................... 115
Features Discouraging Potential Takeovers................. 115
FIDUCIARY RESPONSIBILITY.................................... 116
Trust Managers and Officers of the Trust.................. 116
General Partners of the RELPS............................. 116

ii
<PAGE> 19

MARKET PRICES AND DISTRIBUTIONS............................. 117
The Market Price of the Shares............................ 117
Distributions............................................. 118
Market Price of Units..................................... 118
Partnership Distributions................................. 119
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES................. 120
Investments in Real Estate or Interests in Real Estate.... 120
Investments in Real Estate Mortgages...................... 120
Disposition............................................... 121
Conflict of Interest Policy............................... 121
Affiliate Transaction Policy.............................. 121
Other Activities.......................................... 121
BUSINESS OF THE TRUST....................................... 122
General................................................... 122
Business Objectives and Strategy.......................... 123
Geographic Analysis of Revenue............................ 124
Employees................................................. 124
Competition............................................... 124
Properties................................................ 124
Portfolio Summary......................................... 128
Recent Acquisitions....................................... 128
Lease Expiration.......................................... 129
Mortgage Indebtedness..................................... 129
Legal Proceedings......................................... 129
BUSINESS OF THE RELPS....................................... 131
RELP I.................................................... 131
RELP II................................................... 133
RELP III.................................................. 135
RELP IV................................................... 140
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF RELP I....................... 143
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF RELP II...................... 147
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF RELP III..................... 149
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF RELP IV...................... 155
COMPARISON OF OWNERSHIP OF UNITS AND SHARES................. 159
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS............ 171
Compensation Paid to the General Partners and Their
Affiliates............................................. 171
Distribution Policies..................................... 174
EXECUTIVE AND TRUST MANAGER COMPENSATION.................... 175
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 177
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 178
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR
AFFILIATES................................................ 179
RELP I.................................................... 179
RELP II................................................... 180
RELP III.................................................. 181
RELP IV................................................... 182

iii
<PAGE> 20

EXPERTS..................................................... 183
LEGAL OPINIONS.............................................. 183
SHAREHOLDER PROPOSALS....................................... 183
OTHER MATTERS............................................... 183
GLOSSARY.................................................... 184
INDEX TO FINANCIAL STATEMENTS............................... F-1
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER........... I-1
PRUDENTIAL SECURITIES FAIRNESS OPINION...................... A-1
HOULIHAN FAIRNESS OPINIONS.................................. B-1

iv
<PAGE> 21

AVAILABLE INFORMATION

The Trust and each of the RELPS are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, file reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Trust and each of
the RELPS with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its Regional Offices at Suite 1400,
500 West Madison Street, Chicago, Illinois 60661 and Suite 1300, 7 World Trade
Center, New York, New York 10048. Copies of such material can be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the prescribed fees. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding the Trust and each of the RELPS and other
registrants that have been filed electronically with the Commission. The address
of such site is http://www.sec.gov. The Trust's reports, proxy statements and
other information may and can also be inspected and copied at the offices of the
NYSE, 20 Broad Street, New York, New York 10005.

This Joint Proxy Statement/Prospectus is part of a registration statement
on Form S-4 (together with all amendments and exhibits, the "Registration
Statement") filed by the Trust with the Commission under the Securities Act of
1933, as amended (the "Securities Act"). This Joint Proxy Statement/Prospectus
does not contain all the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules of the
Commission. For further information, reference is made to the Registration
Statement.

Supplements to this Joint Proxy Statement/Prospectus have been prepared for
each RELP to highlight the risks, effects and fairness of the Merger that are
particular to each respective RELP. The Limited Partners of each RELP will
receive, with this Joint Proxy Statement/Prospectus, the Supplement that
corresponds to such RELP. The Limited Partners of a particular RELP may also
receive copies of the supplements prepared for any or all of the RELPS and
copies of such supplements will be provided promptly, without charge, to each
Limited Partner or his representative who has been so designated in writing upon
written request to the particular RELP at 8000 Robert F. McDermott Fwy., IH 10
West, Suite 600, San Antonio, Texas 78230-3884.

All information contained in this Joint Proxy Statement/Prospectus with
respect to the Trust has been supplied by the Trust, and all information with
respect to each RELP has been supplied by such RELP.

No person has been authorized to give any information or to make any
representation other than as contained herein in connection with the offer
contained in this Joint Proxy Statement/Prospectus, and if given or made, such
information or representation must not be relied upon. This Joint Proxy
Statement/Prospectus does not constitute an offer to sell or a solicitation of
an offer to buy any securities other than the securities to which it relates,
nor does it constitute an offer to or solicitation of any person in any
jurisdiction to whom it would be unlawful to make such an offer or solicitation.
The delivery of this Joint Proxy Statement/Prospectus at any time does not imply
that the information herein is correct as of any time subsequent to the date
hereof.

v
<PAGE> 22

SUMMARY

The following summary is qualified in all respects by the information
appearing elsewhere in this Joint Proxy Statement/Prospectus, the Annexes hereto
and the documents referred to herein. All initial capitalized terms shall have
the meanings set forth in the Glossary beginning on page 184. On July 30, 1997,
the Trust Managers approved a one for five reverse Share split, which is subject
to shareholder approval on October 15, 1997. Except with respect to the
discussion under "The Merger -- Fairness Opinions" and in the fairness opinions
themselves, all references to the number of Shares, per Share amounts and the
market prices of the Shares have been restated to reflect the impact of the
reverse Share split.

PARTIES TO THE MERGER

The Trust. The Trust is a self-administered Texas REIT primarily engaged in
the acquisition, renovation, development and operation of industrial properties.
As of June 30, 1997, the Trust owned and operated 11 industrial properties
containing 1,206,212 net rentable square feet, located in Baltimore, Dallas,
Houston, Los Angeles and Milwaukee (the "Trust Industrial Properties"), and one
retail property containing 196,453 net rentable square feet (the "Trust Retail
Property") located in Denver (collectively, the "Trust Properties"). The Trust
Industrial Properties had an average occupancy rate of 93.8% and the Trust
Retail Property had an average occupancy rate of 83.8% for the second quarter
ended June 30, 1997. On August 29, 1997, the Trust purchased two light
industrial properties with a total of 137,265 net rentable square feet. On
October 3, 1997, the Trust, as general partner in a limited partnership,
purchased a portfolio of eight properties consisting of 20 light industrial and
warehouse/distribution buildings with 783,780 net rentable square feet. The new
properties are located in Dallas and suburban areas of Dallas.

The principal executive offices of the Trust are located at 6210 N.
Beltline Road, Suite 170, Irving, Texas 75063 and its phone number is (972)
756-6000. For more information concerning the Trust, see "Business of the
Trust."

The RELPS. The RELPS were initially organized to acquire income producing
real properties, primarily office buildings. Each RELP is a finite life entity
and, pursuant to the terms of any Agreements of Limited Partnership of the RELPS
(collectively, the "Partnership Agreements"), no additional properties may be
acquired by any RELP and upon the sale of any property, the net proceeds are to
be distributed to the partners.

The RELPS own, either directly or through a joint venture, interests in
properties containing in the aggregate 1,394,000 net rentable square feet.
Excluding any properties that will not be transferred in connection with the
Merger, on June 30, 1997, each of the RELPS held the following properties: (i)
RELP I held one office building in San Diego with an average occupancy rate of
100%, and one retail shopping center in Daytona Beach, Florida with an average
occupancy rate of 92%; (ii) RELP II held a manufacturing and distribution
facility located in Elk Grove Village, Illinois with an average occupancy rate
of 100%, and one industrial warehouse building in Lakeland, Florida with an
average occupancy rate of 100%; (iii) RELP III held one office building complex
in Manhattan Beach, California with an average occupancy rate of 74%, and one
office building complex in Phoenix, Arizona with an average occupancy rate of
80%; and (iv) RELP IV held one industrial building in Milpitas, California with
an average occupancy rate of 100%, one industrial building in San Diego,
California with an average occupancy rate of 81%, one office building in St.
Louis, Missouri with an average occupancy rate of 87%, and a joint venture
interest in the sole beneficiary of a trust which owns an office/research and
development facility in Chelmsford, Massachusetts with an average occupancy rate
of 100%.

The properties of RELP II are currently managed solely by its General
Partner. The remaining three RELPS' properties are managed by an Affiliate of
Realco.

The address of the principal executive offices of each of the RELPS and the
General Partners is 8000 Robert F. McDermott Fwy., IH 10 West, Suite 600, San
Antonio, Texas 78230-3884. For more information concerning the RELPS, see
"Business of the RELPS."
1
<PAGE> 23

SUMMARY OF RISK FACTORS

The Trust's shareholders and the Limited Partners should carefully consider
the risks discussed under "Risk Factors" prior to voting on the matters being
submitted to them in connection with the Merger. These risks include:

Risks Related to the Merger

- The Trust has generated losses from operations every year since 1988.

- Participating Limited Partners who become shareholders of the Trust may
not receive the same level of distributions as previously received from
the applicable RELP. Limited Partners may initially receive no
distributions because the Trust currently is not paying distributions.
The Trust has not made distributions for four consecutive quarters since
1993.

- The Exchange Ratio is fixed. As a result, the Limited Partners will not
receive more Shares if the trading price of the Shares decreases. If the
trading price increases, the Trust will not receive the benefit of
issuing fewer Shares to the Limited Partners.

- The size and diversity of the Trust's portfolio after the Merger is
dependent upon which RELPS approve the Merger. Therefore, at the time a
Limited Partner votes, he will not know the ultimate nature of the
portfolio or the business and operations of the Trust following the
Merger.

- The Merger will result in a change in the nature of each Limited
Partner's investment in a Participating RELP from holding an interest in
a specific portfolio of properties in a finite life entity to holding an
interest in an ongoing REIT, whose real estate portfolio may be changed
from time to time by the Trust's Board without the approval of the
shareholders and which does not plan to liquidate such assets within a
fixed period.

- The Net Asset Values assigned to each of the RELPS may not reflect the
true value of such RELP's assets because the Net Asset Values were the
result of negotiations between the common management of the Trust and the
General Partners of the RELPS. Had independent representation been
arranged for each RELP, the Net Asset Value assigned to each RELP may
have been different.

- The common management of the RELPS, who are also Affiliates of Realco,
negotiated the terms of the Merger on behalf of all the RELPS. Each RELP
was not separately represented by parties independent from Realco. Had
separate representation been arranged for a RELP, the terms of the Merger
might have been more favorable to such RELP. Further, issues unique to
the value of a particular RELP might have resulted in adjustments
increasing or decreasing the number of Shares allocable to such RELP.

- The General Partners, through wholly-owned subsidiaries, are owned and
controlled by Realco. Realco currently owns 13.74% of the Trust's
outstanding Shares and two of Realco's designees are Trust Managers. An
Affiliate of Realco will manage and lease the former RELP properties
after the Merger. All of these factors may have influenced a General
Partner's decision to recommend the Merger to its Limited Partners. After
the Merger, assuming conversion of the Trust's debt to Realco, Realco
will own approximately 17.39% of the Trust's outstanding Shares.

- Limited Partners who became shareholders will have fundamentally changed
the nature of their initial investment from an entity that is a
traditional pass-through entity for federal income tax purposes to an
investment in a REIT, which in general is not a pass-through entity for
federal income tax purposes with the exception of certain undistributed
long-term capital gains. See "The Merger -- Material Federal Income Tax
Consequences."

- The General Partners are prohibited by the Merger Agreement from
initiating, soliciting or encouraging competing proposals with the
Merger. This may result in discouraging third parties from making such a
competing proposal.

- Taxable income or loss will be recognized by each taxable Limited Partner
participating in the Merger in an amount equal to the Limited Partner's
allocable share of the income or loss recognized by his respective RELP
from the transfer of the RELPS' assets to the Trust through the Merger
and Limited
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<PAGE> 24

Partners will receive no cash from the Merger (other than cash received
in lieu of fractional Shares) to pay taxes arising from any taxable
income (see "The Merger -- Material Federal Income Tax Consequences").

- The Trust will have potential liability for unknown, undisclosed or
contingent liabilities of the Participating RELPS, including claims
against the Trust for indemnification, environmental liabilities, and
title defects, could adversely affect the cash liquidity of the Trust and
its future ability to make distributions to shareholders.

- Neither management of the Trust nor the General Partners can predict
whether the Shares will trade at a price lower than the Exchange Price or
lower than the value of the Trust's assets after the Merger. The Shares
may trade at prices substantially below trading prices on the date of
execution of the Merger Agreement, the date hereof or the date of the
Special Meetings. Consequently, a Limited Partner in a Participating RELP
desiring to liquidate his investment after the Merger may receive a price
per Share that is lower than the Exchange Price.

- Shareholders of the Trust will be diluted if there is an issuance of
additional equity securities at what may be less than their fair market
value.

- Any declaration of distributions to shareholders is subordinate to the
payment of the Trust's debts and obligations, which could adversely
affect the ability of the Trust to make distributions to shareholders in
the future.

- Expenses of the Merger will be borne by the Trust exclusively, unless (i)
three or more of the RELPS do not approve the Merger, in which event
Realco will reimburse the Trust for up to $250,000 of the Trust's
expenses, or (ii) the Merger Agreement is terminated under certain
circumstances.

- The majority vote of the Limited Partners binds each RELP; if the Merger
is approved, Limited Partners who voted against the Merger will have
their Units converted into Shares based on the Exchange Price unless they
properly exercise their dissenters' rights.

- Approval of the Merger will require the Limited Partners to forego
certain alternatives to the Merger, such as liquidating the RELPS or
continuing to operate the RELPS as limited partnerships.

- The Trust has different business objectives than the RELPS, including the
intent to acquire new properties and, from time to time, to dispose of
existing properties and reinvest the proceeds therefrom, to the extent a
distribution is not required to maintain REIT status.

- Increases in market interest rates may adversely affect the price of the
Shares.

- Approval of the Merger by the Limited Partners will result in the loss of
their respective rights under the applicable Partnership Agreement and
the partnership law of the applicable jurisdiction of organization of
each RELP.

- If the Merger Agreement is terminated prior to consummation, under
certain circumstances, each RELP and the Trust may have to pay their
Proportionate Share of a termination fee or of the expenses of the
Merger.

- The Trust's organizational documents do not restrict the Trust's ability
to incur additional indebtedness. As a result, the Trust could increase
its debt service requirements to a level that may adversely affect the
Trust's ability to make future distributions and may increase the risk of
default.

- The investment and financing policies of the Trust are determined by the
Trust Managers and may be amended or revised at any time without a vote
of the shareholders of the Trust.
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<PAGE> 25

- Claims may be brought against the Trust for the remediation of
environmental conditions, which could result in substantial expenditures
for remediation and in a loss of revenues during remediation efforts.

- There are risks associated with the acquisition and development of
commercial and industrial properties, including lease-up and financing
risks and the risk that such properties may not perform as expected. If
such risks materialize, the ability of the Trust to make future
distributions could be adversely impacted.

- There are risks associated with increased portfolio size and geographic
diversification as a result of the Merger, including the adequacy of the
number of personnel and the available resources to manage the new
portfolio.

- The Trust may experience occurrences of uninsured liability or casualty,
reducing the Trust's capital and adversely affecting anticipated profits.

- The Trust may incur the expense of compliance with the Americans With
Disabilities Act, fire and safety, and other regulatory requirements
applicable to the operation of the Trust's properties.

- The Trust will be taxed as a corporation if it fails to qualify as a REIT
and the Trust will be liable for increased federal, state and local
income taxes in such event.

- Certain provisions in the Trust's governing documents, including the
right to redeem Shares from a shareholder if he owns, directly or
indirectly, more than 9.8% of the Trust's outstanding Shares or to
restrict voting and distribution rights with respect to Shares owned in
excess of such limit, and the Trust Managers' right to issue other
classes of equity securities could delay or prevent changes in control of
the Trust, even if such changes in control were in the shareholders' best
interest.

General Real Estate Investment Risks

- There are risks normally incidental to the ownership and operation of
industrial and commercial properties, including, among others, changes in
general national economic or local market conditions, competition for
tenants, changes in market rental rates, inability to collect rents from
tenants due to bankruptcy or insolvency of tenants or otherwise, and the
need to periodically make capital improvements.

- There are risks associated with leveraged real estate investments, such
as the Trust's inability to meet required principal and interest
payments, the risk that existing indebtedness will not be refinanced or
that the terms of such refinancing will not be favorable, and the risk
that necessary capital expenditures will not be able to be financed on
favorable terms or at all.

- The illiquidity of real estate investments will limit the Trust's ability
to vary its portfolio in response to changes in economic or other
conditions.

- Competition from competing properties could decrease the occupancy levels
and rental rates of the Trust's investments.

- The Trust's assets are subject to general operating risks common to all
real estate developments, including increases in operating costs not
offset by rental increases. In addition, the Trust's assets are primarily
industrial or commercial properties, making the Trust's profitability
dependent upon general trends affecting that type of real estate
investment.

THE SPECIAL MEETINGS

Trust Special Meeting. The Trust Special Meeting will be held on
, 199 at 9:00 a.m., Dallas time at 2200 Ross Avenue, 40th Floor, Dallas,
Texas 75201. The purpose of the Trust Special Meeting is to consider and vote
upon the proposal to approve the Merger Agreement and the issuance of Shares
pursuant thereto. Shareholders may vote at the Trust Special Meeting by
attending the meeting and voting in person, by completing the enclosed proxy and
returning it in the enclosed envelope, or by faxing the enclosed proxy to (214)
999-9323 or (214) 999-9345. Faxed proxies will be accepted until 5:00 p.m.,
Dallas time, on , 199 . See "The Special Meetings."

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<PAGE> 26

RELP Special Meeting. The RELP Special Meeting will be held on
, 199 at 9:00 a.m., time at . The purpose of the RELP
Special Meeting is to vote upon a proposal to approve the Merger Agreement and
to amend the Partnership Agreements as necessary to allow the consummation of
the Merger. Limited Partners in RELP II will also be voting on a proposal to
allow the sale of RELP II's interest in the joint venture which owns Sequoia I
Plaza Building to Realco or its Affiliate. Limited Partners in RELP III will
also be voting on a proposal to sell Curlew Crossing Shopping Center to Realco
or its Affiliate. These sales are collectively referred to herein as the
"Related Transactions." Limited Partners may vote at the RELP Special Meeting by
attending the meeting and voting in person, by completing the enclosed proxy and
returning it in the enclosed envelope, or by faxing the enclosed proxy to (210)
498-6214. Faxed proxies will be accepted until 5:00 p.m. time, Dallas time, on
, 199 . See "The Special Meetings."

RECORD DATE; VOTES REQUIRED; INVESTOR LISTS

The Trust. Only holders of Shares of record at the close of business on
(the "Record Date") will be entitled to notice of and to vote at
the Trust Special Meeting. The Merger Agreement and the issuance of Shares
thereunder will be approved if the proposal receives the affirmative vote of
two-thirds of the outstanding Shares entitled to vote at the Trust Special
Meeting. The holders of a majority of the Shares entitled to vote, present in
person or proxy, will constitute a quorum for purposes of the Trust Special
Meeting. As of the Record Date, there were Shares outstanding and
entitled to vote. The members of the Trust's Board of Trust Managers (the "Trust
Managers" or the "Trust Board") and executive officers of the Trust and their
Affiliates beneficially owned, as of the Record Date, Shares, which is
approximately % of the outstanding Shares. As of the Record Date, Realco
held of record Shares (approximately % of the outstanding
Shares). Management of the Trust, Realco, MSAM, LaSalle Advisors and ABKB,
representing approximately % of the Trusts' outstanding Shares, have agreed
to vote their Shares in favor of the proposal.

Abstentions and broker non-votes (where a nominee holding Shares for a
beneficial owner has not received voting instructions from the beneficial owner
with respect to a particular matter and does not possess or choose to exercise
the discretionary authority with respect thereto) will be included in the
determination of the number of Shares present at the Trust Special Meeting for
quorum purposes. Abstentions and broker non-votes will have the same effect as a
vote against the proposal. Failure to return the Proxy or failure to vote at the
Trust Special Meeting will have the same effect as a vote against the proposal.

RELPS. Only Limited Partners of record at the close of business on the
Record Date will be entitled to notice of and to vote at the RELP Special
Meeting. The respective Merger Agreement and amendment of the Partnership
Agreement will be approved if the proposal receives, for a RELP, the affirmative
vote of (i) the holders of a majority of the outstanding Units and (ii) the
General Partner. The sale of RELP II's interest in the joint venture which owns
Sequoia I Plaza Building will be approved if the proposal receives the
affirmative vote of (a) the holders of a majority of the outstanding Units of
RELP II and (b) the General Partner of RELP II. The sale of Curlew Crossing by
RELP III will be approved if the proposal receives the affirmative vote of (1)
the holders of a majority of the outstanding Units of RELP III and (2) the
General Partner of RELP III. The General Partner of each RELP has approved the
applicable proposals. As of the Record Date, RELP I had 54,610 Units issued and
outstanding, of which 6,039 Units (11.06% of the outstanding Units) were held by
its General Partner and its Affiliates; RELP II had 27,141 Units issued and
outstanding of which 6,691 Units (24.65% of the outstanding Units) were held by
its General Partner and its Affiliates; RELP III had 111,549 Units issued and
outstanding, of which 6,469 Units (5.80% of the outstanding Units) were held by
its General Partner and its Affiliates; and RELP IV had 60,495 Units issued and
outstanding, of which 6,140 Units (10.15% of the outstanding Units) were held by
its General Partner and its Affiliates. The Partnership Agreements of RELP II,
RELP III and RELP IV each provide that in the event that the General Partner
(and its Affiliates) of such RELP owns any Units, such General Partner is not
entitled to vote as a Limited Partner with respect to any such Units. In
accordance with this prohibition, Units held by the General Partner and its
Affiliates of each of RELP II, RELP III and RELP IV will not be entitled to vote
at the RELP Special Meeting. The Partnership Agreement of RELP I does not
contain such a prohibition.
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<PAGE> 27

Consequently, the Units in RELP I held by the RELP I General Partner and its
Affiliates are entitled to vote at the RELP Special Meeting and the holders of
such Units will vote their 6,039 Units (11.06% of the outstanding Units in RELP
I) in favor of the Merger Agreement and the amendment of the Partnership
Agreement. Under federal and state law, and under the RELP Partnership
Agreements, under certain circumstances, Limited Partners may obtain a RELP's
list of investors. See "The Special Meetings -- The RELP Special Meeting."

Abstentions and broker non-votes (where a nominee holding Units for a
beneficial owner has not received voting instructions from the beneficial owner
with respect to a particular matter and does not possess or choose to exercise
the discretionary authority with respect thereto) will be included in the
determination of the number of Units present at the RELP Special Meeting for
quorum purposes. Abstentions and broker non-votes will have the same effect as a
vote against the applicable proposals. Failure to return the Proxy or failure to
vote at the RELP Special Meeting will have the same effect as a vote against the
applicable proposals.

THE MERGER

Pursuant to the Merger Agreement, the Trust will issue an aggregate of up
to 4,412,829 Shares to the Limited Partners in the RELPS as consideration for
the assets of the RELPS that will be transferred to the Trust in connection with
the Merger. Based upon the value of each RELP's real estate assets, as adjusted
for the RELP's known liabilities ("Net Asset Value"), the Shares were allocated
to the Limited Partners in each RELP as follows: (i) the Limited Partners in
RELP I will receive an aggregate of 868,571 Shares (valued at $11,400,000 based
upon the Exchange Price, $ based upon the Closing Price); (ii) the
Limited Partners in RELP II will receive an aggregate of 777,143 Shares (valued
at $10,200,000 based upon the Exchange Price, $ based upon the Closing
Price); (iii) the Limited Partners in RELP III will receive an aggregate of
1,851,429 Shares (valued at $24,300,000 based upon the Exchange Price,
$ based upon the Closing Price); and (iv) the Limited Partners in RELP
IV will receive an aggregate of 915,686 Shares (valued at $12,018,000 based upon
the Exchange Price, $ based upon the Closing Price). Net Asset Values
were initially determined for each RELP by its General Partner utilizing several
factors, including the current and projected net operating income and cash flow,
capitalization rate, market rental rates, lease expirations, and anticipated
capital expenditures for leasing and tenant improvements for each RELP property.
The Net Asset Values were then finally determined for each RELP through
negotiations between the common management of each of the RELPS and the Trust.
The Shares received by the Limited Partners will be listed for trading on the
NYSE. If the requisite number of Limited Partners of only one of the RELPS
approves the Merger, the Trust has the right, but not the obligation, to
consummate the Merger with the one Participating RELP. Upon the effective date
of the Merger, the Participating RELPS will cease to exist.

The General Partners are proposing amendments to the Partnership Agreements
to permit the closing of the transactions contemplated by the Merger Agreement.
Limited Partners voting in favor of the Merger will be deemed to have voted in
favor of each of these proposed amendments. Since the vote of the Limited
Partners holding a majority of the Units of a RELP is required to approve the
proposed amendments, a majority vote is required to approve the Merger. The
proposed amendments authorize the following: (i) the Merger of each RELP with
and into the Trust, whether or not the Trust would be regarded as an Affiliate
of the General Partner; and (ii) such other actions as may be necessary under or
contemplated by the Merger Agreement or this Joint Proxy Statement/Prospectus,
irrespective of any provision in the Partnership Agreement which might otherwise
prohibit such actions. See "The Merger -- Proposed Amendments to Partnership
Agreements."

Each of the General Partners of the RELPS has agreed to waive any right to
receive Shares it might have otherwise be entitled to receive in exchange for
its general partner interest in the RELPS.

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<PAGE> 28

DISSENTERS' RIGHTS

Any Limited Partner may abstain from or vote against the Merger. Abstaining
from voting has the same effect as a vote against the Merger. See "The Special
Meetings -- RELP Special Meeting." If the Merger is approved, a Limited Partner
who abstains or votes against the Merger can still participate in the Merger so
long as the Limited Partner does not exercise the right voluntarily granted by
the Trust to dissent with respect to the Merger ("Dissenters' Rights") and,
subject to certain conditions, receive payment in Shares equal to the "fair
value" of his Units (the "Dissenting Units"). Any Limited Partner who wishes to
exercise his or her Dissenters' Rights or to preserve his or her rights to do so
should review the discussion set forth below under "Dissenters' Rights"
carefully, because failure to timely and properly comply with the procedures
specified will result in the loss of such Dissenters' Rights.

CONFLICTS OF INTEREST

A number of conflicts of interest are inherent in the relationships among
the RELPS, the General Partners, Realco, the Trust and its Trust Managers.
Certain of these conflicts of interest (to the extent not discussed above) are
summarized below:

- United Services Automobile Association ("USAA"), through indirect
wholly-owned subsidiaries, ultimately owns and therefore controls Realco
and each of the General Partners, and each of the officers and directors
of the General Partners are also officers or directors of Realco. Realco,
a wholly-owned indirect subsidiary of USAA, is also one of the largest
shareholders of the Trust, owning, on September 15, 1997, 640,441 Shares
or approximately 13.74% of the issued and outstanding Shares. Realco has
the right, pursuant to a certain Share Purchase Agreement, dated December
13, 1996 (the "Realco Share Purchase Agreement"), to appoint two members
to the Trust Board until December 19, 1999. See "The Merger -- Management
and Operations After the Merger." Realco has the right to acquire
additional Shares upon the conversion of certain indebtedness of the
Trust to Realco. See "Security Ownership of Certain Beneficial Owners and
Management." After the Merger, assuming conversion of the debt, Realco
will own approximately 17.39% of the Trust's outstanding Shares. The
relationships among USAA, Realco, the General Partners and the Trust
involve an inherent conflict of interest in their structuring the terms
and conditions of the Merger.

- Since each of the General Partners is ultimately owned and controlled by
USAA, and thus are affiliated with each other, each General Partner is
not in a position to independently view the Merger proposal solely from
the perspective of a single RELP, and may have advocated certain
positions in connection with the negotiation of the Merger Agreement, the
effect of which could have benefitted one of the RELPS at the expense of
other RELPS.
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<PAGE> 29

Organizational Diagram

Set forth below is a diagram showing the relationships between the parties
to the Merger.

CHART HERE
- ---------------

(1) As of September 15, 1997, Realco had the right to acquire an additional
544,962 Shares upon the conversion of certain indebtedness of the Trust to
Realco, if such conversion occurs on or prior to December 31, 1997. Upon
consummation of the Merger and conversion of the indebtedness, Realco will
own 17.39% of the Trust's outstanding Shares. See "Certain Relationships and
Related Transactions."

(2) Represents the percentage ownership of Units in the RELP by the General
Partner and its Affiliates.

REASONS FOR THE MERGER AND RECOMMENDATIONS

The Trust. The Trust Managers other than the designees of Realco to the
Trust Board (the "Disinterested Trust Managers") believe that the terms of the
Merger Agreement are fair from a financial point of view to the shareholders of
the Trust and in the best interests of the Trust and its shareholders.
Accordingly, the Disinterested Trust Managers have unanimously approved the
Merger Agreement and the issuance of Shares thereunder, and recommend the
shareholders vote for approval of the Merger Agreement and the issuance of
Shares thereunder. The following are the principal reasons why and how the
Disinterested Trust Managers made such determinations (to which relative weights
were not assigned): (i) the Merger should improve the
8
<PAGE> 30

Trust's operating performance and profit margins; (ii) a greater number of
Shares in the market should increase liquidity for shareholders; (iii) a larger
market capitalization should make the Trust more attractive to investors; (iv)
the transfer of the RELPS' properties to the Trust should provide entry into new
markets and favorable positions for future portfolio acquisitions; (v)
geographic diversification will result from the Merger, which management
believes is preferred by investors; (vi) geographic diversification reduces the
vulnerability to recessions in any particular region; (vii) the written fairness
opinion of Prudential Securities Incorporated ("Prudential Securities"); and
(viii) certain representations from, and discussions with, executive officers of
the Trust and outside advisors supported the Merger.

The Disinterested Trust Managers also considered the following potential
adverse consequences of the Merger: (i) because the Exchange Ratio is fixed, an
increase in the value of the Shares would increase the value of the
consideration to be received by the Limited Partners in the Merger; (ii)
expansion into new regions and new markets with which the Trust has little prior
experience; (iii) the significant cost involved in connection with consummating
the Merger; (iv) the substantial time and effort of the Trust's management
required to effectuate the Merger, integrate the business of the RELPS into the
Trust, and manage the increased and more diversified property portfolio; and (v)
the risk that the anticipated benefits of the Merger might not be fully
realized. The Trust Managers believe that the benefits and advantages of the
Merger far outweigh the negative factors and risks. See "The Merger -- The
Trust's Reasons for the Merger and Recommendation."

The Merger Agreement provides that if only one of the RELPS approves the
Merger, the Trust has the right but not the obligation to consummate the Merger
with the RELPs approving the Merger. If more than one RELP approves the Merger,
the Trust must consummate the Merger with such RELP if all of the other
conditions to the Merger have been satisfied.

If the Merger is not consummated for any reason, the Trust will continue to
execute its strategic objective of acquiring light industrial properties. The
Trust will also continue to consider possible acquisitions of compatible
properties in bulk industrial, office and other commercial sectors. See
"Policies With Respect to Certain Activities -- Investments in Real Estate or
Interests in Real Estate."

RELPS. The Board of Directors of each of the General Partners and Realco
believe that the terms of the Merger Agreement, including the consideration to
be received by the Limited Partners in the Merger, are fair to and in the best
interests of the respective Limited Partners. Accordingly, each Board has
unanimously approved the Merger Agreement and recommends that the respective
Limited Partners vote for approval of the Merger Agreement and amendment of the
Partnership Agreement and for approval of the applicable Related Transaction.
The following are the principal reasons why and how the Boards made such
determinations (to which relative weights were not assigned): (i) the fairness
opinion of Houlihan Lokey Howard & Zukin ("Houlihan"), an independent third
party, that the consideration to be received by the Limited Partners is fair
from a financial point of view; (ii) the determination that a business strategy
of seeking a strategic combination with a publicly traded REIT to take advantage
of the growth in the REIT industry and real estate markets in general was
preferable to the alternatives of complete liquidation of the RELPS,
continuation of the RELPS or reorganization of the RELPS into one REIT or four
separate REITS; (iii) simplified tax administration for Limited Partners through
the elimination of Schedule K-1 reporting; (iv) the economic terms of the
Merger, including the favorable Exchange Ratio and the 48.63% equity interest in
the Trust (45.87% if Realco converts the Trust's indebtedness prior to December
31, 1997) to be received by the Limited Partners; (v) the determination that the
Net Asset Values represent fair estimates of the value of the RELPS' assets and
provide a reasonable basis for allocating Merger consideration among
Participating RELPS; (vi) the others terms and conditions of each Merger
Agreement, including the ability of the General Partner to, under certain
circumstances, respond to and engage in discussions and negotiations with
persons making unsolicited proposals or inquiries and may approve or recommend
such a transaction; (vii) benefits of owning Shares in a NYSE-traded REIT with
substantial ownership by institutional investors; (viii) organization as a
single entity to pursue business opportunities; (ix) the RELPS are not
authorized to raise additional capital and are therefore unable to take
advantage of attractive investment opportunities in contrast to the Trust, which
has access to equity and debt capital to pursue real estate acquisition
opportunities; (x) larger and more diverse investment portfolio; (xi) prior to
consummation of the Merger, distributions of $ per Unit
for RELP I, $ per Unit for
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<PAGE> 31

RELP II, $ per Unit for RELP III and
$ per Unit for RELP IV are expected to be made to the
partners of the respective RELPS; and (xii) the General Partners have waived
their rights to receive Shares in exchange for their general partnership
interest.

The General Partners also considered the following potential adverse
consequences of the Merger: (i) because the Exchange Ratio is fixed, a decline
in the value of the Trust's Shares would reduce the value of the consideration
to be received by the Limited Partners in the Merger; (ii) the Trust has not
made distributions for four consecutive quarters on its Shares since 1993; (iii)
the various conditions to the Trust's obligation to consummate the Merger; (iv)
the risk that the anticipated benefits of the Merger may not be realized; (v)
the fact that under the terms of the Merger Agreements, the General Partners and
their directors, officers, employees, agents and representatives are prohibited
from initiating, soliciting or encouraging any inquires or the making of any
proposal that constitutes, or that may reasonably be expected to lead to, a
transaction which would compete with the Merger, except if the General Partner
determines in good faith after consultation with outside legal counsel that it
is required by its fiduciary obligations to do so; (vi) the leverage of the
combined entity would be greater than any RELP's existing leverage; and (vii)
the taxable nature of the Merger and the fact that the Limited Partners will not
receive cash from the Merger (other than cash in lieu of fractional Shares) to
pay any taxes due on any taxable gain. In the view of the General Partners, the
potentially negative factors considered by them were not sufficient, either
individually or collectively, to outweigh the possible benefits considered by
the General Partners in their respective deliberations relating to the Merger.

If the Merger is not consummated for any reason, the RELPS will continue to
pursue their business objectives of maximizing the value of their properties and
liquidating such properties prior to the expiration of their respective finite
lives. In addition, the RELPS may seek another strategic combination or pursue
other attractive alternatives which may become available.

FAIRNESS OPINIONS

The Trust. The Trust Board received the written opinion of Prudential
Securities to the effect that, as of the date of such opinion, based on
Prudential Securities' review and subject to certain limitations stated in the
opinion, the consideration to be paid by the Trust pursuant to the Merger was
fair to the Trust from a financial point of view.

Prudential Securities was retained to render the fairness opinion based
upon its prominence as an internationally recognized investment banking and
financial advisory firm with experience in the valuation of businesses and their
securities in connection with mergers and acquisitions and for other purposes,
and has substantial experience with respect to REITs and other real estate
companies and in transactions similar to the Merger, and because of Prudential
Securities' familiarity with the Trust and its operations.

The Trust has agreed to pay Prudential Securities a fee of $250,000, which
is payable regardless of whether the Merger is consummated, and to indemnify
Prudential Securities against certain liabilities, including liabilities under
federal securities laws. For additional information concerning Prudential
Securities and its opinion, see "The Merger -- Fairness Opinions" and Prudential
Securities' opinion dated as of July 10, 1997, attached hereto as Annex II-A.
The opinion of Prudential Securities should be read in its entirety with respect
to the assumptions made, matters considered and limits of the reviews undertaken
by Prudential Securities in rendering its opinion.

RELPS. The Boards of Directors of the General Partners of the RELPS
received the written opinion of Houlihan at their joint meeting held on June 30,
1997, to the effect that, as of the date of such opinion, the consideration to
be received by the Limited Partners in connection with the Merger and the
applicable Related Transaction was fair to the Limited Partners of each RELP
from a financial point of view. The General Partners retained Houlihan because
of Houlihan's experience in the valuation of businesses and their securities in
connection with mergers and acquisitions, and valuations for corporate purposes
especially with respect to REITs and other real estate companies. The RELPS have
collectively agreed to pay Houlihan $125,000 and to reimburse Houlihan for
certain of its out-of-pocket expenses, regardless of whether the Merger is
consummated and to indemnify Houlihan against certain liabilities, including
liabilities under the
10
<PAGE> 32

federal securities laws. For additional information concerning Houlihan and its
opinions, see the "The Merger -- Fairness Opinions" and Houlihan's opinions,
dated as of June 30, 1997, attached hereto as Annex II-B.

MATERIAL FEDERAL INCOME TAX CONSEQUENCES

The Merger involves numerous federal income tax consequences to the Limited
Partners and the shareholders of the Trust. For a complete discussion describing
these consequences, see "The Merger -- Material Federal Income Tax
Consequences." The material federal income tax consequences of the Merger
include the following:

- The taxable Limited Partners will realize taxable gain or loss in the
Merger (which may be ordinary or capital in nature) and the Limited
Partners will not receive cash from the Merger (other than cash received
in lieu of fractional Shares) to pay any taxes due on any taxable gain.
Any gain or loss will be recognized in the year the Merger is
consummated.

- The amount of gain or loss recognized by a Limited Partner will be based
upon the deemed sale of assets owned by the respective RELP and, as
applicable, the extent to which the fair market value of the Shares
distributed to the Limited Partner exceeds the Limited Partner's adjusted
basis in its Units.

- As a REIT, the Trust will be entitled to a tax deduction for
distributions made to its shareholders. To continue to qualify as a REIT,
however, the Trust must satisfy income, asset and ownership tests imposed
by the Code. Failure to so qualify will result in the loss of such
deduction for distributions paid as well as additional tax on Trust
income and reduced or no distributions to shareholders.

- Trust distributions received by taxable shareholders should be treated as
portfolio income. Such distributions should not be treated as UBTI to
certain tax-exempt shareholders (subject to certain exceptions which may
be applicable to pension-trusts).

Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. has delivered and will deliver
on the closing date of the Merger an opinion which is summarized as follows:
(1) the Trust met the requirements for qualification and taxation as a REIT
under the Code for its taxable year ended December 31, 1985, and has met the
requirements for qualification and taxation as a REIT for its taxable years 1986
through 1996; (2) the Trust's diversity of equity ownership, operations through
the date of closing of the Merger and proposed method of operation for future
periods should allow it to qualify as a REIT for its taxable year ending
December 31, 1997; (3) the discussion contained under the caption "Material
Federal Income Tax Consequences" accurately reflects existing law and fairly
addresses the material federal income tax issues described therein; and (4) the
consummation of the Merger will not result in the Trust's failure to continue to
satisfy the requirements for qualification as a REIT for federal income tax
purposes.

SUMMARY COMPARISON OF OWNERSHIP OF UNITS AND SHARES

Limited Partnerships and REITs are each vehicles generally recognized as
appropriate for the holding of real estate investments and afford passive
investors, such as Limited Partners and shareholders, certain benefits,
including limited liability, a professionally managed portfolio and the
avoidance of double-level taxation on distributed income. The RELPS are under
the control of their General Partners, while the Trust is governed by its Trust
Managers. The information below highlights the material differences between the
RELPS and the Trust. This discussion is qualified in its entirety by the more
detailed discussion contained under "Comparison of Ownership of Units and
Shares."
11
<PAGE> 33

- --------------------------------------------------------------------------------
RELP TRUST
- --------------------------------------------------------------------------------

LENGTH OF INVESTMENT

Limited Partners in each of the RELPS expect liquidation of their investment
when the assets of the RELP are liquidated. Because there is no public market
for the Units, Limited Partners have limited opportunities to liquidate their
investment other than through liquidation of the applicable RELP.

The Trust does not dispose of its investments within any prescribed period and,
in any event, plans to retain the net sale proceeds for future investments
unless distribution of such proceeds is required to maintain REIT status.
Shareholders are expected to achieve liquidity for their investments by trading
the Shares on the NYSE, and not through the liquidation of the Trust's assets.
The Shares may trade at a discount from, or a premium to, their pro rata
interest in the liquidation value of the Trust's properties.

PROPERTIES AND DIVERSIFICATION

The investment portfolio for each RELP is limited to the assets acquired with
the RELP's initial equity and limited debt financing.

The Trust currently has an investment portfolio that is larger than the
portfolio of any of the RELPS. An investment in the Trust is subject to the
risks normally attendant to ongoing real estate ownership and, if the Trust
develops property, to the risks related to property development.

ADDITIONAL EQUITY

None of the RELPS is authorized to issue additional equity securities other than
the Units.

The Trust has substantial flexibility to raise debt and equity capital to
finance its business and affairs. The Trust, through the issuance of new equity
securities, may substantially expand its asset base to make new real estate
investments. An investment in the Trust should not be viewed as an investment in
a specified pool of assets, but instead as an investment in an ongoing real
estate investment business, subject to the risks associated with a real estate
portfolio that is expected to change from time to time. The issuance of
additional equity securities by the Trust will dilute the interests of
shareholders if sold at prices below their fair market value.

BORROWING POLICIES

Subject to varying restrictions, each RELP was authorized to borrow funds for
the acquisition and development of its original real estate portfolio.

In conducting its business, the Trust may borrow funds to the extent it believes
appropriate. It is expected that the Trust will be more leveraged than any of
the RELPS, which have not incurred significant borrowings in comparison to the
overall value of their assets. Borrowing funds may allow the Trust to expand its
asset base, but will likewise increase the Trust's risks due to leverage.

12
<PAGE> 34

- --------------------------------------------------------------------------------
RELP TRUST
- --------------------------------------------------------------------------------

RESTRICTIONS UPON RELATED PARTY TRANSACTIONS

Except to the extent otherwise expressly provided in the Partnership Agreements,
the RELPS are not authorized to enter into transactions with the General
Partners and their Affiliates, unless such transactions are disclosed to and
approved by a vote of the Limited Partners.

Neither the Declaration of Trust nor the Bylaws of the Trust contains similar
restrictions upon the Trust's right to enter into transactions with interested
parties, such as Trust Managers, officers, significant shareholders and
Affiliates thereof, but such transactions must be approved by a majority of the
Trust Managers not interested in the proposed transaction. Since neither the
Declaration of Trust nor the Bylaws requires the approval of shareholders for
entering into transactions with interested parties, it may be easier for the
Trust to enter into interested party transactions than it would be for the RELPS
where Limited Partner approval for such transactions is required.

MANAGEMENT LIABILITY AND INDEMNIFICATION

The General Partners of each of the RELPS have limited liability to the RELPS
for acts or omissions undertaken by them when performed in good faith, in a
manner reasonably believed to be within the scope of their authority and in the
best interests of the RELPS. The General Partners also have, under specified
circumstances, a right to be reimbursed for liability, loss, damage, costs and
expenses incurred by them by virtue of serving as General Partners.

The Trust Managers and officers of the Trust have limited liability to the Trust
when acting on behalf of the Trust in good faith, and in a manner reasonably
believed to be in or not opposed to the best interest of the Trust. Such
persons, subject to some limitations, may also seek indemnification from the
Trust. Through the Merger, the Trust will be assuming all of the existing and
contingent liabilities of Participating RELPS, including their obligation to
indemnify the General Partners and other persons.

EFFECTIVE TIME OF THE MERGER

As soon as practicable after satisfaction of all conditions to consummation
of the Merger (see "The Merger -- Conditions to Consummation of the Merger"),
the parties will file articles of merger with the Clerk of Dallas County and
articles of merger with the respective secretaries of state of the state of
organization of the respective RELPS. For state law purposes, the Merger will
become effective upon the later of the filing of articles of merger described
above, or at such later time which the Trust and the General Partners shall have
agreed upon and designated in such filings in accordance with applicable law
(the "Effective Time"). For all other purposes, the Merger will be effective as
of , 199 . The Trust and the RELPS each has the right, acting
unilaterally so long as it has not willfully and materially breached the Merger
Agreement, to terminate the Merger Agreement should the Merger not be
consummated by the close of business on March 31, 1998. See "The
Merger -- Extension, Waiver and Amendment; Termination."

MANAGEMENT, OPERATIONS AND HEADQUARTERS AFTER THE MERGER

Following the Merger, the Trust Managers prior to the Merger will continue
to serve as Trust Managers of the Trust. The executive officers of the Trust
prior to the Merger will continue to serve as the executive officers of the
Trust after the Merger.

13
<PAGE> 35

Upon consummation of the Merger, an Affiliate of Realco will manage and
lease the properties formerly owned by the RELPS. The Management Agreement
between the Trust and such party (the "Management Agreement") is terminable at
will by either party upon 30 days prior notice.

Following the Merger, the headquarters of the Trust will continue to be
located in Irving, Texas at the current headquarters of the Trust.

CONDITIONS TO CONSUMMATION OF THE MERGER

Consummation of the Merger is also subject to the satisfaction or waiver of
certain other conditions, including, among others: (i) the representations and
warranties in the Merger Agreement of each of the parties shall be true and
correct as of the closing date; (ii) each party shall have performed its
obligations contained in the Merger Agreement; (iii) from and after the date of
the Merger Agreement there shall not have occurred any change in the financial
condition, business or operations of either party that would have or would be
reasonably likely to have a material adverse effect on the business, results of
operations or financial condition of such party; (iv) each party shall have
received an opinion of counsel; and (v) each party shall have obtained all
consents and waivers from third parties necessary to consummate the Merger.

If any material conditions to the Merger are waived by the parties, the
parties shall resolicit proxies from the waiving party's shareholders or Limited
Partners, as applicable.

If three of the four RELPS do not approve the Merger, the Trust has the
right, but not the obligation, to consummate the Merger with the one
Participating RELP. See "The Merger -- Conditions to Consummation of the
Merger."

ANTICIPATED ACCOUNTING TREATMENT

The Merger will be accounted for using the purchase method in accordance
with Accounting Principles Board Opinion No. 16. See "The Merger -- Anticipated
Accounting Treatment."

CONDUCT OF BUSINESS PENDING THE MERGER

Each of the Trust and the RELPS has agreed in the Merger Agreement to
operate its business in the ordinary course and to refrain from taking certain
actions relating to the operation of its business pending consummation of the
Merger without the prior approval of the other party, except as otherwise
permitted by the Merger Agreement. See "The Merger -- Conduct of Business
Pending the Merger."

RESALES OF SHARES

Shares received in the Merger will be freely transferable by the holders
thereof except for those Shares held by holders who may be deemed to be
"Affiliates" of the RELPS (generally including Limited Partners holding more
than 10% of the Units in a RELP) under applicable federal securities laws. The
General Partners have agreed to use their best efforts to cause each of their
officers and directors and Realco to execute "lock-up" agreements for a period
of 90 days following the consummation of the Merger. The Trust has agreed to use
its best efforts to cause each of its Trust Managers and officers to likewise
sign 90-day lock-up agreements.
14
<PAGE> 36

TERMINATION

The Merger Agreement provides that it may be terminated at any time prior
to the Effective Time, whether before or after the approval of the Merger
Agreement by the shareholders of the Trust and the Limited Partners, under
certain circumstances. The Merger Agreement provides for the payment by the
RELPS or AIP of a termination fee up to $2,000,000 (allocated among the RELPS
based upon the relative net book values of the RELPS as of March 31, 1997
("Proportionate Share")) if the Merger is terminated by such party under certain
circumstances, or reimbursement of expenses of up to $1,000,000 (allocated among
the RELPS based upon its Proportionate Share) if the Merger is terminated by
such party under certain circumstances. See "The Merger -- Extension, Waiver and
Amendment; Termination."
15
<PAGE> 37

SUMMARY HISTORICAL FINANCIAL INFORMATION OF THE TRUST
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following table sets forth summary historical financial information for
the Trust. The summary historical financial information as of December 31, 1996
and 1995 and for the three years ended December 31, 1996 are based on the
audited financial statements of the Trust included elsewhere in this Joint Proxy
Statement/Prospectus. The summary historical financial information as of
December 31, 1994, 1993 and 1992 and for the two years ended December 31, 1993
are based on audited financial statements of the Trust. The summary historical
financial information as of June 30, 1997 and 1996 and for the six months ended
June 30, 1997 and 1996 are based on the unaudited financial statements of the
Trust included elsewhere in this Joint Proxy Statement/Prospectus. In the
opinion of management of the Trust, the operating data for the six months ended
June 30, 1997 and 1996 include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
therein. The results for the six months ended June 30, 1997 are not necessarily
indicative of the results to be obtained for the year ending December 31, 1997.
The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Trust" and the historical financial statements of the Trust and notes thereto
included elsewhere in this Joint Proxy Statement/Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
------------------------------------------------ JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1996 1997
-------- ------- ------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues............ $ 15,139 $10,641 $11,226 $11,779 $11,478 $ 5,985 $ 5,252
Loss from operations(a)... (18,719) (5,121) (4,311) (4,338) (4,732) (2,268) (2,073)
Net income (loss)(a)...... (17,593) (7,867) (4,655) (4,584) 1,255 (901) 882
Per share: (b)
Loss from
operations(a)........ (10.30) (2.85) (2.35) (2.40) (2.60) (1.25) (1.00)
Net income (loss)(a)... (9.70) (4.35) (2.55) (2.55) 0.70 (0.50) 0.45
Distributions paid..... 1.00 0.80 -- 0.20 0.20 0.20 --
BALANCE SHEET DATA:
Total assets.............. 110,446 88,297 92,550 89,382 78,936 83,158 73,285
Total debt................ 68,578 57,078 65,613 62,815 53,216 62,702 46,997
Shareholders' equity...... 38,171 28,851 24,196 19,248 22,683 17,984 23,565
</TABLE>

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

(a) Loss from operations and net loss for 1992, 1994 and 1995 include provisions
for possible losses on real estate of $14,094, $650, and $600, respectively.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Trust" for a discussion of extraordinary gains and
losses of $1,910, $(2,530), $(344), $(55) and $5,810 in 1992, 1993, 1994,
1995 and 1996, respectively, and $2,643 for the six months ended June 30,
1997.

(b) The Share amounts and number of Shares outstanding have been restated to
reflect the impact of the one for five reverse Share split approved by the
Trust Managers on July 30, 1997, which is subject to shareholder approval on
October 15, 1997.

16
<PAGE> 38

SUMMARY HISTORICAL FINANCIAL INFORMATION OF RELP I
(IN THOUSANDS, EXCEPT PER UNIT DATA)

The following table sets forth summary historical financial information for
RELP I. The summary historical financial information as of December 31, 1996 and
1995 and for the three years ended December 31, 1996 are based on the audited
financial statements of RELP I included elsewhere in this Joint Proxy
Statement/Prospectus. The summary historical financial information as of
December 31, 1994, 1993 and 1992 and for the two years ended December 31, 1993
are based on audited financial statements of RELP I. The summary historical
financial information as of June 30, 1997 and 1996 and for the six months ended
June 30, 1997 and 1996 are based on the unaudited financial statements of RELP I
included elsewhere in this Joint Proxy Statement/Prospectus. In the opinion of
management of the RELP I General Partner, the operating data for the six months
ended June 30, 1997 and 1996 include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
therein. The results for the six months ended June 30, 1997 are not necessarily
indicative of the results to be obtained for the year ending December 31, 1997.
The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations of RELP
I" and the historical financial statements of RELP I and notes thereto included
elsewhere in this Joint Proxy Statement/Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
----------------------------------------------- JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Rental income.............................. $ 2,529 $ 1,937 $ 1,032 $ 1,421 $ 1,678 $ 806 $ 848
Interest income............................ 644 654 656 639 141 113 26
Net income (loss).......................... 1,562 (5,375) 436 647 356 184 137
Net income (loss) per Limited Partnership
Unit(1).................................. 28.31 (97.44) 7.90 11.73 6.46 3.33 2.49
Taxable income (loss)...................... 1,603 747 (116) (1) (46) (42) (59)
Taxable income (loss) per Limited
Partnership Unit(1)...................... 29.05 13.55 (2.10) (0.02) (0.84) (0.77) (1.06)
Cash distributions......................... 1,820 1,103 883 883 5,717 5,331 441
Cash distributions per Limited Partnership
Unit(2).................................. 33.00 20.00 16.00 16.00 104.56 97.56 8.00
Return of capital portion of distributions
per Unit................................. 4.69 20.00 8.10 4.27 98.10 94.23 5.51
Total assets at period end................. 24,083 17,380 16,969 16,701 11,396 11,644 11,108
Total assets at period end per Unit........ 441 318 311 306 209 213 203
Assets included in Merger at period
end(3)................................... 17,048 10,170 10,421 10,439 9,965 10,166 9,626
Assets included in Merger at period end per
Unit..................................... 312 186 191 191 182 186 177
Total asset value for Merger............... -- -- -- -- -- -- 11,400
Total asset value for Merger per Unit...... -- -- -- -- -- -- 209
Total liabilities.......................... 351 127 162 130 186 220 201
Partners' equity
General Partner.......................... (18) (83) (88) (90) (94) (91) (97)
Limited Partner.......................... 23,750 17,336 16,894 16,661 11,304 11,516 11,003
Cash and cash equivalents.................. 1,338 1,578 796 367 973 1,041 1,027
Net increase (decrease) in cash and cash
equivalents.............................. 540 240 (782) (429) 606 674 54
Net cash provided by operating
activities............................... 2,561 1,561 785 1,015 982 575 499
Ratio of earnings to fixed charges......... 11 10 5 7 9 7 8
</TABLE>

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

(1) Based on Limited Partnership Units issued at period end and net income
(loss)/taxable income (loss) allocated to Limited Partners.

(2) Based on Limited Partnership Units issued at each quarter end and cash
distributions allocated to Limited Partners.

(3) Includes the value of assets to be transferred in the Merger and therefore
excludes cash, accounts receivable and deferred charges.
17
<PAGE> 39

SUMMARY HISTORICAL FINANCIAL INFORMATION OF RELP II
(IN THOUSANDS, EXCEPT PER UNIT DATA)

The following table sets forth summary historical financial information for
RELP II. The summary historical financial information as of June 30, 1997 and
1996 and for the three years ended June 30, 1997 are based on the audited
financial statements of RELP II included elsewhere in this Joint Proxy
Statement/Prospectus. The summary historical financial information as of June
30, 1995, 1994 and 1993 and for the two years ended June 30, 1994 are based on
audited financial statements of RELP II. The following information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations of RELP II" and the historical financial
statements of RELP II and notes thereto included elsewhere in this Joint Proxy
Statement/Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Rental income...................................... $ 1,081 $ 1,126 $ 1,130 $ 1,210 $ 1,403
Equity in earnings of joint venture................ 145 149 154 147 151
Interest income.................................... 54 57 99 75 39
Net income......................................... 836 848 872 946 1,020
Net income per Limited Partnership Unit(1)......... 27.74 28.13 28.90 31.38 33.81
Cash distributions................................. 1,055 1,055 1,003 844 1,055
Cash distributions per Limited Partnership
Unit(2).......................................... 35.00 35.00 33.25 28.00 35.00
Return of capital portion of distribution per
Unit............................................. 7.26 6.87 4.35 -- 1.19
Total assets at period end......................... 12,779 12,578 12,494 12,708 12,532
Total assets at period end per Unit................ 471 463 460 468 462
Assets included in Merger at period end(3)......... 8,434 8,234 8,060 9,494 9,178
Assets included in Merger at period end per Unit... 311 303 297 350 338
Total asset value for Merger....................... -- -- -- -- 10,200
Total asset value for Merger per Unit.............. -- -- -- -- 376
Total liabilities.................................. 120 127 174 286 146
Partners' equity
General Partner.................................. (9) (30) (43) (33) (36)
Limited Partner.................................. 12,667 12,481 12,320 12,455 12,422
Cash and cash equivalents.......................... 1,778 1,824 2,007 836 882
Net increase (decrease) in cash and cash
equivalents...................................... 53 46 183 (1,172) 47
Net cash provided by operating activities.......... 1,108 1,141 1,251 1,369 1,102
Ratio of earnings to fixed charges................. 9 9 7 10 11
</TABLE>

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

(1) Based on Limited Partnership Units issued at period end.

(2) Cash distributions were based on the Limited Partnership Units outstanding
at the end of each quarter and the cash distributions allocated to the
Limited Partners.

(3) Includes the value of assets to be transferred in the Merger and therefore
excludes cash, accounts receivable, deferred charges and the investment in a
joint venture. A sale of the joint venture interest to Realco or one of its
Affiliates will increase the distribution to be made to the partners of RELP
II prior to the consummation of the Merger by $82.90 per Unit to an
aggregate of $459 per Unit.
18
<PAGE> 40

SUMMARY HISTORICAL FINANCIAL INFORMATION OF RELP III
(IN THOUSANDS, EXCEPT PER UNIT DATA)

The following table sets forth summary historical financial information for
RELP III. The summary historical financial information as of December 31, 1996
and 1995 and for the three years ended December 31, 1996 are based on the
audited financial statements of RELP III included elsewhere in this Joint Proxy
Statement/Prospectus. The summary historical financial information as of
December 31, 1994, 1993 and 1992 and for the two years ended December 31, 1993
are based on audited financial statements of RELP III. The summary historical
financial information as of June 30, 1997 and 1996 and for the six months ended
June 30, 1997 and 1996 are based on the unaudited financial statements of RELP
III included elsewhere in this Joint Proxy Statement/Prospectus. In the opinion
of management of the RELP III General Partner, the operating data for the six
months ended June 30, 1997 and 1996 include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the information set
forth therein. The results for the six months ended June 30, 1997 are not
necessarily indicative of the results to be obtained for the year ending
December 31, 1997. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of RELP III" and the historical financial statements of RELP III and
notes thereto included elsewhere in this Joint Proxy Statement/Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
----------------------------------------------- JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Rental income.............................. $ 8,953 $ 9,554 $ 9,539 $10,133 $ 8,368 $ 5,181 $ 2,490
Interest income............................ 198 177 343 648 592 323 206
Net income (loss).......................... (182) (9,269) 1,742 5,299 3,280 2,990 (1,327)
Net income (loss) per Limited Partnership
Unit(1).................................. (1.62) (82.27) 15.46 47.03 29.11 26.53 (11.78)
Taxable income (loss)...................... (5,712) 414 20,549 3,642 (379) 1,355 (2,177)
Taxable income (loss) per Limited
Partnership Unit(1)...................... (50.70) 3.67 182.37 32.32 (3.37) 12.02 (19.32)
Cash distributions......................... 2,811 2,231 1,690 1,690 1,099 648 451
Cash distributions per Limited Partnership
Unit (2)................................. 24.95 19.80 15.00 15.00 9.75 5.75 4.00
Return of capital portion of distributions
per unit................................. 24.95 19.80 -- -- -- -- 4.00
Total assets at period end................. 86,531 75,038 51,924 56,381 53,766 54,561 52,631
Total assets at period end per unit........ 776 673 465 505 482 489 472
Assets included in Merger at period
end(3)................................... 67,331 55,057 30,977 29,827 30,194 31,190 31,888
Assets included in Merger at period end
per Unit................................. 604 494 278 267 271 280 286
Total asset value for Merger(3)............ -- -- -- -- -- -- 39,300
Total asset value for Merger per Unit...... -- -- -- -- -- -- 352
Total mortgages payable at period end...... 51,800 51,800 30,545 27,818 26,000 26,455 26,000
Total liabilities.......................... 53,866 53,873 30,707 31,555 26,759 27,394 27,401
Partners' equity
General Partner.......................... (197) (312) (311) (275) (253) (252) (271)
Limited Partner.......................... 32,862 21,477 21,528 25,101 27,260 27,419 25,501
Cash and Cash Equivalents.................. 5,573 7,503 8,174 12,775 9,419 11,625 6,522
Net increase (decrease) in cash and cash
equivalents.............................. 2,251 1,929 671 4,601 (3,356) (1,150) (2,897)
Net cash provided by operating
activities............................... 4,588 4,361 2,839 9,019 1,059 1,258 (249)
Ratio of earnings to fixed charges......... 34 34 29 39 26 29 13
</TABLE>

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

(1) Based on Limited Partnership Units issued at period end and net income
(loss)/taxable income (loss) allocated to Limited Partners.

(2) Based on Limited Partnership Units issued at each quarter end and cash
distributions allocated to Limited Partners.

(3) Includes the value of assets to be transferred in the Merger and therefore
excludes Curlew Crossing Shopping Center (which will be purchased by Realco
or one of its Affiliates), cash, accounts receivable, deferred charges and
deferred rent.
19
<PAGE> 41

SUMMARY HISTORICAL FINANCIAL INFORMATION OF RELP IV
(IN THOUSANDS, EXCEPT PER UNIT DATA)

The following table sets forth summary historical financial information for
RELP IV. The summary historical financial information as of December 31, 1996
and 1995 and for the three years ended December 31, 1996 are based on the
audited financial statements of RELP IV included elsewhere in this Joint Proxy
Statement/Prospectus. The summary historical financial information as of
December 31, 1994, 1993 and 1992 and for the two years ended December 31, 1993
are based on audited financial statements of RELP IV. The summary historical
financial information as of June 30, 1997 and 1996 and for the six months ended
June 30, 1997 and 1996 are based on the unaudited financial statements of RELP
IV included elsewhere in this Joint Proxy Statement/Prospectus. In the opinion
of management of the RELP IV General Partner, the operating data for the six
months ended June 30, 1997 and 1996 include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the information set
forth therein. The results for the six months ended June 30, 1997 are not
necessarily indicative of the results to be obtained for the year ending
December 31, 1997. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of RELP IV" and the historical financial statements of RELP IV and
notes thereto included elsewhere in this Joint Proxy Statement/Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
----------------------------------------------- JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Rental income........................ $ 5,394 $ 5,267 $ 5,277 $ 4,451 $ 4,011 $ 1,963 $ 2,030
Interest income...................... 44 36 73 144 110 57 30
Net income (loss).................... 732 622 557 (268) (887) (483) (637)
Net income (loss) per Limited
Partnership Unit(1)................ 11.97 10.18 9.12 (4.38) (14.52) (7.90) (10.43)
Taxable income (loss)................ 979 921 1,053 122 (497) (411) (451)
Taxable income (loss) per Limited
Partnership Unit(1)................ 16.02 15.07 17.23 2.00 (8.14) (6.72) (7.38)
Cash distributions................... 1,650 1,192 917 917 596 351 244
Cash distributions per Limited
Partnership Unit(2)................ 27.00 19.50 15.00 15.00 9.75 5.75 4.00
Return of capital portion of
distributions per Unit............. 15.03 9.32 5.88 -- -- 5.75 4.00
Total assets at period end........... 52,386 51,238 50,430 48,773 46,907 47,558 46,953
Total assets at period end per
Unit............................... 866 847 834 806 775 786 776
Assets included in Merger at period
end(3)............................. 38,386 37,578 36,183 34,996 34,517 34,300 34,649
Assets included in Merger at period
end per Unit....................... 634 621 598 578 571 567 573
Total asset value for Merger......... -- -- -- -- -- -- 28,722
Total asset value for Merger per
Unit............................... -- -- -- -- -- -- 475
Total mortgages and note payable at
period end......................... 23,189 23,022 22,839 22,639 22,419 22,531 23,501
Total liabilities.................... 23,384 23,206 23,150 22,948 22,778 22,607 23,891
Partners' equity
General Partner.................... (47) (53) (56) (68) (83) (77) (92)
Limited Partner.................... 23,674 23,110 22,754 21,582 20,114 20,756 19,241
Cash and cash equivalents............ 981 1,008 2,209 2,279 1,204 2,128 1,164
Net increase (decrease) in cash and
cash equivalents................... (107) 27 1,201 70 (1,075) (150) (40)
Net cash provided by operating
activities......................... 2,790 2,701 2,914 1,914 1,231 442 244
Ratio of earnings to fixed charges... 30 31 26 27 23 19 20
</TABLE>

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

(1) Based on Limited Partnership Units issued at period end and net income
(loss)/taxable income (loss) allocated to Limited Partners.

(2) Based on Limited Partnership Units issued at each quarter end and cash
distributions allocated to Limited Partners.

(3)Includes the value of assets to be transferred in the Merger and therefore
excludes cash, accounts receivable, deferred charges and Realco's 44.16%
interest in the USAA Chelmsford Associates Joint Venture. RELP IV
consolidates such joint venture in its financial statements.

20
<PAGE> 42

SUMMARY PRO FORMA FINANCIAL INFORMATION OF THE TRUST (MERGER)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

The following table sets forth summary pro forma financial information for
the Trust (Merger) for the year ended December 31, 1996 and the six months ended
June 30, 1997. The pro forma financial information gives effect to the Private
Placement (as defined in "Pro Forma Financial Information") and the Merger and
the Related Transactions. The pro forma financial information set forth below
should be read in conjunction with, and is qualified in its entirety by, the
historical and pro forma financial statements and notes thereto of the Trust,
RELP I, RELP II, RELP III and RELP IV, which are included elsewhere in this
Joint Proxy Statement/Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
------------ ---------------
<S> <C> <C>
OPERATING DATA:
Total revenues............................................ $28,615 $ 12,838
Income (loss) from operations............................. 92 (1,998)
Per share:(a)
Income (loss) from operations............................. $ 0.01 $ (0.22)
BALANCE SHEET DATA:
Total assets.............................................. $232,605
Total debt................................................ 108,023
Shareholders' equity...................................... 112,415
</TABLE>

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

(a) The Share amounts and number of Shares outstanding have been restated to
reflect the impact of the one for five reverse share split approved by the
Trust Managers on July 30, 1997, which is subject to shareholder approval on
October 15, 1997.

The pro forma information above is presented assuming all the RELPS
participate in the Merger. The following tables illustrate the impact on income
(loss) from operations, income (loss) from operations per share and number of
Shares of the Trust outstanding assuming any one RELP does not participate in
the Merger.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------
PRO EXCLUDES EXCLUDES EXCLUDES EXCLUDES
FORMA RELP I RELP II RELP III RELP IV
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) from operations............ $ 92 $ (508) $ (801) $(3,304) $ 13
Income (loss) from operations
per share(a)........................... $ 0.01 $ (0.06) $ (0.10) $ (0.47) $ 0.00
Weighted average number of Shares
outstanding............................ 8,892 8,024 8,115 7,041 7,977
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------------------------
PRO EXCLUDES EXCLUDES EXCLUDES EXCLUDES
FORMA RELP I RELP II RELP III RELP IV
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) from operations............ $(1,998) $(2,308) $(2,475) $(1,042) $(2,049)
Income (loss) from operations per
share(a)............................... $ (0.22) $ (0.28) $ (0.30) $ (0.14) $ (0.25)
Weighted average number of Shares
outstanding............................ 9,071 8,202 8,294 7,219 8,155
</TABLE>

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

(a) The Share amounts and number of Shares outstanding have been restated to
reflect the impact of the one for five reverse Share split approved by the
Trust Managers on July 30, 1997, which is subject to shareholder approval on
October 15, 1997.

21
<PAGE> 43

COMPARATIVE PER SHARE DATA

Set forth below are historical and pro forma earnings per Share, cash
distributions per Share and book value per Share data of the Trust, and
historical and equivalent pro forma earnings per Unit, cash distributions per
Unit and book value per Unit data of RELP I, RELP II, RELP III and RELP IV. The
data set forth below should be read in conjunction with the Trust, RELP I, RELP
II, RELP III and RELP IV audited financial statements and unaudited interim
financial statements, including the notes thereto, which are included elsewhere
in this Joint Proxy Statement/Prospectus. The data should also be read in
conjunction with the unaudited pro forma financial statements, including the
notes thereto, included elsewhere herein. The pro forma data are not necessarily
indicative of the actual financial position that would have occurred, or future
operating results that will occur, upon consummation of the Merger.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, 1996 JUNE 30, 1997 (UNAUDITED)
---------------------------------------- --------------------------------------
PRO PRO FORMA PRO PRO FORMA
HISTORICAL FORMA(A) EQUIVALENT(B) HISTORICAL FORMA(A) EQUIVALENT(B)
---------- ----------- ------------- ---------- -------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NET INCOME (LOSS)
The Trust(c)................. $ (0.70) $ 0.01 $ 0.45 $(0.22)
RELP I....................... 6.46 $ 0.16 2.49 $ (3.50)
RELP II...................... 32.62(d) 0.29 17.19(d) (6.30)
RELP III..................... 29.11 0.17 (11.78) (3.65)
RELP IV...................... (14.52) 0.15 (10.43) (3.33)
CASH DIVIDENDS/DISTRIBUTIONS
The Trust(c)................. $ -- $ -- $ -- $ --
RELP I....................... 104.56 $ -- 8.00 $ --
RELP II...................... 31.50(d) -- 17.50(d) --
RELP III..................... 9.75 -- 4.00 --
RELP IV...................... 9.75 -- 4.00 --
BOOK VALUE
The Trust(c)................. $ 11.34 $12.30 $ 11.78 $12.39
RELP I....................... 205.28 $195.57 199.71 $197.16
RELP II...................... 456.71 352.15 456.37 355.01
RELP III..................... 242.11 204.18 226.17 205.84
RELP IV...................... 331.11 186.22 316.54 187.74
</TABLE>

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

(a) The pro forma per share data for the Trust for the year ended December 31,
1996 and the six months ended June 30, 1997 have been prepared as if the
Merger and the Private Placement had occurred on January 1, 1996, resulting
in weighted average Shares outstanding of 8,892,451 and 9,070,803 for the
year ended December 31, 1996 and the six months ended June 30, 1997,
respectively.

(b) The equivalent pro forma per Unit amounts are calculated by multiplying pro
forma earnings per Share, cash distributions per Share and book value per
Share by the Exchange Ratios of 15.90 for RELP I, 28.63 for RELP II, 16.60
for RELP III and 15.14 for RELP IV.

(c) The Share amounts and numbers of Shares outstanding have been restated to
reflect the impact of the one for five reverse Share split approved by the
Trust Managers on July 30, 1997, which is subject to shareholder approval on
October 15, 1997.

(d) RELP II's fiscal year is July 1 through June 30. Accordingly, the
information has been adjusted to reflect four quarters ended December 31,
1996 and two quarters ended June 30, 1997.

22
<PAGE> 44

RISK FACTORS

In considering whether to approve the Merger Agreement, the Trust's
shareholders and the Limited Partners should carefully consider, in addition to
the other information in this Joint Proxy Statement/Prospectus, the following
matters:

HISTORY OF LOSSES OF THE TRUST

The Trust has generated losses from operations every year since 1988.
During the five years ended December 31, 1996, losses from operations ranged
from $4,311,000 in 1994 to $18,719,000 in 1992, with an average loss from
operations of $7,444,000 annually. Although the Trust anticipates that it will
generate income from operations in the future based on current growth plans,
there can be no assurance to the Limited Partners as to when, or if, such a
change will occur. Furthermore, a significant part of the losses from operations
during the five years ended December 31, 1996 resulted from writedowns on real
estate reflecting permanent impairments in value. Although additional writedowns
are not currently necessary, there can be no assurance that such writedowns will
not be required in the future.

POTENTIAL CHANGES IN DISTRIBUTION LEVELS FOR LIMITED PARTNERS

Limited Partners becoming shareholders of the Trust may not continue to
receive cash distributions at the same levels that distributions were received
from the RELPS. The Trust, in order to qualify as a REIT, is required to
distribute with respect to each taxable year distributions (other than capital
gain distributions) to its shareholders in an aggregate amount at least equal to
(i) the sum of (A) 95% of its "REIT taxable income" (computed without regard to
the dividends paid deduction and its net capital gain) and (B) 95% of the net
income (after tax), if any, from foreclosure property, minus (ii) the sum of
certain items of non-cash income. Such distributions must be paid in the taxable
year to which they relate, or in the following taxable year if declared before
the Trust timely files its federal income tax return for such year and if paid
on or before the first regular distribution payment date after such declaration.
To the extent that the Trust does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax thereon at regular corporate tax rates.
Furthermore, if the Trust should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain income for such year and (iii) any undistributed taxable
income from prior periods, it would be subject to a 4% nondeductible excise tax
on the excess of such required distribution over the amounts actually
distributed. The Trust has not made distributions for four consecutive quarters
since 1993. Although the Trust anticipates paying quarterly cash distributions
in the future, given the uncertainties related to the Merger and the Trust's
business, it is impossible to predict with certainty the impact of the Merger
upon the distributions to Limited Partners who receive Shares in the Merger.

UNCERTAINTIES AT THE TIME OF VOTING AS TO PARTICIPATION OF RELPS

Consummation of the Merger is subject to the satisfaction or waiver of
certain conditions, including, among other things, obtaining the requisite
approval of the Limited Partners. If the Limited Partners of more than one of
the RELPS approve the Merger, the Trust has the obligation (assuming all other
conditions to consummation of the Merger are satisfied or waived) to consummate
the Merger with each Participating RELP. If the Limited Partners of only one of
the RELPS approve the Merger, the Trust has the right, but not the obligation,
to consummate the Merger with the one Participating RELP. The extent to which
some of the potential advantages of the Merger will be realized depends in part
upon the size of the Trust's portfolio and the amount of its leverage. Because
the identity of the Participating RELPS cannot be known prior to the end of the
Special Meetings, the resulting portfolio, business, operations and leverage,
among other things, of the Trust cannot be determined until such time. Limited
Partners, therefore, cannot know at the time of voting precisely the extent to
which the actual level of participation may affect the Trust's business and
operations. The greater the number of Participating RELPS, the more assets the
Trust will acquire, which will result in the Trust having a larger and more
diversified portfolio, but having more operating risk. Conversely, the fewer the
number of Participating RELPS, the fewer assets the Trust will acquire, which
will result in the Trust having a smaller and less diversified portfolio but
having less operating risk. This uncertainty makes it difficult

23
<PAGE> 45

for the Limited Partners to make an informed decision regarding the ultimate
nature of the Trust's portfolio and the financial and operating risks to which
its business will be subject.

The following scenarios are presented in order to show the differing levels
of assets and leverage which would result assuming any one RELP does not
participate in the Merger (amounts are based upon assumptions in the Pro Forma
Financial Information (Merger) included in this Joint Proxy Statement/
Prospectus and a Share price of $15.00 per Share, based on the closing price on
October 7, 1997 (in thousands, except share data):

<TABLE>
<CAPTION>
EXCLUDES EXCLUDES EXCLUDES EXCLUDES
RELP I RELP II RELP III RELP IV
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assets................................ $ 196,601 $ 197,881 $ 167,026 $ 168,023
Debt.................................. $ 87,348 $ 87,348 $ 72,348 $ 63,847
Shares outstanding.................... 8,202,231 8,293,660 7,219,374 8,155,116
Leverage ratio........................ 41.5% 41.2% 40.1% 34.3%
</TABLE>

As illustrated above, the leverage ratios range from 34.3% to 41.5%. As the
leverage ratio increases, the risk of financial default rises. Total assets
range from $167,026,000 to $197,881,000. As total assets increase, operating
risk will increase due to the larger and more diversified portfolio.

FUNDAMENTAL CHANGE IN NATURE OF INVESTMENT FROM FINITE LIFE TO INFINITE LIFE

Limited Partners who receive Shares in the Merger will have fundamentally
changed the nature of their investment. While each of the RELPS was formed as a
finite-life investment, with Limited Partners to receive regular cash
distributions from the RELP's net operating income and special distributions
upon liquidation of the RELP's real estate investments, the Trust intends to
operate for an indefinite period of time and has no specific plans for the sale
of its investments. Further, the Trust is not expected to make any special
distributions of liquidation proceeds, unless it is required to make such a
distribution to maintain its REIT status. Instead of having investments
liquidated through the liquidation of the Trust's assets, shareholders should
expect to be able to liquidate their investment in the Trust only through the
sale in the public market of the Shares and the amount realized through the sale
of the Shares may not be equal to the amount that would have been realized by
the shareholders through the sale of the Trust's assets. Shareholders will thus
be subject to the market risks of all public companies, particularly in that the
value of their equity securities may fluctuate from time to time depending upon
general market conditions and the Trust's future performance.

FUNDAMENTAL CHANGE IN NATURE OF INVESTMENT FROM PASS-THROUGH TO REIT

Limited Partners who become traditional shareholders will have
fundamentally changed the nature of their initial investment from an entity that
is a pass-through entity for federal income tax purposes to an investment in a
REIT, which in general is not a pass-through entity for federal income tax
purposes, with the exception of certain undistributed long-term gains. Such
Limited Partners, as shareholders of the Trust, will be unable to deduct any
losses realized by the Trust on their individual federal income tax returns.

ANTI-TAKEOVER PROVISIONS

The Declaration of Trust and Bylaws of the Trust, as well as the Texas REIT
Act, contain a number of provisions that might have the effect of entrenching
current management or delaying or discouraging an unsolicited takeover of the
Trust. These provisions include, among others, the following: (a) the power of
the Trust Managers to issue 50,000,000 Preferred Shares, with such rights and
preferences as determined by the Trust Managers; (b) the power of the Trust
Managers to stop transfers and/or redeem Shares under the following conditions:
from any shareholder who owns, directly or indirectly, 9.8% or more of the
outstanding Shares, from any five or fewer shareholders who own, directly or
indirectly more than 50% of the outstanding Shares and from any other
shareholder if the Trust Managers otherwise determine in good faith that
ownership of the outstanding Shares has or may become concentrated to an extent
that may prevent the Trust from qualifying as a REIT under the Code; (c) Trust
Managers remain in office unless removed by the shareholders or if another
nominee for Trust Manager receives the vote of a majority of the outstanding
Shares regardless of whether they receive a vote of the majority of the
outstanding Shares at the Trust's annual meeting; and (d) except in certain
circumstances, the affirmative vote of the holders of not less than 80% of

24
<PAGE> 46

the outstanding Shares, including the affirmative vote of the holders of not
less than 50% of the outstanding Shares not owned, directly or indirectly, by
any Related Person, is required for the approval of certain Business
Combinations. Any Shares transferred in violation of the restrictions set forth
in clause (b) of the preceding sentence become "Excess Shares," with no voting
or distribution rights. The Trust has the power to purchase or direct the sale
of such Excess Shares, with the sale proceeds being paid to the former owner.

POTENTIAL TAXABLE INCOME TO LIMITED PARTNERS WITHOUT CASH DISTRIBUTION

The Merger will result in taxable income or loss to each Limited Partner.
Because the Merger will result in an exchange of Units for Shares, no Limited
Partner will receive cash (other than cash received in lieu of fractional
Shares) in the Merger to pay any taxes due on any taxable income arising as a
result of the Merger. Thus, a Limited Partner may be required to sell Shares or
liquidate other investments in order to pay the taxes arising from such taxable
income.

POTENTIAL CHALLENGES TO PARTNERSHIP VALUATIONS

Limited Partners are subject to the risk that the Net Asset Values of the
RELPS, which were negotiated by the common management of the RELPS and the
Trust, do not properly reflect the value of each RELP's assets and, accordingly,
the RELPS in the aggregate may not have received sufficient Shares consistent
with the actual value of their assets. The allocation of the Net Asset Values
among the RELPS may result in certain of the RELPS receiving more than their
fair allocation of the Shares and the other RELPS receiving less then their fair
allocation of the Shares.

LACK OF INDEPENDENT REPRESENTATION FOR EACH RELP

The terms of the Merger have been negotiated by the common management of
the RELPS, who are also Affiliates of Realco, and by the Trust, and each RELP
was not separately represented by parties independent of Realco in structuring
and negotiating the terms of the Merger. The General Partners are ultimately
owned and controlled by Realco, which owns approximately 13.74% of the Trust.
Upon consummation of the Merger and assuming conversion of the Trust's debt to
Realco, Realco will own approximately 17.39% of the Trust's outstanding Shares.
Realco's two designees to the Board of Trust Managers also serve as officers and
directors of the General Partners. The General Partners did not arrange for
separate representation for each RELP because the General Partners believe that
the fairness opinion of Houlihan, the contractual Dissenters' Rights granted to
Limited Partners who believe that the applicable Exchange Ratio does not provide
such Limited Partners a number of Shares equal to the fair market value of their
Units, the fact that the General Partners of RELPS II, III and IV will not vote
their Units, the allocation of Shares to each Participating RELP and the
expected benefits to Limited Partners from the Merger offset any detriment
arising from such conflicts of interest or the absence of an independent
representative. Had separate representation been arranged for each RELP, the
terms of the Merger might have been different and possibly more favorable to the
Limited Partners, especially the proposed transactions between an Affiliate of
Realco and the Trust. See "Conflicts of Interest." In addition, if separate
representation had been arranged for each RELP, issues unique to the value of a
given RELP might have received greater attention during the structuring of the
Merger, and there might have been adjustments in the Net Asset Value allocated
among the RELPs, thereby increasing or decreasing the number of Shares allocable
to such RELP.

CONFLICTS OF INTEREST OF THE GENERAL PARTNERS

The General Partners, through wholly-owned subsidiaries, are owned and
controlled by Realco. Realco is a significant shareholder of the Trust, owning
approximately 13.74% of the Trust's issued and outstanding Shares. Upon
consummation of the Merger and assuming conversion of the Trust's debt to
Realco, Realco will own approximately 17.39% of the Trust's outstanding Shares.
Realco's two designees to the Trust Board also serve as officers and directors
of the General Partners. The General Partners believe the terms of the Merger
are fair to the Limited Partners. The ownership and management relationships, as
well as the fact that an Affiliate of Realco will manage and lease the former
RELP properties on behalf of the Trust after the Merger, did not influence the
General Partners in recommending that the Limited Partners approve the Merger.

25
<PAGE> 47

THE MERGER AS A TAXABLE EVENT

All taxable Limited Partners who participate in the Merger will be involved
in a taxable transaction resulting in either taxable income or loss for each
Limited Partner. The Merger will result in realization of gain or loss to the
RELP based on the difference between (i) the sum of the fair market value of
Shares deemed received by the RELP and the RELP liabilities assumed by the
Trust; and (ii) the RELP's adjusted tax basis in its assets. Each Limited
Partner (except, as discussed below, certain tax-exempt Limited Partners)
generally will recognize his allocable share of such gain or loss based upon his
respective interest in the RELP. Additionally, each such Limited Partner will
recognize taxable gain to the extent that the fair market value of the Shares
received by such Limited Partner exceeds such Limited Partner's adjusted basis
in his Units. Gain or loss recognized by the Limited Partners will be treated as
passive income or loss. Although Limited Partners should be treated as having
disposed of their entire interest in the RELP's activity for purposes of
"freeing up" suspended passive losses from such activity, such results are
uncertain. See "The Merger -- Material Federal Income Tax Consequences."

Based on the Trust's representation that the RELPS do not hold their
properties for resale in the ordinary course of business, the Merger should not
result in recognition of UBTI by certain tax-exempt Limited Partners that do not
hold their Units as a "dealer" or acquired such interests with debt-financed
proceeds. Certain tax-exempt organizations, however, do not qualify for such
treatment. See "The Merger -- Material Federal Income Tax Consequences."

UNDISCLOSED LIABILITIES THAT WILL BE ASSUMED BY THE TRUST

At closing, the Trust will assume the liabilities of the Participating
RELPS. These liabilities are to be disclosed in the balance sheets prepared for
closing and used by the RELPS to determine the cash distributions to the Limited
Partners immediately prior to the closing which are designed to equalize the Net
Asset Values as of the closing date with the Net Asset Values used to allocate
the Shares. Such balance sheets may, however, not disclose all liabilities of
the RELPS and, in the case of known but contingent liabilities, not provide for
adequate reserves to satisfy such obligations when fixed in amount. Undisclosed
and/or contingent liabilities might include, among others, claims for cleanup or
remediation of unknown environmental conditions, tenant or vendor claims for
pre-Merger activities, unpaid liabilities unintentionally omitted from the
closing balance sheets, claims for indemnification by the General Partners and
other indemnified parties for pre-Merger events, and claims for undisclosed
title defects.

EXPENSES OF THE MERGER

Expenses associated with a successful Merger are expected to be
approximately $1,850,000. If the Merger is consummated, all such expenses will
be borne by the Trust. If three of the four RELPS do not approve the Merger
Agreement, Realco will reimburse the Trust for the Trust's expenses only up to
$250,000. As to any RELP which fails to approve the Merger Agreement, Realco
will reimburse the Trust for the RELP's expenses (to the extent such amounts
were previously paid by the Trust) as follows: such RELP's fairness opinion,
legal fees up to $80,000, and the Proportionate Share of accounting fees,
engineering and environmental reports, printing and solicitation expenses. If
all RELPS approve the Merger Agreement, but the Trust's shareholders do not
approve the Merger Agreement, and if Realco voted its Shares in favor of the
Merger, the Trust must reimburse the RELPS and Realco for all of their expenses.

MAJORITY VOTE BINDS EACH RELP

All RELPS must approve the Merger by a vote of the holders of a majority of
the Units of each RELP. If the Merger is approved, Limited Partners who do not
properly exercise Dissenters' Rights, even if they abstained or voted against
the Merger, will have their Units converted into Shares. Units held by the
General Partner and its Affiliates in RELP II, RELP III and RELP IV will not be
entitled to vote at the RELP Special Meeting. The Units held by the RELP I
General Partner and its Affiliates in RELP I are entitled to vote at the RELP
Special Meeting. The General Partner of RELP I and its Affiliates will vote
their

26
<PAGE> 48

6,039 Units (11.06% of the outstanding Units in RELP I) in favor of the Merger
Agreement and the proposed amendments to the Partnership Agreement.

THE MERGER WILL REQUIRE LIMITED PARTNERS TO FOREGO THE ALTERNATIVES TO THE
MERGER

There are alternatives to the Merger, such as continuing the RELPS as they
are, liquidating the RELPS or merging them into a newly-formed entity. The
benefits of these alternatives are avoiding certain of the expenses of the
Merger and avoiding the risks associated with the Merger of the RELPS. Retaining
the finite-life feature of the RELPS would allow investors eventually to receive
liquidation proceeds from the sale of the RELPS' properties, and a Limited
Partner's share of these sale proceeds could be higher than the amount realized
from a sale of an equivalent number of the Shares.

TRUST BUSINESS OBJECTIVES DIFFER FROM RELP BUSINESS OBJECTIVES

The Trust has different business objectives than the RELPS. While the RELPS
had an objective of capital appreciation, the Trust intends to grow not only
through capital appreciation, but also through a continuous program of owning
and operating real properties, which may include the selling of existing
properties and the acquisition of additional properties. The Trust intends to
invest in additional real properties by raising additional capital, borrowing
and reinvesting sales proceeds. Raising additional capital involves the risk of
diluting the existing shareholders' percentage interest in the Trust, while
borrowing involves the risks associated with leverage. While the Trust has no
specific plans to finance any real property or to acquire new property using
borrowed funds, it may do so at some time in the future. Although the Trust
intends to maintain a conservative leverage policy, it has borrowed, and is
likely to continue to borrow, more money than the RELPS.

LOSS OF RIGHTS BY LIMITED PARTNERS

The rights of the Limited Partners are presently governed by either
California, Delaware and Texas law and the Partnership Agreement of each
respective RELP. After consummation of the Merger, the rights of the holders of
Units that are converted into Shares will be governed by Texas law, the Trust's
Declaration of Trust and the Trust's Bylaws. Certain differences may reduce
certain existing rights of Limited Partners. Examples of these differences
include: (i) the Partnership Agreements of the RELPS require the distribution of
net cash from operations and the net proceeds or refinancing of properties,
unlike the governing documents of the Trust which do not require distributions
under similar circumstances, with the payment of such distribution being subject
to the discretion of the Trust Managers and the distribution requirements of the
Code relating to maintaining REIT status; (ii) unlike the Partnership Agreement
of each RELP, which requires that each RELP must distribute net proceeds from
the sale or refinancing of properties, the Trust's governing documents do not
contain a similar requirement and the Trust currently does not intend to
distribute the net proceeds resulting from the sale or refinancing of
properties, but rather to use such proceeds to acquire additional properties or
for working capital purposes; (iii) Limited Partners expect liquidation of their
investment when the assets of the RELP are liquidated, unlike shareholders who
may liquidate their investment by trading Shares in the open market rather than
through the liquidation of the Trust's assets; and (iv) whereas the RELPS are
not authorized to issue additional equity securities other than the Units, the
Trust has substantial flexibility to issue additional equity securities and
shareholders, unlike Limited Partners, face the risk of dilution by the issuance
of such securities. See "Comparison of Ownership of Units and Shares."

TERMINATION PAYMENTS IF MERGER FAILS TO OCCUR

No assurance can be given that the Merger will be consummated. The Merger
Agreement provides for the payment by a RELP or by the Trust of the
Proportionate Share of a termination fee of up to $2,000,000 if the Merger is
terminated by the RELP or the Trust under certain circumstances, or
reimbursement of the Proportionate Share of expenses up to $1,000,000 if the
Merger is terminated by a party under other circumstances. The obligation to
make such payment may adversely affect the ability of any of the RELPS or

27
<PAGE> 49

the Trust to engage in another transaction in the event the Merger is not
consummated and may have an adverse impact on the financial condition of the
Trust or the RELPS incurring such obligation.

SIGNIFICANT INCREASE IN PORTFOLIO SIZE

Assuming consummation of the Merger, the Trust will have increased its
portfolio of net leasable square feet owned or controlled as of October 6, 1997
from 2,323,710 to 3,718,042 at the Effective Time, an increase of 60.0%. Several
of the properties to be acquired by the Trust from the Participating RELPS are
in markets where the Trust has not historically leased properties. Due primarily
to the number and relative geographic diversity of its properties after the
Merger, the Trust may not have adequate management or other personnel or
adequate systems or other resources to manage its portfolio or its properties to
the same level of efficiency after the Merger, which could adversely affect
operations and result in less cash available for distribution to shareholders.

FUTURE DILUTION OF SHAREHOLDERS

Shareholders will be subject to the risk that their equity interests may be
diluted through the issuance of additional equity securities if such securities
are issued for less than their fair market value. The Trust has the right to
issue, at the discretion of its Trust Managers, Shares other than those to be
issued in the Merger, upon such terms and conditions and at such prices, as the
Trust Managers may establish. In addition, the Trust may in the future issue
Preferred Shares that might have priority over the Shares as to distributions
and liquidation proceeds.

DISTRIBUTIONS SUBORDINATE TO PAYMENTS ON DEBT

The Trust has not made distributions for four consecutive quarters since
1993. Distributions to shareholders of the Trust will be subordinate to the
prior payment of the Trust's current debts and obligations. If the Trust makes
distributions in the future and, for any reason, the Trust did not have
sufficient funds to pay its current debts and obligations, distributions to
shareholders would be suspended pending the payment of such debts and
obligations.

SHARE PRICE FLUCTUATIONS

The trading price of the Shares at the Effective Time of the Merger may
vary significantly from the prices as of the date of execution of the Merger
Agreement, the date hereof or the date on which shareholders vote on the Merger
Agreement, due to changes in the business, operations and prospects of the
Trust, market assessments of the likelihood that the Merger will be consummated
and the timing thereof, general market and economic conditions and other
factors. Neither management of the Trust nor the General Partners can predict
whether the Shares will trade at a price lower than the Exchange Price or lower
than the value of the Trust's assets after the Merger.

Further, there can be no assurance as to the trading volume or price of the
Shares after the Merger. Events outside the control of the Trust which would
adversely affect the market value of the Trust's assets, as well as the market
value of the Shares, may occur during the period from the date of this Joint
Proxy Statement/Prospectus to the date the Merger is consummated or thereafter.
All of the Shares to be issued to Limited Partners other than certain Affiliates
(Limited Partners holding more than 10% of the Units in the RELP) in connection
with the Merger will be freely tradeable. Sales of a substantial number of the
Shares by Limited Partners following the consummation of the Merger, or the
perception that such sales could occur, could adversely affect the market price
for the Shares after the Merger.

Because the Exchange Price is fixed at $13.125 per Share, Limited Partners
will not receive any additional Shares if the trading price of the Shares on the
Effective Date of the Merger is lower than the Exchange Price. If the trading
price is higher than the Exchange Price, the number of Shares to be received by
the Limited Partners in Participating RELPS will not be decreased.

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EFFECT OF MARKET INTEREST RATES ON PRICE OF THE SHARES

An increase in market interest rates may lead prospective purchasers of the
Shares to demand a higher anticipated annual yield from future dividends. Such
an increase in the required anticipated dividend yield may adversely affect the
market price of the Shares.

REAL ESTATE INVESTMENT RISKS

Effect of Economic and Real Estate Conditions. Investments in real estate
typically involve a high level of risk. One of the risks of investing in real
estate is the possibility that the Trust's properties will not generate income
sufficient to meet operating expenses or will generate income and capital
appreciation, if any, at rates lower than those anticipated or available through
investment in comparable real estate or other investments. Income from
properties and yields from investments in properties may be affected by many
factors, including the type of property involved, the form of investment,
conditions in financial markets, over-building, a reduction in rental income as
the result of the inability to maintain occupancy levels, adverse changes in
applicable tax laws, changes in general economic conditions, adverse local
conditions (such as changes in real estate zoning laws that may reduce the
desirability of real estate in the area) and acts of God, such as earthquakes or
floods. Some or all of the foregoing conditions may affect the properties.

Renewal of Leases and Reletting of Space. The Trust will be subject to the
risks that, upon expiration of leases on its properties, the leases may not be
renewed, the space may not be relet or the terms of renewal or reletting
(including the costs of required renovation or concessions to tenants) may be
less favorable than current lease terms. If the Trust were unable to promptly
relet or renew the leases for all or a substantial portion of the space, if the
rental rate upon such renewal or reletting were significantly lower than
expected or if its reserves proved inadequate, then the Trust's cash flow and
FFO and ability to make expected distributions to its shareholders may be
adversely affected. (The Trust believes FFO is an appropriate measure of
performance and provides investors with an understanding of the ability of the
Trust to incur and service debt and make capital expenditures. FFO should not be
considered as an alternative to net income or other measurements under generally
accepted accounting principles as an indicator of the Trust's operating
performance or to cash flows from operating, investing or financing activities
as a measure of liquidity.) Leases on approximately 13.5% of the total net
leasable area of the properties owned by the Trust (prior to the Merger) will
expire in 1998. The expiring leases represent approximately 26.0% of the total
property annualized base rent received by the Trust. Management will attempt to
negotiate renewals with certain of the tenants with expiring leases; however, no
assurance can be given that such negotiations will be successful.

Market Illiquidity. Real estate investments are relatively illiquid. Such
illiquidity will tend to limit the ability of the Trust to vary its portfolio
promptly in response to changes in economic or other conditions. In addition,
federal income tax provisions applicable to REITs limit the Trust's ability to
sell properties held for fewer than four years, which may affect the Trust's
ability to sell properties at a time which would be in the best interest of its
Shareholders.

Operating Risks. The Trust's properties will be subject to all operating
risks common to real estate developments in general, any or all of which might
adversely affect occupancy or rental rates. In addition, increases in operating
costs due to inflation and other factors may not necessarily be offset by
increased rents. If operating expenses increase, the local rental market for
properties similar to the Trust may limit the extent to which rents may be
increased to meet increased expenses without decreasing occupancy rates. If any
of the above occur, the Trust's ability to make distributions to shareholders
could be adversely affected.

Competition. The Trust's properties are predominantly located in the South
and Southwest. All of the Trust's properties are located in areas that include
competing properties. The number of competitive properties in a particular area
could have a material adverse effect on both the Trust's ability to lease space
at any of its properties or at any newly developed or acquired properties and
the rents charged. The Trust may be competing with owners, including, but not
limited to, other REITs, insurance companies and pension funds that have greater
resources than the Trust. There is no dominant competitor in any of the Trust's
markets.

Geographic Diversification. The Trust currently owns properties in five
states. If all of the RELPS approve the Merger, the Trust will own properties in
an additional five states. Prior to the Merger, 86% of the

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Trust's investment in properties were in Denver, Dallas and Houston. If all of
the RELPS approve the Merger, the Trust's investment in properties will be
further diversified so that only 56.3% of its holdings will be in Texas and 3.1%
will be in Colorado. If fewer than all of the RELPS approve the Merger, the
Trust's holdings will be less diversified, putting the Trust more at financial
risk in the event of the downturn of the economy in those regions in which the
Trust's investments are concentrated. Since none of the RELPS own properties in
Texas or Colorado, the Trust's concentration of investment will not increase if
less than all of the RELPS approve the Merger.

Concentration of Investment. Upon consummation of the Merger, assuming all
RELPS approve the transaction, Manhattan Towers, a 301,000 square foot office
building currently owned by RELP III, and Tamarac Square Mall, a 197,000 square
foot specialty retail mall currently owned by the Trust, will comprise
approximately 13.3% and 6.6%, respectively, of the total net book value of the
Trust's total portfolio on a pro forma basis. No other property will comprise
more than 4.8% of the total net book value of the Trust's portfolio on a pro
forma basis.

NO LIMITATION ON DEBT

The Trust's organizational documents do not contain any limitation on the
amount or percentage of indebtedness the Trust can incur. The Trust could become
more highly leveraged, resulting in an increase in debt service that could
adversely affect the Trust's ability to make distributions to its shareholders
and would result in an increased risk of default on its obligations.

Subject to other existing loan documents, the Trust may borrow funds in the
future and secure such loans with mortgages on its properties. In the event such
mortgage loans require balloon payments, the ability of the Trust to make such
payments will depend upon its ability to sell or refinance its properties for
amounts sufficient to repay such loans. In addition, the payment of debt service
in connection with any borrowings may adversely affect cash flow and the value
of the Shares.

Each of the Trust's properties is currently encumbered by mortgage
financing and three of the ten properties to be acquired as result of the Merger
are encumbered by mortgage financing. As of June 30, 1997, the Trust and the
RELPS had $41,547,000 and $31,301,000 (excluding debt for Curlew Crossing, which
is not being transferred in the Merger) in mortgage debt outstanding,
respectively, and $5,450,000 and $7,200,000 in unsecured debt outstanding,
respectively. The Trust's unsecured debt is payable to Realco and is convertible
into Shares. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Trust -- Transactions with Realco."

On a post-Merger pro forma basis, approximately 52.1% of the total net book
value of real estate properties would be encumbered. As of June 30, 1997, the
debt to total market capitalization of the Trust was approximately 61.0%. Pro
Forma debt to total market capitalization after consummation of the Merger will
be approximately 44.3%. The debt on nine properties totalling $26,246,000
contains cross default and cross collateralization provisions, whereby default
on one would constitute an event of default on the other loans.

The above information does not reflect the mortgage indebtedness incurred
by the Trust in connection with the Acquisition on October 3, 1997. On that
date, the Trust entered into a secured acquisition line with Prudential
Securities Capital Corporation in the amount of $35 million and borrowed $20.675
million under the line to partially finance the portfolio acquisition. The terms
of this line include a variable interest rate based on the 30-day LIBOR rate
plus 200 basis points and a maximum loan to value ratio of 70%. Each of the
properties acquired in Acquisition serves as collateral for the borrowing under
this line. According to the terms of the line, borrowings mature in one year
and, if not repaid, allow the lender to move such borrowings into a securitized
mortgage pool. The Trust intends to refinance this borrowing prior to maturity
with proceeds from future permanent financings or equity offerings.

CHANGES IN POLICIES

The investment and financing policies of the Trust and its policies with
respect to all other activities, including its growth, debt, capitalization,
distribution and operating policies, will be determined by its Trust

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Managers. Although the Trust Managers have no present intention to do so, these
policies may be amended or revised at any time and from time to time at the
discretion of the Trust Managers without a vote of the shareholders of the
Trust. See "Investment Policies and Restrictions." A change in these policies
could adversely affect the Trust's financial condition or results of operations
or the market price of its Shares.

POSSIBLE ENVIRONMENTAL LIABILITIES

Under various federal, state and local environmental laws, ordinances and
regulations, an owner or operator of real estate may become liable for the costs
of removal or remediation of certain hazardous substances released on or in its
property. Such laws typically impose cleanup responsibility and liability
without regard to whether the owner knew of or was responsible for the presence
of the contaminants. The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate such property, may adversely affect the owner's
ability to sell or rent such property or to borrow using such property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances also may be liable for the costs of removal or remediation of
such substances at the disposal or treatment facility, whether or not such
facility is owned or operated by such person. Finally, the owner of a site may
be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from a site.

The Trust has been notified of the possible existence of underground
contamination at Tamarac Square, a retail property owned by the Trust in Denver,
Colorado. The source of the possible contamination is apparently related to
underground storage tanks located on an adjacent property. This adjacent
property was placed on Colorado's list of leaking underground storage tanks. A
second potential source of contamination is a nearby tract on which a service
station was formerly operated. The owner of the adjacent property is currently
conducting studies under the direction of the Colorado Department of Health in
an attempt to define the contamination and institute an appropriate plan to
address the situation. At this time, management does not anticipate any exposure
to the Trust relative to this issue.

The performance of the Trust's due diligence of the CST Office Products
Building (formerly the Bowater Communications Paper Building ("Bowater")) in
Lakeland, Florida, owned by RELP II, revealed the presence of naturally
occurring metals in groundwater near a former septic system on the property, but
at concentrations which exceeded regulatory thresholds and expected naturally
occurring concentrations. During its due diligence, the Trust also conducted an
environmental investigation of the Apollo Computer Building in Chelmsford,
Massachusetts, in which a trust, the beneficiary of which is RELP IV, holds a
55.84% interest. Near the place where underground storage tanks were formerly
operated at the property, such investigation revealed the presence of
hydrocarbons in soil at levels below regulatory thresholds, and naturally
occurring metals in groundwater at concentrations which exceeded regulatory
thresholds and expected naturally occurring concentrations. The results of
additional investigation by third-party experts indicated that no discernable
liability existed, nor was there any exposure to future cleanup costs.

Certain federal, state and local laws, regulation and ordinances govern the
removal, encapsulation or disturbance of asbestos-containing materials ("ACMs")
when such materials are in poor condition or in the event of building
remodeling, renovation or demolition. Such laws may impose liability for release
of ACMs and may provide for third parties to seek recovery from owners or
operators of real estate for personal injuries associated with ACMs. In
connection with its ownership, management and operation of its properties, the
Trust may be potentially liable for such costs. Except as described above, the
Trust has not been notified by any governmental authority or any other third
party of any noncompliance, liability or other claim in connection with any of
its properties.

The Trust's management believes that its properties are in compliance in
all material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum products. The
Trust has not been notified (except with respect to Tamarac Square), and is not
otherwise aware, of any material noncompliance, liability or claim relating to
hazardous or toxic substances in connection with any of its properties.

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The Trust has not been notified (except with respect to the CST Office
Products Building and the Apollo Computer Building), and is not otherwise aware,
of any material noncompliance, liability or claim relating to hazardous or toxic
substances in connection with the properties in which the Trust may have an
interest after the Merger.

RISKS OF DEVELOPMENT AND ACQUISITION ACTIVITIES

The Trust will incur risks associated with any development activities it
undertakes, including the risks that (i) occupancy rates and rents at a newly
completed project may not be sufficient to make the project profitable; (ii)
financing may not be available on favorable terms for the project; (iii)
construction and lease-up may not be completed on schedule, resulting in
increased debt service expense and construction costs; (iv) construction costs
of a project may exceed original estimates, possibly making the project
uneconomical; (v) zoning, occupancy and other required governmental approvals or
authorizations may not be granted and development costs associated therewith may
not be recovered; and (vi) development opportunities explored by the Trust may
be abandoned. Acquisitions of properties entail risks that investments will fail
to perform in accordance with expectations and that judgments with respect to
the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property will prove
inaccurate, as well as general investment risks associated with any new real
estate investment.

The Trust anticipates that its new developments and acquisitions will be
financed under lines of credit or other interim forms of secured or unsecured
financing. There is no assurance that permanent financing for such newly
developed or acquired projects will be available or might be available only on
disadvantageous terms. In addition, the fact that the Trust must distribute 95%
of its taxable income in order to maintain its qualification as a REIT will
limit the ability of the Trust to rely upon income from operations or cash flow
from operations to finance new development or acquisitions. As a result, if
permanent debt or equity financing is not available on acceptable terms to
refinance new developments or acquisitions undertaken without permanent
financing, further development activities or acquisitions might be curtailed or
cash available for distribution might be adversely affected. In the case of an
unsuccessful development or acquisition, the Trust's loss could exceed its
investment in the project.

UNINSURED AND UNDERINSURED LOSSES COULD RESULT IN LOSS OF VALUE OF PROPERTY

The Trust carries comprehensive liability, fire, flood, extended coverage
and rental loss insurance with respect to its properties and its management
believes such coverage is of the type and amount customarily obtained for or by
an owner of real property assets similar to the Trust's real property assets.
Similar coverage will be obtained for properties acquired in the future.
However, there are certain types of losses, generally of a catastrophic nature,
such as losses from floods or earthquakes, that may be uninsurable or not
economically insurable. The Trust's management exercises its discretion in
determining amounts, coverage limits and deductibility provisions of insurance,
with a view to maintaining appropriate insurance on the Trust's investments at a
reasonable cost and on suitable terms. This may result in insurance coverage
that in the event of a substantial loss would not be sufficient to pay the full
current market value or current replacement cost of the Trust's lost investment.
Inflation, changes in building codes and ordinances, environmental
considerations and other factors also might make it infeasible to use insurance
proceeds to replace the property after such property has been damaged or
destroyed.

COSTS OF COMPLIANCE WITH FEDERAL LAWS

The Americans with Disabilities Act of 1990 (the "ADA") requires public
accommodations to meet certain federal requirements related to access and use by
disabled persons. These requirements became effective in 1992. Compliance with
the ADA could require removal of structural barriers to handicapped access in
certain public areas of properties owned by the Trust where such removal is
readily achievable. Failure to comply with the ADA could result in an imposition
of fines or the award of damages to private litigants. If required changes
involve greater expenditures than the Trust currently anticipates, or if the
changes must be made on a more accelerated basis than it anticipates, the
Trust's ability to make distributions to its shareholders could be adversely
affected.

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Additional and future legislation may impose other burdens or restrictions
on owners with respect to access by disabled persons. The ultimate costs of
complying with the ADA and other similar legislation are not currently
ascertainable and, while such costs are not expected to have a material adverse
effect on the Trust, such costs could be substantial. Limitations or
restrictions on the completion of certain renovations may limit application of
the Trust's investment strategy in certain instances or reduce overall returns
on the Trust's investments.

ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT

The Trust believes that it has operated so as to qualify as a REIT under
the Code since its formation. Although management of the Trust believes that the
Trust is organized and is operating in such a manner, no assurance can be given
that the Trust will be able to continue to operate in a manner so as to qualify
or remain so qualified. Qualification as a REIT involves the application of
highly technical and complex Code provisions for which there are only limited
judicial or administrative interpretations and the determination of various
factual matters and circumstances not entirely within the Trust's control. For
example, in order to qualify as a REIT, at least 95% of the Trust's gross income
in any year must be derived from qualifying sources and the Trust must make
distributions to shareholders aggregating annually at least 95% of its REIT
taxable income (excluding net capital gains). In addition, no assurance can be
given that new legislation, regulations, administrative interpretations or court
decisions will not change the tax laws with respect to qualification as a REIT
or the federal income tax consequences of such qualification. The Trust is not
aware, however, of any currently pending tax legislation that would adversely
affect its ability to continue to qualify as a REIT.

For any taxable year that the Trust fails to qualify as a REIT, the Trust
will be subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at corporate rates. In addition, unless
entitled to relief under certain statutory provisions, the Trust also will be
disqualified from treatment as a REIT for the four taxable years following the
year during which qualification is lost. This treatment would reduce the net
earnings of the Trust available for investment or distribution to shareholders
because of the additional tax liability to the Trust for the year or years
involved. In addition, distributions no longer would qualify for the dividends
paid deduction nor would there by any requirement that such distributions be
made. To the extent that distributions to shareholders would have been made in
anticipation of the Trust's qualifying as a REIT, the Trust might be required to
borrow funds or to liquidate certain of its investments to pay the applicable
tax.

UNCERTAINTIES RELATED TO LITIGATION

On August 20, 1997, a purported class action lawsuit (the "Lawsuit"), which
was filed in the Superior Court of the State of Arizona and which has been
removed to the United States District Court for the District of Arizona, was
served upon Realco, the General Partners, certain other affiliated entities and
the individual members of the boards of directors of each of the General
Partners. The Trust was also named as a defendant. The Lawsuit alleges, among
other things, breaches of fiduciary duty in connection with the transactions
contemplated by the Merger Agreement. The Lawsuit seeks, among other things, to
enjoin the consummation of the Merger and damages, including attorneys' fees and
expenses. The defendants in the Lawsuit believe that the plaintiffs' claims are
without merit and intend to defend vigorously against the Lawsuit. However, no
assurance can be given that the plaintiffs in the Lawsuit will not be
successful. If such plaintiffs were to successfully enjoin the consummation of
the Merger, a condition to the obligations of the Trust and the RELPS to
consummate the Merger would not be satisfied, which would entitle the General
Partner of any RELP or the Trust Managers to terminate the Merger Agreement and
abandon the Merger. See "The Merger -- Extensions, Waiver and Amendment;
Termination." If such plaintiffs were to succeed in the Lawsuit after the
Effective Time, it could have a material adverse effect on the Trust.

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THE SPECIAL MEETINGS

TRUST SPECIAL MEETING

General. Each copy of this Joint Proxy Statement/Prospectus mailed to
holders of Shares is accompanied by a form of proxy furnished in connection with
the solicitation of proxies by the Trust Managers for use at the Trust Special
Meeting and any adjournments or postponements thereof. The Trust Special Meeting
is scheduled to be held on , 199 at 9:00 a.m., Dallas time, at 2200
Ross Avenue, 40th Floor, Dallas, Texas. Only holders of record of Shares on the
Record Date are entitled to receive notice of and to vote at the Trust Special
Meeting. At the Trust Special Meeting, shareholders will consider and vote upon
a proposal to approve the Merger Agreement and the issuance of Shares
thereunder. See "The Merger."

EACH HOLDER OF SHARES IS REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO THE TRUST IN THE ENCLOSED,
POSTAGE-PAID ENVELOPE OR BY FACSIMILE. THE MERGER WILL BE APPROVED IF IT
RECEIVES THE AFFIRMATIVE VOTE OF TWO-THIRDS OF THE SHARES ENTITLED TO VOTE AT
THE TRUST SPECIAL MEETING.

Voting and Revocation of Proxies. Any holder of Shares who has executed and
delivered a proxy may revoke it at any time before it is voted by attending and
voting in person at the Trust Special Meeting or by giving written notice of
revocation or submitting a signed proxy bearing a later date to the Trust,
Attention: Secretary, provided such notice or proxy is actually received by the
Trust prior to the vote of shareholders. Shareholders may vote via facsimile by
faxing the enclosed proxy to (214) 999-9323 or (214) 999-9345. Faxed proxies
will be accepted until 5:00 p.m., Dallas time, on , 199 . A
proxy will not be revoked by the death or incapacity of the shareholder
executing it unless, before the Shares are voted, notice of such death or
supervening incapacity is filed with the Secretary or other person authorized to
tabulate the votes on behalf of the Trust. The Shares represented by properly
executed proxies received at or before the Trust Special Meeting and not
subsequently revoked will be voted as directed by the shareholders submitting
such proxies. IF INSTRUCTIONS ARE NOT GIVEN, PROXIES WILL BE VOTED FOR APPROVAL
OF THE MERGER AGREEMENT AND THE ISSUANCE OF SHARES THEREUNDER AND WILL BE VOTED
IN THE DISCRETION OF THE PROXY HOLDERS ON ANY OTHER MATTERS PROPERLY PRESENTED
FOR CONSIDERATION AT THE TRUST SPECIAL MEETING OR ANY ADJOURNMENT THEREOF. The
Bylaws of the Trust permit the holders of a majority of the Shares represented
at the Trust Special Meeting, whether or not constituting a quorum, to adjourn
the Trust Special Meeting or any adjournment thereof. If necessary, unless
authority to do so is withheld, the proxy holders also may vote in favor of a
proposal to adjourn the Trust Special Meeting for any reason, including to
permit further solicitation of proxies in order to obtain sufficient votes to
approve any of the matters being considered at the Trust Special Meeting. The
Trust shareholders who wish to withhold from the persons named as proxies in the
enclosed Trust proxy authority to vote such shareholders' Shares to adjourn the
Trust Special Meeting should so indicate by appropriately marking Item 2 on the
proxy.

Solicitation of Proxies. The Trust will bear the costs of soliciting
proxies from its shareholders, including the $20,000 fee payable to The Herman
Group, Inc. for soliciting proxies on behalf of the Trust. In addition to use of
the mails, proxies may be solicited personally or by telephone or facsimile by
Trust Managers, officers and other employees of the Trust, who will not be
specially compensated for such solicitation activities. Arrangements also will
be made with brokerage firms and other custodians, nominees and fiduciaries for
the forwarding of solicitation materials to the beneficial owners of Shares held
of record by such persons, and such persons will be reimbursed for their
reasonable expenses incurred in that effort by the Trust.

Vote Required. The Merger will be approved if it receives the affirmative
vote of two-thirds of Shares entitled to vote at the Trust Special Meeting. The
holders of a majority of the Shares entitled to vote, present in person or by
proxy, constitute a quorum for purposes of the Trust Special Meeting. A holder
of a Share will be treated as being present at the Trust Special Meeting if the
holder of such Share is (i) present in person at the meeting, or (ii)
represented at the meeting by a valid proxy, whether the instrument granting
such proxy is marked as casting a vote or abstaining, is left blank or does not
empower such proxy to vote with respect to some or all matters to be voted upon
at the Trust Special Meeting. The proposal allowing the Trust to

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postpone or adjourn the Trust Special Meeting to solicit additional votes will
be approved if it receives the affirmative vote of a majority of the votes cast
at the Trust Special Meeting, whether or not a quorum is present. Abstentions
and "broker non-votes" (where a nominee holding Shares for a beneficial owner
has not received voting instructions from the beneficial owner with respect to a
particular matter and such nominee does not possess or choose to exercise
discretionary authority with respect thereto) will be included in the
determination of the number of Shares present at the Trust Special Meeting for
quorum purposes. Abstentions and broker non-votes will have the same effect as a
vote against the proposals. Failure to return the proxy or failure to vote at
the Trust Special Meeting will have the same effect as a vote against the
proposals.

As of the Record Date, there were Shares outstanding and entitled
to vote at the Trust Special Meeting, with each Share being entitled to one
vote. As of the Record Date, the Trust Managers and executive officers of the
Trust and their Affiliates are deemed to beneficially own a total of
shares (representing approximately % of the outstanding Shares), all of
which are expected to be voted in favor of the Merger Agreement. Realco
beneficially owns, as of the Record Date, a total of Shares,
representing approximately % of the outstanding Shares, all of which will
be voted in favor of the Merger Agreement. MSAM, ABKB and LaSalle Advisors have
advised the Trust that they intend to vote the Shares they
control (representing % of the outstanding Shares on the Record Date) in
favor of the Merger Agreement.

Recommendation. For the reasons described herein, the Disinterested Trust
Managers approved the Merger Agreement and the issuance of Shares thereunder.
For this purpose, T. Patrick Duncan and Edward B. Kelley were deemed
"interested" due to their affiliation with Realco and thus abstained from voting
on the proposal. THE DISINTERESTED TRUST MANAGERS BELIEVE THE TERMS OF THE
MERGER AGREEMENT ARE FAIR FROM A FINANCIAL POINT OF VIEW TO THE SHAREHOLDERS OF
THE TRUST AND IN THE BEST INTEREST OF THE TRUST AND ITS SHAREHOLDERS AND
UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS OF THE TRUST VOTE FOR APPROVAL OF
THE MERGER AGREEMENT AND THE ISSUANCE OF SHARES PURSUANT THERETO. In making its
recommendation, the Disinterested Trust Managers considered, among other things,
the opinion of Prudential Securities that the consideration to be paid by the
Trust pursuant to the Merger is fair to the Trust from a financial point of
view. See "The Merger -- Background of and Reasons for the Merger" and
"-- Fairness Opinions."

Other Matters. The Trust is unaware of any matter to be presented at the
Trust Special Meeting other than the proposal to approve the Merger Agreement
and the issuance of Shares thereunder and the proposal to permit the
postponement or adjournment of the Trust Special Meeting for any reason,
including to solicit additional votes.

RELP SPECIAL MEETING

General. Each copy of this Joint Proxy Statement/Prospectus mailed to the
Limited Partners is accompanied by a form of proxy furnished in connection with
the solicitation of proxies by the General Partners for use at the RELP Special
Meeting and any adjournments or postponements thereof. The RELP Special Meeting
is scheduled to be held on , 199 at 9:00 a.m., Dallas time, at the
Four Seasons Resort at Las Colinas, Irving, Texas. Only holders of Units on the
Record Date are entitled to notice of and to vote at the RELP Special Meeting.
At the RELP Special Meeting, holders of Units will consider and vote on a
proposal to approve the Merger Agreement and certain amendments to the
Partnership Agreements, as described below.

EACH HOLDER OF UNITS IS REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO REALCO IN THE ENCLOSED,
POSTAGE-PAID ENVELOPE OR BY FACSIMILE. AS TO EACH RELP, THE MERGER WILL BE
APPROVED IF IT RECEIVES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE UNITS ENTITLED
TO VOTE AT THE RELP SPECIAL MEETING.

Voting and Revocation of Proxies. Any holder of Units who has executed and
delivered a proxy may revoke it at any time before it is voted by attending and
voting in person at the RELP Special Meeting or by giving written notice of
revocation or submitting a signed proxy bearing a later date to Realco,
Attention: Secretary, provided such notice or proxy is actually received by the
Realco prior to the vote of holders of

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Units. Limited Partners may vote via facsimile by sending the executed proxy to
(210) 498-6214 prior to 5:00 p.m., Dallas time, on , 199 . A proxy
will not be revoked by the death or incapacity of the Limited Partner executing
it unless, before the Units are voted, notice of such death or supervening
incapacity is filed with the Secretary or other person authorized to tabulate
the votes on behalf of the RELP. The Units represented by properly executed
proxies received at or before the RELP Special Meeting and not subsequently
revoked will be voted as directed by the Limited Partners submitting such
proxies. IF INSTRUCTIONS ARE NOT GIVEN, PROXIES WILL BE VOTED FOR APPROVAL OF
THE MERGER AGREEMENT AND THE PARTNERSHIP AGREEMENT AMENDMENTS NECESSARY TO
PERMIT THE CONSUMMATION OF THE MERGER, FOR APPROVAL OF THE APPLICABLE RELATED
TRANSACTION AND WILL BE VOTED IN THE DISCRETION OF THE PROXY HOLDERS ON ANY
OTHER MATTERS PROPERLY PRESENTED FOR CONSIDERATION AT THE RELP SPECIAL MEETING
OR ANY ADJOURNMENT THEREOF. Unless authority to do so is withheld, the proxy
holders also may vote in favor of a proposal to adjourn the RELP Special Meeting
for any reason, including to permit further solicitation of proxies in order to
obtain sufficient votes to approve any of the matters being considered at the
RELP Special Meeting. The Limited Partners who wish to withhold from the persons
named as proxies in the enclosed RELP proxy authority to vote such Limited
Partners' Units to adjourn the RELP Special Meeting should so indicate by
appropriately marking Item 3 on the proxy.

Solicitation of Proxies. The Trust will initially bear the costs of
soliciting proxies from the Limited Partners. In addition to use of the mails,
proxies may be solicited personally or by telephone or facsimile by officers and
other employees of Realco or its Affiliates who will not be specially
compensated for such solicitation activities. Arrangements also will be made
with brokerage firms and other custodians, nominees and fiduciaries for the
forwarding of solicitation materials to the beneficial owners of Units held of
record by such persons, and such persons will be reimbursed for their reasonable
expenses incurred in that effort by the Trust.

List of Investors. Pursuant to the rules and regulations promulgated by the
Commission, if a Limited Partner entitled to vote at the RELP Special Meeting
desires to obtain a list of the other Limited Partners entitled to vote at the
RELP Special Meeting to enable the requesting Limited Partner to mail soliciting
materials to the other Limited Partners, the Limited Partner may request in
writing a list of the other Limited Partners. The request should be made in
writing to the appropriate General Partner, c/o Randal R. Seewald, 8000 Robert
F. McDermott Freeway, IH10 West, Suite 600, San Antonio, Texas 78230-3884.
Alternatively, the requesting Limited Partner may request that the RELP mail
copies of any proxy statement, form of proxy or other soliciting material
furnished by the requesting Limited Partner to the other Limited Partners of the
applicable RELP. The requesting Limited Partner must reimburse the RELP for its
reasonable expenses incurred in connection with performing such services. At the
time of making the request, the requesting Limited Partner must, if the Units
are held through a nominee, provide the RELP with a statement from the nominee
or other independent third party confirming such Limited Partner's beneficial
ownership. Additionally, the requesting Limited Partner must provide the RELP
with an affidavit or similar document (i) identifying the proposal that will be
the subject of the Limited Partner's solicitation; (ii) stating that the Limited
Partner will not use the list for any purpose other than to solicit Limited
Partners with respect to the same action for which the RELP is soliciting votes;
and (iii) stating that the Limited Partner will not disclose the information
provided to it to any person other than a beneficial owner for whom the request
was made and an employee or agent to the extent necessary to effectuate the
communication or solicitation. Upon termination of the solicitation, the
requesting Limited Partner must return to the RELP, without keeping any copies
thereof, the list of information provided by the RELP and any information
derived from such information. A Limited Partner is only entitled to the
foregoing information with respect to the RELP in which the Limited Partner
holds Units.

Pursuant to the RELP I Partnership Agreement, a RELP I Limited Partner has
the right, upon reasonable request, to inspect and copy the list of RELP I
Limited Partners. Under California law, a RELP I Limited Partner may request a
list of other RELP I Limited Partners. RELP I must deliver the list to the
requesting Limited Partner at RELP I's expense. The RELP II Partnership
Agreement provides that for any proper purpose, a RELP II Limited Partner may
obtain a copy of the list of RELP II Limited Partners upon written request after
payment of the reasonable expense of duplication. Under Texas law, for a proper
purpose,

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a RELP II Limited Partner may inspect and copy at his expense, the list of RELP
II Limited Partners. Pursuant to the RELP III Partnership Agreement, any RELP
III Limited Partner, upon paying the costs of collection, duplication and
mailing, is entitled to a copy of the list of RELP III Limited Partners. For any
purpose reasonably related to a RELP IV Limited Partner's interest as a limited
partner of RELP IV, RELP IV Limited Partners shall be permitted access to all
records of RELP IV at the partnership's principal office during reasonable
business hours and to make copies thereof. Under Delaware law, a Limited Partner
in RELP III or RELP IV may obtain a list of Limited Partners in accordance with
their respective Partnership Agreements.

Vote Required. The Merger will be approved by any RELP if it receives the
affirmative vote of the holders of a majority of the Units entitled to vote at
the RELP Special Meeting. The holders of a majority of the Units entitled to
vote, present in person or by proxy, constitute a quorum for purposes of the
RELP Special Meeting. A holder of a Unit will be treated as being present at the
RELP Special Meeting if the holder of such Unit is (i) present in person at the
meeting, or (ii) represented at the meeting by a valid proxy, whether the
instrument granting such proxy is marked as casting a vote or abstaining, is
left blank or does not empower such proxy to vote with respect to some or all
matters to be voted upon at the RELP Special Meeting. The proposal allowing the
RELP to postpone or adjourn the RELP Special Meeting to solicit additional votes
will be approved if it receives the affirmative vote of a majority of the votes
cast at the RELP Special Meeting, whether or not a quorum is present.
Abstentions and "broker non-votes" (where a nominee holding Units for a
beneficial owner has not received voting instructions from the beneficial owner
with respect to a particular matter and such nominee does not possess or choose
to exercise discretionary authority with respect thereto) will be included in
the determination of the number of Units present at the RELP Special Meeting for
quorum purposes. Abstentions and broker non-votes will have the same effect as a
vote against the proposals. Failure to return the proxy or failure to vote at
the RELP Special Meeting will have the same effect as a vote against the
proposals.

In accordance with the terms of the Partnership Agreements of RELP II, RELP
III and RELP IV, Units held by the General Partner and its Affiliates in each
respective RELP will not be entitled to vote at the RELP Special Meeting and,
consequently, will be treated as abstentions. As of the Record Date, the General
Partner of each of RELP II, RELP III and RELP IV held Units totaling
approximately 24.65%, 5.80% and 10.15% of the issued and outstanding Units of
each respective RELP. The Units held by the RELP I General Partner and its
Affiliates in RELP I are entitled to vote at the RELP Special Meeting and such
Units will be voted to approve the Merger. As of the Record Date, the RELP I
General Partner held 6,039 Units totaling approximately 11.06% of the issued and
outstanding Units in RELP I.

Recommendation. For the reasons described herein, the General Partner of
each RELP approved the Merger Agreement. THE BOARD OF DIRECTORS OF EACH GENERAL
PARTNER AND REALCO BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT, INCLUDING
THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN THE MERGER, ARE FAIR
TO AND IN THE BEST INTERESTS OF THE RESPECTIVE LIMITED PARTNERS AND UNANIMOUSLY
RECOMMENDS THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT
AND AMENDMENT OF THE PARTNERSHIP AGREEMENT AND FOR APPROVAL OF THE APPLICABLE
RELATED TRANSACTION. In making its recommendation, the General Partners
considered, among other things, the opinion of Houlihan that the consideration
to be received by the Limited Partners in connection with the Merger and the
applicable Related Transaction is fair to the Limited Partners from a financial
point of view. See "The Merger -- Background of and Reasons for the Merger" and
"-- Fairness Opinions."

Other Matters. The General Partners are unaware of any matter to be
presented at the RELP Special Meeting other than the proposal to approve the
Merger Agreement and the Partnership Agreement amendments necessary to permit
the consummation of the Merger, the proposal to approve the applicable Related
Transaction and the proposal to permit the postponement or adjournment of the
RELP Special Meeting for any reason, including to solicit additional votes.

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THE MERGER

The detailed terms of the Merger are contained in the form of Merger
Agreement attached as Annex I to this Joint Proxy Statement/Prospectus. The
following discussion describes the material aspects of the Merger and the terms
of the Merger Agreement. This description is qualified in its entirety by
reference to the Merger Agreement, which is incorporated by reference herein and
which the Trust's shareholders and the Limited Partners are urged to read
carefully.

BACKGROUND OF THE MERGER

On September 3, 1996, a meeting was held at Realco's offices in San
Antonio, Texas to discuss a potential strategic investment by Realco in the
Trust. Attending this meeting were Messrs. T. Patrick Duncan and Edward B.
Kelley for Realco and Messrs. Charles W. Wolcott, the President and Chief
Executive Officer of the Trust and a Disinterested Trust Manager, Marc A.
Simpson, the Vice President and Chief Financial Officer of the Trust, David B.
Warner, the Vice President-Operations of the Trust, and William H. Bricker and
Robert E. Giles, each of whom is a Disinterested Trust Manager. Among the issues
discussed was the need for the Trust to increase its critical mass of
properties. In response to this issue, Realco stated that it was willing to
consider the contribution of properties or capital in exchange for Trust Shares
to augment the existing properties of the Trust. The discussion was reduced to a
memorandum of understanding between Realco and the Trust dated September 16,
1996.

On October 15, 1996, Mr. Wolcott and Mr. Duncan met to discuss a potential
acquisition by Realco of the Trust's 8.8% unsecured notes (the "MLI Notes") from
The Manufacturer's Life Insurance Company ("MLI"). Such an acquisition would
allow the Trust to reduce the principal amount of the MLI Notes in return for
granting Realco an option to convert its principal investment in the MLI Notes
into Shares of the Trust.

Messrs. Wolcott and Duncan had numerous telephone conversations between
October 15, 1996 and December 18, 1996 regarding the terms of the proposed
purchase of the MLI Notes by Realco.

On December 11, 1996, Mr. Duncan met with Mr. Wolcott in Dallas to further
discuss the details of the MLI Notes transaction.

On December 18, 1996, the Trust executed a letter agreement with Realco
wherein Realco agreed to commence negotiations to purchase or repay the MLI
Notes.

On December 19, 1996, a meeting of Realco's Real Estate Investment
Committee (Edward B. Kelley, Chairman, T. Patrick Duncan, Randal R. Seewald,
Martha J. Barrow, Susan Wallace, S. Wayne Peacock, David Holmes and David
Rosales (collectively, the "Real Estate Investment Committee")) was held in
Realco's offices in San Antonio. During the meeting, Mr. Duncan briefed the
committee on the potential purchase of the MLI Notes and the conversion features
of the debt.

On December 23, 1996, the Trust announced that Realco had acquired 636,441
of the Trust's outstanding Shares, making Realco the Trust's largest shareholder
at that time. With this transaction, the number of Trust Managers was increased
to five members and Messrs. Kelley and Duncan were appointed to the Trust Board.
Subsequently, on February 27, 1997, the Trust announced that Realco had acquired
the MLI Notes pursuant to an agreement in which the outstanding principal
balance of the MLI Notes was reduced to $5,449,618 and an option was granted to
convert the MLI Notes into Shares of the Trust at $10.00 per Share until
December 31, 1997, and at $11.25 per Share between December 31, 1997 and
December 31, 2000.

Also during the later part of 1996, the Board of Directors of each General
Partner and Realco, based on the evaluation of the alternatives available,
determined to pursue a business strategy of seeking a strategic combination with
a publicly traded REIT to take advantage of the growth in the REIT industry and
real estate markets in general.

On January 8, 1997, a meeting was held at the Trust's offices in Irving,
Texas. Attending the meeting were Mr. Duncan of Realco, Mr. Wolcott of the Trust
and a representative of Prudential Securities. The purpose of the meeting was to
interview Prudential Securities as a potential financial advisor to the Trust.

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During this meeting, a number of potential capital raising transactions were
discussed, including the possible contribution of Realco sponsored assets to the
Trust in exchange for Shares.

On March 27, 1997, a meeting was held at the Trust's offices in Irving,
Texas. Attending the meeting were Mr. Duncan and Mr. Wolcott. During the
meeting, Mr. Duncan described a potential transaction involving the Trust and
the RELPS. Mr. Wolcott then provided suggestions on the possible structure of a
transaction. Mr. Duncan then agreed to present the transaction on a preliminary
basis to the senior leadership of Realco, and if there was an interest in moving
forward, he would then present the transaction on a preliminary basis to the
Trust Managers at their next quarterly Trust Managers' meeting scheduled for
April 29, 1997.

On April 1, 1997, a meeting of Realco's Real Estate Investment Committee
was held in Realco's offices in San Antonio, Texas. During the meeting, Mr.
Duncan discussed the possibility of merging the RELPS into the Trust. The
consensus of those at the meeting was to continue discussions of the merger.

On April 22, 1997, a meeting of Realco's Real Estate Investment Committee
was held in Realco's offices in San Antonio. At this meeting Mr. Seewald
discussed the expected benefits and detriments of the proposed merger and
distributed a proposed task list for comment and discussion.

On April 23, 1997, a Realco Business Management meeting was held in USAA's
offices in San Antonio, Texas. Attendees included Robert G. Davis, Chairman of
Realco and President of CAPCO, the sole shareholder of Realco; the CAPCO staff,
Cathy McMichael, David Adams, Karen Presley and Richard Goertz; and Edward B.
Kelley, T. Patrick Duncan, Martha J. Barrow and David Rosales of Realco. At this
meeting Messrs. Kelley, Duncan and Seewald reported on the status of discussions
regarding the proposed merger of the RELPS into the Trust.

On April 26, 1997, Mr. Duncan called Mr. Wolcott and stated that he had
received preliminary approval from senior leadership within Realco to pursue
discussions with the Trust. Following that call, Realco sent the Trust initial
information on the properties comprising the RELPS' portfolios.

On April 29, 1997, Mr. Duncan of Realco presented the Trust Managers
(Messrs. Bricker, Duncan, Giles, Kelley and Wolcott) with the concept of merging
the Trust with four real estate limited partnerships sponsored by Realco.
Following a discussion of the benefits and detriments to the Trust of the
proposed transaction and the estimated costs and expenses, the Disinterested
Trust Managers, including Messrs. Bricker, Giles and Wolcott, approved further
investigation of the transaction including preparation of pro forma financial
information.

On May 5, 1997, the Trust began its analysis of the RELPS' portfolio and
requested copies of comprehensive business plans on each of the RELPS' assets.
Then on May 6, 1997, Mr. Duncan met with Mr. Wolcott of the Trust at the Trust's
offices in Irving, Texas to discuss the terms of the transaction to be included
in a letter agreement to be presented to the Trust Managers.

On May 20, 1997, a meeting of Realco's Real Estate Investment Committee was
held in Realco's offices in San Antonio, Texas. At the meeting Mr. Seewald
updated the committee on the status of the proposed merger and advised that
proposals for fairness opinions were due May 30.

On May 21, 1997, a Realco Business Management meeting was held in Realco's
offices in San Antonio, Texas. At this meeting Mr. Seewald reported on the
status of the proposed merger.

On May 21, 1997, Realco provided the Trust with copies of Form 10-Ks,
annual reports and business plans for each of the RELPS. Representatives of the
Trust then met with representatives of Realco on May 22, 1997, at Realco's
office in San Antonio, Texas to begin detailed reviews of each of the RELP
properties. Also on that date, Mr. Wolcott of the Trust met with Mr. Duncan at
Realco's offices in San Antonio, Texas to discuss the initial draft of the
letter agreement.

On May 27, 1997, Mr. Duncan of Realco and Mr. Wolcott of the Trust spoke by
telephone to coordinate the process of obtaining fairness opinions for the RELPS
and the Trust.

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During the period May 27 through May 29, 1997, representatives of the Trust
(including Messrs. Wolcott, Warner and Lewis D. Friedland, Vice President and
Chief Investment Officer of the Trust) traveled to and performed preliminary
property inspections on each of the RELP properties, with the exception of the
one RELP property located in Milpitas, California.

By letters dated May 29, 1997 and June 16, 1997, Mr. Kelley received a
preliminary indication of interest from and on behalf of Glenborough Realty
Trust ("Glenborough") to acquire the properties of the RELPS, which did not
include any suggestion of the price it would pay. Because, based on the
evaluation of the alternatives available, the Board of Directors of each General
Partner and Realco determined to pursue a business strategy of seeking a
strategic combination with the Trust to take advantage of the growth in the REIT
industry and real estate markets in general, rather than a complete liquidation
of the RELPS, the General Partners determined that pursuing a liquidation of the
portfolio with Glenborough was not, at such time, in the best interests of the
Limited Partners. Accordingly, no discussions were held with Glenborough and
such indication of interest was not pursued.

On June 4, 1997, a meeting of Realco's Board of Directors was held in
Realco's offices in San Antonio, Texas. Members of the Realco Board of Directors
include Robert G. Davis, Edward B. Kelley, T. Patrick Duncan, George K. Sykes,
Albert J. Kirsling, Kenneth R. Fleenor, Chris O. Divich, Stephanie A. Coleman
and Luis de la Garza. At this meeting, Mr. Seewald briefed the directors on the
proposed merger of the RELPS into the Trust. Areas addressed included a history
of the partnerships and their characteristics, investors concerns, current
status of the partnerships and the Trust, the letter agreement between the RELPS
and the Trust, and the potential benefits and detriments of the proposed merger
to all parties.

On June 6, 1997, the Disinterested Trust Managers approved the execution of
a letter agreement with the RELPS regarding a merger of the RELPS into the
Trust. Furthermore, the Trust was authorized to negotiate definitive merger
agreements with the RELPS. On June 10, 1997, the Trust announced that the letter
agreement had been signed. Among other things, the agreement was subject to
negotiation of the financial terms of the merger including the respective
exchange ratios for each of the RELPS, obtaining fairness opinions with respect
to the transactions, completion of definitive merger agreements, approval by the
Board of Directors of each of the General Partners of the RELPS and the Trust
Managers, and completion of satisfactory due diligence.

On June 10, 1997, representatives of Realco (Messrs. Duncan, Holmes, and
Seewald) and representatives of the Trust (Messrs. Wolcott, Friedland and
Warner) discussed by telephonic conference call various issues related to the
RELP properties including leases, contracts, environmental and engineering
reports, capital improvements, repairs, surveys and other real estate due
diligence related issues.

On June 16, 1997, the General Partners retained Houlihan to render a
fairness opinion as to whether the consideration to be received by the Limited
Partners in connection with the Merger and the other transactions contemplated
in connection therewith is fair to the Limited Partners from a financial point
of view.

On June 17, 1997, a meeting of Realco's Real Estate Investment Committee
was held in Realco's offices in San Antonio, Texas. At this meeting Mr. Seewald
updated the committee on the proposed merger advising that a letter agreement
had been signed with the Trust and that a letter and a copy of the Trust's press
release had been sent to all Limited Partners. The committee was advised that
Houlihan had been engaged to issue fairness opinions to the Boards of Directors
of the General Partners on behalf of the four RELPS and advised that drafts of
the merger agreement and Form S-4 Registration Statement were due to be
circulated within the next week.

On June 18, 1997, representatives of Realco (Messrs. Duncan, Holmes and
Seewald) and representatives of the Trust (including Messrs. Wolcott, Friedland
and Warner) discussed by telephonic conference call the timing and coordination
of the meetings scheduled for June 20 and 30.

On June 19, 1997, Mr. Duncan and Mr. Wolcott met on related business at
O'Hare airport in Chicago, Illinois and discussed various issues related to the
setting of the exchange ratios in the proposed transaction, including recent
Share prices, trading volume and volatility of the Shares.

On June 20, 1997, Mr. Duncan and representatives of Realco (Messrs. Duncan,
Holmes and Seewald) met with Messrs. Wolcott, Friedland and Warner of the Trust
at Realco's offices in San Antonio, Texas and

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negotiated the financial terms of the proposed transaction. This information was
then distributed on June 23, 1997 to the Trust Managers and to Prudential
Securities and Houlihan. The Trust then entered into a process of underwriting
the values of the real estate and other assets held by the RELPS (including
cash, accounts receivable, deferred charges and deferred rent and an investment
in a joint venture) leading to a negotiation of exchange ratios for each of the
RELPS.

On June 23, 1997, a Realco business management meeting was held in Realco's
offices in San Antonio, Texas. At this meeting Mr. Seewald reported on the
status of the proposed merger.

On June 26, 1997, the Trust retained Prudential Securities to render a
fairness opinion as to whether the consideration to be paid by the Trust
pursuant to the Merger was fair from a financial point of view to the Trust.

On June 30, 1997, the Board of Directors of the General Partners met to
discuss the execution of the Merger Agreement. The proposed terms of the
transaction were discussed with Houlihan, which delivered its opinion that the
consideration to be received by the Limited Partners in connection with the
Merger was fair from a financial point of view.

On June 30, 1997, the Disinterested Trust Managers met to discuss the
proposed transaction. The Trust's management (including Messrs. Wolcott,
Friedland and Warner) presented a detailed overview of each property subject to
the proposed merger and exchange ratios negotiated with Realco. The
Disinterested Trust Managers then discussed the pricing of the transaction with
a representative of Prudential Securities. Based on this discussion, the meeting
was adjourned until July 7, 1997, at which time the Disinterested Trust Managers
approved a resolution to sign definitive merger agreements with the RELPS,
contingent upon due diligence investigation and receipt of a satisfactory
fairness opinion from Prudential Securities. On July 10, 1997, the Trust
Managers (excluding Mr. Duncan who was not present) received the written opinion
from Prudential Securities stating that, as of such date, based on Prudential
Securities' review and subject to the limitations set forth in the opinion, the
consideration to be paid by the Trust was fair from a financial point of view to
the Trust. A definitive merger agreement was signed on that date.

On July 23, 1997, a meeting of Realco's Real Estate Investment Committee
was held in Realco's offices in San Antonio, Texas. At this meeting Mr. Seewald
advised the committee that the Form S-4 Registration Statement and supplements
had been filed with the SEC, the Form 8-Ks had been filed on behalf of the RELPS
in connection with the execution of the Merger Agreement, the due diligence
period under the Merger Agreement was due to expire and the disclosure letters
set forth in the Merger Agreement were being drafted.

On July 28, 1997, a Realco business management meeting was held in Realco's
offices in San Antonio, Texas. At this meeting Ms. Barrow reported on the status
of the proposed merger.

On August 18, 1997, a Realco business management meeting was held in
Realco's offices in San Antonio, Texas. At this meeting Mr. Seewald reported on
the status of the proposed Merger.

On August 18, 1997, a meeting of Realco's Real Estate Investment Committee
was held in Realco's offices in San Antonio, Texas. In connection with the
Merger, the committee discussed due diligence and the extension of the due
diligence completion date.

On August 20, 1997, a meeting of Realco's Board of Directors was held in
Schaumberg, Illinois. At this meeting Mr. Seewald updated the Board of Directors
on the proposed Merger of the RELPS into the Trust.

On September 16, 1997, the parties executed an amended and restated merger
agreement to, among other things, extend the period to conduct their due
diligence investigations and make certain technical amendments. A form of such
Merger Agreement, as amended and restated, is attached as Annex I to this Joint
Proxy Statement/Prospectus.

By letter dated September 25, 1997 to Mr. Kelley, Glenborough submitted a
proposal to purchase certain of the real properties of the RELPS for $95 million
in cash. Also by letter dated September 25, 1997 to Mr. Kelley, Burack
Investors, a real estate investment company ("Burack"), submitted a proposal to
purchase the same real properties of the RELPS for $98.9 million in cash. Each
such offer is subject to numerous

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conditions, including the successful completion of due diligence, and would
require the RELPS to pay off all loans related to such properties and deliver
such properties to the transferee free and clear of any mortgage debt. Such
proposals are currently being reviewed by the General Partners and their
advisors. Should the General Partners elect to terminate the Merger Agreement
and pursue either of the foregoing proposals, such termination could subject the
RELPS to the payment of the Liquidated Damages Amount under the terms of the
Merger Agreement.

BACKGROUND OF THE RELPS

RELP I. RELP I was formed in August 1984 under the California Revised
Limited Partnership Act. RELP I has two primary business purposes: (i) to
purchase qualified income producing real properties; and (ii) to make
participating first mortgage loans on qualified income producing properties. To
the extent possible (a) all acquisitions of real property will be made for cash
(no acquisition indebtedness will be incurred); and (b) participating first
mortgage loans will earn fixed interest and will contain participation rights in
the underlying property's cash flow and net proceeds of sale or refinancing and
other items, or both. In 1985, RELP I sold $27,305,000 in Units (54,610 Units at
$500 per Unit). Limited Partners are not required to make any additional capital
contributions. Proceeds of the offering were used to acquire Volusia Point
Shopping Center in 1985. In 1986, RELP I acquired one property (the Systech
building) and funded one first mortgage loan, which was paid in full in January
1996. Remaining offering proceeds were used to repay the mortgage indebtedness
on the Systech building upon its maturity in 1988.

RELP II. RELP II was formed in August 1987 under the Texas Revised Limited
Partnership Act. RELP II has three principal business objectives: (i) to
preserve and protect RELP II's capital; (ii) to provide the Limited Partners
with quarterly distributions of net cash from operations; and (iii) to obtain
long-term appreciation in the value of the properties. RELP II was formed to
invest in a diversified portfolio of income-producing multi-family residential
and commercial properties and/or make one or more participating first mortgage
loans. Pursuant to the Partnership Agreement of RELP II, to the extent possible,
all acquisitions of real property are made for cash and all participating first
mortgage loans earn fixed interest and contain participation rights in the
underlying property's cash flow and net proceeds of sale or refinancing and
other items, or both. From the commencement of the offering of Units on February
11, 1988 through the termination of the offering on January 30, 1989, RELP II
sold $13,570,500 in Units (27,141 Units at $500 per Unit). Proceeds of the
offering were used to acquire the Continental Plastic Containers Buildings on
April 21, 1989. RELP II also invested in the Combined Capital Resources Joint
Venture (the "joint venture"), the owner of a participating first mortgage loan
secured by Sequoia Plaza I. The joint venture's investment in the mortgage loan
was converted to ownership of the underlying property in August 1991 through
foreclosure on the mortgage loan. Sequoia Plaza I has not been offered for sale.
However, the property was externally appraised as of January 1, 1997 at a total
value of $29.7 million. RELP II's joint venture interest will not be included in
the Merger but will be purchased by Realco or an Affiliate of Realco for $2.25
million if the Merger is approved by the Limited Partners of RELP II. RELP II
purchased its final property, CST Office Products Building (formerly Bowater),
on July 24, 1989.

RELP III. RELP III was formed in February 1985 under the Uniform Limited
Partnership Act of the State of Delaware to invest in a diversified portfolio of
income-producing real properties such as shopping centers, office buildings,
apartments, industrial buildings and other similar income-producing real
property. RELP III has four principal business objectives: (i) to provide the
limited partners with cash distributions which will not constitute taxable
income by reason of partnership tax deductions and possibly tax losses which may
be used to offset other taxable income; (ii) to preserve and protect the Limited
Partners' capital and related buying power; (iii) to obtain long-term
appreciation in the value of the properties; and (iv) to provide a build-up of
equity through the reduction of mortgage loans on the properties. In 1985, RELP
III sold $55,774,500 in Units (111,549 Units at $500 per Unit). Proceeds from
the offering were used to acquire the following properties in fiscal year 1986:
Curlew Crossing (formerly Courtyard Shoppes) Shopping Center, Manhattan Towers
(formerly Parkview Plaza Office Buildings) and the Skygate Commons (formerly
Ramada World Headquarters Office Buildings). These properties comprise the
complete portfolio of

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<PAGE> 64

RELP III. Curlew Crossing will not be included in the Merger but will be
purchased by Realco or an Affiliate of Realco for $11,200,000 if the Merger is
approved by RELP III's Limited Partners.

RELP IV. RELP IV was formed in February 1987 under the Uniform Limited
Partnership Act of the State of Delaware to invest in a diversified portfolio of
income-producing real properties such as shopping centers, office buildings,
apartments, industrial buildings and other similar income-producing real
property. RELP IV has three principal business objectives: (i) to preserve and
protect RELP IV's capital; (ii) to obtain long-term appreciation in the value of
its properties; and (iii) to provide partially "tax-sheltered" distributions of
cash from operations. In 1987 and 1988, RELP IV sold $30,247,500 in Units
(60,495 Units at $500 per Unit). Proceeds of the offering were used to acquire
the following properties in fiscal year 1987: Linear Technology Corporate
Headquarters, Eastman Kodak Building, and 1881 Pine Street (Century Electric
Office Building). During 1988, RELP IV acquired a 55.84% joint venture interest
in USAA Chelmsford Associates Joint Venture, the beneficial owner of the Apollo
Computer Research and Development Headquarters Building.

The General Partners periodically review the overall market conditions of
each respective RELP's real estate investments. The review is conducted to
ascertain whether the properties are ready for disposition. Exit strategies are
reviewed to consider alternative liquidation methods for each RELP and or
individual properties. A potential alternative consisted of a possible roll-up
of the RELPS into an existing public REIT. This alternative was considered and
pursued to determine whether any existing public REITs would be interested in
such a transaction. The General Partners initially contacted the Trust for their
consideration of a potential transaction. The General Partners presented to a
representative of the Trust the individual real estate portfolios of each RELP
for the Trust's consideration. A broad, general review of each property was
conducted by the Trust to determine which properties met the Trust's investment
criteria. It was determined at the outset that a 7.275% interest in a joint
venture would not be part of the assets that would be considered by the Trust
for participation in a proposed transaction because a minority interest in a
joint venture did not meet the Trust's investment criteria. In addition, the
majority member of the joint venture is USAA Real Estate Equities Inc., which
has a right of first refusal on the sale of the joint venture interest. USAA
Real Estate Equities Inc. is considering purchasing the minority interest and it
is likely that the Trust would not be able to obtain the minority interest even
if it met the Trust's investment criteria. The shopping center in RELP III is
not involved in the Merger because the Trust and the RELP III General Partner
could not come to terms on the value of the property.

THE TRUST'S REASONS FOR THE MERGER AND RECOMMENDATION

The Disinterested Trust Managers believe that the terms of the Merger
Agreement are fair from a financial point of view to the shareholders of the
Trust and in the best interests of the Trust and its shareholders. Accordingly,
the Disinterested Trust Managers have unanimously approved the Merger Agreement
and the issuance of Shares thereunder, and recommend the shareholders vote for
approval of the Merger Agreement and the issuance of Shares thereunder. As the
Disinterested Trust Managers determined that it would be in the best interests
of the shareholders to acquire all or any one of the RELPS, the Disinterested
Trust Managers did not condition the consummation of each of the Mergers on the
consummation of any other Merger. Nevertheless, the Merger Agreement gives the
Trust the option of not consummating the Merger if only one of the RELPS
approves the Merger. In reaching its decision, the Disinterested Trust Managers
considered several factors, and consulted with the Trust's management and
Prudential Securities. The principal reasons, to which relative weights were not
assigned, of why and how the Disinterested Trust Managers made such
determinations are as follows:

(1) The Disinterested Trust Managers reviewed analyses by management
showing that the Merger should help increase the Trust's cash flow and FFO
per Share in 1998. FFO is a widely accepted measure of an equity REIT's
operating performance. An increase in cash flow and FFO per Share as a
result of the Merger or any other reason may result in a greater likelihood
that distributions will be made to shareholders. The Trust believes FFO is
an appropriate measure of performance and provides investors with an
understanding of the ability of the Trust to incur and service debt and
make capital expenditures. FFO should not be considered as an alternative
to net income or other measurements under generally

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<PAGE> 65

accepted accounting principles as an indicator of the Trust's operating
performance or to cash flows from operating, investing or financing
activities as a measure of liquidity.

(2) The Merger will substantially increase the Trust's total
capitalization and increase its market equity from approximately $
million to approximately $ million (based on $ per Share, the
closing price of Shares on , 1997). This increased size affords
several benefits. First, the Merger will increase the number of Shares in
the market, which should result in greater liquidity for holders of the
Shares. The Disinterested Trust Managers believe that institutional
investors prefer larger capitalization companies when making investment
decisions due to greater liquidity which allows the purchase and sale of
larger volumes of Shares without disrupting the market for such Shares. The
Disinterested Trust Managers also believe that the credit rating agencies
generally favor larger capitalization companies and view them as being more
stable for unsecured debt investors. Management believes all of these
factors increase the attractiveness of the Trust to potential investors,
and that the Merger should ultimately result in an improved ability to
access favorably priced equity and debt capital.

(3) The Disinterested Trust Managers believe that the Merger will
allow the Trust to realize economies of scale by spreading costs over a
larger number of properties, thereby improving the Trust's profit margin.

(4) As a result of the Merger, the Trust will acquire the RELPS'
properties, which are located in new regions and markets. The Disinterested
Trust Managers believe that this should provide the combined entity with
easier entry into these new areas and more favorably position the Trust to
make future portfolio acquisitions.

(5) The Trust currently has properties in Texas, California, Colorado,
Maryland and Wisconsin. The Merger adds five additional states: Arizona,
Florida, Illinois, Massachusetts and Missouri. Management considers each of
these to be attractive markets. Based on internally generated estimates of
value, approximately 86% of the Trust's investment in properties is
currently in Denver, Dallas and Houston. Following the Merger, the Trust's
investment in properties will be spread among 10 states, with California
representing 15.6%, Texas representing 56.3% and Colorado representing
3.1%. The Disinterested Trust Managers believe that this type of geographic
diversification is preferred by investors. The Merger should therefore
improve the Trust's access to attractively priced alternative sources of
capital.

(6) Geographic diversification also reduces the vulnerability to
recessions in any particular region. The last recession was a "rolling
recession," because it affected the economies of different regions at
different times. For example, the Southwestern United States went into and
emerged from the recession earlier than the Southeast. The Disinterested
Trust Managers believe that the expansion into new areas resulting from the
Merger should reduce the risk that a regional economic downturn will affect
all of the Trust's properties simultaneously thus smoothing the Trust's
performance through the economic cycles.

(7) The Trust Managers (other than Mr. Duncan who was not present)
received the written opinion of Prudential Securities on July 10, 1997 that
the consideration to be paid by the Trust pursuant to the Merger was fair
from a financial point of view to the Trust as of the date of such opinion,
based upon and subject to certain matters stated therein.

(8) The Disinterested Trust Managers received and reviewed
presentations from, and discussions with, certain executive officers of the
Trust and Prudential Securities regarding the business, real estate assets,
financial, accounting and due diligence with respect to the RELPS and the
terms and conditions of the Merger Agreement, all of which supported the
Merger.

The Disinterested Trust Managers and management also discussed certain
potential negative factors and risks that could arise or do arise from the
Merger. These potential negative factors and risks include the following:

(1) The Exchange Ratio is fixed. Therefore, if the trading price of
the Shares is higher on the closing date of the Merger than the amount of
the Exchange Ratio, the number of Shares to be received by the Limited
Partners in the Participating RELPS will not be reduced, thereby increasing
the value of

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<PAGE> 66

the consideration to be received by the Limited Partners in the Merger. The
Disinterested Trust Managers believe this fact was mitigated by the fact
that the number of Shares to be received by the Limited Partners in the
Participating RELPS will not be increased if the trading price of the
Shares is lower on the closing date of the Merger.

(2) If the Merger occurs, the Trust will be expanding into new regions
and new markets with which the Trust has little prior experience. There is
also a risk that in certain of these markets, the supply of industrial and
commercial properties will exceed the demand for such properties.

(3) Costs related to the Merger (including legal and accounting fees,
financial advisory fees, printing and other costs) are expected to be
significant.

(4) The process of integrating each of the Participating RELP's
properties into the Trust will be time consuming and will require a great
deal of time and effort on the part of management of the Trust.

(5) The Trust's management will have to devote a great deal of time
and effort to effectuate the Merger.

(6) The Trust will now have to manage a more increased and diverse
property portfolio. To manage these additional properties, the Trust will
retain Realco to provide the leasing and management services for the
properties formerly owned by the Participating RELPS.

(7) The expected benefits of the Merger may not occur.

The Disinterested Trust Managers believe that the benefits and advantages
of the Merger far outweigh the negative factors and risks.

In view of a wide variety of factors, both positive and negative considered
by the Disinterested Trust Managers, the Disinterested Trust Managers did not
find it practicable to quantify or otherwise assign relative weights to the
specific factors considered. In addition, no analysis or attempt to quantify any
financial and operational benefits or detriments was made.

THE DISINTERESTED TRUST MANAGERS BELIEVE THAT THE TERMS OF THE MERGER
AGREEMENT ARE FAIR FROM A FINANCIAL POINT OF VIEW TO THE SHAREHOLDERS OF THE
TRUST AND IN THE BEST INTERESTS OF THE TRUST AND ITS SHAREHOLDERS AND HAVE
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE ISSUANCE OF SHARES THEREUNDER
AND RECOMMEND THAT SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND
THE ISSUANCE OF SHARES THEREUNDER.

In the event the Merger is not consummated for any reason, the Trust will
continue to pursue its strategic objective of acquiring light industrial
properties. The Trust will also continue to consider possible acquisitions of
compatible properties in bulk industrial, office and other commercial sectors.

THE RELPS' REASONS FOR THE MERGER AND RECOMMENDATION

The Board of Directors of each of the General Partners and Realco
unanimously determined that the terms of the Merger Agreement, including the
consideration to be received by the Limited Partners in the Merger, are fair to
and in the best interests of the respective Limited Partners. Accordingly, such
Boards have approved the Merger Agreement and recommend that the respective
Limited Partners vote for approval of the Merger Agreement and amendment of the
Partnership Agreement.

Each General Partner's fairness determination was based upon the
transaction as a whole as well as the combination of less than all RELPS because
the Exchange Ratio applicable to each RELP is based upon that particular RELP's
Net Asset Value. Each of the General Partners determined that the fairness to
Limited Partners of each RELP, considered separately, of the Merger Agreement
and the transactions contemplated thereby was therefore not materially affected
as to any RELP in the event the Merger is completed in any combination with
fewer than all RELPS.

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<PAGE> 67

The General Partners' assessment of the fairness of the proposed Merger was
based on the review of different alternatives that were available. The
evaluations of the different alternatives included, but were not limited to, a
strategic combination with a publicly traded REIT to take advantage of the
growth of the REIT industry and real estate markets in general, completely
liquidating the RELPS, continuing the RELPS through an orderly liquidation
(estimated at up to six years), or reorganizing the RELPS into one REIT or four
separate REITs. The outcome of these different alternatives is discussed in more
detail below. The Board of Directors of each of the General Partners and Realco
believe that a strategic combination with the Trust should provide the Limited
Partners the most viable option.

In reaching their determinations, the General Partners consulted with
Realco and Houlihan, and considered several factors as to which relative weights
were not assigned. The following are the material reasons why and how the Board
of Directors of each of the General Partners made its decision to approve the
Merger:

(1) Houlihan, which was not engaged to represent the interests of the
General Partners or any specific group of Limited Partners, but was engaged
to determine the fairness of the consideration to be received by the
Limited Partners from a financial point of view without taking into account
the specific financial interest of any person or group of investors,
determined that the consideration to be received by the Limited Partners of
each RELP is fair from a financial point of view to the RELPS' Limited
Partners.

(2) Prior to implementing a business strategy of seeking a strategic
combination with a publicly traded REIT to take advantage of the growth in
the REIT industry and real estate markets in general, the General Partners
considered the following alternatives: liquidation of the RELPS,
continuation of the RELPS through an orderly liquidation period (estimated
at up to six years) and reorganization of the RELPS into one REIT or as
four separate REITs. In order to determine whether the Merger or one of its
alternatives would be more attractive to the Limited Partners, the General
Partners compared the potential benefits and detriments of the Merger with
the potential benefits and detriments of the alternatives. See
"-- Alternatives to Merger" below for a detailed discussion of the
potential benefits and detriments of each of these alternatives. The
General Partners believe that each of the Merger and its alternatives
offers potential benefits and suffers from potential detriments not
possessed by the other alternatives. Set forth below are the General
Partners' conclusions regarding the comparisons of the Merger to its
alternatives.

(a) Liquidation of the RELPS. The General Partners favor the Merger
over liquidation of the RELPS' assets based upon the General Partners'
conclusion that the Merger permits Limited Partners to take advantage of
the currently favorable market valuations of publicly traded REITs
relative to the private market valuations of the underlying real estate
assets. It is the General Partners' belief that publicly traded REITs
are favorably viewed in the public market in comparison to private
valuations of the underlying real estate assets. The value derived in a
publicly traded REIT is based on the continued growth ability of the
REIT, which is intended to generate a constant source of cash flow in
order to provide distributions to shareholders. The value of a
publicly-traded REIT is measured on a daily basis as the stock is traded
on the stock exchange and is generally priced at a premium over
underlying asset values. The dividend yields of REIT stocks currently
range from 5% to 8%. Real estate assets are typically valued at 8% to
12% capitalization rates. A publicly-traded REIT allows investors to
invest in real estate with the greater degree of liquidity afforded by
an exchange-listed security. Further, the General Partners believe that
the value to each Limited Partner in an immediate liquidation of each
RELP would be less than the consideration to be received under the
Merger. This is due in part to the fact that each RELP would incur
selling costs for each individual property or the portfolio as a whole
and the General Partners believe the sale of multiple assets in a short
defined period would likely result in a discount of the property values
from fair market value. An immediate liquidation would also require
legal, accounting and printing costs to prepare a proxy requesting an
approval from all Unit holders to approve the liquidation values. With
respect to the Merger, the General Partners have waived their right to

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<PAGE> 68

receive Shares to which they may be entitled in exchange for their
general partnership interests. The following is a table comparison of
these alternatives (on a per Unit basis):

<TABLE>
<CAPTION>
NON-MERGER TOTAL
MERGER OFFER SALES CONSIDERATION LIQUIDATION VALUE(1)
------------ ---------- ------------- --------------------
<S> <C> <C> <C> <C>
RELP I............ $209.00 -- $209.00 $177.00
RELP II........... 376.00 $83.00 459.00 419.00
RELP III.......... 218.00 -- 218.00 191.00
RELP IV........... 199.00 -- 199.00 175.00
</TABLE>

(1) Liquidation value was determined using the projected future cash
flows of the properties based on an assumed capitalization rate for the
particular property. The liquidation value is net of an assumed 3.0% for
estimated closing costs, a 5.0% adjustment for a liquidation discount
and an estimate of proxy costs for limited partner approval of the
liquidation.

(b) Continuation of the RELPS Through an Orderly Liquidation. The
General Partners have concluded that continuation of the RELPS is not as
attractive an alternative as the Merger based on the benefits of the
Merger which Limited Partners would forgo in the event of the RELPS'
continuation. Specifically, the Limited Partners would not realize the
liquidity or diversification afforded by the Merger, would not benefit
from the currently favorable markets for the equity securities of REITs,
which markets today may value real estate assets more favorably than
such assets are valued in the real estate markets, and would not be able
to participate in new real estate investment opportunities.

Continuing each RELP in accordance with an orderly liquidation plan
would enable the RELPS to sell each property at a different time to
maximize price. The downside to this option is the estimated projected
time frame for a complete liquidation of the RELPS ranges from an
additional one to six years. This additional time frame would place the
RELPS in a position that exceeds the originally anticipated holding
period for these real estate investments. During this extended time
frame, each individual investor would remain in an illiquid investment
vehicle without the ability to reasonably exit the investment. Because
of the relatively small total size of each RELP, the advantages of
diversification and liquidity would not be available. Given the size and
number of properties held by each of the RELPS, the sale of each
individual property would cause each RELP to continue to cover fixed
administrative charges with the remaining properties resulting in future
reductions in partnership distributions. In addition, the RELP Unit
holders would continue to have the burden of incorporating yearly K-1s
with their personal tax returns. The following is a comparison of going
concern values (on a per Unit basis) compared to the Merger:

<TABLE>
<CAPTION>
NON-MERGER TOTAL
MERGER SALES CONSIDERATION GOING CONCERN(1)
------- ---------- ------------- ----------------
<S> <C> <C> <C> <C>
RELP I................. $209.00 -- $209.00 $194.00
RELP II................ 376.00 $83.00 459.00 452.00
RELP III............... 218.00 -- 218.00 212.00
RELP IV................ 199.00 -- 199.00 205.00
</TABLE>

(1) Going concern values were determined using the projected cash
flows of the properties assuming an orderly liquidation of the
properties over a five year period. Projected sales values were
discounted back to January 1998 using a discount factor of 12%. The
going concern value is net of an assumed 3% for estimated closing costs.

(c) Reorganization of the RELPS into one REIT or as a Separate
REIT. The General Partners believe that the reorganization of the RELPS
into one REIT or as separate REITs would present the potential
detriments of the Merger without providing many of its potential
benefits, such as creation of an active and broad-based market for the
REIT's securities, elimination of conflicts of interest among the
various RELPS, increased diversification, access to an existing
publicly-traded vehicle such as the Trust and more immediate growth
potential and improved access to the capital

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<PAGE> 69

markets. In addition, the General Partners believe that the cost of
pursuing the reorganization would be significantly greater than each
RELP's pro rata share of the Merger expenses, which expenses will be
paid by the Trust if the Merger is approved or paid by Realco if the
Merger is not approved.

The consideration of rolling up the RELPS into a single REIT was
not attractive as an alternative due to the size of the ultimate
portfolio. Also, the transaction and REIT formation costs in
reorganizing the RELPS into one REIT would be significant for each RELP.
The consideration to have individual REITs was not achievable due to
similar reasons stated for rolling up the four RELPS into a single REIT.
The General Partners concluded that the size of the individual REITs
would be too small in the public market to be an attractive investment,
therefore making it a difficult vehicle to generate long-term value and
liquidity for the Limited Partners.

(3) The General Partners believe that the Merger will result in
simplified tax administration for many Limited Partners. Shareholders will
receive Form 1099-DIV to report their distributions from the Trust. Forms
1099-DIV are substantially easier to understand than the more complicated
Schedule K-1 prepared for the reporting of the financial results of the
RELPS.

(4) The General Partners believe that the economic terms of the Merger
Agreement, including the Exchange Ratio for each RELP and the 48.63% equity
interest in the combined entity (45.87% if Realco converts the Trust's
indebtedness prior to December 31, 1997) to be received by the Limited
Partners, assuming all RELPS participate in the Merger, were favorable to
the Limited Partners.

(5) The General Partners' believe that the Net Asset Values of the
RELPS represent fair estimates of the value of the RELP assets, net of
liabilities, as of June 30, 1997, and constitute a reasonable basis for
allocating the consideration offered by the Trust among all RELPS that may
be combined through the Merger.

(6) The General Partners reviewed the other terms and conditions of
the Merger Agreement, including the mutuality of the representations and
warranties and covenants, the requirement that each party consult with the
other on significant business and financial matters prior to consummation
of the Merger and the ability of each of the General Partners to pursue an
unsolicited superior competing transaction should its fiduciary duties so
require, and believe that they were fair to the Limited Partners.

(7) The General Partners believe that the Limited Partners should
benefit from owning Shares in a NYSE-traded REIT with strong sponsorship
and substantial equity ownership of Realco, Affiliates of MSAM, ABKB and
LaSalle Advisors and the expectation that, in the future, the combined
entity will have improved access to capital markets for future growth and
Limited Partners will have enhanced liquidity as a result of the larger
total equity market capitalization of the combined entity.

(8) As separate legal entities with different investors, each of the
RELPS must segregate its assets and liabilities (to avoid commingling
assets), conduct operations independently, and maintain separate books and
records for the preparation of financial statements, tax returns, investor
information and reports and filings to be made to the Commission. The
assets of one RELP cannot be employed for the benefit of one or more of the
other RELPS and the General Partners' fiduciary duties prevent them from
pursuing activities favoring some RELPS to the disadvantage of other RELPS.
Due to the separate nature of the RELPS, with their different groups of
investors, the General Partners must always be mindful of the separate
programs, and treat them separately, even if other courses of action would
benefit most if not all of the RELPS. Potential conflicts of interest arise
in the allocation of management resources and efforts to refinance or
dispose of properties. In contrast, the Merger places substantially all of
the assets of the Participating RELPS into the Trust, and allows such
assets to be used to achieve a common set of investment objectives without
taking into account the differences among the RELPS. The General Partners
therefore concluded that, through the Merger, the Trust should secure
advantages that cannot be fully pursued by the RELPS acting on their own.
Such advantages include, but are not limited to, the opportunity of making
new investments, the availability of financing and taking advantage of
certain business opportunities (which may not be profitably pursued by any
of the RELPS). Certain of these benefits are described in more detail in
the following paragraphs.

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<PAGE> 70

(9) Each year the RELPS must prepare four separate sets of financial
statements, annual and quarterly filings for the Commission, tax returns
and investor communications. The accurate preparation of this material
requires substantial management time and effort. Furthermore, to the extent
other service providers, such as legal counsel, accountants, appraisers,
land use consultants and other professionals, render services benefiting
two or more of the RELPS, relative to the benefits afforded the RELPS,
costs and expenses associated with and services must be fairly and
equitably allocated among the RELPS. The General Partners therefore believe
that, by combining the Participating RELPS into a single ownership entity,
the Merger should eliminate much of the duplication in reporting, filing,
and other administrative services, simplifying administration of the
consolidated entities including tax administration as described below. The
General Partners found it difficult to quantify to what extent, if any,
this merger of functions would reduce the overall cost of administrative
services. For example, while the Merger reduces the number of entities for
which administrative services are required, the Merger will not reduce the
number of investors or the assets under management. The General Partners
concluded that whether or not the Merger reduces the overall costs, it
should eliminate the risk of misallocating expenses benefiting one or more
of the programs, and the problems of determining a fair method of
allocating common costs and expenses, and simplify the preparation of
financial statements, tax returns, investor information and reports and
filings otherwise required.

(10) The General Partners have seen in recent years a number of
significant changes take place in the financial and real estate markets.
These same factors created attractive investment opportunities for
investors which have access to capital. The General Partners also concluded
that the RELPS are not in a position to take advantage of these
opportunities since they have already committed their capital and are not
authorized to raise additional funds. The General Partners believe that, in
contrast, the Trust can take advantage of investment opportunities that may
be available in current real estate markets because it has both the right
to reinvest net sale or refinancing proceeds and the authority to raise
additional capital, through the sale of debt and/or equity securities, to
finance investments. This ability will allow those Limited Partners who
become shareholders in the Trust to participate in the investment
opportunities in the current real estate market.

The General Partners further believe that even if the RELPS were able
to raise additional funds through debt or equity offerings, the Trust is
able to issue additional debt and equity securities with greater ease and
on more attractive terms than would be available to any of the RELPS due to
its larger base of assets and shareholders' equity. If all of the RELPS
participate in the Merger, the Trust will control assets having a value of
approximately $200 million. The General Partners believe that the Trust's
capital base may make it a more attractive candidate for the services of
investment banking firms, financial institutions, institutional lenders and
others interested in placing large amounts of capital. Generally speaking,
all other conditions being equal, the cost of money for large borrowers is
less than the cost of money for borrowers having a smaller capital base.

(11) By combining the RELPS with the Trust, the Merger will create an
investment portfolio substantially larger and more geographically
diversified than the portfolio of any of the RELPS. The General Partners
therefore concluded that this increased size and the resulting
consolidation of operations spread the risk of an investment in the Trust
over a broader group of assets and reduces the dependence of the investment
upon the performance of any particular asset or group of assets, such as
assets in the same geographical area.

(12) Prior to consummation of the Merger, all cash and cash
equivalents, net of related payables, liabilities or other contingencies,
will be distributed to the partners of the RELPS. Such distributions are
expected to be $ for RELP I ($ per Unit), $ for RELP II ($
per Unit), $ for RELP III ($ per Unit) and $ for RELP IV
($ per Unit).

(13) The General Partners have agreed to waive their rights to receive
any Shares to which they may be entitled in exchange for their general
partnership interests.

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<PAGE> 71

Each General Partner considered the following potentially negative factors
in its deliberations concerning the Merger:

(1) Because the Exchange Ratio for each RELP is fixed, a decline in
the value of the Shares would reduce the value of the consideration to be
received by Limited Partners in the Merger. This factor was mitigated, in
each of the General Partner's view, by the fact that because of the fixed
Exchange Ratio, Limited Partners would benefit from any appreciation in the
price of the Shares.

(2) The Trust has not made distributions for four consecutive quarters
since 1993 and the Limited Partners currently receive quarterly
distributions from each respective RELP.

(3) There are numerous conditions to the Trust's obligation to
consummate the Merger.

(4) The anticipated benefits of the Merger may not be realized.

(5) Under the terms of the Merger Agreement, each of the General
Partners is prohibited from initiating, soliciting or encouraging any
inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, a transaction which would compete with the Merger
except that if the General Partner determines in good faith after
consultation with outside legal counsel that it is required by its
fiduciary obligations to do so, the General Partner may, among other
things, respond to and engage in discussions and negotiations with persons
making unsolicited proposals or inquiries and may approve or recommend such
a transaction.

(6) A RELP may be required, if the Merger Agreement is terminated
under certain circumstances, to pay the Trust its Proportionate Share of a
termination fee of $2,000,000 or to reimburse the Trust for its
Proportionate Share of up to $1,000,000 of the Trust's out-of-pocket
expenses incurred in connection with the Merger.

(7) The leverage of the combined entity will be greater than the
leverage of any existing RELP.

(8) The Merger will result in taxable income or loss to each Limited
Partner. Because the Merger will result in an exchange of Units for Shares,
no Limited Partner will receive cash (other than cash in lieu of fractional
Shares) in the Merger to pay any taxes due on any taxable income arising as
a result of the Merger.

In light of the wide variety of factors, both positive and negative,
considered by each General Partner, no General Partner found it practicable to
quantify or otherwise assign relative weights to the specific factors considered
in making its determination. However, in the view of each General Partner, the
potentially negative factors considered by it were not sufficient, either
individually or collectively, to outweigh the positive factors considered by the
General Partner in its deliberations relating to the Merger. In addition, except
as detailed above, no analysis or attempt to quantify any financial or
operational benefits or detriments was made.

The following is a brief discussion of the benefits and disadvantages of
alternatives to the Merger that could have been pursued by the General Partners.

Liquidation

Benefits of Liquidation. An alternative to the Merger would be liquidating
the assets of each of the RELPS, distributing the net liquidation proceeds to
the General and Limited Partners in accordance with the Partnership Agreements,
and thereafter dissolving the RELPS. Through such liquidations, the General
Partners would provide for a final disposition of the investors' interest in the
RELPS. Any net liquidation proceeds would be utilized by Limited Partners for
investment, business, personal or other purposes. Liquidating the RELPS within
one year would result in concluding the investors' investments in RELP III and
RELP I approximately three years after the outside date expected for the holding
of such investments and the investments in RELP IV and RELP II within a few
months of the time frame originally expected. If the RELPS liquidated their
assets, such assets would be valued through arm's length negotiations between
the RELPS and the prospective purchasers. Each of the RELPS has reviewed
numerous unsolicited offers to

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purchase various properties. These unsolicited offers are discussed in detail
below under "Offers From Third Parties."

Disadvantages of Liquidation. Since the RELPS were organized, significant
changes have taken place in the financial and real estate markets that have had
a material adverse impact upon the value of commercial real estate. In the 1980s
and early 1990s, the United States real estate market experienced one of the
worst real estate cycles in recent history. Undisciplined flows of capital into
the real estate market resulted in a large increase in supply of product, while
simultaneously there occurred an economic downturn which affected every area of
the United States, constraining a corresponding increase in demand. One of the
capital sources, the savings and loan industry, experienced a crisis which
sharply curtailed lending as well as prompted a large number of property sales,
contributing to the oversupply. In addition, a significant change in tax laws
made investment in real estate less attractive and reduced the pool of
prospective real estate buyers. Other sources of capital such as life insurance
companies and pension funds reduced their investment in real estate as the
market became less favorable. All of these factors, as well as other less
apparent ones, contributed to reductions in the revenue streams and a loss in
value in all types of real estate located across the nation. Many real estate
markets have begun to strengthen, and some value has been regained. However,
even in improving markets, liquidation of an entire portfolio within a short
period of time typically produces substandard valuations and may prevent all
RELPS from maximizing the net proceeds from a sale of a property which may
otherwise be achievable. The General Partners favor the Merger as a means for
permitting Limited Partners to take advantage of the currently favorable market
valuations of publicly traded REITs relative to the private market valuations of
the underlying real estate assets.

Liquidation Procedures. The process for liquidating the RELPS' assets is in
large measure within the control of the Limited Partners. The General Partners
are not authorized, without notice to or the approval of the Limited Partners,
to sell, refinance or otherwise dispose of all or substantially all of the
RELPS' assets. Liquidation may be accomplished through a series of separate
transactions with the same or different purchasers or as a part of a
multi-property transaction that might also involve properties owned by other
RELPS. The General Partners may engage real estate brokers, investment bankers,
financial consultants and others to assist with the disposition of the RELPS'
assets. These persons may assist with the identification of prospective
purchasers, arrangements for asset financing, and assistance with the structure
of the transaction. The General Partners, as fiduciaries to the Limited
Partners, remain responsible for determining the terms and conditions of the
transaction. One of the more significant considerations for the General Partners
will be the decision whether to insist upon payment in full upon sale of a RELP
property or to accept a portion of the sale price at closing and the balance
through installment payments. Acceptance of a sale proposal providing for
deferred payments would extend the life of a RELP until receipt of those amounts
by the RELP and their distribution in accordance with the Partnership Agreement.
Such arrangements would also expose a RELP to the risk that deferred payments
might not be collected in full and that the RELP might be forced to foreclose on
any collateral given to secure payment of the deferred obligations.

Continuation of RELPS

Benefits of Continuation. A second alternative to the Merger would be to
continue each of the RELPS in accordance with its existing business plan, with
the RELP remaining as a separate legal entity, with its own assets and
liabilities, and continuing to be governed by its existing Partnership
Agreement. Nothing in the RELPS' organizational documents requires the General
Partners to proceed with liquidating the RELP's assets in today's real estate
markets. While the disclosure documents, pursuant to which the Units were
offered to the public, disclosed the intentions of the RELPS to liquidate their
assets within a four to ten-year period, depending upon the program, the General
Partners are not under a legal obligation to liquidate assets within that time
frame. To the contrary, each of the RELPS has a stated life of 40 to 64 years,
and the Limited Partners were advised that the liquidation of the RELPS would be
in the control of the General Partners.

Although there is no established public trading market for the Units, upon
request, Realco has historically assisted Limited Partners desiring to transfer
Units by providing to them the names of persons who have indicated a desire to
buy Units. The purchase price for the Units in the secondary market are subject
to

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negotiation between the buyer and seller. The General Partners of RELP I, RELP
III and RELP IV have also received and responded to offers from investors to
purchase up to 4.9% of their outstanding Units. RELP I has received two such
offers, RELP III has received two such offers and RELP IV has received one such
offer.

A number of advantages would be expected to arise from the continued
operation of the RELPS. Limited Partners should continue to receive regular
quarterly distributions of net cash flow, arising from operations and the sale
or refinancing of partnership assets. Since the RELPS are not obligated to
dispose of their assets at any particular point in time, continuing the RELPS
allows the General Partners to select the most opportune time for disposing of
the RELPS' assets, irrespective of the expected holding period set forth in the
original disclosure documents. In addition, the decision to continue the RELPS,
if selected, means that there would be no change in the nature of the Limited
Partners' investment. This option avoids most disadvantages that might be deemed
inherent in the Merger.

Disadvantages of Continuation. The primary disadvantage with continuing the
RELPS is the failure of that strategy to secure the benefits that the General
Partners expect to result from consolidating the RELPS' assets in the Trust.
These benefits are highlighted under "Background and Reasons for Merger." The
Limited Partners of a RELP which does not participate in the Merger should be
prepared to continue holding their investments in such RELPS for the foreseeable
future. For investments in all the RELPS, Limited Partners' investments will be
held beyond the time period originally contemplated for the length of those
investments. Limited Partners also will not have the opportunity for liquidity
that will be afforded through listing the Shares on the NYSE. By not
participating in the Merger, Limited Partners will miss the opportunity of
taking advantage of the currently favorable markets for the equity securities of
REITs, which markets today may value real estate assets more favorably than such
assets are valued in the real estate markets themselves. The Trust is expected
to have a substantially larger, more diversified, investment portfolio than any
particular RELP which reduces the risks associated with any particular assets or
group of assets, increases the Trust's ability to access capital markets for new
capital investments and eliminates duplication in administrative services,
reporting and filing. Another disadvantage of continuation as a limited
partnership is that Limited Partners would continue to be burdened by the more
complicated Schedule K-1 for the reporting of the financial results of the
RELPS.

Reorganization of RELPS as One REIT or as Separate REITs

The General Partners considered the advisability of reorganizing the RELPS
into one or separate corporations taxed as a REIT. If approved, such action
would have provided some of the advantages contemplated by the Merger. Such
reorganization would be expected to (i) provide investors in the reorganized
entities with some liquidity; (ii) permit distribution to investors of a simpler
federal income tax Form 1099-DIV (compared to the Schedule K-1); and (iii)
potentially be formed tax-free to the Limited Partners. The General Partners
believe that the reorganization of the RELPS into separate REITs has a number of
significant disadvantages. Substantial costs and expenses would be incurred by
each of the RELPS were they to separately pursue reorganization into separate
REITs. It is believed that such costs in the aggregate would be substantially
greater than the costs expected for the Merger. Because of the size of the
RELPS, the General Partners believe such reorganization would result in a
limited market for the shares of the newly formed REITs. The General Partners
also believe that reorganization of all the RELPS into one REIT would not
provide the critical mass of properties or property diversification necessary to
attract growth capital to the new entity. One of the benefits of the Merger is
that the Shares will be listed on the NYSE and that a public market for the
Shares currently exists. It is unlikely that the RELPS, if organized into one or
separate REITs, would in the near term permit a market as broad based and as
active as the market that should develop from the merger of the RELPS into the
Trust.

THE BOARD OF DIRECTORS OF EACH OF THE GENERAL PARTNERS AND REALCO BELIEVE
THAT THE TERMS OF THE MERGER AGREEMENT, INCLUDING THE CONSIDERATION TO BE
RECEIVED BY THE LIMITED PARTNERS IN CONNECTION WITH THE MERGER, ARE FAIR TO AND
IN THE BEST INTERESTS OF THE RESPECTIVE LIMITED PARTNERS AND HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT THE RESPECTIVE LIMITED
PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREE-

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MENT AND AMENDMENT TO THE PARTNERSHIP AGREEMENT AND FOR APPROVAL OF THE
APPLICABLE RELATED TRANSACTION.

In the event the Merger is not consummated for any reason, each RELP will
continue to pursue its business objectives of maximizing the value of its
properties.

Offers From Third Parties

All offers received during the past twelve months by the General Partners
of the RELPS from unaffiliated third parties are described below in addition to
a brief discussion of why such offers were not accepted. Conditions placed on
each of the offers which are considered significant are also described. In all
of these instances, the General Partner assessed each offer in light of the
current market and property conditions prevalent at the time. Counteroffers were
made when the initial offer was considered too low or the other terms were
inadequate and there was reason to believe further price negotiations were
possible.

RELP I Properties

Systech -- 10505 Sorrento Valley Road. On April 22, 1997, the General
Partner received an offer to purchase the Systech Office Building for $4,323,000
(gross) in cash. Believing that the offer was too low at the time, the General
Partner declined and responded verbally that offers would need to be
approximately $4,500,000 (net) to be considered. The purchaser did not increase
its offer and negotiations ended.

On June 19, 1997, the General partner received an offer to purchase the
Systech Office Building for $3,850,000 (gross) in cash. Believing that the offer
was too low at the time, the General Partner declined and responded verbally
that offers would need to be approximately $4,500,000 (net) to be considered.
The purchaser did not increase his offer and negotiations ended.

Volusia Point. On June 10, 1997, the General Partner received an offer to
purchase the Volusia Point Shopping Center for $6,800,000 (gross) in cash.
Believing that the offer was too low at the time, the General Partner declined
and responded verbally that offers would need to be in excess of $7,000,000
(net) to be considered. The purchaser did not increase his offer and
negotiations ended.

RELP II Properties

CST Office Products Building. On July 10, 1996, the General Partner
received an offer to purchase the CST Office Products Building for $3,833,000
(gross) in cash. Believing that the offer was too low at that time, the General
Partner countered with an offer of $4,000,000 (gross) in cash. The purchaser
responded with an offer of $3,900,000 (gross) in cash which was accepted by the
General Partner, and a Purchase and Sale contract was executed. At the
completion of the contract's due diligence period, the purchaser executed its
right to cancel the contract. This sale would have provided net proceeds to RELP
II of approximately $3,800,000.

On October 29, 1996, the General Partner received an offer to purchase the
CST Office Products Building for $3,250,000 (gross) with seller financing at a
minimum of 10 years. Believing that the offer was too low at the time, the
General Partner declined.

Continental Plastics. On April 26, 1996, the General Partner received an
offer to purchase the Continental Plastics Building for $6,450,000 (gross) in
cash. Believing that the offer was too low at the time, the General Partner
countered with an offer of $7,400,000 (gross) in cash. The purchaser did not
increase its offer and negotiations ended.

On September 30, 1996, the General Partner received an offer to purchase
the Continental Plastics Building for $6,300,000 (gross) in cash. Believing that
the offer was too low at the time, the General Partner declined.

On September 30, 1996, the General Partner received an offer to purchase
the Continental Plastics Building for $6,500,000 (gross) with seller financing.
Believing that the offer was too low at that time, the General Partner countered
with an offer of $7,600,000 with Realco financing. The purchaser responded with

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an offer of $7,400,000 with Realco financing at below-market rates. Believing
that the offer was still too low, the General Partner countered with an offer of
$7,450,000 (gross) with Realco financing at market rates. The purchaser did not
increase his offer and required below-market financing and certain guarantees
from Affiliates. The General Partner declined, and negotiations ended.

On February 1, 1997, the General Partner received an offer to purchase the
Continental Plastics Building for $5,000,000 (gross) in cash. Believing that the
offer was too low at the time, the General Partner declined.

On February 1, 1997, the General Partner received an offer to purchase the
Continental Plastics Building for $6,250,000 (gross) in cash. Believing that the
offer was too low at the time, the General Partner declined.

On February 26, 1997, the General Partner received an offer to purchase the
Continental Plastics Building for $6,435,000 (gross) in cash. Believing that the
offer was too low at the time, the General Partner countered with an offer of
$7,585,000 (gross) in cash. The purchaser responded with an offer of $6,643,000
(gross) in cash. Believing that the offer was still too low, the General Partner
countered with an offer of $7,394,000 (gross) in cash. The purchaser did not
increase its offer, and negotiations ended.

On February 28, 1997, the General Partner received an offer to purchase the
Continental Plastics Building for $6,100,000 (gross) in cash. Believing that the
offer was too low at the time, the General Partner declined.

On April 8, 1997, the General Partner received an offer to purchase the
Continental Plastics Building for $7,080,000 (gross) in cash. Believing that the
offer was too low at the time, the General Partner countered with an offer of
$7,550,000 (gross) in cash. The purchaser did not increase its offer, and
negotiations ended.

On April 22, 1997, the General Partner received an offer to purchase the
Continental Plastics Building for $7,300,000 (gross) in cash. Believing that the
offer was too low at the time, the General Partner countered with an offer of
$7,600,000 (gross) in cash. The purchaser responded on April 28, 1997, with an
offer of $7,320,000 (gross) in cash. Believing that the proceeds from the offer
were still too low, the General Partner countered with an offer of $7,490,000
(gross) in cash. The purchaser responded with its best and final offer on May
13, 1997, of $7,400,000 (gross) in cash. This offer would provide net proceeds
of approximately $7,225,000. The General Partner declined, and negotiations
ended.

On April 24, 1997, the General Partner received an offer to purchase the
Continental Plastics Building for $6,900,000 (gross) in cash. Believing that the
offer was too low at the time, the General Partner countered with an offer of
$7,575,000 (gross) in cash. The purchaser did not increase its offer, and
negotiations ended.

RELP III Properties

Manhattan Towers. The General Partner received three unsolicited offers
for the Manhattan Towers from September 1996 to May 1997. The offers ranged from
$22,000,000 to $30,500,000 (gross). These offers were declined by the General
Partner as the property's leasing needed to be stabilized. As such, the General
Partner believed that the offers were too low compared to the value of the
property after the anticipated lease up. This valuation was based on a holding
period of greater than five years.

Curlew Cross Shopping Center. On June 30, 1997, the General Partner
received an offer to purchase the Curlew Cross Shopping Center for $9,124,000
(gross) in cash. Believing that the offer was too low at that time, the General
Partner declined and responded verbally that offers would need to provide net
proceeds in excess of $10,500,000 to be considered. The offerer increased its
offer on July 16, 1997 to $10,000,000 (gross) in cash. The General Partner
declined and again responded verbally that offers would need to provide net
proceeds in excess of $10,500,000 to be considered. The offeror did not increase
its offer, and negotiations ended.

RELP IV Properties

Apollo Office Building. On January 30, 1997, the General Partner received
an offer to purchase the Apollo Office Building for $24,660,000 (gross) in cash.
RELP III owns a 55.84% interest in a joint venture that owns the Apollo Office
Building. Believing that the offer was too low at this time, the General Partner
declined and responded verbally that the offers would need to be significantly
higher to be considered. The offeror responded that for various reasons this
negotiation would have to be delayed until further notice.

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All RELPS

By letters dated May 29, 1997 and June 16, 1997, Mr. Kelley received a
preliminary indication of interest from and on behalf of Glenborough to acquire
the properties of the RELPS, which did not include any suggestion of the price
it would pay. Because, based on the evaluation of the alternatives available,
the Board of Directors of each General Partner and Realco each determined to
pursue to a business strategy of seeking a strategic combination with the Trust
to take advantage of the growth in the REIT industry and real estate markets in
general, rather than a complete liquidation of the RELPS, the General Partners
determined that pursuing a liquidation of the portfolio with Glenborough was
not, at such time, in the best interests of the Limited Partners. Accordingly,
no discussions were held with Glenborough and such indication of interest was
not pursued.

By letter dated September 25, 1997 to Mr. Kelley, Glenborough submitted a
proposal to purchase certain of the real properties of the RELPS for $95 million
in cash. Also by letter dated September 25, 1997 to Mr. Kelley, Burack submitted
a proposal to purchase the same real properties of the RELPS for $98.9 million
in cash. Each such offer is subject to numerous conditions, including the
successful completion of due diligence, and would require the RELPS to pay off
all loans related to such properties and deliver such properties to the
transferee free and clear of any mortgage debt. Such proposals are currently
being reviewed by the General Partners and their advisors. Should the General
Partners elect to terminate the Merger Agreement and pursue either of the
foregoing proposals, such termination could subject the RELPS to the Liquidated
Damages Amount under the terms of the Merger Agreement.

FAIRNESS OPINIONS

The Trust. Management of the Trust solicited proposals from four firms for
the preparation of the fairness opinion. The Trust retained Prudential
Securities on June 26, 1997, to render an opinion as to whether the
consideration to be paid by the Trust pursuant to the Merger was fair from a
financial point of view to the Trust. Prudential Securities was not requested
to, and did not make, any recommendation to the Disinterested Trust Managers as
to the Exchange Ratio to be provided for in the Merger, which Exchange Ratio was
determined through negotiations between the Trust, Realco and the General
Partner.

Prudential Securities was retained to render the fairness opinion based
upon its prominence as an internationally recognized investment banking and
financial advisory firm with experience in the valuation of businesses and their
securities in connection with mergers and acquisitions, and for other purposes,
and has substantial experience with respect to REITs and other real estate
companies and in transactions similar to the Merger, and because of Prudential
Securities' familiarity with the Trust and its operations.

Prudential Securities has acted as financial advisor to the Trust since
January 24, 1997. In connection with its financial advisory role, Prudential
Securities acted as placement agent in the private placement of (i) 1,433,483
Shares to MSAM and its affiliates pursuant to a Common Share Purchase Agreement
dated June 20, 1997; (ii) 442,040 Shares to LaSalle Advisors pursuant to a
Common Share Purchase Agreement dated July 3, 1997; and (iii) 782,449 Shares to
ABKB pursuant to Common Share Purchase Agreements dated July 3, 1997.

On July 10, 1997, Prudential Securities delivered its written opinion to
the Board of Trust Managers (the "Prudential Securities Opinion"), to the effect
that, as of the date of such opinion, based on Prudential Securities' review and
subject to the limitations described below, the consideration to be paid by the
Trust pursuant to the Merger was fair from a financial point of view to the
Trust. The Prudential Securities Opinion does not constitute a recommendation to
any shareholder of the Trust as to how any such shareholder should vote on the
Merger. Prudential Securities has no existing contractual obligation to update
its fairness opinion.

THE FULL TEXT OF THE PRUDENTIAL SECURITIES OPINION, WHICH SETS FORTH, AMONG
OTHER THINGS, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON ITS REVIEW
UNDERTAKEN, IS ATTACHED AS ANNEX II-A TO THIS JOINT PROXY STATEMENT/PROSPECTUS.
THE TRUST'S SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY.

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Prudential Securities made a presentation of the Prudential Securities
Opinion and the underlying financial analysis to the Trust Managers (other than
Mr. Duncan who was not present) on July 10, 1997 and, in addition, provided to
the Trust Managers (other than Mr. Duncan who was not present), prior to the
meeting, a report setting forth the analysis underlying the Prudential
Securities Opinion. This analysis, as presented to the Trust Managers, is
summarized herein. Trust Managers present at the meeting (either in person or
via teleconference) had an opportunity to ask questions of Prudential
Securities. Prudential Securities discussed the information in the report, and
the financial data and other factors considered by Prudential Securities, in
conducting its analysis, all of which are summarized herein.

In requesting the Prudential Securities Opinion, the Trust Managers did not
give any special instructions to Prudential Securities or impose any limitations
upon the scope of the investigation that Prudential Securities deemed necessary
to enable it to deliver its opinion. A copy of the Prudential Securities
Opinion, which sets forth the assumptions made, matters considered and limits on
the review undertaken, is attached hereto as Annex II-A and is incorporated
herein by reference. The summary of the opinion set forth below is qualified in
its entirety by reference to the full text of the Prudential Securities Opinion.
Shareholders are urged to read the opinion in its entirety. The opinion is
directed only to the fairness of the consideration to be paid by the Trust from
a financial point of view and does not constitute a recommendation to any
shareholder as to how such shareholder should vote at the Trust Special Meeting.

The Trust selected Prudential Securities to provide a fairness opinion
because it is an internationally recognized investment banking firm engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions and for other purposes and has substantial experience in
transactions similar to the Merger. The engagement letter with Prudential
Securities provides that the Trust will pay Prudential Securities a fee equal to
$250,000 upon the delivery of the opinion. In addition, the engagement letter
with Prudential Securities provides that the Trust will reimburse Prudential
Securities for its reasonable out-of-pocket expenses and will indemnify
Prudential Securities and certain related persons against certain liabilities,
including liabilities under securities laws, arising out of the Merger or its
engagement.

In conducting its analysis and arriving at the opinion, Prudential
Securities reviewed such information and considered such financial data and
other factors as Prudential Securities deemed relevant under the circumstances,
including:

(i) a draft, dated July 3, 1997, of the Merger Agreement;

(ii) the Trust's Annual Report on Form 10-K and the related financial
information for the fiscal year ended December 31, 1996 and the Trust's
Quarterly Report on Form 10-Q and the related unaudited financial
information for the quarterly period ended March 31, 1997;

(iii) each RELP's Annual Report on Form 10-K and the related financial
information for the fiscal year ended December 31, 1996 or, in the case of
RELP II, for the fiscal year ended June 30, 1996, and each RELP's Quarterly
Report on Form 10-Q and the related unaudited financial information for the
quarterly period ended March 31, 1997;

(iv) certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets and prospects of the Trust
furnished to Prudential Securities by the Trust's management;

(v) certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets and prospects regarding the
properties of each RELP furnished to Prudential Securities by such RELP's
management;

(vi) certain information provided by the Trust's management relating
to the properties of the RELPS including projections of net operating
income for years 1998 and 1999 based on the Trust management's review of
the properties and lease profiles of the RELPS;

(vii) the historical market prices and trading activity for the Shares
and certain publicly traded companies which Prudential Securities deemed to
be reasonably similar to the Trust;

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(viii) the historical and projected results of operations of the Trust
and historical and certain future earnings estimate of selected companies
which Prudential Securities deemed to be reasonably similar to the Trust;

(ix) publicly available financial, operating and stock market data
concerning certain companies engaged in businesses Prudential Securities
deemed comparable to the Trust or otherwise relevant to Prudential
Securities' inquiry;

(x) the financial terms of certain recent transactions Prudential
Securities deemed relevant; and

(xi) such other financial studies, analyses and investigations as
Prudential Securities deemed relevant.

The financial forecasts provided to Prudential Securities were the RELPS'
property-by-property cash budget for 1997 (actual for the six months ended June
30, 1997) and forecast of net operating income and net cash flow for the
five-year period 1998 to 2002, a pro forma combined balance sheet for the RELPS
and the Trust at March 31, 1997 and a pro forma combined net operating income
model for the RELPS and the Trust for 1998. Prudential Securities discussed with
senior management of the Trust: (a) the prospects for the Trust's business, (b)
management's estimate of such business' future financial performance, (c) the
potential financial impact of the Merger on the Trust, including management's
estimate of the Trust's expenses related to the Merger, and (d) such other
matters as Prudential Securities deemed relevant. Prudential Securities also
visited selected properties owned by the RELPS.

In connection with its review and analyses and in arriving at the opinion,
Prudential Securities assumed and relied upon the accuracy and completeness of
the financial and other information provided to Prudential Securities by the
Trust and the RELPS or which was publicly available, and did not undertake to
verify independently any such information. Prudential Securities neither made
nor obtained any independent valuations or appraisals of any of the Trust's
assets or the assets of the RELPS. With respect to certain financial projections
provided to Prudential Securities for the Trust and for each of the properties
owned by the RELPS, Prudential Securities assumed that the information was
reasonably prepared and that the projections represented managements' best
currently available estimate as to the future financial performance of the Trust
and of the properties owned by the RELPS. This opinion is necessarily based on
economic, financial and market conditions as they existed and can only be
evaluated as of the date of the Prudential Securities Opinion.

Prudential Securities assumed that the draft Merger Agreement reviewed by
it will conform in all material respects to those documents when in final form,
that the disclosure letters and due diligence contemplated by that agreement
will not identify any adverse condition, and that the Merger will be consummated
substantially as contemplated by the draft Merger Agreement.

Prudential Securities expressed no opinion as to what the market value of
the Trust's Shares will be when issued in the Merger or the prices at which the
Shares will trade after the Merger. In addition, the opinion does not evaluate
the relative merits of the Merger as compared to any other business plan or
opportunity which might be presented to the Trust or the effect of any other
arrangement which the Trust might pursue.

Prudential Securities concluded that the Merger would increase the Trust's
shareholder base, public float and equity market capitalization at an effective
price per Share which was reasonable relative to Trust management's estimated
net asset value per Share and the net proceeds per Share received by the Trust
in recent private equity placements with unaffiliated third parties, and should
increase the Trust's FFO.

In arriving at the opinion, Prudential Securities performed a variety of
financial analyses, including those summarized herein. The summary set forth
herein of the analyses presented to the Disinterested Trust Managers at the July
10, 1997 meeting does not purport to be a complete description of the analyses
performed. The preparation of a fairness opinion is a complex process that
involves various determinations as to the most appropriate and relevant methods
of financial analyses and the application of these methods as to the particular
circumstances and, therefore, such an opinion is not necessarily susceptible to
partial analysis or summary description. Prudential Securities believes that its
analysis must be considered as a whole and that

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selecting portions thereof or portions of the factors considered by it, without
considering all the analyses and factors, could create an incomplete view of the
evaluation process underlying the opinion. Prudential Securities made numerous
assumptions with respect to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of the Trust. Any estimates contained in Prudential Securities' analyses
are not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
Additionally, estimates of the values of businesses and securities do not
purport to be appraisals or necessarily reflect the prices at which securities
actually may be sold. Accordingly, such analyses and estimates are inherently
subject to substantial uncertainty.

Subject to the foregoing, the following is a summary of the material
financial analyses performed by Prudential Securities in arriving at the
opinion.

In its analysis, Prudential Securities assumed the purchase price paid in
the Merger to be $57.918 million (the "equity purchase price"). Prudential
Securities arrived at this amount by multiplying $2.625, the agreed upon Merger
value per Share, by the number of Shares (approximately 22,064,000) to be issued
in the Merger. Prudential Securities assumed the unleveraged purchase price for
the Merger (exclusive of estimated Merger expenses) to be $89.622 million.
Prudential Securities arrived at this amount by adding $31.704 million principal
amount of total indebtedness of the RELPS to the equity purchase price. The
amount of the RELPS' indebtedness was measured as of December 31, 1997.
Prudential Securities also analyzed the Merger from the perspective of an equity
issuance to determine the implied price range per Share issued in the Merger for
the consideration received in exchange for such shares.

Comparable Company Analysis. A comparable company analysis was used by
Prudential Securities to establish an implied range of equity market values for
the RELPS. Prudential Securities analyzed publicly available historical and
projected financial results, including multiples of current stock price to
projected 1998 FFO on a per share basis of certain companies considered by
Prudential Securities to be reasonably similar (although greater in size) to the
RELPS. The comparable companies included Eastgroup Properties, First Industrial
Realty Trust, Inc., Spieker Properties, Inc., Weeks Corporation, Duke Realty
Investments, Inc. and Prentiss Properties Trust. None of the companies
considered in the analysis for comparative purposes is, of course, identical to
the RELPS. Accordingly, a complete analysis of the results of the calculations
cannot be limited to a quantitative review of such results and involves complex
considerations and judgments concerning differences in financing and operating
characteristics of the comparable companies and other factors that could affect
the public trading value of the comparable companies as well as an equity market
valuation of the RELPS. Prudential Securities deemed these companies comparable
based on scope of operations and the content of their portfolios.

The comparable companies were found to have an equity market value range
estimated to be between 10.0x and 13.2x projected 1998 FFO. Applying such
multiples to the RELPS' 1998 projected FFO resulted in an implied equity
valuation range of $63.120 million to $83.457 million. The equity purchase price
for the RELPS is below the mean and median of the equity market valuation ranges
implied by Prudential Securities comparable companies analysis. Thus, in
Prudential Securities' view, such analysis supports Prudential Securities'
conclusion that the consideration to be paid by the Trust pursuant to the Merger
is fair to the Trust from a financial point of view.

Comparable Transaction Analysis. Prudential Securities analyzed the
consideration paid in several recent combination or acquisition transactions
deemed by Prudential Securities to be reasonably similar to the transaction, and
considered the multiple of the total purchase price to the acquired entity's net
operating income ("NOI"). The transactions considered were the portfolio
combinations or acquisitions or announced (but not yet completed) portfolio
combinations or acquisitions of: Meridian Industrial Trust Inc./Prudential Real
Estate Investors, Meridian Industrial Trust Inc./Prudential Insurance Co.,
Meridian Industrial Trust Inc./Ameritech Pension Trust, Cali Realty
Corporation/Robert Martin Company, Liberty Property Trust/ APEX Asset
Management, First Industrial Realty Trust, Inc./Lazarus Burman Properties, Weeks
Corporation/Lichtin Properties Inc., Weeks Corporation/NWI Warehouse Group,
L.P., Spieker Properties, L.P./ Mission West Properties, Liberty Property
Trust/Lingerfelt Development Corp. and Highwoods Properties,

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<PAGE> 80

Inc./Forsyth Properties, Inc. None of the acquired entities or portfolios
considered in the analysis for comparative purposes is, of course, identical to
the RELPS. Accordingly, a complete analysis of the results of the calculations
cannot be limited to a quantitative review of such results and involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the acquired entities and portfolios and other factors that
could affect the consideration paid for each of the acquired entities and
portfolios as well as for the RELPS. Such transactions were deemed relevant
because of the consideration involved in the transactions and/or the size and
scope of the operations were similar to the size and scope of operations
involved in the Merger. Prudential Securities served as financial advisor in
several of the comparable transactions.

Such transactions were found to have an implied purchase price for the
acquired entity or portfolio equal to 9.5x to 12.2x NOI. Applying such multiples
to the RELPS' projected 1998 NOI resulted in an implied enterprise valuation of
the RELPS in the range of $87.599 million to $113.276 million. The total
purchase price for the RELPS is below the mean and median of the enterprise
valuation ranges implied by Prudential Securities' comparable transaction
analysis. Thus, in Prudential Securities' view, such analysis supports
Prudential Securities' conclusion that the consideration to be paid by the Trust
is fair to the Trust from a financial point of view.

Pro Forma Funds From Operations Per Share Analysis. Prudential Securities
also analyzed the pro forma effect of the Merger on the Trust's FFO. An analysis
of anticipated future results based on projections provided by management of the
Trust indicated that as a result of the Merger, pro forma FFO per Share would
increase.

Projected financial and other information concerning the Trust and the
impact of the Merger upon holders of Shares is not necessarily indicative of
future results. All projected financial information is subject to numerous
contingencies beyond the control of the management of the Trust.

Prudential Securities was retained by the Trust to render the opinion and
other financial advisory services in connection with the Merger and received a
fee for such services, which fee was contingent upon the delivery of the
opinion. In the past, Prudential Securities has provided financial advisory
services to the Trust and has received compensation for rendering such services.
In the ordinary course of business, Prudential Securities may actively trade
Shares for its own account and for the accounts of customers, and, accordingly,
may at any time hold a long or short position in such securities.

RELPS. The General Partners, on behalf of each RELP, solicited proposals
from seven firms for the preparation of fairness opinions. On June 16, 1997, the
General Partners, on behalf of each RELP, retained Houlihan to render an opinion
as to whether the consideration to be received by the Limited Partners in
connection with the Merger was fair from a financial point of view to its
Limited Partners. Houlihan was not requested to, and did not make, any
recommendation to the RELPS as to the consideration to be received by the
Limited Partners in connection with the Merger, which consideration was
determined through negotiations between the Trust, Realco and the General
Partners. The General Partners retained Houlihan to render fairness opinions
based upon Houlihan's experience in the valuation of businesses and their
securities in connection with mergers and acquisitions, and valuation for
corporate purposes especially with respect to REITs and other real estate
companies. On June 30, 1997, Houlihan delivered its written opinions to the
Boards of Directors of the General Partners (collectively, the "Houlihan
Opinion"), to the effect that, as of the date of such opinion, based on
Houlihan's review and subject to the limitations described below, the
consideration to be received by the Limited Partners in connection with the
Merger was fair, from a financial point of view, to the RELP's respective
Limited Partners. The Houlihan Opinion does not constitute a recommendation to
any Limited Partner as to how any such Limited Partner should vote on the
Merger. Houlihan has no existing contractual obligation to update its fairness
opinions.

THE FULL TEXT OF THE HOULIHAN OPINIONS, WHICH SET FORTH, AMONG OTHER
THINGS, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THEIR REVIEW
UNDERTAKEN, IS ATTACHED AS ANNEX II-B TO THIS JOINT PROXY STATEMENT/ PROSPECTUS.
THE LIMITED PARTNERS ARE URGED TO READ THE OPINIONS IN THEIR ENTIRETY.

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Each of the General Partners engaged Houlihan on behalf of each RELP to
render an opinion that the consideration to be received by the Limited Partners
of each RELP in connection with the Merger and the applicable Related
Transaction is fair to them from a financial point of view. In the case RELP I
and RELP IV, the consideration consists solely of Shares to be received in
connection with the Merger. In the case of RELP II and RELP III, the
consideration consists of Shares to be received in connection with the Merger
and cash to be received in connection with the applicable Related Transaction.
Houlihan is a nationally recognized investment banking firm that is continually
engaged in providing financial advisory services in connection with mergers and
acquisitions, leveraged buyouts, business valuations for a variety of regulatory
and planning purposes, recapitalizations, financial restructuring, and private
placements of debt and equity securities. Houlihan has no material prior
relationship with the General Partners or their Affiliates.

As compensation to Houlihan for its services in connection with the Merger,
the General Partners have agreed to pay Houlihan an aggregate fee of $115,000 to
$125,000. No portion of Houlihan's fees were contingent upon the successful
completion of the Merger. Each General Partner and each RELP has also agreed to
indemnify Houlihan and related persons against certain liabilities, including
liabilities under federal securities laws, arising out of the engagement of
Houlihan, and to reimburse Houlihan for certain expenses.

Houlihan did not, and was not requested by any General Partner, to make any
recommendations as to the form or amount of consideration to be paid to the
Limited Partners in connection with the Merger. Houlihan was not asked to opine
on and did not express any opinion as to (i) tax consequences of the Merger,
including but not limited to tax consequences to the Limited Partners; (ii) the
public market values or realizable value of the Shares or the prices at which
the Shares may trade in the future following the Merger; (iii) alternatives to
the Merger; or (iv) the fairness of any aspect of the Merger not expressly
addressed in the Houlihan Opinion, including the fairness of the Merger as a
whole. Houlihan considered all possible combinations of RELPS in the Merger, and
its opinion as to each RELP does not depend on the participation of any one or a
combination of other RELPS.

In arriving at its opinion, Houlihan made its determination as to the
fairness, from a financial point of view, of the consideration to be given to
the Limited Partners on the basis of the analyses described below. No
restrictions or limitations were imposed by any General Partner upon Houlihan
with respect to its investigation made or the procedures followed by Houlihan in
rendering its opinion. Houlihan's opinion is not intended to be and does not
constitute a recommendation to any Limited Partner as to whether to accept the
consideration to be received by such Limited Partner in connection with the
offers. It should be noted that the aggregate value of the consideration that
may be received by each Limited Partner in connection with the Merger (other
than the cash portion of the consideration to be received by the Limited
Partners of RELP II and RELP III) is fixed, the ultimate value actually received
by each Limited Partner at the time of consummation of the Merger will vary
depending on the market price of the Shares at such time.

In arriving at its opinion, Houlihan

(i) reviewed the annual reports to partners for RELP I, RELP III and
RELP IV for each of the five fiscal years ended December 31, 1996 and the
annual report to partners for RELP II for each of the five fiscal years
ended June 30, 1997;

(ii) reviewed the Trust's annual reports to shareholders and Form 10-K
for the three fiscal years ended December 31, 1996 and quarterly reports on
Form 10-Q for the quarter ended March 31, 1997;

(iii) reviewed the draft Merger Agreement, dated June 17, 1997;

(iv) met with certain members of the senior management of Realco to
discuss Realco's, the RELPS', and the Trust's operations, financial
condition, future prospects, projected operations and performance, and the
Merger;

(v) held discussions with senior management of the Trust to discuss
the history and nature of the Trust's business, the Trust's operations,
financial condition, future prospects, projected operations and
performance, Realco Share acquisition, the MSAM Transaction, the LaSalle
Transaction, and the Merger;

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(vi) visited certain facilities and business offices of Realco and the
RELPS, and visited certain real property owned by the RELPS;

(vii) reviewed forecasts and projections prepared by Realco's
management with respect to the RELPS' properties for the years ended 1997
through 2007;

(viii) reviewed the historical market prices and trading volume for
the Trust's publicly-traded securities;

(ix) reviewed certain other publicly available financial data for
certain companies that Houlihan deemed comparable to the RELPS and the
Trust and publicly available prices and premiums paid in other transactions
that it considered similar to the Merger; and

(x) conducted such other studies, analyses and inquiries as it deemed
appropriate.

Houlihan used several methodologies in arriving at its opinion. Each
methodology provided an estimate as to the value of the Limited Partners'
aggregate interests in each RELP (the "LP Value") or the value of the
consideration to be received by the Limited Partners and thus provided a basis
of comparison to the consideration offered in the Merger. Moreover, several of
the analyses conducted by Houlihan provided an estimate as to the value of the
General Partners' interests in the RELP (the "GP Value").

With respect to arriving at the LP Value, Houlihan performed the following
analyses with respect to each property held by the RELPS including the
properties that will be transferred to Realco Affiliates for cash:

(i) One methodology was a "NET ASSET SALE" analysis, in which Houlihan
performed an analysis of the value of each RELP's underlying assets and
liabilities under an orderly sale/liquidation scenario. This approach
allowed Houlihan to determine the net equity value of each RELP by first
determining the value of such RELP's assets and then subtracting the value
of the RELP's liabilities. In order to arrive at the value of the RELP's
assets, Houlihan utilized capitalization rates of NOI and RELPS'
properties' individual NOIs to thus arrive at a value for each property,
and then aggregated the resulting property values for each RELP to arrive
at an aggregate value of such RELP.

Capitalization rates utilized in the Net Asset Value analysis were
determined based upon (i) comparable sales data provided by the General
Partner's management, (ii) statistics from the National Real Estate Index,
an independent organization that compiles pricing data from real estate
transactions; and (iii) comparable sale information provided by a major
national real estate brokerage organization. Additionally, on a
property-by-property basis, a number of characteristics and financial
statistics were considered, including property classification, NOI and
revenue growth, total revenues, profitability, and property's relative
size. Moreover, the market and location of the property were considered. In
sum, Houlihan selected capitalization rates that range from 9.5% to 13% and
applied what it believes to be the appropriate capitalization rate within
this range to each property's NOI.

The Net Asset Value analysis generally utilized the higher of each
property's actual or projected NOI for the annual periods ended December
31, 1996 through December 31, 1998. The NOI for certain properties were
adjusted to reflect normal income streams for such properties which had
recently experienced material change of circumstances such as the addition
or departure of a major tenant or a significant renovation.

Applying those selected capitalization rates to each property's
normalized NOI results in an aggregate value for each property. Property
values were then adjusted for reasonable real estate transaction costs
(i.e., assumed brokerage fees and commissions) and any contractual fees due
to the General Partner in the event of a property sale. The net result for
each property owned by each RELP was then aggregated to arrive at an
aggregate property value for each RELP based upon the Net Asset Sale
analysis.

Each RELP's aggregate property value was adjusted to reflect the
capital structure of the relevant assets, the working capital assets and
liabilities of the RELP, and any excess cash or other liabilities. The

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resulting value was then divided among the Limited Partners and General
Partner of each RELP based upon the rights and privileges of the
Partnership Agreement.

(ii) An alternative methodology, a "GOING CONCERN VALUE" analysis,
which, like the Net Asset Sale analysis considered the capitalization rates
to arrive at the estimated value of the RELP's underlying real properties.
However, rather than assuming a sale of such real properties, the Going
Concern Value did not assume the transaction costs associated with the sale
of the properties. Thus, the Going Concern Value utilized the aggregate NOI
for each RELP, as determined in the Net Asset Sale Analysis, and
appropriate capitalization rates to determine the aggregate value of each
RELP. The resulting value was then divided among the Limited Partners and
General Partner of each RELP based upon the rights and privileges of the
Partnership Agreement.

(iii) Yet another analysis was a "UNIT YIELD" analysis, whereby the LP
Value was estimated by calculating capitalization rates for alternative
investments such as publicly traded real estate investment trusts and
privately held real estate companies whose securities sale are periodically
monitored in a publication entitled the "Partnership Spectrum." The
indicated capitalization rates for alternative investments ranged between
approximately 5.0% to 10.0%. Utilizing capitalization rates within this
range and then applying a selected capitalization rate to the RELPS'
Limited Partner distributions resulted in an indication of the value of the
Limited Partners' aggregate interests in each RELP.

(iv) Finally, a "COMPARABLE TRANSACTION" analysis, which considered
the terms and conditions of transactions which Houlihan deemed similar to
the Merger, was considered. Houlihan analyzed the consideration paid in
several recent combination or acquisition transactions deemed by Houlihan
to be reasonably similar to the transaction, and considered the multiple of
the total purchase price to the acquired entity's earnings before taxes,
depreciation and growth (approximately for net operating income); total
purchase price to EBITDA, and total purchase price to revenues. The
transactions involving publicly-traded REITS considered were the portfolio
combinations or acquisitions of: Health Equity Properties Inc./Omega
Healthcare Investors Inc., Holly Residential Properties/Wellsford
Residential Property Trust, Crocker Realty Investors Inc./Southeast Realty
Corp., Vanguard Real Estate Fund I -- Seattle/Undisclosed Acquiror,
Security Capital Pacific Trust/Property Trust of America, Lingerfelt
Industries Properties/Liberty Property Trust, McArthur/Glen Realty
Corp./Horizon Outlet Centers Inc., Real Estate Investment Trust, CA/BRE
Properties, Rockefeller Center Properties/Investor Group, Tucker Properties
(Bradley)/Bradley Real Estate Inc., Franklin Real Estate Income Fund/
Franklin Select Real Estate Income Fund, Brandywine Commons,
Wilmington/Mid-Atlantic Realty Trust, Meridian Property REIT IV, VI,
VII/Meridian Industrial Trust Inc., Retail Property Investors Inc./Glimcher
Realty Trust, DeBartolo Realty Corp./Simon Property Group Inc., Franklin
Select Real Estate Income Fund/Bedford Property Investors Inc., Kahler
Realty Corp/Tiger Real Estate Fund LP, Paragon Group
Inc -- Commercial/Insignia Financial Group, United Dominion Realty
Trust -- VIII/ Sam Development Associates, ROC Communities Inc./Chateau
Properties Inc., South West Property Trust Inc./United Dominion Realty
Trust, Union Property Investors Inc./Kranzco Realty Trust, Paragon Group
Inc./Camden Property Trust, Partners Preferred Yield III/Public Storage
Inc. The transactions involving private real estate companies considered
were the combinations or acquisitions of: Capital Apartment
Properties/Investor Group, RM Bradley & Co Inc. -- REIT/Bradley Real Estate
Trust, MSA Realty Corp/Simon Property Group Inc., CRI Inc. -- Mortgage
Businesses/CRIIMI MAE, America First REIT Inc./Mid-American Apartment
Communities, TR Preston Co/DeWolfe Companies Inc., TR Preston, Farmington
Valley/DeWolfe Companies Inc., Meridian Point Property -- Marketplace
P/Weingarten Realty Investors, Prudential Realty Trust -- Park 100/Security
Capital Industrial, AMERCO -- Self Storage Property/CBA Mortgage Corp, JE
Robert-Whitehall Real Estate Invest/Goldman Sachs & Co., USL Capital -- RE
Financing Op/Bankers Trust New York Corp, Prudential Insurance -- Real
Estate/Owen Financial Corp., Branch Properties LP/Regency Realty Corp.,
Mendik Company Inc./Vornado Realty Trust, Nevada Land & Resource
Co/Investor Group. The entities involved in such transactions had total
values ranging from less than $10 million to nearly $1 billion. For those
public entities involved in such transactions the average premium paid was
10%. None of the acquired entities or portfolios considered in the analysis
for comparative purposes is, of

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course, identical to the RELPS. Accordingly, a complete analysis of the
results of the calculations cannot be limited to a quantitative review of
such results and involves complex considerations and judgments concerning
differences in financial and operating characteristics of the acquired
entities and portfolios and other factors that could affect the
consideration paid for each of the acquired entities and portfolios as well
as for the RELPS. Such transactions were deemed relevant because of the
consideration involved in the transactions and/or the size and scope of the
operations were similar to the size and scope of operations involved in the
Merger.

Based on all of the aforementioned analyses, Houlihan reached a conclusion
as to the LP Value. The range of values of the net assets of each of the RELPS
that Houlihan derived from its consideration of the foregoing methodologies was:
RELP I, $8.3 -- $9.7 million; RELP II, $9.0 -- $9.5 million; RELP III,
$16.7 -- $25.8 million; and RELP IV, $9.1 -- $10.8 million.

With respect to arriving at the value of the consideration to be received
by the Limited Partners, Houlihan performed the following analysis.

(i) The principal methodology was consideration of transactions
involving the Trust's publicly-traded securities, or a "MARKET PRICE"
analysis, in light of the recent MSAM Transaction and the LaSalle
Transaction. Houlihan assumed that the indicated price per Share resulting
from these transactions of $2.45 is the result of arms length negotiations
involving sophisticated, institutional investors who are willing buyers and
the Trust who is a willing seller, with all parties having reasonable
knowledge of all relevant facts, with no parties having compulsion to act,
and with equity to all parties. This analysis also considered the price and
trading history of the Shares.

(ii) An alternative methodology was a "NET ASSET SALE" analysis which
utilized capitalization rates of Net Operating Income statistics exhibited
by publicly traded companies which are similar to the Trust (including, but
not limited to, Bedford Property Investors Inc., Centerpoint Property
Corporation, Eastgroup Property, Liberty Property Trust and Meridian
Industrial Trust, Inc.), as well capitalization rates provided from the
National Real Estate Index. In order to arrive at an estimate of the value
of the Trust, and thus its Shares, an appropriate capitalization rate was
multiplied by the Trust's properties' net operating income. This provided
the value of the Trust's underlying real properties. Then, adjustments were
made to reflect the capital structure of the Trust's, and normal and
customary costs associated with a sale. The net proceeds provided an
indication of the value of the Trust's Shares that was lower than the
valuation obtained by the Market Price analysis described above.

(iii) An alternative methodology, a "GOING CONCERN VALUE" analysis,
which, like the Net Asset Sale analysis considered the capitalization rates
to arrive at the estimated value of the Trust's underlying real properties.
In order to arrive at an estimate of the Trust, normal and customary
expenses for corporate overhead were deducted from the implied value of the
Trust's properties. The resulting aggregate value for the Trust was the
adjusted, as appropriate, to reflect the Trust's capital structure. This
net amount provided an indication of the value of the Trust's Shares that
was lower than the valuation obtained by the Market Price analysis
described above.

Based on all of the aforementioned analyses, Houlihan utilized $2.45 as the
value of the Shares for purposes of its opinion.

The conclusions resulting from the aforementioned analyses indicated an LP
Value for each RELP that was lower than the value of the Shares to be received
as consideration by its Limited Partners in connection with the Merger, leading
Houlihan to conclude that the consideration to be paid to the Limited Partners
of each RELP in connection with the Merger is fair to the Limited Partners from
a financial point of view.

The aforementioned analyses required studies of the overall market,
economic and industry conditions in which the RELPS and the Trust operate, the
RELPS' and the Trust's operating results, and the RELPS' distributions to the
Limited Partners. Research into, and consideration of, these conditions were
incorporated into the analyses.

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Houlihan's opinion is based on the business, economic, market and other
conditions as they existed as of June 30, 1997. In rendering its opinion,
Houlihan relied upon and assumed, without independent verification, that the
financial information provided to Houlihan by the General Partners and the Trust
was reasonably prepared and reflect the best current available estimates of the
financial results and condition of the RELPS and the Trust. Houlihan did not
independently verify the accuracy or completeness of the information supplied to
it with respect to the RELPS or the Trust and does not assume responsibility to
do it. Except as set forth above, Houlihan did not make any physical inspection
or independent appraisal of the specific properties or assets of the RELPS or
the Trust.

The summary set forth above describes the material points of more detailed
analyses performed by Houlihan in arriving at its fairness opinions. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and application of those methods to the particular
circumstances and is, therefore, not readily susceptible to summary description.
In arriving at its opinion, Houlihan did not attribute any particular weight to
any analysis and factor. Accordingly, Houlihan believes that its analyses and
the summary set forth herein must be considered as a whole and that selecting
portions of its analyses could create an incomplete view of the processes
underlying the analyses set forth in the Houlihan opinions. In its analysis,
Houlihan made numerous assumptions with respect to the RELPS, industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of the RELPS. The estimates
contained in such analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be more or less favorable than
suggested by such analyses. Additionally, analyses relating to the value of
businesses or securities are not appraisals. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty.

EXCHANGE RATIO AND EXCHANGE FOR THE TRUST'S SHARES

The Exchange Ratio was arrived at through negotiations between the Trust
and the common management of the General Partners. Each Unit issued and
outstanding at the Effective Time of the Merger would cease to be outstanding
and would be converted into the right to receive with respect to each RELP:
15.90 Shares per Unit in RELP I, 28.63 Shares per Unit in RELP II, 16.60 Shares
per Unit in RELP III and 15.14 Shares per Unit in RELP IV. Pursuant to the
Merger Agreement, if, at any time prior to and including the Closing Date, (i)
the RELP pays any mortgage indebtedness existing as of June 30, 1997 or (ii) the
outstanding Shares have been changed to a different number of Shares by reason
of any Share dividend, subdivision, reclassification, recapitalization, Share
split, reverse Share split, combination, exchange of Shares or the like, the
Exchange Ratio will be appropriately adjusted. The General Partners of each of
the RELPS have agreed to waive any right to any Shares to which they may be
entitled in exchange for their general partnership interest.

Notwithstanding any other provision of the Merger Agreement, each holder of
Units exchanged pursuant to the Merger who would otherwise have been entitled to
receive a fraction of a Share (after taking into account all Units exchanged by
such holder) shall receive, in lieu thereof, cash (without interest)
representing such holder's proportionate interest, if any, and the net proceeds
from the sale by Boston EquiServe Limited Partnership (the "Exchange Agent") in
one or more transactions which sale transaction shall be made at such times, in
such manner and on such terms as the Exchange Agent shall determine in its
reasonable discretion on behalf of all such holders of the aggregate of the
fractional Shares, as applicable, which would otherwise have been issued. The
sale of such Shares by the Exchange Agent shall be executed on the NYSE through
one or more member firms on the NYSE and shall be executed in round lots to the
extent practicable.

As soon as reasonably practicable after the Effective Time, the Trust will
cause the Exchange Agent to send each holder of Units in a Participating RELP, a
certificate or certificates representing Shares and a check for any fractional
Share interest, as applicable.

Any distributions made by the Trust after the Effective Time will include
distributions on all Shares issued in the Merger. After the Effective Time of
the Merger, the transfer books of any Participating RELP will be closed and
there will be no transfers on the transfer books of the Participating RELP of
the Units that were outstanding immediately prior to the Effective Time of the
Merger.

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MANAGEMENT AND OPERATIONS AFTER THE MERGER

From and after the Effective Time of the Merger, the Trust Board will
continue to consist of the eight current members of the Trust Board and the
executive officers of the Trust will continue to serve in their capacities
following the Merger. Set forth below is information regarding the Trust
Managers and executive officers of the Trust.

<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Charles W. Wolcott.......................... 44 Trust Manager, President and Chief
Executive Officer
Marc A. Simpson............................. 43 Vice President and Chief Financial
Officer, Secretary and Treasurer
David B. Warner............................. 38 Vice President -- Operations
Lewis D. Friedland.......................... 38 Vice President and
Chief Investment Officer
Theodore R. Bigman.......................... 34 Trust Manager
William H. Bricker.......................... 65 Trust Manager
T. Patrick Duncan........................... 48 Trust Manager
Robert E. Giles............................. 49 Trust Manager
Edward B. Kelley............................ 56 Trust Manager
Stanley J. Kraska, Jr....................... 37 Trust Manager
Russell C. Platt............................ 37 Trust Manager
</TABLE>

CHARLES W. WOLCOTT currently serves as Trust Manager, President and Chief
Executive Officer. Mr. Wolcott was hired as the President and Chief Executive
Officer of the Trust in May 1993 and has served as a Trust Manager since August
1993. Mr. Wolcott was President and Chief Executive Officer for Trammell Crow
Asset Services, a real estate asset and portfolio management affiliate of
Trammell Crow Company, from 1990 to 1992. He served as Vice President and Chief
Financial and Operating Officer of the Trust from 1988 to 1991. From 1988 to
1990, Mr. Wolcott was a partner in Trammell Crow Ventures Operating Partnership.
Prior to joining the Trammell Crow Company in 1984, Mr. Wolcott was President of
Wolcott Corporation, a firm engaged in the development and management of
commercial real estate properties. Mr. Wolcott graduated from the University of
Texas at Austin in 1975 with a Bachelor of Science degree and received a Master
of Business Administration degree from Harvard University in 1977.

MARC A. SIMPSON currently serves as Vice President and Chief Financial
Officer, Secretary and Treasurer. Mr. Simpson was hired as the Vice President
and Chief Financial Officer, Secretary and Treasurer of the Trust in March 1994.
From November 1989 to March 1994, Mr. Simpson was a Manager in the Financial
Advisory Services group of Coopers & Lybrand L.L.P. Prior to that time, he
served as Controller of Pacific Realty Corporation, a real estate development
company. Mr. Simpson graduated with a Bachelor of Business Administration degree
from Midwestern State University in 1978, and received a Master of Business
Administration degree from Southern Methodist University in 1990.

DAVID B. WARNER currently serves as Vice President -- Operations. Mr.
Warner was hired as Vice President and Chief Operating Officer of the Trust in
May 1993. From 1989 through the date of his accepting a position with the Trust,
Mr. Warner was a Director of the Equity Investment Group for The Prudential
Realty Group. From 1985 to 1989, he served in the Real Estate Banking Group of
NCNB Texas National Bank. Mr. Warner graduated from the University of Texas at
Austin in 1981 with a degree in Finance and received a Master of Business
Administration from the same institution in 1984.

LEWIS D. FRIEDLAND currently serves as Vice President and Chief Investment
Officer. He was hired as Vice President and Chief Investment Officer of the
Trust in 1997. Prior to joining the Trust, Mr. Friedland was a founding partner
of Crimson Partners, an investment firm formed in 1992 that engaged in the

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acquisition and development real estate assets. Prior to founding this firm he
was a Division Partner and Managing Director of Trammell Crow Company where he
was responsible for that firm's development, leasing, and property management
activities in Richmond, Va. Mr. Friedland graduated from the Wharton School of
the University of Pennsylvania in 1981 with a Bachelor of Science Degree in
Economics and received a Master of Business Administration degree from Harvard
University in 1985.

THEODORE R. BIGMAN has served as a Trust Manager since July 8, 1997, when
he was appointed as an independent Trust Manager at the request of MSAM pursuant
to the terms of the MSAM Transaction. Mr. Bigman is a Principal at MSAM. Having
joined the company in 1995, Mr. Bigman is the senior portfolio manager of the
U.S. Real Estate Portfolio. Prior to joining MSAM, he was a Director at CS First
Boston, where he worked for eight years in the real estate group. He is a member
of NAREIT and is a Trustee of Grove Property Trust. He graduated from Brandeis
University in 1983 and received a Master of Business Administration from Harvard
University in 1987.

WILLIAM H. BRICKER has served as a Trust Manager since September 1985. Mr.
Bricker has served as President of DS Energy Services Incorporated and has
consulted in the energy field and international trade since 1987. In May 1987,
Mr. Bricker retired as the Chairman and Chief Executive Officer of Diamond
Shamrock Corporation where he held various management positions from 1969
through May 1987. Mr. Bricker is a Trust Manager of the LTV Corporation, the
Eltech Systems Corporation and the National Paralysis Foundation. He received
his Bachelor of Science and Master of Science degrees from Michigan State
University.

T. PATRICK DUNCAN has served as a Trust Manager since December 1996, when
he was appointed as an independent Trust Manager at the request of Realco
pursuant to the terms of the Realco Share Purchase Agreement. Mr. Duncan joined
Realco in November 1986 as Chief Financial Officer. With over 24 years of
experience, Mr. Duncan serves as Senior Vice President of Real Estate Operations
with responsibilities which include the direction of all acquisitions, sales,
management and leasing of real estate for USAA-affiliated companies. Mr. Duncan
received degrees from the University of Arizona in Accounting and Finance. He is
a Certified Public Accountant, Certified Commercial Investment Manager, and
holds a Texas Real Estate Broker's License. Mr. Duncan is also a member of the
Board of Directors of Meridian Industrial Trust, and a member of the Board of
Directors of the general partner of RELP I, RELP II, RELP III and RELP IV and a
member of the Board of Directors of USAA Equity Advisors, Inc..

ROBERT E. GILES has served as a Trust Manager since March 1996. Mr. Giles
is currently the owner and President of Robert E. Giles Interests, Inc., a real
estate consulting and development firm based in Houston, Texas. Mr. Giles also
serves as President of Title Network, Ltd., a national title insurance agency.
Mr. Giles was a Vice President with the J.E. Roberts Companies, Inc. from 1994
to 1995. From 1990 to 1994, Mr. Giles was President and a Director of National
Loan Bank, a publicly-held company created through the merger of Chemical Bank
and Texas Commerce Bank. Mr. Giles received his Bachelor of Arts degree from
University of Texas -- Austin in 1970 and received a Master of Arts degree from
University of Texas -- Arlington in 1973.

EDWARD B. KELLEY has served as a Trust Manager since December 1996, when he
was appointed as an independent Trust Manager at the request of Realco pursuant
to the terms of Realco Share Purchase Agreement. Mr. Kelley is President of
Realco. He joined Realco in April 1989 as Executive Vice President and Chief
Operating Officer before assuming his new title in August 1989. Mr. Kelley
received his Bachelor of Business Administration degree from St. Mary's
University in 1964 and a Masters in Business Administration from Southern
Methodist University in 1967, and is a Member of the Appraisal Institute (MAI).
Mr. Kelley is Chairman of the Board of Directors of the general partner of RELP
I, RELP II, RELP III and RELP IV, and a member of the Board of Directors of USAA
Equity Advisors, Inc.

STANLEY J. KRASKA, JR. has served as Trust Manager since July 10, 1997,
when he was appointed as an independent Trust Manager at the request of
ABKB/LaSalle Securities Limited Partnership ("ABKB") and LaSalle Advisors
Limited Partnership ("LaSalle Advisors") pursuant to the terms of the LaSalle
Transaction. Mr. Kraska has been employed by ABKB or its Affiliates since
February 1988. He currently serves as Managing Director, with responsibility for
private placement investment. Mr. Kraska graduated from

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Dartmouth College in 1982 with a Bachelor of Arts degree and received a Master
of Business Administration degree from Harvard University in 1986.

RUSSELL C. PLATT has served as a Trust Manager since July 8, 1997 when he
was appointed as an independent Trust Manager at the request of MSAM pursuant to
the terms of the MSAM Transaction. Mr. Platt joined Morgan Stanley in 1982. He
is a Managing Director of the Firm and has primary responsibility for managing
the real estate securities investment business for MSAM. MSAM manages
approximately $1.3 billion in real estate securities worldwide for institutional
and individual investors. He also serves as a member of the Investment Committee
of The Morgan Stanley Real Estate Fund, a privately held limited partnership
engaged in the acquisition of real estate assets, portfolios and real estate
operating companies with gross assets of approximately $4 billion. He graduated
from Williams College in 1982 with a Bachelor of Arts in Economics and received
a Master of Business Administration from Harvard Business School in 1986. He is
a member of the advisory boards of the National Multi Housing Council, The
Wharton Real Estate Center and the MIT Center for Real Estate. He is also a
member of The Urban Land Institute, NAREIT and the Pension Real Estate
Association.

EFFECTIVE TIME OF THE MERGER

As soon as practicable after satisfaction of all conditions to consummation
of the Merger, the parties will file articles of merger with the Clerk of Dallas
County and articles of merger with the secretary of state of the state of
organization of each RELP. For state law purposes, the Merger will become
effective upon the later of the filing of articles of merger with the
appropriate state officials or such later time which the Trust and the RELPS
shall have agreed upon and designated in such filings in accordance with
applicable law. For all other purposes, the Merger will be effective as of
, 199 (the "Effective Time"). The Trust and the RELPS each have the
right, acting unilaterally as long as it has not willfully and materially
breached the Merger Agreement, to terminate the Merger Agreement should the
Merger not be consummated by the close of business on March 31, 1998. Until the
Effective Time of the Merger, the Limited Partners will retain their rights as
Limited Partners of their respective RELPS to vote on matters submitted to them.

HEADQUARTERS

After the Merger, the headquarters of the Trust will continue to be located
at 6210 N. Beltline Road, Suite 170, Irving, Texas 75063, the current
headquarters of the Trust.

CONDITIONS TO CONSUMMATION OF THE MERGER

The respective obligations of the Trust and the RELPS to effect the Merger
are subject to the satisfaction of certain conditions (none of which may be
waived), including the following: (i) the Merger Agreement and the transactions
contemplated thereby shall have been approved by the shareholders of the Trust
and the Limited Partners of the Participating RELPS; (ii) the Trust shall have
obtained the approval for the listing of the Shares issuable in the Merger on
the NYSE, subject to official notice of issuance; (iii) the Registration
Statement on Form S-4 of which this Joint Proxy Statement/Prospectus constitutes
a part, shall have become effective and all necessary state securities law or
"Blue Sky" permits or approvals required to carry out the transactions
contemplated by the Merger Agreement shall have been obtained and no stop order
with respect to any of the foregoing shall be in effect; (iv) none of the
parties shall be subject to any order or injunction of a court of competent
jurisdiction or other legal prohibition which prohibits the consummation of the
transactions contemplated by the Merger Agreement; and (v) all material actions
by or in respect of or filings with any governmental entity required for the
consummation of the Merger and related transactions shall have been obtained or
made.

Consummation of the Merger also is subject to the satisfaction or waiver of
various other conditions specified in the Merger Agreement, including, among
others: (i) the representations and warranties of each party contained in the
Merger Agreement shall be true and correct in all material respects as of the
closing date; (ii) each party shall have performed its obligations contained in
the Merger Agreement at or prior to the Effective Time; (iii) from the date of
the Merger Agreement there shall not have occurred any change in the

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financial condition, business or operations of either party that would have or
would be reasonably likely to have a material adverse effect on the business,
results of operations or financial condition of such party; (iv) each party
shall have received an opinion of counsel; and (v) each party shall have
obtained all consents and waivers from third parties necessary in connection
with the consummation of the Merger and related transactions.

If any material conditions to the Merger are waived by the parties, the
parties shall resolicit proxies from the waiving party's shareholders or Limited
Partners, as applicable.

CONDUCT OF BUSINESS PENDING THE MERGER

During the period from the date of the Merger Agreement to the Effective
Time, the parties agreed to carry on their respective businesses in the usual,
regular and ordinary course in substantially the same manner as previously
conducted and, to the extent consistent therewith, use commercially reasonable
efforts to preserve in tact their respective current business organizations,
goodwill and ongoing business. The parties also agreed, except as disclosed to
the other party or in certain limited circumstances specified therein, they
shall:

(1) Use their reasonable efforts, and shall cause each of their
respective subsidiaries to use their reasonable efforts, to preserve intact
their business organizations and goodwill and keep available the services
of their respective officers and employees.

(2) Confer on a regular basis with one or more representatives of the
other to report operational matters of materiality and any proposals to
engage in material transactions.

(3) Promptly notify the other of any material emergency or other
material change in the condition (financial or otherwise) of the business,
properties, assets or liabilities, or any material governmental complaints,
investigations or hearings (or communications indicating that the same may
be contemplated), or the breach in any material respect of any
representation, warranty, covenant or agreement contained therein.

(4) Except for regular quarterly distributions and the special
distribution to be made by each of the RELPS immediately prior to the
closing of the Merger, no party to the Merger shall make quarterly
distributions or make distributions payable with respect to the Shares and
Units.

(5) Promptly deliver to the other true and correct copies of any
report, statement or schedule filed with the Commission.

Prior to the Effective Time, except as otherwise disclosed pursuant to the
Merger Agreement, unless the Trust has consented (such consent not to be
unreasonably withheld or delayed) in writing thereto, each RELP:

(1) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as conducted.

(2) Shall not amend its Partnership Agreement.

(3) Shall not (i) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on the
Merger Agreement hereof and disclosed pursuant to the Merger Agreement,
issue any Units, make any distribution, effect any recapitalization or
other similar transaction; (ii) grant, confer or award any option, warrant,
conversion right or other right not existing on the date of the Merger
Agreement to acquire any Units; (iii) increase any compensation or enter
into or amend any employment agreement with any of its present or future
officers or directors of the General Partner; or (iv) adopt any new
employee benefit plan or amend any existing employee benefit plan in any
material respect, except for changes which are less favorable to
participants in such plans.

(4) Shall not directly or indirectly redeem, purchase or otherwise
acquire any Units or make any commitment for any such action.

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(5) Shall not sell or otherwise dispose of (i) any RELP properties; or
(ii) except in the ordinary course of business, any of its other assets
which are material, individually or in the aggregate.

(6) Shall not make any loans, advances or capital contributions to, or
investments in, any other person.

(7) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or the
notes thereto) of each RELP included in the RELP's filings with the
Commission or incurred in the ordinary course of business consistent with
past practice.

(8) Shall not enter into any commitment which individually may result
in total payments or liability by or to it in excess of $250,000 in the
case of any one commitment or in excess of $500,000 for all commitments.

(9) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment with any officer, director or Affiliate of the RELP or
its General Partner except to the extent the same occur in the ordinary
course of business consistent with past practice and would not have a RELP
Material Adverse Effect (as defined in the Merger Agreement).

(10) Shall not enter into or terminate any lease representing annual
revenues of $100,000 or more.

Prior to the Effective Time, except as may be otherwise disclosed pursuant
to the Merger Agreement, unless each RELP has consented (such consent not to be
unreasonably withheld or delayed) in writing thereto, the Trust:

(1) Shall, and shall cause each of its subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted.

(2) Shall not amend its Declaration of Trust or Bylaws.

(3) Shall not (i) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights (including the
Trust's existing dividend reinvestment plan) existing on the date of the
Merger Agreement and disclosed pursuant to the Merger Agreement, issue any
shares of its capital stock, effect any share split, reverse share split,
share dividend, recapitalization or other similar transaction; (ii) grant,
confer or award any option, warrant, conversion right or other right not
existing on the date hereof to acquire any shares of its capital shares
(except pursuant to any employee incentive plan approved by shareholders);
(iii) amend any employment agreement with any of its present or future
officers or Trust Managers; or (iv) adopt any new employee benefit plan
(including any share option, share benefit or share purchase plan) except
the employee incentive plan approved by the shareholders at its shareholder
meeting for the fiscal year ended December 31, 1995.

(4) Shall not declare, set aside or pay any dividend or make any other
distribution or payment with respect to any Shares or directly or
indirectly redeem, purchase or otherwise acquire any Shares or capital
stock of any of its subsidiaries, or make any commitment for any such
action.

(5) Shall not, and shall not permit any of its subsidiaries to, sell
or otherwise dispose of (i) any properties or any of its capital stock of
or other interests in subsidiaries or (ii) except in the ordinary course of
business, any of its other assets which are material, individually or in
the aggregate.

(6) Shall not, and shall not permit any of its subsidiaries to, make
any loans, advances or capital contributions to, or investments in, any
other person other than in connection with the sale of properties.

(7) Shall not, and shall not permit any of its subsidiaries to, pay,
discharge or satisfy any claims, liabilities or obligations (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of business
consistent with past practice or in accordance with their terms, of
liabilities reflected or reserved against in, or contemplated by, the most

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recent consolidated financial statements (or the notes thereto) of the
Trust included in the Trust's reports filed with the Commission or incurred
in the ordinary course of business consistent with past practice.

(8) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment which individually may result in total payments or
liability by or to it in excess of $250,000 in the case of any one
commitment or in excess of $500,000 for all commitments; and

(9) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment with any officer, Trust Manager or Affiliate of the
Trust or any of its subsidiaries, except as provided in the Merger
Agreement or except in the ordinary course of business.

For purposes of the Merger Agreement, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three days of request. Further, if no response is received by
the end of business on such third day, the party receiving the request shall be
deemed to have consented to such action.

ACQUISITION PROPOSALS

Prior to the Effective Time, each RELP and the Trust agreed (i) that
neither of them nor any of their subsidiaries shall, and each of them shall
direct and use its best efforts to cause its respective officers, General
Partner, Limited Partners, Trust Managers, employees, agents, affiliates and
representatives (including, without limitation, any investment banker, attorney
or accountant retained by it or any of its subsidiaries), as applicable, not to,
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its shareholders or limited partners) with
respect to a merger, acquisition, tender offer, exchange offer, consolidation or
similar transaction involving, or any purchase of all or any significant portion
of the assets or any equity securities (or any debt securities convertible into
equity securities) of, such party or any of its subsidiaries, other than the
transactions contemplated by the Merger Agreement (any such proposal or offer
being hereinafter referred to as an "Acquisition Proposal") or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Acquisition Proposal, or
otherwise facilitate any effort or attempt to make or implement an Acquisition
Proposal; (ii) that it will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing and each will take the necessary
steps to inform the individuals or entities referred to above of the undertaken
obligations; and (iii) that it will notify the other party immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with, it; provided, however, that nothing contained in the Merger
Agreement prohibits the Board of Directors of the General Partner of each RELP
(collectively, the "Board of Directors") or the Trust Board from (x) furnishing
information to or entering into discussions or negotiations with, any person or
entity that makes an unsolicited bona fide Acquisition Proposal, if, and only to
the extent that, (A) the Board of Directors or Trust Board, as applicable,
determines in good faith that such action is required for it to comply with its
fiduciary duties to Limited Partners or shareholders, as applicable, imposed by
law as advised by counsel, (B) prior to furnishing such information to, or
entering into discussions or negotiations with, such person or entity, such
party provides written notice to the other party to the Merger Agreement to the
effect that it is furnishing information to, or entering into discussions with,
such person or entity, and (C) subject to any confidentiality agreement with
such person or entity (which such party determined in good faith was required to
be executed in order for the Board of Directors or Trust Board, as applicable,
to comply with its fiduciary duties to Limited Partners or shareholders, as
applicable, imposed by law as advised by counsel), such party keeps the other
party to the Merger Agreement informed of the status (but not the terms) of any
such discussions or negotiations; and (y) to the extent applicable, complying
with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition
Proposal.

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EXTENSION, WAIVER AND AMENDMENT; TERMINATION

Termination by Either the Trust or any RELP. The Merger Agreement may be
terminated and the Merger may be abandoned by action of the General Partner of
any RELP or the Trust Managers if (i) the Merger shall not have been consummated
by March 31, 1998; (ii) a meeting of RELP's partners shall have been duly
convened and held and the approval of RELP's partners shall not have been
obtained at such meeting or at any adjournment thereof; (iii) a meeting of the
Trust's shareholders shall have been duly convened and held and the approval of
the Trust's shareholders shall not have been obtained at such meeting or at any
adjournment thereof; (iv) as a result of due diligence investigation by one of
the parties, it is determined in good faith by such party that certain facts or
circumstances not previously known by such party constitute a Material Adverse
Effect on the business, results of operations or financial condition of the
other party; (v) a United States federal or state court of competent
jurisdiction or United States federal or state governmental, regulatory or
administrative agency or commission shall have issued an order, decree or ruling
or taken any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by the Merger Agreement and such
order, decree, ruling or other action shall have become final and
non-appealable, provided that the party seeking to terminate the Merger
Agreement pursuant to clause (v) shall have used all reasonable efforts to
remove such order, decree, ruling or injunction; or (vi) any of the conditions
described above shall not have been satisfied, and provided, in the case of a
termination pursuant to clause (i) or (iv) above, that the terminating party
shall not have breached in any material respect its obligations under the Merger
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause. The Trust and each RELP
shall (i) deliver its disclosure letter to one another not later than 5:00 P.M.,
Central Time, September 20, 1997; and (ii) shall complete its due diligence
investigations not later than 5:00 P.M., Central Time, on September 30, 1997.
Until October 7, 1997 (the period from the date of the Merger Agreement through
October 7, 1997 being hereinafter referred to as the "Due Diligence Period"),
either party may terminate the Merger Agreement without liability or penalty due
to the discovery of a fact or circumstance that reasonably could be expected to
constitute a Material Adverse Effect on the business, results of operations or
financial condition of the other party.

Termination by any RELP. The Merger Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the adoption and approval by the Limited Partners, by action of the General
Partner, if (i) in the exercise of its good faith judgment as to its fiduciary
duties to its partners imposed by law, as advised by counsel, the General
Partner determines that such termination is required by reason of a RELP
Acquisition Proposal being made; (ii) the Trust Board withdraws, materially
modifies or changes in a manner materially adverse to RELP its recommendations
to the Trust's shareholders of the Merger, other than as a result of the
occurrence of an event that in the good faith judgment of the Board of Trust
Managers has or is reasonably likely to have a RELP Material Adverse Effect;
(iii) the Trust Board postpones the date scheduled for the meeting of
shareholders of the Trust to approve the Merger Agreement and the transactions
contemplated thereby beyond March 31, 1998 or fails to set a date for such
meeting by such date, except with the written consent of RELP; (iv) there has
been a breach by the Trust of any representation or warranty contained in this
Agreement which would have or would be reasonably likely to have an AIP Material
Adverse Effect, which breach is not curable by March 31, 1998; or (v) there has
been a material breach of any of the covenants or agreements set forth in the
Merger Agreement on the part of the Trust, which breach is not curable or, if
curable, is not cured within 30 days after written notice of such breach is
given by RELP to the Trust.

Termination by the Trust. The Merger Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the approval by the shareholders of the Trust, by action of the Trust Board, if
(i) in the exercise of its good faith judgment as to its fiduciary duties to its
shareholders imposed by law, as advised by counsel, the Trust Board determines
that such termination is required by reason of an AIP Acquisition Proposal being
made; (ii) the General Partner withdraws, materially modifies or changes in a
manner materially adverse to the Trust its recommendation to Limited Partners of
the Merger Agreement or the Merger, other than as a result of the occurrence of
an event that in the good faith judgment of the General Partner has or is
reasonably likely to have an AIP Material Adverse Effect; (iii) the General
Partner postpones the date scheduled for the RELP Special Meeting beyond March
31, 1998, or fails to set a

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date for such meeting by such date, except with the written consent of the
Trust; (iv) there has been a breach by the RELP of any representation or
warranty contained in the Merger Agreement which would have or would be
reasonably likely to have a RELP Material Adverse Effect, which breach is not
curable by March 31, 1998; or (v) there has been a material breach of any of the
covenants or agreements set forth in the Merger Agreement on the part of the
RELP, which breach is not curable or, if curable, is not cured within 30 days
after written notice of such breach is given by the Trust to the RELP.

EFFECT OF TERMINATION AND ABANDONMENT

If an election to terminate the Merger Agreement is made because (i) the
Merger is not consummated by March 31, 1998 or the RELP Special Meeting shall
have been duly held and convened and approval of a RELP's Limited Partners shall
not have been obtained, or a RELP Acquisition Proposal relating to RELP shall
have been made and, within one year from the date of such termination, the RELP
consummates a RELP Acquisition Proposal or enters into an agreement to
consummate a RELP Acquisition Proposal which is subsequently consummated; or
(ii) in the exercise of its good faith judgment as to its fiduciary duties to
its partners imposed by law, as advised by counsel, the General Partner
determines that such termination is required by reason of a RELP Acquisition
Proposal being made, the RELP shall pay to the Trust, provided that the Trust
was not in material breach of its obligations at the time of such termination,
as liquidated damages and not as a penalty or forfeiture, an amount equal to the
lesser of (m) RELP's Proportionate Share of $2,000,000 (the "Liquidated Damages
Amount") and (n) the sum of (1) the maximum amount that can be paid to the Trust
without causing the Trust to fail to meet the requirements of Sections 856(c)(2)
and (3) of the Code determined as if the payment of such amount did not
constitute income described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of
the Code ("Qualifying Income"), as determined by the Trust's certified public
accountants, plus (2) an amount equal to the Liquidated Damages Amount less the
amount payable under clause (1) above in the event the Trust receives a letter
from the Trust's counsel indicating that the Trust has received a ruling from
the IRS to the effect that Liquidated Damages Amount payments constitute
Qualifying Income. In addition to the Liquidated Damages Amount, the Trust shall
be entitled to receive from RELP (or its successor in interest) all documented
out-of-pocket costs and expenses, up to a maximum of the RELP's Proportionate
Share of $1,000,000 in connection with the Merger Agreement and the transactions
contemplated thereby (the "AIP Expenses") incurred by the Trust. The payments to
which the Trust is entitled as described above shall be its sole remedy with
respect to the termination of the Merger Agreement under the circumstances
contemplated above.

If an election to terminate the Merger Agreement is made because of a RELP
Material Adverse Effect, the RELP shall, provided that the Trust was not in
material breach of its obligations at the time of such termination, pay the
Trust for the AIP Expenses, up to a maximum of RELP's Proportionate Share of
$1,000,000, although it shall not be required to pay the Liquidated Damages
Amount, which payment of the AIP Expenses shall be the Trust's sole remedy for
termination of the Merger Agreement in such circumstances.

If an election to terminate the Merger Agreement is made because (i) the
Merger is not consummated by March 31, 1998 or the Trust Special Meeting shall
have been duly held and convened and approval of the Trust's shareholders shall
not have been obtained, or an AIP Acquisition Proposal relating to the Trust
shall have been made and, within one year from the date of such termination, AIP
consummates an AIP Acquisition Proposal or enters into an agreement to
consummate an AIP Acquisition Proposal which is subsequently consummated; or
(ii) in the exercise of its good faith judgment as to its fiduciary duties to
its shareholders imposed by law, as advised by counsel, the Trust Board
determines that such termination is required by reason of an AIP Acquisition
Proposal being made, the Trust shall pay to the RELP, provided that the RELP was
not in material breach of its obligations hereunder at the time of such
termination, as liquidated damages and not as a penalty or forfeiture, an amount
equal to the Proportionate Share of the Liquidated Damages Amount. In addition
to the Proportionate Share of the Liquidated Damages Amount, the RELP shall be
entitled to receive from the Trust (or its successor in interest) all documented
out-of-pocket costs and expenses, up to a maximum amount equal to the
Proportionate Share of $1,000,000, in connection with the Merger Agreement and
the transactions contemplated thereby (the "RELP Expenses"

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and, together with the AIP Expenses, the "Expenses") incurred by the RELP. The
payments to which the RELP is entitled as described above shall be its sole
remedy with respect to the termination of the Merger Agreement under the
circumstances contemplated above.

If an election to terminate the Merger Agreement is made because of an AIP
Material Adverse Effect, the Trust shall, provided that the RELP was not in
material breach of its obligations at the time of such termination, pay the RELP
for the Proportionate Share of the RELP Expenses, up to a maximum amount equal
to the amount of RELP's Proportionate Share of $1,000,000, although it shall not
be required to pay the Liquidated Damages Amount, which payment of the RELP
Expenses shall be the RELP's sole remedy for termination of the Merger Agreement
in such circumstances.

If the Merger Agreement is terminated because of a breach of
representations and warranties or breach of covenants, the non-terminating party
shall, provided that the terminating party was not in material breach of its
obligations at the time of such termination, pay the terminating party all
Expenses, up to a maximum amount equal to the amount of the RELP's Proportionate
Share of $1,000,000, incurred by it and the non-terminating party shall remain
liable to the terminating party for its breach.

If either party terminates the Merger Agreement during the Due Diligence
Period other than for a due diligence related reason, the non-terminating party
shall be entitled to receive the Proportionate Share of the Liquidated Damages
Amount and the Proportionate Share of the Expenses.

EXTENSION; WAIVER

At any time prior to the Effective Time, either party, by action taken by
its Trust Board or General Partner, as applicable, may, to the extent legally
allowed, (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto; (ii) waive any inaccuracies in the
representations and warranties made to such party contained in the Merger
Agreement or in any document delivered pursuant hereto; and (iii) waive
compliance with any of the agreements or conditions for the benefit of such
party contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.

PROPOSED AMENDMENTS TO PARTNERSHIP AGREEMENTS

The General Partners are proposing amendments to the Partnership Agreements
to permit the closing of the transactions contemplated by the Merger. The
Partnership Agreements of the RELPS do not explicitly provide that the RELPS can
merge with and into another entity. The General Partners are proposing to amend
the Partnership Agreements to empower and expressly permit each General Partner,
for the benefit and on behalf of each respective RELP, to consummate the Merger.
Also, the Partnership Agreements each place certain prohibitions on the General
Partners from entering into various agreements, contracts or arrangements for
and on behalf of the RELPS with the General Partners or their Affiliates. As
discussed herein, Realco is an Affiliate of both the General Partners and the
Trust. See "Conflicts of Interest." Consequently, the Merger Agreement cannot be
effected unless and until the proposed amendments are adopted which approve the
Merger whether or not the Trust would be regarded as an Affiliate of the General
Partners.

Accordingly, for each of the RELPS, the Limited Partners are being asked to
consider and vote upon proposed amendments which authorize the following: (i)
the Merger of each RELP with and into the Trust, whether or not the Trust would
be regarded as an Affiliate of the General Partners; and (ii) such other actions
as may be necessary under or contemplated by the Merger Agreement or this Joint
Proxy Statement/Prospectus, irrespective of any provisions in the Partnership
Agreements which might otherwise prohibit such actions.

In addition to the proposed amendments outlined above relating the Merger,
the General Partner of RELP II is proposing an amendment to the Partnership
Agreement of RELP II authorizing the sale of RELP II's interest in the joint
venture which owns the Sequoia Plaza I Building to Realco, or an Affiliate of
Realco, notwithstanding the fact that Realco is an Affiliate of the General
Partner. See "Supplement to

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Prospectus" relating to RELP II. Also, in addition to the proposed amendments
outlined above relating to the Merger, the General Partner of RELP III is
proposing an amendment to the Partnership Agreement of RELP III authorizing the
sale of the Curlew Crossing property by RELP III to Realco, notwithstanding the
fact that Realco is an Affiliate of the General Partners. See "Supplement to
Prospectus" relating to RELP III.

Limited Partners voting in favor of the Merger will be deemed to have voted
in favor of each of these proposed amendments. Since a majority vote of the
Limited Partners is required to approve the proposed amendments, a majority vote
is required to approve the Merger. Similarly, the amendments will not be
effective as to each RELP that does not participate in the Merger. In accordance
with the terms of the Partnership Agreements of RELP II, RELP III and RELP IV,
Units held by the General Partner and its Affiliates in each respective RELP
will not be entitled to vote at the RELP Special Meeting. However, the Units
held by the RELP I General Partner and its Affiliates in RELP I are entitled to
vote at the RELP Special Meeting and 6,039 such Units (representing 11.06% of
the outstanding RELP I Units) will be voted to approve the proposed amendments,
and the Merger Agreement.

THE MERGER EXPENSES

If the Merger is approved by each RELP's Limited Partners, all transaction
costs of the Merger shall be paid by the Trust. If three or more of the four
RELPS do not approve the Merger, Realco must reimburse the Trust for the Trust's
expenses relating to the proposed Merger up to $250,000. If the RELPS approve
the Merger, but the shareholders of the Trust do not approve the Merger, and if
Realco voted its Shares in favor of the Merger, the Trust will reimburse each
RELP for all expenses it incurred in connection with the proposed Merger. Any
expenses to be reimbursed shall include, but not be limited to, costs of
fairness opinions, property appraisals, engineering and environmental reports,
title policies, accounting fees, legal fees, printing and solicitation expenses.
Each RELP will bear the costs of preparing its initial fairness opinion, with
later reimbursement by the Trust in the event the Merger is approved by the
Limited Partners. If the Limited Partners of a RELP fail to approve the proposed
Merger, then Realco will reimburse the Trust for the RELP's expenses (to the
extent paid by the Trust) or reimburse the RELP as follows: the actual cost of
such RELP's fairness opinion, legal fees up to $80,000, and the actual cost or
the Proportionate Share (if the actual cost is not separately determined), of
RELP's accounting fees, engineering and environmental reports, printing and
solicitation expenses.

ANTICIPATED ACCOUNTING TREATMENT

The Trust will account for the Merger as a purchase in accordance with
Accounting Principles Board Opinion No. 16. The fair market value of the
consideration given by the Trust in the Merger and the market value of
liabilities assumed will be used as the basis of the purchase price. The
purchase price will be allocated to the assets and liabilities of the
Participating RELPS based upon their respective fair market values at the
Effective Time of the Merger. The financial statements of the Trust will reflect
the combined operations of the Trust and the Participating RELPS from the
Effective Time of the Merger.

MATERIAL FEDERAL INCOME TAX CONSEQUENCES

General

The following discussion summarizes those United States federal income tax
consequences that materially affect Limited Partners participating in the
Merger. The discussion is general in nature and does not discuss all aspects of
federal income tax law that may be relevant to a particular Limited Partner
based on such Limited Partner's tax situation. Specifically, this discussion
does not address state, local or foreign tax consequences to any Limited Partner
and the subsequent ownership and disposition of the Shares. ACCORDINGLY, THIS
DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING AND EACH
LIMITED PARTNER IS URGED TO CONSULT HIS OWN TAX ADVISORS WITH SPECIFIC REFERENCE
TO ITS OWN TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL
AND OTHER TAX LAWS.

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Tax Treatment of the Merger for Participating RELPS and Taxable Limited
Partners

Overview. For RELPS electing to participate in the Merger, the Merger will
be structured as a merger of the Participating RELPS into the Trust under
applicable state law. For federal income tax purposes, the Merger should be
treated as a taxable acquisition of RELP assets by the Trust in exchange for
Shares and a subsequent distribution of such Shares by the RELPS to the Limited
Partners.

Tax Consequences of Acquisition. In the Merger, each RELP's assets will be
deemed to be transferred to the Trust in return for Shares and taxed as if the
assets were sold for such Shares. Such deemed sale should result in recognition
of gain or loss by each RELP and, therefore, should result in recognition of
gain or loss by the Limited Partners (other than certain tax-exempt Limited
Partners who have not financed their acquisition of Units). See "-- Consequences
of Merger on Tax-Exempt Limited Partners" below. The overall amount of gain or
loss recognition by a RELP will be the difference between the fair market value
of the Shares deemed to be received by the RELP at the Effective Time of the
Merger (plus any RELP liabilities assumed by the Trust in connection with the
Merger) and the adjusted tax basis of the RELP assets exchanged therefor.

Allocation of Gain or Loss Among Limited Partners. The amount of gain or
loss recognized by the various RELPS in the year of the Merger will be allocated
among their respective Limited Partners in accordance with the terms of their
respective Partnership Agreement. Generally, gain or loss arising from the
deemed sale of RELP assets will be shared by each Limited Partner based upon the
relative interest of each such Limited Partner in the RELP. A pro rata
allocation of such gain or loss may result in improperly maintained Limited
Partner capital accounts such that a liquidation of the RELP would not reflect
such Limited Partner's actual equity interest.

Characterization of Gain or Loss. In general, gains or losses recognized
with respect to the transfer of each of the RELP properties in the Merger should
be treated as gains or losses, respectively, from the sale of "Section 1231"
assets (i.e., real property and depreciable assets used in a trade or business
and held for more than one year). Gains or losses from the sale of Section 1231
assets of any RELP would be combined with any other Section 1231 gains and
losses recognized by a Limited Partner in that year. If the result is a net
loss, such loss will be characterized as an ordinary loss. If the result is a
net gain, such gain will be characterized as a capital gain; provided, however,
that such gain will be treated as ordinary income to the extent of the Limited
Partner's "non-recaptured" Section 1231 losses. For these purposes,
"non-recaptured" Section 1231 losses means a Limited Partner's aggregate Section
1231 losses for the five most recent prior years that have not previously been
recaptured. Although the Trust does not anticipate any of its assets being
considered inventory for federal income tax purposes, to the extent that any
such assets were determined to be inventory, gain resulting from the deemed sale
of RELP assets would result in ordinary income to the Limited Partners.

Passive Activity Losses. For purposes of the passive activity loss
limitation rules of Section 469 of the Code, gains or losses recognized from the
transfers of the RELPS' properties generally will be treated as passive activity
income or loss. A taxpayer generally only uses passive losses to offset passive
income and unused passive losses are generally carried over into future tax
years. In general, a taxpayer who disposes of his entire interest in a passive
activity during a taxable year may avoid the passive activity loss limitations
on the excess of passive losses from such activity (including such activity's
suspended passive losses from prior periods and any loss recognized on the
disposition) over passive income or gains in the year of disposition from all of
the taxpayer's activities. For this provision to apply, however, the taxpayer
must dispose of its entire interest in the passive activity to an unrelated
taxpayer. Although each Limited Partner should be treated as having disposed of
its entire interest in its respective RELP, because a Limited Partner receiving
Shares in the Trust has a continuing indirect interest in the RELP's activities
following the Merger (through its ownership of Shares), it is uncertain whether
the Merger will result in a disposition of a Limited Partner's entire interest
in the passive activity of a RELP. Furthermore, if the Trust is treated as a
related party to a Limited Partner receiving Shares, the Limited Partner will be
precluded from applying this provision to avoid the passive activity loss
limitations.

Nonrecognition Transfers. There are provisions of the Code that may limit
the recognition of losses realized with respect to assets transferred by a RELP
in the Merger. Under Section 267(a) of the Code, a loss may not be recognized in
connection with a sale or exchange between related parties even though the loss
is

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realized for tax purposes. A RELP could be treated as a related party to the
Trust if the Limited Partners of such RELP own more than 50% of the Shares after
the Merger. In addition, if an individual (as opposed to a corporation or trust)
Limited Partner owns interests in more than one RELP and if those RELPS
collectively receive more than 50% of the Shares in the Merger, such Limited
Partner may not be entitled to deduct his share of any losses realized by those
RELPS in the Merger. If Section 267(a) of the Code were to apply, any disallowed
loss generally would be available to the Trust to offset gains with respect to
the RELP properties if and when such RELP properties are ultimately disposed of
by the Trust at a gain. A Limited Partner's basis in his Shares in the Trust may
be reduced by losses disallowed under Section 267(a) of the Code in the same
manner as recognized losses. The Trust's basis in the properties acquired in the
Merger, however, is not affected by the application of Section 267(a) of the
Code.

Termination of RELPS. For federal income tax purposes, upon the Effective
Time of the Merger and the receipt of Shares in the Merger by the Limited
Partners of a RELP, such RELP will be treated as if it liquidated and
distributed to its Limited Partners the Shares received in the Merger. The
taxable year of each such RELP will end at such time. Assuming the closing date
occurs by December 31, 1997, each Limited Partner in a Participating RELP must
report, in his taxable year that includes the Merger, his share of all income,
gain, loss, deduction and credit for such RELP for the fiscal period ending on
the date of the Merger (including his allocable share of the gain or loss
resulting from the Merger described above). Accordingly, an individual Limited
Partner would report on his tax return for 1997 his share of all income, gain,
loss, deduction and credit for such RELP including any gain or loss from the
Merger. A Limited Partner whose taxable year differs from that of the RELP's
could have "bunching" of income from the RELP and the Trust because of the short
taxable year of the RELP. However, a Limited Partner whose taxable year is the
calendar year will not experience any "bunching" of income.

Consequences of Merger on Tax-Exempt Limited Partners. Based on the RELPS'
representations that RELP assets are held by the RELPS for trade or business
purposes and not for resale, the Merger should not result in recognition of
unrelated business taxable income by a tax-exempt Limited Partner that does not
hold Units in the RELP as a "dealer," did not acquire such Units with debt
financed proceeds, or is not an organization described in Code Section 501(c)(7)
(social clubs), 501(c)(9) (voluntary employee beneficiary associations),
501(c)(17) (supplementary unemployment benefit trusts), or 501(c)(20) (qualified
group legal services plans).

Taxable Distribution of Shares. Section 731(c) of the Code provides that
the distribution by a partnership of marketable securities shall be treated in
the same manner as a cash distribution. Under this provision, the Limited
Partners of each RELP should recognize gain to the extent that the fair value of
the Shares exceed their adjusted basis in the partnership. However, the
allocation of gain to the Limited Partners of each RELP described in "Allocation
of Gain or Loss Among Limited Partners," above, should minimize the amount of
gain recognized by such Limited Partners upon the subsequent deemed distribution
of Shares pursuant to the Merger because such Limited Partners will be allocated
gain from the deemed transfer of RELP assets to the Trust and such gain will
increase their adjusted bases in their Units. If the fair market value of the
Shares received by a Limited Partner exceeds the Limited Partner's adjusted
basis in its Units, the gain equal to such excess recognized by the Limited
Partners should be long-term capital gain as long as the Limited Partner holds
its Units as a capital asset and has held such Units for at least one year. In
the event that a Limited Partner's basis in its Units exceeds the fair market
value of the Shares received by the Limited Partner, such Limited Partner should
recognize a capital loss (as long as such Limited Partner holds its RELP Units
as a capital asset.)

Taxation of the Trust. The Trust currently has in effect an election to be
taxed as a REIT under Sections 856 through 859 of the Code. The Trust believes
that it has, since its inception, been organized and operated in such a manner
so as to qualify for taxation as a REIT under the Code. The Trust intends to
continue to operate in a manner so as to qualify as a REIT following the
Effective Time of the Merger, but no assurance can be given that the Trust will
qualify or remain qualified as a REIT. As a result of the Merger, each RELP's
separate existence will cease as of the Effective Time of the Merger.
Accordingly, the following discussion summarizes only the taxation of the Trust.

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The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth certain
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder and administrative and judicial interpretations thereof, all of which
are subject to change prospectively or retroactively.

Each Limited Partner who receives Shares pursuant to the Merger will own an
equity interest in the Trust, making such Limited Partner a REIT shareholder
following the Merger. Although a REIT is not a pass-through entity for federal
income tax purposes, so long as the Trust continues to qualify for taxation as a
REIT, it generally will not be subject to federal corporate income tax on its
net income that is distributed currently to its shareholders. Such treatment
substantially eliminates the "double taxation" (i.e., taxation at both the
corporate and shareholder levels) that generally results from investment in a
corporation. However, the Trust will be subject to federal income tax in the
following circumstances. First, the Trust will be taxed at regular corporate
rates on any undistributed REIT taxable income, including undistributed net
capital gains. Second, under certain circumstances, the Trust may be subject to
the "alternative minimum tax" on its items of tax preference, if any. Third, if
the Trust has (i) net income from the sale or other disposition of "foreclosure
property" that is held primarily for sale to customers in the ordinary course of
business or (ii) other nonqualifying income from foreclosure property, it will
be subject to tax at the highest corporate rate on such income. Fourth, if the
Trust has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property (other than foreclosure
property) held primarily for sale to customers in the ordinary course of
business), such income will be subject to a 100% tax. Fifth, if the Trust should
fail to satisfy the 75% gross income test or the 95% gross income test (as
discussed below), and nonetheless has maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which it
fails the 75% or 95% gross income test. Sixth, if the Trust should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year and (iii) any undistributed taxable income from prior periods, it
would be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. Seventh, if the Trust acquires any asset
from a C corporation (i.e., a corporation generally subject to full
corporate-level tax) in a transaction in which the basis of the asset in the
Trust's hands is determined by reference to the basis of the asset (or any other
asset) in the hands of the C corporation and the Trust recognizes gain on the
disposition of such asset during the 10-year period beginning on the date on
which such asset was acquired by the Trust, then to the extent of such asset's
"built-in-gain" (i.e., the excess of the fair market value of such asset at the
time of acquisition by the Trust over the adjusted basis in such asset at such
time), such gain will be subject to tax at the highest regular corporate rate
applicable. The results described above with respect to the recognition of
"built-in-gain" assume that the Trust will timely make an election pursuant to
IRS Notice 88-19 following any such acquisition.

Requirements for Qualification

The Code provides a definition of a REIT which the Trust must satisfy to
maintain its qualification as a REIT. Generally, the Code defines a REIT as a
corporation, trust or association (i) that is managed by one or more trustees or
directors; (ii) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest; (iii) that would
be taxable as a domestic corporation, but for sections 856 through 859 of the
Code; (iv) that is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (v) the beneficial ownership of which
is held by 100 or more persons; (vi) not more than 50% in value of the
outstanding shares of which is owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) during the last
half of each taxable year (the "5/50 Rule"); (vii) that makes an election to be
a REIT (or has made such election for a previous taxable year which has not been
revoked or terminated) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and maintain REIT status; (viii) that uses a calendar year for federal
income tax purposes and complies with the record keeping requirements of the
Code and Treasury Regulations promulgated thereunder (pursuant to the Taxpayer
Relief Act of 1997, for taxable years beginning after August 5, 1997, failure to
comply with the record keeping

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requirements of the Code and Treasury Regulations results in the imposition of a
$25,000 penalty ($50,000 if the failure is due to intentional disregard) rather
than loss of REIT status); and (ix) that meets certain other tests, described
below, regarding the nature of its income and assets. The Code provides that
conditions (i) to (iv), inclusive, must be met during the entire taxable year
and that condition (v) must be met during at least 335 days of a taxable year of
12 months, or during a proportionate part of a taxable year of less than 12
months. For purposes of determining stock ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is treated as an individual. A trust that is a qualified
trust under Code section 401(a), however, generally is not considered an
individual and beneficiaries of such a trust are treated as holding shares of a
REIT in proportion to their actuarial interests in the trust for purposes of the
5/50 Rule.

The Trust's Declaration of Trust contains restrictions regarding the
transfer of Shares that are intended to assist the Trust in continuing to
satisfy the share ownership requirements described in clauses (v) and (vi)
above. Those restrictions may not ensure that the Trust in all cases will be
able to satisfy the share ownership requirements described above. If the Trust
fails to satisfy those share ownership requirements, the Trust's status as a
REIT will terminate. See "-- Failure to Qualify." Pursuant to the Taxpayer
Relief Act of 1997, enacted August 5, 1997, starting with a REIT's first taxable
year that begins after August 5, 1997, a REIT that complies with Treasury
Regulations for ascertaining the ownership of its shares and that does not know
or, exercising reasonable diligence would not have known, whether it failed
condition (vi) will be treated as meeting condition (vi).

The Trust currently has wholly-owned corporate subsidiaries (the "Corporate
Subsidiaries"). The Trust may form or acquire additional Corporate Subsidiaries
in the future. Code section 856(i) provides that a corporation that is a
"qualified REIT subsidiary" shall not be treated as a separate corporation, and
all assets, liabilities and items of income, deduction and credit of a
"qualified REIT subsidiary" shall be treated as assets, liabilities and items of
income, deduction and credit of the REIT. A "qualified REIT subsidiary" is a
corporation, all of the capital stock of which has been held by the REIT at all
times during the period such corporation was in existence. Pursuant to the
Taxpayer Relief Act of 1997, starting with a REIT's first taxable year that
begins after August 5, 1997, a corporation may qualify as a qualified REIT
subsidiary as long as the REIT owns 100% of its stock even though such
corporation was not wholly-owned by the REIT during its entire period of
existence. Under such provisions, where a REIT acquires an existing corporation,
such corporation is treated as being liquidated at the time of acquisition by
the REIT and then reincorporated. In applying the income and asset tests
described below, any Corporate Subsidiaries of the Trust that are "qualified
REIT subsidiaries" will be ignored, and all assets, liabilities and items of
income, deduction and credit of such Corporate Subsidiaries will be treated as
assets, liabilities and items of income, deduction and credit of the Trust.
Because each of the current Corporate Subsidiaries will continue to be a
"qualified REIT subsidiary" of the Trust after the Merger, no such Corporate
Subsidiary will be subject to federal corporate income taxation, although it may
be subject to state and local taxation.

Income Tests. In order for the Trust to qualify and maintain its
qualification as a REIT, three requirements relating to gross income must be
satisfied annually. First, at least 75% of its gross income (excluding gross
income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments relating
to real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or temporary investment
income. Second, at least 95% of its gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from sources that
qualify under the 75% test, and from dividends, other types of interest and gain
from the sale or disposition of stock or securities, or from any combination of
the foregoing. Third, not more than 30% of its gross income (including gross
income from prohibited transactions) for each taxable year may be gain from the
sale or other disposition of (i) stock or securities held for less than one
year, (ii) dealer property that is not foreclosure property and (iii) certain
real property held for less than four years (other than from involuntary
conversions and sales of foreclosure property). Pursuant to the Taxpayer Relief
Act of 1997, the 30% gross income test is eliminated, starting with a REIT's
first taxable year that begins after August 5, 1997.

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Rents Received by the Trust. The rent received by the Trust from its
tenants ("Rent") will qualify as "rents from real property" in satisfying the
gross income requirements for a REIT described above only if several conditions
are met. First, the amount of Rent must not be based, in whole or in part, on
the income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term "rents from real property" solely
by reason of being based on a fixed percentage or percentages of receipts or
sales. Second, the Code provides that rents received from a tenant of the Trust
will not qualify as "rents from real property" in satisfying the gross income
tests if the Trust, or a direct or indirect owner of 10% or more of the Trust,
directly or constructively owns 10% or more of such tenant (a "Related Party
Tenant"). Third, if rent attributable to personal property, leased in connection
with a lease of real property, is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to such personal property
will not qualify as "rents from real property." Finally, for the Rent to qualify
as "rents from real property," the Trust generally must not operate or manage
its properties or furnish or render services to the tenants of such properties,
other than through an "independent contractor" who is adequately compensated and
from whom the Trust derives no revenue. The "independent contractor"
requirement, however, does not apply to the extent the services provided by the
Trust are "usually or customarily rendered" in connection with the rental of
space for occupancy only and are not otherwise considered "rendered to the
occupant." Moreover, pursuant to the Taxpayer Relief Act of 1997, starting with
a REIT's first taxable year that begins after August 5, 1997, income derived by
a REIT from non-qualifying services provided to tenants or from managing or
operating a property which it owns will not be treated as rent from real
property unless such income does not exceed 1% of the REIT's gross income from
the property.

If any portion of the Rent does not qualify as "rents from real property"
because the Rent attributable to personal property leased in connection with any
lease of real property exceeds 15% of the total Rent received under the lease
for a taxable year, the portion of the Rent that is attributable to personal
property will not be qualifying income for purposes of either the 75% or 95%
gross income test. Thus, if the Rent attributable to personal property, plus any
other income received by the Trust during a taxable year that is not qualifying
income for purposes of the 95% gross income test, exceeds 5% of its gross income
during such year, the Trust likely would lose its REIT status. If, however, any
portion of the Rent received under a lease does not qualify as "rents from real
property" because either (i) the Rent is considered based on the income or
profits of any person or (ii) the tenant is a Related Party Tenant, none of the
Rent received by the Trust under such lease would qualify as "rents from real
property." In that case, if the Rent received by the Trust under such lease,
plus any other income received by it during the taxable year that is not
qualifying income for purposes of the 95% gross income test, exceeds 5% of its
gross income for such year, the Trust likely would lose its REIT status.
Finally, if any portion of the Rent does not qualify as "rents from real
property" because the Trust furnishes noncustomary services with respect to a
property other than through a qualifying independent contractor, none of the
Rent received by it with respect to the such property would qualify as "rents
from real property." In that case, if the Rent received by the Trust with
respect to such property, plus any other income received by it during the
taxable year that is not qualifying income for purposes of the 95% gross income
test, exceeds 5% of its gross income for such year, the Trust likely would lose
its REIT status.

If the Trust fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the failure to meet such tests is due
to reasonable cause and not due to willful neglect, the Trust attaches a
schedule of the sources of its income to its return, and any incorrect
information on the schedule was not due to fraud with intent to evade tax. It is
not possible, however, to state whether in all circumstances the Trust would be
entitled to the benefit of those relief provisions. As discussed above in
"Taxation of the Trust" even if those relief provisions apply, a 100% tax would
be imposed on the net income attributable to the greater of the amount by which
the Trust fails the 75% and 95% gross income tests. No such relief is available
for the failure to satisfy the 30% income test.

Asset Tests. Generally, the Code requires that a REIT satisfy certain tests
regarding the nature of its assets. The Trust, at the close of each quarter of
each taxable year, must satisfy two tests relating to the nature of its assets.
First, at least 75% of the value of its total assets must be represented by cash
or cash items (including certain receivables), government securities, "real
estate assets" or, in cases where it raises new

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capital through stock or long-term (at least five-year) debt offerings,
temporary investments in stock or debt instruments during the one-year period
following its receipt of such capital. The term "real estate assets" includes
interests in real property, interests in mortgages on real property to the
extent the principal balance of a mortgage does not exceed the value of the
associated real property and shares of other REITs. For purposes of the 75%
asset test, the term "interest in real property" includes an interest in land
and improvements thereon, such as buildings or other inherently permanent
structures (including items that are structural components of such buildings or
structures), a leasehold of real property and an option to acquire real property
(or a leasehold of real property). Second, of the investments not included in
the 75% asset class, the value of any one issuer's securities owned by the Trust
may not exceed 5% of the value of the Trust's total assets and the Trust may not
own more than 10% of any one issuer's outstanding voting securities other than
any qualified REIT subsidiary.

If the Trust should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar quarter
and (ii) the discrepancy between the value of its assets and the asset tests
either did not exist immediately after the acquisition of any particular asset
or was not wholly or partly caused by such an acquisition (i.e., the discrepancy
arose from changes in the market values of its assets). If the condition
described in clause (ii) of the preceding sentence were not satisfied, the Trust
still could avoid disqualification by eliminating any discrepancy within 30 days
after the close of the calendar quarter in which it arose.

Distribution Requirements. In order to maintain REIT status, the Trust must
satisfy certain distribution requirements prescribed by the Code. As a REIT, the
Trust is required to distribute with respect to each taxable year dividends
(other than capital gain dividends) to its shareholders in an aggregate amount
at least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed
without regard to the dividends paid deduction and its net capital gain) and (B)
95% of the net income (after tax), if any, from foreclosure property, minus (ii)
the sum of certain items of non-cash income. Such distributions must be paid in
the taxable year to which they relate, or in the following taxable year if
declared before the Trust timely files its federal income tax return for such
year and if paid on or before the first regular dividend payment date after such
declaration. To the extent that the Trust does not distribute all of its net
capital gain or distributes at least 95%, but less than 100%, of its "REIT
taxable income," as adjusted, it will be subject to tax thereon at regular
corporate tax rates. Furthermore, if the Trust should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain income for such year and (iii) any
undistributed taxable income from prior periods, it would be subject to a 4%
nondeductible excise tax on the excess of such required distribution over the
amounts actually distributed.

Under certain circumstances, the Trust may be able to rectify a failure to
meet the distribution requirements for a year by paying "deficiency dividends"
to its shareholders in a later year, which may be included in its deduction for
dividends paid for the earlier year. Although the Trust may be able to avoid
being taxed on amounts distributed as deficiency dividends, it will be required
to pay to the Service interest based upon the amount of any deduction taken for
deficiency dividends.

Recordkeeping Requirements. Pursuant to applicable Treasury Regulations, in
order to be able to elect to be taxed as a REIT, the Trust must maintain certain
records and request on an annual basis certain information from its shareholders
designed to disclose the actual ownership of its outstanding shares. Pursuant to
the Taxpayer Relief Act of 1997, for taxable years beginning after August 5,
1997, failure to comply with the record keeping requirements of the Code and
Treasury Regulations results in the imposition of a $25,000 penalty ($50,000 if
the failure is due to intentional disregard) rather than loss of REIT status.

Failure to Qualify

If the Trust fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, it will be subject to tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. Distributions to shareholders in any year in which the Trust fails to
qualify will not be deductible nor will they be required to be made. In such
event, to the extent of current and accumulated earnings and profits, all
distributions to shareholders will be taxable as ordinary income and, subject to
certain

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limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Trust also will be disqualified from taxation as a REIT for the
four taxable years following the year during which it ceased to qualify as a
REIT. It is not possible to predict whether in all circumstances the Trust would
be entitled to such statutory relief.

Taxation of Taxable U.S. Shareholders

As long as the Trust qualifies as a REIT, distributions made to taxable
U.S. Shareholders (as hereinafter defined), including those U.S. Shareholders
who formerly were Limited Partners of the Participating RELPS, out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will be taken into account by such taxable U.S. Shareholders as ordinary income
and will not be eligible for the dividends received deduction generally
available to corporations. As used herein, the term "U.S. Shareholder" means a
holder of Shares that for United States federal income tax purposes is (i) a
citizen or resident of the United States, (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof or (iii) an estate or trust the income of
which is subject to United States federal income taxation regardless of its
source. Distributions that are designated as capital gain dividends will be
taxed as long-term capital gains (to the extent they do not exceed the payor's
actual net capital gain for the taxable year) without regard to the period for
which the U.S. Shareholder has held his shares. However, corporate U.S.
Shareholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. Pursuant to the Taxpayer Relief Act of 1997,
starting with a REIT's first taxable year that begins after August 5, 1997, a
REIT may elect to retain and pay income tax on net long-term capital gains that
it receives during a taxable year. If a REIT makes this election, its
shareholders are required to include in their income as long-term capital gain
their proportionate share of the undistributed long-term capital gains so
designated by the REIT. A shareholder will be treated as having paid his or her
share of the tax paid by the REIT in respect of long-term capital gains so
designated by the REIT, for which the shareholder will be entitled to a credit
or refund. In addition, the shareholder's basis in his or her REIT shares will
be increased by the amount of the REIT's designated undistributed long-term
capital gains that are included in the shareholder's long-term capital gains,
reduced by the shareholder's proportionate share of tax paid by the REIT on
those gains that the shareholder is treated as having paid. The earnings and
profits of the REIT will be reduced, and the earnings and profits of any
corporate shareholder of the REIT will be increased, to take into account
amounts designated by the REIT pursuant to this rule. A REIT must pay its tax on
its designated long-term capital gains within 30 days of the close of any
taxable year in which it designates long-term capital gains pursuant to this
rule, and it must mail a written notice of its designation to its shareholders
within 60 days of the close of the taxable year. Distributions in excess of
current and accumulated earnings and profits will not be taxable to a U.S.
Shareholder to the extent that they do not exceed the adjusted basis of the U.S.
Shareholder's Shares, but rather will reduce the adjusted basis of such Shares.
To the extent that such distributions in excess of current and accumulated
earnings and profits exceed the adjusted basis of a U.S. Shareholder's Shares,
such distributions will be included in income as long-term capital gain (or
short-term capital gain if such shares have been held for one year or less),
assuming that such Shares are capital assets in the hands of the U.S.
Shareholder. In addition, any distribution declared by the Trust in October,
November or December of any year and payable to a U.S. Shareholder of record on
a specified date in any such month shall be treated as both paid by the payor
and received by the U.S. Shareholder on December 31 of such year, provided that
the distribution is actually paid by the payor during January of the following
calendar year.

U.S. Shareholders may not include in their individual income tax returns
any net operating losses or capital losses of the Trust. Instead, such losses
would be carried over by the Trust for potential offset against its future
income (subject to certain limitations). Taxable distributions from the Trust
and gain from the disposition of Shares will not be treated as passive activity
income and, therefore, U.S. Shareholders generally will not be able to apply any
"passive activity losses" (such as losses from certain types of limited
partnerships in which a shareholder is a limited partner) against such income.
In addition, taxable distributions from the Trust generally will be treated as
investment income for purposes of the investment interest limitations. Capital
gains from the disposition of the Shares (and distributions treated as such),
however, will be treated as investment income only if the U.S. Shareholder so
elects, in which case such capital gains will be taxed at

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ordinary income rates. The Trust will notify shareholders after the close of the
Trust's taxable year as to the portions of the distributions attributable to
that year that constitute ordinary income, return of capital and capital gain.

Taxation of U.S. Shareholders on the Disposition of Shares

In general, any gain or loss realized upon a taxable disposition of Shares
by a U.S. Shareholder who is not a dealer in securities will be treated as
long-term capital gain or loss if the Shares have been held for more than one
year and otherwise as short-term capital gain or loss. However, any loss upon a
sale or exchange by a U.S. Shareholder who has held such Shares for six months
or less (after applying certain holding period rules), will be treated as a
long-term capital loss to the extent of distributions from the Trust required to
be treated by such U.S. Shareholder as long-term capital gain. All or a portion
of any loss realized upon a taxable disposition of shares of Shares may be
disallowed if other Shares are purchased within 30 days before or after the
disposition.

Capital Gains and Losses

A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%,
and the tax rate on net capital gains applicable to individuals is 28%. Thus,
the tax rate differential between capital gain and ordinary income for
individuals may be significant. The Taxpayer Relief Act of 1997 has changed the
tax rates and holding periods applicable to long-term capital gains of
individuals. In general, under applicable provisions of the Taxpayer Relief Act
of 1997, which are generally effective for taxable years ending after May 6,
1997, the maximum tax rate applicable to net capital gains of individuals
realized upon the sale of property held for 18 months or more is 20%, and the
maximum tax rate on net capital gains of individuals realized upon the sale of
property for more than one year and for not more than 18 months is 28%. The
Taxpayer Relief Act of 1997 does not affect the taxation of a corporation's
capital gains. Because the tax rates and applicable holding periods will vary
depending upon a shareholder's individual circumstances, investors should
consult their own tax advisors concerning the effect of these Taxpayer Relief
Act of 1997 changes. In addition, the characterization of income as capital or
ordinary may affect the deductibility of capital losses. Capital losses not
offset by capital gains may be deducted against an individual's ordinary income
only up to a maximum annual amount of $3,000. Unused capital losses may be
carried forward. All net capital gains of a corporate taxpayer is subject to tax
at ordinary corporate rates. A corporate taxpayer can deduct capital losses only
to the extent of capital gains, with unused losses being carried back three
years and forward five years.

Information Reporting Requirements and Backup Withholding

Under the backup withholding rules, a U.S. Shareholder may be subject to
backup withholding at the rate of 31% with respect to distributions paid unless
such holder (i) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact or (ii) provides a taxpayer
identification number to the Trust, certifies as to no loss of exemption from
backup withholding and otherwise complies with the applicable requirements of
the backup withholding rules. A U.S. Shareholder who does not provide the Trust
with his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the U.S. Shareholder's income tax liability. In addition, the Trust may
be required to withhold a portion of capital gain distributions to any U.S.
Shareholders who fail to certify their nonforeign status to the Trust. The
Service issued proposed regulations in April 1996 regarding the backup
withholding rules as applied to Non-U.S. Shareholders (as hereinafter defined).
Those proposed regulations would alter the current system of backup withholding
compliance. See " -- Taxation of Non-U.S. Shareholders" below.

Taxation of Tax-Exempt Shareholders

Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However,

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they are subject to taxation on their unrelated business taxable income
("UBTI"). While many investments in real estate generate UBTI, the Service has
issued a published ruling that dividend distributions from a REIT to an exempt
employee pension trust do not constitute UBTI, provided that the shares of the
REIT are not otherwise used in an unrelated trade or business of the exempt
employee pension trust. Based on that ruling, amounts distributed by the Trust
to Exempt Organizations generally should not constitute UBTI. However, if an
Exempt Organization finances its acquisition of Shares with debt, a portion of
its income from distributions on such shares will constitute UBTI pursuant to
the "debt-financed property" rules. Furthermore, social clubs, voluntary
employee benefit associations, supplemental unemployment benefit trusts and
qualified group legal services plans that are exempt from taxation under
paragraphs (7), (9), (17) and (20), respectively, of Code section 501(c) are
subject to different UBTI rules, which generally will require them to
characterize distributions from the Trust as UBTI. In addition, in certain
circumstances, a pension trust that owns more than 10% of the Shares of the
Trust is required to treat a percentage of the dividends on its Shares as UBTI
(the "UBTI Percentage"). The UBTI Percentage is the gross income derived by the
Trust from an unrelated trade or business (determined as if the Trust were a
pension trust) divided by the gross income of the Trust for the year in which
the dividends are paid. The UBTI rule applies to a pension trust holding more
than 10% of the Shares only if (i) the UBTI Percentage is at least 5%; (ii) the
Trust qualifies as a REIT by reason of the modification of the 5/50 Rule that
allows the beneficiaries of the pension trust to be treated as holding shares of
the Trust in proportion to their actuarial interests in the pension trust; and
(iii) the Trust is a "pension" held REIT" (i.e., either (A) one pension trust
owns more than 25% of the value of the Shares or (B) a group of pension trusts
individually holding more than 10% of the value of the Trust's shares
collectively owns more than 50% of the value of the Trust's shares).

Taxation of Non-U.S. Shareholders

The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
holders of Shares (collectively, "Non-U.S. Shareholders") are complex and no
attempt will be made herein to provide more than a brief summary of such rules.
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN SHARES, INCLUDING ANY REPORTING REQUIREMENTS.

Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges of United States real property interests and are not
designated by the payor as capital gains dividends will be treated as dividends
of ordinary income to the extent that they are made out of the payor's current
or accumulated earnings and profits. Such distributions ordinarily will be
subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in Shares is treated as effectively
connected with the Non-U.S. Shareholder's conduct of a United States trade or
business, the Non-U.S. Shareholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. Shareholders are taxed with
respect to such distributions (and also may be subject to the 30% branch profits
tax in the case of a Non-U.S. Shareholder that is a corporate Non-U.S.
Shareholder). The Trust expects to withhold United States income tax at the rate
of 30% on the gross amount of any such distributions made to a Non-U.S.
Shareholder unless (i) a lower treaty rate applies and any required form
evidencing eligibility for that reduced rate is filed with the Trust or (ii) the
Non-U.S. Shareholder files an IRS Form 4224 with the Trust claiming that the
distribution is effectively connected income. The Service issued proposed
regulations in April 1996 that would modify the manner in which the Trust
complies with the withholding requirements.

Distributions in excess of current and accumulated earnings and profits of
the Trust will not be taxable to a Non-U.S. Shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's Shares but
rather will reduce the adjusted basis of such shares. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a Non-U.S. Shareholder's Shares, such distributions will
give rise to tax liability if the Non-U.S. Shareholder would otherwise be
subject to tax on any gain from the sale or disposition of his Shares as
described below. Because it

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generally cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of current and accumulated earnings and
profits, the entire amount of any distribution normally will be subject to
withholding at the same rate as a dividend. However, amounts so withheld are
refundable to the extent it is determined subsequently that such distribution
was, in fact, in excess of the payor's current and accumulated earnings and
profits.

In August 1996, the President signed into law the Small Business Job
Protection Act of 1996, which requires the Trust to withhold 10% of any
distribution in excess of its current and accumulated earnings and profits. That
statute is effective for distributions made after August 20, 1996. Consequently,
to the extent that the Trust otherwise would not have withheld tax at a rate
greater than 10% on any distribution (or portion thereof), such distribution (or
portion thereof) will be subject to withholding at a rate of 10%.

For any year in which the Trust qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges of U.S. real property interests
will be taxed to a Non-U.S. Shareholder under the provisions of the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA,
distributions attributable to gain from sales of United States real property
interests are taxed to a Non-U.S. Shareholder as if such gain were effectively
connected with a United States business. Non-U.S. Shareholders thus would be
taxed at the normal capital gain rates applicable to U.S. Shareholders (subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals). Distributions subject to FIRPTA also
may be subject to the 30% branch profits tax in the hands of a corporate
Non-U.S. Shareholder not entitled to treaty relief or exemption. The payor is
required to withhold 35% of any distribution that is designated by it as a
capital gains dividend. The amount withheld is creditable against the Non-U.S.
Shareholder's FIRPTA tax liability.

Gain recognized by a Non-U.S. Shareholder upon a sale of his Shares
generally will not be taxed under FIRPTA if the Trust is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. The Trust is currently a
"domestically-controlled REIT" and, therefore, the sale of Shares will not be
subject to taxation under FIRPTA. However, no assurance can be given that the
Trust will continue to be a "domestically-controlled REIT." Furthermore, gain
not subject to FIRPTA will be taxable to a Non-U.S. Shareholder if (i)
investment in Shares is effectively connected with the Non-U.S. Shareholder's
United States trade or business, in which case the Non-U.S. Shareholder will be
subject to the same treatment as U.S. Shareholders with respect to such gain, or
(ii) the Non-U.S. Shareholder is a nonresident alien individual who was present
in the United States for 183 days or more during the taxable year and certain
other conditions apply, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains. If the gain on the sale
of Shares were to be subject to taxation under FIRPTA, the Non-U.S. Shareholder
would be subject to the same treatment as U.S. Shareholders with respect to such
gain (subject to applicable alternative minimum tax, a special alternative
minimum tax in the case of nonresident alien individuals, and the possible
application of the 30% branch profits tax in the case of corporate Non-U.S.
Shareholders).

Legal Opinion. Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. will render an
opinion that: (1) the Trust met the requirements for qualification and taxation
as a REIT under the Code for its taxable year ending December 31, 1985, and has
met the requirements for qualification and taxation as a REIT for its taxable
years 1986 through 1996; (2) the Trust's diversity of equity ownership,
operations through the Closing Date and proposed method of operation for future
periods should allow it to qualify as a REIT for its taxable year ending
December 31, 1997; (3) the discussion contained herein accurately reflects
existing law and fairly addresses the material federal income tax issues
described; and (4) the consummation of the Merger will not result in the Trust's
failure to continue to satisfy the requirements for qualification as a REIT for
federal income tax purposes.

Upon receipt of a written request of a Limited Partner or his duly
authorized representative, the General Partner will transmit promptly, without
charge, a copy of the tax opinion. Written requests should be directed to the
General Partner at 8000 Robert F. McDermott Freeway, IH 10 West, Suite 600, San
Antonio, Texas 78230-3884.

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Other Tax Consequences. The Trust, the Corporate Subsidiaries or the
Trust's shareholders may be subject to state or local taxation in various state
or local jurisdictions, including those in which it or they own property,
transact business or reside. The state and local tax treatment of the Trust and
its shareholders may not conform to the federal income tax consequences
discussed above. CONSEQUENTLY, LIMITED PARTNERS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT IN
THE TRUST.

EACH LIMITED PARTNER IS URGED TO CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE MERGER, THE ACQUISITION, OWNERSHIP AND
SALE OF THE SHARES AND OF THE TRUST'S ELECTION TO BE TAXED AS A REIT, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE MERGER,
SUCH ACQUISITION, OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.

RESALES OF THE TRUST'S SHARES

The Trust's Shares issuable to holders of Units in Participating RELPS upon
consummation of the Merger have been registered under the Securities Act, and
will be transferrable freely and without restrictions by those holders of Units
in Participating RELPS who receive such Shares following consummation of the
Merger and who are not deemed to be "affiliates" (as defined under the
Securities Act, and generally including holders of 10% or more of each RELP) of
the Trust or each RELP. This Joint Proxy Statement/Prospectus does not cover any
resales of shares received by affiliates of any RELP. Each of the executive
officers of the Trust, and each officer and director of the General Partners and
Realco have signed 90-day lock-up agreements.

THE INDEPENDENT TRUST MANAGERS AND THE GENERAL PARTNERS EACH UNANIMOUSLY
RECOMMEND A VOTE FOR THE MERGER AGREEMENT AND THE ISSUANCE OF SHARES THEREUNDER.

DISSENTERS' RIGHTS

None of the Limited Partners are entitled to dissenters' or appraisal
rights with respect to the Merger under applicable state law or pursuant to any
Partnership Agreement. The Trust has, however, voluntarily granted the Limited
Partners Dissenters' Rights, which entitle each Limited Partner who dissents
with respect to the Merger to, subject to certain conditions, receive payment in
Shares of the "fair value" of their Dissenting Units. This Joint Proxy
Statement/Prospectus constitutes notice to each Limited Partner that Dissenters'
Rights are available. Any Limited Partner who wishes to exercise his or her
Dissenters' Rights or to preserve his or her rights to do so should review the
following discussion carefully, because failure to timely and properly comply
with the procedures specified will result in the loss of such Dissenters'
Rights.

A HOLDER OF DISSENTING UNITS WISHING TO EXERCISE SUCH HOLDER'S DISSENTERS'
RIGHTS (a) MUST NOT VOTE SUCH UNITS IN FAVOR OF THE MERGER, (b) MUST DELIVER TO
THE APPLICABLE RELP A WRITTEN DEMAND FOR APPRAISAL OF SUCH HOLDER'S DISSENTING
UNITS PRIOR TO THE RELP SPECIAL MEETING AND (c) MUST CONTINUOUSLY HOLD SUCH
DISSENTING UNITS FROM THE DATE THE WRITTEN DEMAND FOR APPRAISAL IS MADE THROUGH
THE EFFECTIVE TIME. ACCORDINGLY, A HOLDER OF DISSENTING UNITS WHO IS THE RECORD
HOLDER OF DISSENTING UNITS ON THE DATE THE WRITTEN DEMAND FOR APPRAISAL IS MADE,
BUT WHO THEREAFTER TRANSFERS SUCH DISSENTING UNITS PRIOR TO THE EFFECTIVE TIME,
WILL LOSE ANY DISSENTERS' RIGHTS WITH RESPECT OF SUCH DISSENTING UNITS.

Only a holder of record of Dissenting Units is entitled to assert
Dissenters' Rights for the Dissenting Units registered in that holder's name. A
demand for Dissenters' Rights should be executed by or on behalf of the holder
of record, fully and correctly, as such holder's name appears on such holder's
Unit certificate. If the Dissenting Units are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution of the demand
should be made in that capacity, and if the Dissenting Units are owned of record
by more than one person, as in a joint tenancy or tenancy in common, the demand
should be executed by or on behalf of all joint owners. An authorized agent,
including one or more joint owners, may execute a demand for

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Dissenters' Rights on behalf of a holder of record; however, the agent must
identify the record owner or owners and expressly disclose the fact that, in
executing the demand, the agent is agent for such owner or owners. A record
holder, such as a broker, who holds Dissenting Units as nominee for several
beneficial owners may exercise Dissenters' Rights with respect to the Dissenting
Units held for one or more beneficial owners while not exercising such rights
with respect to the Dissenting Units held for other beneficial owners; in such
case, the written demand should set forth the number of Dissenting Units as to
which Dissenters' Rights are sought. When no number of Dissenting Units is
expressly mentioned, the demand will be presumed to cover all Dissenting Units
held in the name of the record owner. Limited Partners who hold their Dissenting
Units in brokerage accounts or other nominee forms and who wish to exercise
Dissenters' Rights are urged to consult with their brokers to determine the
appropriate procedures for the making a demand for Dissenters' Rights by such
nominee.

ALL WRITTEN DEMANDS SHOULD BE SENT OR DELIVERED TO: MR. RANDAL R. SEEWALD,
USAA REAL ESTATE COMPANY, 8000 ROBERT F. MCDERMOTT FWY., IH 10 WEST, SUITE 600,
SAN ANTONIO, TEXAS 78230-3884.

Within 10 days after the consummation of the Merger, the Trust will notify
each Limited Partner who has properly asserted Dissenters' Rights as set forth
in the preceding paragraph and has not voted in favor of the Merger as of the
date that the Merger became effective.

Within 120 days after the consummation of the Merger, but not thereafter,
any holder of Dissenting Units who has satisfied the requirements set forth
above may file a petition in the applicable court (the "Applicable Court")
listed below demanding a determination of the fair value of the Dissenting
Units:

(i) For Limited Partners of RELP I:

Superior Court of California, County of San Diego
220 West Broadway
San Diego, California 92101

(ii) For Limited Partners of RELP II:

Bexar County District Court
100 Dolorosa Street
San Antonio, Texas 78205

(iii) For Limited Partners of RELP III and RELP IV:

Court of Chancery
Courthouse New Castle County
1020 N. King Street
Wilmington, Delaware 19801

Notwithstanding the foregoing, at any time within 60 days after the
Effective Time (or thereafter, with the written approval of the Trust), any
Limited Partner has the right to withdraw his or her demand for Dissenters'
Rights and to accept the terms offered upon the Merger.

Within 120 days after the consummation of the Merger, any Limited Partner
who has complied with the requirements for exercise of Dissenters' Rights will
be entitled, upon written request, to receive from the applicable General
Partner a statement setting forth the aggregate number of Dissenting Units not
voted in favor of the Merger and with respect to which demands for Dissenters'
Rights have been received and the aggregate number of holders of such Dissenting
Units. Such statements will be mailed within 10 days after written request
therefor has been received by Realco.

Upon the filing of any such petition by a Limited Partner, service of a
copy thereof must be made upon the Trust. The Trust will within 20 days after
such service file with the Applicable Court a verified list of the names and
addresses of all Limited Partners who have demanded Dissenters' Rights and with
whom agreements as the value of their Units have not been reached.

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At a hearing on such petition, the Applicable Court will determine which
Limited Partners have become entitled to Dissenters' Rights and will appraise
the Units, determining their "fair value," exclusive of any element of value
arising from the accomplishment or expectation of the Merger, together with a
fair rate of interest, if any, to be paid upon the amount determined to be the
"fair value." Limited Partners considering seeking Dissenters' Rights should be
aware that any such judicial determination of the "fair value" of the Dissenting
Units could be more than, the same as or less than the value of the
consideration they would receive pursuant to the Merger Agreement if they did
not seek Dissenters' Rights. Such Limited Partners should also be aware that the
investment banking opinions as to fairness of the Merger from a financial point
of view are not necessarily opinions as to fair value under state law as
determined by the Applicable Court.

The Applicable Court will determine the amount of interest, if any, to be
paid upon the amounts to be received by persons whose Dissenting Units have been
appraised. The costs of the action may be determined by the Applicable Court and
taxed upon the parties as the court deems equitable. The court may order all or
a portion of the expenses incurred by any Limited Partner in connection with the
Dissenters' Rights proceeding, including, without limitation, reasonable
attorneys' fees and the fees and expenses of experts utilized in the Dissenters'
Rights proceeding, to be charged pro rata against the value of the Dissenting
Units entitled to Dissenters' Rights.

LIMITED PARTNERS WHO FOLLOW THE PROCEDURE DETAILED ABOVE AND EXERCISE
DISSENTERS' RIGHTS ARE ENTITLED TO RECEIVE ONLY SHARES FOR THEIR DISSENTING
UNITS. THE TRUST IS NOT OFFERING CASH OR ANY CONSIDERATION OTHER THAN SHARES FOR
DISSENTING UNITS. SUCH SHARES WILL BE FREELY TRANSFERABLE BY THE HOLDERS THEREOF
EXCEPT FOR THOSE SHARES HELD BY HOLDERS WHO MAY BE DEEMED TO BE "AFFILIATES" OF
THE RELPS (GENERALLY INCLUDING LIMITED PARTNERS HOLDING MORE THAN 10% OF THE
UNITS IN A RELP) UNDER APPLICABLE FEDERAL SECURITIES LAWS.

Any holder of Dissenting Units who has duly demanded Dissenters' Rights in
compliance with these provisions will not, after the Effective Time, be entitled
to vote the Dissenting Units subject to such demand for any purpose or be
entitled to the payment of distributions on those Dissenting Units (other than
those payable or deemed to be payable to Limited Partners of record as of a date
prior to the Effective Time).

If any Limited Partner who properly demands Dissenters' Rights fails to
perfect, or effectively withdraws or loses, such Limited Partners' Dissenters'
Rights, the Dissenting Units of such Limited Partner will be converted into the
right to receive the consideration receivable with respect to such Dissenting
Units in accordance with the Merger Agreement.

FAILURE TO FOLLOW ANY OF THE STEPS SET FORTH ABOVE FOR PERFECTING
DISSENTERS' RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS, IN WHICH EVENT A
LIMITED PARTNER WILL BE ENTITLED TO RECEIVE THE CONSIDERATION RECEIVABLE WITH
RESPECT TO SUCH DISSENTING UNITS IN ACCORDANCE WITH THE MERGER AGREEMENT.

87
<PAGE> 109

AMERICAN INDUSTRIAL PROPERTIES REIT

PRO FORMA FINANCIAL INFORMATION (MERGER)

The following Pro Forma Condensed Consolidated Balance Sheet (Merger) of
the Trust as of June 30, 1997 has been prepared as if each of the following
transactions had occurred as of June 30, 1997: (i) the issuance of 2,657,973
Shares of the Trust at $12.25 per share in July 1997 (the "Private Placement");
(ii) the acquisition, through a partnership in which the Trust has a 98.0%
controlling ownership interest, of Merit Texas Properties Portfolio consisting
of eight properties consisting of 20 light industrial and warehouse/
distribution buildings in the Dallas area (the "Acquisition"); and (iii) the
Merger and the Related Transactions. The following Pro Forma Condensed
Consolidated Statements of Operations (Merger) of the Trust for the year ended
December 31, 1996 and the six months ended June 30, 1997 have been prepared as
if each of the following transactions had occurred as of January 1, 1996: (i)
the Private Placement; (ii) the Acquisition; and (iii) the Merger and the
Related Transactions.

The Pro Forma Financial Information (Merger) of the Trust has been prepared
using the purchase method of accounting whereby the assets and liabilities of
the RELPS are adjusted to estimated fair market value, based upon preliminary
estimates, which are subject to change as additional information is obtained.
The allocations of purchase costs are subject to final determination based upon
estimates and other evaluations of fair market value. Therefore, the allocations
reflected in the following Pro Forma Financial Information (Merger) may differ
from the amounts ultimately determined.

The Pro Forma Financial Information (Merger) is presented for informational
purposes only and is not necessarily indicative of the financial position or
results of operations of the Trust that would have occurred if such transactions
had been completed on the dates indicated, nor does it purport to be indicative
of future financial position or results of operations. In the opinion of the
Trust management, all material adjustments necessary to reflect the effect of
these transactions have been made. The Pro Forma Condensed Consolidated
Statement of Operations (Merger) for the six months ended June 30, 1997 is not
necessarily indicative of the results of operations to be expected for the year
ending December 31, 1997.

88
<PAGE> 110

AMERICAN INDUSTRIAL PROPERTIES REIT

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (MERGER)
AS OF JUNE 30, 1997

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

ASSETS

LIABILITIES AND SHAREHOLDERS'
AND PARTNERS' EQUITY

Mortgage notes payable........ $ 41,547 $ -- $ 20,675 $ 16,301 $ -- $ -- $ 78,523
Notes payable to affiliates... 5,450 -- -- 33,200 (11,000)(D) 1,850(I) 29,500
Accrued interest payable...... 973 -- -- -- -- -- 973
Accounts payable, accrued
expenses and other.......... 1,750 -- 752 2,139 (100)(D) -- 4,541
-------- ------- -------- -------- -------- -------- --------
49,720 -- 21,427 51,640 (11,100) 1,850 113,537
-------- ------- -------- -------- -------- -------- --------
Minority interest in
consolidated subsidiary..... -- 2,740 3,913 -- -- 6,653
Shareholders' and partners'
equity:
Shares of beneficial
interest ($0.10 par
value).................... 1,000 1,329 -- -- -- 2,206(J) 4,535
Additional paid-in
capital................... 127,056 29,603 -- -- -- 55,712(J) 212,371
Accumulated distributions... (58,456) -- -- -- -- -- (58,456)
Accumulated loss from
operations and
extraordinary gains
(losses).................. (47,495) -- -- -- -- -- (47,495)
Accumulated net realized
gain on sales of real
estate.................... 1,460 -- -- -- -- -- 1,460
Partners' equity............ -- -- -- 67,671 2,188(D) 4,624(G) --
(2,139)(E) (4,548)(H)
(8,028)(F) (1,850)(I)
(57,918)(J) --
-------- ------- -------- -------- -------- -------- --------
23,565 30,932 -- 67,671 (7,979) (1,774) 112,415
-------- ------- -------- -------- -------- -------- --------
$ 73,285 $30,932 $ 24,167 $123,224 $(19,079) $ 76 $232,605
======== ======= ======== ======== ======== ======== ========
Book Value per Share(a)....... $ 11.80 $ 12.40
======== ========
Shares Outstanding(a)......... 2,000 9,071
======== ========
</TABLE>

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

89
<PAGE> 111

AMERICAN INDUSTRIAL PROPERTIES REIT

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (MERGER)
AS OF JUNE 30, 1997
(IN THOUSANDS EXCEPT SHARE AND UNIT DATA)
(UNAUDITED)

(A) Represents the following adjustments to reflect the Private Placement: on
July 8, 1997, 1,035,688 Shares were issued at $12.25 per Share; on July 10,
1997, 1,224,490 Shares were issued at $12.25 per Share; and on July 17,
1997, 397,795 Shares were issued at $12.25 per Share. The proceeds are net
of costs of $1,628.

(B) Represents adjustments for the Acquisition, through a partnership in which
the Trust has a 98.0% controlling partnership interest for which the Trust
made an investment, including closing and transaction costs, of $34,578,
comprised of cash of $13,448, mortgage debt of $20,675, deferred loan costs
of $297, and $752 of assumed liabilities. The limited partner of such
partnership made an investment of $2,740. The mortgage debt bears interest
at LIBOR plus 2% with a maturity of one year.

(C) Combined historical balance sheets of the RELPS at June 30, 1997 are as
follows (certain reclassifications have been made to conform to the balance
sheet presentation of the Trust):

ASSETS

<TABLE>
<CAPTION>
RELP I RELP II RELP III RELP IV COMBINED
------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Real estate, net....................... $ 9,676 $ 9,178 $40,628 $45,365 $104,847
Investment in joint venture............ -- 2,139 -- -- 2,139
Cash -- unrestricted................... 1,027 882 6,522 1,164 9,595
Other assets, net...................... 405 333 5,481 424 6,643
------- ------- ------- ------- --------
$11,108 $12,532 $52,631 $46,953 $123,224
======= ======= ======= ======= ========

LIABILITIES AND PARTNERS' EQUITY

Mortgage notes payable................. $ -- $ -- $ -- $16,301 $ 16,301
Notes payable to affiliates............ -- -- 26,000 7,200 33,200
Accounts payable, accrued expenses and
other................................ 202 146 1,401 390 2,139
------- ------- ------- ------- --------
202 146 27,401 23,891 51,640
Minority interest in joint venture..... -- -- -- 3,913 3,913
Partners' equity....................... 10,906 12,386 25,230 19,149 67,671
------- ------- ------- ------- --------
$11,108 $12,532 $52,631 $46,953 $123,224
======= ======= ======= ======= ========
</TABLE>

(D) Represents adjustments to eliminate the assets and liabilities of Curlew
Crossing shopping center (RELP III), which will be sold by the RELP to
Realco or an Affiliate in conjunction with the Merger. It is anticipated
that this property will be purchased by Realco or an Affiliate for $11,200.
Distributions to the limited partners of RELP III after payment of the
$11,000 mortgage loan will be negligible.

(E) Represents adjustments to eliminate joint venture interest in the Sequoia
Plaza I Building (RELP II), which will be sold by the RELP to Realco or an
Affiliate in conjunction with the Merger. It is anticipated that RELP II's
interest in the joint venture will be sold to Realco or an Affiliate of
Realco for $2,250 if the Merger is approved by the Limited Partners of RELP
II. The estimated distribution of proceeds is 1% to the General Partner and
99%, or $2,228 to the Limited Partners.

(F) Represents adjustments to reflect the distribution of cash to the RELP
partners for the excess of estimated working capital assets over
liabilities at the Effective Time of the Merger, as follows: RELP
I -- $860; RELP II -- $736; RELP III -- $5,681; and RELP IV -- $751.

90
<PAGE> 112

(G) Represents adjustments for the purchase method of accounting whereby the
real estate owned by the RELPS is adjusted to estimated fair market value as
follows:

<TABLE>
<CAPTION>
NET BOOK
VALUE FAIR VALUE ADJUSTMENT
-------- ---------- ----------
<S> <C> <C> <C>
RELP I................................................. $ 9,676 $11,635 $ 1,959
RELP II................................................ 9,178 10,411 1,233
RELP III............................................... 33,182 40,111 6,929
RELP IV................................................ 34,812 29,315 (5,497)
------- ------- -------
Total........................................ $86,848 $91,472 $ 4,624
------- ------- -------
</TABLE>

(H) Represents adjustments to record deferred financing and other intangible
costs of the RELPS at their estimated fair market values as follows:

(I) Represents adjustment to accrue costs related to the Merger, including
legal and accounting fees, financial advisory fees, printing and other
costs.

(J) Represents the issuance of 4,412,829 Shares of the Trust valued at $57,918
based on a per share price of $13.125, as follows:

<TABLE>
<CAPTION>
RELP I RELP II RELP III RELP IV TOTAL
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Exchange ratio....................... 15.90 28.63 16.60 15.14
Limited Partnership Units
outstanding........................ 54,610 27,141 111,549 60,495
--------- --------- --------- ---------
Trust Shares to be issued............ 868,571 777,143 1,851,429 915,686 4,412,829
========= ========= ========= ========= ==========
Value................................ $ 11,400 $ 10,200 $ 24,300 $ 12,018 $ 57,918
========= ========= ========= ========= ==========
</TABLE>

91
<PAGE> 113

AMERICAN INDUSTRIAL PROPERTIES REIT

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (MERGER)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
TRUST RELPS RELPS MERGER PRO FORMA
HISTORICAL ACQUISITIONS HISTORICAL ADJUSTMENTS ADJUSTMENTS TOTAL
---------- ------------ ---------- ----------- ----------- ---------
(A) (B) (C)
<S> <C> <C> <C> <C> <C> <C>
INCOME
Rents and tenant
reimbursements........... $11,320 $3,928 $14,448 $(1,264)(F) $ -- $28,432
Equity in earnings of joint
venture.................. -- -- 144 (144)(G) -- --
Interest income............ 158 25 886 (886)(H) -- 183
------- ------ ------- ------- ------- -------
11,478 3,953 15,478 (2,294) -- 28,615
------- ------ ------- ------- ------- -------
EXPENSES
Property operating
expenses................. 4,022 1,341 1,594 (400)(F) -- 6,557
Depreciation and
amortization............. 2,909 746(D) 4,402 (320)(F) (2,061)(I) 5,676
Interest on mortgage notes
payable.................. 5,901 1,843(E) 4,452 (907)(F) 167(J) 11,456
General and
administrative........... 3,378 -- 1,271 -- -- 4,649
Minority interest in
consolidated
subsidiaries............. -- -- 185 -- -- 185
------- ------ ------- ------- ------- -------
16,210 3,930 11,904 (1,627) (1,894) 28,523
------- ------ ------- ------- ------- -------
Income (loss) from
operations............... $(4,732) $ 23 $ 3,574 $ (667) $ 1,894 $ 92(K)
======= ====== ======= ======= ======= =======
Income (loss) from
operations per
share(a)................. $ (2.60) $ 0.01(K)
======= =======
Weighted average number of
Shares outstanding(a).... 1,822 8,892
======= =======
</TABLE>

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

92
<PAGE> 114

AMERICAN INDUSTRIAL PROPERTIES REIT

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (MERGER)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)

(A) Certain reclassifications have been made to the historical statements of
operations of the Trust to conform to the pro forma financial information
presentation. In addition, excludes gain on sale of real estate of $177 and
extraordinary gain on extinguishment of debt of $5,810.

(B) Represents adjustments for the Acquisition, based on historical operating
results. Depreciation is based on the allocation of the purchase price and
a 40 year life. Interest expense is based on the borrowings incurred for
the Acquisition at the related interest rate. The Trust is allocated all
net income under the terms of the partnership agreement until it receives a
cumulative preferred return of 20%, as defined in the partnership
agreement.

(C) Combined historical statements of operations of the RELPS for year ended
December 31, 1996 as follows (certain reclassifications have been made to
conform to the pro forma financial information presentation):

<TABLE>
<CAPTION>
RELP I RELP II RELP III RELP IV COMBINED
------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
INCOME
Rents and tenant reimbursements...... $1,397 $1,306 $7,930 $3,815 $14,448
Equity in earnings of joint
venture............................ -- 144 -- -- 144
Interest income...................... 141 43 592 110 886
------ ------ ------ ------ -------
1,538 1,493 8,522 3,925 15,478
------ ------ ------ ------ -------
EXPENSES
Property operating expenses.......... 247 52 930 365 1,594
Depreciation and amortization........ 616 300 1,614 1,872 4,402
Interest on mortgage notes payable... -- -- 2,336 2,116 4,452
General and administrative........... 319 158 520 274 1,271
Minority interest in consolidated
joint venture...................... -- -- -- 185 185
------ ------ ------ ------ -------
1,182 510 5,400 4,812 11,904
------ ------ ------ ------ -------
Income (loss) from operations........ $ 356 $ 983 $3,122 $ (887) $ 3,574
====== ====== ====== ====== =======
</TABLE>

(D) Represents depreciation of the Acquisition. Buildings are depreciated using
the straight-line method over a 40 year period.

(E) Represents interest expense related to borrowings of $20,675 for the
Acquisition, based on an interest rate of LIBOR plus 2% (7.48% for 1996).
Also includes amortization of deferred loan costs incurred related to the
borrowings of $297.

(F) Represents adjustments to eliminate the results of operations of Curlew
Crossing shopping center (RELP III), which will be sold by the RELP to
Realco or an Affiliate in conjunction with the Merger. It is anticipated
that this property will be purchased by Realco or an Affiliate of Realco
for $11,200. Distributions to the limited partners of RELP III after
payment of the $11,000 mortgage loan will be negligible.

(G) Represents adjustments to eliminate the equity in earnings of joint venture
(RELP II), which interest in will be sold by the RELP to Realco or an
Affiliate in conjunction with the Merger. It is anticipated that RELP II's
interest in the joint venture will be sold to Realco or an Affiliate of
Realco for $2,250 if the Merger is approved by the Limited Partners of RELP
II. The estimated distribution of proceeds is 1% to the General Partner and
99%, or $2,228 to the Limited Partners.

93
<PAGE> 115

(H) Represents adjustment to eliminate interest income as a substantial majority
of cash held by the RELPS will be distributed to the limited partners in
connection with the Merger.

(I) Represents adjustment to reduce the depreciation of real estate. This
adjustment is primarily due to the use of a 40 year period rather than a 30
year period as has been the practice by the RELPs.

(J) Represents adjustment for interest expense on additional borrowings of
$1,850 to fund the Merger costs at an interest rate of 9.0% per annum.

(K) The Pro Forma Statement of Operations is presented assuming all the RELPS
participate in the Merger. The following table illustrates the impact on
income (loss) from operations, income (loss) from operations per share and
number of Shares of the Trust outstanding assuming any one RELP does not
participate in the Merger.

<TABLE>
<CAPTION>
PRO EXCLUDES EXCLUDES EXCLUDES EXCLUDES
FORMA RELP I RELP II RELP III RELP IV
------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) from operations......... $ 92 $ (508) $ (801) $(3,304) $ 13
Income (loss) from operations
per share........................... $ 0.01 $(0.06) $(0.10) $ (0.47) $ 0.00
Weighted average number of Shares
outstanding......................... 8,892 8,024 8,115 7,041 7,977
</TABLE>

94
<PAGE> 116

AMERICAN INDUSTRIAL PROPERTIES REIT

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (MERGER)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
TRUST RELPS RELPS MERGER PRO FORMA
HISTORICAL ACQUISITIONS HISTORICAL ADJUSTMENTS ADJUSTMENTS TOTAL
---------- ------------ ---------- ----------- ----------- ---------
(A) (B) (C)
<S> <C> <C> <C> <C> <C> <C>
INCOME
Rents and tenant
reimbursements................. $ 5,221 $2,082 $ 6,114 $(621)(F) $ -- $12,796
Equity in earnings of joint
venture........................ -- -- 78 (78)(G) -- --
Interest income.................. 31 11 282 (282)(H) -- 42
------- ------ ------- ----- ------- -------
5,252 2,093 6,474 (981) -- 12,838
EXPENSES
Property operating expenses...... 1,841 658 2,433 (216)(F) -- 4,716
Depreciation and amortization.... 1,390 373(D) 2,523 (155)(F) (1,350)(I) 2,781
Interest on mortgage notes
payable........................ 2,846 786(E) 2,225 (450)(F) 83(J) 5,490
General and administrative....... 1,248 -- 708 -- -- 1,956
Minority interest in consolidated
subsidiaries................... -- -- (107) -- -- (107)
------- ------ ------- ----- ------- -------
7,325 1,817 7,782 (821) (1,267) 14,838
------- ------ ------- ----- ------- -------

Income (loss) from operations.... $(2,073) $ 276 $(1,308) $(160) $ 1,267 $(1,998)(K)
======= ====== ======= ===== ======= =======
Income (loss) from operations per
share(a)....................... $ (1.05) $ (0.22)(K)
======= =======
Weighted average number of Shares
outstanding(a)................. 2,000 9,071
======= =======
</TABLE>

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

95
<PAGE> 117

AMERICAN INDUSTRIAL PROPERTIES REIT

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (MERGER)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)

(A) Certain reclassifications have been made to the historical statements of
operations of the Trust to conform to the pro forma financial information
presentation. In addition, excludes gain on sale of real estate of $312 and
extraordinary gain on extinguishment of debt of $2,643.

(B) Represents adjustments for the Acquisition, based on historical operating
results. Depreciation is based on the allocation of the purchase price and
a 40-year life. Interest expense is based on the borrowings incurred for
the Acquisition at the related interest rate. The Trust is allocated all
net income under the terms of the partnership agreement until it receives a
cumulative preferred return of 20%, as defined in the partnership
agreement.

(C) Combined historical statements of operations of the RELPS for the six
months ended June 30, 1997 as follows (certain reclassifications have been
made to conform to the pro forma financial information presentation):

<TABLE>
<CAPTION>
RELP I RELP II RELP III RELP IV COMBINED
------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
INCOME
Rents and tenant reimbursements...... $848 $746 $ 2,490 $2,030 $ 6,114
Equity in earnings of joint
venture............................ -- 78 -- -- 78
Interest income...................... 26 20 206 30 282
---- ---- ------- ------ -------
874 844 2,696 2,060 6,474
---- ---- ------- ------ -------
EXPENSES
Property operating expenses.......... 271 94 1,608 460 2,433
Depreciation and amortization........ 315 160 932 1,116 2,523
Interest on mortgage notes payable... -- -- 1,162 1,063 2,225
General and administrative........... 151 71 321 165 708
Minority interest in consolidated
joint venture...................... -- -- -- (107) (107)
---- ---- ------- ------ -------
737 325 4,023 2,697 7,782
---- ---- ------- ------ -------
Income (loss) from operations........ $137 $519 $(1,327) $ (637) $(1,308)
==== ==== ======= ====== =======
</TABLE>

(D) Represents depreciation of the Acquisition. Buildings are depreciated using
the straight-line method over a 40 year period.

(E) Represents interest expense related to borrowings at $20,675 for the
Acquisition, based on an interest rate of LIBOR plus 2% (7.60% for 1997).

(F) Represents adjustments to eliminate the results of operations of Curlew
Crossing shopping center (RELP III), which will be sold by the RELP to
Realco or an Affiliate in conjunction with the Merger. It is anticipated
that this property will be purchased by Realco or an Affiliate of Realco for
$11,200. Distributions to the Limited Partners of RELP III after payment of
the $11,000 mortgage loan will be negligible.

(H) Represents adjustment to eliminate interest income as a substantial
majority of cash held by the RELPS will be distributed to the limited
partners in connection with the Merger.

96
<PAGE> 118

(J) Represents adjustment for interest expense on additional borrowings of
$1,850 to fund the Merger costs at an interest rate of 9.0% per annum.

<TABLE>
<CAPTION>
PRO EXCLUDES EXCLUDES EXCLUDES EXCLUDES
FORMA RELP I RELP II RELP III RELP IV
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) from operations............ $(1,998) $(2,308) $(2,475) $(1,042) $(2,049)
Income (loss) from operations per
share.................................. $ (0.22) $ (0.28) $ (0.30) $ (0.14) $ (0.25)
Weighted average number of Shares
outstanding............................ 9,071 8,202 8,294 7,219 8,155
</TABLE>

97
<PAGE> 119

AMERICAN INDUSTRIAL PROPERTIES REIT

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (MERGER)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, UNAUDITED)

<TABLE>
<CAPTION>
TRUST PRIVATE RELPS RELPS MERGER PRO FORMA
HISTORICAL PLACEMENT ACQUISITIONS HISTORICAL ADJUSTMENTS ADJUSTMENTS TOTAL
---------- --------- ------------ ---------- ----------- ----------- ---------
(A) (B) (C) (D)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)............... $ (4,732) $ -- $ 23(E) $ 3,574 $ (667)(E) $ 1,894(E) $ 92
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Loss on retirement of fixed
assets...................... -- -- -- 60 -- -- 60
Depreciation.................. 2,577 -- 746 4,231 (320)(G) (2,061)(I) 5,173
Amortization.................. 332 -- -- 171 -- -- 503
Amortization of deferred loan
costs....................... 70 -- 297 -- -- -- 367
Earnings from joint venture... -- -- -- (144) 144(H) -- --
Minority interest in joint
venture earnings............ -- -- -- 185 -- -- 185
Changes in operating assets
and liabilities:
Decrease (increase) in other
assets and restricted
cash...................... (1,270) -- (1,363) (874) 2,150(G) -- (1,357)
Increase (decrease) in
accounts payable, accrued
expenses and other
liabilities............... (2,635) -- 752 (2,777) (1,307)(G) 167(J) (5,800)
-------- ------- -------- -------- ------- ------- --------
Net Cash Provided By (Used In)
Operating Activities............ (5,658) -- 455 4,426 -- -- (777)
-------- ------- -------- -------- ------- ------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of Real Estate...... -- -- (37,318) -- -- -- (37,318)
Capitalized improvements and
leasing commissions........... (1,372) -- -- (3,836) -- -- (5,208)
Distributions from joint
venture....................... -- -- -- 159 -- -- 159
Proceeds from mortgage loan
receivable.................... -- -- -- 5,440 -- -- 5,440
Net proceeds from sales of real
estate........................ 6,545 -- -- 220 -- -- 6,765
-------- ------- -------- -------- ------- ------- --------
Net Cash Provided By Investing
Activities...................... 5,173 -- (37,318) 1,983 -- -- (30,162)
-------- ------- -------- -------- ------- ------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal repayments on mortgage
notes payable................. (31,832) -- -- (2,038) -- -- (33,870)
Proceeds from issuance of note
payable....................... 26,453 -- 20,675 -- -- -- 47,128
Contribution received from
minority interest in
consolidated subsidiaries..... -- -- 2,740(F) -- -- -- 2,740
Proceeds from sale of common
shares........................ 2,543 30,932 -- -- -- -- 33,475
Distributions................... (363) -- -- (8,758) -- -- (9,121)
-------- ------- -------- -------- ------- ------- --------
Net Cash Provided By (Used In)
Financing Activities............ (3,199) 30,932 23,415 (10,796) -- -- 40,352
-------- ------- -------- -------- ------- ------- --------
Net Increase (Decrease) in
Unrestricted Cash and Cash
Equivalents..................... (3,684) 30,932 (13,448) (4,387) -- -- 9,413
Unrestricted Cash and Cash
Equivalents at Beginning of
Period.......................... 7,694 -- -- 16,797 (8,028)(K) -- 16,463
-------- ------- -------- -------- ------- ------- --------
Unrestricted Cash and Cash
Equivalents at End of Period.... $ 4,010 $30,932 $(13,448) $ 12,410 $(8,028) $ -- $ 25,876
======== ======= ======== ======== ======= ======= ========
</TABLE>

98
<PAGE> 120

AMERICAN INDUSTRIAL PROPERTIES REIT

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (MERGER)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
(UNAUDITED)

(A) Certain reclassifications have been made to the historical statement of cash
flows of the Trust to conform to the pro forma financial information
presentation. In addition, excludes gain on sale of real estate of $177 and
extraordinary gain on extinguishment of debt of $5,810.

(B) Represents the cash received in connection with the sale of Shares of the
Trust.

(D) Combined historical statements of cash flows of the RELPS for the year ended
December 31, 1996 as follows (certain reclassifications have been made to
conform to the pro forma financial information presentation):

<TABLE>
<CAPTION>
RELP I RELP II RELP III RELP IV COMBINED
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ 356 $ 982 $ 3,123 $ (887) $ 3,574
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Loss on retirement of fixed assets............. -- -- 11 49 60
Depreciation................................... 572 298 1,509 1,852 4,231
Amortization................................... 44 2 105 20 171
Earnings from joint venture.................... -- (144) -- -- (144)
Minority interest in joint venture earnings.... -- -- -- 185 185
Changes in operating assets and liabilities:
Increase in other assets and restricted
cash....................................... (48) (79) (710) (37) (874)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities..... 56 96 (2,978) 49 (2,777)
------- ------ ------- ------- --------
Net Cash Provided By Operating Activities.......... 980 1,155 1,060 1,231 4,426
------- ------ ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized improvements and leasing
commissions.................................... (98) (927) (1,718) (1,093) (3,836)
Distributions from joint venture................. -- 159 -- -- 159
Proceeds from mortgage loan receivable........... 5,440 -- -- -- 5,440
Net proceeds from sales of real estate........... -- -- 220 -- 220
------- ------ ------- ------- --------
Net Cash Provided By (Used In) Investing
Activities....................................... 5,342 (768) (1,498) (1,093) 1,983
------- ------ ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgage notes payable... -- -- (1,818) (220) (2,038)
Distributions.................................... (5,717) (949) (1,099) (993) (8,758)
------- ------ ------- ------- --------
Net Cash Used In Financing Activities.............. (5,717) (949) (2,917) (1,213) (10,796)
------- ------ ------- ------- --------
Net Increase (Decrease) in Unrestricted Cash and
Cash Equivalents................................. 605 (562) (3,355) (1,075) (4,387)
Unrestricted Cash and Cash Equivalents at Beginning
of Period........................................ 367 1,376 12,775 2,279 16,797
------- ------ ------- ------- --------
Unrestricted Cash and Cash Equivalents at End of
Period........................................... $ 972 $ 814 $ 9,420 $1,204 $ 12,410
======= ====== ======= ======= ========
</TABLE>

(E) Represents the adjusted net income (loss) from operations from the Pro
Forma Condensed Consolidated Statement of Operations.

(F) Represents contribution from the limited partners for a 2% interest in the
partnership formed to complete the Acquisition.

(G) Represents adjustments to eliminate the results of operations of Curlew
Crossing shopping center (RELP III), which will be sold by the RELP to
Realco or an Affiliate in conjunction with the Merger. It is anticipated
that this property will be purchased by Realco or an Affiliate for $11,200.
Distributions to the Limited Partners of RELP III after payment of the
$11,000 mortgage loan will be negligible.

(H) Represents adjustments to eliminate the equity in earnings of joint venture
(RELP II), which interest in will be sold by the RELP to Realco or an
Affiliate in conjunction with the Merger. It is anticipated that RELP II's
interest in the joint venture will be sold to Realco or an affiliate of
Realco for $2,250 if the Merger is approved by the Limited Partners of RELP
II. The estimated distribution of proceeds is 1% to the General Partner and
99%, or $2,228, to the Limited Partners.

99
<PAGE> 121

(I) Represents adjustment to reduce the depreciation of real estate as noted in
the Pro Forma Condensed Consolidated Statement of Operations, primarily due
to the use of a 40 year period rather than a 30 year period as has been the
practice by the RELPs.

(J) Represents adjustment for the accrual of interest expense on additional
borrowings of $1,850 to fund the Merger costs at an interest rate of 9.0%
per annum, as noted in the Pro Forma Condensed Consolidated Statement of
Operations.

(K) Represents adjustments to reflect the distribution of cash to the RELP
partners for the excess of estimated working capital assets over liabilities
at the Effective Time of the Merger, as follows: RELP I -- $860; RELP
II -- $736; RELP III -- $5,861; and RELP IV -- $751.

100
<PAGE> 122

AMERICAN INDUSTRIAL PROPERTIES REIT

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (MERGER)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, UNAUDITED)

<TABLE>
<CAPTION>
TRUST PRIVATE RELPS RELPS MERGER PRO FORMA
HISTORICAL PLACEMENT ACQUISITIONS HISTORICAL ADJUSTMENTS ADJUSTMENTS TOTAL
---------- --------- ------------ ---------- ----------- ----------- ---------
(A) (B) (C) (D)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss).......... $(2,073) $ -- $ 276(E) $(1,308) $ (160)(E) $ 1,267(E) $(1,998)
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Depreciation............. 1,218 -- 373 2,368 (151)(F) (1,350)(H) 2,458
Amortization............. 172 -- -- 155 (4)(F) -- 323
Amortization of deferred
loan costs............. 98 -- -- -- -- -- 98
Earnings from joint
venture................ -- -- -- (78) 78(G) -- --
Minority interest in
joint venture
earnings............... -- -- -- (107) -- -- (107)
Changes in operating
assets and liabilities:
Decrease (increase) in
other assets and
restricted cash...... 57 -- (649) (671) 903(F) -- (360)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities.... 13 -- -- 633 (666)(F) 83(I) 63
------- ------- -------- ------- ------- ------- -------
Net Cash Provided by (Used
In) Operating Activities... (515) -- -- 992 -- -- 477
------- ------- -------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of Real
Estate................... --
Capitalized improvements
and leasing
commissions.............. (430) -- -- (3,232) -- -- (3,662)
Distribution from joint
venture.................. -- -- -- 87 -- -- 87
Proceeds from mortgage loan
receivable............... -- --
Net proceeds from sales of
real estate.............. 2,029 -- -- -- -- -- 2,029
------- ------- -------- ------- ------- ------- -------
Net Cash Provided By (Used
In) Investing Activities... 1,599 -- -- (3,145) -- -- (1,546)
------- ------- -------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal repayments on
mortgage notes payable... (3,841) -- -- (118) -- -- (3,959)
Proceeds from issuance of
note payable............. -- -- -- 1,200 -- -- 1,200
Distributions.............. -- -- -- (1,744) -- -- (1,744)
------- ------- -------- ------- ------- ------- -------
Net Cash Used In Financing
Activities................. (3,841) -- -- (662) -- -- (4,503)
------- ------- -------- ------- ------- ------- -------
Net Decrease in Unrestricted
Cash and Cash
Equivalents................ (2,757) -- -- (2,815) -- -- (5,572)
Unrestricted Cash and Cash
Equivalents at Beginning of
Period..................... 4,010 30,932 (13,448) 12,410 (8,028)(J) -- 25,876
------- ------- -------- ------- ------- ------- -------
Unrestricted Cash and Cash
Equivalents at End of
Period..................... $ 1,253 $30,932 $(13,448) $ 9,595 $(8,028) $ -- $20,304
======= ======= ======== ======= ======= ======= =======
</TABLE>

101
<PAGE> 123

AMERICAN INDUSTRIAL PROPERTIES REIT

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (MERGER)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
(UNAUDITED)

(A) Certain reclassifications have been made to the historical statement of cash
flows of the Trust to conform to the pro forma financial information
presentation. In addition, excludes gain on sale of real estate of $312 and
extraordinary gain on extinguishment of debt of $2,643.

(B) Represents the cash received in connection with the sale of Shares of the
Trust.

(D) Combined historical statements of cash flows of the RELPS for the six months
ended June 30, 1997 as follows (certain reclassifications have been made to
conform to the pro forma financial information presentation):

<TABLE>
<CAPTION>
RELP I RELP II RELP III RELP IV COMBINED
------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ 137 $ 519 $(1,327) $ (637) $(1,308)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation...................................... 292 158 832 1,086 2,368
Amortization...................................... 23 2 100 30 155
Earnings from joint venture....................... -- (78) -- -- (78)
Minority interest in joint venture earnings....... -- -- -- (107) (107)
Changes in operating assets and liabilities:
Decrease (increase) in other assets and
restricted cash............................... 31 (46) (496) (160) (671)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities................ 16 (56) 642 31 633
------ ----- ------- ------- -------
Net Cash Provided By (Used In) Operating Activities... 499 499 (249) 243 992
------ ----- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized improvements and leasing commissions.... (4) 11 (2,197) (1,042) (3,232)
Distribution from joint venture..................... -- 87 -- -- 87
------ ----- ------- ------- -------
Net Cash Provided By (Used In) Investing Activities... (4) 98 (2,197) (1,042) (3,145)
------ ----- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgage notes payable...... -- -- -- (118) (118)
Proceeds from issuance of note payable.............. -- -- -- 1,200 1,200
Distributions....................................... (441) (528) (451) (324) (1,744)
------ ----- ------- ------- -------
Net Cash Provided By (Used) In Financing Activities... (441) (528) (451) 758 (662)
------ ----- ------- ------- -------
Net Increase (Decrease) in Unrestricted Cash and Cash
Equivalents......................................... 54 69 (2,897) (41) (2,815)
Unrestricted Cash and Cash Equivalents at Beginning of
Period.............................................. 973 814 9,419 1,204 12,410
------ ----- ------- ------- -------
Unrestricted Cash and Cash Equivalents at End of
Period.............................................. $1,027 $ 883 $ 6,522 $1,163 $ 9,595
====== ===== ======= ======= =======
</TABLE>

(E) Represents the adjusted net income (loss) from operations from the Pro Forma
Condensed Consolidated Statement of Operations.

(F) Represents adjustments to eliminate the results of operations of Curlew
Crossing shopping center (RELP III), which will be sold by the RELP to
Realco or an Affiliate in conjunction with the Merger. It is anticipated
that this property will be purchased by Realco or an Affiliate for $11,200.
Distributions to the limited partners of RELP III after payment of the
$11,000 mortgage loan will be negligible.

(G) Represents adjustments to eliminate the equity in earnings of joint venture
(RELP II), which interest in will be sold by the RELP to Realco or an
Affiliate in conjunction with the Merger. It is anticipated that RELP II's
interest in the joint venture will be sold to Realco or an affiliate of
Realco for $2,250 if the Merger is approved by the Limited Partners of RELP
II. The estimated distribution of proceeds is 1% to the General Partner and
99%, or $2,228, to the Limited Partners.

(H) Represents adjustment to reduce the depreciation of real estate as noted in
the Pro Forma Condensed Consolidated Statement of Operations, primarily due
to the use of a 40 year period rather than a 30 year period as has been the
practice by the RELPS.

102
<PAGE> 124

(I) Represents adjustment for the accrual of interest expense on additional
borrowings of $1,850 to fund the Merger costs at an interest rate of 9% per
annum, as noted in the Pro Forma Condensed Consolidated Statement of
Operations.

(J) Represents adjustments to reflect the distribution of cash to the RELP
partners for the excess of estimated working capital assets over liabilities
at the Effective Time of the Merger, as follows: RELP I -- $860; RELP
II -- $736; RELP III -- $5,861; and RELP IV -- $751.

103
<PAGE> 125

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

The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Trust and accompanying Notes included
elsewhere in this Joint Proxy Statement/Prospectus.

RESULTS OF OPERATIONS

Comparison of 1996 to 1995

The sale of two properties in late 1996 and the purchase of a property in
August 1995 resulted in a net decrease in 1996 property revenue and net
operating income of $67,000 and $51,000, respectively, when compared to 1995. On
a same property basis, property revenues decreased from $10,209,000 in 1995 to
$10,186,000 in 1996, a decrease of 0.2%, comprised of a 2.9% increase in revenue
related to industrial properties and a 6.2% decrease in revenue at the Trust's
retail property. The decrease in revenue at the Trust's retail property stemmed
principally from lower percentage rents ($115,000) and slower leasing of
vacancies and is partially attributable to the opening of a new regional mall in
Denver during the third quarter of 1996. Overall leased occupancy of the Trust's
portfolio was 94.2% at December 31, 1996 compared to 93.7% at December 31, 1995.

On a same property basis, net operating income (which is defined as
property revenues less property operating expenses and which does not include
depreciation and amortization, interest expense, Trust administration and
overhead expenses or provision for possible losses on real estate) decreased
from $6,704,000 in 1995 to $6,494,000 in 1996, a decrease of 3.1%. This overall
decrease is comprised of a 0.5% increase related to industrial properties and a
10.7% decrease related to the Trust's retail property. The decrease in the
Trust's retail property is a result of the decrease in revenue explained above.
Same property operating expenses increased by 5.3%, reflecting an increase in
repairs and maintenance expenses and tenant refit costs of $98,000 in 1996. On
the same property basis, loss from operations increased from $4,964,000 in 1995
to $5,351,000 in 1996 (see following explanation).

Loss from operations increased from $4,338,000 in 1995 to $4,732,000 in
1996 as a result of the decrease in net operating income explained above, a
decrease in total interest expense of $584,000 (due to the larger accrual of
default rate interest on the MLI Notes in 1995), the provision of $600,000 for
possible losses on real estate in 1995, an increase in litigation, refinancing
and proxy costs of $568,000 (due to the shareholder litigation in 1996), an
increase in Trust administration and overhead expenses of $406,000 (due to the
accrual of $240,000 in incentive compensation, higher legal fees and increased
Trust Manager compensation in 1996) and a decrease in interest income (due to
higher invested balances in 1995 from the nonpayment of interest to the Trust's
unsecured lender).

During 1996, the Trust sold two industrial properties and recognized a gain
on sale of $177,000, compared to the sale of one property in 1995 resulting in a
loss on sale of $191,000. In 1996, the Trust recognized an extraordinary gain on
extinguishment of debt of $5,810,000, or $3.20 per share, pursuant to settlement
of litigation with MLI.

Comparison of 1995 to 1994

Property revenues increased from $11,080,000 in 1994 to $11,410,000 in
1995, resulting from the stabilization in occupancy of the Trust's portfolio and
improving rental rates in selected markets. Property operating expenses
decreased from $3,952,000 in 1994 to $3,851,000 in 1995, primarily due to the
net effect of a sale of a property in February 1995 and the purchase of a
property in August 1995. Property net operating income increased from $7,128,000
in 1994 to $7,559,000 in 1995, an increase of 6.0%. On a same property basis,
net operating income increased from $6,927,000 in 1994 to $7,474,000 in 1995, an
increase of 7.9%. Overall leased occupancy of the portfolio was 93.7% at
December 31, 1995 compared to 93.2% at December 31, 1994.

Loss from operations increased from $4,311,000 in 1994 to $4,338,000 in
1995 as a result of the increase in net operating income and an increase in
interest income of $223,000 (due to higher invested balances

104
<PAGE> 126

resulting from the nonpayment of interest to the Trust's unsecured lender), a
decrease in total administrative expenses of $128,000 (as a result of two proxy
contests in 1994 versus one in 1995), a net increase in interest expense of
$1,215,000 (due to the November 1994 refinancing transaction and the default
rate interest accrued by the Trust in 1995 of $724,000), a decrease in
depreciation and amortization of $356,000 (due to the Trust's property
transactions in 1995), and a decrease in provision for possible losses on real
estate of $50,000 (due to the timing of writedowns related to properties held
for sale).

During 1995, the Trust recognized a loss of $191,000 on the sale of its
Quadrant property and an extraordinary loss of $55,000 related to the prepayment
of an outstanding mortgage loan. In 1994, the Trust recognized an extraordinary
loss of $344,000 on the partial in-substance defeasance of Zero Coupon Notes due
1997.

During 1995, the Trust incurred approximately $980,000 in expenses related
to litigation, a proxy contest in connection with issues before the shareholders
at the Trust's annual meeting and attempted recapitalization costs, compared to
approximately $1,027,000 in 1994. During 1994, the Trust had no litigation
expenses but incurred costs related to two proxy contests.

The Trust recorded a provision for possible loss on real estate related to
its Patapsco property at December 31, 1995 of $600,000. This provision follows a
$650,000 provision made at December 31, 1994. The Trust began marketing this
property in early 1995.

Comparison of Six Months Ended June 30, 1997 to June 30, 1996

The overall occupancy of the Trust's portfolio on June 30, 1997 was 93.7%,
compared to 93.9% on June 30, 1996 and 91.1% on March 31, 1997. When comparing
the six months ended June 30, 1997 with the same period in 1996, property
revenues decreased from $5,846,000 in 1996 to $5,221,000 in 1997 and property
operating expenses decreased from $1,907,000 in 1996 to $1,841,000 in 1997,
primarily as a result of the sale of two properties during the fourth quarter of
1996 and one property during the first quarter of 1997. When comparing the six
months ended June 30, 1997 to the same period in 1996 on a same property basis,
revenue increased 6.7% and net operating income increased 5.6% for the Trust's
industrial properties whereas revenue decreased 14.3% and net operating income
decreased 24.6% for the Trust's retail property. The decline in the performance
of the Trust's retail property was primarily related to nonrecurring collections
of approximately $80,000 in lease termination fees and $76,000 in percentage
rents in 1996, bad debt writeoffs of approximately $20,000 in 1997 and a decline
in average occupancy from 86.2% in 1996 to 84.8% in 1997. The Trust is
continuing its efforts to increase leasing at this property.

The Trust had a net loss from operations of $2,073,000 for the six months
ended June 30, 1997 compared to $2,268,000 for the same period in 1996. This
change was primarily related to the decrease in property net operating income of
$559,000 explained above, a decrease in interest income of $108,000 (resulting
from a decrease in investable funds due to the settlement of litigation in
1996), a decrease in litigation and proxy costs of $451,000 (due to the
settlement of litigation matters during 1996, offset by the costs of the Trust's
special shareholder meeting in June 1997), a net decrease in interest expense of
$314,000 (due to the paydown/forgiveness of debt during 1996 and 1997, offset by
the accrual of $647,000 in interest expense relating to the expected future
conversion of the Realco debt to equity), and a decrease in administration and
overhead expenses of $79,000 (due to $240,000 in incentive compensation expense
in January 1996, offset by the addition of two Trust Managers in December 1996
and the use of compensation and computer consultants during 1997).

Analysis of Cash Flows

Comparison of 1996 to 1995

Cash flow used in operating activities in 1996 was $5,658,000. This deficit
reflects the results of property operations, interest expense, administrative
expenses and an increase in restricted cash of $707,000 as a result of the
Trust's property financing in 1996. Interest expense reflects several items of
non-recurring nature, including a decrease in accrued interest of $2,986,000
related to the settlement of the MLI litigation in 1996,

105
<PAGE> 127

the accrual of $369,000 of default rate interest which was ultimately forgiven
and approximately $535,000 related to principal which was forgiven in November
1996 and February 1997. In addition, administrative expenses includes $1,548,000
of litigation, refinancing and proxy costs which relate to special situations
and should not be considered to be recurring expenses. Management believes that,
in the future, cash flow provided by operations will increase due to the
elimination of the non-recurring items described above and the Trust's plans to
attract capital and pursue a growth strategy.

Cash flow provided by investing activities in 1996 was $5,173,000,
representing proceeds from the sale of two properties and amounts expended on
capitalized improvements and leasing commissions. The sale of the two properties
was necessary to raise capital with which to make payments under the Trust's
option to retire certain indebtedness at a discount.

Cash flow used in financing activities in 1996 was $3,199,000. This amount
reflects proceeds from the mortgage financing on nine properties, the payment of
amounts on the option to retire certain indebtedness at a discount, the sale of
Shares to Realco, and the first quarter distribution to shareholders.

Comparison of Six Months Ended June 30, 1997 to June 30, 1996

Net cash used in operating activities was $515,000 for the six months ended
June 30, 1997. This is primarily the net result of the operational items
discussed above, a decrease in accounts payable, other liabilities and tenant
security deposits of $623,000 (due principally to the payment of property taxes
during the first quarter) and an offsetting increase in accrued interest of
$636,000 (due to the accrual of $647,000 in interest related to the Realco debt
conversion). Included in net cash used in operating activities is approximately
$437,000 in litigation and proxy costs, which management believes is of a
nonrecurring nature. Management believes that, in the future, cash flow provided
by operations will increase due to the elimination of such nonrecurring items
and the Trust's plans to pursue a growth strategy.

Net cash provided by investing activities was $1,599,000 for the six months
ended June 30, 1997 resulting from the expenditure of $430,000 for capitalized
leasing commissions and improvements to real estate properties and $2,029,000
received from the sale of the Trust's Burnsville property in March 1997.

Net cash used in financing activities was $3,841,000, resulting from the
payment of principal on mortgage notes payable. Included in this amount is
approximately $1,924,000 related to the payment of the mortgage loan on the
Trust's Burnsville property which was sold in March 1997.

Funds from Operations

In March 1995, NAREIT issued its White Paper on FFO which clarified the
treatment of certain items in determining FFO and recommended additional
supplemental disclosures. The Trust has adopted the recommendations of NAREIT
and restated its FFO calculation for prior years. The changes promulgated by
NAREIT eliminate the add back of depreciation and amortization of non-real
estate items, including the amortization of deferred financing costs, in
determining FFO. The revised definition of FFO is net income (loss) computed in
accordance with generally accepted accounting principles, excluding gains or
losses from debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. In addition, NAREIT recommends that
extraordinary items or significant non-recurring items that distort
comparability should not be considered in arriving at FFO. Accordingly, the
Trust does not include the non-recurring interest accrual related to the
expected future conversion of the modified notes held by Realco into Shares or
the default rate interest accrued on its $45.2 million in unsecured notes
payable in the determination of FFO. Funds Available for Distribution ("FAD") is
also presented as it more accurately portrays the ability of the Trust to make
distributions because it reflects capital expenditures. The Trust believes FFO
and FAD are appropriate measures of performance relative to other REITs. FFO
provides investors with an understanding of the ability of the Trust to incur
and service debt and make capital expenditures. There can be no assurance that
FFO and FAD presented by the Trust is comparable to similarly titled measures of
other REITs. While other REITs may not always use a similar definition, this
information does add comparability to those which have adopted the NAREIT
definitions.

106
<PAGE> 128

FFO and FAD should not be considered as an alternative to net income or
other measurements under generally accepted accounting principles as an
indicator of the Trust's operating performance or to cash flows from operating,
investing or financing activities as a measure of liquidity. FFO does not
reflect working capital changes, cash expenditures for capital improvements or
principal payments on indebtedness.

The following table shows the Trust's cash flows from its operating,
investing and financing activities, prepared in accordance with generally
accepted accounting principles.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1996 1995 1994 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by operating
activities............................. $(5,658) $ 3,848 $ (594) $ (515) $(4,445)
Net cash (used in) provided by investing
activities............................. $ 5,173 $ 144 $(1,476) $ 1,599 $ (618)
Net cash (used in) provided by financing
activities............................. $(3,199) $(3,217) $ 7,870 $(3,841) $ (476)
</TABLE>

FFO and FAD are calculated as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss).................................... $ 1,255 $ (4,584) $ (4,655)
Exclude effects of:
Extraordinary (gain) loss on extinguishment of
debt.......................................... (5,810) 55 --
(Gain) loss on sales of real estate............. (177) 191 --
Provision for possible losses on real estate.... -- 600 650
Real estate depreciation and amortization....... 2,890 2,771 3,102
Default rate interest accrual................... 369 724 --
Extraordinary loss on partial in-substance
defeasance of Zero Coupon Notes............... -- -- 344
-------- -------- --------
Funds from operations................................ $ (1,473) $ (243) $ (559)
======== ======== ========

Funds from operations................................ $ (1,473) $ (243) $ (559)
Capitalized improvements and leasing
commissions(a)..................................... (1,372) (1,023) (1,476)
Non-cash effect of straight-line rents on FFO........ 193 161 156
-------- -------- --------
Funds available for distribution..................... $ (2,652) $ (1,105) $ (1,879)
======== ======== ========
</TABLE>

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

(a) The breakdown of capitalized improvements and leasing commissions is as
follows for each of the two years ending December 31, 1996:

<TABLE>
<CAPTION>
FYE 12/31/96 FYE 12/31/95
--------------- ---------------
AMOUNT PSF AMOUNT PSF
------ ----- ------ -----
<S> <C> <C> <C> <C>
Tenant improvements -- new tenants................ $ 287 $3.32 $ 343 $2.58
Tenant improvements -- renewing tenants........... 282 1.93 184 1.30
Leasing costs -- new tenants...................... 245 1.71 168 1.16
Leasing costs -- renewing tenants................. 144 0.58 107 0.55
Expansions and major renovations.................. 414 0.26 221 0.13
------ ------
Total................................... $1,372 $1,023
====== ======
</TABLE>

107
<PAGE> 129

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1996
------- -------
<S> <C> <C>
Net income (loss)........................................... $ 882 $ (901)
Exclude effects of:
Gain on sale of real estate............................... (312) --
Extraordinary gain on extinguishment of debt.............. (2,643) (1,367)
Real estate depreciation and amortization................. 1,389 1,404
Non-recurring interest accrual assuming future conversion
of debt to equity...................................... 647 --
Default rate interest accrual............................. -- 369
------- -------
Funds from operations....................................... $ (37) $ (495)
======= =======

Funds from operations....................................... $ (37) $ (495)
Capitalized improvements and leasing commissions............ (430) (618)
Non-cash effect of straight-line rents on FFO............... 45 109
------- -------
Funds available for distribution............................ $ (422) $(1,004)
======= =======
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

In June 1997, the Trust entered into the MSAM Transaction and in July 1997
entered into the LaSalle Transaction whereby the Trust agreed to sell up to $20
million and $15 million, respectively, of Shares at $12.25 per share. The MSAM
Transaction and the LaSalle Transaction originally contemplated the issuance of
convertible debt so as to allow the Trust to accept this capital in advance of
shareholder approval for the transactions and for an increase in the authorized
shares of the Trust at the June 30, 1997 annual meeting of shareholders.
Ultimately, a decision was made to fund the transactions after June 30, thereby
eliminating the expense associated with issuance and conversion of convertible
debt. The Trust has currently received proceeds totaling $17,560,176 and
$15,000,000 under the respective agreements. The Trust will utilize these
proceeds to purchase additional properties as part of its growth plans. Through
October 8, 1997, the Trust had expended approximately $19.7 million of such
proceeds in connection with the acquisition of properties. In addition, the
Trust may seek to raise other capital through private placements of equity or
acquisition debt or a combination of both during 1997 to fund purchases of
additional properties.

The principal sources of funds for the Trust's liquidity requirements are
funds generated from operations of the Trust's real estate assets and
unrestricted cash reserves. As of June 30, 1997, the Trust had $1,253,000 in
unrestricted cash on hand. The Trust presently anticipates that these cash
reserves will provide sufficient funds for all currently known liabilities and
commitments relating to the Trust's operations during 1997.

In May 1995, the Trust filed a lawsuit against MLI, holder of the Trust's
$45,239,000, 8.8% unsecured notes payable, alleging breach of the Note Purchase
Agreement between MLI and the Trust and unlawful attempts to coerce the Trust
into relinquishing certain of its rights under that agreement. The Trust settled
its MLI litigation in May 1996 and paid $5,200,000 in settlement of all past due
interest on the MLI notes, thereby allowing the Trust to record an extraordinary
gain of $1,367,000. The Trust was also granted an option to repay the
approximate $45,239,000 in principal amount outstanding on the MLI notes for
$36,800,000 (the "Option Price"). In November 1996, the Trust completed a
mortgage financing on nine properties in the amount of $26,453,000. Net proceeds
of $24,805,000 were applied to the Option Price. In addition, the Trust sold two
properties during the fourth quarter of 1996, generating net proceeds of
$6,545,000 which were also applied to the Option Price. In accordance with the
settlement agreement with MLI, $4,220,000 in debt was forgiven, allowing the
Trust to record an extraordinary gain of $4,443,000 (including accrued interest
forgiven). These notes were purchased by Realco in February 1997. Realco has the
option to convert the principal amount of these notes into Shares at the
conversion rate of $10.00 per Share (if converted prior to December 31, 1997) or
$11.25 per Share (if converted between January 1, 1998 and December 31, 2000).
If conversion of this debt were to occur in 1997, Realco would own approximately
21.9% of the outstanding

108
<PAGE> 130

Shares of the Trust (assuming no other issuances of Shares other than the
199,169 Shares to be sold to MSAM).

The Trust declared a distribution of $0.20 per Share in February 1996. The
settlement agreement with MLI prohibited the payment of distributions while the
agreement was in effect. The modified notes now owned by Realco provided that
the Trust could not pay distributions until the debt is paid in full; however,
this restriction terminated on June 30, 1997, when the shareholders approved
Realco's conversion right and approved an increase in the number of authorized
Shares. To the extent allowable, the Trust intends to evaluate future
distributions on a quarterly basis.

The nature of the Trust's operating properties, which generally provide for
leases with a term of between three and five years, results in an approximate
turnover rate of 20% to 25% of the Trust's tenants and related revenue annually.
Such turnover requires capital outlays related to tenant improvements and
leasing commissions in order to maintain or improve the Trust's occupancy
levels. These costs amounted to $1,372,000 in the year ended December 31, 1996,
$1,023,000 in the year ended December 31, 1995 and $430,000 in the six months
ended June 30, 1997. These costs have historically been funded out of the
Trust's operating cash flow and cash reserves. The Trust has made no commitments
for additional capital expenditures beyond those related to normal leasing and
releasing activity and related escrows. No capital improvements or renovations
of significance are anticipated in the near future for any of the Trust's
properties, with the possible exception of a large retail lease at the Trust's
retail property. Such a lease, if agreed to, could result in expenditures for
tenant improvements in excess of $500,000.

At June 30, 1997, the Trust had $41,547,061 in mortgage debt outstanding,
all of which is comprised of fixed rate debt with a weighted average interest
rate of 8.61%.

On a long term basis, the Trust expects to meet liquidity requirements
generated by property operating expenses, debt service and future distributions
with funds generated by the operations of its real properties. Should such funds
not cover these needs, the possibility of future distributions may be reduced or
eliminated. The Trust currently intends to maintain a debt to total market
capitalization ratio between 30% and 40%, thereby reducing the risk of financial
default. The Trust may increase this leverage in order to fund growth
opportunities in anticipation of reducing this leverage through future equity
offerings. Should the Trust be unable to complete anticipated equity offerings,
the risk of financial default would increase.

TRANSACTIONS WITH REALCO

During 1996, there were a series of transactions involving Realco. On
November 25, 1996, Realco entered into independently negotiated agreements to
purchase an aggregate of 451,521 Shares from certain shareholders for $13.75 per
Share, pending approval of the settlement of certain shareholder litigation,
which the Trust had initiated, alleging that certain significant shareholders of
the Trust had made material misrepresentations in their filings with the
Commission. The $13.75 price per Share was negotiated between the selling
shareholders and Realco without any involvement by the Trust. The majority of
these Shares were purchased from two shareholders, one of which was involved in
the shareholder litigation. The other selling shareholder was unwilling to wait
for the settlement of the litigation and Realco did not want to purchase Shares
until the settlement of the litigation. In order to facilitate the settlement of
the litigation, Realco advanced approximately $2,770,000 to the Trust on
November 25, 1996. The proceeds of this loan, which bore interest at 9%, were
used by a subsidiary of the Trust to acquire 199,620 Shares from the selling
shareholder not involved in the shareholder litigation. On December 19, 1996,
the Trust sold 184,920 Shares, representing the remainder of its authorized
Shares, to Realco for $13.75 per share, the same price at which Realco had
independently agreed to purchase the Shares from the other shareholders. On
December 20, 1996, after approval of the settlement of the shareholder
litigation, Realco closed the purchase of the 451,521 Shares, including the
acquisition of 199,620 Shares held by a subsidiary of the Trust in return for
cancellation of the related loan discussed above, resulting in Realco's
ownership of 636,441 Shares, or 13.66% of the outstanding Shares of the Trust as
of July 18, 1997. Pursuant to internal policies at Realco, Messrs. Duncan and
Kelley transferred to Realco the 4,000 options they received as Trust Managers.
As of September 11, 1997, Realco owned 640,441 Shares (including the 4,000
Shares that may be purchased upon exercise of the vested options).

109
<PAGE> 131

On December 18, 1996, the Trust entered into an agreement granting Realco
the right to commence negotiations to purchase the Trust's notes held by MLI
and, if Realco was successful in acquiring these notes, setting forth the terms
of the modifications to the MLI notes, including the right to convert the
principal amount of these notes into Shares of the Trust at $10.00 per Share
during 1997 and $11.25 per Share thereafter. On February 26, 1997, Realco
acquired the MLI notes for $5,481,152. The MLI notes were then modified to
reduce the outstanding principal balance from $9,419,213 to $7,040,721, to
release all security for the notes, to provide for monthly payments of interest
at 8.8% and to extend the maturity date from March 31, 1997 to December 31,
2000. In addition, Realco has the option to convert the principal amount of the
notes into Shares of the Trust at the conversion rate of $10.00 per Share (if
converted prior to December 31, 1997) or $11.25 per Share (if converted between
December 31, 1997 and December 31, 2000). Subsequent to the modification, the
Trust made a principal payment of $1,591,103, resulting in a current principal
balance of $5,449,618. The modification of this debt resulted in a reduction of
approximately $1,591,000 of the potential $3,969,000 discount remaining under an
option agreement on this debt. The Trust Managers viewed this as a reasonable
cost of this transaction as it (i) removed the risk of losing the entire
potential discount if payment was not made by March 31, 1997; (ii) removed the
necessity to liquidate certain properties; (iii) allowed for release of all
collateral securing this obligation; (iv) allowed the Trust to recognize an
extraordinary gain of approximately $2,643,000 or $1.30 per share in the first
quarter of 1997; and (v) allowed for the possibility of conversion of this
obligation into Shares, thereby improving the Trust's financial position.

The Trust currently anticipates it will reflect approximately $1,022,000,
representing the difference between the market trading price of $11.90 per Share
on February 26, 1997 and the $10.00 conversion price, as interest expense
between February 26, 1997 and September 30, 1997. The date of February 26, 1997
is used to measure market value as this is deemed to be the date of issuance of
the modified notes, which contain the convertibility option. This will result in
additional interest expense of approximately $272,000 in the first quarter of
1997 and approximately $375,000 in each of the second and third quarters of
1997.

The closing sale price of the Trust's Shares on the NYSE on the above dates
was as follows: $10.65 per Share on November 25, 1996, $10.00 per Share on
December 18 and December 19, 1996, $9.40 per Share on December 20, 1996, and
$11.90 per Share on February 26, 1997.

RECENT DEVELOPMENTS

On August 20, 1997, the Lawsuit, which was filed in the Superior Court of
the State of Arizona and which has been removed to the United States District
Court for the District of Arizona, was served upon Realco, the General Partners,
certain other affiliated entities and the individual members of the boards of
directors of each of the General Partners. The Trust was also named as a
defendant. The Lawsuit alleges, among other things, breaches of fiduciary duty
in connection with the transactions contemplated by the Merger Agreement. The
Lawsuit seeks, among other things, to enjoin the consummation of the Merger and
damages, including attorneys' fees and expenses. The defendants in the Lawsuit
believe that the plaintiffs' claims are without merit and intend to defend
vigorously against the Lawsuit. However, no assurance can be given that the
plaintiffs in the Lawsuit will not be successful. If such plaintiffs were to
successfully enjoin the consummation of the Merger, a condition to the
obligations of the Trust and the RELPS to consummate the Merger would not be
satisfied, which would entitle the General Partner of any RELP or the Trust
Managers to terminate the Merger Agreement and abandon the Merger.

Pursuant to the terms of the Merger Agreement, for a period of six years
from and after the Effective Time, the Trust must indemnify the partners or
agents of any RELP who at any time prior to the Effective Time were entitled to
indemnification under the Partnership Agreement of the RELP. Such persons are
entitled to indemnification to the same extent as they would have been entitled
to indemnification under the Partnership Agreement. If the Merger occurs and if
the court were to determine that the General Partners, their affiliated entities
and/or the members of the boards of directors of the General Partners were
liable for damages in connection with the Lawsuit, to the extent the General
Partners and the directors would have been entitled to indemnification under the
Partnership Agreements, the Trust would be required to indemnify such parties
for costs and expenses related to the Lawsuit. Depending upon the amount of such
costs and expenses, it could have a material adverse effect on the Trust.

110
<PAGE> 132

On August 29, 1997, the Trust purchased two light industrial properties
with a total of 137,265 net rentable square feet for $6.4 million. The
properties are located in suburban areas of Dallas, Texas.

On October 3, 1997, the Trust, as general partner in a limited partnership,
purchased a portfolio of eight properties with 783,780 net rentable square feet
located in Dallas and suburban areas of Dallas, Texas. The purchase price of the
portfolio was $36.8 million. The purchase price was partially financed by a
borrowing of approximately $20.7 million under the acquisition line discussed
below and approximately $2.8 million in limited partnership units ("OP Units")
issued to the limited partner of the partnership. The OP Units are convertible
by the limited partner, after a one year lockout period, into Shares of the
Trust on a one-for-one basis.

Also on October 3, 1997, the Trust entered into a secured acquisition line
with Prudential Securities Capital Corporation in the amount of $35 million. The
terms of this line include a variable interest rate based on the 30-day LIBOR
rate plus 200 basis points and a maximum loan to value of 70%. The terms also
state that borrowings mature in one year and, if not repaid, allow the lender to
move such borrowings into a securitized mortgage pool.

111
<PAGE> 133

ALLOCATION OF CONSIDERATION

ALLOCATION PRINCIPLES

The Trust is offering to issue in the aggregate up to 4,412,829 Shares,
which will be allocate among the Participating RELPS in accordance with their
Net Asset Values. Pursuant to the Merger Agreement, each Limited Partner of the
Participating RELPS will receive Shares in exchange for Units held as follows:
each Unit in RELP I will be converted into the right to receive 15.90 Shares,
each Unit in RELP II will be converted into the right to receive 28.63 Shares,
each Unit in RELP III will be converted into the right to receive 16.60 Shares
and each Unit in RELP IV will be converted into the right to receive 15.14
Shares. Cash will be issued in lieu of fractional Shares (based on $13.125 per
Share).

The number of Shares allocable to each RELP through the Exchange Ratios is
based upon the Net Asset Values assigned to each RELP. Net Asset Values were
initially determined for each RELP by its General Partner utilizing several
factors, including the current and projected net operating income and cash flow,
capitalization rate, market rental rates, lease expirations, and anticipated
capital expenditures for leasing and tenant improvements for each RELP property.
The Net Asset Values were then finally determined for each RELP through
negotiations between the common management of each of the RELPS and the Trust.
The method of allocation of Shares described above was utilized by the General
Partners because it was deemed to be the best method to allocate Shares among
the RELPS based upon the underlying value of the properties owned by each RELP.
Other methods of allocation were not considered by the General Partners since no
other acceptable options could be identified which in the view of the General
Partners allocated value among the RELPS equitably.

The following table has been prepared to show the allocations of Shares
among the RELPS and includes the following: (a) the Net Asset Values assigned to
each of the RELPS; (b) the percentage of the Net Asset Value of each RELP
against the aggregate Net Asset Value of all RELPS; (c) the number of Shares to
be allocable to each of the RELPS based upon its Net Asset Value and the
percentage of the total amount of all such Shares offered by the Trust; (d) the
number of Shares that would be issued by the Trust in exchange for each $500 of
original investment in each of the RELPS.

<TABLE>
<CAPTION>
PERCENTAGE OF ALLOCATION OF SHARES
AGGREGATE NUMBER OF SHARES PERCENTAGE PER $500 OF ORIGINAL
NET ASSET NET ASSET ALLOCABLE TO THE OF AGGREGATE INVESTMENT BY
VALUE VALUE RELP FOR UNITS SHARES LIMITED PARTNERS
----------- ------------- ---------------- ------------- ----------------------
(A) (A)
<S> <C> <C> <C> <C> <C>
RELP I
Systech..................... $ 4,400,000 7.60% 335,238 7.60% 6.13
Volusia..................... 7,000,000 12.09% 533,333 12.09% 9.77
----------- ------ ---------- ------ -------
TOTAL......................... $11,400,000 19.69% 868,571 19.69% 15.90
=========== ====== ========== ====== =======
RELP II
Continental Plastic......... $ 7,200,000 12.43% 548,571 12.43% 20.21
Bowater..................... 3,000,000 5.18% 228,572 5.18% 8.42
----------- ------ ---------- ------ -------
TOTAL......................... $10,200,000 17.61% 777,143 17.61% 28.63
=========== ====== ========== ====== =======
RELP III
Manhattan Towers............ $14,000,000 24.17% 1,066,667 24.17% 9.56
Skygate Commons............. 10,300,000 17.78% 784,762 17.78% 7.04
----------- ------ ---------- ------ -------
TOTAL......................... $24,300,000 41.95% 1,851,429 41.95% 16.60
=========== ====== ========== ====== =======
RELP IV
Linear...................... $ 4,300,000(b) 7.42% 327,620 7.42% 5.41
Kodak....................... 4,800,000(b) 8.29% 365,714 8.29% 6.05
1881 Pine................... 6,500,000(b) 11.22% 495,238 11.22% 8.19
Apollo...................... 13,122,400(b) 34.18% 999,802 34.18% 16.53
----------- ------ ---------- ------ -------
Subtotal...................... $28,722,400 61.11% 2,188,374 61.11% 36.18
Debt.......................... (16,704,013) (40.36)% (1,272,688) (40.36)% (21.04)
----------- ------ ---------- ------ -------
TOTAL......................... $12,018,387 20.75% 915,686 20.75% 15.14
GRAND TOTAL................... $57,918,387 100.00% 4,412,829 100.00%
=========== ====== ========== ======
</TABLE>

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

(b) Net Asset Value does not reflect the outstanding debt assignable to the
individual properties.

112
<PAGE> 134

Each of the General Partners of the RELPS has agreed to waive any right to
receive Shares it might have otherwise been entitled to in exchange for its
general partnership interest.

NET ASSET VALUES

The Net Asset Value of each of the RELPS is defined as the relative value
of each RELP's real estate and other assets (if any), as adjusted for the RELP's
known liabilities. The value placed on each RELP's assets was determined by the
General Partner of such RELP as of June 30, 1997. Substantially all cash and
cash equivalents held by each RELP will be distributed to the Limited Partners
immediately prior to the Merger. Consequently, the Trust will essentially only
acquire real properties from the RELPS pursuant to the Merger.

Shares will be allocated to the General Partners in exchange for Units in
the same manner as for all other Limited Partners of the RELPS. The amount that
the General Partners paid for their Units and the number of Units owned by them
are as follows:

<TABLE>
<CAPTION>
NUMBER OF
CONSIDERATION PAID UNITS OWNED
------------------ -----------
<S> <C> <C>
USAA Investors I, Inc................................... $3,010,781 6,039
USAA Investors II, Inc.................................. $3,346,898 6,691
USAA Income Properties III, Inc......................... $3,120,227 6,469
USAA Income Properties IV, Inc.......................... $3,056,484 6,140
</TABLE>

The General Partners will not receive Shares in exchange for their general
partnership interests in the RELPS.

113
<PAGE> 135

CONFLICTS OF INTEREST

A number of conflicts of interest are inherent in the relationships among
the RELPS, the General Partners, Realco, the Trust and its Trust Managers and
officers. No formal procedures were put in place by the General Partners, Realco
or their affiliates to minimize the potential conflicts of interest. Certain of
these conflicts of interest are summarized below.

AFFILIATED GENERAL PARTNERS

The General Partners have sought to discharge faithfully their fiduciary
duties to each of the RELPS, but it should be borne in mind that each of the
General Partners is affiliated with the other General Partners and Realco, which
ultimately controls the General Partners and which is one of the largest
shareholders of the Trust, owning approximately 13.74% of the outstanding
Shares. Upon consummation of the Merger and assuming conversion of the Trust's
debt to Realco, Realco will own approximately 17.39% of the outstanding Shares.
No RELP was separately represented by parties independent of Realco in
structuring and negotiating the terms of the Merger. The General Partners
believe that the fairness opinion of Houlihan, the contractual Dissenters'
Rights granted to Limited Partners who believe that the applicable Exchange
Ratio does not provide such Limited Partners a number of Shares equal to the
fair market value of their Units and other aspects of procedural fairness that
have been incorporated into the structure of the Merger, the allocation of
Shares to each Participating RELP and the expected benefits to Limited Partners
from the Merger offset any detriment arising from such conflicts of interest or
the absence of an independent representative. Had separate representation been
arranged for each RELP, the terms of the Merger might have been different and
possibly more favorable to the Limited Partners, especially the proposed
transactions between an Affiliate of Realco and the Trust. In addition, if
separate representation had been arranged for each RELP, issues unique to the
value of a given RELP might have received greater attention during the
structuring of the Merger, and there might have been adjustments in the Net
Asset Value allocated among the RELPS, thereby increasing or decreasing the
number of Shares allocable to such RELP. See "Risk Factors -- Lack of
Independent Representation" and "-- Conflicts of Interest."

BENEFITS TO REALCO, GENERAL PARTNERS AND AFFILIATES

Because Realco and the General Partners have a financial interest in
consummating the Merger, there is an inherent conflict of interest in their
structuring the terms and conditions of the Merger and the manner in which the
Merger has been structured might have been different if structured by persons
having no financial interest in whether or not the Merger proceeded. The
financial benefits to the General Partners and to Realco from the Merger include
the following:

(a) As part of the Merger, the Trust will assume all of the liabilities of
the Participating RELPS, effectively relieving the General Partners of liability
for payment of such debts and obligations.

(b) An Affiliate of Realco will manage and lease the Participating RELPS'
former properties on behalf of the Trust after the Merger. The Management
Agreement will provide for management fees on terms substantially similar to the
terms governing management arrangements the Trust typically uses in managing its
current properties and will be terminable at will by either party upon 30 days
prior notice.

(c) Each of the General Partners owns Units in the respective RELP such
General Partner manages. As of September 15, 1997, the General Partner of RELP I
owned 6,039 Units in RELP I, or approximately 11.06% of all outstanding Units of
RELP I; the General Partner of RELP II owned 6,691 Units in RELP II, or
approximately 24.65% of all outstanding Units of RELP II; the General Partner of
RELP III owned 6,469 Units in RELP III, or approximately 5.80% of all
outstanding Units of RELP III; and the General Partner of RELP IV owned 6,140
Units in RELP IV, or approximately 10.15% of all outstanding Units of RELP IV.
The General Partners will exchange these Units for Shares on the same terms and
according to the same Exchange Ratio as all other Limited Partners.

114
<PAGE> 136

However, the Merger also eliminates the following benefits currently
available to the General Partners and subjects the General Partners to the
following detriments:

(a) Affiliates of the General Partners have historically performed a
variety of services for the RELPS. In return for these services, these
Affiliates received compensation from the RELPS, including management fees,
interest income, leasing commissions and mortgage service fees, and were
reimbursed for expenses. Upon completion of the Merger, with the exception of an
Affiliate of Realco which will continue to perform property management and
leasing services, these Affiliates will no longer perform these services and,
consequently, will no longer receive compensation. These Affiliates received, in
the aggregate, approximately $3,217,000 from the RELPS in compensation,
distributions and reimbursements during each RELP's 1996 fiscal year. This
compensation is described more fully in "Comparable Compensation, Fees and
Distributions" below. For purposes of comparison, the General Partners estimate
that on a pro forma basis, assuming the Merger had been completed prior to the
beginning of the same time period, an Affiliate of Realco would have received
approximately $2,223,000 in compensation, distributions and reimbursements,
assuming such entity received management and leasing fees pursuant to terms
substantially similar to the terms governing management arrangements the Trust
typically used in managing its current properties. This compensation would have
been the only compensation the General Partners or their Affiliates would have
received. Consequently, Affiliates of the General Partners will provide less
services in relation to the RELPS' properties and, correspondingly, will receive
less compensation and will receive substantially less in distributions.

(b) Like all Limited Partners, the General Partners have received regular
distributions paid on the Units they own, as well as for their general partner
interests. The General Partners, like all Limited Partners, will no longer
receive these distributions upon completion of the Merger.

(c) If the Merger proceeds, the General Partners will relinquish their
control over the RELPS because the Trust will be controlled by the Trust
Managers who are elected by the shareholders of the Trust.

(d) The General Partners have agreed to waive their rights to receive any
Shares to which they may otherwise be entitled in exchange for their general
partnership interests.

TRUST MANAGERS AND OFFICERS

Realco ultimately owns and controls each of the General Partners and each
of the officers and directors of the General Partners are also officers or
directors of Realco. Realco, a wholly-owned indirect subsidiary of USAA, is also
one of the largest shareholders of the Trust, owning 640,441 Shares or
approximately 13.74% of the issued and outstanding Shares. Upon consummation of
the Merger and assuming conversion of the Trust's debt to Realco, Realco will
own approximately 17.39% of the outstanding Shares. Pursuant to the Share
Purchase Agreement between the Trust and Realco, Realco has the right to appoint
two members of the Trust Board until 1999. See "Management." The relationships
among USAA, Realco and the Trust involves an inherent conflict of interest in
their structuring the terms and conditions of the Merger.

FEATURES DISCOURAGING POTENTIAL TAKEOVERS

Certain provisions in the Declaration of Trust and Bylaws, as well as
statutory rights under Texas law, could be used by the Trust's management to
delay, discourage, or thwart efforts of third parties to acquire control of, or
a significant equity interest in, the Trust. See "Comparison of Ownership of
Units and Shares" and "Risk Factors -- Anti-Takeover Provisions."

115
<PAGE> 137

FIDUCIARY RESPONSIBILITY

TRUST MANAGERS AND OFFICERS OF THE TRUST

The Trust Managers are accountable to the Trust and its shareholders as
fiduciaries and must perform their duties in good faith, in a manner believed to
be in the best interests of the Trust and its shareholders and with such care,
including reasonable inquiry, as an ordinarily prudent person in a like position
would use under similar circumstances. The Trust's Declaration of Trust provides
that no Trust Manager or officer of the Trust shall be liable to the Trust for
any act, omission, loss, damage, or expense arising from the performance of his
or her duties under the Trust save only for his or her own willful misfeasance
or malfeasance or negligence. In discharging their duties to the Trust, Trust
Managers and officers of the Trust shall be entitled to rely upon experts and
other matters as provided in the Texas REIT Act and the Trust's Bylaws. The
Trust's Declaration of Trust provides that the Trust will indemnify its Trust
Managers and officers to the fullest extent permitted under Texas law. Pursuant
to the Declaration of Trust and Texas law, the Trust will indemnify each Trust
Manager and officer against any liability and related expenses (including
attorneys' fees) incurred in connection with any proceeding in which he may be
involved by reason of serving in such capacity so long as the Trust Manager or
officer acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interest of the Trust, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. A Trust Manager and officer is also entitled to indemnification
against expenses incurred in any action or suit by or in the right of the Trust
to procure a judgment in its favor by reason of serving in such capacity if he
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the Trust, except that no such indemnification will be
made if the Trust Manager or officer is judged to be liable to the Trust, unless
the applicable court of law determines that despite the adjudication of
liability the Trust Manager or officer is reasonably entitled to indemnification
for such expenses.

The Declaration of Trust authorizes the Trust to advance reasonable funds
to a Trust Manager or officer for costs and expenses (including attorneys' fees)
incurred in a suit or proceeding upon receipt of an undertaking by such Trust
Manager or officer to repay such amounts if it is ultimately determined that he
is not entitled to be indemnified. The Trust has entered into agreements with
the its Trust Managers and executive officers, indemnifying them to the fullest
extent permitted by Texas law. Shareholders may have more limited recourse
against such persons than would apply absent these provisions and agreements. To
the extent that the foregoing provisions concerning indemnification apply to
actions arising under the Securities Act, the Trust has been advised that, in
the opinion of the Commission, such provisions are contrary to public policy and
therefore are not enforceable. The Trust has obtained insurance policies
indemnifying the Trust Managers and officers against certain civil liabilities,
including liabilities under the federal securities laws, which might be incurred
by them in such capacity.

GENERAL PARTNERS OF THE RELPS

Under California, Texas and Delaware partnership law, the General Partners
are accountable to the RELPS as fiduciaries and are required to exercise good
faith and integrity in all their dealings in the RELP's affairs. The Partnership
Agreements generally provide that neither the General Partners nor any of their
Affiliates performing services on behalf of the RELPS will be liable to the RELP
or any of the Limited Partners for any act or omission by any such person
performed in good faith pursuant to authority granted to such person by the
Partnership Agreements, or in accordance with its provisions, and any manner
reasonably believed by such person to be within the scope of authority granted
to such person and in the best interests of the RELP provided that such act or
omission did not constitute fraud, misconduct, bad faith or negligence. As a
result, Limited Partners might have a more limited right of action in certain
circumstances than they would have in the absence of such a provision in the
Partnership Agreements.

The Partnership Agreements also generally provide that the General Partners
and certain related parties are indemnified from losses relating to acts
performed or failures to act in connection with the business of the RELPS
(except to the extent indemnification is prohibited by law) provided that such
person determined in good faith that the course of conduct did not constitute
fraud, negligence or misconduct. Notwithstanding the

116
<PAGE> 138

foregoing, none of the above-mentioned persons is to be indemnified by the RELPS
from liability, loss, damage, cost or expense incurred by him in connection with
any claim involving allegations that such person violated federal or state
securities laws unless (a) there has been a successful adjudication on the
merits of the claims of each count involving alleged securities law violations
as to the person seeking indemnification and the court approves indemnification
of the litigation costs, (b) such claims have been dismissed with prejudice on
the merits by a court of competent jurisdiction and the court approves
indemnification of the litigation costs, or (c) a court of competent
jurisdiction has approved a settlement of the claims against the person seeking
indemnification and finds that indemnification of the settlement and related
costs should be made. In each of the foregoing situations, the court of law
considering the request for indemnification must be advised as to the position
of the Commission, and any other applicable regulatory authority regarding
indemnification for violations of securities laws. Indemnification may not be
enforceable as to certain liabilities arising from claims under the Securities
Act and state securities laws; and, in the opinion of the Commission, such
indemnification is contrary to public policy and is therefore unenforceable. For
purposes of the foregoing, the Affiliates of the General Partners will be
indemnified only when operating within the scope of the General Partner's
authority. Any claim for indemnification under the Partnership Agreement will be
satisfied only out of the assets of the RELP and no Limited Partner will have
any personal liability to satisfy an indemnification claim made against the
RELP.

The RELPS may also advance funds to a person indemnified under the
Partnership Agreements for legal expenses incurred as a result of legal action
brought against such person if such person undertakes to repay the advanced
funds to the RELP if it is subsequently determined that such person is not
entitled to indemnification. The RELPS do not pay for any insurance covering
liability of the General Partners or any other indemnified person for acts or
omissions for which indemnification is not permitted by the Partnership
Agreements, although the General Partners may be named as additional insured
parties on policies obtained for the benefit of the RELP if there is no
additional cost to such RELP. As part of its assumption of liabilities in the
Merger, the Trust will indemnify the General Partners and their Affiliates for
periods prior to and following the Merger to the extent of the indemnity under
the terms of the Partnership Agreements and applicable law.

MARKET PRICES AND DISTRIBUTIONS

THE MARKET PRICE OF THE SHARES

The Shares are listed and traded on the NYSE under the symbol "IND." The
following table sets forth for the periods indicated the high and low closing
sales price of the Shares, and the cash distributions declared per Share for
such fiscal quarter:

<TABLE>
<CAPTION>
QUARTER ENDED HIGH(A) LOW(A) DISTRIBUTIONS(A)
------------- ------- ------ ----------------
<S> <C> <C> <C>
December 31, 1997 (through October 8, 1997).... $15 $1411/16 $.00
September 30, 1997............................. 1515/16 14 3/8 .00
June 30, 1997.................................. 15 5/8 11 7/8 .00
March 31, 1997................................. 13 3/4 11 1/4 .00
December 31, 1996.............................. 11 7/8 9 3/8 .00
September 30, 1996............................. 10 8 1/8 .00
June 30, 1996.................................. 9 3/8 6 7/8 .00
March 31, 1996................................. 11 1/4 6 7/8 .20
December 31, 1995.............................. 12 1/2 8 1/8 .20
September 30, 1995............................. 10 6 7/8 .00
June 30, 1995.................................. 8 1/8 5 5/8 .00
March 31, 1995................................. 7 1/2 6 1/4 .00
</TABLE>

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

117
<PAGE> 139

As of October 8, 1997, the closing sale price per Share on the NYSE was
$14.688. On such date, there were 4,657,973 outstanding Shares held by 1,680
shareholders of record.

DISTRIBUTIONS

A distribution of $0.20 per share was declared on October 2, 1995, payable
on October 23, 1995 to shareholders of record on October 11, 1995, and a
distribution of $0.20 per share was declared on January 22, 1996, payable on
February 13, 1996 to shareholders of record on February 2, 1996.

On May 22, 1996, the Trust and certain of its affiliates entered into a
settlement agreement with MLI to repay the Trust's 8.8% unsecured notes to MLI
at a substantial discount in connection with the settlement of the Trust's
litigation with MLI and Fidelity Management and Research Company and certain of
its affiliates. The settlement agreement with MLI prohibited the Trust from
making distributions to shareholders while the agreement was in place.

In February 1997, Realco acquired the Trust's notes held by MLI and
pursuant to the Renewal, Extension, Modification and Amendment Agreement dated
as of February 26, 1997, by and between the Trust and Realco, the MLI notes were
amended to incorporate various amendments. The prohibition on payment of
distributions terminated upon the passing of certain proposals by the
shareholders of the Trust at the Trust's annual meeting on June 30, 1997. As a
result, except with respect to the limitations imposed by the Merger Agreement,
the Trust is no longer contractually prohibited from making distributions to its
shareholders.

The Trust intends to evaluate future distributions on a quarterly basis.

MARKET PRICE OF UNITS

The Units are not listed on any national securities exchange or quoted on
Nasdaq, and there is no established public trading market for the Units.
Secondary sales activity for the Units has been limited and sporadic. The
General Partners monitor transfers of the Units (i) because the admission of the
transferee as a substitute Limited Partner requires the consent of the General
Partner under each Partnership Agreement; and (ii) in order to track compliance
with safe harbor provisions to avoid treatment as a "publicly traded
partnership" for tax purposes. It should be noted that some transactions may not
be reflected on the records of the RELPS. The General Partners estimate, based
solely upon the transfer records of the RELPS, that the number of Units
transferred in sale transactions, (i.e., excluding transactions believed to be
between related parties, family members or the same beneficial owner) was as
follows:

<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
RELP I
Quarter -- 1.............................................. 47 5 1
Quarter -- 2.............................................. 37 2 1
Quarter -- 3.............................................. 72 0 2
Quarter -- 4.............................................. 6 2
--- --- ---
TOTAL............................................. 84 13 6
=== === ===
RELP II(1)
Quarter -- 1.............................................. 3 2 0
Quarter -- 2.............................................. 2 1 0
Quarter -- 3.............................................. 8 0 1
Quarter -- 4.............................................. 7 4 0
--- --- ---
TOTAL............................................. 20 7 1
=== === ===
</TABLE>

118
<PAGE> 140

<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
RELP III
Quarter -- 1.............................................. 49 2 3
Quarter -- 2.............................................. 364 15 3
Quarter -- 3.............................................. 280 12 4
Quarter -- 4.............................................. 18 7
--- --- ---
TOTAL............................................. 693 47 17
=== === ===
RELP IV
Quarter -- 1.............................................. 20 1 2
Quarter -- 2.............................................. 27 3 0
Quarter -- 3.............................................. 50 6 1
Quarter -- 4.............................................. 2 3
--- --- ---
TOTAL............................................. 97 12 6
=== === ===
</TABLE>

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

(1) RELP II's fiscal year is July 1 through June 30. Accordingly, the
information is presented for the years ended June 30, 1995, 1996 and 1997.

PARTNERSHIP DISTRIBUTIONS

The following table sets forth the distributions paid per Unit per RELP
during the periods indicated below. Amounts paid in the indicated quarter were
determined based upon RELP operations during the preceding quarter. The original
cost per Unit was $500 for each of the RELPS. All distributions were made from
cash flow from operations except as otherwise noted.

<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
RELP I
Quarter -- 1.............................................. $4.00 $3.00 $4.00
Proceeds from liquidation of loan receivable.............. 91.56
Quarter -- 2.............................................. 4.00 3.00 4.00
Quarter -- 3.............................................. 3.00 4.00
Quarter -- 4.............................................. 4.00 4.00
RELP II(1)
Quarter -- 1.............................................. 8.75 7.00 8.75
Quarter -- 2.............................................. 8.75 7.00 8.75
Quarter -- 3.............................................. 8.75 7.00 8.75
Quarter -- 4.............................................. 8.75 7.00 7.00
RELP III
Quarter -- 1.............................................. 2.00 3.75 3.75
Quarter -- 2.............................................. 2.00 2.00 3.75
Quarter -- 3.............................................. 2.00 3.75
Quarter -- 4.............................................. 2.00 3.75
RELP IV
Quarter -- 1.............................................. 2.00 3.75 3.75
Quarter -- 2.............................................. 2.00 2.00 3.75
Quarter -- 3.............................................. 2.00 3.75
Quarter -- 4.............................................. 2.00 3.75
</TABLE>

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

(1) RELP II's fiscal year is July 1 through June 30. Accordingly, the
information is presented for the years ended June 30, 1995, 1996 and 1997.

119
<PAGE> 141

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

The Trust's policies with respect to the following activities have been
determined by the Trust Managers and may be amended or revised from time to time
at the discretion of the Trust Managers without a vote of the shareholders if
they determine in the future that such a change is in the best interest of the
Trust and its shareholders. See "Risk Factors -- Changes in Policies."

INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE

The Trust's primary business objective is to maximize shareholder value by
maintaining long-term growth in cash available for distribution to its
shareholders. The Trust intends to pursue this objective by continuing to focus
on the acquisition of light industrial properties for long term capital gains.
The Trust will also continue to consider possible acquisitions of compatible
properties in bulk industrial, office and other commercial sectors. The Trust's
policy is to acquire or to develop assets where the Trust believes that
opportunities exist for acceptable investment returns. The Trust expects to
pursue its investment objectives primarily through the direct ownership of
properties. There is no limit on the amount or percentage of assets that will be
invested in any specific property.

While the Trust has emphasized equity real estate investments, it may, in
its discretion, invest in real estate interests, including debt or equity
securities of other REITs, consistent with its qualification as a REIT. While
there is no requirement as to the types of REITs or other real estate entities
in which the Trust may invest, it is currently anticipated that such entities
would be engaged in the development and/or acquisition of industrial or
commercial properties. The Trust has not previously invested in securities of
other entities, including other REITs, and does not presently intend to make
such investments.

Subject to the percentage of ownership limitations and gross income tests
necessary for qualification as a REIT (see "The Merger -- Material Federal
Income Tax Consequences"), the Trust also may invest in securities of concerns
engaged in real estate activities or securities of other issuers. The Trust may
also invest in the securities of other issuers in connection with acquisitions
of indirect interests in properties (normally general or limited partnership
interests in special purpose partnerships owning properties). The Trust may in
the future acquire all or substantially all of the securities or assets of other
REITs or similar entities where such investments would be consistent with the
Trust's investment policies. The Trust will not be limited as to the percentage
of securities of any one issuer it may acquire. However, the Trust does not
anticipate investing in issuers of securities (other than REITs and to acquire
interests in real property) for the purpose of exercising control or acquiring
any investments primarily for sale in the ordinary course of business or holding
any investments with a view to making short-term profits from their sale. Except
for limitations arising under federal income tax law, there is no limit on the
amount of the Trust's assets that may be invested in the securities of or
interests in other entities. In any event, the Trust does not intend that its
investments in securities will require the Trust to register as an "investment
trust" under the Investment Trust Act of 1940, and the Trust intends to divest
securities before any such registration would be required. The Trust does not
intend to underwrite the securities of other issuers.

The Trust may, but has no present intention to, make investments other than
as previously described. At all times, the Trust intends to make investments in
a manner consistent with the requirements of the Code to qualify as a REIT
unless, because of circumstances or changes in the applicable law, the Trust
Managers determine that it is no longer in the best interests of the Trust to
qualify as a REIT. See "The Merger -- Material Federal Income Tax Consequences."

INVESTMENTS IN REAL ESTATE MORTGAGES

While the Trust intends to emphasize equity real estate investments, it
may, in its discretion, invest in mortgages or other real estate interests
consistent with its qualification as a REIT. The Trust may also invest in
participating or convertible mortgages if the Trust Managers conclude that the
Trust and its shareholders may benefit from the cash flow or any appreciation in
the value of the subject property. Such mortgages are similar to equity
participations. The mortgages in which the Trust may invest may be either first
mortgages or junior mortgages and may or may not be insured by a governmental
agency.

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<PAGE> 142

DISPOSITION

Management will periodically review the assets comprising the Trust's
portfolio. Except as described elsewhere in this Joint Proxy
Statement/Prospectus, the Trust has no current intention to dispose of any of
its properties or other properties acquired in the Merger unless the sale of
properties is necessary or appropriate because of liquidity problems. The Trust
reserves the right to dispose of any of the properties or any property that may
be acquired in the future if the Trust Managers, based in part upon management's
periodic reviews, determines that the disposition of such property is in the
best interests of the Trust.

CONFLICT OF INTEREST POLICY

Each of Messrs. Wolcott, Warner, Friedland and Simpson are prohibited from
engaging in any real estate acquisitions, development or management activities,
except on behalf of the Trust, during their employment with the Trust.

AFFILIATE TRANSACTION POLICY

The Trust will not enter into any transactions, including, without
limitation, loans, acquisitions or sales of property, joint ventures and
partnerships, in which the Trust or a subsidiary is a party and in which any
Trust Manager, officer, principal security holder or Affiliate has any direct or
indirect pecuniary interest, unless such transaction is approved by a majority
of the disinterested Trust Managers after full disclosure of such interests to
the disinterested Trust Managers. In determining whether to approve the
transaction, the Trust Managers will condition such approval on the transaction
being fair and reasonable to the Trust and, to the extent deemed relevant by
such Trust Managers, on terms no less favorable to the Trust than prevailing
market terms and conditions for comparable transactions. Trust Managers who are
also officers of the Trust will be considered to be disinterested for this
purpose provided they have no direct or indirect pecuniary interest in the
transaction.

OTHER ACTIVITIES

The Trust has authority to issue additional Shares or other securities in
exchange for property and other valid consideration, and to repurchase or
otherwise reacquire its shares or any other securities and may engage in such
activities in the future. The Trust has a dividend reinvestment program, and may
from time to time repurchase Shares in the open market for the purposes of
fulfilling its obligations under the program or may elect to issue additional
Shares.

During the past three years, the Trust has issued senior securities,
primarily in the form of mortgage debt, and anticipates continuation of such
activity in the future, as well as potentially borrowing money on an unsecured
basis in the future. The Trust has not, and does not anticipate, making loans to
other persons, investing in securities of others or underwriting securities of
other issuers. Should acceptable terms be negotiated, the Trust may engage in
future transactions to issue securities in exchange for properties.

121
<PAGE> 143

BUSINESS OF THE TRUST

GENERAL

The Trust was organized on September 26, 1985. On November 27, 1985, the
Trust completed an initial public offering and commenced operations. The Trust's
investment objective is to maximize the total return to its shareholders through
the acquisition, leasing, management and disposition of industrial real estate
properties.

The Trust is currently engaged in the operation of developed industrial
real estate properties and one retail real estate property. The industrial
properties are leased for office, office-showroom, warehouse, distribution,
research and development, and light assembly purposes. The retail property is
leased to retail merchandise establishments, restaurants and a cinema. The Trust
leases space in its properties to a variety of tenants. No single tenant
accounts for more than 10% of the Trust's consolidated gross revenue for the six
months ended June 30, 1997. On December 31, 1996, the Trust's portfolio
consisted of 11 industrial properties located in California, Texas, Maryland and
Wisconsin, and one retail property, Tamarac Square, located in Colorado. Rents
and tenant reimbursements related to Tamarac Square were approximately 29%, 30%
and 31% of the Trust's total revenues in 1996, 1995 and 1994, respectively.

On August 29, 1997, the Trust purchased two light industrial properties
located in suburban areas of Dallas. On October 3, 1997, the Trust, as general
partner in a limited partnership, purchased a portfolio of eight properties in
Dallas and suburban areas of Dallas.

The Trust was initially advised by an outside advisor under an advisory
agreement that provided for the payment of an annual advisory fee and
reimbursements for certain expenses as well as transaction fees for asset
acquisitions and dispositions. In June 1993, the Trust terminated its agreement
with the advisor and converted to self-administration. The name of the Trust was
changed to American Industrial Properties REIT and its ticker symbol on the NYSE
was changed to "IND" to reflect the Trust's industrial property focus. In
October 1993, shareholders voted to remove the finite life term of the Trust as
contained in the original Declaration of Trust, thereby making the Trust a
perpetual life entity.

As part of its initial capitalization in 1985, the Trust issued
$179,698,000 (face amount at maturity) of Zero Coupon Notes due 1997. As part of
its effort to retire the outstanding notes, which were accruing interest at 12%,
the Trust utilized net proceeds from property sales and issuance of certain
unsecured notes payable to reduce the amount of outstanding notes to $19,491,000
(face amount at maturity) at December 31, 1993. On December 31, 1993, the Trust
partially in-substance defeased $12,696,000 (face amount at maturity) of the
outstanding notes with proceeds from disposal of short term investments. During
the first half of 1994, the Trust purchased $239,000 (face amount at maturity)
of notes and submitted the notes to the Trustee for cancellation. In November
1994, $3,669,000 (face amount at maturity) of the outstanding notes were
partially in-substance defeased with the proceeds from a refinancing of certain
of the Trust's properties. In December 1994, the Trust purchased the remaining
non-defeased notes outstanding of approximately $2,887,000 (face amount at
maturity) in the open market and submitted the notes to the Trustee for
cancellation. As a result of the 1994 defeasance, the liens securing the notes
on each of the Trust's properties were released.

In connection with the retirement of certain notes, the Trust issued
$53,234,000 in unsecured promissory notes in February 1992 to MLI. The terms of
these unsecured notes included an 8.8% fixed rate of interest, semi-annual
interest only payments commencing May 1993, the deferral of interest due prior
to May 1993, full principal maturity on November 27, 1997 and a mandatory
principal payment on or before November 27, 1993. On December 31, 1992, the
Trust used $11,648,000 of the net sales proceeds from its 1992 sales of real
estate to make a principal and interest payment on the 8.8% unsecured notes
which included the mandatory principal payment due November 27, 1993.

On May 1, 1995, the Trust filed a lawsuit against MLI alleging that MLI had
engaged in acts of bad faith and conspiracy in an attempt to force the Trust to
consent to the transfer of the MLI notes to a third party. Subsequent to the
filing of this lawsuit, the Trust elected not to make a scheduled interest
payment on the

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<PAGE> 144

MLI notes and MLI declared the notes in default. An agreement to settle this
lawsuit was entered into on May 22, 1996 whereby the Trust settled the
litigation and obtained an option to repay the outstanding $45,239,000 in
principal amount due on the MLI notes for $36,800,000. As a result of the
settlement agreement and subsequent principal payments, the Trust recorded an
extraordinary gain on extinguishment of debt of $5,810,000 for the year ended
December 31, 1996.

On February 26, 1997, Realco purchased these notes, with an outstanding
principal balance of $9,419,213. The notes were then modified by Realco to,
among other things, reduce the principal amount of these notes from $9,419,213
to $7,040,721, resulting in an extraordinary gain on extinguishment of debt
(including certain accrued interest) to the Trust of $2,643,000. At the time the
notes were modified, the Trust made a principal payment of $1,591,103, reducing
the outstanding principal amount to $5,449,618. According to the modification
terms, interest continues to accrue at 8.8%, payable monthly, and the maturity
of the notes is extended from March 31, 1997 to December 31, 2000. In addition,
Realco has the option to convert the principal amount of the notes into Shares
at the conversion rate of $10.00 per Share (if converted prior to December 31,
1997) or $11.25 per share (if converted between December 31, 1997 and December
31, 2000).

To further its business objectives and strategy, the Trust may sell certain
properties and reinvest such proceeds in properties in targeted markets. In
December 1993, the Trust purchased an industrial distribution property in
Dallas, Texas. In February 1995, the Trust sold its industrial distribution
property in Ft. Lauderdale, Florida and in August 1995, the Trust purchased an
industrial distribution property in Arlington, Texas. In November 1996, December
1996 and March 1997, the Trust sold industrial distribution properties in
Seattle, Washington and Minneapolis, Minnesota, respectively. In August 1997,
the Trust acquired two industrial properties in the Dallas area. In October
1997, the Trust acquired eight properties in the Dallas area.

The Trust has historically qualified as a REIT for federal income tax
purposes and intends to maintain its REIT qualification in the future. In order
to preserve its REIT status, the Trust must meet certain criteria with respect
to assets, income, and shareholder ownership. In addition, the Trust is required
to distribute at least 95% of taxable income (as defined) to its shareholders.

BUSINESS OBJECTIVES AND STRATEGY

The Trust intends to pursue a growth strategy which will maximize the total
return to its shareholders. In February 1997, the Trust engaged Prudential
Securities as its exclusive financial advisor to provide consultation and advice
on attracting debt and/or equity capital to implement this strategy. On June 20,
1997, the Trust entered into the MSAM Transaction to sell an aggregate of up to
1,632,653 Shares to MS Real Estate Special Situations, Inc. and certain clients
of MSAM for $20 million. As of July 18, 1997, the Trust has sold an aggregate of
1,433,483 Shares pursuant to the MSAM Agreement for the aggregate consideration
of $17,560,176. The Trust currently anticipates issuing the remaining 199,170
Shares pursuant to the MSAM Agreement prior to the end of fiscal 1997. On July
3, 1997, the Trust entered in to the LaSalle Transaction. Pursuant to the terms
of the LaSalle Transaction, on July 10, 1997, the Trust issued an aggregate of
1,224,489 Shares for $15 million. Prudential Securities acted as the placement
agent in connection with these transactions.

The Trust intends to focus on the light industrial sector of the real
estate market, believing that this sector is underserved and capable of
providing significantly higher returns than other more competitive sectors. The
Trust will also continue to consider possible acquisitions of compatible
properties in bulk industrial, office and other commercial sectors. The Trust's
growth strategy will focus on major markets in the South and Southwest regions
of the United States, with the goal of achieving a significant presence in the
industrial markets of targeted cities. In pursuing its growth strategy, the
Trust intends to utilize research-driven investment analysis, disciplined
buy/sell decisions and state-of-the-art operating systems.

The Trust presently intends to raise debt and equity capital to fund its
growth strategy through traditional mortgage debt transactions and private
equity placements and/or public equity offerings.

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<PAGE> 145

GEOGRAPHIC ANALYSIS OF REVENUE

The geographic breakdown of the Trust's rents and tenant reimbursements for
each of the years ended December 31, 1996, 1995, and 1994 is as follows (in
thousands):

<TABLE>
<CAPTION>
MARKET 1996 1995 1994
------ ------- ------- -------
<S> <C> <C> <C>
Baltimore industrial.................................. $ 541 $ 577 $ 583
Dallas industrial(1).................................. 2,863 2,575 2,259
Ft. Lauderdale industrial(2).......................... -- 71 384
Houston industrial.................................... 1,461 1,387 1,197
Los Angeles industrial................................ 908 922 936
Milwaukee industrial.................................. 910 906 982
Minneapolis industrial(3)............................. 805 824 721
Seattle industrial(4)................................. 524 623 577
Denver retail......................................... 3,308 3,525 3,441
------- ------- -------
Total rents and tenant reimbursements................. $11,320 $11,410 $11,080
======= ======= =======
</TABLE>

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

(1) One property was purchased in August 1995.

(2) The Ft. Lauderdale property was sold in February 1995.

(3) One property was sold in December 1996.

(4) The Seattle property was sold in November 1996.

EMPLOYEES

The Trust currently employs seven people on a full-time basis.

COMPETITION

The Trust's properties are predominantly located in the South and
Southwest. All of the Trust's properties are located in areas that include
competing properties. The number of competitive properties in a particular area
could have a material adverse effect on both the Trust's ability to lease space
at any of its properties or at any newly developed or acquired properties and
the rents charged. The Trust may be competing with owners, including, but not
limited to, other REITs, insurance companies and pension funds that have greater
resources than the Trust. There is no dominant competitor in any of the Trust's
markets.

PROPERTIES

The Trust currently owns 22 real estate properties consisting of 21
industrial developments and one enclosed specialty retail mall. Other than
normal and ordinary tenant improvements related to the leasing of space, there
is no program for significant renovation, improvement or development at any of
the Trust's properties. The Trust sold one industrial property in each of
February 1995, November 1996, December 1996 and March 1997. The Trust purchased
an industrial property in August 1995. The Trust purchased two industrial
properties in August 1997 and eight industrial properties in October 1997. A
description of the properties owned by the Trust as of June 30, 1997, as well as
related leased occupancy and mortgage indebtedness, is presented below.
Management of the Trust believes the Trust's properties are adequately covered
by insurance.

Baltimore Industrial

Patapsco Industrial Center. Patapsco Industrial Center is a five-building,
two phase industrial park located in Linthicum Heights, Maryland, a suburb of
Baltimore. The project comprises approximately 95,000 square feet of net
rentable space. As of June 30, 1997, leased occupancy was 93.7%. Patapsco
Industrial Center is subject to a mortgage with a principal amount outstanding
of $3,088,150 as of June 30, 1997 and a prepayment penalty based on a yield
maintenance formula. Principal due at maturity in December 2003 will be
$2,662,000.

124
<PAGE> 146

Dallas Industrial

Beltline Business Center. Beltline Business Center consists of three
industrial buildings located in Irving, Texas, a suburb of Dallas, that are 100%
finished for office space and, together, comprise approximately 60,000 square
feet of net rentable space. The Trust's corporate offices, comprising
approximately 4,850 square feet of space, are located in this property. As of
June 30, 1997, leased occupancy (including space utilized by the Trust) was
87.6%. Beltline Business Center is subject to a mortgage with a principal amount
outstanding of $2,753,290 as of June 30, 1997 and a prepayment penalty based
upon a yield maintenance formula. Principal due at maturity in December 2003
will be $2,374,000.

Gateway 5 and 6. Gateway 5 and 6 consists of two industrial buildings
located in Irving, Texas comprising approximately 79,000 square feet of net
rentable space. As of June 30, 1997, leased occupancy was 100%. Gateway 5 and 6
is subject to a mortgage with a principal amount outstanding of $2,827,703 as of
June 30, 1997, which cannot be prepaid before December 1999 and has a prepayment
penalty based upon a yield maintenance formula. Principal due at maturity in
December 2003 will be $2,438,000.

Meridian Street Warehouse. The Meridian Street Warehouse, purchased in
August 1995, is an industrial distribution property in Arlington, Texas
comprising approximately 72,000 square feet of net rentable space. As of June
30, 1997, leased occupancy was 100%. The Meridian Street Warehouse is subject to
a mortgage with a principal amount outstanding of $1,153,405 as of June 30, 1997
and a prepayment penalty based upon a yield maintenance formula. Principal due
at maturity in December 2003 will be $994,000.

Northgate II. Northgate II consists of four industrial buildings located
within a 21-building industrial park in Dallas, Texas. The project consists of
approximately 236,000 square feet of net rentable space. As of June 30, 1997,
leased occupancy was 98.2%. Northgate II is subject to a mortgage with a
principal amount outstanding of $5,134,514 as of June 30, 1997, which cannot be
prepaid before December 1999 and has a prepayment penalty based upon a yield
maintenance formula. Principal due at maturity in December 2003 will be
$4,427,000.

Northview Distribution Center. Northview Distribution Center consists of
two industrial buildings located in Dallas, Texas. The project consists of
approximately 175,000 square feet of net rentable space. As of June 30, 1997,
leased occupancy was 100%. Northview Distribution Center is subject to a
mortgage with a principal amount outstanding of $2,178,091 as of June 30, 1997
and a prepayment penalty currently at 5%. Principal due at maturity in December
2001 will be $2,003,000.

Recent Acquisitions. In August 1997, the Trust purchased Central Park
Office Tech, a 70,250 square foot light industrial property located in
Richardson, Texas, a suburb of Dallas. The property, which was purchased for
$4.2 million, is currently 100% leased to 10 tenants.

In August 1997, the Trust purchased Skyway Circle South, a 67,015 square
foot light industrial property located in Irving, Texas, a suburb of Dallas. The
property, which was purchased for $2.2 million, is currently 84% leased to six
tenants.

In October 1997, the Trust, as general partner in a limited partnership,
purchased a portfolio of eight properties with 783,780 net rentable square feet
(see "Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Trust -- Recent Developments"). The portfolio includes the
following properties, all of which are collateral for a borrowing under the
Trust's secured acquisition line:

Northgate III is a 257,505 square foot six-building light industrial
complex located in Garland, Texas, a suburb of Dallas. The property is 93%
leased to 20 tenants.

Valwood II is a 52,607 square foot light industrial property located in
Carrollton, Texas, a suburb of Dallas. The property is 100% leased to one
tenant.

Valley View Commerce Center is a 137,581 square foot four-building light
industrial complex located in Carrollton, Texas, a suburb of Dallas. The
property is 90% leased to seven tenants.

DFW IV is a 72,918 square foot two-building warehouse/distribution property
located near the D/FW Airport. The property is 91% leased to seven tenants.

125
<PAGE> 147

Parkway Tech is a 69,010 square foot light industrial property located in
Richardson, Texas, a suburb of Dallas. The property is 100% leased to eight
tenants.

Carpenter Center is a 44,114 square foot light industrial property located
in Dallas, Texas. The property is 70% leased to eight tenants.

Walnut Oaks is a 67,945 square foot four-building light industrial complex
located in Dallas, Texas. The property is 80% leased to 16 tenants.

Carrier Place is a 82,100 square foot light industrial property located in
Grand Prairie, Texas, a suburb of Dallas. The property is 79% leased to 14
tenants.

Houston Industrial

Plaza Southwest. Plaza Southwest consists of five industrial buildings in
Houston, Texas comprising approximately 149,000 square feet of net rentable
space. As of June 30, 1997, leased occupancy was 84.8%. Plaza Southwest is
subject to a mortgage with a principal amount outstanding of $3,348,596 as of
June 30, 1997 and a prepayment penalty based upon a yield maintenance formula.
Principal due at maturity in December 2003 will be $2,887,000.

Commerce Park. Commerce Park consists of two industrial buildings in
Houston, Texas comprising approximately 87,000 square feet of net rentable
space. As of June 30, 1997, leased occupancy was 97.2%. Commerce Park is subject
to a mortgage with a principal amount outstanding of $2,083,571 as of June 30,
1997 and a prepayment penalty based upon a yield maintenance formula. Principal
due at maturity in December 2003 will be $1,796,000.

Westchase Park. Westchase Park consists of two industrial buildings in
Houston, Texas comprising approximately 47,000 square feet of net rentable
space. As of June 30, 1997, leased occupancy was 100%. Westchase Park is subject
to a mortgage with a principal amount outstanding of $1,317,115 as of June 30,
1997 and a prepayment penalty based upon a yield maintenance formula. Principal
due at maturity in December 2003 will be $1,136,000.

Los Angeles Industrial

Huntington Drive Center. Huntington Drive Center consists of a two-story
office building and an industrial building comprising approximately 62,000
square feet of net rentable space located in Monrovia, California, a suburb of
Los Angeles. As of June 30, 1997, leased occupancy was 100%. Huntington Drive
Center is subject to a mortgage with a principal amount outstanding of
$4,539,208 as of June 30, 1997 and a prepayment penalty based upon a yield
maintenance formula. Principal due at maturity in December 2003 will be
$3,913,000.

Milwaukee Industrial

Northwest Business Park. Northwest Business Park consists of three
industrial buildings comprising approximately 143,000 square feet of net
rentable space located in Menomonee Falls, Wisconsin, a suburb of Milwaukee. As
of June 30, 1997, leased occupancy was 90.2%. The Trust is currently soliciting
offers for the sale of Northwest Business Park. If an acceptable offer is
received, it is likely that the Trust will sell this property during 1997. Phase
I of Northwest Business Park is subject to a mortgage with a principal amount
outstanding of $1,264,922 as of June 30, 1997 and a prepayment penalty currently
at 2%. Principal due at maturity in March 1999 will be $1,217,000. The Trust is
currently considering the sale of Northwest Business Park for $5,900,000. There
is no assurance that the buyer, who is currently conducting due diligence, will
close this transaction.

Denver Retail

Tamarac Square. Tamarac Square, located in Denver, Colorado, consists of an
enclosed specialty retail mall of approximately 139,000 net rentable square feet
with an adjacent convenience center of approximately

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<PAGE> 148

33,000 net rentable square feet, two free-standing buildings of approximately
8,000 net rentable square feet each, a separate free-standing building of
approximately 9,000 net rentable square feet and two ground leases comprising
approximately 4.91 acres.

The retail tenants provide goods and services, including clothing and
accessories, eyecare, eating establishments and a movie theatre. The movie
theatre is the only tenant occupying in excess of 10% of the net rentable square
footage. This lease currently specifies rent of $5.70 per square foot plus a
percentage of receipts and expires on December 31, 2001, subject to three
five-year renewals.

Based upon the year ended December 31, 1996, revenue from Tamarac Square
was $3,308,000 or approximately 29% of the Trust's total revenue. Additional
information pertaining to the Trust's Tamarac Square property is as follows,
assuming none of the tenants exercise renewal options:

<TABLE>
<CAPTION>
ANNUALIZED 1997
NET LEASABLE AREA BASE RENTAL INCOME
LEASE NUMBER OF --------------------- ----------------------
EXPIRATION LEASES APPROX. PERCENTAGE PERCENTAGE AVG. PER ANNUAL
YEAR EXPIRING SQ. FT. OF TOTAL OF TOTAL SQ. FT. RENT
---------- --------- ------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
1997...................... 4 5,272 2.7% 3.2% $12.86 $ 67,785
1998...................... 7 17,873 9.1% 10.3% 12.26 219,038
1999...................... 7 12,773 6.5% 8.5% 14.07 179,700
2000...................... 13 27,649 14.1% 18.1% 13.84 382,563
2001...................... 8 37,738 19.2% 15.8% 8.87 334,565
2002...................... 5 16,845 8.6% 11.2% 14.12 237,891
2003...................... 2 19,894 10.1% 14.6% 15.55 309,446
2004...................... 3 9,823 5.0% 7.8% 16.70 164,078
2005...................... 4 10,700 5.4% 8.2% 16.29 174,294
2006...................... 1 3,150 1.6% 2.3% 15.50 48,813
-- ------- ---- ----- ------ ----------
Total........... 54 161,717 82.3% 100.0% $13.10 $2,118,173
== ======= ==== ===== ====== ==========
</TABLE>

The following table provides Tamarac Square property occupancy as well as
the average annual rental and tenant reimbursement per square foot rates since
1992:

<TABLE>
<CAPTION>
AVERAGE
ANNUAL RENTAL
YEAR OCCUPANCY PER SQUARE FOOT
- ---- --------- ---------------
<S> <C> <C>
1992 92.2% $15.91
1993 89.5% $16.20
1994 91.5% $17.52
1995 87.8% $17.94
1996 85.4% $16.84
</TABLE>

Depreciation of buildings and major improvements is calculated on a 40-year
straight-line basis. Tenant improvements are depreciated on a 10-year
straight-line basis. Based on a current tax rate of $2.34 per $100 of assessed
value, 1997 real estate property taxes are estimated at approximately $415,000.
Insurance coverage includes liability, fire, rental and umbrella protection and,
in the opinion of management, is considered adequate.

During 1993, the Trust completed a $2 million renovation of Tamarac Square.
As of June 30, 1997, leased occupancy was 84.0%. Tamarac Square is subject to a
mortgage with a principal amount outstanding of $11,858,496 as of June 30, 1997
and a prepayment penalty currently at 5%. Principal due at maturity in December
2001 will be $10,907,000. The Trust has been notified of the existence of
limited underground petroleum based contamination at a portion of Tamarac
Square. The source of the contamination is apparently related to underground
storage tanks ("USTs") located on adjacent property. The owner of the adjacent
property has agreed to remediate the property to comply with state standards,
and has indemnified the Trust against costs related to its sampling activity.
The responsible party for the adjacent USTs has submitted a corrective Action
Plan to the Colorado Department of Public Health and Environment. Implementation
of the

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<PAGE> 149

plan is ongoing. The responsible party is negotiating to obtain access
agreements from impacted landowners, including the Trust.

PORTFOLIO SUMMARY

PROPERTIES AT JUNE 30, 1997

<TABLE>
<CAPTION>
JUNE 30, 1997
AVG. MONTHLY
RENTAL RATES
JUNE 30, 1997 PER
NET LEASABLE YEAR PLACED AVG. % NET LEASABLE
PROPERTY AND LOCATION SQUARE FEET IN SERVICE OCCUPANCY SQUARE FEET
--------------------- ------------ ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Northwest, Milwaukee, WI...... 143,120 1983-86 88.4% $0.42
Tamarac, Denver, CO........... 196,453 1976-79 85.4 0.87
Northview, Dallas, TX......... 174,793 1980 100.0 0.25
Beltline, Irving, TX.......... 59,656 1984 90.5 0.46
Gateway, Irving, TX........... 78,786 1984-85 100.0 0.48
Meridian, Arlington, TX....... 72,072 1981 100.0 0.00
Northgate, Dallas, TX......... 235,827 1982-83 99.1 0.26
Commerce Park, Houston, TX.... 87,279 1984 97.2 0.43
Plaza Southwest, Houston,
TX.......................... 149,680 1970-74 85.9 0.31
Westchase, Houston, TX........ 47,630 1983 100.0 0.45
Huntington, Los Angeles....... 62,218 1984-85 100.0 1.38
Patapsco, Baltimore, MD....... 95,151 1980-84 89.9 0.52
---------
Total............... 1,402,665
---------
</TABLE>

RECENT ACQUISITIONS

<TABLE>
<CAPTION>
OCTOBER 6, 1997
AVG. MONTHLY
RENTAL RATES
OCTOBER 6, 1997 PER
NET LEASABLE YEAR PLACED AVG. % NET LEASABLE
PROPERTY AND LOCATION SQUARE FEET IN SERVICE OCCUPANCY SQUARE FEET
--------------------- ------------ ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Northgate III, Dallas, TX..... 257,505 1979-86 92.6% $0.30
Valwood II, Carrollton, TX.... 52,607 1983 100.0 0.37
Valley View Commerce, Dallas,
TX.......................... 137,581 1986 90.0 0.46
Walnut Oaks, Dallas, TX....... 67,945 1984 80.3 0.26
Carpenter Center, Dallas,
TX.......................... 44,114 1983 69.6 0.26
DFW IV, Grapevine, TX......... 72,918 1985 91.0 0.39
Carrier Place, Grand Prairie,
TX.......................... 82,100 1984 78.7 0.26
Parkway Tech, Plano, TX....... 69,010 1984 100.0 0.38
Central Park, Richardson,
TX.......................... 70,250 1984 100.0 0.71
Skyway Circle, Irving, TX..... 67,015 1981 84.2 0.33
---------
Total............... 921,045
---------

Grand Total................... 2,323,710
=========
</TABLE>

128
<PAGE> 150

LEASE EXPIRATION

The following table shows lease expirations for the next 10 years for the
Trust's properties assuming that none of the tenants exercise renewal options:

<TABLE>
<CAPTION>
ANNUALIZED 1997
NET LEASABLE AREA BASE RENTAL INCOME
LEASE NUMBER OF ---------------------- ---------------------
EXPIRATION LEASES APPROX. PERCENTAGE PERCENTAGE AVG. PER ANNUAL
YEAR EXPIRING SQ. FT. OF TOTAL OF TOTAL SQ. FT. RENT
---------- --------- --------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
1998................. 72 313,650 13.5% 26.0% $ 8.64 $ 2,711,098
1999................. 66 477,096 20.5 19.2 4.21 2,007,260
2000................. 62 372,235 16.0 21.0 5.88 2,188,668
2001................. 29 231,835 10.0 13.0 5.85 1,356,582
2002................. 21 196,103 8.4 10.1 5.40 1,058,058
2003................. 3 66,539 2.9 3.4 5.28 351,129
2004................. 6 117,616 5.1 5.1 4.53 532,357
2005................. 4 10,700 0.5 1.7 16.29 174,294
2006................. 1 3,150 0.1 0.5 15.50 48,813
2007................. -- -- 0.0 0.0 -- --
--- --------- ---- ----- ------ -----------
Total...... 264 1,788,924 77.0% 100.0% $ 5.83 $10,428,259
=== ========= ==== ===== ====== ===========
</TABLE>

MORTGAGE INDEBTEDNESS

<TABLE>
<CAPTION>
PRINCIPAL AMORTIZATION ANNUAL DEBT
PROPERTY BALANCE SCHEDULE INTEREST RATE MATURITY DATE SERVICE
-------- ----------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Northwest............ $ 1,264,922 30 years 11.00% Mar-99 $ 165,732
Tamarac.............. 11,858,496 25 years 8.40 Dec-01 1,174,764
Northview............ 2,178,091 25 years 8.40 Dec-01 215,772
Beltline............. 2,753,290 22 years 8.61 Dec-03 281,580
Gateway.............. 2,827,703 22 years 8.61 Dec-03 289,188
Meridian............. 1,153,405 22 years 8.61 Dec-03 117,960
Northgate............ 5,134,514 22 years 8.61 Dec-03 525,096
Commerce Park........ 2,083,571 22 years 8.61 Dec-03 213,084
Plaza Southwest...... 3,348,596 22 years 8.61 Dec-03 342,456
Westchase............ 1,317,115 22 years 8.61 Dec-03 134,700
Huntington........... 4,539,208 22 years 8.61 Dec-03 464,220
Patapsco............. 3,088,150 22 years 8.61 Dec-03 315,816
----------- ----- ----------
Total...... $41,547,061 8.61% $4,240,368
=========== ===== ==========
</TABLE>

The above information does not reflect the mortgage indebtedness incurred
by the Trust in connection with the Acquisition on October 3, 1997. On this
date, the Trust entered into a secured acquisition line with Prudential
Securities Capital Corporation in the amount of $35 million and borrowed $20.675
million under the line to partially finance the portfolio acquisition. The terms
of this line include a variable interest rate based on the 30-day LIBOR rate
plus 200 basis points and a maximum loan to value ratio of 70%. Each of the
properties acquired in the Acquisition serves as collateral for the borrowing
under this line. According to the terms of the line, borrowings mature in one
year and, if not repaid, allow the lender to move such borrowings into a
securitized mortgage pool. The Trust intends to refinance this borrowing prior
to maturity with proceeds from future permanent financings or equity offerings.

LEGAL PROCEEDINGS

On August 20, 1997, the Lawsuit, which was filed in the Superior Court of
the State of Arizona, was served upon Realco, the General Partners, certain
other affiliated entities and the individual members of the boards of directors
of each of the General Partners. The Trust was also named as a defendant. The
Lawsuit alleges, among other things, breaches of fiduciary duty in connection
with the transactions contemplated by the Merger Agreement. The Lawsuit seeks,
among other things, to enjoin the consummation of the Merger

129
<PAGE> 151

and damages, including attorneys' fees and expenses. The defendants in the
Lawsuit believe that the plaintiffs' claims are without merit and intend to
defend vigorously against the Lawsuit. However, no assurance can be given that
the plaintiffs in the Lawsuit will not be successful. If such plaintiffs were to
succeed in the Lawsuit prior to the Effective Time, a condition to the
obligations of the Trust and the RELPS to consummate the Merger would not be
satisfied, which would entitle the General Partner of any RELP or the Trust
Managers to terminate the Merger Agreement and abandon the Merger. See "The
Merger -- Extensions, Waiver and Amendment; Termination." If such plaintiffs
were to succeed in the Lawsuit after the Effective Time, it could have a
material adverse effect on the Trust.

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<PAGE> 152

BUSINESS OF THE RELPS

RELP I

General

RELP I was formed in August 1984 under the California Revised Limited
Partnership Act. RELP I has two primary business purposes: (i) to purchase
qualified income producing real properties; and (ii) to make participating first
mortgage loans on qualified income producing properties. To the extent possible
(i) all acquisitions of real property will be made for cash (no acquisition
indebtedness will be incurred); and (ii) participating first mortgage loans will
earn fixed interest and will contain participation rights in the underlying
property's cash flow and net proceeds of sale or refinancing and other items, or
both.

In 1985, RELP I sold $27,305,000 of Units (54,610 Units at $500 per Unit).
Limited Partners are not required to make any additional capital contributions.
Proceeds of the offering were used to acquire Volusia Point Shopping Center in
1985. In 1986, RELP I acquired one property (the Systech building) and funded
one first mortgage loan, which was paid in full in January 1996. Remaining
offering proceeds were used to repay the mortgage indebtedness on the Systech
building upon its maturity in 1988.

Properties

Volusia Point Shopping Center. The Volusia Point Shopping Center, located
in Daytona Beach, Florida, is a shopping center containing 76,579 gross rentable
square feet situated on approximately nine acres of land. As of June 30, 1997,
the property was 92% leased and average monthly cash rental was approximately
$61,000. There are lease expirations totaling approximately 3% of total square
footage in 1997 which are subject to market risk. There is no debt on the
property and RELP I owns the property in fee-simple. Occupancy at Volusia Point
increased throughout 1996 to 92% at year end, compared to approximately 95% in
the surrounding retail market.

The Systech Building. The Systech building, located in San Diego,
California, is an office building containing 54,094 gross rentable square feet
situated on approximately two acres of land. As of June 30, 1997, the property
was 100% leased and average monthly cash rental was approximately $51,000. There
are no lease expirations in 1997. There is no debt on the property. The building
was vacated in August 1993 upon the lease expiration of the prior single tenant,
and remained vacant throughout 1994 during building renovations and improvements
and re-tenanting efforts. A lease for approximately 79% of the building
commenced in March 1995 with Systech Computer Corporation; the lease provided
for an increase in occupancy to 98% in March 1996. After a change in their
business requirements, the lease with Systech Computer Corporation was amended
in July 1996 to allow for scheduled decreases in occupied square footage. At the
same time, a 42-month lease was executed with Integrated Systems, Inc. ("ISI").
ISI is scheduled to occupy additional space as Systech Computer Corporation
downsizes throughout the remainder of their lease term which expires in February
2000. As a result of the above leasing activity, the Systech building was 100%
leased as of June 30, 1997. During the years ended December 31, 1996 and 1995,
RELP I recorded rental income of approximately $493,000 and $414,000,
respectively, from a major tenant in the computer industry. This income
represented approximately 35% and 37% of total rental income of RELP I for 1996
and 1995, respectively. Due to the configuration of the Systech building, it
competes in both the office and research and development ("R&D") markets of the
Sorrento Valley submarket of San Diego.

Employees and General Partner

RELP I has no employees; it has, however, entered into an Advisory
Agreement with Realco. Realco is responsible for managing the day-to-day
operations of RELP I. The General Partner of RELP I is USAA Investors I, Inc, a
Texas corporation and a subsidiary of Realco. USAA Investors I, Inc. has the
general responsibility for management of RELP I's business and oversees the
activities of Realco.

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<PAGE> 153

Market for RELP I Units and Distributions

There is no established public trading market for RELP I Units, and it is
not anticipated that a public market will develop. Upon request, Real Estate
Limited Partnership Investor Services ("Investor Services"), a department of
Realco, may assist a Limited Partner desiring to transfer his Units. The
purchase price for the Units upon resale and all other terms of a resale
transaction are subject to negotiations between the buyer and the seller.

As of June 30, 1997, there were 6,330 Limited Partners of RELP I, owning an
aggregate of 54,610 Units.

During the year ended December 31, 1996, quarterly distributions totaling
$709,930 and $7,171 were distributed to the Limited Partners and the General
Partner, respectively, for a total of $717,101 in cash distributions. In
addition, a special distribution of approximately $4,999,986 was made in March
1996 to Limited Partners after the payoff of the mortgage loan. The return of
capital portion of the total 1996 distributions was $5,357,405 and $3,610 for
the Limited Partners and General Partner, respectively.

During the year ended December 31, 1995, quarterly distributions totaling
$873,760 and $8,826 were distributed to the Limited Partners and the General
Partner, respectively, for a total of $882,586 in cash distributions. The return
of capital portion of 1995 distributions was $232,975 and $2,354 for the Limited
Partners and General Partner, respectively.

Portfolio Summary

<TABLE>
<CAPTION>
JUNE 30, 1997
AVG. MONTHLY
RENTAL RATES
JUNE 30, 1997 PER NET
NET LEASABLE YEAR PLACED AVG. % LEASABLE
PROPERTY AND LOCATION SQUARE FEET IN SERVICE OCCUPANCY SQUARE FEET
--------------------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Volusia Point Shopping Center; Daytona
Beach, Fla........................... 76,579 1984 92.42% $0.80
Systech Building San Diego, CA......... 54,094 1982 100.00 0.94
-------
Total........................ 130,673
=======
</TABLE>

Lease Expirations

The following table shows lease expirations for the next 10 years for RELP
I's properties assuming that none of the tenants exercise renewal options:

<TABLE>
<CAPTION>
ANNUALIZED 1997
NET LEASABLE AREA BASE RENTAL INCOME
LEASE NUMBER OF --------------------- ----------------------
EXPIRATION LEASES APPROX. PERCENTAGE PERCENTAGE AVG. PER
YEAR EXPIRING SQ. FT. OF TOTAL OF TOTAL SQ. FT.
---------- --------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
1998......................... 5 8,692 6.65% 21.94% $11.87
1999......................... 6 15,867 12.14 22.72 12.29
2000......................... 6 76,814 58.78 24.52 13.26
2001......................... 1 N/A* 0.00 0.00 0.00
2002......................... 0 0.00 0.00 0.00 0.00
2003......................... 0 0.00 0.00 0.00 0.00
2004......................... 2 6,880 5.20 30.82 16.67
2005......................... 0 0.00 0.00 0.00 0.00
2006......................... 0 0.00 0.00 0.00 0.00
2007......................... 0 0.00 0.00 0.00 0.00
-- ------- ----- ------
Total.............. 20 108,253 82.77% 100.00% $13.22
== ======= ===== ====== ======
</TABLE>

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

* Roof top lease with Pacific Bell Mobile Services; rent not included in
annualized 1997 base rental income as there is no square footage applicable to
this lease.

132
<PAGE> 154

RELP II

General

RELP II was formed in August 1987 under the Texas Revised Limited
Partnership Act. RELP II has three principal business objectives: (i) preserve
and protect RELP II's capital; (ii) provide the Limited Partners with quarterly
distributions of net cash from operations; and (iii) obtain long-term
appreciation in the value of the properties. RELP II was formed to invest in a
diversified portfolio of income-producing multi-family residential and
commercial properties and/or make one or more participating first mortgage
loans. Pursuant to the agreement of RELP II, to the extent possible all
acquisitions of real property are made for cash and all participating first
mortgage loans earn fixed interest and contain participation rights in the
underlying property's cash flow and net proceeds of sale or refinancing and
other items, or both.

From the commencement of the offering of Units on February 11, 1988 through
the termination of the offering on January 30, 1989, RELP II sold $13,570,500 of
Units (27,141 Units at $500 per Unit). Proceeds of the offering were used to
acquire the Continental Plastic Containers Buildings on April 21, 1989.

RELP II also invested in Combined Capital Resources Joint Venture, the
owner of a participating first mortgage loan secured by Sequoia Plaza I. This
joint venture's investment in the mortgage loan was converted to ownership of
the underlying property in August 1991 through foreclosure on the mortgage loan.
Sequoia Plaza I has not been offered for sale. However, the property was
externally appraised as of January 1, 1997 at a total value of $29.7 million.
RELP II has a 7.275% interest in this joint venture.

During negotiations between the General Partner and the Trust, it was
determined at the outset that an asset consisting of a 7.275% interest in a
joint venture would not be an asset that would be considered by the Trust for
participation in a proposed transaction because a minority interest in a joint
venture did not meet the Trust's investment policies and criteria. In addition,
the majority member of the joint venture is USAA Real Estate Equities Inc. which
has a right of first refusal on the sale of the joint venture interest. USAA
Real Estate Equities Inc. is considering purchasing the minority interest and it
is likely that the Trust would not be able to obtain the minority interest even
if it met the Trust's investment criteria. Considering these factors, the
General Partner and the Trust determined that the joint venture interest would
not be included in the assets to be transferred in the Merger. This joint
venture interest will be purchased by Realco or an Affiliate of Realco for $2.25
million if the Merger is approved by the Limited Partners of RELP II. The book
value of RELP II's interest in this joint venture was approximately $2,139,000
as of June 30, 1997. The sale of this interest to Realco or an Affiliate of
Realco at $2.25 million will result in a gain of approximately $100,000. The
proceeds from the sale of this joint venture interest will be paid 1% ($22,500)
to the General Partner and 99% ($2,227,500) to the Limited Partners.

RELP II purchased its final property, CST Office Products Building
(formerly the Bowater Communication Papers Building), on July 24, 1989.

Properties

RELP II owns two single-tenant industrial complexes. The lease agreements
between RELP II and these tenants (a manufacturer in the packaging industry and
a manufacturer of business forms) are absolute triple net lease arrangements
whereby the lessee is required to make all payments for expenses related to the
use and occupation of the leased premises including real estate taxes and
assessments, property and liability insurance, repairs and maintenance,
utilities and other operating costs associated with the property.

Continental Plastic Containers Buildings. The Continental Plastic
Containers Buildings (the "Continental Buildings") comprise a manufacturing and
distribution facility containing 208,290 net rentable square feet situated on
approximately 9.37 acres. As of June 30, 1997 the property was 100% leased and
average monthly cash rental was approximately $62,000 per net rentable square
foot. RELP II owns the property in fee-simple. These buildings are 100% leased
under a triple net lease to Continental Plastic Containers, Inc., a wholly-owned
subsidiary of Plastic Containers, Inc. which manufactures materials and
containers used in the packaging industry. The tenant provided approximately
$856,263 of annual rental income to RELP II for the fiscal year ended 1997,
$677,739 for fiscal year 1996, and $593,829 for fiscal year

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<PAGE> 155

1995, which represented approximately 61% of total RELP II rental income for
1997, 56% for 1996 and 53% for 1995.

In March 1995, RELP II completed negotiations with Continental Plastic
Containers, Inc. to expand the facilities under lease and to extend the term of
the triple net lease at the Continental Buildings. The original lease expiration
was extended from April 1998 to February 2011. RELP II funded approximately $1.7
million to provide 45,200 square feet of additional leasable area. The building
expansion was completed and the tenant occupied the building in March 1996. RELP
II utilized existing working capital and cash available due to decreased
distributions to partners to fund the construction. Distributions were reduced
to $7.00 per Unit for the quarter ended March 31, 1995, in order to avoid
borrowing to fund the construction of the addition and maintain working capital
at an adequate level for operations.

CST Office Products Building (formerly Bowater). This building is a 111,720
square foot industrial warehouse building in Lakeland, Florida and is 100%
leased under a triple net lease to CST Office Products, Inc., which expires in
1999. As of June 30, 1997, the average monthly cash rental was approximately
$37,000. RELP II owns the property in fee-simple. CST Office Products, Inc. is a
manufacturer of continuous computer stock forms, including word processing
forms. Under terms of the lease with CST Office Products, the lease rate on the
RELP II property will increase each year by the rate of the Consumer Price
Index, up to a maximum of 5.5% per year, through the lease expiration in 1999.
The tenant provided approximately $547,220 of annual rental income to RELP II
for fiscal year 1997, $532,581 for fiscal year 1996 and $536,194 for fiscal year
1995 which represented approximately 39% of total RELP II rental income for
fiscal 1997, 44% for 1996 and 47% for 1995. Leasing efforts will begin to pursue
renewal of this lease.

The performance of the Trust's due diligence of the property revealed the
presence of naturally occurring metals in groundwater near a former septic
system on the property, but at concentrations which exceeded regulatory
thresholds and expected naturally occurring concentrations. The Trust is
undertaking additional investigation to confirm the existence and concentration
of the substances detected at the property and, if confirmed, to better
determine whether the former septic system is the source of these impacts. The
Trust may face obligations to further investigate and remediate these impacts
after the Merger, which obligations could have a material adverse effect on the
Trust.

Employees and General Partner

RELP II has no employees. The General Partner of RELP II is USAA Investors
II, Inc., a Texas corporation. USAA Investors II, Inc. maintains general
responsibility for management of RELP II's business.

Market for RELP II Units and Distributions

There is no established public market for the RELP II Units and it is not
anticipated that a public market will develop. Upon request, Investor Services
may assist an investor desiring to transfer his Units. The limited market for
the Units could affect the value of the Units. The purchase price for the Units
upon resale and any other terms of a resale transaction will be subject to
negotiation between the buyer and the seller. As of June 30, 1997, there were
1,675 Limited Partners of RELP II owning an aggregate of 27,141 Units.

During the fiscal year ended June 30, 1997, quarterly distributions
totaling $949,936 and $105,549 were distributed to the Limited Partners and
General Partner, respectively, for a total of $1,055,485 in cash distributions.
The return of capital portion of 1997 distributions was $32,364 and $3,597 for
the Limited Partners and General Partner, respectively. During the fiscal year
ended June 30, 1996, quarterly distributions totaling $759,948 and $84,438 were
distributed to the Limited Partners and General Partner, respectively, for a
total of $844,386 in cash distributions. During the fiscal year ended June 30,
1995, quarterly distributions totaling $902,438 and $100,271 were distributed to
the Limited Partners and General Partner, respectively, for a total of
$1,002,709 in cash distributions. The return of capital portion of 1995
distributions was $118,037 and $13,115 for the Limited Partners and General
Partner, respectively.

134
<PAGE> 156

Portfolio Summary

<TABLE>
<CAPTION>
JUNE 30, 1997
AVG. MONTHLY
RENTAL RATES
JUNE 30, 1997 PER NET
NET LEASABLE YEAR PLACED AVG. % LEASABLE
PROPERTY AND LOCATION SQUARE FEET IN SERVICE OCCUPANCY SQUARE FEET
--------------------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Continental Plastic Containers
Buildings 1963, 1969,
Elk Grove Village, Ill............ 208,290 1996 100% $0.30
CST Office Products Building
Lakeland, Fla..................... 111,720 1989 100 0.33
-------
Total..................... 320,010
=======
</TABLE>

Lease Expirations

The following table shows lease expirations for the next 10 years for RELP
II's properties assuming that none of the tenants exercise renewal options:

<TABLE>
<CAPTION>
ANNUALIZED 1997
NET LEASABLE AREA BASE RENTAL INCOME
-------------------- ---------------------
NUMBER OF APPROX. PERCENTAGE PERCENTAGE AVG. PER
LEASE EXPIRATION YEAR LEASES EXPIRING SQ. FT. OF TOTAL OF TOTAL SQ. FT.
--------------------- --------------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
1998............................ 0 -- -- -- $ --
1999............................ 1 111,720 34.91% 100% 4.02
2000............................ 0 -- -- -- --
2001............................ 0 -- -- -- --
2002............................ 0 -- -- -- --
2003............................ 0 -- -- -- --
2004............................ 0 -- -- -- --
2005............................ 0 -- -- -- --
2006............................ 0 -- -- -- --
2007............................ 0 -- -- -- --
-- ------- ----- ---
Total................. 1 111,720 34.91% 100% $4.02
== ======= ===== === =====
</TABLE>

RELP III

General

RELP III was formed in February 1985 under the Uniform Limited Partnership
Act of the State of Delaware to invest in a diversified portfolio of
income-producing real properties such as shopping centers, office buildings,
apartments, industrial buildings and other similar income- producing real
property. RELP III has four principal business objectives: (i) to provide the
limited partners with cash distributions which will not constitute taxable
income by reason of partnership tax deductions and possibly tax losses which may
be used to offset other taxable income; (ii) to preserve and protect the Limited
Partners' capital and related buying power; (iii) to obtain long-term
appreciation in the value of the properties; and (iv) to provide a build-up of
equity through the reduction of mortgage loans on the properties.

In 1985, RELP III sold $55,774,500 in Units (111,549 Units at $500 per
Unit). Proceeds from the offering were used to acquire the following properties
in fiscal year 1986: Curlew Crossing (formerly Courtyard Shoppes) Shopping
Center, Manhattan Towers (formerly Parkview Plaza Office Buildings) and the
Skygate Commons (formerly Ramada World Headquarters Office Buildings). These
properties comprise the complete portfolio of RELP III.

135
<PAGE> 157

Properties

Curlew Crossing Shopping Center. Curlew Crossing Shopping Center is located
in Clearwater, Florida in northern Pinellas County on North U.S. Highway 19. The
shopping center contains approximately 207,090 net rentable square feet,
situated on 22.32 acres including the ground under lease to Home Depot. At June
30, 1997, the property was 92% occupied and average monthly cash rental was
approximately $78,000. RELP III owns the property in fee-simple. The $11,000,000
mortgage on Curlew Crossing matured on March 31, 1996. The lender, which is
Realco, renewed the loan for a period of two years at an annual interest rate of
8.25% to reflect market rates at the time of maturity. This rate is a decrease
from the 10.25% paid in March 1996 which was based on the lesser of 12% or prime
rate plus two percent. Interest is payable monthly with the principal due March
31, 1998.

In April 1996, RELP III received $220,400 as a result of land condemned at
Curlew Crossing by the Florida Department of Transportation ("FDOT"). This
represented a good faith estimate of the value of the land actually taken. The
land was condemned in connection with the widening of Curlew Road. During 1996,
the tenant of two out parcels, containing approximately 15,700 square feet,
claimed the right to terminate its respective leases based upon the FDOT taking.
RELP III has initiated legal action against the defaulted tenant and is
currently seeking a summary declaration by the court regarding the continuing
nature of the leases as well as recovery of the rent and other sums due under
the leases. Following the adjudication of this tenant related action, a final
determination will be made regarding the total damages due from the FDOT to RELP
III as a result of the condemnation. Resolution of both the tenant action and
condemnation proceeding are anticipated by the third quarter of 1997.

Curlew Crossing is not included in the Merger and therefore, was not
considered in determining the Exchange Ratio. The property was not included in
the Merger because the Trust and the General Partner could not come to terms on
the value of the property. The property had some existing litigation and a lease
which could be affected by the impact of a projected road expansion on the
accessibility to the property. Curlew Crossing will be purchased by Realco or an
Affiliate of Realco for $11,200,000 if the Merger is approved by the Limited
Partners of RELP III. Realco has an $11,000,000 loan secured by the property.
Curlew Crossing has been offered for sale and one offer of $9,124,000 has been
received. The purchaser declined a counter-offer of $10.5 million, and the sale
was not completed.

Curlew Crossing had a net book value of $7,445,900 as of June 30, 1997. The
sale of Curlew Crossing to Realco will result in a gain of $200,000. It is
anticipated that any cash remaining after payment of all liabilities will be
distributed to all Partners prior to consummation of the Merger.

Manhattan Towers. The Manhattan Towers are located in the City of Manhattan
Beach, California, a suburb of Los Angeles. The property consists of two office
buildings containing, in the aggregate, 301,457 net rentable square feet,
situated on approximately 5.13 acres of land. At June 30, 1997, the property was
98% leased and average monthly cash rental for the six months ended June 30,
1997 was approximately $145,000. The mortgage payable on this property is
$15,000,000. RELP III owns the property in fee-simple. The two buildings on the
site were triple net leased to Hughes Aircraft Company, a wholly-owned
subsidiary of General Motors, through August 1996. Control of the daily
operations at the property were assumed by RELP III upon expiration of the
Hughes lease. As part of the marketing campaign to re-lease the property, the
name of the property was changed from Parkview Plaza to Manhattan Towers. Along
with this name change, the property will undergo repairs and renovations to the
lobby area, corridors and parking lot, as well as exterior landscaping and
signage. The cost of these renovations is estimated to be $1.4 million to be
funded from the working capital reserve of RELP III. In addition, subterranean
water damage was discovered in the parking garage. Engineers and other
consultants were hired to assess the damage and determine the appropriate
remediation. The cost of the repairs to the parking garage is estimated to be
$1.1 million to be funded from the working capital reserve of RELP III.
Manhattan Towers will experience a significant decrease in cash flow in 1997 as
a result of the expiration of the Hughes lease and the cash requirement for
tenant improvements and lease commissions needed to re-lease the property.
Current rental rates in the market surrounding the property are lower than the
rate that was paid by Hughes. Hughes provided approximately $4,869,000 of annual
rental income to RELP III during 1996, approximately $6,679,000 during 1995 and
approximately $6,241,000 during

136
<PAGE> 158

1994 which represents approximately 62% of total RELP III rental income for
1996, 69% for 1995 and 67% for 1994.

Since the expiration of the Hughes lease in August 1996, significant
leasing activity has occurred. Hughes Aircraft Company negotiated a one-year
lease for 79,647 square feet at an annual rental rate of $12 gross per square
foot with an expiration date of August 31, 1997. The previous annual rental rate
was at approximately $22.64 net per square foot for the entire 301,457 square
feet of net leasable area. Other leases signed have terms from three to five
years at an annual rental rate of $13.80 per square foot. One of the five year
leases provided for an allowance for tenant improvements at $6.00 per square
foot for a total of $74,274 to be paid out of the working capital reserve of
RELP III.

A sixty-two month lease was signed during the fourth quarter of 1996 for
11,553 square feet. This lease commenced February 1, 1997 and ends March 31,
2002. The lease provides for an annual rental rate of $19.20 per square foot. An
allowance for tenant improvements was provided for a total of approximately
$404,000 to be paid from the working capital reserve of RELP III.

As of December 31, 1996, these leases at Manhattan Towers total 145,796 of
the 301,457 square feet, or 48% of the total leasable area of property. Rental
rates for these new leases are lower than the previous rate charged to Hughes,
reflecting the current market conditions in the area surrounding the property.
One of the two buildings at this property remains vacant. Several prospects have
expressed interest in leasing the vacant building.

<TABLE>
<CAPTION>
ANNUALIZED 1997 BASE
NET LEASABLE AREA RENTAL INCOME
LEASE NUMBER -------------------- ---------------------
EXPIRATION OF LEASES APPROX. PERCENTAGE PERCENTAGE AVG. PER ANNUAL
YEAR EXPIRING SQ. FT. OF TOTAL OF TOTAL SQ. FT. RENT
---------- --------- ------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1998....................... 0
1999....................... 2 40,699 9.16% 19.77% $13.80 $561,646
2000....................... 0
2001....................... 1 12,379 2.79% 6.01% 13.80 170,830
2002....................... 1 11,553 2.60% 7.81% 19.20 221,818
2003....................... 0
2004....................... 0
2005....................... 0
2006....................... 0
2007....................... 0
-- ------ ----- ----- ------ --------
Total.............. 4 64,631 15.00% 33.58% $14.77 $954,294
== ====== ===== ===== ====== ========
</TABLE>

Total Portfolio Net Leasable Area 444,153

The following table provides Manhattan Towers property occupancy as well as
the average annual rental and tenant reimbursement per square foot rates since
1992:

<TABLE>
<CAPTION>
AVERAGE ANNUAL
RENTAL PER
YEAR OCCUPANCY SQUARE FOOT
- ---- --------- --------------
<S> <C> <C>
1992.................................................. 100% $22.64
1993.................................................. 100% $22.64
1994.................................................. 100% $22.64
1995.................................................. 100% $22.64
1996.................................................. 48% $16.80
</TABLE>

Depreciation is based on a 30 year life, straight-line method for buildings
and five year life straight-line method for personal property. Tenant
improvements are amortized over the life of the related lease using the
straight-line method. Based on a tax rate of 1.139%, 1997 real estate property
taxes are estimated at

137
<PAGE> 159

approximately $265,000. Insurance coverage includes general liability, umbrella,
fire, pollution, flood and earthquake and, in the opinion of management, is
considered adequate.

The Manhattan Towers mortgage loan matured on August 31, 1996. The lender,
Las Colinas Management Company, an affiliate of the General Partner of RELP III,
renewed the loan for a period of two years at an annual interest rate of 9.57%
to reflect market rates at the time of maturity. The loan was converted to
monthly interest only payments with the principal of $15,000,000 due September
30, 1998.

Skygate Commons. The Skygate Commons Buildings are located in Phoenix,
Arizona. This property is an office complex which is comprised of three office
buildings containing, in the aggregate, 142,696 net rentable square feet,
situated on approximately 7.4 acres of land. At June 30, 1997, the property was
89% leased and average monthly cash rental was approximately $133,000. There is
no debt on this property. RELP III owns the property in fee-simple. At June 30,
1997, 70% of the property, the ten-story building, was leased to Hospitality
Franchise Systems, Inc. ("HFS"). Substantial completion of tenant improvements
for HFS occurred October 31, 1996. RELP III funded approximately $1.2 million
related to its commitment for improvements from the working capital reserve of
RELP III. During the tenant improvement phase, the base rent due from HFS was at
a reduced rate and HFS was responsible for all operating expenses of the
property. Upon substantial completion of the improvements, the rental rate
increased to approximately $14.61 per square foot annually and HFS will pay its
proportionate share of operating expenses which exceed $7.00 per square foot
annually. HFS paid approximately $1,644,000 of rental income to RELP III during
1996 and approximately $1,246,000 during 1995, which represents approximately
21% of total RELP III rental income for 1996 and 13% for 1995.

During the fourth quarter of 1996, a small parcel of land adjacent to the
Skygate Commons property was purchased for approximately $72,000. RELP III
purchased the property to be used for additional parking. Market interest in the
area surrounding the Skygate property has been increasing. In order to more
successfully market the vacancy, the remaining two buildings at the Skygate
property are scheduled for renovation which began in March 1997. Renovations
will include improvements to comply with the ADA, heating and air conditioning
and exterior renovations. The total cost of renovations will be approximately
$900,000 to be paid from the working capital reserve of RELP III. It is
anticipated that the renovation will be completed by December, 1997.

Employees and General Partner

RELP III has no employees; it has, however, entered into an Advisory
Agreement with Realco. Realco is responsible for managing the day-to-day
operations of RELP III. The General Partner of RELP III is USAA Properties III,
Inc., a Texas corporation and a subsidiary of Realco. RELP III, Inc. has the
general responsibility for management of RELP III's business and oversees the
activities of Realco.

Market for the RELP III Units and Distributions

There is no established public trading market for the RELP III Units, and
it is not anticipated that a public market will develop. Upon request, Investor
Services may assist a Limited Partner desiring to transfer his Units. The
purchase price for the Units upon resale and all other terms of a resale
transaction are subject to negotiation between the buyer and the seller. The
limited market for the Units may adversely affect the value of the Units.

As of June 30, 1997, there were 7,412 Limited Partners of RELP III, owning
an aggregate of 111,549 Units.

During the year ended December 31, 1996, quarterly distributions totaling
$1,087,603 and $10,985 were distributed to the Limited Partners and General
Partner, respectively, for a total of $1,098,588 in cash distributions. During
the year ended December 31, 1995, quarterly distributions totaling $1,673,236
and $16,902 were distributed to the Limited Partners and General Partner,
respectively, for a total of $1,690,138 in cash distributions.

138
<PAGE> 160

Portfolio Summary

<TABLE>
<CAPTION>
JUNE 30, 1997
AVG. MONTHLY
JUNE 30, 1997 RENTAL RATES PER
NET LEASABLE YEAR PLACED AVG. % NET LEASABLE
PROPERTY AND LOCATION SQUARE FEET IN SERVICE OCCUPANCY SQUARE FEET
--------------------- ------------ ----------- ------------- ----------------
<S> <C> <C> <C> <C>
Curlew Crossing Shopping
Center, Clearwater, Fla...... 207,090 1985 91.40% 0.41
Manhattan Tower, Manhattan
Beach, CA.................... 301,457 1985 74.35 0.48
Skygate Common; Phoenix, AZ.... 142,696 1964-1973 79.66 0.93
--------
Total................ 651,243
========
</TABLE>

Lease Expirations

The following table shows lease expirations for the next 10 years for RELP
III's properties assuming that none of the tenants exercise renewal options:

<TABLE>
<CAPTION>
ANNUALIZED 1997
NET LEASABLE AREA BASE RENTAL INCOME
--------------------- ----------------------
NUMBER OF APPROX. PERCENTAGE PERCENTAGE AVG. PER
LEASE EXPIRATION YEAR LEASES EXPIRING SQ. FT. OF TOTAL OF TOTAL SQ. FT.
--------------------- --------------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
1998........................ 0 0 0.00% 0.00% $ 0.00
1999(1)..................... 4 47,183 7.25 19.73 24.70
2000(1)..................... 2 4,595 0.71 2.17 15.15
2001........................ 1 12,379 1.90 5.33 13.80
2002........................ 2 33,673 5.17 17.10 33.95
2003(1)..................... 2 20,374 3.13 4.65 7.32
2004(1)..................... 1 5,000 0.77 2.32 14.90
2005........................ 0 0 0.00 0.00 0.00
2006........................ 0 0 0.00 0.00 0.00
2007........................ 1 100,000 15.36 48.70 15.61
-- ------- ----- ------ ------
Total............. 13 223,204 34.27% 100.00% $14.36
== ======= ===== ====== ======
</TABLE>

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

(1) Includes expiring leases at Curlew Crossing of 6,484, 4,595, 20,374 and
5,000 for 1999, 2000, 2003 and 2004, respectively. Average Annualized 1997
Base Rental Income for Curlew Crossing of $10.90, $15.15, $7.32 and $14.90
for 1999, 2000, 2003 and 2004, respectively.

Mortgage Indebtedness

<TABLE>
<CAPTION>
PRINCIPAL AMORTIZATION INTEREST MATURITY ANNUAL DEBT
PROPERTY BALANCE SCHEDULE RATE DATE SERVICE
-------- ----------- ---------------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Manhattan Towers..... $15,000,000 Monthly 9.57% 09/30/98 $1,435,500
interest
only
Curlew Crossing...... 11,000,000 Monthly 8.25 03/31/98 907,500
interest
only
----------- ----------
Total...... $26,000,000 $2,343,000
=========== ==========
</TABLE>

139
<PAGE> 161

RELP IV

General

RELP IV was formed in February 1987 under the Uniform Limited Partnership
Act of the State of Delaware to invest in a diversified portfolio of
income-producing real properties such as shopping centers, office buildings,
apartments, industrial buildings and other similar income-producing real
property. RELP IV has three principal business objectives: (i) to preserve and
protect RELP IV's capital; (ii) to obtain long-term appreciation in the value of
its properties; and (iii) to provide partially "tax-sheltered" distributions of
cash from operations.

In 1987 and 1988, RELP IV sold $30,247,500 of Units (60,495 Units at $500
per Unit). Limited Partners are not required to make any additional capital
contributions. Proceeds of the offering were used to acquire the following
properties in fiscal year 1987: Linear Technology Corporate Headquarters,
Eastman Kodak Building, and 1881 Pine Street (Century Electric Office Building).
During 1988, RELP IV acquired a 55.84% joint venture interest in USAA Chelmsford
Associates Joint Venture, the beneficial owner of the Apollo Computer Research
and Development Headquarters Building.

Properties

The Linear Technology Building. The Linear Technology Building is located
in Milpitas, California. The property is comprised of an office building
containing approximately 42,130 net leasable square feet situated on 2.66 acres.
At June 30, 1997, the property was 100% occupied and average monthly cash rental
was approximately $32,000. There is no debt on this property and RELP IV owns
the property in fee-simple. At June 30, 1997, the building was leased under a
triple net lease by Linear Technology Corporation ("Linear Technology") as its
corporate headquarters under a lease which expires in 2000. The $168,500 tenant
improvement allowance from the 1995 renewal was expended in May 1997. Linear
Technology provided approximately $379,000 of annual rental income to RELP IV in
1996, $459,000 during 1995 and $561,000 during 1994, which represented
approximately 10% of total RELP IV rental income for 1996 and 11% for 1995 and
1994.

The Eastman Kodak Building. The Eastman Kodak Building is located in San
Diego, California and consists of an office building containing approximately
57,747 net leasable square feet situated on 4.64 acres. At June 30, 1997, the
property was 61% occupied and average monthly cash rental was $41,000. The
mortgage payable on this property is $1,098,504. RELP IV owns the property in
fee-simple. Eastman Kodak occupies 34,600 square feet and the remaining 23,147
square feet are unoccupied. Eastman Kodak's lease expires in February 1998.
Discussions are continuing with Eastman Kodak regarding early renewal of their
lease; however, Eastman Kodak is not interested in expanding into the vacant
space. Invitrogen Corporation ("Invitrogen") leased the vacant space under a
lease that was scheduled to expire December 31, 1996, however, Invitrogen
remained in the building until February 1997 paying holdover rent (200% of
December 1996 rent) for January and February. Discussions are currently underway
with a prospective tenant for the vacant space. Water infiltration has been
discovered at the Eastman Kodak Building that has caused damage to a portion of
the ground floor tiles, exterior walls and slab joints. Remediation alternatives
are being sought with costs estimated to be approximately $120,000 to be funded
from the working capital reserve of RELP IV.

The 1881 Pine Street Office Building. The 1881 Pine Street Office Building
is located in St. Louis, Missouri and is comprised of an office building
containing approximately 106,340 net leasable square feet situated on
approximately one acre. At June 30, 1997, the property was 89.84% leased and
average monthly cash rental was $79,000. There is no debt on this property and
RELP IV owns the property in fee-simple. During the third quarter of 1996, a
five-year lease was signed with Sherwood Medical Company. Sherwood occupied the
building on August 24, 1996 and the lease will expire August 2001. The lease
provides for an annual rental rate of $12.75 per square foot for 22,376 square
feet of space and provides for annual parking revenue of $21,600. In addition to
rent, Sherwood will pay their pro rata share of operating expenses in excess of
their base year of 1996. An allowance for tenant improvements of approximately
$259,600 was provided which was paid out of the working capital reserve of RELP
IV. During the fourth quarter of 1996, a five-year lease was signed with Busch
Creative Services Corporation for 64,805 square feet at 1881 Pine Street. This

140
<PAGE> 162

lease commenced February 1, 1997 and will expire on January 31, 2002. The lease
provides for an annual rental rate of approximately $12.25 per square foot and
annual parking revenue of $71,400. In addition, this tenant will pay their pro
rata share of operating expenses in excess of their base year of 1997. An
allowance for tenant improvements of $1,036,880 was provided to be paid out of
the working capital reserve of RELP IV.

Apollo Computer Building. USAA Chelmsford Associates Joint Venture, the
joint venture in which a trust, the beneficiary of which is RELP IV holds a
55.84% interest, owns the property in fee-simple and operates the Apollo
Computer Research and Development Headquarters Building, which is located in
Chelmsford, Massachusetts, a suburb of Boston. The property consists of an
office/research and development facility containing approximately 291,424 net
leasable square feet situated on 26.651 acres. At June 30, 1997, the property
was 100% leased and average monthly cash rental was $166,000. The mortgage
payable on this property at June 30, 1997 is $15,202,386. The property is an
office/R & D building and is leased under a triple net lease to Hewlett-Packard
Company, successor in interest to Apollo Computer, Inc. During 1995,
negotiations with Hewlett-Packard Company resulted in the renewal of their lease
for an additional 41 months. The new monthly rental rate of approximately $.57
per square foot for the 291,424 square foot building began January 1997. This
rate is lower than the rate paid in 1996 of approximately $.76 per square foot
and reflects the current market conditions in the area surrounding the property.
An allowance for tenant improvements was provided at a total of approximately
$565,000 to be paid from the working capital reserve. During 1996,
Hewlett-Packard used approximately $260,000 of the allowance for tenant
improvements. Approximately $82,000 remains of the tenant improvement allowance
as of June 30, 1997. This tenant provided approximately $2,763,000 of annual
rental income to RELP IV in 1996, $2,759,000 in 1995 and $2,761,000 in 1994
which represented approximately 72% of total Partnership rental income for 1996,
65% for 1995 and 54% for 1994.

During its due diligence, the Trust conducted an environmental
investigation of the property. Near the place where underground storage tanks
were formerly operated at the property, such investigation revealed the presence
of hydrocarbons in soil at levels below regulatory thresholds, and naturally
occurring metals in groundwater at concentrations which exceeded regulatory
thresholds and expected naturally occurring concentrations. The Trust is
undertaking additional investigation to confirm the existence and concentration
of the substances detected at the property and, if confirmed, to better
determine whether the former tanks are the source of these impacts. After the
Merger, the Trust's interest in the joint venture with beneficial interest in
the property could be materially adversely affected by regulatory obligations to
investigate and remediate these conditions.

Employees and General Partner

RELP IV has no employees; it has, however, entered into an Advisory
Agreement with Realco. Realco is responsible for managing the day-to-day
operations of RELP IV. The General Partner of RELP IV is USAA Properties IV,
Inc., a Texas corporation and a subsidiary of Realco. USAA Properties IV, Inc.
has the general responsibility for management of RELP IV's business and oversees
the activities of Realco.

Market for the RELP IV Interests and Distributions

There is no established public trading market for the RELP IV Units, and it
is not anticipated that a public market will develop. Upon request, Investor
Services may assist a Limited Partner desiring to transfer his Units. The
limited market for the Units may adversely affect the value of the Units. The
purchase price for the Units upon resale and all other terms of a resale
transaction are subject to negotiation between the buyer and the seller.

As of June 30, 1997 there were 2,981 Limited Partners of RELP IV, owning an
aggregate of 60,495 Units.

During the year ended December 31, 1996, quarterly distributions totaling
$589,826 and $5,958 were distributed to the Limited Partners and General
Partner, respectively, for a total of $595,784 in cash distributions. These
distributions represented a return of capital for both the Limited Partners and
General Partner. During the year ended December 31, 1995, quarterly
distributions totaling $907,425 and $9,166 were

141
<PAGE> 163

distributed to the Limited Partners and General Partner, respectively, for a
total of $916,591 in cash distributions. During the year ended December 31,
1994, quarterly distributions totalling $907,426 and $9,166 were distributed to
the Limited Partners and General Partner, respectively, for a total of $916,592
in cash distributions.

Portfolio Summary

<TABLE>
<CAPTION>
JUNE 30, 1997
AVG. MONTHLY
JUNE 30, 1997 RENTAL RATES PER
NET LEASABLE YEAR PLACED AVG. % NET LEASABLE
PROPERTY AND LOCATION SQUARE FEET IN SERVICE OCCUPANCY SQUARE FEET
--------------------- ------------ ----------- ------------- ----------------
<S> <C> <C> <C> <C>
Linear Technology Office Building,
Milpitas, CA....................... 42,130 1986 100.00% 0.75
Eastman Kodak Office Building, San
Diego, CA.......................... 57,747 1987 80.58 0.71
1881 Pine Street Office Building, St.
Louis, Missouri.................... 106,340 1987 87.22 0.74
Apollo Computer Research and
Development Headquarters Building,
Chelmsford, MA..................... 291,424 1987 100.00 0.57
-------
Total...................... 497,641
</TABLE>

Lease Expirations

The following table shows lease expirations for the next 10 years for RELP
IV's properties assuming that none of the tenants exercise renewal options:

<TABLE>
<CAPTION>
ANNUALIZED 1997 BASE
NET LEASABLE AREA RENTAL INCOME
LEASE NUMBER -------------------- ---------------------
EXPIRATION OF LEASES APPROX. PERCENTAGE PERCENTAGE AVG. PER
YEAR EXPIRING SQ. FT. OF TOTAL OF TOTAL SQ. FT.
---------- --------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
1998........................................ 1 34,600 6.95% 9.14% $10.44
1999........................................ 0 0 0.00 0.00 0.00
2000........................................ 2 333,554 67.03 60.18 15.86
2001........................................ 1 22,376 4.50 7.22 12.75
2002........................................ 2 73,155 14.70 23.46 12.68
2003........................................ 0 0 0.00 0.00 0.00
2004........................................ 0 0 0.00 0.00 0.00
2005........................................ 0 0 0.00 0.00 0.00
2006........................................ 0 0 0.00 0.00 0.00
2007........................................ 0 0 0.00 0.00 0.00
-- ------- ----- ------ ------
Total............................... 6 463,685 93.18% 100.00% $ 8.53
== ======= ===== ====== ======
</TABLE>

Mortgage Indebtedness

<TABLE>
<CAPTION>
6/30/97
PRINCIPAL AMORTIZATION ANNUAL DEBT
PROPERTY BALANCE SCHEDULE INTEREST RATE MATURITY DATE SERVICE
-------- ----------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Kodak...................... $ 1,098,504 $ 14,391* 9.625% 08/01/08 $ 172,692
Apollo..................... 15,202,386 $130,181 9.125 08/01/01 1,562,172
----------- ----------
Total............ $16,300,890 $1,734,864
=========== ==========
</TABLE>

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

* (monthly, including interest)

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<PAGE> 164

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

The following discussion should be read in conjunction with the Financial
Statements of RELP I and accompanying Notes included elsewhere in this Joint
Proxy Statement/Prospectus.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, RELP I had cash of $46,204 and temporary investments
of $926,892. These funds were held in the working capital reserve for the
payment of obligations of RELP I . Accounts receivable consisted of amounts due
from tenants at Volusia Point and the Systech building. Deferred charges and
other assets consisted of deferred rent that resulted from recognition of income
as required by generally accepted accounting principles and lease commissions.
Accounts payable included amounts due to Affiliates for management fees and
reimbursable expenses and amounts due to third parties for expenses incurred for
operations. Accrued expenses and other liabilities consisted of security
deposits and prepaid revenue from tenants.

On January 31, 1996, the maturity date of the Plaza on the Lake mortgage
loan receivable, RELP I received $5,440,000 from Realco, the borrower, in full
payment of the loan. Approximately $5,000,000 of the proceeds from the loan
payoff, or $91.56 per Unit, was distributed to the Limited Partners during the
quarter ended March 31, 1996. The balance of the proceeds of approximately
$440,000 was held by RELP I for future operating requirements.

In addition to the distribution of funds from the mortgage loan payoff,
RELP I distributed $709,930 to its Limited Partners and $7,171 to the General
Partner during 1996 for a total of $717,101, or $13.00 per Unit. Quarterly
distributions were decreased from $4.00 per Unit to $3.00 per Unit beginning in
the first quarter of 1996 due to the reduced cash flow that occurred subsequent
to the repayment of the mortgage loan receivable and the resulting loss of
interest income to RELP I. During the ten-year term of the mortgage loan
receivable, RELP I recorded interest income on the mortgage loan receivable,
including participation income, averaging approximately $590,000 per year.

Quarterly distributions were increased in the fourth quarter of 1996 from
$3.00 to $4.00 per Unit. Management evaluates reserves and the availability of
funds for distribution to the partners on a continuing basis based on
anticipated leasing activity and cash flows available from RELP I investments.

At the Systech building, a 42-month lease was executed in July 1996 between
RELP I and a new tenant after a change in Systech Computer Corporation's
business requirements. The new tenant is ISI. In August 1996, ISI occupied
24,191 square feet of the Systech building. Prior to the scheduled date of
December 1996, ISI moved into an additional 4,712 square feet. The lease
provides for a subsequent addition of 13,201 square feet in April 1998,
following vacancy of that space by Systech Computer Corporation. The lease also
provides ISI with the right of first refusal for any additional space which may
become available on the fourth floor of the building as a result of the early
termination of the lease with Systech Computer Corporation. The rental rate for
ISI began at $10.13 per square foot per year and will increase to $12.57 per
square foot per year over the term of the lease. In addition to rent, ISI will
pay their pro rata share of property operating expenses which exceed those of
1995, the base year.

The lease between RELP I and Systech Computer Corporation was amended in
July 1996 to allow for the gradual decrease of leased square footage and early
termination. In August 1996, Systech Computer Corporation vacated the first two
floors of the four story office building to accommodate occupancy by ISI.
Systech Computer Corporation's lease obligation was further reduced in December
1996 by the 4,712 square feet ISI expanded into; a further reduction is
scheduled to occur in March 1998, and will again be followed by the increases in
space occupied by ISI.

The rental rate for ISI is lower than the rate paid by Systech Computer
Corporation. To compensate RELP I for this difference and the potential vacancy
of approximately 8,300 square feet on the fourth floor of the Systech building,
the tenant forfeited its security deposit of approximately $36,400, paid a
$10,000 buy-out fee and was responsible for payment of brokerage fees and legal
fees associated with this lease restructuring

143
<PAGE> 165

process. In addition to payment of these fees, Systech's current rental rate was
increased from $11.04 to $11.53 per square foot per year, and will increase to
$12.98 over the remaining term of the lease.

Approximately $75,000 of RELP I's commitment for the final phase of tenant
improvements at the Systech building was expended as of December 31, 1996. The
original $84,400 allowance for the improvements was increased to approximately
$97,000 to allow for HVAC improvements. The balance of approximately $22,000 was
paid in January 1997 and was funded from the working capital reserve of RELP I.

Comparison of Three and Six Months Ended June 30, 1997 to June 30, 1996

At June 30, 1997, RELP I had cash of $58,930 and temporary investments of
$968,288. These funds were held in the working capital reserve for the payment
of obligations of the Partnership. Accounts receivable consisted of amounts due
from tenants at both of RELP I properties. Deferred charges and other assets
consisted of deferred rent that resulted from recognition of income as required
by generally accepted accounting principles and lease commissions. Accounts
payable included amounts due to affiliates for management fees and reimbursable
expenses and to third parties for expenses incurred for operations. Accrued
expenses and other liabilities consisted of property tax accruals, security
deposits and prepaid revenue from tenants.

During the quarter ended June 30, 1997, RELP I distributed $218,440 to
Limited Partners and $2,207 to the General Partner for a total of $220,647.
Management evaluates reserves and the availability of funds for distribution to
the Partners on a continuing basis based on anticipated leasing activity and
cash flows available from RELP I investments. As a result of this analysis,
quarterly distributions were increased from $3.00 to $4.00 per limited
partnership unit in the fourth quarter of 1996.

Due to the change in tenancy, the name of the Systech building has been
changed to 10505 Sorrento Valley Road. The balance of approximately $22,000 of
RELP I's commitment for the final phase of tenant improvements at this property
was expended in January 1997. The funding of these improvements was from the
working capital reserve of RELP I.

Future liquidity is expected to result from cash generated from operations
of the properties, interest on temporary investments and ultimately through the
sale of the properties.

RESULTS OF OPERATIONS

For each of the years in the three-year period ended December 31, 1996,
income was generated from rental income from the income producing properties,
interest income and participation income earned on the mortgage loan and
interest income earned on the funds invested in temporary investments. As there
was no lease in force at the Systech building from August 1993 through February
1995, no income was generated by that property during that period. Subsequent to
January 31, 1996, the date of the payoff of the mortgage loan receivable, no
interest was earned on that investment. Expenses incurred during the same
periods were associated with operations of RELP I's properties and various other
costs required for administration of RELP I.

The decrease in rental properties from December 31, 1995 to December 31,
1996 was attributable to depreciation on RELP I's properties, and was offset by
the tenant improvements at the Systech building. Cash and cash equivalents
increased during the same period primarily due to the reserve held by RELP I
from the proceeds of the mortgage loan payoff. The increase in accounts
receivable from December 31, 1995 to December 31, 1996 reflects outstanding
reimbursement of property operating expenses from tenants at the Systech
building. Amortization of lease commissions for the Systech building caused the
decrease in deferred charges. The increase in accounts payable reflected timing
of payment of tenant improvements at the Systech building. The receipt of
prepaid revenue from a tenant at the Systech building accounted for the increase
in accrued expenses from December 31, 1995 to December 31, 1996.

The increases in rental income from the twelve-month period ended December
31, 1994 to December 31, 1995 and from the twelve-month period ended December
31, 1995 to December 31, 1996 reflected the March 1, 1995 commencement of a
single-tenant lease at the Systech building. The increase in rental income

144
<PAGE> 166

from 1995 to 1996 was also impacted by Systech Computer Corporation's forfeiture
of its $36,456 security deposit, payment of a $10,000 fee related to the lease
restructuring and receipt of reimbursable property operating expenses subsequent
to the 1995 base year of the leases at the Systech building.

Occupancy at Volusia Point remained fairly consistent at 92%, 88% and 93%
at December 31, 1996, 1995 and 1994, respectively. The increase in rental income
at Volusia Point from the year ended December 31, 1995 to December 31, 1996 that
resulted from the increase in occupancy was offset by a decrease in percentage
rent during the same period.

The decrease in interest income from the mortgage loan receivable for the
year ended December 31, 1996 from the two prior years reflected the January 31,
1996 payoff of the receivable. Interest income on cash held by RELP I fluctuated
during the three-year period ended December 31, 1996 as a result of the changes
in cash and cash equivalents held by RELP I.

The increases in direct expenses during the three-year period ended
December 31, 1996 was consistent with the increase in depreciation on the tenant
and building improvements at the Systech building. This increase in depreciation
expense from 1995 to 1996 was partially offset by increases in reimbursements of
property operating expenses from tenants at the Systech building during the same
time period.

General and administrative expenses remained stable overall during each of
the years in the three-year period ended December 31, 1996. Printing charges
decreased in each of the years in the three-year period ended December 31, 1996.
The decrease from 1994 to 1995 reflected savings realized on annual reports to
investors. Legal charges were higher for the year ended December 31, 1994 than
for the years ended December 31, 1995 and 1996 due to pending litigation at both
of RELP I's properties during 1994. The mortgage loan servicing fee decreased as
a result of the payoff of the mortgage loan receivable in January 1996. These
decreases in printing and legal charges and the mortgage loan servicing fee were
offset by increases in amortization expense on lease commissions at the Systech
building.

RELP I's management fee is based on cash flow from operations of RELP I
adjusted for cash reserves and fluctuated accordingly. The decrease in the
management fee for the year ended December 31, 1996 from the prior year
reflected the decrease in revenue resulting from the maturity of the mortgage
loan receivable. The increase in the management fee for the year ended December
31, 1995 from the prior year resulted from the increase in rental revenue at the
Systech building.

Comparison of Three and Six Months Ended June 30, 1997 to June 30, 1996

For the three-month and six-month periods ended June 30, 1997 and 1996,
income was generated from rental income from the income producing properties and
interest earned on the funds invested in temporary investments. Interest income
and participation income earned on the mortgage loan prior to the January 31,
1996 payoff of the mortgage loan receivable is also included in income for the
six-month period ended June 30, 1996. Expenses incurred during the same periods
were associated with operations of RELP I's properties and various other costs
required for administration of RELP I.

The decrease in rental properties from December 31, 1996 to June 30, 1997
was primarily attributable to depreciation on RELP I properties. The decrease in
accounts receivable during the same time period reflects the collection of rents
and reimbursable operating expenses from tenants at both of RELP I properties.
Amortization of lease commissions caused the decrease in deferred charges. The
decrease in accounts payable reflected timing in payment of tenant improvements
at 10505 Sorrento Valley Road and the reissuance of certain distribution checks
to Limited Partners. Accrued property taxes for Volusia Point accounted for the
increase in accrued expenses and other liabilities.

Rental income decreased at both of the RELP I properties from the
three-month period ended June 30, 1996 to the same three-month period in 1997.
Approximately $33,000 of the $36,000 decrease was attributable to an adjustment
for prior month and prior year operating expense reimbursements from tenants at
10505 Sorrento Valley Road. Conversely, rental income increased at both of the
RELP I properties from the six-month period ended June 30, 1996 to the same
six-month period in 1997. The increase at Volusia Point of approximately $22,000
was due to an increase in percentage rent and operating expense reimbursements
from

145
<PAGE> 167

tenants. The increase at 10505 Sorrento Valley Road of approximately $20,000
resulted from the increase in physical occupancy and utility reimbursements from
tenants. The decrease in interest income from the mortgage loan for the
six-month period ended June 30, 1997 was the result of the January 31, 1996
payoff of the receivable. Interest income was higher for the six-month period in
1996 as a result of the increase in cash and cash equivalents temporarily held
by RELP I after the payoff of the mortgage loan receivable and prior to
distribution of those proceeds to Limited Partners.

The increase in depreciation during the three-month and six-month periods
ended June 30, 1997 over the same periods ended June 30, 1996 was due to the
addition of tenant improvements at 10505 Sorrento Valley Road, and was partially
offset by a decrease in depreciation at Volusia Point as some tenant
improvements were fully depreciated in 1996.

General and administrative expenses were higher during the three-month and
six-month periods ended June 30, 1996 than during the same periods in 1997.
Legal fees were higher during the three-month period in 1996 due to the lease
restructuring that occurred at 10505 Sorrento Valley Road. Savings on audit fees
and a decrease in legal fees accounted for the decrease in general and
administrative expenses from the six-month period ended June 30, 1996 to the
six-month period ended June 30, 1997. The portfolio management fee is based on
cash flow from operations of RELP I, adjusted for cash reserves, and fluctuated
accordingly.

INFLATION

An increase in inflation could affect RELP I's investments through
increases in the costs of operating and maintaining the properties acquired and
in various administrative costs of Partnership operation. The adverse effect
inflation may have on operating expenses would be offset to some extent by
increases in rental rates charged tenants at RELP I's properties. If high
occupancy levels are maintained at the properties, increases in rental income
should offset increasing property operating expenses with a minimal effect on
operating income.

RECENT DEVELOPMENTS

Pursuant to the terms of the Merger Agreement, for a period of six years
from and after the Effective Time, the Trust must indemnify the partners or
agents of any RELP who at any time prior to the Effective Time were entitled to
indemnification under the Partnership Agreement of the RELP. Such persons are
entitled to indemnification to the same extent as they would have been entitled
to indemnification under the Partnership Agreement. If the Merger occurs and if
the court were to determine that the General Partners, their affiliated entities
and/or the members of the boards of directors of the General Partners were
liable for damages in connection with the Lawsuit, to the extent the General
Partners and the directors would have been entitled to indemnification under the
Partnership Agreements, the Trust would be required to indemnify such parties
for costs and expenses related to the Lawsuit. If the Merger does not occur and
such parties are held liable for damages, if they are entitled to
indemnification under the RELP I Partnership Agreement, depending upon the
amount of such costs and expenses, it could have a material adverse effect on
RELP I.

146
<PAGE> 168

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

The following discussion should be read in conjunction with the Financial
Statements of RELP II and accompanying Notes included elsewhere in this Joint
Proxy Statement/Prospectus.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1997, RELP II had cash of $33,288 and temporary investments of
$848,892. Included in RELP II's cash and cash equivalents was the working
capital reserve. Deferred charges and other assets included an acquisition fee
paid to the General Partner on the joint venture interest and deferred rent
resulting from recognition of income as required by generally accepted
accounting principles. Accounts payable included amounts due to affiliates for
reimbursable expenses and amounts due to third parties for expenses incurred for
operations. Accrued expenses and other liabilities consisted primarily of
prepaid rent, accrued property taxes and a security deposit.

Total cash distributions to partners for the year ended June 30, 1997
increased as compared to the year ended June 30, 1996. Management evaluates
reserves and the availability of funds for distribution to partners on a
continuing basis based on anticipated leasing activity and cash flows available
from RELP II investments.

At the beginning of the fiscal year, Bowater Communication Papers, Inc.,
the tenant at the Lakeland, Florida property, changed its name to Star Forms
Incorporated. Star Forms was later sold to CST Office Products, Inc. This lease
expires in 1999.

During the second fiscal quarter, RELP II entered into a contract to sell
the CST Building subject to satisfactory completion of due diligence. During the
due diligence period specified in the contract, the potential buyer attempted to
arrange for financing but was unsuccessful. Accordingly, the contract with the
potential buyer was canceled during April 1997.

In August 1997, the major tenant, Logicon, at the Sequoia Plaza I property
in Arlington, Virginia, completed a merger with Northrop Grumman Corporation in
which Logicon will be operated as a wholly owned subsidiary. Logicon occupies
approximately 89% of the leasable space at Sequoia Plaza I with a lease
expiration in April 2008.

Future liquidity is expected to result from the temporary investment of
working capital funds, cash generated from the operations of the properties and
ultimately through the liquidation of such properties.

RESULTS OF OPERATIONS

For each of the years in the three-year period ended June 30, 1997, income
was generated from rental income from the income-producing rental properties,
interest income earned on the funds in temporary investments and earnings from
the joint venture interest.

Expenses incurred during each of the years in the three-year period ended
June 30, 1997 were associated with the operations of RELP II's properties and
various other costs required for the administration of RELP II.

The asset value of rental properties at June 30, 1997 decreased from June
30, 1996 due to depreciation. The investment in the joint venture decreased by
the amount of distributions received from the joint venture, offset by increases
as a result of equity in earnings of the joint venture which were derived from
the net income of the Sequoia Plaza I property. The increase in deferred charges
and other assets at June 30, 1997 was due to an increase in deferred rent at
Continental Plastic Buildings. Accounts payable decreased at June 30, 1997 as a
result of timing in the payment of building costs associated with the addition
at the Continental Plastic Buildings. Accrued expenses and other liabilities at
June 30, 1997 decreased from June 30, 1996 as a result of a decrease in prepaid
rent.

Rental income was higher for the fiscal years ended June 30, 1997 and 1996
as compared to the fiscal year ended June 30, 1995 primarily as a result of
Continental Plastic Containers occupying the building addition and paying an
increased rental rate since March 1, 1996.

147
<PAGE> 169

Lower cash balances caused the decrease in interest income for the fiscal
years ended June 30, 1997 and 1996 as compared to the fiscal year ended June 30,
1995. The cash was used to fund the building addition at the Continental Plastic
Buildings.

Direct expenses increased for the 1997 fiscal year as compared to the 1996
fiscal year due to loading dock repairs at the CST Building. Direct expenses
decreased for the fiscal year ended 1996 as compared to the fiscal year ended
1995 as a result of sewer connections fees incurred in 1995 at the CST Building.

Depreciation increased for each of the years in the three-year period ended
June 30, 1997 due to the building addition at Continental Plastic.

General and administrative expenses were higher for the fiscal year ended
June 30, 1997 due to lease commissions paid at Continental Plastic on the lease
renewal. A decrease in state filing fees caused the decrease in general and
administrative expenses for the fiscal year ended 1996.

INFLATION

An increase in inflation could affect RELP II's investments through
increases in the costs of operating and maintaining the properties and in
various administrative costs of operations. The adverse effect inflation may
have on operating expenses would be offset to some extent by contractual
increases in rental rates and tenant reimbursement of expenses incurred at RELP
II's properties.

RECENT DEVELOPMENTS

On August 20, 1997, the Lawsuit, which was filed in the Superior Court of
the State of Arizona and which has been removed to the United States District
Court for the District of Arizona, was served upon Realco, the General Partners,
certain other affiliated entities and the individual members of the board of
directors of each of the General Partners. The Trust was also named as a
defendant. The Lawsuit alleges, among other things, breaches of fiduciary duty
in connection with the transactions contemplated by the Merger Agreement. The
Lawsuit seeks, among other things, to enjoin the consummation of the Merger and
damages, including attorneys' fees and expenses. The defendants in the Lawsuit
believe that the plaintiffs' claims are without merit and intend to defend
vigorously against the Lawsuit. However, no assurance can be given that the
plaintiffs in the Lawsuit will not be successful. If such plaintiffs were to
successfully enjoin the consummation of the Merger, a condition to the
obligations of the Trust and the RELPS to consummate the Merger would not be
satisfied, which would entitle the General Partner of any RELP or the Trust
Manager to terminate the Merger Agreement and abandon the Merger.

Pursuant to the terms of the Merger Agreement, for a period of six years
from and after the Effective Time, the Trust must indemnify the partners or
agents of any RELP who at any time prior to the Effective Time were entitled to
indemnification under the Partnership Agreement of the RELP. Such persons are
entitled to indemnification to the same extent as they would have been entitled
to indemnification under the Partnership Agreement. If the Merger occurs and if
the court were to determine that the General Partners, their affiliated entities
and/or the members of the boards of directors of the General Partners were
liable for damages in connection with the Lawsuit, to the extent the General
Partners and the directors would have been entitled to indemnification under the
Partnership Agreements, the Trust would be required to indemnify such parties
for costs and expenses related to the Lawsuit. If the Merger does not occur and
such parties are held liable for damages, if they are entitled to
indemnification under the RELP II Partnership Agreement, depending upon the
amount of such costs and expenses, it could have a material adverse effect on
RELP II.

148
<PAGE> 170

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

The following discussion should be read in conjunction with the Financial
Statements of RELP III and accompanying Notes included elsewhere in this Joint
Proxy Statement/Prospectus.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, RELP III had cash of $118,000 and temporary
investments of $9,301,147. Included in the cash and cash equivalents were the
working capital reserve and funds held for current obligations of RELP III.
Accounts receivable consisted of tenant receivables. Deferred charges and other
assets included deferred rent resulting from recognition of income as required
by generally accepted accounting principles, lease commissions and prepaid
expenses. Accounts payable included amounts due to affiliates for reimbursable
expenses and management fees, and amounts due to third parties for expenses
incurred for operations. Accrued expenses and other liabilities consisted
primarily of security deposits, prepaid rent and accrued property taxes.

The $11,000,000 mortgage on Curlew Crossing matured on March 31, 1996. The
lender, Realco, renewed the loan for a period of two years at an annual interest
rate of 8.25% to reflect market rates at the time of maturity. This rate is a
decrease from the 10.25% paid in March 1996 which was based on the lesser of 12%
or prime rate plus two percent. Interest is payable monthly with the principal
due March 31, 1998.

In April 1996, RELP III received $220,400 as a result of land condemned at
Curlew Crossing by the Florida Department of Transportation ("FDOT"). This
represented a good faith estimate of the value of the land actually taken. The
land was condemned in connection with the widening of Curlew Road. Contrary to
early concerns regarding the extent and nature of the condemnation, no parking,
access or structure at Curlew was included in the taking. During 1996, the
tenant of two out parcels, containing approximately 15,700 square feet, has
claimed the right to terminate its respective leases based upon the FDOT taking.
RELP III has initiated legal action against the defaulted tenant and is
currently seeking a summary declaration by the court regarding the continuing
nature of the leases as well as recovery of the rent and other sums due under
the leases. Following the adjudication of this tenant related action, a final
determination will be made regarding the total damages due from the FDOT to RELP
III as a result of the condemnation. Resolution of both the tenant action and
condemnation proceeding are anticipated by the third quarter of 1997.

Substantial completion of the improvements for Hospitality Franchise
Systems, Inc. ("HFS") at the Ramada property in Phoenix, Arizona occurred
October 31, 1996. RELP III funded approximately $1.2 million related to its
commitment for improvements from the working capital reserve of RELP III. During
the tenant improvement phase, the base rent due from HFS was at a reduced rate
and HFS was responsible for all operating expenses of the property. Upon
substantial completion of the improvements, the rental rate increased to
approximately $14.61 per square foot annually and HFS will pay its proportionate
share of operating expenses which exceed $7.00 per square foot annually.

During the fourth quarter, a small parcel of land adjacent to the Skygate
Commons property was purchased for approximately $72,000. RELP III purchased the
property to be used for additional parking. Market interest in the area
surrounding the Skygate Commons property has been increasing. As a result of
this interest, the remaining two buildings at the Skygate Commons property were
scheduled for renovation which will begin in March 1997. Renovations will
include improvements to comply with the ADA, and heating, air conditioning and
exterior renovations. The total cost of renovations will be approximately
$900,000 to be paid from the working capital reserve of RELP III.

The Manhattan Towers Buildings in Manhattan Beach, California were 100%
leased to Hughes Aircraft Company until August 31, 1996. Control of the daily
operations was assumed upon expiration of the Hughes lease. As part of the
marketing campaign to re-lease the property, the name of the property was
changed from Parkview Plaza to Manhattan Towers. Along with this name change,
the property will undergo repairs and renovations to the lobby area, corridors
and parking lot, as well as exterior landscaping and signage. The cost of these
renovations is estimated to be $2.7 million to be funded from the working
capital reserve of RELP III.

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<PAGE> 171

In addition, subterranean water damage was discovered in the parking garage.
Engineers and other consultants were hired to assess the damage and determine
the appropriate remediation. The cost of the repairs to the parking garage is
estimated to be $1.1 million and will be funded from the working capital reserve
of RELP III.

Other leases signed have terms from three to five years at an annual rental
rate of $13.80 per square foot. One of the five year leases provided for an
allowance for tenant improvements at $6.00 per square foot for a total of
$74,274 to be paid out of the working capital reserve of RELP III.

A 62-month lease was signed during the fourth quarter for 11,553 square
feet. This lease commenced February 1, 1997 and ends March 31, 2002. The lease
provides for an annual rental rate of $19.20 per square foot. An allowance for
tenant improvements was provided for a total of approximately $404,000 to be
paid from the working capital reserve of the Partnership.

As of December 31, 1996, these leases at Manhattan Towers total 145,796 of
the 301,457 square feet, or 48%, of the total leasable area of the property.
Rental rates for these new leases are lower than the previous rate charged to
Hughes, reflecting the current market conditions in the area surrounding the
property. One of the two buildings at this property remains vacant. Several
large tenant prospects have expressed interest in leasing the vacant building.

During the year ended December 31, 1996, quarterly distributions totaling
$1,087,603 and $10,985 were distributed to the Limited Partners and General
Partner, respectively, for a total of $1,098,588 in cash distributions. Total
cash distributions to partners for the year ended December 31, 1996 decreased as
compared to the year ended December 31, 1995 to reserve cash for the
renovations, tenant improvements and lease commissions required to re-lease
Manhattan Towers upon expiration of the Hughes lease. Due to the expiration of
the Hughes lease in August 1996, the two remaining vacant buildings at Skygate
Commons and the vacancy at Curlew Crossing, tenant improvements and lease
commissions will be required at all of RELP III properties and will be funded
from RELP III's working capital reserve. Management evaluates reserves and the
availability of funds for distribution to partners on a continuing basis based
on anticipated leasing activity and cash flows available from RELP III's
investments.

Comparison of Three and Six Months Ended June 30, 1997 to June 30, 1996

At June 30, 1997, RELP III had cash of $5,132,002 and temporary investments
of $1,390,304. These funds were held in the working capital reserve for the
payment of obligations of RELP III. Accounts receivable consisted of amounts due
from tenants. Deferred charges and other assets included deferred rent resulting
from recognition of income as required by generally accepted accounting
principles and lease commissions. Accounts payable included amounts due to
affiliates for reimbursable expenses and amounts payable to third parties for
expenses incurred for operations. Accrued expenses and other liabilities
consisted primarily of accrued property taxes, prepaid rent and security
deposits.

During the quarter ended June 30, 1997, RELP III distributed $223,098 to
Limited Partners and $2,254 to the General Partner for a total of $225,352.
Management evaluates reserves and the availability of funds for distribution to
partners on a continuing basis based on anticipated leasing activity and cash
flows available from the RELP's investments. Based on the amount of funds needed
for tenant improvements, lease

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commissions and renovation costs at Manhattan Towers and Skygate Commons, future
distributions may be suspended. In addition, RELP III may need to borrow funds
to cover any shortage in the working capital reserve.

During the second quarter, RELP III was awarded favorable summary judgment
against the defaulted tenant for one of the two out parcels vacated by the
tenant at Curlew Crossing in 1996. The action against the remaining tenant is
scheduled to go to trial in the third quarter.

As of June 30, 1997, Manhattan Towers was 98% leased. During the second
quarter, a fifty-six month lease was signed at Manhattan Towers with TRW, Inc.
for 155,118 square feet at a net monthly base rent of $141,200 to commence in
August 1997. In addition, TRW will pay its pro rata share of operating expenses
of the property. TRW will occupy one of the two towers at Manhattan Towers. RELP
III provided a tenant improvement allowance for a total of approximately $2.7
million, or approximately $17 per square foot, to be paid out of the working
capital reserve of RELP III.

Also at Manhattan Towers, the parking garage water damage remediation work
is in progress and is scheduled to be complete by the end of May. The cost of
the repairs is estimated to be approximately $1.1 million and will be funded
from the working capital reserve of RELP III. Renovations at the property are
also in progress which include lobby area, corridors and parking lot as well as
exterior landscaping and signage. The cost for renovations is estimated to be
approximately $1.4 million and will be funded from the working capital reserve
of RELP III.

As part of a marketing campaign to lease the two vacant buildings of the
three building complex at the Phoenix, Arizona property, the name of the
property has been changed from Ramada World Headquarters Building to Skygate
Commons. Renovation to the two vacant buildings began during the first quarter
of 1997 which includes improvements to comply with the Americans With
Disabilities Act, and heating, air conditioning and exterior renovations. The
total cost of the renovations will be approximately $900,000 to be paid from the
working capital reserve of RELP III. In addition, the construction of additional
parking on the adjacent land is planned in an attempt to increase the property's
competitiveness in the market. The cost for the parking lot is estimated at
$95,000 to be funded from the working capital reserve of RELP III.

During April, a five-year lease was signed at Skygate Commons with FHP
International Corporation for one of the two vacant buildings or 22,120 square
feet at an annual rental rate beginning at $14.75 per square foot. The lease
commenced July 1997 and terminates June 2002. RELP III provided a tenant
improvement allowance of $331,800 to be paid from the working capital reserve of
RELP III. As of June 30, 1997, Skygate Commons was 89% leased.

Future liquidity is expected to result from cash generated from operations
of the properties, interest on temporary investments and ultimately through the
sale of the properties.

RESULTS OF OPERATIONS

For the three-year period ended December 31, 1996, income was generated
from rental income from the income-producing real estate properties and interest
income earned on the funds in temporary investments.

Expenses incurred during the same period were associated with the operation
of RELP III's properties, interest on the mortgages payable and various other
costs required for administration of RELP III.

During 1995 and 1994, lease agreements between RELP III and tenants at two
properties were absolute triple net leases. Under an absolute triple net lease,
the lessee is required to make all payments for expenses related to the use and
occupation of the leased premises, including real estate taxes and assessments,
property and liability insurance, repairs and maintenance, utilities and other
operating costs associated with the property. Accordingly, RELP III receives
rental income and the lessee absorbs all such expenses.

Rental properties increased at December 31, 1996 as compared to December
31, 1995 due primarily to improvements at Skygate Commons for HFS, offset by
depreciation. The decrease in cash and cash equivalents was due to payment for
tenant improvements for HFS. Deferred charges and other assets decreased at
December 31, 1996 primarily due to amortizing deferred charges. Other deposits
held decreased

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as a result of using the deposit held as a contribution toward tenant
improvements for HFS. Accrued expenses and other liabilities decreased at
December 31, 1996 due to a decrease in prepaid rent.

Rental income decreased for the year ended December 31, 1996 as compared to
December 31, 1995 primarily as a result of the expiration of the Hughes lease at
Manhattan Towers. Hughes provided monthly rent revenue of $568,748. Rental
income increased for the year ended December 31, 1995 as compared to December
31, 1994 due to the write-down of a deferred rent receivable on Manhattan Towers
in 1993. Rental income is recognized under the operating method, whereby
aggregate rentals are reported on a straight-line basis as income over the life
of the lease. The deferred rent receivable remaining after the original maturity
date of the mortgage loan (March 31, 1995) was written off in 1993; therefore,
income recognized after March 31, 1995 was actual rent received.

Depreciation expense increased for the year ended December 31, 1996 due to
two months of depreciation on the tenant improvements for HFS. The write-down on
Manhattan Towers in 1994 caused the decrease in depreciation as of December 31,
1995. Other direct expenses increased for 1996 as compared to 1995 as a result
of assuming control of the operations at both Manhattan Towers and Skygate
Commons. Prior to the Hughes lease expiration on August 31, 1996, at Manhattan
Towers, Hughes was responsible for all operating expenses under their triple net
lease. Prior to substantial completion of the tenant improvements at Skygate
Commons for HFS on October 31, 1996, HFS was responsible for all operating
expenses. Operating expenses for Manhattan Towers accounted for approximately
$500,000 of the increase in other direct expenses at December 31, 1996.
Operating expenses for the Skygate Commons property accounted for approximately
$100,000 of the increase. The default by a tenant at Curlew Crossing caused an
increase in property taxes and bad debt expense. Other direct expenses were
higher for 1995 as compared to 1994. Contributing to this increase was an
increase in property insurance expense at Manhattan Towers and an increase in
bad debt expense at Curlew Crossing. Property tax expense was also higher at
Curlew Crossing due to a credit in 1994 resulting from a tax protest. The gain
on disposal of rental property at December 31, 1996 was a result of the land
condemnation at Curlew Crossing. See "Liquidity and Capital Resources" above. An
investment property write-down was recognized on Manhattan Towers in 1994.

Interest income decreased for the year ended December 31, 1996 as compared
to the year ended December 31, 1995 due to lower cash balances. An increase in
interest rates and a higher cash reserve accounted for the increase in interest
income for the year ended December 31, 1995.

General and administrative expenses increased for the year ended 1996 as
compared to the year ended 1995. An increase in legal expenses accounted for
approximately half of the increase. Legal fees were incurred as a result of the
default by a tenant and the land condemnation at Curlew Crossing and new leases
at Manhattan Towers. Lease commissions at Manhattan Towers accounted for the
remaining increase in general and administrative expenses. General and
administrative expenses decreased in 1995 as compared to 1994 due to a decrease
in printing charges and legal fees. The management fee is based on cash flow
from operations of the Partnership adjusted for cash reserves and fluctuated
accordingly. The decrease in management fees for the year ended 1996 was
primarily caused by the expiration of the Hughes lease at Manhattan Towers.

Interest expense decreased for the year ended December 31, 1996 as compared
to the year ended December 31, 1995. The interest rate on the Curlew Crossing
mortgage loan was decreased to 8.25% as compared to the 10.5% paid December 31,
1995. Interest expense on the Manhattan Towers loan decreased due to principal
balance reductions through August 31, 1996. The decrease in interest expense for
1995 as compared to 1994 reflected a decrease in the interest rate charged on
the Manhattan Towers mortgage loan attributable to the loan modifications in
1994 and a decrease in the loan balance from forgiveness of debt and principal
payments. Slightly offsetting this decrease was an increase in interest paid on
the Curlew Crossing mortgage. The Curlew Crossing mortgage is based on the prime
rate and the changes in expense for this mortgage were a result of changes in
the prime rate.

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Comparison of Three and Six Months Ended June 30, 1997 to June 30, 1996

For the three-month and six-month periods ended June 30, 1997 and 1996,
income was generated from rental income from the income-producing real estate
properties and interest income earned on the funds in temporary investments.

Expenses incurred during the same periods were associated with the
operation of RELP III's properties, interest on the mortgages payable and
various other costs required for administration of RELP III.

The asset value of rental properties increased as of June 30, 1997 as
compared to December 31, 1996 due to renovation costs and tenant improvements at
Manhattan Towers and Skygate Commons offset by depreciation. The decrease in
cash and cash equivalents at June 30, 1997 was due to payment for renovations
and tenant improvements. Accounts receivable increased at June 30, 1997
primarily due to an increase in receivables from tenants at Skygate Commons. The
increase in deferred charges and other assets at June 30, 1997 was due to lease
commissions paid at Manhattan Towers and Skygate Commons. The decrease in
accounts payable reflected timing in the payment of renovation costs at
Manhattan Towers. The increase in accrued expenses and other liabilities was a
result of an increase in prepaid rent, property tax accruals and security
deposits.

Rental income was lower for the three-month and six-month periods ended
June 30, 1997 as compared to the three-month and six-month periods ended June
30, 1996. Rental rates for the new leases at Manhattan Towers, since the
expiration of the Hughes lease in August 1996, are lower than the rate charged
to Hughes, reflecting market conditions in the area surrounding the property.

The gain on disposal of rental property in 1996 was a result of the land
condemned by the Florida Department of Transportation in connection with the
widening of Curlew Road.

Interest income decreased for the three-month and six-month periods ended
June 30, 1997 as compared to the three-month and six-month periods ended June
30, 1996 due to lower cash balances. During the second quarter of 1997, RELP III
invested in short-term commercial paper with USAA Capital Corporation, an
affiliate of the General Partner.

Direct expenses were higher for the three-month and six-month periods ended
June 30, 1997 as compared to the three-month and six-month periods ended June
30, 1996 as a result of assuming control of the daily operations at both
Manhattan Towers and Skygate Commons. Prior to the Hughes lease expiration on
August 31, 1996, at Manhattan Towers, Hughes was responsible for all operating
expenses under terms of their triple net lease. Operating expenses at Manhattan
Towers for the periods ended June 30, 1997 accounted for approximately 63% of
the increase in operating expenses. Prior to substantial completion of the
tenant improvements for Hospitality Franchise Systems, Inc. ("HFS") at Skygate
Commons on October 31, 1996, HFS was responsible for all operating expenses.
Operating expenses at Skygate Commons for the periods ended June 30, 1997
accounted for the remaining increase in direct expenses. Operating expenses
included utilities, cleaning, landscaping, repairs and maintenance, property
taxes, property insurance, management fees and other building service expenses.

Depreciation expense increased for the three-month and six-month periods
ended June 30, 1997 as compared to the three-month and six-month periods ended
June 30, 1996 due to depreciation on the tenant improvements at Manhattan Towers
and at Skygate Commons for HFS.

General and administrative expenses were higher for the three-month and
six-month periods ended June 30, 1997 as compared to the three-month and
six-month periods ended June 30, 1996. Legal fees at Curlew Crossing related to
the 1996 default by a tenant of two out parcels accounted for approximately 40%
of the increase for the three-month period ended June 30, 1997 and approximately
24% of the increase for the six-month period ended June 30, 1997. Lease
commission expense at Manhattan Towers accounted for the remaining increase in
general and administrative expenses.

The management fee is based on cash flow from operations of RELP III
adjusted for cash reserves and fluctuated accordingly.

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Interest expense increased for the three-month period ended June 30, 1997
as compared to the three-month period ended June 30, 1996. The payment terms of
the Manhattan Towers loan for the three months and six months ended June 30,
1997 included monthly interest only payments at an interest rate of 9.57% on a
principal balance of $15,000,000. Terms of the mortgage loan for the three
months and six months ended June 30, 1996 included monthly principal payments in
the set amount of $227,272.72 and interest payments set monthly at the London
Interbank Offered Rate (LIBOR) plus .625% which was approximately 6% for the
June 1996 interest payment. The interest rate on the Curlew Crossing mortgage
loan was decreased to 8.25% in April 1996 compared to 10.25% paid in March 1996.
Interest expense on the Curlew Crossing mortgage loan for the six-month period
ended June 30, 1997 decreased by approximately $58,000 offset by the increase in
interest expense for the Manhattan Towers Loan of approximately $40,000.

INFLATION

An increase in inflation could affect RELP III's investments through
increases in the costs of operating and maintaining the properties and in
various administrative costs of operations. The adverse effect inflation may
have on operating expenses would be offset to some extent by increases in rental
rates charged tenants at RELP III's properties. If high occupancy levels are
maintained at the properties, increases in rental income should offset
increasing property operating expenses with minimal effect on operating income.

RECENT DEVELOPMENTS

On August 20, 1997, the Lawsuit, which was filed in the Superior Court of
the State of Arizona and which has been removed to the United States District
Court for the District of Arizona, was served upon Realco, the General Partners,
certain other affiliated entities and the individual members of the board of
directors of each of the General Partners. The Trust was also named as a
defendant. The Lawsuit alleges, among other things, breaches of fiduciary duty
in connection with the transactions contemplated by the Merger Agreement. The
Lawsuit seeks, among other things, to enjoin the consummation of the Merger and
damages, including attorneys' fees and expenses. The defendants in the Lawsuit
believe that the plaintiffs' claims are without merit and intend to defend
vigorously against the Lawsuit. However, no assurance can be given that the
plaintiffs in the Lawsuit will not be successful. If such plaintiffs were to
successfully enjoin the consummation of the Merger, a condition to the
obligations of the Trust and the RELPS to consummate the Merger would not be
satisfied, which would entitle the General Partner of any RELP or the Trust
Manager to terminate the Merger Agreement and abandon the Merger.

Pursuant to the terms of the Merger Agreement, for a period of six years
from and after the Effective Time, the Trust must indemnify the partners or
agents of any RELP who at any time prior to the Effective Time were entitled to
indemnification under the Partnership Agreement of the RELP. Such persons are
entitled to indemnification to the same extent as they would have been entitled
to indemnification under the Partnership Agreement. If the Merger occurs and if
the court were to determine that the General Partners, their affiliated entities
and/or the members of the boards of directors of the General Partners were
liable for damages in connection with the Lawsuit, to the extent the General
Partners and the directors would have been entitled to indemnification under the
Partnership Agreements, the Trust would be required to indemnify such parties
for costs and expenses related to the Lawsuit. If the Merger does not occur and
such parties are held liable for damages, if they are entitled to
indemnification under the RELP II Partnership Agreement, depending upon the
amount of such costs and expenses, it could have a material adverse effect on
RELP III.

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

The following discussion should be read in conjunction with the
Consolidated Financial Statements of RELP IV and accompanying Notes included
elsewhere in this Joint Proxy Statement/Prospectus.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, RELP IV had cash of $226,365 and temporary
investments of $977,512. Included in these amounts were the working capital
reserve and funds held for payment of current obligations of RELP IV. Accounts
receivable consisted of amounts due from tenants. Deferred charges and other
assets consisted primarily of deferred rent resulting from recognition of income
as required by generally accepted accounting principles and lease commissions.
Accounts payable consisted of amounts due to affiliates for management fees and
reimbursable expenses and amounts due to third parties for expenses incurred for
operations. Accrued expenses and other liabilities consisted of security
deposits and prepaid rent.

During the third quarter of 1996, a five-year lease was signed with
Sherwood Medical Company at 1881 Pine Street in St. Louis, Missouri. Sherwood
occupied the building on August 24, 1996 and the lease will expire August 2001.
The lease provides for an annual rental rate of $12.75 per square foot for
22,376 square feet of space and annual parking revenue of $21,600. In addition
to rent, Sherwood will pay their pro rata share of operating expenses in excess
of their base year of 1996. An allowance for tenant improvements in the
approximate amount of $259,600 was provided which was paid out of the working
capital reserve of RELP IV. In addition, Sherwood paid a security deposit of
$23,774.

During the fourth quarter of 1996, a five-year lease was signed with Busch
Creative Services Corporation for 64,805 square feet at 1881 Pine Street. This
lease commenced February 1, 1997 and will expire on January 31, 2002. The lease
provides for an annual rental rate of approximately $12.25 per square foot and
annual parking revenue of $71,400. In addition, this tenant will pay their pro
rata share of operating expenses in excess of their base year of 1997. An
allowance for tenant improvements of $1,036,880 was provided to be paid out of
the working capital reserve of RELP IV. These two leases at 1881 Pine Street
have resulted in 87,181 square feet of the 106,340 square feet leased at
December 31, 1996.

During 1995, the lease with Hewlett-Packard Company, the single tenant at
the Apollo Building in Chelmsford, Massachusetts was renewed for an additional
41 months. The new monthly rental rate of approximately $.57 per square foot for
the 291,424 square foot building began in January 1997. This rate is lower than
the rate paid in 1996 of approximately $.76 per square foot and reflects the
market conditions in the area surrounding the property. An allowance for tenant
improvements was provided at a total of $565,000 to be paid from the working
capital reserve. During 1996, Hewlett-Packard used approximately $260,000 of the
allowance for tenant improvements. Approximately $197,000 of the tenant
improvement allowance remained as of December 31, 1996.

The Kodak Building was 100% occupied at December 31, 1996 with Eastman
Kodak occupying 34,600 square feet and Invitrogen Corporation occupying the
remaining 23,147 square feet. The lease with Invitrogen was scheduled to expire
in April 1996; however, the lease was extended through December 1996. Invitrogen
paid an extension fee of $20,000. Invitrogen remained in the building until
February 1997 paying holdover rent (200% of December 1996 rent) for January and
February 1997. Eastman Kodak's lease is scheduled to expire February 1998.
Discussions have commenced with Eastman Kodak regarding the possibility of
renewing early and leasing the entire building.

During the year ended December 31, 1996, quarterly distributions totaling
$589,826 and $5,958 were distributed to the Limited Partners and General
Partner, respectively for a total of $595,784 in cash distributions. Cash
distributions were reduced to $2.00 per Unit for the quarter ended March 31,
1996 in order to build working capital reserves to meet the cash requirements
needed for tenant improvements and lease commissions at 1881 Pine Street as new
leases are signed. In addition, tenant improvements and lease commissions will
be required at Kodak due to Invitrogen vacating the premises. Management
evaluates reserves and the availability of funds for distribution to partners on
a continuing basis based on anticipated

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leasing activity and cash flows available from investments. Due to the
significant amount of the working capital reserve that was used and will be
needed for leasing costs at RELP IV's properties, RELP IV borrowed $1,200,000
from Realco, subsequent to year-end to fund working capital needs in 1997. The
$6,000,000 note payable was thereby increased to $7,200,000 with a decrease in
the interest rate from 10% to 9%. The maturity date of the note was extended
from September 1997 to March 1, 1999.

Comparison of Three and Six Months Ended June 30, 1997 to June 30, 1996

At June 30, 1997, RELP IV had cash of $66,601 and temporary investments of
$1,097,639. These funds were held in the working capital reserve for the payment
of obligations of RELP IV. Accounts receivable consisted of amounts due from
tenants. Deferred charges and other assets consisted primarily of deferred rent
resulting from recognition of income as required by generally accepted
accounting principles and lease commissions. Accounts payable consisted of
amounts due to affiliates for reimbursable expenses and management fees, and
amounts due to third parties for expenses incurred for operations. Accrued
expenses and other liabilities consisted primarily of security deposits,
property tax accruals and prepaid rent.

During the quarter ended June 30, 1997, RELP IV distributed $120,990 to
Limited Partners and $1,222 to the General Partner for a total of $122,212.
Management evaluates reserves and the availability of funds for distribution to
partners on a continuing basis based on anticipated leasing activity and cash
flows available from the RELP's investments.

A significant amount of the working capital reserve was used during 1996
and will be needed in 1997 for leasing costs at RELP IV properties. During the
first quarter of 1997, RELP IV borrowed $1,200,000 from USAA Real Estate Company
to fund working capital needs in 1997. The $6,000,000 note payable was thereby
increased to $7,200,000 with a decrease in the interest rate from 10% to 9%. The
maturity date of the note payable was extended from September 1, 1997 to March
1, 1999.

During the second quarter, the $168,500 tenant improvement allowance
provided to Linear Technology in conjunction with its 1995 lease renewal was
paid from the working capital reserve of RELP IV.

At June 30, 1997, the Kodak Building was 61% occupied by Eastman Kodak.
Eastman Kodak's lease is scheduled to expire February 1998. Discussions continue
with Eastman Kodak regarding early renewal of their lease; however, Eastman
Kodak is not interested in expanding into the space vacated by Invitrogen. The
lease with Invitrogen Corporation was scheduled to expire December 31, 1996;
however, Invitrogen remained in the building until February 1997 paying holdover
rent (200% of December 1996 rent) for January and February. Discussions are
currently underway with a prospective tenant for the vacant space at the Kodak
Building. Water infiltration has been discovered at the Kodak Building that has
caused damage to a portion of the ground floor tiles, exterior walls and slab
joints. Remediation alternatives are being sought with costs estimated to be
approximately $120,000 to be funded from the working capital reserve of RELP IV.

At June 30, 1997, 1881 Pine Street was 90% leased. During the first quarter
of 1997, a sixty-two month lease was signed at 1881 Pine Street for 8,350
rentable square feet. The lease commenced May 1, 1997 and will terminate on June
30, 2002. The lease provides for an annual rental rate beginning at $16.00 per
square foot. In addition, this tenant will pay its pro rata share of operating
expenses in excess of a 1997 base year. RELP IV provided approximately $133,600
of tenant improvements, which was paid out of the working capital reserve of
RELP IV.

During 1995, the lease with Hewlett-Packard Company, the single tenant at
the Apollo Building in Chelmsford, Massachusetts was renewed for an additional
41 months. The new monthly rental rate of approximately $.57 per square foot net
for the 291,454 square foot building began January 1, 1997. This rate is lower
than the rate paid in 1996 of approximately $.76 per square foot net and
reflects the market conditions in the area surrounding the property at the time
of the lease renewal. An allowance for tenant improvements was provided for a
total of $565,000 to be paid from the working capital reserve. During 1997,
Hewlett-Packard used approximately $115,000 of the allowance. Approximately
$82,000 of the allowance remains. Hewlett-Packard has announced plans to
relocate its workstation group out of Massachusetts and to sublease the top
floor of the Apollo Building.

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Future liquidity is expected to result from cash generated from the
operations of the properties, interest on temporary investments and ultimately
through the sale of the properties.

RESULTS OF OPERATIONS

For the three-years ended December 31, 1996, income was generated from
rental income from the income-producing real estate properties and from interest
income earned on the funds in temporary investments.

Expenses incurred during the same periods were associated with the
operation of RELP IV's properties, interest on the mortgages and note payable
and various other costs required for administration of RELP IV.

During 1996, 1995 and 1994, two of RELP IV's properties were single-tenant
properties with absolute triple net leases. Under an absolute triple net lease,
the lessee is required to make all payments for expenses related to the use and
occupation of the leased premises, including real estate taxes and assessments,
property and liability insurance, repairs and maintenance, utilities and other
operating costs associated with the property. Accordingly, RELP IV received
rental income and the lessee absorbed all such expenses on these properties.

Rental properties decreased as of December 31, 1996 as compared to December
31, 1995 due to depreciation, offset by tenant improvements at 1881 Pine Street
and Apollo. Cash and cash equivalents decreased as of December 31, 1996 as
compared to December 31, 1995 due to payment for tenant improvements. Deferred
charges and other assets increased as of December 31, 1996 due to lease
commissions at 1881 Pine Street.

Rental income decreased for the year ended 1996 as compared to the year
ended 1995 primarily due to the vacancy at 1881 Pine Street. The rental rate
decrease at Linear due to the 1995 renewal added to the variance for 1996.
Rental income decreased for 1995 as compared to 1994 primarily due to the single
tenant at 1881 Pine Street vacating the property in May 1995 upon expiration of
the lease. The single tenant provided approximately $1.3 million of rental
income during 1994. Also contributing to the decrease in rental income in 1995
was the rent reduction at Linear. The tenant at Linear renewed at a monthly rate
of $.75 per square foot for the 42,130 square foot building, which is lower than
the previous monthly rate of $1.15 per square foot and reflects the current
market conditions in the area surrounding the property.

Depreciation increased for 1995 as compared to 1994 due to improvements at
1881 Pine Street and Kodak. Other direct expenses were higher for 1996 as
compared to 1995 due to operating expenses at 1881 Pine Street. The 1881 Pine
Street property incurred legal fees for new leases, expenses for utilities,
heating and air conditioning repairs and other building service expenses
previously paid by the single tenant. Other direct expenses were higher for 1995
as compared to 1994 as a result of sidewalk repairs, property tax payments and
demolition costs at the 1881 Pine Street property to enhance the appearance of
the property for showing to prospective tenants. Also contributing to the
increase were parking lot repairs at the Apollo Building which was part of the
tenant improvement allowance.

Lower cash reserves caused the decrease in interest income for the year
ended 1996 as compared to the year ended 1995. Higher interest rates and an
increase in cash reserves accounted for the increase in interest income for 1995
as compared to 1994.

General and administrative expenses increased for the year ended 1996 as
compared to the year ended 1995 primarily due to lease commission expense. Lease
commissions were paid for the Linear Technology lease renewal and the Invitrogen
lease renewal at the Kodak Building. General and administrative expenses
decreased for 1995 as compared to 1994 due to a reduction in charges for
preparation of federal and state tax returns, a reduction in a partnership
earnings tax paid to the City of St. Louis and a decrease in printing charges.

The management fee payable to Realco is based on cash flow from operations
of RELP IV adjusted for cash reserves and fluctuated accordingly. The decrease
in the management fee for 1996 as compared to 1995 was a result of the decrease
in revenues and an increase in operating expenses at 1881 Pine Street.

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Interest expense decreased in 1996 and 1995 as compared to 1994 due to
principal balance reductions.

Minority interest in joint venture earnings increased for the year ended
1996 as compared to the year ended 1995 as a result of an increase in net income
of the joint venture property due to decreases in parking lot repairs and
interest expense. Minority interest in joint venture earnings decreased for 1995
as compared to 1994 due to a decrease in net income of the joint venture
property as a result of parking lot repairs, offset somewhat by a decrease in
interest expense.

Comparison of Three and Six Months Ended June 30, 1997 to June 30, 1996

Expenses incurred during the same periods were associated with the
operation of RELP IV's properties, interest on the mortgages payable and various
other costs required for administration of RELP IV.

Rental properties decreased as of June 30, 1997 as compared to December 31,
1996 due to depreciation offset by tenant improvements at 1881 Pine Street,
Linear and at the Apollo Building for Hewlett-Packard. Accounts receivable was
higher at June 30, 1997 due to a receivable from a tenant at the Apollo
Building. Deferred charges and other assets increased as a result of lease
commissions paid at 1881 Pine Street. The note payable to affiliate increased as
of June 30, 1997 due to borrowing from Realco to fund working capital needs. See
"Liquidity and Capital Resources." Accrued expenses and other liabilities
increased primarily due to an increase in accrued property taxes at 1881 Pine
Street and was offset by a decrease in prepaid revenue.

Rental income increased for the three-month and six-month periods ended
June 30, 1997 as compared to the three-month and six-month periods ended June
30, 1996. Rental income at 1881 Pine Street increased by approximately $310,000
and $529,000 for the three-month and six-month periods ended June 30, 1997,
respectively, due to increased occupancy from 0% at June 30, 1996 to 90% at June
30, 1997. Offsetting this increase in rental income was a decrease in rental
income at the Apollo Building. The 1995 lease renewal became effective January
1, 1997, decreasing monthly rental income from approximately $.76 per square
foot to approximately $.57 per square foot resulting in a decrease for the
three-month and six-month periods ended June 30, 1997 of approximately $194,000
and $383,000, respectively. A decrease in rental income at the Kodak Building
also contributed approximately $86,000 and $72,000 for the three-month and
six-month periods ended June 30, 1997, respectively, due to a decrease in
occupancy from 100% at December 31, 1996 to 61% at June 30, 1997.

Interest income decreased due to lower cash balances for the three-month
and six-month periods ended June 30, 1997 as compared to the three-month and
six-month periods ended June 30, 1996.

Direct expenses were higher for the three-month and six-month periods ended
June 30, 1997 as compared to the three-month and six-month periods ended June
30, 1996 due to operating expenses at 1881 Pine Street. Expenses were minimal
for the three-month and six-month periods ended June 30, 1996 due to the
building being 100% vacant. For the three-month and six-month periods ended June
30, 1997, 1881 Pine Street incurred expenses for utilities, heating and air
conditioning repairs, cleaning and other building services. Also contributing to
the increase was an increase in the property tax accrual. 1881 Pine Street was
under a redevelopment real estate tax incentive program, which expired December
31, 1996. The 1996 tax payment was approximately $23,000 compared to an estimate
for 1997 taxes of approximately $212,000.

Depreciation increased for the three-month and six-month periods ended June
30, 1997 as compared to the three-month and six-month periods ended June 30,
1996 due to tenant improvements at 1881 Pine Street, Linear and Apollo offset by
a decrease at the Kodak Building caused by tenant improvements for Invitrogen
being fully depreciated in April 1996.

General and administrative expenses increased for the three-month and
six-month periods ended June 30, 1997 as compared to the three-month and
six-month periods ended June 30, 1996 due to lease commission expense at 1881
Pine Street for the new leases and at Apollo for the lease renewal. The

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management fee is based on cash flow from operations of RELP IV adjusted for
cash reserves and fluctuated accordingly. The decrease in the management fee for
the three-month and six-month periods ended June 30, 1997 was due to an increase
in expenses at 1881 Pine Street.

Minority interest in joint venture earnings decreased for the three-month
and six-month periods ended June 30, 1997 as compared to the three-month and
six-month periods ended June 30, 1996 due to a net loss for the joint venture
property for the three-month and six-month periods ended June 30, 1997. Rental
income at the Apollo Building decreased based on the lease renewal effective
January 1, 1997.

INFLATION

An increase in inflation could affect RELP IV's investments through
increases in the costs of operating and maintaining the properties and in
various administrative costs of RELP IV operations. The adverse effect inflation
may have on operating expenses would be offset to some extent by increases in
rental rates charged tenants at RELP IV'S properties. If high occupancy levels
are maintained at the properties, increases in rental income should offset
increasing property operating expenses with minimal effect on operating income.

RECENT DEVELOPMENTS

On August 20, 1997, the Lawsuit, which was filed in the Superior Court of
the State of Arizona and which has been removed to the United States District
Court for the District of Arizona, was served upon Realco, the General Partners,
certain other affiliated entities and the individual members of the boards of
directors of each of the General Partners. The Trust was also named as a
defendant. The Lawsuit alleges, among other things, breaches of fiduciary duty
in connection with the transactions contemplated by the Merger Agreement. The
Lawsuit seeks, among other things, to enjoin the consummation of the Merger and
damages, including attorneys' fees and expenses. The defendants in the Lawsuit
believe that the plaintiffs' claims are without merit and intend to defend
vigorously against the Lawsuit. However, no assurance can be given that the
plaintiffs in the Lawsuit will not be successful. If such plaintiffs were to
successfully enjoy the consummation of the Merger, a condition to the
obligations of the Trust and the RELPS to consummate the Merger would not be
satisfied, which would entitle the General Partner of any RELP or the Trust
Managers to terminate the Merger Agreement and abandon the Merger.

Pursuant to the terms of the Merger Agreement, for a period of six years
from and after the Effective Time, the Trust must indemnify the partners or
agents of any RELP who at any time prior to the Effective Time were entitled to
indemnification under the Partnership Agreement of the RELP. Such persons are
entitled to indemnification to the same extent as they would have been entitled
to indemnification under the RELP IV Partnership Agreement. If the Merger occurs
and if the court were to determine that the General Partners, their affiliated
entities and/or the members of the boards of directors of the General Partners
were liable for damages in connection with the Lawsuit, to the extent the
General Partners and the directors would have been entitled to indemnification
under the Partnership Agreements, the Trust would be required to indemnify such
parties for costs and expenses related to the Lawsuit. If the Merger does not
occur and such parties are held liable for damages, if they are entitled to
indemnification under the RELP IV Partnership Agreement, depending upon the
amount of such costs and expenses, it could have a material adverse effect on
RELP IV.

COMPARISON OF OWNERSHIP OF UNITS AND SHARES

The information below highlights a number of the significant differences
between the RELPS and the Trust relating to, among other things, form of
organization, investment objectives, policies and restrictions, asset
diversification, capitalization, management structure, compensation and fees,
and investor rights, and compares certain of the respective legal rights
associated with the ownership of Units and Shares. These comparisons are
intended to assist Limited Partners in understanding how their investments will
be changed if, as a result of the Merger, their Units are exchanged for Shares.
This discussion is summary in nature and does not constitute a complete
discussion of these matters, and Limited Partners should carefully review the
balance of this Joint Proxy Statement/Prospectus for additional discussions.

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FORM OF ORGANIZATION

Each of the RELPS is a limited partnership organized under California, Texas or
Delaware law formed for the purpose of investing in a real estate portfolio
consisting of income producing commercial or industrial real property. Each RELP
has been treated as a partnership for federal income tax purposes. See "Business
of the RELPS."

The Trust is a Texas real estate investment trust (a "Texas REIT") formed for
the purpose of investing in real estate properties. As a Texas REIT, the Trust
may remain in existence in perpetuity. The Trust intends to continue to qualify
as a REIT for federal income tax purposes.

Each of the RELPS is a limited partnership under state law, while the Trust is
organized as a Texas REIT. The RELPS and the Trust are each vehicles recognized
as appropriate for the holding of real estate investments and afford passive
investors, such as Limited Partners and shareholders, certain benefits,
including limited liability, a professionally managed portfolio and the
avoidance of double-level taxation on distributed income. The RELPS are under
the control of their General Partners, while the Trust is governed by its Trust
Managers. In addition, there are significant differences in the tax treatment of
the RELPS as partnerships and the Trust as a REIT, and some of the material tax
differences are summarized below under the captions "Taxation of Taxable
Investors" and "Taxation of Tax-Exempt Investors."

LENGTH OF INVESTMENT

An investment in each of the RELPS was presented to Limited Partners as a finite
life investment, with the Limited Partners to receive regular cash distributions
out of the RELP's net operating income and special distributions of net sale
proceeds through the liquidation of the RELP's real estate investments. Under
each of the Partnership Agreements, the RELP's stated term of existence was for
a substantial period (from 40 to 65 years depending upon the RELP), but the
General Partner stated its intention of selling the RELP's properties within a
period of four to ten years after acquisition or development of the properties.
Limited Partners were advised that sale of the RELP's assets would, however, be
dependent upon market conditions and as such, might vary from time to time. See
"Business of the RELPS -- Properties."

Unlike the RELPS, the Trust intends to continue its operations for an indefinite
time period and has no specific plans for disposition of the assets acquired
through the Merger or subsequent acquisitions. The Trust intends to distribute
at least 95% of its REIT taxable income, but expects to retain net sale or
refinancing proceeds for new investments, capital expenditures, working capital
reserves or other appropriate purposes. In contrast to the RELPS, the Trust will
constitute a vehicle for taking advantage of future investment opportunities
that may be available in the real estate markets. See "The Merger -- Background
of and Reasons for Merger."

Limited Partners in each of the RELPS expect liquidation of their investment
when the assets of the RELP are liquidated. In contrast, the Trust does not
expect to dispose of its investments within any prescribed periods and, in any
event, plans to retain the net sale proceeds for future investments unless
distributions are required to retain REIT status. Shareholders are expected to
achieve liquidity for their investments by trading the Shares in the market that
may develop after the Merger, and not through the liquidation of the Trust's
assets. The Shares may trade at a discount from, or premium to, their pro rata
interest in the liquidation value of the Trust's properties.

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PROPERTIES AND DIVERSIFICATION

The investment portfolio of each of the RELPS is generally limited to the assets
acquired with the initial equity raised from the General and Limited Partners as
well as the debt financing obtained by the RELPS within the established
borrowing restrictions.

As a result of the Merger, the Trust will acquire substantially all of the
properties of the Participating RELPS. In addition, the Trust may issue debt
and/or equity securities in the future, and to retain all, or substantially all,
of the net liquidation proceeds from the sale of the Trust's assets to finance
expansion of the Trust's investment portfolio.

Through the Merger, the Trust's current portfolio and through additional
investments that may be made from time to time, the Trust will have an
investment portfolio substantially larger and more diversified than the
portfolio of any of the RELPS. An investment in the Trust is subject to the
risks normally attendant to ongoing real estate ownership and, if the Trust
develops property, to the risks related to property development.

PERMITTED INVESTMENTS

Each of the RELPS was generally authorized to invest in all types of
income-producing properties, as well as, in some cases, undeveloped real estate.
The RELPS have limited their investments primarily to office buildings, shopping
centers and industrial buildings. See "Business of the RELPS."

Under the Declaration of Trust, the Trust may purchase, hold, lease, manage,
sell, develop, subdivide and improve real property and interests in real
property. See "Investment Policies and Restrictions."

The RELPS have concentrated their investment typically in office and industrial
buildings, while the Trust has concentrated its investments in industrial
properties. The Declaration of Trust, however, authorizes it to make other real
estate investments. Consequently, after the Merger, the Trust's investments will
be more diversified than the investments of the RELPS. Such diversification, if
it occurs, may serve as a hedge against the risk of having all of the Trust's
investments limited to a single asset group but will also expose the Trust to
the risk of owning and operating assets not directly related to its primary
property type.

ADDITIONAL EQUITY

None of the RELPS is authorized to issue additional equity securities other than
the Units.

The Trust Managers may, in their discretion, issue additional equity securities
consisting of Common Shares or Preferred Shares, provided that the total number
of Shares issued does not exceed the authorized number of Shares or Preferred
Shares set forth in the Declaration of Trust. The Trust expects to raise
additional equity from time to time to increase its available capital for
investment.

Unlike the RELPS, the Trust has substantial flexibility to raise equity, through
the sale of Shares or Preferred Shares, to finance its business and affairs. The
Trust, through the issuance of new equity securities, may substantially expand
its capital base to make new real estate investments. An investment in the Trust
should not be viewed as an investment in a specified pool of assets, but instead
as an investment in an ongoing real estate investment business, subject to the
risks associated with a real estate portfolio that is expected to change from
time to time. The issuance of additional equity securities by the Trust will
dilute the interests of shareholders if sold at prices below their fair market
value.

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BORROWING POLICIES

Subject to varying restrictions, each of the RELPS was authorized to borrow
funds for the acquisition and development of its original portfolio.

The Trust is permitted to borrow, on a secured or unsecured basis, funds to
finance its business.

In conducting its business, the Trust may borrow funds to the extent believed
appropriate. It is expected that the Trust will be more leveraged than the
RELPS, some of which have not incurred significant borrowings in comparison to
the overall value of their assets. Borrowing funds may allow the Trust to
substantially expand its asset base, but likewise will increase the Trust's
risks due to its leveraged investments.

RESTRICTIONS UPON RELATED PARTY TRANSACTIONS

In varying degrees, each of the Partnership Agreements restricts the applicable
RELP from entering into a variety of business transactions with the General
Partners and their Affiliates. Since each of the Partnership Agreements may be
amended by a majority vote of Limited Partners, it is possible to amend the
Partnership Agreement to authorize any transaction with the General Partners and
affiliates.

Texas law allows the Trust to engage in transactions with Trust Managers, or
other persons a Trust Manager is directly or indirectly interested in or
connected with, as a trustee, partner, trust manager, shareholder, member,
employee, officer or agent of such other persons. The Bylaws prohibit the Trust
from entering into a transaction with any of the interested parties unless the
terms and conditions of such transaction have been disclosed to the Trust
Managers and approved by a majority of Trust Managers not otherwise interested
in the matter (including a majority of independent Trust Managers or has been
disclosed in reasonable detail to the shareholders, and approved by holders of a
majority of Shares then outstanding or entitled to vote thereon).

Except for transactions specifically approved in the Partnership Agreements, the
RELPS are, to varying degrees, not authorized to enter into transactions with
the General Partners and their affiliates without Limited Partner approval.
Texas law allows the Trust to enter into transactions with interested parties,
such as Trust Managers, officers, significant shareholders, Realco and
Affiliates thereof, but such transactions must be approved by a majority of the
Trust Managers not interested in the matter provided that they have determined
the transaction to be fair, competitive and commercially reasonable. Since the
neither the Bylaws nor the Declaration of Trust requires the approval of
shareholders for entering into transactions with interested parties, it may be
easier for the Trust to enter into such transactions than it would be for the
RELPS, where Limited Partner approval for such transactions is mandated.

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MANAGEMENT CONTROL AND RESPONSIBILITY

Under each of the Partnership Agreements, the General Partners are, subject to
certain narrow limitations, vested with all management authority to conduct the
business of the RELP, including authority and responsibility for overseeing all
executive, supervisory and administrative services rendered to the RELP. The
General Partners have the right to continue to serve in such capacities unless
removed by a majority vote of Limited Partners. Limited Partners have no right
to participate in the management and control of the RELP and have no voice in
its affairs except for certain limited matters that must be submitted to a vote
of the Limited Partners under the terms of the Partnership Agreements or as
required by law. See "Voting Rights" below. The General Partners are accountable
as fiduciaries to the RELPS and are required to exercise good faith and
integrity in their dealings in conducting the RELP's affairs. See "Fiduciary
Responsibility -- General Partners of the RELPS."

The Board of Trust Managers will have exclusive control over the Trust's
business and affairs subject only to the restrictions in the Declaration of
Trust and the Bylaws. Shareholders have the right to elect members of the Board
of Trust Managers. The Trust Managers are required to act in good faith and
exercise care in conducting the Trust's affairs. See "Fiduciary
Responsibility -- Trust Managers and Officers of the Trust."

Shareholders will have greater control over management of the Trust than the
Limited Partners have over the RELPS because the Trust Board is elected by the
shareholders. The General Partners do not need to seek re-election annually, but
instead serve unless removed by an affirmative vote of the Limited Partners,
which is generally regarded as an extraordinary event only appropriate in cases
of mismanagement and changes in control due to shifts in the ownership of Units.

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MANAGEMENT LIABILITY AND INDEMNIFICATION

As a matter of state law, the General Partners have liability for the payment of
RELP obligations and debts unless limitations upon such liability are expressly
stated in the obligation. Each of the Partnership Agreements provides generally
that neither General Partners nor any of their affiliates performing services on
behalf of the RELP will be liable to the partnership or its Limited Partners for
any act or omission performed in good faith pursuant to authority granted by the
Partnership Agreement, and in a manner reasonably believed to be within the
scope of the authority granted and in the best interest of the RELPS, provided
that such act or omission did not constitute fraud, misconduct, bad faith or
negligence. In addition, the Partnership Agreements indemnify the General
Partners and their affiliates for liability, loss, damage, cost and expenses,
including attorneys' fees, incurred by them in conducting the RELPS' business,
except in events such as fraud, misconduct, bad faith or negligence.

The Declaration of Trust and state law provide broad indemnification rights to
Trust Managers and officers who act in good faith, and in a manner reasonably
believed to be in or not opposed to the best interests of the Trust and, with
respect to criminal actions or proceedings, without reasonable cause to believe
their conduct was unlawful. In addition, the Declaration of Trust indemnifies
Trust Managers and officers against amounts paid in settlement, authorizes the
Trust to advance expenses incurred in defense, upon the Trust's receipt of an
appropriate undertaking to repay such amounts if appropriate, and authorizes the
Trust to carry insurance for the benefit of its offices and trust managers even
for matters as to which such persons are not entitled to indemnification. See
"Fiduciary Responsibility." Through the Merger, the Trust will be assuming all
existing and contingent liabilities of the Participating RELP, including their
obligations to indemnify the General Partners and others for litigation expenses
that might be incurred by them for serving as general partners of the RELPS or
for sponsoring the Merger.

To varying degrees, the General Partners of each of the RELPS have limited
liability to the RELP for acts of omissions undertaken by them when performed in
good faith, in a manner reasonably believed to be within the scope of their
authority and in the best interests of the RELP. The General Partners also have,
under specified circumstances, a right to be reimbursed for liability, loss,
damage, costs and expenses incurred by them by virtue of serving as General
Partners. Although the standards are expressed somewhat differently, there are
similar limitations upon the liability of the Trust Managers and officers of the
Trust when acting on behalf of the Trust and upon the rights of such persons to
seek indemnification from the Trust. The Trust believes that the scope of the
liability and indemnification provisions in the Trust's governing documents
provides protection against claims for personal liability against the Trust's
Trust Managers and officers which is comparable to, though not identical with,
the protections afforded to the General Partners and their affiliates under the
Partnership Agreements. Through the Merger, the Trust will be assuming all of
the existing and contingent liabilities of Participating RELP, including their
obligations to indemnify the General Partners and other persons.

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ANTI-TAKEOVER PROVISIONS

Changes in management can be The Declaration of Trust and Bylaws
effected only by removal of the contain a number of provisions that
General Partners, which action might have the effect of entrenching
requires a majority vote of Limited current management and delaying or
Partners. Due to transfer discouraging a hostile takeover of
restrictions in the Partnership the Trust. These provisions include,
Agreements, the General Partners may among others, the following:
restrict transfers of the Units and,
in particular, affect whether the (a) the power of the Trust Managers
transferees have voting rights. Of to issue 50,000,000 Preferred
particular significance is that an Shares, with such rights and
assignee of a Unit may not become a preferences as determined by the
substitute Limited Partner, Trust Managers;
entitling him to vote on matters
that may be submitted to the Limited (b) the power of the Trust Managers
Partners for approval, unless such to stop transfers and/or redeem
substitution is consented to by the Shares under the following
General Partners, which consent, in conditions: from any shareholder
the General Partners' absolute who owns, directly or
discretion, may be withheld. The indirectly, 9.8% or more of the
General Partners may exercise this outstanding Shares, from any
right of approval to deter, delay or five or fewer shareholders who
hamper attempts by persons to own, directly or indirectly,
acquire a majority interest of the more than 50% of the outstanding
Limited Partners. Shares, or from any other
Shareholder if the Trust
Managers otherwise determine in
good faith that ownership of the
outstanding Shares has or may
become concentrated to an extent
that may prevent the Trust from
qualifying as a REIT under the
Code. Any Shares transferred in
violation of this restriction
become "Excess Shares," with no
voting or distribution rights.
The Trust has the power to
purchase or direct the sale of
such Excess Shares, with the
sale proceeds being paid to the
former owner;

(c) Trust Managers remain in office
unless removed by the
shareholders or if another
nominee for Trust Manager
receives the vote of a majority
of the outstanding Shares. Trust
Managers remain on the Trust
Board regardless of whether they
receive a vote of the majority
of the outstanding Shares at the
Trust's annual meeting; and

(d) the requirement that, except in
certain circumstances, certain
"business combinations" (as
defined therein) between the
Trust and a "related person" (as
also defined therein, generally
a person or entity which owns
more than 50% of the outstanding
shares of the Trust) be approved
by the affirmative vote of the
holders of 80% of the
outstanding Shares and Preferred
Shares, including the vote of
the holders of not less than 50%
of the Shares and Preferred
Shares not owned by the related
person. This business
combination section in the
Declara-

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tion of Trust includes a "fair
price provision" which is
designed to prevent a purchaser
from utilizing two-tier pricing
and similar tactics in an
attempted takeover of the Trust,
and it may have the overall
effect of making it more
difficult to acquire and
exercise control of the Trust.
In very general terms, the fair
price provision requires that
unless a potential purchaser
were willing to purchase 80% of
the outstanding shares of the
Trust as the first step in a
business combination (or unless
a potential purchaser were
assured of obtaining the
affirmative votes of at least
80% of the Trust's outstanding
shares), the purchaser would be
required either to negotiate
with the Trust Managers and
offer terms acceptable to them
or to abandon the proposed
business combination. The fair
price provision may provide the
Trust Managers with enhanced
ability to block any proposed
acquisition of the Trust and to
retain their positions in the
event of a takeover bid and may
require a related person to pay
a higher price for shares or
structure his, her or its
transaction differently than
would be the case in the absence
of the Fair Price provision.
Although it may, under certain
circumstances, have the effect
of discouraging unilateral
tender offers or other takeover
proposals and enhance the
ability of the Trust Managers to
retain their positions in the
event of a takeover bid, the
business combination provision
in the Declaration of Trust
assures, to some degree, fair
treatment of all shareholders in
the event of a two-step takeover
attempt.

Certain provisions of the governing documents of the RELPS and the Trust could
be used to deter attempts to obtain control of the RELPS and the Trust in
transactions not approved by the General Partners and the Trust Managers,
respectively. Because the Shares are freely transferable and traded on the NYSE,
there is a greater likelihood of changes in control in the case of the Trust,
notwithstanding those provisions that might be employed by the Trust Board to
resist efforts to change control.

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VOTING RIGHTS

Limited Partners by a majority vote may, without the concurrence of the General
Partners, amend the Partnership Agreement, dissolve the RELP, remove and/or
elect a General Partner, and approve or disapprove the sale of all or
substantially all of the RELP's assets. Limited Partners may not exercise these
rights in a way to extend the term of the RELP, change the RELP to a general
partnership, change the limited liability to the Limited Partners or affect the
status of the RELP for federal income tax purposes. Furthermore, the RELPS
cannot change the allocations of income, losses and cash distributions or the
powers, rights and duties of the General Partner without the consent of the
General Partner.

Shareholders are entitled to elect the Trust Board at each annual meeting of the
Trust. However, Trust Managers remain in office even if they do not receive the
vote of the holders of a majority of the outstanding Shares unless another
nominee for his seat receives such a vote. The Declaration of Trust grants
shareholders the non-exclusive right, with approval of the Trust Managers, to
amend the Declaration of Trust or without Trust Manager approval, to amend the
Bylaws, dissolve the Trust, vote to remove members of the Board of Trust
Managers, and approve or disapprove the sale of substantially all of the Trust's
assets. In addition, certain other actions may not be taken by the Trust
Managers without the approval of shareholders, such as:

(a) amendment of the Declaration of Trust; and

(b) merger of the Trust with or into another entity unless (i) the Trust is the
surviving entity and the merger does not amend in any respect the
Declaration of Trust; (ii) each share of the Trust outstanding prior to the
merger is to be an identical share of the Trust after the merger; and (iii)
either no Shares or no securities convertible into Shares are issued under
the plan or the authorized unissued Shares or treasury shares of the Trust
to be issued under the merger plus those issuable upon conversion of any
other securities to be issued in the merger do not exceed 20% of the Shares
of the Trust outstanding immediately prior to the merger.

Shareholders have broader voting rights (i.e., the right to elect the Trust
Managers at each annual meeting) than those currently afforded to Limited
Partners.

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LIMITED LIABILITY OF INVESTORS

Under each of the Partnership Agreements and applicable state law, the liability
of Limited Partners for the RELP's debts and obligations is generally limited to
the amount of their investment in the RELP, together with an interest in
undistributed income, if any. The Units are fully paid and nonassessable.

Under Texas law, shareholders will not be liable for Trust debts or obligations.
The Shares, upon issuance, will be fully paid and nonassessable.

The limitation on personal liability of Shareholders of the Trust is
substantially the same as that of Limited Partners in the RELPS.

REVIEW OF INVESTOR LISTS

Generally speaking, Limited Partners of each of the RELPS are entitled to
request copies of investor lists showing the names and addresses of all General
and Limited Partners. The right to receive such investor lists may be
conditioned upon the Limited Partners' payment of the cost of duplication and a
showing that the request is for a reasonable purpose. Reasonable requests would
include requests for investor lists for the purpose of opposing the Merger.

A Shareholder is entitled, upon written demand, to inspect and copy the share
records of the Trust, at any time during usual business hours, for a purpose
reasonably related to his interest as a shareholder.

The right of shareholders to review investor lists is substantially the same as
the right afforded Limited Partners.

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TAXATION OF TAXABLE INVESTORS

Income or loss earned by each of the RELPS, is not taxed at the partnership
level. Limited Partners are required to report their allocable share of RELP
income and loss on their respective tax returns. Income and loss from a RELP
generally constitute "passive" income and loss, which can generally offset
"passive" income and loss from other investments. Due to depreciation and other
noncash items, cash distributions are not generally equivalent to the income and
loss allocated to Limited Partners. During operations, such cash distributions
are partially sheltered but, if the properties retain their value or appreciate,
gain upon liquidation of the asset will exceed the cash distributions available
to Limited Partners. After the end of each fiscal year, Limited Partners receive
annual Schedule K-1 forms showing their allocable share of RELP income and loss
for inclusion on their federal income tax returns.

If the Trust qualifies as a REIT (and the Trust intends to conduct its business
to so qualify), the Trust generally is permitted to deduct distributions to its
shareholders, which effectively reduces or eliminates the "double taxation" (at
the corporate and shareholder levels) that typically results when a corporation
earns income and distributes that income to shareholders in the form of
dividends. Shareholders will only recognize income on amounts actually
distributed by the Trust. Dividends received by shareholders from the Trust
generally will constitute portfolio income; which cannot offset "passive" income
and loss from other investments. Losses and credits generated within the Trust,
however, do not pass through to the shareholders. Because the amount of
distributions required to be made by the Company for purposes of maintaining its
REIT characterization is determined based on a percentage of taxable income
(calculated with depreciation deductions, excluding any net capital gains and
prior to payment of any dividends) the amount of distributions required to be
made by the Trust may be less than the distributions made by the RELPS. After
the end of the Company's calendar year, Shareholders should receive a Form
1099-DIV used by corporations to report their dividend income.

Each of the RELPS is a pass-through entity, whose income and loss is not
taxed at the entity level but instead allocated directly to the General Partners
and Limited Partners. Limited Partners are taxed on income or loss allocated to
them, whether or not cash distributions are made to the Limited Partners. In
contrast, the Trust intends to qualify as a REIT, allowing it to deduct
dividends paid to its Shareholders. To the extent the Trust has net income
(after taking into account the dividends paid deduction), such income will be
taxed at the Trust's level at the standard corporate tax rates. Dividends paid
to shareholders will constitute portfolio income and not passive income.

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TAXATION OF TAX-EXEMPT INVESTORS

Income or loss earned by each of the RELPS is generally treated as UBTI unless
the type of income generated by the RELP would constitute qualified rental
income or other specifically excluded types of income. For RELP income to be
characterized as rental income, the RELP could not provide services to tenants
that are considered other than those usually or customarily rendered in
connection with the rental of rooms for occupancy only. Because of the
inherently factual nature of this issue, it is uncertain whether the income
received by the RELPs in connection with the leasing of its Properties
constitutes rental income for these UBTI purposes. Accordingly, there is risk
that the RELP's income could be treated as UBTI for tax-exempt Limited Partners.

The IRS has ruled that income attributable to an investment in a REIT will not
constitute UBTI to certain tax-exempt investors as long as such investor does
not hold its shares subject to acquisition indebtedness. Accordingly, dividends
received from the Trust by tax-exempt shareholders should not constitute UBTI if
such shareholders did not finance the acquisition of their Shares. The amount of
dividends paid to tax-exempt shareholders may be less than the distributions
made to such entities from their respective RELP because of the REIT requirement
that distributions be based on a percentage of REIT taxable income.

A tax-exempt entity is treated as owning and carrying on the business
activity conducted by a partnership in which such entity owns an interest.
Accordingly, to the extent a tax-exempt Limited Partner owns an interest in a
RELP, the income received by such RELP must not constitute UBTI in order for the
tax-exempt Limited Partner to avoid taxation.

170
<PAGE> 192

COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS

This discussion is intended to provide Limited Partners with a comparison
of the compensation, fees and distributions payable by the Trust to the General
Partners and their Affiliates after the Merger with the compensation, fees and
distribution currently payable by the RELPS to the General Partners and their
Affiliates. The Trust intends to engage an Affiliate of Realco to manage and
lease the properties obtained by the Trust from the Participating RELPS pursuant
to the Merger. The terms of this engagement will be substantially similar to the
terms governing the management arrangements the Trust typically uses in managing
its current properties. Other than compensation payable to Realco's designees as
Trust Managers, the General Partners and their Affiliates will enter into no
other compensation arrangements with the Trust.

Each General Partner owns Units in the RELP for which it serves as General
Partner. Consequently, each General Partner has received cash distributions as a
result of owning these Units to the same extent as other Limited Partners, as
well as distributions with respect to its general partner interest. If the
Merger is consummated, the General Partners will receive distributions on Shares
they receive in exchange for their Units to the same extent as other
shareholders of the Trust. The General Partners have agreed to waive any right
to receive Shares to which they may otherwise have been entitled in exchange for
their general partnership interest.

The General Partners believe that any conflicts that may have arisen
between their interests and the interests of the Limited Partners in connection
with the Merger were immaterial because, as described below, the compensation
and fees the General Partners and their Affiliates expect to receive after the
Merger for property management and leasing services are substantially similar,
or identical, to the compensation and fees the General Partners and their
Affiliates currently receive. Further, the Merger's effect on the cash
distributions received previously to the Merger is identical to the Limited
Partners and the General Partners and their Affiliates, except that the effect
on the General Partners will be more detrimental considering that the General
Partners will not receive Shares for their general partnership interest.

Set forth below, for each RELP, is a table showing the actual amounts of
compensation and distributions paid by each RELP on a combined basis to each
respective General Partner and its Affiliates for the last three fiscal years
and the most recently ended interim period. Each table also shows amounts of
compensation and distributions that would have been paid if the compensation and
distributions structure to be in effect after the Merger had been in effect
during such period.

COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES

Combined

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------- SIX MONTHS ENDED
1994(1) 1995(1) 1996(1) JUNE 30, 1997(1)
--------------------- --------------------- --------------------- ---------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees.............. 115,543 121,376 105,096 109,806 139,303 154,948 115,880 158,858
Adviser Fees................. 276,114 0 332,611 0 185,175 0 131,787 0
Leasing Commissions.......... 28,108 28,108 457,213 457,213 75,472 75,472 288,353 288,353
Interest Expense............. 808,656 863,973 1,829,888 1,928,049 1,741,138 1,894,892 1,025,429 908,971
Cash Distributions........... 988,419 0 599,618 97,365 1,075,835 97,365 279,448 48,795
--------- --------- --------- --------- --------- --------- --------- ---------
2,216,840 1,013,457 3,324,426 2,592,433 3,216,923 2,222,677 1,840,897 1,404,977
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>

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

(1) The information for RELP II has been converted to calendar year for
comparison purposes.

171
<PAGE> 193

RELP I

The following table sets forth the compensation, fees and distributions by
RELP I to the General Partner and its Affiliates during the three most recent
fiscal years and the six-month period ended June 30, 1997 and compares those
payments to the amount that would have been paid assuming the Merger had
occurred on January 1, 1994.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------ SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
-------------------- -------------------- -------------------- --------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees(1)............. $ 29,205 $29,205 $ 40,089 $40,089 $ 48,992 $48,992 $ 27,014 $27,014
Advisor Fees(2)................ 49,325 -- 77,791 -- 67,893 -- 36,029 --
Leasing Commissions(3)......... 28,108 28,108 9,671 9,671 9,199 9,199 220 220
Cash Distributions(4).......... 104,826 -- 104,826 19,210 634,946 19,210 52,693 9,605
-------- ------- -------- ------- -------- ------- -------- -------
$211,464 $57,313 $232,377 $68,970 $761,030 $77,401 $115,956 $36,839
-------- ------- -------- ------- -------- ------- -------- -------
</TABLE>

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

(1) USAA Realty Company receives fees of up to 6% of the cash receipts of the
properties for managing and providing leasing services for the properties.

(2) Realco receives advisory fees of up to 4% of gross revenues from operations
or 9% of RELP I's adjusted cash flow.

(3) Actual numbers have been adjusted to represent the gross amount of
commissions due, which are presently earned when the monthly rent from the
lease contracts are collected under the current Partnership Agreement.
Payments to outside brokers have not been included. It was assumed for the
pro forma numbers that the services of the outside brokers would still have
been utilized.

(4) Includes all cash distributions made to the General Partner and its
Affiliates resulting from ownership of Units and general partner interests.

RELP II

The following table sets forth the compensation, fees and distributions by
RELP II to the General Partner and its Affiliates during the three most recent
fiscal years and compares those payments to the amount that would have been paid
assuming the Merger had occurred on June 30, 1995.

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------
1995 1996 1997
-------------------- -------------------- --------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Management Fees(1).................................. $ 12,299 $ 12,299 $ 12,110 $12,110 $ 12,496 $12,496
Leasing Commissions(2).............................. 185,066 185,066 -- -- -- --
Cash Distributions(3)............................... 321,184 38,260 270,471 38,260 339,208 38,318
-------- -------- -------- ------- -------- -------
$518,549 $235,625 $282,581 $50,370 $351,704 $50,814
======== ======== ======== ======= ======== =======
</TABLE>

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

(1) USAA Realty Company receives fees of up to 6% of the cash receipts of the
properties for managing and providing leasing services for the properties.
Actual and pro forma numbers are based on a 1% property management fee.

(2) Actual numbers have been adjusted to represent the gross amount of
commissions due, which are presently earned when the monthly rent from the
lease contracts are collected under the current Partnership Agreement.

(3) Includes all cash distributions made to the General Partner and its
Affiliates resulting from ownership of Units and general partner interests.

RELP III

The following table sets forth the compensation, fees and distributions by
RELP III to the General Partner and its Affiliates during the three most recent
fiscal years and the six-month period ended June 30,

172
<PAGE> 194

1997 and compares those payments to the amount that would have been paid
assuming the Merger had occurred on January 1, 1994.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------ SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
-------------------- ----------------------- ----------------------- -----------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees(1)......... $ -- $ -- $ -- $ -- $ 27,114 $ 39,117 $ 61,651 $ 102,751
Advisor Fees(2)............ 135,340 -- 164,444 -- 67,148 -- 82,201 --
Leasing Commissions(3)..... -- -- -- -- 62,699 62,699 288,133 288,133
Interest Expense(4)........ 208,656 233,973 1,229,888 1,298,049 1,141,138 1,264,892 711,851 749,042
Cash Distribution(5)....... 106,901 -- 106,901 21,338 70,562 21,338 29,819 10,737
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
$450,897 $233,973 $1,501,233 $1,319,387 $1,368,661 $1,388,046 $1,173,655 $1,150,663
======== ======== ========== ========== ========== ========== ========== ==========
</TABLE>

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

(1) There were no property management fees for 1994 and 1995 since the
properties were triple-net leased and managed by the respective single
tenants and Curlew is excluded since it is not part of the Merger. In 1996,
as the triple-net leases expired and the properties became multi-tenanted,
RELP III began paying property management fees to USAA Realty Company, an
Affiliate of Realco. USAA Realty Company receives fees of up to 6% of the
cash receipts for managing and leasing services for the properties. Pro
forma numbers assume a 5% property management fee. RELP III was limited to
paying a 3% property management fee and up to a 3% leasing fee.

(2) Realco receives an advisory fee equal to 4% of cash receipts from operations
not to exceed 9% of adjusted cash flow from RELP III.

(3) Actual numbers have been adjusted to represent the gross amount of
commissions due, which are presently earned when the monthly rent from the
lease contracts are collected under the current Partnership Agreement.
Payments of lease commissions to outside brokers were not included. It was
assumed for pro forma numbers that the services of an outside broker would
still have been utilized.

(4) Represents interest on a note payable. Pro forma numbers assume the interest
rate would have been .5% higher.

(5) Includes all cash distributions made to the General Partner and its
Affiliates resulting from ownership of Units and general partner interests.

RELP IV

The following table sets forth the compensation, fees and distributions by
RELP IV to the General Partner and its Affiliates during the three most recent
fiscal years and the six-month period ended June 30, 1997 and compares those
payments to the amount that would have been paid assuming the Merger had
occurred on January 1, 1994.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------- SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
-------------------- ---------------------- -------------------- --------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- ---------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees(1)............ $ 63,118 $ 68,951 $ 52,802 $ 57,512 $ 50,894 $ 54,536 $ 20,967 $ 22,845
Advisor Fees(2)............... 91,449 -- 90,376 -- 50,134 -- 13,557 --
Leasing Commissions(3)........ -- -- 262,476 262,476 3,574 3,574 -- --
Interest Expense(4)........... 600,000 630,000 600,000 630,000 600,000 630,000 313,578 159,929
Cash Distributions(5)......... 100,516 -- 100,516 18,557 65,575 18,557 27,244 9,294
-------- -------- ---------- -------- -------- -------- -------- --------
$855,083 $698,951 $1,106,170 $968,545 $770,177 $706,667 $375,346 $192,068
======== ======== ========== ======== ======== ======== ======== ========
</TABLE>

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

(1) USAA Realty Company receives fees of up to 6% of the cash receipts of the
properties for managing and providing leasing services for the properties.
Pro forma numbers include a 1% property management fee on the Linear
Technologies property.

(2) Realco receives an advisory fee equal to 9% of adjusted cash flow from
operations.

173
<PAGE> 195

(3) Actual numbers have been adjusted to represent the gross amount of
commissions due, which are presently earned when the monthly rent from the
lease contracts are collected under the current Partnership Agreement.
Payments of lease commissions to outside brokers were not included. It was
assumed for the pro forma numbers that the services of an outside broker
would still have been utilized.

(4) Represents interest on a note payable. Pro forma assumes that the interest
rate would have been .5% higher.

(5) Includes all cash distributions made to the General Partner and its
Affiliates resulting from ownership of Units and general partner interests.

DISTRIBUTION POLICIES

None of the Trust's governing documents mandate the payment of
distributions to shareholders. Distributions by the Trust will be determined by
the Trust Managers and will be dependent upon a number of factors, including the
federal income tax requirement that a REIT must distribute annually at least 95%
of its taxable income. Although the Trust has not made distributions to
shareholders for some time, it intends to make regular quarterly distributions
in the future when it has sufficient cash from operations. See "Market Prices
and Distributions -- Distribution" for a more detailed discussion of the Trust's
distribution history. It is the policy of the Trust to retain proceeds from the
sale, financing or refinancing of properties for reinvestment in new properties
or for working capital purposes.

The Partnership Agreement of each RELP requires that net cash from
operations must be distributed quarterly to partners. Further, each Partnership
Agreement would require that net proceeds obtained from the sale or refinancing
of properties be distributed to partners, rather than being retained by the
applicable RELP for reinvestment or working capital. See "Market Prices and
Distributions -- Partnership Distributions" for a more detailed history of the
distributions paid by the RELPS to their respective partners.

Limited Partners participating in the Merger will experience substantial
differences in the payment of distributions as shareholders of the Trust in
comparison to owning Units in the RELPS. Rather than owning equity interests in
an entity whose governing instruments require the distribution of net cash from
operations and the net proceeds or refinancing of properties, they will own
Shares in an entity whose governing documents do not require distributions under
similar circumstances, with the payment of such distribution being subject to
the discretion of the Trust Managers. Further, unlike the RELPS, which must
distribute net proceeds from the sale or refinancing of properties, the Trust
currently does not intend to distribute the net proceeds resulting from the sale
or refinancing of properties, but rather to use such proceeds to acquire
additional properties or for working capital purposes. See "Risk
Factors -- Potential Changes in Distribution Levels for Limited Partners."

174
<PAGE> 196

EXECUTIVE AND TRUST MANAGER COMPENSATION

The following table summarizes the compensation paid by the Trust to the
executive officers of the Trust for the three years ended December 31, 1996:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND -------------------- ALL OTHER
PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION
------------------ ----------- ------ ----- ------------
<S> <C> <C> <C> <C>
Charles W. Wolcott 1996 $195,000 $100,000(1) $8,039(4)
President and CEO 1995 189,000 72,000(2) 7,040(5)
1994 180,000 62,100(3) 7,222(6)
Marc A. Simpson 1996 110,000 55,000(1) 8,039(4)
Vice President and CFO, 1995 105,000 40,000(2) 6,838(5)
Secretary and Treasurer 1994 81,859(7) 34,500(3) 4,095(6)
David B. Warner 1996 110,000 55,000(1) 8,039(4)
Vice President -- Operations 1995 100,000 43,000(2) 6,312(5)
1994 92,000 34,500(3) 4,429(6)
</TABLE>

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

(1) Represents bonus payments for 1996 paid in January 1997.

(2) Represents bonus payments for 1995 paid in January 1996.

(3) Represents bonus payments for 1994 paid in February 1995.

(4) Represents the Trust's contribution to the Retirement and Profit Sharing
Plan in January 1997.

(5) Represents the Trust's contribution to the Retirement and Profit Sharing
Plan in January 1996.

(6) Represents the Trust's contribution to the Retirement and Profit Sharing
Plan paid in February 1995.

(7) Mr. Simpson's annualized salary for 1994 was $100,000.

In 1995, the Trust paid its Non-Employee Trust Managers an annual fee of
$20,000 plus $1,000 for each Trust Manager or committee meeting attended in
person. In addition, the Trust Managers are reimbursed for their expenses
incurred in connection with their duties as Trust Managers. In addition to the
annual fee, Mr. Bricker received $17,000 in 1995 for attendance at Trust Manager
and committee meetings. Mr. Wolcott did not receive any compensation for his
services as a Trust Manager. In March 1996, the Trust increased the annual fee
paid its Non-Employee Trust Managers to $40,000 plus $1,000 for each Trust
Manager or committee meeting attended in person. In addition to the annual fee,
Mr. Bricker received $16,000 and Mr. Giles received $11,000 in 1996 for
attendance at Trust Manager and committee meetings.

The Board of Trust Managers has voted to reduce their compensation
effective July 1, 1997 to an annual retainer of $25,000 plus $1,000 for each
Trust Manager meeting attended in person, $500 for each Trust Manager meeting
attended via teleconference, $500 for each committee meeting attended in person
and $250 for each committee meeting attended via teleconference. Each
non-employee Trust Manager has the right to receive his annual retainer in cash
and/or Shares.

Bylaws Amendments Limiting Trust Manager Compensation

Section 3.9 of the Bylaws of the Trust has been amended by the Trust
Managers to limit the increase in cash compensation paid to the Trust Managers
to 20% over the prior year without the approval of the holders of a majority of
the Shares cast at the annual meeting of shareholders.

175
<PAGE> 197

Employment Agreements

On March 13, 1996, the Trust entered into Bonus and Severance Agreements
with each of Messrs. Wolcott, Simpson and Warner. These agreements formalized
the Trust's policy of providing an annual incentive bonus of up to 50% of the
employee's base salary upon the achievement of certain objectives established by
the Compensation Committee. In addition, the agreements generally provide that
if the employee is terminated within one year after a Change in Control (as
defined), the employee will be entitled to receive an amount equal to one times
the employee's annual base salary, continuation of health and welfare benefits
for up to one year and the prorated amount of any annual incentive bonus earned
through the date of termination. The agreements are effective through March 13,
1999.

Committees of the Trust Managers

The Trust Managers have appointed three committees, the Audit Committee,
the Compensation Committee and the Investment Committee. All of the Committees
include only Trust Managers who are independent of management and who are free
from any relationship that would interfere with the exercise of their
independent judgment. The Audit Committee appoints the independent public
accountants for the Trust subject to ratification by the shareholders at the
Annual Meeting and consults with the independent public accountants on the
Trust's audited financial statements and on the efficacy of the Trust's internal
control systems. The Compensation Committee establishes guidelines for
compensation and benefits of the executive officers of the Trust based upon
achievement of objectives and other factors, including review of compensation to
executive officers of comparable entities and recommendations of independent
compensation consultants. The Investment Committee reviews potential real
property acquisitions and makes recommendations to the Trust Board. Mr. Bricker
was the sole independent Trust Manager and member of the Audit and Compensation
Committees until March 1996, at which time Mr. Giles was appointed to both of
such committees. In January 1997, Mr. Duncan was appointed to the Compensation
Committee and Mr. Kelley was appointed to the Audit Committee. The Trust does
not have a Nominating Committee. The Investment Committee was formed in 1997 and
consists of Messrs. Giles, Platt, Duncan and Kraska.

Audit Committee. The Audit Committee of the Trust Managers met once during
the 1996 fiscal year. The Audit Committee reviews and approves the scope and
results of any outside audit of the Trust, and the fees therefor, and makes
recommendations to the Trust Managers or management concerning auditing and
accounting matters and the efficacy of the Trust's internal control systems. The
Audit Committee selects the Trust's independent auditors. During the 1996 fiscal
year, Messrs. Bricker and Giles served on the Audit Committee. Current members
of the Audit Committee are Messrs. Bricker, Kelley and Giles.

Compensation Committee. The Compensation Committee met two times during the
1996 fiscal year. The Compensation Committee establishes guidelines for
compensation and benefits of the executive officers of the Trust based upon
achievement of objectives and other factors. The Compensation Committee is also
responsible for acting upon all matters concerning, and exercising such
authority as is delegated to it under the provisions of, any benefit, retirement
or pension plan. During the 1996 fiscal year, Messrs. Bricker and Giles served
on the Compensation Committee. Current members of the Compensation Committee are
Messrs. Bricker, Duncan and Giles.

Investment Committee. The Investment Committee was appointed on April 29,
1997. The committee reviews and is authorized to approve all proposed
acquisitions up to $10,000,000. Any proposed acquisition in excess of
$10,000,000 must be approved by the Trust Board. Current members of the
Investment Committee are Messrs. Duncan, Giles, Kraska, Platt and Wolcott.

176
<PAGE> 198

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of Shares by (i) each Trust Manager, (ii) the Trust's Chief Executive
Officer and each executive officer of the Trust, (iii) all Trust Managers and
executive officers of the Trust as a group, and, (iv) to the Trust's knowledge,
by any person owning beneficially more than 5% of the outstanding shares of such
class, in each case at October , 1997. The percentage ownership of each person
assumes (i) conversion of the Trust's notes held by Realco, (ii) the exercise of
vested warrants to purchase 40,000 Shares, (iii) the exercise of vested options
to purchase 39,000 Shares, and (iv) the purchase of an additional 199,169 Shares
by clients and affiliates of MSAM. Except as otherwise noted, each person named
in the table has sole voting and investment power with respect to all Shares
shown as beneficially owned by such person.

<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
---------------- ----------------------- ----------
<S> <C> <C>
Theodore R. Bigman....................................... 2,000(1) *
William H. Bricker....................................... 2,400(1) *
T. Patrick Duncan........................................ 600 *
Robert E. Giles.......................................... 2,750(1) *
Edward B. Kelley......................................... 1,000 *
Russell C. Platt......................................... 2,000(1) *
Stanley J. Kraska, Jr.................................... 2,000(1)(2) *
Charles W. Wolcott....................................... 26,600(3) *
Marc A. Simpson.......................................... 6,900(4) *
David B. Warner.......................................... 5,200(4) *
Lewis D. Friedland....................................... 7,000(5) --
USAA Real Estate Company
8000 Robert F. McDermott Freeway
IH-10 West, Suite 600
San Antonio, Texas 78230-3884.......................... 1,185,403(6) 21.62%
ABKB/LaSalle Securities Limited Partnership
LaSalle Advisors Limited Partnership
William K. Morrill, Jr.
Stanley J. Kraska, Jr.
Keith R. Pauley
100 East Pratt Street
Baltimore, MD. 21202................................... 1,224,489(7) 22.34
Morgan Stanley, Dean Witter, Discover & Co.
The Morgan Stanley Real Estate Special Situations Fund I,
L.P.
The Morgan Stanley Real Estate Special Situations Fund
II, L.P.
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, N.Y. 10020................................... 1,632,653(8)(9) 29.79
All Trust Managers and executive officers as a group (11
persons)............................................... 58,450 1.07%
</TABLE>

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

* Ownership is less than 1% of outstanding Shares.

(1) Includes 2,000 Shares that may be purchased upon exercise of vested options.

(2) See note 7 below.

(3) Includes 10,000 Shares that may be purchased upon exercise of vested
options.

(4) Includes 4,000 Shares that may be purchased upon exercise of vested options.

(5) Includes 7,000 Shares that may be purchased upon exercise of vested options.

(6) Includes (i) 544,962 Shares into which notes held by Realco may be converted
(assumes a $10.00 per Share conversion price); and (ii) 4,000 Shares that
may be purchased upon exercise of vested options transferred by Messrs.
Duncan and Kelley to Realco.

177
<PAGE> 199

(7) Based upon the Schedule 13D filed jointly by the listed reporting persons
with the Commission on July 21, 1997, (i) ABKB has sole voting and
dispositive power over 782,449 Shares; (ii) LaSalle Advisors has sole voting
and dispositive power over 442,040 Shares; and (iii) each of Messrs.
Morrill, Kraska and Pauley, as a managing director of both ABKB and LaSalle
Advisors, has sole voting and dispositive power over the 782,449 Shares
controlled by ABKB and the 442,040 Shares controlled by LaSalle Advisors (an
aggregate 1,224,489 Shares). Messrs. Morrill, Kraska and Pauley disclaim,
however, beneficial ownership of the 1,224,489 Shares, but state that as a
group, the reporting persons have the sole power to vote and dispose of
1,224,489 Shares.

(8) Includes 199,169 Shares that may be acquired by certain clients and
affiliates of MSAM in connection with the MSAM Transaction.

(9) Based upon the Schedule 13D filed jointly by the listed reporting persons
with the Commission on July 18, 1997, (i) Morgan Stanley, Dean Witter,
Discover & Co. has sole voting and dispositive power over 125,588 Shares and
shared voting and dispositive power over 1,307,895 Shares; (ii) MSAM has
shared voting and dispositive power over 1,307,895 Shares; (iii) The Morgan
Stanley Real Estate Special Situations Fund I, L.P. has shared voting and
dispositive power over 376,766 Shares; and (iv) The Morgan Stanley Real
Estate Special Situations Fund II, L.P. has shared voting and dispositive
power over 465,332 Shares. Pursuant to separate investment management
agreements between MSAM and certain of its clients, MSAM has been granted
voting and dispositive power with respect to the Shares held by each client.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As detailed above, Realco currently owns 640,441 Shares, representing
13.74% of the outstanding Shares of the Trust. In February 1997, Realco
purchased certain outstanding indebtedness of the Trust having a then current
principal balance of $9,419,213. The notes were then modified by Realco to,
among other things, reduce the principal amount of these notes from $9,419,213
to $7,040,721, resulting in an extraordinary gain on extinguishment of debt
(including certain accrued interest) to the Trust of $2,643,000 in the first
quarter of 1997. At the time the notes were modified, the Trust made a principal
payment of $1,591,103, reducing the outstanding principal amount to $5,449,618.
According to the modification terms, interest continues to accrue at 8.8%,
payable monthly, and the maturity of the notes was extended from March 31, 1997
to December 31, 2000. In addition, Realco has the option to convert the
principal amount of the notes into Shares of the Trust at the conversion rate of
$10.00 per Share (if converted prior to December 31, 1997) or $11.25 per Share
(if converted between December 31, 1997 and December 31, 2000). Upon
consummation of the Merger and assuming conversion of the notes, Realco will own
approximately 17.39% of the outstanding Shares of the Trust.

Pursuant to its rights under the Realco Share Purchase Agreement, Realco
requested that Edward B. Kelley and T. Patrick Duncan, who are also executive
officers of Realco, be appointed Trust Managers. On December 20, 1996, the Trust
Managers unanimously voted to appoint Messrs. Kelley and Duncan as Trust
Managers.

On June 20, 1997, the Trust entered into the MSAM Transaction pursuant to
which certain clients and affiliates of MSAM agreed to acquire up to 1,632,653
Shares. As of July 18, 1997, they had acquired 1,433,483 Shares. The remaining
Shares will be acquired at such time as the Trust issues additional Shares.
Messrs. Platt and Bigman were appointed as Trust Managers effective July 8, 1997
in connection with the MSAM Transaction.

On July 3, 1997, the Trust entered into the LaSalle Transaction pursuant to
which ABKB and LaSalle Advisors, on behalf of certain clients, agreed to
purchase 1,224,489 Shares. The closing of the sale occurred on July 10, 1997.
Mr. Kraska was appointed as a Trust Manager effective July 10, 1997 in
connection with the LaSalle Transaction.

178
<PAGE> 200

COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES

RELP I

Realco, as the advisor to RELP I, may receive real estate brokerage
commissions of up to 1% of the aggregate selling prices of properties sold,
management fees of up to 4% of gross revenues from operations or 9% of the RELP
I's adjusted cash flow, and an annual mortgage servicing fee of up to 1/4 of 1%
of amounts funded by RELP I in mortgage loans which are serviced by Realco.

Through January 1995, a portion of RELP I's working capital reserve and
other available funds were invested in USAA Mutual Fund, Inc., an affiliate of
the RELP I General Partner, and earned interest thereon at market rates.

Quorum Real Estate Services Corporation ("USAA Realty"), an affiliate of
the RELP I General Partner, provides managing and leasing services for the
properties.

A summary of transactions with affiliates for the years ended December 31,
1996, 1995 and 1994 follows:

<TABLE>
<CAPTION>
MORTGAGE
REIMBURSEMENT INTEREST MANAGEMENT LEASING SERVICING
OF EXPENSES(1) INCOME FEES COMMISSIONS FEES TOTAL
-------------- --------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1996..................... $ -- $ -- $ -- $ -- $ -- $ --
1995..................... -- (18) -- -- -- (18)
1994..................... -- (363) -- -- -- (363)
Realco:
1996..................... $117,027 (52,124) 67,893 -- 1,115 133,911
1995..................... 112,413 (612,757) 77,791 -- 13,600 (408,953)
1994..................... 136,978 (605,535) 49,325 -- 12,427 (406,805)
USAA Realty:
1996..................... $ 60,609 -- 48,992 17,282 -- 126,883
1995..................... 19,550 -- 40,089 16,273 -- 75,912
1994..................... 15,832 -- 29,205 15,745 -- 60,782
</TABLE>

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

(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expense incurred on behalf of RELP I at actual cost and
does not include any mark-up or items normally considered as overhead.

179
<PAGE> 201

RELP II

USAA Investors II, Inc., the General Partner, may receive, in the
aggregate, property acquisition fees and loan origination and commitment fees of
up to 5% of the gross offering proceeds; real estate brokerage commissions of up
to 2% of the selling prices of properties sold; 10% of all distributions of Net
Cash from Operations and an annual mortgage servicing fee of up to 1/4 of 1% of
amounts funded by the RELP in mortgage loans which are serviced by the General
Partner.

Through January 1995, RELP II had funds invested in USAA Mutual Fund, Inc.
and earned interest thereon at market rates.

USAA Realty provides property management and leasing services for the
properties.

A summary of transactions with affiliates for the years ended June 30,
1997, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
REIMBURSEMENT MORTGAGE
OF INTEREST MANAGEMENT LEASING SERVICING
EXPENSES(1) INCOME FEES COMMISSIONS FEES TOTAL
------------- -------- ---------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1997........................... $ -- $ -- $ -- $ -- $ -- --
1996........................... -- -- -- -- -- --
1995........................... -- (316) -- -- -- (316)
Realco:
1997........................... 78,288 -- -- -- -- 78,288
1996........................... 71,029 -- -- -- -- 71,029
1995........................... 89,155 -- -- -- -- 89,155
USAA Realty:
1997........................... 3,255 -- 12,496 39,908 -- 55,659
1996........................... 3,016 -- 12,110 12,444 -- 27,570
1995........................... 2,823 -- 12,299 -- -- 15,122
</TABLE>

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

(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expense incurred on behalf of RELP II at actual cost and
does not include any mark-up or items normally considered as overhead.

180
<PAGE> 202

RELP III

Realco, as the advisor to RELP III, may receive property acquisition fees
of up to 4% of the gross offering proceeds, real estate brokerage commissions of
up to 1% of the aggregate selling prices of property sold and management fees
equal to 4% of Cash Receipts from Operations not to exceed 9% of adjusted cash
flow from RELP III.

Through January 1995, RELP III had funds invested in USAA Mutual Fund, Inc.
and earned interest thereon at market rates.

An affiliate of the General Partner, Las Colinas Management Company,
received monthly payments of principal of $227,272.72 plus interest at one-month
LIBOR plus .625% through August 31, 1996. The mortgage loan was converted to
interest only payments at an interest rate of 9.57%.

USAA Realty provides property management and leasing services for the
properties.

A summary of transactions with affiliates for the years ended December 31,
1996, 1995 and 1994 are as follows:

<TABLE>
<CAPTION>
REIMBURSEMENT INTEREST MANAGEMENT LEASING INTEREST
OF EXPENSES(1) INCOME FEES COMMISSIONS EXPENSE(2) TOTAL
-------------- -------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1996.................... $ -- $ -- $ -- $ -- $ -- $ --
1995.................... -- (1,262) -- -- -- (1,262)
1994.................... -- (36,253) -- -- -- (36,253)
Realco:
1996.................... 200,417 -- 60,523 -- 964,529 1,225,469
1995.................... 162,493 -- 168,389 -- 1,191,014 1,521,896
1994.................... 174,407 -- 149,216 -- 1,005,973 1,329,596
Las Colinas Management
Company:
1996.................... -- -- -- -- 1,141,138 1,141,138
1995.................... -- -- -- -- 1,229,888 1,229,888
1994.................... -- -- -- -- 208,656 208,656
USAA Realty:
1996.................... 85,876 -- 63,446 30,541 -- 179,863
1995.................... 47,548 -- 46,628 22,816 -- 116,992
1994.................... 41,652 -- 46,501 24,824 -- 112,977
</TABLE>

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

(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expense incurred on behalf of RELP III at actual cost and
does not include any mark-up or items normally considered as overhead.

(2) Represents interest expense incurred at market rate on mortgage loans.

181
<PAGE> 203

RELP IV

Realco may receive property acquisition fees of up to 5% of gross offering
proceeds, real estate brokerage commissions of up to 2% of the aggregate selling
prices of properties sold and management fees of 9% of adjusted cash flow from
operations.

Through January 1995, a portion of RELP IV's working capital reserve and
other available funds were invested in USAA Mutual Funds, Inc. and earned
interest thereon at market rates.

USAA Realty provides property management and leasing services for the
properties.

A summary of transactions with affiliates for the years ended December 31,
1996, 1995 and 1994 are as follows:

<TABLE>
<CAPTION>
REIMBURSEMENT
OF INTEREST MANAGEMENT LEASING INTEREST
EXPENSES(1) INCOME FEES COMMISSIONS EXPENSE(2) TOTAL
------------- -------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1996........................ $ -- $ -- $ -- $ -- $ -- $ --
1995........................ -- (27) -- -- -- (27)
1994........................ -- (542) -- -- -- (542)
Realco:
1996........................ 114,171 -- 50,134 -- 600,000 764,305
1995........................ 108,885 -- 90,376 -- 600,000 799,261
1994........................ 110,947 -- 91,449 -- 600,000 802,396
USAA Realty:
1996........................ 33,042 -- 50,894 30,947 -- 114,883
1995........................ 36,559 -- 52,802 9,487 -- 98,848
1994........................ 22,556 -- 63,118 8,865 -- 94,539
</TABLE>

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

(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expense incurred on behalf of RELP IV at actual cost and
does not include any mark-up or items normally considered as overhead.

(2) Represents interest expense incurred on an note payable.

182
<PAGE> 204

EXPERTS

The consolidated financial statements and the related financial statement
schedule of American Industrial Properties REIT as of December 31, 1996 and 1995
and for the years ended December 31, 1996, 1995 and 1994 included in this Joint
Proxy Statement/Prospectus have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.

The Combined Historical Summary of Gross Income and Direct Operating
Expenses of Merit Texas Properties Portfolio for the year ended December 31,
1996 included in this Joint Proxy Statement/Prospectus has been audited by Ernst
& Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.

The financial statements and financial statement schedules of USAA Real
Estate Income Investments I Limited Partnership, A California Limited
Partnership and USAA Income Properties III Limited Partnership as of December
31, 1996 and 1995, and for each of the years in the three-year period ended
December 31, 1996, and the consolidated financial statements and financial
statement schedules of USAA Income Properties IV Limited Partnership as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996, and the financial statements and financial statement
schedules of USAA Real Estate Income Investments II Limited Partnership as of
June 30, 1997 and 1996, and for each of the years in the three-year period ended
June 30, 1997, have been included herein in reliance upon the reports of KPMG
Peat Marwick LLP, independent certified public accountants, included herein, and
upon the authority of said firm as experts in accounting and auditing.

LEGAL OPINIONS

The legality of the Shares to be issued in the Merger will be passed on for
the Trust by Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., Dallas, Texas.
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., Dallas, Texas, counsel to the
Trust and to each RELP, will deliver opinions to the Trust and each RELP
respectively, concerning federal income tax consequences of the Merger.

SHAREHOLDER PROPOSALS

A proper proposal submitted by a shareholder for presentation at the
Trust's annual meeting relating to fiscal 199 and received at the Trust's
principal executive office no later than , 199 will be included in
the Proxy Statement and Proxy related to such annual meeting.

OTHER MATTERS

The Trust Managers do not intend to bring any matter before the Trust
Special Meeting other than as specifically set forth in the Notice of Special
Meeting of Shareholders, nor does it know of any matter to be brought before the
Trust Special Meeting by others. If, however, any other matters properly come
before the Trust Special Meeting, it is the intention of the proxy holders to
vote such proxy in accordance with their best judgment.

The General Partners do not intend to bring any matter before the RELP
Special Meeting other than as specifically set forth in each Notice of Special
Meeting of Partners, nor does it know of any matter to be brought before the
RELP Special Meeting by others. If, however, any other matters properly come
before the RELP Special Meeting, it is the intention of the proxy holders to
vote such proxies in accordance with their best judgment.

183
<PAGE> 205

GLOSSARY

"ABKB" means ABKB/LaSalle Securities Limited Partnership.

"ACQUISITION PROPOSAL" shall have the meaning set forth in the Merger
Agreement.

"ACMS" means asbestos-containing materials.

"ACQUISITION" means the acquisition of eight properties consisting of 20
light industrial and warehouse/distribution buildings in the Dallas area.

"ADA" means Americans with Disabilities Act of 1990.

"AFFILIATE" means with respect to a specified person, a person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the person specified.

"AIP ACQUISITION PROPOSAL" shall have the meaning set forth in the Merger
Agreement.

"AIP EXPENSES" means all documented out-of-pocket costs and expenses (up to
a maximum of a RELP's Proportionate Share of $1,000,000) incurred by the Trust
in connection with the Merger Agreement and the transactions contemplated
thereby.

"AIP MATERIAL ADVERSE EFFECT" shall have the meaning set forth in the
Merger Agreement.

"APPLICABLE COURT" means the court in which a petition demanding a
determination of the fair value of the Dissenting Units may be filed.

"BOARD OF DIRECTORS" means collectively the Boards of Directors of the
RELPS.

"BURACK" means Burack Investors.

"BUSINESS COMBINATION" means (A) any merger or consolidation, if and to the
extent permitted by law, of the Trust or a subsidiary, with or into a Related
Person, (B) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition, of all or any Substantial Part (as hereinafter defined) of the
assets of the Trust and its subsidiaries (taken as a whole) (including, without
limitation, any voting securities of a subsidiary) to or with a Related Person,
(C) the issuance or transfer by the Trust or a subsidiary (other than by way of
a pro rata distribution to all shareholders) of any securities of the Trust or a
subsidiary of the Trust to a Related Person, (D) any reclassification of
securities (including any reverse Share split) or recapitalization by the Trust,
the effect of which would be to increase the voting power (whether or not
currently exercisable) of the Related Person, (E) the adoption of any plan or
proposal for the liquidation or dissolution of the Trust proposed by or on
behalf of a Related Person which involves any transfer of assets, or any other
transaction, in which the Related Person has any direct or indirect interest
(except proportionately as a shareholder), (F) any series or combination of
transactions having, directly or indirectly, the same or substantially the same
effect as any of the foregoing, and (G) any agreement, contract or other
arrangement providing, directly or indirectly, for any of the foregoing.

"BYLAWS" means the Trust's Fourth Amended and Restated Bylaws.

"CLOSING PRICE" means $ , the closing price of the Trust's Shares
on the NYSE on , 199 .

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

"CORPORATE SUBSIDIARIES" means the Trust's wholly-owned corporate
subsidiaries.

"DECLARATION OF TRUST" means the Trust's Third Amended and Restated
Declaration of Trust.

"DISINTERESTED TRUST MANAGERS" means all of the Trust Managers except the
designees of Realco. The Disinterested Trust Managers prior to June 8, 1997 are
Charles W. Wolcott, William H. Bricker, and Robert E. Giles. Theodore R. Bigman
and Russell C. Platt became Disinterested Trust Managers on June 8, 1997.
Stanley J. Kruska, Jr. became a Disinterested Trust Manager on July 10, 1997.

184
<PAGE> 206

"DISSENTERS' RIGHTS" means the right voluntarily granted by the Trust to
the Limited Partners to dissent with respect to the Merger and, subject to
certain conditions, receive payment in Shares equal to the "fair value" of his
Dissenting Units.

"DISSENTING UNITS" means the Units held by Limited Partners that exercise
Dissenters' Rights.

"DUE DILIGENCE PERIOD" means June 30, 1997 through October 7, 1997.

"EBITDA" means earnings before interest, taxes, depreciation and
amortization.

"EFFECTIVE TIME" means the effective time of the Merger.

"EXCHANGE AGENT" means Boston EquiServe Limited Partnership.

"EXEMPT ORGANIZATIONS" means the tax exempt entities, including qualified
employee pension and profit sharing trusts and individual retirement accounts.

"EXPENSES" means collectively the AIP Expense and the RELP Expenses.

"EXCHANGE PRICE" means $13.125 per Share.

"EXCHANGE RATIO" means with respect to (i) RELP I, 15.90 Shares per Unit;
(ii) RELP II, 28.63 Shares per Unit; (iii) RELP III, 16.60 Shares per Unit; and
(iv) RELP IV, 15.14 Shares per Unit.

"FAD" means funds available for distribution.

"FDOT" means Florida Department of Transportation.

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

"FFO" means funds from operations.

"GENERAL PARTNER" shall mean collectively USAA Investors I, Inc., USAA
Investors II, Inc., USAA Income Properties III, Inc. and USAA Income Properties
IV, Inc., the General Partner of RELP I, RELP II, RELP III and RELP IV,
respectively.

"GLENBOROUGH" means Glenborough Realty Trust.

"GP VALUE" means Houlihan's estimate as to the value of the General
Partners' interest in each RELP.

"HFS" means Hospitality Franchise Systems, Inc.

"HOULIHAN" means Houlihan Lokey Howard & Zukin.

"HOULIHAN OPINION" means the fairness opinion of Houlihan delivered to the
Boards of Directors of the General Partners on June 30, 1997.

"INDEPENDENT APPRAISER" means the appraiser of the fair market value of
Dissenting Units.

"ISI" means Integrated Systems, Inc.

"INVESTOR SERVICES" means Real Estate Limited Partnership Investor
Services, a department of Realco.

"INVITROGEN" means Invitrogen Corporation.

"JOINT VENTURE" means the Combined Capital Resources Joint Venture.

"LASALLE ADVISORS" means LaSalle Advisors Limited Partnership.

"LASALLE TRANSACTION" means the sale by the Trust of an aggregate of
1,224,489 Shares to ABKB, as Agent for and for the benefit of certain clients,
and LaSalle Advisors, as Agent for and for the benefit of certain clients,
pursuant to Common Share Purchase Agreements dated as of July 3, 1997.

"LAWSUIT" means the purported class action lawsuit filed in the Superior
Court of the State of Arizona against Realco, the General Partners of the RELPS,
certain other affiliated entities, members of the Boards of Directors of the
General Partners and the Trust.

185
<PAGE> 207

"LIQUIDATED DAMAGES AMOUNT" means $2,000,000.

"LIMITED PARTNERS" means collectively, the holders of Units in the RELPS.

"LINEAR TECHNOLOGY" means Linear Technology Corporation.

"LP VALUE" means Houlihan's estimate as to the value of the General
Partners' interest in each RELP.

"MERGER" means the merging of the RELPS with and into the Trust.

"MERGER AGREEMENT" means collectively, the Amended and Restated Agreements
and Plans of Merger dated as of June 30, 1997 by and between the Trust and each
of the RELPS.

"MERGER CONSIDERATION" means the Shares to be received by Limited Partners
in connection with the Merger.

"MLI" means The Manufacturers Life Insurance Company.

"MLI NOTES" means the Trust's 8.8% unsecured notes.

"MSAM" means Morgan Stanley Asset Management Inc., a Delaware corporation.

"MSAM TRANSACTION" means the sale by the Trust of up to an aggregate of
1,632,653 Shares to MS Real Estate Special Situations, Inc. and MSAM, as agent
and attorney-in-fact of certain of its clients, pursuant to a Common Share
Purchase Agreement dated as of June 30, 1997.

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

"NON-U.S. SHAREHOLDERS" means nonresident alien individuals, foreign
corporation, foreign partnership and other foreign holders of Shares.

"NYSE" means the New York Stock Exchange.

"OPTION PRICE" means the price at which MIL was willing to sell the Trust's
notes to the Trust.

"OP UNITS" means the limited partnership units issued by an Affiliate of
the Trust in connection with its acquisition of eight properties consisting of
20 light industrial and warehouse/distribution buildings.

"PARTICIPATING RELP" means those RELPS whose Limited Partners approve the
Merger.

"PREFERRED SHARES" means the Trust's Preferred Shares of Beneficial
Interest, par value $0.10 per share.

"PRIVATE PLACEMENT" means collectively, the sale of Shares pursuant to the
MSAM Transaction and the LaSalle Transaction.

"PROPORTIONATE SHARE" means each RELP's share based upon its book value as
of March 31, 1997.

"PRUDENTIAL SECURITIES" means Prudential Securities Incorporated.

"PRUDENTIAL SECURITIES OPINION" means the fairness opinion of Prudential
Securities delivered to the Trust on July 10, 1997.

"QUALIFYING INCOME" means income described in Section 856(c)(2)(A)-(H) and
856(c)(3)(A)-(I) of the Code.

"R&D" means research and development.

"REALCO" means USAA Real Estate Company, a Delaware corporation.

"REALCO SHARE PURCHASE AGREEMENT" means that certain Share Purchase
Agreement dated December 13, 1996, by and between the Trust and Realco.

"REAL ESTATE INVESTMENT COMMITTEE" means Realco's Real Estate Investment
Committee whose members are Edward B. Kelley, Chairman, T. Patrick Duncan,
Randal R. Seewald, Martha J. Barrow, Susan Wallace, S. Wayne Peacock, David
Holmes and David Rosales.

186
<PAGE> 208

"REIT" means a real estate investment trust.

"RELATED PERSON" means any individual, corporation, partnership or other
"person" (as defined in Section 13(d)(3) of the Exchange Act), and the
"Affiliates" and "Associates" (as defined in Rule 12b-2 of the Exchange Act) of
any such individual, corporation, partnership or other person which individually
or together is the "Beneficial Owner" (as defined in Rule 13d-3 of the Exchange
Act) in the aggregate of more than 50% of the outstanding Shares of the Trust,
other than the Trust or any employee benefit plan(s) sponsored by the Trust,
except that an individual, corporation, partnership or other person which
individually or together Beneficially Owns or upon conversion of debt securities
(owned or with regard to which such individual, corporation, partnership or
other person is committed to purchase as of the date of adoption of the
Declaration of Trust) would own in excess of 20% of the outstanding Shares on
June 30, 1997 shall only be considered a Related Person at such time as he, she,
it or they acquire in the aggregate Beneficial Ownership of more than 80% of the
outstanding Shares.

"RELATED TRANSACTIONS" means the proposed sale of the Curlew Crossing
property by RELP III to Realco and the proposed sale of RELP II's joint venture
interest in the Sequoia Plaza I Building to Realco.

"RELP" means any of RELP I, RELP II, RELP III and RELP IV.

"RELP I" means USAA Real Estate Income Investments I, A California Limited
Partnership, a California limited partnership.

"RELP II" means USAA Real Estate Income Investments II Limited Partnership,
a Texas limited partnership.

"RELP III" means USAA Real Estate Income Properties III Limited
Partnership, a Delaware limited partnership.

"RELP IV" means USAA Income Properties IV Limited Partnership, a Delaware
limited partnership.

"RELP ACQUISITION PROPOSAL" shall have the meaning set forth in the Merger
Agreement.

"RELP EXPENSES" means all documented out-of-pocket costs and expenses (up
to a maximum of a RELP's Proportionate Share of $1,000,000) incurred by the RELP
in connection with the Merger Agreement and the transactions contemplated
thereby.

"RELP MATERIAL ADVERSE EFFECT" shall have the meaning set forth in the
Merger Agreement.

"RELP SPECIAL MEETING" means the joint special meeting of the Limited
Partners to be held on , 199 .

"RELPS" means collectively, RELP I, RELP II, RELP III and RELP V.

"RENT" means rent received by the Trust from its tenants.

"SHARES" means the Trust's Common Shares of Beneficial Interest, par value
$0.10 per share.

"SPECIAL MEETINGS" means collectively the Trust Special Meeting and the
RELP Special Meeting.

"SUBSTANTIAL PART" means more than 35% of the book value of the total
assets of the Trust and its subsidiaries (taken as a whole) as of the end of the
fiscal year ending prior to the time the determination is made.

"TRUST" means American Industrial Properties REIT, a Texas REIT.

"TRUST SPECIAL MEETING" means the special meeting of shareholders of the
Trust to be held on , 199 .

"UBTI" means unrelated business taxable income.

"UNITS" means Units of Limited Partnership Interests in any of the RELPS.

"USAA" means United Services Automobile Association.

"USAA REALTY" means USAA Realty Company.

187
<PAGE> 209

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMERICAN INDUSTRIAL PROPERTIES REIT
ANNUAL AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors......................... F-3
Consolidated Statements of Operations for the years
ended December 31, 1996,
1995 and 1994........................................ F-4
Consolidated Balance Sheets as of December 31, 1996 and
1995.................................................. F-5
Consolidated Statements of Changes in Shareholders'
Equity for the years ended
December 31, 1996, 1995 and 1994..................... F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1996,
1995 and 1994........................................ F-7
Notes to Consolidated Financial Statements............. F-8
Schedule III -- Consolidated Real Estate and
Accumulated Depreciation.............................. F-15
Notes to Schedule III.................................. F-16
QUARTERLY UNAUDITED FINANCIAL STATEMENTS
Consolidated Statements of Operations for the three and
six months ended June 30, 1997 and 1996 (unaudited)... F-17
Consolidated Balance Sheets as of June 30, 1997
(unaudited) and December 31, 1996..................... F-18
Consolidated Statements of Cash Flows for the six
months ended June 30, 1997 and 1996 (unaudited)....... F-19
Notes to Consolidated Financial Statements............. F-20
USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP
ANNUAL AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report........................... F-24
Balance Sheets as of December 31, 1996 and 1995........ F-25
Statements of Income for the years ended December 31,
1996, 1995 and 1994................................... F-26
Statements of Partners' Equity for the years ended
December 31, 1996, 1995 and 1994...................... F-27
Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994............................... F-28
Notes to Financial Statements.......................... F-29
Schedule III -- Real Estate and Accumulated
Depreciation.......................................... F-33
Notes to Schedule III.................................. F-34
QUARTERLY UNAUDITED FINANCIAL STATEMENTS
Condensed Balance Sheets as of June 30, 1997
(unaudited) and December 31, 1996..................... F-35
Condensed Statements of Income for the three and six
months ended June 30, 1997 and 1996 (unaudited)....... F-36
Condensed Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 (unaudited).............. F-37
Notes to Condensed Financial Statements................ F-38
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
ANNUAL AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report........................... F-39
Balance Sheets as of June 30, 1997 and 1996............ F-40
Statements of Income for the years ended June 30, 1997,
1996 and 1995......................................... F-41
Statements of Partners' Equity for the years ended June
30, 1997, 1996 and 1995............................... F-42
Statements of Cash Flows for the years ended June 30,
1997, 1996 and 1995................................... F-43
Notes to Financial Statements.......................... F-44
Schedule III -- Real Estate and Accumulated
Depreciation.......................................... F-51
Notes to Schedule III.................................. F-52
</TABLE>

F-1
<PAGE> 210

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
ANNUAL AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report........................... F-53
Balance Sheets as of December 31, 1996 and 1995........ F-54
Statements of Income for the years ended December 31,
1996, 1995 and 1994................................... F-55
Statements of Partners' Equity for the years ended
December 31, 1996, 1995 and 1994...................... F-56
Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994............................... F-57
Notes to Financial Statements.......................... F-58
Schedule III -- Real Estate and Accumulated
Depreciation.......................................... F-63
Notes to Schedule III.................................. F-64
QUARTERLY UNAUDITED FINANCIAL STATEMENTS
Condensed Balance Sheets as of June 30, 1997
(unaudited) and December 31, 1996..................... F-65
Condensed Statements of Operations for the three and
six months ended June 30, 1997 and 1996 (unaudited)... F-66
Condensed Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 (unaudited).............. F-67
Notes to Condensed Financial Statements................ F-68
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
ANNUAL AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report........................... F-69
Consolidated Balance Sheets as of December 31, 1996 and
1995.................................................. F-70
Consolidated Statements of Operations for the years
ended December 31, 1996,
1995 and 1994........................................ F-71
Consolidated Statements of Partners' Equity for the
years ended December 31, 1996,
1995 and 1994........................................ F-72
Consolidated Statements of Cash Flows for the years
ended December 31, 1996,
1995 and 1994........................................ F-73
Notes to Consolidated Financial Statements............. F-74
Schedule III -- Consolidated Real Estate and
Accumulated Depreciation.............................. F-80
Notes to Schedule III.................................. F-81
QUARTERLY UNAUDITED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30,
1997 (unaudited) and
December 31, 1996.................................... F-82
Condensed Consolidated Statements of Operations for the
three and six months ended
June 30, 1997 and 1996 (unaudited)................... F-83
Condensed Consolidated Statements of Cash Flows for the
six months ended
June 30, 1997 and 1996 (unaudited)................... F-84
Notes to Condensed Consolidated Financial Statements... F-85
MERIT TEXAS PROPERTIES PORTFOLIO
COMBINED HISTORICAL SUMMARY
Report of Independent Auditors......................... F-86
Combined Historical Summary of Gross Income and Direct
Operating Expenses for the year ended December 31,
1996 and for the six months ended June 30, 1997
(unaudited)........................................... F-87
Notes to Combined Historical Summary of Gross Income
and Direct Operating Expenses......................... F-88
</TABLE>

F-2
<PAGE> 211

REPORT OF INDEPENDENT AUDITORS

Trust Managers and Shareholders
American Industrial Properties REIT:

We have audited the accompanying consolidated balance sheets of American
Industrial Properties REIT (the "Trust") as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the consolidated financial statement schedule listed in the
Index at Item 21(b). These financial statements and schedule are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Trust as of December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly,
in all material respects the information set forth therein.

ERNST & YOUNG LLP

Dallas, Texas
February 13, 1997
except for Note 14, as to

which the date is October 15, 1997

THE FOREGOING REPORT IS IN THE FORM THAT WILL BE SIGNED UPON THE COMPLETION
OF THE ONE FOR FIVE REVERSE SHARE SPLIT DESCRIBED IN NOTE 14 TO THE FINANCIAL
STATEMENTS.

/s/ ERNST & YOUNG LLP

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

ERNST & YOUNG LLP

Dallas, Texas

October 8, 1997

F-3
<PAGE> 212

AMERICAN INDUSTRIAL PROPERTIES REIT

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Rents................................................... $ 8,592 $ 8,676 $ 8,397
Tenant reimbursements................................... 2,728 2,734 2,683
Interest income......................................... 158 369 146
--------- --------- ---------
11,478 11,779 11,226
--------- --------- ---------
EXPENSES
Property operating expenses:
Property taxes....................................... 1,421 1,397 1,421
Property management fees............................. 430 428 442
Utilities............................................ 476 478 501
General operating.................................... 849 795 705
Repairs and maintenance.............................. 529 431 656
Other property operating expenses.................... 317 322 227
Depreciation and amortization........................... 2,909 2,777 3,133
Interest on 8.8% notes payable.......................... 4,003 4,707 4,001
Interest on mortgages payable........................... 1,898 1,778 850
Amortization of original issue discount on Zero Coupon
Notes due 1997....................................... -- -- 419
Administrative expenses:
Trust administration and overhead.................... 1,830 1,424 1,505
Litigation, refinancing and proxy costs.............. 1,548 980 1,027
Provision for possible losses on real estate............ -- 600 650
--------- --------- ---------
16,210 16,117 15,537
--------- --------- ---------
Loss from operations.................................... (4,732) (4,338) (4,311)
Gain (loss) on sales of real estate..................... 177 (191) --
--------- --------- ---------
Loss before extraordinary items......................... (4,555) (4,529) (4,311)
Extraordinary gain (loss) on extinguishment of debt..... 5,810 (55) --
Extraordinary loss on partial in-substance defeasance of
Zero Coupon Notes due 1997........................... -- -- (344)
--------- --------- ---------
NET INCOME (LOSS)......................................... $ 1,255 $ (4,584) $ (4,655)
========= ========= =========
PER SHARE DATA(A)
Loss from operations.................................... $ (2.60) $ (2.40) $ (2.35)
Gain (loss) on sales of real estate..................... 0.10 (0.10) --
Extraordinary gain (loss) on extinguishment of debt..... 3.20 (0.05) --
Extraordinary loss on partial in-substance defeasance of
Zero Coupon Notes due 1997........................... -- -- (0.20)
--------- --------- ---------
Net Income (Loss)....................................... $ 0.70 $ (2.55) $ (2.55)
========= ========= =========
Distributions Paid...................................... $ 0.20 $ 0.20 $ 0.00
========= ========= =========
Weighted average shares outstanding..................... 1,821,648 1,815,080 1,815,080
========= ========= =========
</TABLE>

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

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

F-4
<PAGE> 213

AMERICAN INDUSTRIAL PROPERTIES REIT

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Real estate:
Held for investment....................................... $ 84,693 $ 97,091
Held for sale............................................. 9,779 4,806
-------- --------
Total real estate......................................... 94,472 101,897
Accumulated depreciation.................................. (23,973) (23,441)
-------- --------
Net real estate........................................... 70,499 78,456
Cash and cash equivalents:
Unrestricted.............................................. 4,010 7,694
Restricted................................................ 1,366 659
-------- --------
Total cash and cash equivalents........................... 5,376 8,353
Other assets, net........................................... 3,061 2,573
-------- --------
Total Assets...................................... $ 78,936 $ 89,382
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Mortgage notes payable.................................... $ 43,797 $ 17,576
8.8% notes payable........................................ 9,419 45,239
Accrued interest.......................................... 602 5,178
Accounts payable, accrued expenses and other
liabilities............................................ 1,964 1,620
Tenant security deposits.................................. 471 521
-------- --------
Total Liabilities................................. 56,253 70,134
-------- --------
Shareholders' Equity:
Shares of beneficial interest, $0.10 par value; authorized
10,000,000 Shares; issued and outstanding 2,000,000
Shares at 1996 and 1,815,080 Shares at 1995(a)......... 1,000 908
Additional paid-in capital................................ 127,056 124,605
Accumulated distributions................................. (58,456) (58,093)
Accumulated loss from operations and extraordinary gains
(losses)............................................... (48,065) (49,143)
Accumulated net realized gain on sales of real estate..... 1,148 971
-------- --------
Total Shareholders' Equity........................ 22,683 19,248
-------- --------
Total Liabilities and Shareholders' Equity........ $ 78,936 $ 89,382
======== ========
</TABLE>

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

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

F-5
<PAGE> 214

AMERICAN INDUSTRIAL PROPERTIES REIT

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)

<TABLE>
<CAPTION>
SHARES OF BENEFICIAL
INTEREST ADDITIONAL RETAINED
--------------------- PAID-IN EARNINGS
NUMBER(A) AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994................... 1,815,080 $ 908 $124,605 $ (96,662) $28,851
Net loss................................... -- -- -- (4,655) (4,655)
---------- ------ -------- --------- -------
Balance at December 31, 1994................. 1,815,080 908 124,605 (101,317) 24,196
Net loss................................... -- -- -- (4,584) (4,584)
Distributions to shareholders.............. -- -- -- (364) (364)
---------- ------ -------- --------- -------
Balance at December 31, 1995................. 1,815,080 908 124,605 (106,265) 19,248
Issuance of additional shares.............. 184,920 92 2,451 -- 2,543
Net income................................. -- -- -- 1,255 1,255
Distributions to shareholders.............. -- -- -- (363) (363)
---------- ------ -------- --------- -------
Balance at December 31, 1996................. 2,000,000 $1,000 $127,056 $(105,373) $22,683
========== ====== ======== ========= =======
</TABLE>

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

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

F-6
<PAGE> 215

AMERICAN INDUSTRIAL PROPERTIES REIT

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,255 $(4,584) $(4,655)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Extraordinary (gains) losses........................... (5,810) 55 344
(Gains) losses on real estate.......................... (177) 791 650
Depreciation........................................... 2,577 2,479 2,622
Amortization of deferred financing costs............... 70 70 --
Other amortization..................................... 332 298 511
Amortization of original issue discount................ -- -- 419
Changes in operating assets and liabilities:
(Increase) decrease in other assets and restricted
cash.............................................. (1,270) 126 (858)
Increase (decrease) in accounts payable, other
liabilities and tenant security deposits.......... 351 (61) 373
(Decrease) increase in accrued interest................ (2,986) 4,674 --
-------- ------- -------
Net Cash (Used In) Provided By Operating
Activities...................................... (5,658) 3,848 (594)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sales of real estate.................... 6,545 2,476 --
Capitalized improvements and leasing commissions.......... (1,372) (1,023) (1,476)
Acquisition of real estate................................ -- (1,309) --
-------- ------- -------
Net Cash Provided By (Used In) Investing
Activities...................................... 5,173 144 (1,476)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgage notes payable............ (31,832) (2,798) (1,283)
Proceeds from mortgage financing.......................... 26,453 -- 14,500
Proceeds from sale of common shares....................... 2,543 -- --
Distributions to shareholders............................. (363) (364) --
Prepayment penalty on extinguishment of debt.............. -- (55) --
Partial in-substance defeasance of Zero Coupon Notes...... -- -- (3,106)
Partial repurchase of Zero Coupon Notes................... -- -- (2,241)
-------- ------- -------
Net Cash (Used In) Provided By Financing
Activities...................................... (3,199) (3,217) 7,870
-------- ------- -------
Net (Decrease) Increase in Unrestricted Cash and
Cash Equivalents................................ (3,684) 775 5,800
Unrestricted Cash and Cash Equivalents at Beginning of
Year...................................................... 7,694 6,919 1,119
-------- ------- -------
Unrestricted Cash and Cash Equivalents at End of Year....... $ 4,010 $ 7,694 $ 6,919
======== ======= =======
Cash Paid for Interest...................................... $ 8,817 $ 1,741 $ 4,718
======== ======= =======
</TABLE>

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

F-7
<PAGE> 216

AMERICAN INDUSTRIAL PROPERTIES REIT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES:

General.

American Industrial Properties REIT (the "Trust") is a self-administered
Texas real estate investment trust which, as of December 31, 1996, owns and
operates thirteen commercial real estate properties consisting of twelve
industrial properties and one retail property. The Trust was formed September
26, 1985 and commenced operations on November 27, 1985. Pursuant to the Trust's
1993 Annual Meeting of Shareholders, amendments to the Trust's Declaration of
Trust and Bylaws were approved which, among other things, changed the name of
the Trust to American Industrial Properties REIT and converted the Trust from a
finite life entity to a perpetual life entity.

Principles of Consolidation.

The consolidated financial statements of the Trust include the accounts of
American Industrial Properties REIT and its wholly-owned subsidiaries.
Significant intercompany balances and transactions have been eliminated in
consolidation.

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 amounts reported in the financial statements and
accompanying notes. Actual results may differ significantly from such estimates
and assumptions.

Real Estate.

The Trust carries its real estate held for investment at depreciated cost
unless the asset is determined to be impaired. Real estate classified as held
for sale is carried at lower of depreciated cost or fair market value less costs
to sell. In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, issued in March 1995, the Trust records impairment losses on
long-lived assets used in operations when events and circumstances indicate that
the assets might be impaired and the expected undiscounted cash flows estimated
to be generated by those assets are less than the related carrying amounts. If
an asset held for investment is determined to be impaired, the impairment would
be measured based upon the excess of the asset's carrying value over the fair
value. In addition, the Trust records impairment losses on assets held for sale
when the estimated sales proceeds, after estimated selling costs, are less than
the carrying value of the related asset (see Note 2).

Property improvements are capitalized while maintenance and repairs are
expensed as incurred. Depreciation of buildings and capital improvements is
computed using the straight-line method over forty years. Depreciation of tenant
improvements is computed using the straight-line method over ten years.

Cash and Cash Equivalents.

Cash equivalents include demand deposits and all highly liquid instruments
purchased with an original maturity of three months or less. Restricted amounts
reflect escrow deposits held by third parties for the payment of taxes and
insurance and reserves held by third parties for property repairs or tenant
improvements.

F-8
<PAGE> 217

AMERICAN INDUSTRIAL PROPERTIES REIT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Other Assets.

Other assets primarily consists of deferred rent receivable, prepaid
commissions and loan fees. Leasing commissions are capitalized and amortized on
a straight line basis over the life of the lease. Loan fees are capitalized and
amortized to interest expense on a level yield basis over the term of the
related loan.

Rents and Tenant Reimbursements.

Rental income, including contractual rent increases or delayed rent starts,
is recognized on a straight-line basis over the lease term. The Trust has
recorded deferred rent receivable (representing the excess of rental revenue
recognized on a straight line basis over actual rents received under the
applicable lease provisions) of $599,000 and $810,000 at December 31, 1996 and
1995, respectively.

Several tenants in the Trust's retail property are also required to pay as
rent a percentage of their gross sales volume, to the extent such percentage
rent exceeds their base rents. Such percentage rents amounted to $154,000,
$269,000 and $245,000 for the years ended December 31, 1996, 1995, and 1994,
respectively. In addition to paying base and percentage rents, most tenants are
required to reimburse the Trust for operating expenses in excess of a negotiated
base amount.

Tamarac Square, the Trust's only retail property, has rental revenues in
excess of 10% of the total revenues of the Trust. Rental revenues and tenant
reimbursements from Tamarac totaled $3,308,000, $3,525,000, and $3,441,000 in
1996, 1995, and 1994, respectively.

Income Tax Matters.

The Trust operates as a real estate investment trust ("REIT") for federal
income tax purposes. Under the REIT provisions, the Trust is required to
distribute 95% of REIT taxable income and is allowed a deduction for dividends
paid during the year. The Trust had a taxable loss in each of the years ending
December 31, 1996, 1995, and 1994. Accordingly, no provision for income taxes
has been reflected in the financial statements.

The Trust has a net operating loss carryforward from 1996 and prior years
of approximately $34,800,000. Subject to certain restrictions, the losses may be
carried forward for up to 15 years. The present losses will expire beginning in
the year 2004. Management intends to operate the Trust in such a manner as to
continue to qualify as a REIT and to continue to distribute cash flow in excess
of taxable income.

Earnings and profits, which will determine the taxability of distributions
to shareholders, will differ from that reported for financial reporting purposes
due primarily to differences in the basis of the assets and the estimated useful
lives used to compute depreciation.

Concentrations.

The Trust owns industrial properties in Baltimore, Dallas, Houston, Los
Angeles, Milwaukee, and Minneapolis, and one retail property in Denver. The
principal competitive factors in these markets are price, location, quality of
space, and amenities. In each case, the Trust owns a small portion of the total
similar space in the market and competes with owners of other space for tenants.
Each of these markets is highly competitive, and other owners of property may
have competitive advantages not available to the Trust. The Trust's retail
property, Tamarac Square, represents approximately 29% of the rent and tenant
reimbursement revenues for the year ended December 31, 1996, and approximately
41% of net real estate at December 31, 1996.

F-9
<PAGE> 218

AMERICAN INDUSTRIAL PROPERTIES REIT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Reverse Stock Split.

On July 30, 1997 the Trust Managers approved a one for five reverse Share
split, which is subject to shareholder approval on October 15, 1997. All
references to the number of Shares, per Share amounts and the market prices of
the Shares have been restated to reflect the impact of the reverse Share split.

Reclassification.

Certain amounts in prior years financial statements have been reclassified
to conform with the current year presentation.

NOTE 2 -- REAL ESTATE AND PROVISIONS FOR POSSIBLE LOSSES ON REAL ESTATE:

At December 31, 1996 and 1995, real estate was comprised of the following:

<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Held for investment:
Land..................................................... $15,149,000 $ 17,526,000
Buildings and improvements............................... 69,544,000 79,565,000
----------- ------------
84,693,000 97,091,000
----------- ------------
Held for sale:
Land..................................................... 1,728,000 897,000
Buildings and improvements............................... 8,051,000 3,909,000
----------- ------------
9,779,000 4,806,000
----------- ------------
Total............................................ $94,472,000 $101,897,000
=========== ============
</TABLE>

During 1996, the Trust reclassified four properties from held for
investment to held for sale in anticipation of the need to raise capital to
complete the discounted purchase of certain indebtedness. Two of these
properties were sold in the fourth quarter of 1996 for net proceeds of
$6,545,000, resulting in a net gain of $177,000, and two remain classified as
held for sale at December 31, 1996. The net operating income of the properties
held for sale at December 31, 1996 was approximately $827,000 in 1996. During
1995, the Trust sold one industrial property for net proceeds of $2,476,000,
resulting in a net loss of $191,000, and acquired a 72,000 square foot
industrial distribution property in Arlington, Texas for total consideration of
approximately $1,309,000. One property was classified as held for sale at
December 31, 1995. This property, on which provisions for possible losses on
real estate were recorded of $600,000 and $650,000 in 1995 and 1994,
respectively, was reclassified to held for investment in 1996.

If unforeseen factors should cause a reclassification of the Trust's real
estate from held for investment to held for sale, significant adjustments to
reduce the depreciated cost of the real estate to net realizable value could be
required.

NOTE 3 -- MORTGAGES PAYABLE:

At December 31, 1996, the Trust's properties were subject to liens securing
mortgage notes payable totaling $43,797,000. Of this amount $1,927,000
represented a note with a variable interest rate of prime plus 2% (at December
31, 1996, the prime rate was 8.25%) and $41,870,000 represented notes with fixed
interest rates ranging from 8.40% to 11.0%.

Principal payments due during each of the next five years are as follows:
$675,000 in 1997, $2,632,000 in 1998, $1,973,000 in 1999, $818,000 in 2000,
$13,776,000 in 2001 and $23,923,000 thereafter.

F-10
<PAGE> 219

AMERICAN INDUSTRIAL PROPERTIES REIT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Bylaws of the Trust, the settlement agreement relating to the 8.8%
Notes Payable, and certain mortgages payable contain various borrowing
restrictions and operating performance covenants. The Trust is in compliance
with all such restrictions and covenants as of December 31, 1996.

NOTE 4 -- 8.8% NOTES PAYABLE:

In February 1992, the Trust issued $53,234,000 of unsecured notes payable
due November 1997 (the "8.8% Notes Payable"), proceeds of which were used to
retire certain other indebtedness. In May 1995, the Trust initiated litigation
against the holder of these notes and elected not to make scheduled interest
payments thereafter. In June 1995, the noteholder declared the entire principal
amount and all accrued interest on the notes due and payable and, effective June
13, 1995, began accruing interest on the principal amount at the 11.7% default
rate provided for in the Note Purchase Agreement.

In May 1996, the Trust settled this litigation and, as a result, the notes
became secured by first or second liens on various properties and by pledges of
ownership interests in certain Trust entities owning properties. The Trust paid
$5,200,000 to satisfy all accrued interest payable through April 12, 1996,
allowing the Trust to recognize an extraordinary gain of $1,367,000 in the
second quarter of 1996.

As part of the settlement, the Trust obtained an option to pay the
remaining $45,239,000 in outstanding principal indebtedness for $36,800,000 (the
"Option Price"). As a result of a mortgage financing on nine properties and the
sale of two other properties in the fourth quarter of 1996, the Trust made
payments of $31,350,000 during 1996 on the Option Price, decreasing the
remaining required payment under the option to $5,450,000. The Trust paid
$250,000 to extend the date by which the Option Price must be paid to March 31,
1997. This amount reduced the principal amount outstanding on the 8.8% Notes
Payable but did not reduce the Option Price. The principal amount of
indebtedness outstanding on the 8.8% Notes Payable is $9,419,000. In connection
with the settlement of the litigation and the terms of the option, the Trust
recorded an extraordinary gain on extinguishment of debt of $1,367,000 in the
second quarter of 1996 and $4,443,000 in the fourth quarter of 1996.

In February 1997, the notes were sold to a major shareholder of the Trust
(see Note 14).

NOTE 5 -- ZERO COUPON NOTES:

As part of its original capitalization in 1985, the Trust issued
$179,698,000 (face amount at maturity) of Zero Coupon Notes due 1997 (the
"Notes"). These Notes, which were collateralized by first and second mortgage
liens on each of the Trust's real estate properties, accreted at 12%, compounded
semiannually. In 1991, the Trust began a program to retire the outstanding
Notes, resulting in a reduction of the outstanding Notes to $19,491,000 (face
amount at maturity) at December 31, 1993. On December 31, 1993, the Trust
effected a partial in-substance defeasance on $12,696,000 (face amount at
maturity) of the Notes and recorded an extraordinary loss of $2,530,000. In
November 1994, the Trust completed a partial in-substance defeasance on
$3,669,000 (face amount at maturity) of Notes and recorded an extraordinary loss
of $344,000. In December 1994, the Trust purchased the remaining non-defeased
Notes outstanding in the open market and submitted the Notes to the Trustee for
cancellation. The legal defeasance of the Notes resulted in the release of the
Zero Coupon Note mortgage liens which encumbered each of the Trust's properties.

The accreted value of the Notes defeased at December 31, 1996 and 1995 was
$14,725,000 and $13,104,000, respectively.

NOTE 6 -- ENVIRONMENTAL MATTERS:

The Trust has been notified of the existence of limited underground
petroleum based contamination at a portion of Tamarac Square, the Trust's Denver
retail property. The source of the contamination is apparently related to
underground storage tanks ("USTs") located on adjacent property. The owner of
the adjacent

F-11
<PAGE> 220

AMERICAN INDUSTRIAL PROPERTIES REIT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

property has agreed to remediate the property to comply with state standards and
has indemnified the Trust against costs related to its sampling activity. The
responsible party for the adjacent USTs has submitted a corrective Action Plan
to the Colorado Department of Public Health and Environment. Implementation of
the plan is ongoing. The responsible party is negotiating to obtain access
agreements from impacted landowners, including the Trust.

With the exception of Tamarac Square, the Trust has not been notified, and
is not otherwise aware, of any material non-compliance, liability or claim
relating to hazardous or toxic substances in connection with any of its
properties.

NOTE 7 -- SHAREHOLDER TRANSACTIONS:

In January 1996, the Trust filed a lawsuit in federal court in Dallas,
Texas against a major shareholder of the Trust, alleging violations of federal
and state securities laws. The defendants filed a counterclaim against the Trust
and its Trust Managers and, in February 1996, another shareholder filed a claim
against the Trust and its Trust Managers. The litigation related to these claims
was consolidated in April 1996. In December 1996, a settlement of this
litigation was approved by the Court. This settlement provided, among other
things, that certain amendments to the Trust's Bylaws be made and that the Trust
pay the shareholders a total of $955,000. Of this amount, $625,000 was paid by
the Trust's directors and officers liability insurance.

On November 25, 1996, USAA Real Estate Company ("USAA REALCO") entered into
independently negotiated agreements to purchase an aggregate of 451,521 Shares
from certain shareholders for $13.75 per share, pending approval of the
settlement of the shareholder litigation discussed above. On December 19, 1996,
the Trust sold 184,920 Shares, representing the remainder of its authorized
Shares, to USAA REALCO for $13.75 per share, the same price at which USAA REALCO
had independently agreed to purchase the Shares from other shareholders. On
December 20, 1996, after approval of the settlement of the shareholder
litigation, USAA REALCO closed the purchase of 451,521 Shares, resulting in USAA
REALCO's current ownership of 636,441 Shares, or 31.82% of the outstanding
Shares of the Trust.

On December 18, 1996, the Trust executed an agreement with USAA REALCO
contemplating the purchase by USAA REALCO of certain outstanding indebtedness of
the Trust. This agreement set forth the modifications which would occur if USAA
REALCO acquired the indebtedness, including the right to convert the principal
amount of this indebtedness into Shares of the Trust at either $10.00 or $11.25
per share, depending upon the date of conversion. On February 26, 1997, USAA
REALCO purchased this debt (see Note 14).

NOTE 8 -- LITIGATION:

During 1996, the Trust concluded two significant litigation matters (see
Notes 4 and 7). Although the Trust is not currently involved in any significant
litigation, the Trust may, on occasion and in the normal course of business, be
involved in legal actions relating to the ownership and operations of its
properties. In management's opinion, the liabilities, if any, that may
ultimately result from such legal actions are not expected to have a material
adverse effect on the consolidated financial position of the Trust.

NOTE 9 -- RETIREMENT AND PROFIT SHARING PLAN:

During 1993, the Trust adopted a retirement and profit sharing plan which
qualifies under section 401(k) of the Internal Revenue Code. All existing Trust
employees at adoption and subsequent employees who have completed six months of
service are eligible to participate in the plan. Subject to certain limitations,
employees may contribute up to 15% of their salary. The Trust may make annual
discretionary contributions to the plan. Contributions by the Trust related to
the years ended December 31, 1996, 1995 and 1994 were $30,000, $25,000 and
$20,000, respectively.

F-12
<PAGE> 221

AMERICAN INDUSTRIAL PROPERTIES REIT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- OPERATING LEASES:

The Trust's properties are leased to others under operating leases with
expiration dates ranging from 1997 to 2011. Future minimum rentals on
noncancellable tenant leases at December 31, 1996 are as follows:

<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C> <C>
1997...................................................... $ 7,592,000
1998...................................................... 6,179,000
1999...................................................... 4,328,000
2000...................................................... 2,844,000
2001...................................................... 2,091,000
Thereafter................................................ 2,217,000
-----------
$25,251,000
===========
</TABLE>

NOTE 11 -- DISTRIBUTIONS:

The Trust's distributions of $363,000 ($0.20 per share) in 1996 and
$364,000 ($0.20 per share) in 1995 represent a return of capital to shareholders
(to the extent of the shareholder's basis in the Shares.) The Trust did not pay
any distributions in 1994.

NOTE 12 -- PER SHARE DATA:

Per share data is based on a weighted average number of Shares outstanding
of 1,821,648 for the year ending December 31, 1996 and 1,815,080 or the years
ended December 31, 1995 and 1994.

NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS:

Accounts receivable, accounts payable and accrued expenses and other
liabilities are carried at amounts that reasonably approximate their fair
values. The fair values of the Trust's mortgage notes payable are estimated
using discounted cash flow analyses, based on the Trust's incremental borrowing
rates for similar types of borrowing arrangements. The carrying values of such
mortgage notes payable reasonably approximate their fair values.

NOTE 14 -- SUBSEQUENT EVENT:

On February 26, 1997, USAA REALCO, a shareholder owning 31.8% of the
outstanding Shares in the Trust, purchased outstanding indebtedness of the Trust
totaling $9,419,213 pursuant to an earlier agreement with the Trust. (See Note
7). USAA REALCO and the Trust then entered into an agreement modifying the terms
of the indebtedness. The amount of the outstanding debt was reduced from
$9,419,213 to $7,040,721, allowing the Trust to recognize an extraordinary gain
on extinguishment of debt (including accrued interest) of $2,643,000 in the
first quarter of 1997. The Trust made an immediate principal reduction on the
modified notes of $1,591,103, leaving an outstanding principal balance of
$5,449,618.

The terms of the modified notes provide for monthly payments of interest at
8.8% and an extension in the maturity date from March 31, 1997 to December 31,
2000. In addition, USAA REALCO has the option to convert the principal amount of
the notes into Shares of the Trust at the conversion rate of $10.00 per share
(if converted prior to December 31, 1997) or $11.25 per share (if converted
between December 31, 1997 and December 31, 2000). In order for USAA REALCO to
convert its debt into Shares, the shareholders must approve an increase in the
authorized Shares of the Trust. An increase in the authorized Shares of the
Trust requires approval by holders of two-thirds of the outstanding Shares. In
addition, the shareholders must approve the right of USAA REALCO to convert its
debt into Shares. The notes provide that if shareholder

F-13
<PAGE> 222

AMERICAN INDUSTRIAL PROPERTIES REIT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approval of this conversion right is not approved by June 30, 1997, interest on
the debt will increase to the lesser of 18% or the highest lawful rate effective
July 1, 1997 and the full principal amount will become due and payable on
October 31, 1997. Management believes that the sale of one or more properties
would be required to satisfy this obligation in the event the notes become due
and payable.

The Trust anticipates shareholder approval for this transaction will be
received on or about June 30, 1997 and that USAA REALCO will convert the
principal amount of the debt into Shares of the Trust soon thereafter.
Therefore, the Trust currently anticipates it will reflect approximately
$1,022,000, representing the difference between the market trading price of
$11.90 per share on February 26, 1997 and the $10.00 conversion price, as
interest expense between February 26, 1997 and June 30, 1997. The date of
February 26, 1997 is used to measure market value as this is deemed to be the
date of issuance of the modified note, which contains the convertibility option.
This will result in additional interest expense of approximately $272,000 in the
first quarter of 1997 and approximately $750,000 in the second quarter of 1997.

F-14
<PAGE> 223

SCHEDULE III

AMERICAN INDUSTRIAL PROPERTIES REIT

CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
($000'S)
<TABLE>
<CAPTION>

INITIAL COST
ENCUM- ---------------------- WRITEDOWNS
BRANCES BUILDINGS & CAPITALIZED AND
DESCRIPTION AT 12/31/96 LAND IMPROVEMENTS IMPROVEMENTS RETIREMENTS ALLOWANCES
----------- ----------- ------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL PROPERTIES:
TEXAS --
Beltline Business Ctr.... $ 2,775 $ 1,303 $ 5,213 $ 424 ($ 5) ($ 3,516)
Commerce Park............ 2,100 1,108 4,431 542 (2,014)
Gateway 5 & 6............ 2,850 935 3,741 693 (1,861)
Northgate II............. 5,175 2,153 8,612 758 (4,122)
Northview................ 2,194 658 2,631 38
Plaza Southwest.......... 3,375 1,312 5,248 979
Westchase................ 1,327 697 2,787 322 (74) (1,158)
Meridian................. 1,163 262 1,047
CALIFORNIA --
Huntington Drive......... 4,575 1,559 6,237 731
MARYLAND --
Patapsco................. 3,112 1,147 4,588 371 (1,250)
MINNESOTA --
Burnsville............... 1,927 761 3,045 443 (18) (1,563)
WISCONSIN --
Northwest Business
Park................... 1,278 1,296 5,184 762 (131)
RETAIL PROPERTY:
COLORADO --
Tamarac Square........... 11,946 6,799 27,194 4,383 (241)
TRUST HOME OFFICE.......... 31
------- ------- ------- ------- ----- --------
TOTAL............. $43,797 $19,990 $79,958 $10,477 ($469) ($15,484)
======= ======= ======= ======= ===== ========

<CAPTION>
GROSS AMT. CARRIED
AT DECEMBER 31, 1996
-----------------------------------------------
BUILDINGS & ACCUMULATED DATE OF DATE
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
----------- ------- ------------ ------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL PROPERTIES:
TEXAS --
Beltline Business Ctr.... $ 600 $ 2,819 $ 3,419 $ 1,320 1984 1985
Commerce Park............ 705 3,362 4,067 1,214 1984 1985
Gateway 5 & 6............ 563 2,945 3,508 1,208 1984-85 1985
Northgate II............. 1,329 6,072 7,401 2,365 1982-83 1985
Northview................ 658 2,669 3,327 215 980 1993
Plaza Southwest.......... 1,312 6,227 7,539 1,737 1970-74 1985
Westchase................ 465 2,109 2,574 773 1983 1985
Meridian................. 262 1,047 1,309 35 1981 1995
CALIFORNIA --
Huntington Drive......... 1,559 6,968 8,527 2,004 1984-85 1985
MARYLAND --
Patapsco................. 897 3,959 4,856 1,155 1980-84 1985
MINNESOTA --
Burnsville............... 432 2,236 2,668 941 1984 1986
WISCONSIN --
Northwest Business
Park................... 1,296 5,815 7,111 1,668 1983-86 1986
RETAIL PROPERTY:
COLORADO --
Tamarac Square........... 6,799 31,336 38,135 9,307 1976-79 1985
TRUST HOME OFFICE.......... 31 31 31 N/A various
------- ------- ------- -------
TOTAL............. $16,877 $77,595 $94,472 $23,973
======= ======= ======= =======
</TABLE>

The accompanying notes are an integral part of this schedule.

F-15
<PAGE> 224

AMERICAN INDUSTRIAL PROPERTIES REIT

NOTES TO SCHEDULE III
DECEMBER 31, 1996
($000)

RECONCILIATION OF REAL ESTATE:

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year............................... $101,897 $103,843 $103,710
Additions during period:
Improvements.......................................... 982 752 1,024
Acquisitions.......................................... -- 1,309 --
-------- -------- --------
102,879 105,904 104,734
Deductions during period:
Dispositions.......................................... 8,407 3,402 --
Writedowns............................................ -- 600 650
Asset retirements..................................... -- 5 241
-------- -------- --------
Balance at end of year..................................... $ 94,472 $101,897 $103,843
======== ======== ========
</TABLE>

RECONCILIATION OF ACCUMULATED DEPRECIATION:

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year............................... $ 23,441 $ 21,859 $ 19,315
Additions during period:
Depreciation expense for period.......................... 2,577 2,479 2,622
-------- -------- --------
26,018 24,338 21,937
Deductions during period:
Accumulated depreciation of real estate sold.......... 2,045 897 --
Asset retirements..................................... -- -- 78
-------- -------- --------
Balance at end of year..................................... $ 23,973 $ 23,441 $ 21,859
======== ======== ========
</TABLE>

TAX BASIS:

The income tax basis of real estate, net of accumulated tax depreciation,
is approximately $89,033 at December 31, 1996.

DEPRECIABLE LIFE:

Depreciation is provided by the straight-line method over the estimated
useful lives which are as follows:

<TABLE>
<S> <C>
Buildings and capital improvements.......................... 40 years
Tenant improvements......................................... 10 years
</TABLE>

F-16
<PAGE> 225

AMERICAN INDUSTRIAL PROPERTIES REIT

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
REVENUES
Rents..................................... $ 1,925 $ 2,268 $ 3,895 $ 4,418
Tenant reimbursements..................... 659 761 1,326 1,428
Interest income........................... 2 52 31 139
---------- --------- ---------- ---------
2,586 3,081 5,252 5,985
---------- --------- ---------- ---------

EXPENSES
Property operating expenses:
Property taxes......................... 332 366 687 742
Property management fees............... 96 111 194 217
Utilities.............................. 86 110 183 217
General operating...................... 203 191 422 421
Repairs and maintenance................ 90 116 179 165
Other property operating expenses...... 98 73 176 145
Depreciation and amortization............. 697 707 1,390 1,408
Interest on 8.8% notes payable............ 495 1,029 885 2,349
Interest on mortgages payable............. 947 403 1,961 811
Administrative expenses:
Trust administration and overhead...... 395 333 811 890
Litigation and proxy costs............. 201 400 437 888
---------- --------- ---------- ---------
3,640 3,839 7,325 8,253
---------- --------- ---------- ---------
Loss from operations...................... (1,054) (758) (2,073) (2,268)
Extraordinary gain on extinguishment of
debt................................... -- 1,367 2,643 1,367
Gain on sale of real estate............... -- -- 312 --
---------- --------- ---------- ---------
NET INCOME (LOSS)........................... $ (1,054) $ 609 $ 882 $ (901)
========== ========= ========== =========

PER SHARE DATA(a)
Loss from operations...................... $ (0.55) $ (0.40) $ (1.00) $ (1.25)
Extraordinary gain on extinguishment of
debt................................... -- 0.75 1.30 0.75
Gain on sale of real estate............... -- -- 0.15 --
---------- --------- ---------- ---------
Net Income (Loss)......................... $ (0.55) $ 0.35 $ 0.45 $ (0.50)
========== ========= ========== =========
Distributions Paid........................ $ -- $ 0.20 $ -- $ 0.20
========== ========= ========== =========
Weighted average number of common shares
outstanding............................ 2,000,000 1,815,080 2,000,000 1,815,080
========== ========= ========== =========
</TABLE>

The accompanying notes are an part of these financial statements.
- ---------------

F-17
<PAGE> 226

AMERICAN INDUSTRIAL PROPERTIES REIT

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Real estate:
Held for investment....................................... $ 92,074 $ 84,693
Held for sale............................................. -- 9,779
-------- --------
92,074 94,472
Accumulated depreciation.................................. (24,249) (23,973)
-------- --------
Net real estate........................................... 67,825 70,499
Cash and cash equivalents:
Unrestricted.............................................. 1,253 4,010
Restricted................................................ 1,104 1,366
-------- --------
Total cash and cash equivalents........................... 2,357 5,376
Other assets, net........................................... 3,103 3,061
-------- --------
Total Assets...................................... $ 73,285 $ 78,936
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................... $ 41,547 $ 43,797
8.8% notes payable........................................ 5,450 9,419
Accrued interest.......................................... 973 602
Accounts payable, accrued expenses and other
liabilities............................................ 1,286 1,964
Tenant security deposits.................................. 464 471
-------- --------
Total Liabilities................................. 49,720 56,253
-------- --------
Shareholders' Equity:
Preferred shares, $0.10 par value; 50,000,000 shares
authorized; none issued or outstanding................. -- --
Shares of beneficial interest, $0.10 par value;
500,000,000 Shares authorized; 2,000,000 Shares issued
and outstanding(a)..................................... 1,000 1,000
Additional paid-in capital................................ 127,056 127,056
Accumulated distributions................................. (58,456) (58,456)
Accumulated loss from operations and extraordinary gains
(losses)............................................... (47,495) (48,065)
Accumulated net realized gain on sales of real estate..... 1,460 1,148
-------- --------
Total Shareholders' Equity........................ 23,565 22,683
-------- --------
Total Liabilities and Shareholders' Equity........ $ 73,285 $ 78,936
======== ========
</TABLE>

The accompanying notes are an integral of these financial statements.
- ---------------

F-18
<PAGE> 227

AMERICAN INDUSTRIAL PROPERTIES REIT

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 882 $ (901)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Extraordinary gain on extinguishment of debt........... (2,643) (1,367)
Gain on sale of real estate............................ (312) --
Depreciation........................................... 1,218 1,244
Amortization of deferred financing costs............... 98 36
Other amortization..................................... 172 164
Changes in operating assets and liabilities:
Decrease (increase) in other assets and restricted
cash................................................ 57 (141)
Decrease in accounts payable, other liabilities and
tenant security deposits............................ (623) (186)
Increase (decrease) in accrued interest.............. 636 (3,294)
------- -------
Net Cash Used In Operating Activities............. (515) (4,445)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized improvements and leasing commissions.......... (430) (618)
Net proceeds from sales of real estate.................... 2,029 --
------- -------
Net Cash Provided By (Used In) Investing
Activities....................................... 1,599 (618)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgage notes payable............ (3,841) (113)
Distributions to shareholders............................. -- (363)
------- -------
Net Cash Used In Financing Activities............. (3,841) (476)
------- -------
Net Decrease in Unrestricted Cash and Cash
Equivalents...................................... (2,757) (5,539)
Unrestricted Cash and Cash Equivalents at
Beginning of Period.............................. 4,010 7,694
------- -------
Unrestricted Cash and Cash Equivalents at End of
Period........................................... $ 1,253 $ 2,155
======= =======
Cash Paid for Interest............................ $ 2,112 $ 6,454
======= =======
</TABLE>

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

F-19
<PAGE> 228

AMERICAN INDUSTRIAL PROPERTIES REIT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)

NOTE 1 -- BASIS OF PRESENTATION

The accompanying consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all of the disclosures required by generally accepted accounting principles or
those contained in the Trust's Annual Report on Form 10-K. Accordingly, these
financial statements should be read in conjunction with the audited financial
statements of the Trust for the year ended December 31, 1996, included in the
Trust's Annual Report on Form 10-K.

The financial information included herein has been prepared in accordance
with the Trust's customary accounting practices and has not been audited. In the
opinion of management, the information presented reflects all adjustments
necessary for a fair presentation of interim results. All such adjustments are
of a normal and recurring nature.

Certain amounts in prior year financial statements have been reclassified
to conform with the current year presentation.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The consolidated financial statements of the
Trust include the accounts of American Industrial Properties REIT and its
wholly-owned subsidiaries. Significant intercompany balances and transactions
have been eliminated in consolidation.

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 amounts reported in the financial
statements and accompanying notes. Actual results may differ significantly from
such estimates and assumptions.

Real Estate. The Trust carries its real estate held for investment at
depreciated cost unless the asset is determined to be impaired. Real estate
classified as held for sale is carried at the lower of depreciated cost or fair
market value less costs to sell. In accordance with Statement of Financial
Accounting Standards No. 121, Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, the Trust records impairment losses on
long-lived assets used in operations when events and circumstances indicate that
the assets might be impaired and the expected undiscounted cash flows estimated
to be generated by those assets are less than the related carrying amounts. If
an asset held for investment is determined to be impaired, the impairment would
be measured based upon the excess of the asset's carrying value over the fair
value. In addition, the Trust records impairment losses on assets held for sale
when the estimated sales proceeds, after estimated selling costs, is less than
the carrying value of the related asset. At June 30, 1997, all of the Trust's
properties were classified as held for investment. Should unforeseen factors
cause certain properties to be reclassified to held for sale, significant
adjustments to reduce the net book value of such properties could be required.

Other Assets. Other assets consists primarily of deferred rent receivable,
prepaid leasing commissions and loan fees. Deferred rent receivable arises as
the Trust recognizes rental income, including contractual rent increases or
delayed rent starts, on a straight-line basis over the lease term. The Trust has
recorded deferred rent receivable of $553,000 and $599,000 at June 30, 1997 and
December 31, 1996, respectively. Leasing commissions are capitalized and
amortized on a straight-line basis over the life of the lease. Loan fees are
capitalized and amortized to interest expense on a level yield basis over the
term of the related loan.

F-20
<PAGE> 229

AMERICAN INDUSTRIAL PROPERTIES REIT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Income Taxes. The Trust operates as a real estate investment trust ("REIT")
for federal income tax purposes. Under the REIT provisions, the Trust is
required to distribute 95% of REIT taxable income and is allowed a deduction for
dividends paid during the year. No provisions for Federal income taxes have been
required or recorded to date.

Reverse Stock Split. On July 30, 1997 the Trust Managers approved a one for
five reverse Share split, which is subject to shareholder approval on October
15, 1997. All references to the number of Shares, per Share amounts and the
market prices of the Shares have been restated to reflect the impact of the
reverse Share split.

Earnings per share. Earnings per share is computed based upon the weighted
average number of common shares outstanding. The computation of earnings per
share does not include common share equivalents as the inclusion of such does
not result in dilution (based upon application of the "treasury stock" method)
or, in periods where there is a net loss, is anti-dilutive.

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" ("Statement
128"). Statement 128 specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Management believes that adoption of Statement 128 will not have a material
effect on the Trust's earnings per share.

Share Compensation. The Trust accounts for its share compensation
arrangements under the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and intends to continue to
do so. See Note 5 for a discussion of the Trust's share compensation
arrangements.

NOTE 3 -- ZERO COUPON NOTES

In December 1993 and November 1994, the Trust deposited United States
Government investment securities into an irrevocable trust to complete
in-substance defeasance of certain of its Zero Coupon Notes due November 1997.
The debt, which aggregated $15,606,000 at June 30, 1997, was accounted for as if
extinguished in December 1993 and November 1994. The funds in the trust, which
will be used solely to satisfy the principal and interest of the defeased debt,
will be sufficient to satisfy all future debt service requirements for the
defeased debt instruments.

NOTE 4 -- SHAREHOLDER TRANSACTIONS

On February 26, 1997, USAA Real Estate Company ("REALCO"), the owner at
that time of approximately 31.8% of the Trust's outstanding Shares of Beneficial
Interest (the "Shares"), purchased outstanding indebtedness of the Trust
totaling $9,419,213. Pursuant to an earlier agreement with the Trust, the notes
were then modified by REALCO to, among other things, reduce the principal amount
of these notes from $9,419,213 to $7,040,721, resulting in an extraordinary gain
on extinguishment of debt (including certain accrued interest) to the Trust of
$2,643,000. At the time the notes were modified, the Trust made a principal
payment of $1,591,103, reducing the outstanding principal amount to $5,449,618.
According to the modification terms, interest continues to accrue at 8.8%,
payable monthly, and the maturity of the notes is extended from March 31, 1997
to December 31, 2000. Pursuant to shareholder approval on June 30, 1997, REALCO
has the option to convert the principal amount of the notes into Shares of the
Trust at the conversion rate of $10.00 per share (if converted prior to December
31, 1997) or $11.25 per share (if converted between December 31, 1997 and
December 31, 2000). The Trust currently expects REALCO to elect this conversion
in the fourth quarter of 1997. As a result, the Trust will reflect approximately
$1,022,000, based upon the difference between the market trading price of $11.90
per share on February 26, 1997 and the $10.00 conversion price, as interest
expense between February 26, 1997 and September 30, 1997. The date of February
26, 1997 is used to measure market value as this is deemed to be the date of
issuance of the modified note, which contains the convertibility option. Based
upon these assumptions, the Trust recorded additional

F-21
<PAGE> 230

AMERICAN INDUSTRIAL PROPERTIES REIT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interest expense of $375,000 in the second quarter of 1997 ($647,000 for the six
months ended June 30, 1997) and expects to record the remaining $375,000 in
interest expense in the third quarter of 1997.

On June 30, 1997, the shareholders of the Trust approved an increase in the
authorized number of shares of beneficial interest from 10,000,000 to
500,000,000 and approved the authorization of 50,000,000 preferred shares. The
preferences or rights of the preferred shares, which have a par value per share
of $0.10, will be set as such shares are issued.

NOTE 5 -- INCENTIVE COMPENSATION

On June 30, 1997, the shareholders of the Trust approved an Employee and
Trust Manager Incentive Share Plan (the "Plan"). The Plan, which is to be
administered by the Compensation Committee of the Board of Trust Managers (the
"Committee"), reserves a total of 160,000 common shares for issuance under the
Plan pursuant to the exercise of incentive and non-qualified share options and
the grant of restricted share awards. On June 30, 1997, the Committee awarded a
total of 125,000 options to management with an exercise price of $15.00 (the
closing trading price of common shares on June 30, 1997), an expiration date of
June 30, 2007, and vesting of 20% annually, beginning on June 30, 1997. As
provided in the Plan, the Committee also awarded 2,000 options to each Trust
Manager with an exercise price of $15.00, an expiration date of June 30, 2007,
and immediate vesting.

The Trust has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under Statement 123 requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Trust's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.

NOTE 6 -- SUBSEQUENT EVENTS

In July 1997, the Trust sold a total of 1,433,483 Shares to clients and
affiliates of Morgan Stanley Asset Management, Inc. (collectively "MSAM").
Pursuant to an earlier agreement, the Shares were issued at $12.25 per Share,
generating total proceeds of $17,560,176. Also in July 1997, the Trust sold to
certain clients of ABKB/LaSalle Securities Limited Partnership and LaSalle
Advisors Limited Partnership (collectively, "ABKB") a total of 1,224,489 Shares
at $12.25 per Share for total proceeds of $15,000,000. The agreement with MSAM
allows them to purchase an additional 199,169 Shares at $12.25 per Share. In
connection with these transactions, the Board of Trust Managers was expanded
from five to eight members, with two MSAM representatives and one ABKB
representative appointed as Trust Managers.

On July 7, 1997, the Trust signed definitive merger agreements with USAA
Real Estate Income Investments I, A California Limited Partnership, USAA Real
Estate Income Investments II Limited Partnership, a Texas limited partnership,
USAA Income Properties III Limited Partnership, a Delaware limited partnership,
and USAA Income Properties IV Limited Partnership, a Delaware limited
partnership (collectively, the "RELPs") pursuant to which the RELPs will be
merged into the Trust (the "Merger"). If the Merger is accomplished, the Trust
will acquire nine real estate properties consisting of three office buildings
totaling 550,000 square feet, two industrial properties totaling 320,000 square
feet, three office/research and development properties totaling 156,000 square
feet, and one retail property totaling 77,000 square feet. In addition, the
Trust will acquire a 55.84% joint venture interest in a 291,000 square foot
office property. The agreed value of the interests in these properties,
including assumption of $31,704,000 in related debt, is $89,622,000. Pursuant to
the terms of the agreements, the Trust will issue an aggregate of 4,412,829
shares of beneficial interest at $13.125 per share (for a total value of
$57,918,385) to the limited partners in the RELPs in exchange for their limited
partnership interests in the RELPs. The Merger, which has been approved by the
Trust's Board of Trust Managers and the Board of Directors of each of the
general partners of

F-22
<PAGE> 231

AMERICAN INDUSTRIAL PROPERTIES REIT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the RELPs, is subject to due diligence by both parties and certain other
conditions, including approval by the shareholders of the Trust and the limited
partners of each of the RELPs.

F-23
<PAGE> 232

INDEPENDENT AUDITORS' REPORT

The Partners
USAA Real Estate Income Investments I Limited Partnership:

We have audited the accompanying balance sheets of USAA Real Estate Income
Investments I Limited Partnership as of December 31, 1996 and 1995, and the
related statements of income, partners' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of USAA Real Estate Income
Investments I Limited Partnership as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included in
Schedule III is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.

/s/ KPMG PEAT MARWICK LLP
------------------------------------
KPMG PEAT MARWICK LLP

San Antonio, Texas
January 29, 1997

F-24
<PAGE> 233

USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP

BALANCE SHEETS
DECEMBER 31, 1996 AND 1995

ASSETS

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Rental properties, net (note 3)............................. $ 9,964,683 $ 10,438,578
Mortgage loan receivable from affiliate (note 4)............ -- 5,440,000
Temporary investments at cost which approximates market
value -- Money market fund................................ 926,892 343,834
Cash........................................................ 46,204 23,003
------------ ------------
Cash and cash equivalents................................. 973,096 366,837
Accounts receivable......................................... 72,175 45,201
Deferred charges, at amortized cost, and other assets....... 386,325 410,731
------------ ------------
$ 11,396,279 $ 16,701,347
============ ============

LIABILITIES AND PARTNERS' EQUITY
Accounts payable, including amounts due to affiliates of
$27,907 and $45,090 (note 6).............................. $ 83,582 $ 55,379
Accrued expenses............................................ 35,634 8,510
Security deposits........................................... 66,616 65,996
------------ ------------
Total liabilities................................. 185,832 129,885
------------ ------------
Partners' equity:
General Partner:
Capital contribution................................... 1,000 1,000
Cumulative net income.................................. 89,818 86,257
Cumulative distributions............................... (184,391) (177,220)
------------ ------------
(93,573) (89,963)
------------ ------------
Limited Partners (54,610 units):
Capital contributions, net of offering costs........... 25,666,700 25,666,700
Cumulative net income.................................. 8,892,025 8,539,514
Cumulative distributions............................... (23,254,705) (17,544,789)
------------ ------------
11,304,020 16,661,425
------------ ------------
Total Partners' equity............................ 11,210,447 16,571,462
------------ ------------
$ 11,396,279 $ 16,701,347
============ ============
</TABLE>

See accompanying notes to financial statements.

F-25
<PAGE> 234

USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP

STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
INCOME
Rental income............................................ $1,678,468 $1,420,968 $1,031,522
Interest from mortgage loan from affiliate (notes 4 and
6)..................................................... 52,124 612,757 605,535
Interest income, including $18 for 1995 and $363 for 1994
to affiliate (note 6).................................. 89,058 26,283 50,447
---------- ---------- ----------
Total income................................... 1,819,650 2,060,008 1,687,504
---------- ---------- ----------
EXPENSES
Direct expenses, including $109,601, $59,639 and $45,037
to affiliate (note 6).................................. 572,686 539,300 517,399
Depreciation............................................. 572,255 543,494 431,171
General and administrative, including $135,424, $142,286
and $165,150 to affiliates (note 6).................... 250,744 252,165 253,560
Management fee to affiliate (note 6)..................... 67,893 77,792 49,325
---------- ---------- ----------
Total expenses................................. 1,463,578 1,412,751 1,251,455
---------- ---------- ----------
Net income............................................... $ 356,072 $ 647,257 $ 436,049
========== ========== ==========
Net income per limited partnership unit.................. $ 6.46 $ 11.73 $ 7.90
========== ========== ==========
</TABLE>

See accompanying notes to financial statements.

F-26
<PAGE> 235

USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP

STATEMENTS OF PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
-------- ----------- -----------
<S> <C> <C> <C>
Balances at December 31, 1993........................... $(83,144) $17,336,471 $17,253,327
Net income............................................ 4,360 431,689 436,049
Cash distributions.................................... (8,825) (873,760) (882,585)
-------- ----------- -----------
Balances at December 31, 1994........................... (87,609) 16,894,400 16,806,791
Net income............................................ 6,472 640,785 647,257
Cash distributions.................................... (8,826) (873,760) (882,586)
-------- ----------- -----------
Balances at December 31, 1995........................... (89,963) 16,661,425 16,571,462
Net income............................................ 3,561 352,511 356,072
Cash distributions.................................... (7,171) (5,709,916) (5,717,087)
-------- ----------- -----------
Balances at December 31, 1996........................... $(93,573) $11,304,020 $11,210,447
======== =========== ===========
</TABLE>

See accompanying notes to financial statements.

F-27
<PAGE> 236

USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 356,072 $ 647,257 $ 436,049
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 572,255 543,494 431,171
Amortization....................................... 44,937 34,290 9,467
Loss on early retirement of assets................. -- -- 2,465
Decrease (increase) in accounts receivable......... (26,974) (9,297) 65,380
Increase in deferred charges and other assets...... (20,531) (168,240) (194,539)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities................... 55,947 (32,205) 35,086
----------- ---------- ----------
Cash provided by operating activities......... 981,706 1,015,299 785,079
----------- ---------- ----------
Cash flows from investing activities:
Additions to rental properties........................ (98,360) (561,552) (684,626)
Proceeds from mortgage loan receivable................ 5,440,000 -- --
----------- ---------- ----------
Cash provided by (used in) investing
activities.................................. 5,341,640 (561,552) (684,626)
----------- ---------- ----------
Cash flows used in financing activities -- Payment of
distributions......................................... (5,717,087) (882,586) (882,585)
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.... 606,259 (428,839) (782,132)
Cash and cash equivalents at beginning of year.......... 366,837 795,676 1,577,808
----------- ---------- ----------
Cash and cash equivalents at end of year................ $ 973,096 $ 366,837 $ 795,676
=========== ========== ==========
</TABLE>

See accompanying notes to financial statements.

F-28
<PAGE> 237

USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994

1. ORGANIZATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER

USAA Real Estate Income Investments I Limited Partnership is engaged solely
in the business of real estate investment; therefore, presentation of
information about industry segments is not applicable. The General Partner, USAA
Investors I, Inc., is a wholly-owned subsidiary of USAA Real Estate Company,
which is a wholly-owned subsidiary of USAA Capital Corporation, which is a
wholly-owned subsidiary of United Services Automobile Association ("USAA").

At December 31, 1996, the Partnership owned a shopping center located in
Daytona Beach, Florida and an office building located in San Diego, California.
The Partnership's revenue is subject to changes in the economic environments of
these areas.

Rental properties are valued at cost. The carrying amount of a property is
not changed for temporary fluctuations in value unless the carrying value is
believed to be permanently impaired. In 1995, the Partnership adopted the
provisions of Financial Accounting Standards Board Statement No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," ("Statement 121"). Statement 121 provides guidance for determining
impairment of long-lived assets utilizing undiscounted future cash flows. The
assessment for and measurement of impairment is based upon the undiscounted
future cash flows and fair value, respectively, of the individual real estate
properties. Based on the provisions of Statement 121, the Partnership's
long-lived assets, real estate and improvements are not considered impaired. The
adoption of Statement 121 had no financial statement impact.

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. Actual results could differ from those estimates.

For purposes of the Statements of Cash Flows, all highly liquid marketable
securities that have a maturity at purchase of three months or less and money
market mutual funds are considered to be cash equivalents.

Depreciation is provided over the estimated useful lives of properties
using the straight-line method. The estimated lives of the buildings and
improvements are 30 years (19-39 years for Federal income tax purposes).

Rental income is recognized under the operating method, whereby aggregate
rentals are reported as income on the straight-line basis over the life of the
lease. Rental income recognized was $15,873, $65,461 and $68,669 more than the
amount due per the lease agreements for the years ended December 31, 1996, 1995
and 1994, respectively.

No provision or credit for income taxes has been made as the liability for
such taxes is that of the Partners rather than the Partnership. The Partnership
files its tax return on an accrual basis.

For financial reporting purposes, net income (loss) is allocated 1% to the
General Partner and 99% to the Limited Partners. Net income (loss) per limited
partnership unit is based upon the limited partnership units outstanding at the
end of the period and the net income (loss) allocated to the Limited Partners.

Cash distributions per limited partnership unit were $104.56 during 1996
and $16.00 during 1995 and 1994. The distributions of $13.00, $16.00 and $16.00
per limited partnership unit paid during the years ended December 31, 1996, 1995
and 1994, respectively, were based on the limited partnership units outstanding
at each quarter end and the cash distributions allocated to Limited Partners.
The additional distribution of $91.56 per limited partnership unit that was paid
in March 1996 was based on the limited partnership units outstanding at January
31, 1996, the date of the mortgage loan payoff. See note 4.

F-29
<PAGE> 238

2. PARTNERSHIP AGREEMENT

Pursuant to the terms of the Partnership Agreement, all net cash flow shall
be distributed in the ratio of 1% to the General Partner and 99% to the Limited
Partners within 60 days after the close of each fiscal quarter. Generally, net
taxable income or losses not arising from the sale or refinancing of properties
of the Partnership are allocated 99% to the Limited Partners and 1% to the
General Partner.

Residual proceeds are allocated first to the Limited Partners until the
Limited Partners shall receive an amount equal to their adjusted capital
contributions plus an amount which when added to all prior distributions to
Limited Partners equals a 9% per annum cumulative return on their adjusted
capital contributions; second, to all Partners, in an amount equal to their
respective positive capital account balances to the extent such balances exceed
the amounts provided for in the preceding clauses; third, in the case of any
sale of a property, a real estate brokerage commission to the Advisor as
provided in the Partnership Agreement; and fourth, the balance, 90% to the
Limited Partners and 10% to the General Partner.

Generally, all items of income, gain, loss, deduction and credit from
operations will be allocated 99% to the Limited Partners and 1% to the General
Partner. Net taxable gain or loss from the sale or other disposition of a
property shall be allocated as described in the Partnership Agreement.

3. RENTAL PROPERTIES

Rental properties at December 31 consisted of the following:

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Buildings and improvements.............................. $13,710,277 $13,611,917
Land.................................................... 2,282,163 2,282,163
----------- -----------
15,992,440 15,894,080
Less accumulated depreciation........................... (6,027,757) (5,455,502)
----------- -----------
$ 9,964,683 $10,438,578
=========== ===========
</TABLE>

4. MORTGAGE LOAN RECEIVABLE FROM AFFILIATE

On January 31, 1986, the Partnership funded a first mortgage loan in the
amount of $5,440,000 with interest at 10% due January 31, 1996 to Plaza on the
Lake Investors, Ltd. USAA Real Estate Company, the parent of the General
Partner, held a second mortgage note on Plaza on the Lake. On February 9, 1987,
as allowed in the loan documents, upon default of the borrower, USAA Real Estate
Company accepted a deed on the property effective January 1, 1987, and replaced
Plaza on the Lake Investors, Ltd. as the borrower on the first lien held by the
Partnership. All terms and conditions contained in the original documents
remained as originally written.

On January 31, 1996, in accordance with the terms of the mortgage loan
agreement between USAA Real Estate Income Investments I Limited Partnership and
USAA Real Estate Company, the principal balance of the $5,440,000 mortgage loan
receivable was received by the Partnership and the underlying note paid in full.
Approximately $5,000,000 of the proceeds from the loan payoff, or $91.56 per
Limited Partnership unit, was distributed to the Limited Partners during the
first quarter of 1996.

In addition to the interest income, the Partnership received 3.2% of the
gross revenues of the property through year six and 3.84% in years seven through
ten. The Partnership recorded interest income on the mortgage loan receivable of
$52,124, $612,757 and $605,535, which includes $5,921, $68,757 and $61,535 in
participation income for the years ended December 31, 1996, 1995 and 1994,
respectively.

F-30
<PAGE> 239

The following is summarized financial information for the years ended
December 31 for Plaza on the Lake, the underlying property of the mortgage loan
receivable.

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Rental income............................................... $1,594,840 $1,520,306
Net loss.................................................... (77,393) (274,968)
Net rental property at period end........................... 7,659,893 7,702,603
Total assets at period end.................................. 8,169,336 8,174,974
Mortgage payable at period end.............................. 5,440,000 5,440,000
Total liabilities at period end............................. 5,782,150 5,761,506
</TABLE>

Financial information for Plaza on the Lake for fiscal year 1996 is not
included as the mortgage loan receivable was paid in full in January 1996.

5. MINIMUM FUTURE RENTALS

Operating leases with tenants have remaining terms from one to twelve
years. Minimum future rentals are cash payments to be received under
non-cancelable leases over the lease terms and do not necessarily represent
rental income under generally accepted accounting principles. Rental income
reported in the Statements of Income is recognized under the operating method,
whereby aggregate rentals are reported as income on the straight-line basis over
the life of the lease. Approximate minimum future rentals are as follows:

<TABLE>
<S> <C>
1997..................................................... $1,319,000
1998..................................................... 1,235,000
1999..................................................... 1,096,000
2000..................................................... 384,000
2001..................................................... 222,000
Thereafter............................................... 1,073,000
----------
$5,329,000
==========
</TABLE>

6. TRANSACTIONS WITH AFFILIATES

USAA Real Estate Company (as the Advisor) may receive real estate brokerage
commissions of up to 1% of the aggregate selling prices of properties sold,
management fees of up to 4% of gross revenues from operations or 9% of the
Partnership's adjusted cash flow, and an annual mortgage servicing fee of up to
1/4 of 1% of amounts funded by the Partnership in mortgage loans which are
serviced by the Advisor.

Through January 1995, a portion of the Partnership's working capital
reserve and other available funds were invested in USAA Mutual Fund, Inc., an
affiliate of the General Partner, and earned interest thereon at market rates.

Quorum Real Estate Services Corporation (also known as USAA Realty
Company), an affiliate of the General Partner, receives fees of up to 6% of the
cash receipts of Partnership properties for managing and providing leasing
services for the properties.

F-31
<PAGE> 240

A summary of transactions with affiliates follows:

<TABLE>
<CAPTION>
MORTGAGE
REIMBURSEMENT INTEREST MANAGEMENT LEASE SERVICING
OF EXPENSES(1) INCOME FEES COMMISSIONS FEES TOTAL
-------------- --------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1996.................................... $ -- $ -- $ -- $ -- $ -- $ --
1995.................................... -- (18) -- -- -- (18)
1994.................................... -- (363) -- -- -- (363)
USAA Real Estate Company:
1996.................................... 117,027 (52,124) 67,893 -- 1,115 133,911
1995.................................... 112,413 (612,757) 77,791 -- 13,600 (408,953)
1994.................................... 136,978 (605,535) 49,325 -- 12,427 (406,805)
Quorum Real Estate Services Corporation:
1996.................................... 60,609 -- 48,992 17,282 -- 126,883
1995.................................... 19,550 -- 40,089 16,273 -- 75,912
1994.................................... 15,832 -- 29,205 15,745 -- 60,782
</TABLE>

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

(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expenses incurred on behalf of the Partnership at actual
cost and does not include any mark-up or items normally considered as
overhead.

7. INCOME TAXES

A reconciliation of financial statement net income to taxable loss follows:

<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Net income -- financial statement basis........... $ 356,072 $ 647,257 $ 436,049
Adjusted by:
Increase in deferred rent....................... (15,600) (65,461) (66,001)
Repairs and maintenance capitalized............. -- -- 33,728
Excess tax depreciation over financial statement
depreciation................................. (412,660) (441,114) (531,939)
Prepaid rent.................................... 27,933 (10,420) 8,407
Other reconciling items......................... (1,946) 1,638 3,692
Tax loss on disposal of asset................... -- (133,124) --
--------- --------- ---------
Taxable loss...................................... $ (46,201) $ (1,224) $(116,064)
========= ========= =========
</TABLE>

8. MAJOR CUSTOMER INFORMATION

During the years ended December 31, 1996 and 1995, the Partnership recorded
rental income of approximately $493,000 and $414,000, respectively, from a major
tenant in the computer industry. This income represented approximately 35% and
37% of total rental income for 1996 and 1995, respectively. There is no
applicable major customer information for the year ended December 31, 1994.

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents, accounts payable and
accrued expenses and other liabilities approximates fair value because of the
short-term nature of these instruments.

F-32
<PAGE> 241

SCHEDULE III

USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP

REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
COST CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO PARTNERSHIP ACQUISITION(S)
--------------------------- -----------------------
BUILDINGS
YEAR OF AND CARRYING
CONSTRUCTION DATE ACQUIRED DESCRIPTION LAND IMPROVEMENTS IMPROVEMENTS COSTS
- ------------ -------------- ----------- ----------- ------------- ------------ --------
<C> <S> <C> <C> <C> <C> <C>
1984 Sept 30, 1985 Volusia Point
Shopping Center
Daytona Beach, FL $1,800,000 6,890,958 720,254 --
1982 June 11, 1986 Systech Building
San Diego, CA 1,532,876 10,509,494 1,266,177 --
---------- ---------- --------- --
$3,332,876 17,400,452 1,986,431 --
========== ========== ========= ==

GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF PERIOD
-------------------------- TOTAL
BUILDINGS INVESTMENT ACCUMULATED RELATED
YEAR OF AND PROPERTIES DEPRECIATION MORTGAGES
CONSTRUCTION LAND(5) IMPROVEMENTS (2)(4) (1)(3) PAYABLE
- ------------ ---------- ------------- ---------- ------------ ---------
<C> <C> <C> <C> <C> <C>
1984

1,800,000 7,383,894 9,183,894 2,765,012 --
1982
482,163 6,326,383 6,808,546 3,262,745 --
--------- ---------- ---------- --------- --
2,282,163 13,710,277 15,992,440 6,027,757 --
========= ========== ========== ========= ==
</TABLE>

F-33
<PAGE> 242

USAA REAL ESTATE INCOME INVESTMENT I LIMITED PARTNERSHIP

NOTES TO SCHEDULE III
DECEMBER 31, 1996

(1) Depreciation is based on a 30 year life, straight-line method for buildings.
Tenant improvements are amortized over the life of the related lease using
the straight-line method.

(2) Reconciliation of real estate:

<TABLE>
<S> <C> <C>
Balance at December 31, 1993....................... $14,824,256
Additions during period -- improvements.......... $ 684,626
Less: Retirements................................ (16,516) 668,110
--------- -----------
Balance at December 31, 1994....................... 15,492,366
Additions during period -- improvements.......... 561,552
Less: Retirements................................ (159,838) 401,714
--------- -----------
Balance at December 31, 1995....................... 15,894,080
Additions during period -- improvements.......... 98,360
Less: Retirements................................ -- 98,360
--------- -----------
Balance at December 31, 1996....................... $15,992,440
===========
</TABLE>

(3) Reconciliation of accumulated depreciation:

<TABLE>
<S> <C> <C>
Balance at December 31, 1993....................... $ 4,654,726
Depreciation during period....................... $ 431,171
Less: Retirements................................ (14,051) 417,120
--------- -----------
Balance at December 31, 1994....................... 5,071,846
Depreciation during period....................... 543,494
Less: Retirements................................ (159,838) 383,656
--------- -----------
Balance at December 31, 1995....................... 5,455,502
Depreciation during period....................... 572,255
Less: Retirements................................ -- 572,255
--------- -----------
Balance at December 31, 1996....................... $ 6,027,757
===========
</TABLE>

(4) The aggregate cost of real estate at December 31, 1996 for Federal income
tax purposes is $22,802,414.

(5) There were no additions to land subsequent to acquisition.

F-34
<PAGE> 243

USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP

CONDENSED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Rental properties, net...................................... $ 9,676,309 $ 9,964,683
Temporary investments, at cost which approximates market
value --
Money market fund......................................... 968,288 926,892
Cash........................................................ 58,930 46,204
------------ ------------
Cash and cash equivalents................................. 1,027,218 973,096
Accounts receivable......................................... 34,695 72,175
Deferred charges, at amortized cost, and other assets....... 369,918 386,325
------------ ------------
$ 11,108,140 $ 11,396,279
============ ============

LIABILITIES AND PARTNERS' EQUITY

Accounts payable, including amounts due to affiliates of
$29,605 and $27,907....................................... $ 46,346 $ 83,582
Accrued expenses and other liabilities...................... 88,746 35,634
Security deposits........................................... 66,616 66,616
------------ ------------
Total liabilities................................. 201,708 185,832
------------ ------------

Partners' equity:
General Partner:
Capital contribution................................... 1,000 1,000
Cumulative net income.................................. 91,191 89,818
Cumulative distributions............................... (188,804) (184,391)
------------ ------------
(96,613) (93,573)
------------ ------------
Limited Partners (54,610 units):
Capital contributions, net of offering costs........... 25,666,700 25,666,700
Cumulative net income.................................. 9,027,930 8,892,025
Cumulative distributions............................... (23,691,585) (23,254,705)
------------ ------------
11,003,045 11,304,020
------------ ------------
Total Partners' equity............................ 10,906,432 11,210,447
------------ ------------
$ 11,108,140 $ 11,396,279
============ ============
</TABLE>

See accompanying notes to condensed financial statements.

F-35
<PAGE> 244

USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP

CONDENSED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
------------ ------------
<S> <C> <C>
Income
Rental income............................................... $376,922 $413,490
Interest income............................................. 13,455 13,244
-------- --------
Total income...................................... 390,377 426,734
-------- --------
Expenses
Direct expenses, $25,138 and $26,370 to affiliate (note
1)........................................................ 131,686 135,782
Depreciation................................................ 146,177 140,437
General and administrative, $31,893 and $35,589 to
affiliates (note 1)....................................... 61,140 66,117
Management fee to affiliate (note 1)........................ 15,906 13,371
-------- --------
Total expenses.................................... 354,909 355,707
-------- --------
Net income.................................................. $ 35,468 $ 71,027
======== ========
Net income per limited partnership unit..................... $ 0.64 $ 1.29
======== ========
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
---------- ----------
<S> <C> <C>
Income
Rental income............................................. $847,899 $805,571
Interest from mortgage loan from affiliate................ -- 52,124
Interest income........................................... 26,397 61,290
-------- --------
Total income...................................... 874,296 918,985
-------- --------
Expenses
Direct expenses, $58,921 and $57,456 to affiliate (note
1)..................................................... 270,563 266,094
Depreciation.............................................. 292,420 281,801
General and administrative, $74,046 and $71,990 to
affiliates (note 1).................................... 138,006 152,264
Management fee to affiliate (note 1)...................... 36,029 35,159
-------- --------
Total expenses.................................... 737,018 735,318
-------- --------
Net income........................................ $137,278 $183,667
======== ========
Net income per limited partnership unit..................... $ 2.49 $ 3.33
======== ========
</TABLE>

See accompanying notes to condensed financial statements.

F-36
<PAGE> 245

USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP

CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)

<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 137,278 $ 183,667
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 292,420 281,801
Amortization........................................... 22,723 22,209
Decrease in accounts receivable........................ 37,480 21,249
Increase in deferred charges and other assets.......... (6,316) (24,302)
Increase in accounts payable, accrued expenses and
other liabilities..................................... 15,876 89,990
---------- -----------
Cash provided by operating activities................ 499,461 574,614
---------- -----------
Cash flows from investing activities:
Additions to rental properties............................ (4,046) (9,031)
Proceeds from mortgage loan receivable.................... -- 5,440,000
---------- -----------
Cash provided by (used in) investing activities........ (4,046) 5,430,969
---------- -----------
Cash flows used in financing activities --
Distributions to Partners................................. (441,293) (5,330,955)
---------- -----------
Net increase in cash and cash equivalents................... 54,122 674,628
Cash and cash equivalents at beginning of period............ 973,096 366,837
---------- -----------
Cash and cash equivalents at end of period.................. $1,027,218 $ 1,041,465
========== ===========
</TABLE>

See accompanying notes to condensed financial statements.

F-37
<PAGE> 246

USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP

NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)

1. TRANSACTIONS WITH AFFILIATES

A summary of transactions with affiliates follows for the six-month period
ended June 30, 1997:

<TABLE>
<CAPTION>
QUORUM
USAA REAL ESTATE
REAL ESTATE SERVICES
COMPANY CORPORATION
----------- -----------
<S> <C> <C>
Reimbursement of expenses(a)................................ $63,921 $31,907
Management fees............................................. 36,029 27,014
Lease commissions........................................... -- 10,125
------- -------
Total............................................. $99,950 $69,046
======= =======
</TABLE>

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

(a) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expenses incurred on behalf of the Partnership at actual
cost and does not include any mark-up or items normally considered as
overhead.

2. OTHER

Reference is made to the financial statements in the Annual Report filed as
part of the Form 10-K for the year ended December 31, 1996 with respect to
significant accounting and financial reporting policies as well as to other
pertinent information concerning the Partnership. Information furnished in this
report reflects all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. Further, the operating results presented for these interim
periods are not necessarily indicative of the results that may occur for the
remaining six months of 1997 or any other future period.

The financial information included in this interim report as of June 30,
1997 and for the three-month and six-month periods ended June 30, 1997 and 1996
has been prepared by management without audit by independent certified public
accountants who do not express an opinion thereon. The Partnership's annual
report includes audited financial statements.

Certain 1996 balances have been reclassified to conform to the 1997
presentation.

F-38
<PAGE> 247

INDEPENDENT AUDITORS' REPORT

The Partners
USAA Real Estate Income Investments II Limited Partnership

We have audited the accompanying balance sheets of USAA Real Estate Income
Investments II Limited Partnership as of June 30, 1997 and 1996 and the related
statements of income, partners' equity, and cash flows for each of the years in
the three-year period ended June 30, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of USAA Real Estate Income
Investments II Limited Partnership as of June 30, 1997 and 1996, and the results
of its operations and its cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.

/s/ KPMG PEAT MARWICK LLP
------------------------------------
KPMG PEAT MARWICK LLP

San Antonio, Texas

July 25, 1997, except

for Note 10 as to which

the date is August 20, 1997

F-39
<PAGE> 248

USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP

BALANCE SHEETS
JUNE 30, 1997 AND 1996

ASSETS

<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Rental properties, net (note 3)............................. $ 9,177,883 $ 9,493,829
Investment in joint venture (note 4)........................ 2,139,009 2,147,966
Temporary investments, at cost which approximates market
value --
Money market fund......................................... 848,892 804,821
Cash........................................................ 33,288 30,737
----------- -----------
Cash and cash equivalents................................. 882,180 835,558
Deferred charges and other assets........................... 333,315 230,824
----------- -----------
$12,532,387 $12,708,177
=========== ===========

LIABILITIES AND PARTNERS' EQUITY

Accounts payable, including amounts due to affiliates of
$6,722
and $7,981................................................ $ 16,822 $ 113,426
Accrued expenses and other liabilities...................... 129,354 172,579
----------- -----------
Total liabilities................................. 146,176 286,005
----------- -----------
Partners' equity:
General Partner:
Capital contribution................................... 1,000 1,000
Cumulative net income.................................. 779,387 677,435
Cumulative distributions............................... (816,492) (710,943)
----------- -----------
(36,105) (32,508)
----------- -----------
Limited Partners (27,141 interests):
Capital contributions, net of offering costs........... 12,756,270 12,756,270
Cumulative net income.................................. 7,014,471 6,096,899
Cumulative distributions............................... (7,348,425) (6,398,489)
----------- -----------
12,422,316 12,454,680
----------- -----------
Total Partners' equity............................ 12,386,211 12,422,172
----------- -----------
$12,532,387 $12,708,177
=========== ===========
</TABLE>

See accompanying notes to financial statements.

F-40
<PAGE> 249

USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP

STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
INCOME
Rental income (notes 5 and 7).......................... $1,403,483 $1,210,320 $1,130,023
Equity in earnings of joint venture (note 4)........... 151,093 147,059 153,787
Interest income, $316 to affiliate in 1995 (note 6).... 38,954 74,952 98,629
---------- ---------- ----------
Total income................................. 1,593,530 1,432,331 1,382,439
---------- ---------- ----------
EXPENSES
Direct expenses, $15,751, $15,126 and $15,122 to
affiliated (note 6).................................. 96,681 91,298 107,583
Depreciation........................................... 315,104 262,935 239,039
General and administrative, $118,196, $83,473 and
$89,155 to affiliates (note 6)....................... 162,221 131,642 164,260
---------- ---------- ----------
Total expenses......................................... $ 574,006 $ 485,875 $ 510,882
---------- ---------- ----------
Net income............................................. $1,019,524 $ 946,456 $ 871,557
========== ========== ==========
Net income per limited partnership unit................ $ 33.81 $ 31.38 $ 28.90
========== ========== ==========
</TABLE>

See accompanying notes to financial statements.

F-41
<PAGE> 250

USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP

STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
--------- ----------- -----------
<S> <C> <C> <C>
Balances at June 30, 1994............................ $ (29,601) $12,480,855 $12,451,254
Net income......................................... 87,156 784,401 871,557
Cash distributions................................. (100,271) (902,438) (1,002,709)
--------- ----------- -----------
Balances at June 30, 1995............................ (42,716) 12,362,818 12,320,102
Net income......................................... 94,646 851,810 946,456
Cash distributions................................. (84,438) (759,948) (844,386)
--------- ----------- -----------
Balances at June 30, 1996............................ (32,508) 12,454,680 12,422,172
Net income......................................... 101,952 917,572 1,019,524
Cash distributions................................. (105,549) (949,936) (1,055,485)
--------- ----------- -----------
Balances at June 30, 1997............................ $ (36,105) $12,422,316 $12,386,211
========= =========== ===========
</TABLE>

See accompanying notes to financial statements.

F-42
<PAGE> 251

USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 1,019,524 $ 946,456 $ 871,557
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 315,104 262,935 239,039
Amortization................................... 2,528 2,528 2,528
Earnings from joint venture.................... (151,093) (147,059) (153,787)
Distributions from joint venture............... 160,050 189,150 185,513
Decrease in accounts receivable................ -- 6,000 9,000
(Increase) decrease in deferred charges and
other assets................................. (105,019) (2,235) 49,024
(Decrease) increase in accounts payable,
accrued expenses and other liabilities....... (139,829) 111,621 47,737
Other adjustments.............................. 842 -- --
----------- ----------- -----------
Cash provided by operating activities........ 1,102,107 1,369,396 1,250,611
----------- ----------- -----------
Cash flows used in investing activities --
Additions to rental properties.................... -- (1,696,823) (64,685)
Cash flows used in financing activities --
Distributions to partners......................... (1,055,485) (844,386) (1,002,709)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 46,622 (1,171,813) 183,217
Cash and cash equivalents at beginning of period.... 835,558 2,007,371 1,824,154
----------- ----------- -----------
Cash and cash equivalents at end of period.......... $ 882,180 $ 835,558 $ 2,007,371
=========== =========== ===========
</TABLE>

See accompanying notes to financial statements.

F-43
<PAGE> 252

USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995

1. ORGANIZATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER

USAA Real Estate Income Investments II Limited Partnership is engaged
solely in the business of real estate investment; therefore, presentation of
information about industry segments is not applicable.

The Partnership owns industrial buildings in Lakeland, Florida and Elk
Grove Village, Illinois and an equity investment in an office building in
Arlington, Virginia.

The General Partner, USAA Investors II, Inc., is a wholly-owned subsidiary
of USAA Real Estate Company, which is a wholly-owned subsidiary of USAA Capital
Corporation, which is a wholly-owned subsidiary of United Services Automobile
Association (USAA).

Rental properties are valued at cost. The carrying amount of a property is
not changed for temporary fluctuations in value unless the carrying value is
believed to be permanently impaired. In 1995, the Partnership adopted the
provisions of Financial Accounting Standards Board Statement No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," ("Statement 121"). Statement 121 provides guidance for determining
impairment of long-lived assets utilizing undiscounted future cash flows. The
assessment for and measurement of impairment is based upon the undiscounted cash
flows and fair value, respectively, of the individual properties. Based on the
provisions of Statement 121, the Partnership's long-lived assets, real estate
and improvements are not considered impaired. The adoption of this Statement had
no financial statement impact.

The Partnership's investment in Combined Capital Resources Joint Venture is
accounted for on the equity method. The Partnership has a 7.275% interest and
USAA Real Estate Equities, Inc. has a 92.725% interest. Both partners have joint
control of the joint venture.

For purposes of the Statement of Cash Flows, all highly liquid marketable
securities that have a maturity at purchase of three months or less and money
market mutual funds are considered to be cash equivalents. Depreciation is
provided over the estimated useful lives of the properties using the
straight-line method. The estimated lives of the buildings and improvements are
30 years (31.5 years for Federal income tax purposes).

Acquisition fees related to the investment in joint venture are being
amortized over the remaining life of the building (note 4).

Rental income is recognized under the operating method, whereby aggregate
rentals are reported on the straight-line basis over the life of the lease.
Rental income recognized was $104,047 and $2,185 more than the amount per lease
agreements for the years ended June 30, 1997 and 1996, respectively. Rental
income recognized was $48,746 less than the amount per lease agreements for the
year ended June 30, 1995.

Deferred charges consisted primarily of deferred rent resulting from
recognition of income as required by generally accepted accounting principles.

No provision or credit for income taxes has been made, as the liability for
such taxes is that of the Partners rather than the Partnership. The Partnership
files its tax return each calendar year on an accrual basis.

F-44
<PAGE> 253

USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

For financial reporting purposes, net income is allocated 10% to the
General Partner and 90% to the Limited Partners. Net income per limited
partnership interest is based upon the limited partnership interests outstanding
at the end of the period and net income allocated to the Limited Partners.

Cash distributions per limited partnership interest were $35.00 for the
year ended June 30, 1997, $28.00 for the year ended June 30, 1996 and $33.25 for
the year ended June 30, 1995 and were based on the limited partnership interests
outstanding at each quarter end and the cash distributions allocated to Limited
Partners.

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

2. PARTNERSHIP AGREEMENT

Pursuant to the terms of the Partnership Agreement, Net Cash from
Operations shall be allocated and paid 10% to the General Partner and 90% to the
Limited Partners. Any Net Cash from Operations received by a Limited Partner
shall count toward his 6% cumulative Preferred Return (10% as to that portion of
Partnership funds invested in mortgage loans), as defined in the Partnership
Agreement. Net Proceeds from Sales or Refinancings shall be allocated and paid
1% to the General Partner and 99% to the Limited Partners until the Limited
Partners have been returned their Original Invested Capital plus their Preferred
Return. Second, Net Proceeds from Sales or Refinancings shall be allocated and
paid to the General Partner in payment of any unpaid Subordinated Disposition
Fee. Third, Net Proceeds from Sales or Refinancings shall be allocated and paid
90% to the Limited Partners and 10% to the General Partner.

Generally, all items of income, gain, loss, deduction and credit from
operations will be allocated 90% to the Limited Partners and 10% to the General
Partner. Net gain or net loss from the sale or other disposition of a Property
shall be allocated as described in the Partnership Agreement.

3. RENTAL PROPERTIES

Rental properties at June 30 consisted of the following:

<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Buildings and improvements........................ $ 8,913,171 $ 8,914,013
Land.............................................. 2,276,850 2,276,850
----------- -----------
11,190,021 11,190,863
Less accumulated depreciation..................... (2,012,138) (1,697,034)
----------- -----------
$ 9,177,883 $ 9,493,829
=========== ===========
</TABLE>

4. INVESTMENT IN JOINT VENTURE

On September 28, 1988, the Partnership entered into the Combined Capital
Resources Joint Venture (the joint venture) with USAA Real Estate Company
("REALCO"), an affiliate of the General Partner, for the ownership and operation
of income-producing properties and participating first mortgage loans. The joint
venture was structured in a manner which granted joint control of the joint
venture to both partners, but which gave REALCO the responsibility of conducting
the ordinary and usual day-to-day management of the joint venture property.

The initial joint venture investment was a participating first mortgage on
the Sequoia Plaza I in an amount of $30,927,000 which was originally extended by
REALCO on May 23, 1988. On June 30, 1989, the Partnership invested $2,250,000 in
this participating first mortgage which was paid directly to REALCO with the
understanding that such sum would be the Partnership's capital contribution to
the joint venture and would reduce REALCO's contribution. As a result, REALCO's
contribution became $28,677,000. REALCO's joint venture interest is 92.725% and
the Partnership's joint venture interest is 7.275%.

F-45
<PAGE> 254

USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

On March 27, 1990, REALCO sold its joint venture interest to USAA Real
Estate Equities, Inc., a real estate investment trust, which is majority-owned
by REALCO. All other terms and conditions contained in the joint venture
agreement remained as originally written and amended.

On August 20, 1991, the Combined Capital Resources Joint Venture acquired
the underlying mortgaged property through foreclosure. This transaction
converted the joint venture's investment from a mortgage loan to real property.
As the fair value of the asset approximated the mortgage loan and other
receivables, no loss was recorded on this transaction. This event did not have a
material negative impact on the Partnership's cash flow but has reduced the
equity in earnings from the joint venture due to depreciation expense on the
property.

The following is the unaudited summary financial information for the
Combined Capital Resources Joint Venture as of June 30, 1997 and 1996 and for
the three years ended June 30, 1997.

<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash...................................................... $ 474,762 $ 487,379
Property, net............................................. 26,888,892 27,501,449
Other receivables......................................... 21,500 123,058
Deferred rent and other assets, net....................... 2,046,589 1,766,585
----------- -----------
$29,431,743 $29,878,471
=========== ===========
LIABILITIES AND EQUITY
Accounts Payable.......................................... $ 27,975 $ 54,276
----------- -----------
Equity:
USAA Real Estate Equities, Inc.......................... 27,264,759 27,676,229
USAA Real Estate Income Investments II Limited
Partnership.......................................... 2,139,009 2,147,966
----------- -----------
Total equity.................................... 29,403,768 29,824,195
----------- -----------
$29,431,743 $29,878,471
=========== ===========
</TABLE>

OPERATIONS

<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues(a).................................... $4,023,186 $3,946,260 $4,068,973
Operating expenses............................. (921,397) (939,074) (971,684)
Other expenses................................. (244,192) (225,152) (218,975)
Depreciation................................... (780,718) (760,608) (764,227)
---------- ---------- ----------
Net income................................... $2,076,879 $2,021,426 $2,114,087
========== ========== ==========
EQUITY IN NET INCOME:
USAA Real Estate Equities, Inc............... $1,925,786 $1,874,367 $1,960,300
USAA Real Estate Income Investments II
Limited Partnership....................... 151,093 147,059 153,787
---------- ---------- ----------
$2,076,879 $2,021,426 $2,114,087
========== ========== ==========
CASH DISTRIBUTIONS:
USAA Real Estate Equities, Inc............... $2,039,950 $2,410,850 $2,364,487
USAA Real Estate Income Investments II
Limited Partnership....................... 160,050 189,150 185,513
---------- ---------- ----------
$2,200,000 $2,600,000 $2,550,000
========== ========== ==========
</TABLE>

- ---------------
(a) For the years ended June 30, 1997, 1996 and 1995, the joint venture recorded
$3,560,658 of revenue from a single tenant which represented 89%, 90% and
88%, respectively, of total revenue.

5. MINIMUM FUTURE RENTALS

Minimum future rentals are cash payments to be received under
non-cancelable leases over the lease terms and do not necessarily represent
rental income under generally accepted accounting principles. Rental

F-46
<PAGE> 255

USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

income reported in the Statements of Income is recognized under the operating
method, whereby aggregate rentals are reported as income over the life of the
lease. The Partnership's rental properties are leased for two to fourteen years
under triple-net leases whereby the tenants pay all operating expenses.
Approximate minimum future rentals are as follows:

<TABLE>
<S> <C>
1998............................................ $ 1,208,000
1999............................................ 1,208,000
2000............................................ 754,000
2001............................................ 784,000
2002............................................ 854,000
Thereafter...................................... 8,023,000
-----------
$12,831,000
===========
</TABLE>

For the years ended June 30, 1997, 1996 and 1995, the Partnership received
$113,467, $101,239 and $88,139, respectively of contingent rental income.

6. TRANSACTIONS WITH AFFILIATES

USAA Investors II, Inc. (the General Partner) may receive, in the
aggregate, property acquisition fees and loan origination and commitment fees of
up to 5% of the gross offering proceeds; real estate brokerage commissions of up
to 2% of the selling prices of properties sold; 10% of all distributions of Net
Cash from Operations and an annual mortgage servicing fee of up to 1/4 of 1% of
amounts funded by the Partnership in mortgage loans which are serviced by the
General Partner.

Through January 1995, the Partnership had funds invested in USAA Mutual
Fund, Inc. and earned interest thereon at market rates.

Quorum Real Estate Services Corporation (also known as USAA Realty
Company), an affiliate of the General Partner, provides property management and
leasing services for the properties and may receive a fee up to 6% of property
cash receipts for those services.

A summary of transactions with affiliates follows for the three years ended
June 30, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
REIMBURSEMENT MANAGEMENT LEASE INTEREST
OF EXPENSES(1) FEES COMMISSIONS INCOME TOTAL
-------------- ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1997............................... $ -- $ -- $ -- $ -- $ --
1996............................... -- -- -- -- --
1995............................... -- -- -- (316) (316)

USAA Real Estate Company:
1997............................... 78,288 -- -- -- 78,288
1996............................... 71,029 -- -- -- 71,029
1995............................... 89,155 -- -- -- 89,155

Quorum Real Estate Services
Corporation:
1997............................... 3,255 12,496 39,908 -- 55,659
1996............................... 3,016 12,110 12,444 -- 27,570
1995............................... 2,823 12,299 -- -- 15,122
</TABLE>

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

F-47
<PAGE> 256

USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

7. MAJOR CUSTOMER INFORMATION

The Partnership owns two single-tenant industrial complexes. The lease
agreements between the Partnership and these tenants (a manufacturer in the
packaging industry and a manufacturer of business forms) are absolute triple net
lease arrangements whereby the lessee is required to make all payments for
expenses related to the use and occupation of the leased premises including real
estate taxes and assessments, property and liability insurance, repairs and
maintenance, utilities and other operating costs associated with the property.
Accordingly, net operating income for 1997, 1996 and 1995 reflects only rental
income and excludes all expenses directly related to the operations of the
properties as payments for such expenses are made directly by the respective
lessees.

For the years ended June 30, 1997, 1996 and 1995, the Partnership recorded
$547,220, $532,581 and $536,194 of rental income from a single tenant, a
manufacturer of business forms, which represents 39%, 44% and 47%, respectively
of total rental income.

For the years ended June 30, 1997, 1996 and 1995, the Partnership recorded
$856,263, $677,739 and $593,829 of rental income from this single tenant which
represented 61%, 56% and 53%, respectively of total rental income.

Continental Plastic Containers, Inc. ("CPC") is the single tenant at the
Continental Plastic Buildings in Elk Grove Village, Illinois. CPC is a
manufacturer in the packaging industry and a wholly-owned subsidiary of Plastic
Containers, Inc. ("PCI"). PCI is the corporate guarantor for the lease between
the Partnership and CPC. PCI is a public company currently filing periodic
reports with the Securities Exchange Commission. The following is the summary
financial information for CPC as of December 31, 1996 and 1995 and for the three
years ended December 31, 1996.

CONTINENTAL PLASTIC CONTAINERS, INC.
SUMMARIZED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 10,522,000 $ --
Investment securities..................................... 1,000,000 --
Property, net............................................. 98,778,000 137,637,000
Other receivables, net.................................... 27,029,000 32,673,000
Inventories............................................... 18,727,000 19,317,000
Other assets, net......................................... 42,999,000 23,677,000
------------ ------------
$199,055,000 $213,304,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities....................................... $ 38,838,000 $ 57,319,000
Long-term obligations..................................... 129,002,000 105,212,000
Other liabilities......................................... 23,155,000 19,417,000
------------ ------------
Total liabilities................................. 190,995,000 181,948,000
Stockholders' Equity...................................... 8,060,000 31,356,000
------------ ------------
Total liabilities and stockholders' equity........ $199,055,000 $213,304,000
============ ============
</TABLE>

F-48
<PAGE> 257

USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATIONS
Net sales...................................... $262,200,000 $271,088,000 $222,980,000
Cost of goods sold............................. (219,210,000) (231,845,000) (185,696,000)
Other income (expenses)........................ (48,525,000) (41,950,000) (41,353,000)
Income tax benefit............................. 1,896,000 2,526,000 1,637,000
Extraordinary item -- loss on early
extinguishment of debt...................... (7,305,000) (230,000) (217,000)
Cumulative effect of accounting change......... -- -- (475,000)
------------ ------------ ------------
Net loss............................... $(10,944,000) $ (411,000) $ (3,124,000)
============ ============ ============
</TABLE>

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents, accounts payable and
accrued expenses and other liabilities approximate fair value because of the
short-term nature of these instruments.

9. PROPOSED MERGER TRANSACTION

On June 10, 1997, the Partnership signed a letter of intent with American
Industrial Properties REIT [NYSE: IND] (the "Trust") contemplating the merger of
four real estate limited partnerships, including the Partnership, into the
Trust. The four real estate limited partnerships are USAA Real Estate Income
Investments I Limited Partnership, USAA Real Estate Income Investments II
Limited Partnership, USAA Income Properties III Limited Partnership and USAA
Income Properties IV Limited Partnership (collectively, the "RELPs"). Each of
the RELPs is affiliated with USAA Real Estate Company, which currently owns
approximately 13.66% of the outstanding shares of the Trust.

On July 7, 1997, the Trust signed definitive merger agreements with each of
the RELPs pursuant to which the RELPs will be merged into the Trust (the
"Merger"). According to the Merger Agreement, the Trust will issue an aggregate
of 4,412,829 shares of beneficial interest at $13.125 per share (for a total
value of $57,918,385) in exchange for the limited partnership interests in the
RELPs. The number of Shares to be issued to each RELP will be equal to the net
asset value for each RELP (as agreed by the Trust and each RELP) divided by
$13.125. The number of Shares to be received by a Limited Partner in each RELP
will be computed in accordance with such partner's percentage interest in the
RELP. The general partner of each RELP has waived any right it may have to
receive Shares to which it may be entitled in exchange for its general
partnership interest.

The Merger, which has been approved by the Trust's Board of Trust Managers
and the Board of Directors of each of the general partners of the RELPs, is
subject to due diligence by both parties and certain other conditions, including
approval by the shareholders of the Trust and the limited partners of each of
the RELPs. Accordingly, there can be no assurance that the mergers will
ultimately be consummated. The Merger is a taxable transaction to the partners
in the RELPs and will be subject to the completion of a joint proxy
statement/prospectus filed on Form S-4 with the Securities and Exchange
Commission. No date has been scheduled for the shareholder meeting for the Trust
or limited partner meetings for each of the RELPs to vote on the proposed
transaction. Prudential Securities Inc., on behalf of the Trust, and Houlihan
Lokey Howard & Zukin on behalf of the RELPs, have rendered opinions to their
respective parties that the transaction is fair from a financial point of view.

F-49
<PAGE> 258

USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The Partnership has a 7.275% interest in the Combined Capital Resources
Joint Venture (the "joint venture"), the owner of Sequoia Plaza I. The joint
venture interest will not be included in the Merger but will be purchased by
USAA Real Estate Company ("Realco") or an affiliate of Realco for $2.25 million
if the Merger is approved by the Limited Partners of the Partnership. This
purchase price was determined using the January 1, 1997 external appraisal of
Sequoia Plaza I at a total value of $29.7 million and adjusted by an
appreciation factor.

10. SUBSEQUENT EVENT

On August 20, 1997, a purported class action lawsuit (the "Lawsuit"), which
was filed in the Superior Court of the State of Arizona, was served upon USAA
Real Estate Company, USAA Properties I, Inc. ("RELP GP I"), USAA Properties II,
Inc. ("RELP GP II"), USAA Properties III, Inc. ("RELP GP III"), USAA Properties
IV, Inc. ("RELP GP IV", together with RELP GP I, RELP GP II and RELP GP III, the
"RELP GPs"), certain other affiliated entities and the individual members of the
boards of directors of each of the RELP GPs. The Trust was also named as a
defendant. The suit alleges among other things, breaches of fiduciary duty in
connection with the transactions contemplated by merger agreements entered into
by USAA Real Estate Income Investments I Limited Partnership, USAA Real Estate
Income Investments II Limited Partnership, USAA Income Properties III Limited
Partnership and USAA Income Properties IV Limited Partnership (collectively the
"RELPS") and the Trust, dated as of June 30, 1997, whereby each RELP would be
merged with and into the Trust (collectively, the "Merger").

The Lawsuit seeks, among other things, to enjoin the consummation of the
Merger and damages, including attorneys' fees and expenses. The defendants
believe that the plaintiffs' claims are without merit and intend to defend
vigorously against the Lawsuit.

F-50
<PAGE> 259

SCHEDULE III

USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP

REAL ESTATE AND ACCUMULATED DEPRECIATION
JUNE 30, 1997
<TABLE>
<CAPTION>
COST CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO PARTNERSHIP ACQUISITION
--------------------------- -----------------------
BUILDINGS
YEAR OF DATE AND CARRYING
DESCRIPTION CONSTRUCTION ACQUIRED LAND IMPROVEMENTS IMPROVEMENTS COSTS
----------- ------------ -------------- ----------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Continental Plastic 1963, 1969 & April 21, 1989
Containers Buildings; 1996
Manufacturing and
Distribution
facility; Elk Grove
Village, Illinois $1,800,000 $3,270,910 $1,819,531 $--
Bowater Communication 1989 July 24, 1989
Papers Building;
Industrial Warehouse;
Lakeland, Florida 480,000 3,775,200 44,380 --
---------- ---------- ---------- ---
$2,280,000 $7,046,110 $1,863,911 $--
========== ========== ========== ===

GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF PERIOD
--------------------------------------------
BUILDINGS
AND TOTAL INVESTMENT ACCUMULATED
DESCRIPTION LAND IMPROVEMENTS PROPERTIES(2)(5) DEPRECIATION(1)(3)
----------- ---------- ------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Continental Plastic
Containers Buildings;
Manufacturing and
Distribution
facility; Elk Grove
Village, Illinois $1,800,000 $5,090,441 $ 6,890,441 $1,003,879
Bowater Communication
Papers Building;
Industrial Warehouse;
Lakeland, Florida 476,850 3,822,730 4,299,580 1,008,259
---------- ---------- ----------- ----------
$2,276,850 $8,913,171 $11,190,021 $2,012,138
========== ========== =========== ==========
</TABLE>

F-51
<PAGE> 260

USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP

NOTES TO SCHEDULE III
JUNE 30, 1997

(1) Depreciation is based on a 30 year life, straight-line method for buildings
and 5 year life, straight-line method for personal property. Tenant
improvements are amortized over the life of the related lease using the
straight-line method.

(2) Reconciliation of real estate:

<TABLE>
<S> <C>
Balance at June 30, 1994.................................... $ 9,429,355
Additions during period-improvements...................... 64,685
-----------
Balance at June 30, 1995.................................... 9,494,040
Additions during period-improvements(5)................... 1,696,823
-----------
Balance at June 30, 1996.................................... 11,190,863
Deductions during period.................................. (842)
-----------
Balance at June 30, 1997.................................... $11,190,021
===========
</TABLE>

(3) Reconciliation of accumulated depreciation:

<TABLE>
<S> <C>
Balance at June 30, 1994.................................... $ 1,195,060
Additions during period-depreciation...................... 239,039
-----------
Balance at June 30, 1995.................................... 1,434,099
Additions during period-depreciation...................... 262,935
-----------
Balance at June 30, 1996.................................... 1,697,034
Additions during period-depreciation...................... 315,104
-----------
Balance at June 30, 1997.................................... $ 2,012,138
===========
</TABLE>

(4) The aggregate cost of real estate owned by the Partnership at June 30, 1997
for Federal Income Tax purposes is $11,190,020.

(5) During fiscal 1996, approximately 45,200 square feet of additional leasable
area was added to the Continental Plastic Buildings.

F-52
<PAGE> 261

INDEPENDENT AUDITORS' REPORT

The Partners
USAA Income Properties III Limited Partnership:

We have audited the accompanying balance sheets of USAA Income Properties
III Limited Partnership as of December 31, 1996 and 1995, and the related
statements of income, partners' equity, and cash flows for each of the years in
the three-year period ended December 31, 1996. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of USAA Income Properties III
Limited Partnership as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.

/s/ KPMG PEAT MARWICK LLP
------------------------------------
KPMG PEAT MARWICK LLP

San Antonio, Texas
February 3, 1997

F-53
<PAGE> 262

USAA INCOME PROPERTIES III LIMITED PARTNERSHIP

BALANCE SHEETS
DECEMBER 31, 1996 AND 1995

ASSETS

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Rental properties, net (notes 3, 4 and 7)................... $ 39,262,249 $ 39,125,747
Temporary investments, at cost which approximates market
value --
Money market fund......................................... 9,301,147 12,202,023
Cash........................................................ 118,000 573,020
------------ ------------
Cash and cash equivalents................................. 9,419,147 12,775,043
Accounts receivable, net of allowance for doubtful accounts
of $90,000 and $12,000.................................... 555,959 419,871
Deferred rent............................................... 2,882,064 1,841,535
Deferred charges and other assets, at amortized cost........ 1,646,751 2,218,611
------------ ------------
$ 53,766,170 $ 56,380,807
============ ============
LIABILITIES AND PARTNERS' EQUITY
Mortgages payable to affiliates (notes 7 and 8)............. $ 26,000,000 $ 27,818,182
Accounts payable, including amounts due to affiliates of
$101,194 and $65,139...................................... 414,274 138,535
Other deposits held......................................... 18,485 2,761,130
Accrued expenses and other liabilities...................... 326,166 837,192
------------ ------------
Total liabilities................................. 26,758,925 31,555,039
============ ============
Partners' equity:
General Partner:
Capital contribution................................... 1,000 1,000
Cumulative net earnings................................ 14,982 (17,819)
Cumulative distributions............................... (269,199) (258,214)
------------ ------------
(253,217) (275,033)
------------ ------------
Limited Partners (111,549 units):
Capital contributions, net of offering costs........... 52,428,030 52,428,030
Cumulative net earnings................................ 1,483,181 (1,764,083)
Cumulative distributions............................... (26,650,749) (25,563,146)
------------ ------------
27,260,462 25,100,801
------------ ------------
Total Partners' equity............................ 27,007,245 24,825,768
------------ ------------
$ 53,766,170 $ 56,380,807
============ ============
</TABLE>

See accompanying notes to financial statements.

F-54
<PAGE> 263

USAA INCOME PROPERTIES III LIMITED PARTNERSHIP

STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ------------
<S> <C> <C> <C>
INCOME
Rental income..................................... $8,367,557 $10,132,791 $ 9,539,147
Gain on disposal of rental property............... 157,852 -- --
Interest income, including $1,262 for 1995 and
$36,253 for 1994 to affiliate (note 8)......... 592,123 648,218 343,378
---------- ----------- ------------
Total income.............................. 9,117,532 10,781,009 9,882,525
---------- ----------- ------------
EXPENSES
Direct expenses, including $149,322, $94,176 and
$88,153 to affiliate (note 8).................. 1,471,616 704,015 498,967
Depreciation...................................... 1,509,109 1,477,439 2,324,394
General and administrative, including $230,958,
$185,309 and $199,231 to affiliates (note 8)... 459,834 366,291 412,691
Management fee to affiliate (note 8).............. 60,523 168,389 149,216
Interest, including $2,105,667, $2,420,902 and
$1,214,629 to affiliate (note 8)............... 2,336,385 2,766,034 4,390,598
Provision for investment property write-down (note
4)............................................. -- -- 21,164,478
---------- ----------- ------------
Total expenses............................ 5,837,467 5,482,168 28,940,344
---------- ----------- ------------
Net income (loss) before extraordinary item....... 3,280,065 5,298,841 (19,057,819)
Extraordinary gain on debt forgiveness (note 4)... -- -- 20,800,000
---------- ----------- ------------
Net income........................................ $3,280,065 $ 5,298,841 $ 1,742,181
========== =========== ============
Net income (loss) per limited partnership unit
before extraordinary item...................... $ 29.11 $ 47.03 $ (169,14)
Extraordinary item................................ -- -- 184.60
---------- ----------- ------------
Net income per limited partnership unit........... $ 29.11 $ 47.03 $ 15.46
========== =========== ============
</TABLE>

See accompanying notes to financial statements.

F-55
<PAGE> 264

USAA INCOME PROPERTIES III LIMITED PARTNERSHIP

STATEMENTS OF PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
--------- ----------- -----------
<S> <C> <C> <C>
Balances at December 31, 1993........................ $(311,640) $21,476,661 $21,165,021
Net income......................................... 17,422 1,724,759 1,742,181
Distributions...................................... (16,901) (1,673,236) (1,690,137)
--------- ----------- -----------
Balances at December 31, 1994........................ (311,119) 21,528,184 21,217,065
Net income......................................... 52,988 5,245,853 5,298,841
Distributions...................................... (16,902) (1,673,236) (1,690,138)
--------- ----------- -----------
Balances at December 31, 1995........................ (275,033) 25,100,801 24,825,768
Net income......................................... 32,801 3,247,264 3,280,065
Distributions...................................... (10,985) (1,087,603) (1,098,588)
--------- ----------- -----------
Balances at December 31, 1996........................ $(253,217) $27,260,462 $27,007,245
========= =========== ===========
</TABLE>

See accompanying notes to financial statements.

F-56
<PAGE> 265

USAA INCOME PROPERTIES III LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 3,280,065 $ 5,298,841 $ 1,742,181
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 1,509,109 1,477,439 2,324,394
Amortization...................................... 105,325 84,471 57,759
Provision for investment property write-down...... -- -- 21,164,478
Gain on debt forgiveness.......................... -- -- (20,800,000)
Decrease (increase) in accounts receivable........ (136,088) (335,001) 169,410
Decrease (increase) in deferred charges and other
assets.......................................... (573,994) (334,751) 91,275
Increase (decrease) in accounts payable, accrued
expenses and other liabilities.................. (2,977,932) 2,820,522 (1,910,760)
Gain on disposal of rental property............... (157,852) -- --
Loss on early retirement of fixed assets.......... 10,598 -- --
Other adjustments................................. -- 7,118 --
----------- ----------- ------------
Cash provided by operating activities........... 1,059,231 9,018,639 2,838,737
----------- ----------- ------------
Cash flows from investing activities:
Additions to rental properties....................... (1,718,757) -- (22,771)
Proceeds from disposal of rental properties.......... 220,400 -- --
----------- ----------- ------------
Cash used in investing activities............... (1,498,357) -- (22,771)
----------- ----------- ------------
Cash flows from financing activities:
Repayment of mortgages payable....................... (1,818,182) (2,727,273) (454,545)
Distributions to partners............................ (1,098,588) (1,690,138) (1,690,137)
----------- ----------- ------------
Cash used in financing activities............... (2,916,770) (4,417,411) (2,144,682)
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents... (3,355,896) 4,601,228 671,284
Cash and cash equivalents at beginning of year......... 12,775,043 8,173,815 7,502,531
----------- ----------- ------------
Cash and cash equivalents at end of year............... $ 9,419,147 $12,775,043 $ 8,173,815
=========== =========== ============
</TABLE>

See accompanying notes to financial statements.

F-57
<PAGE> 266

USAA INCOME PROPERTIES III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994

1. ORGANIZATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER

USAA Income Properties III Limited Partnership is engaged solely in the
business of real estate investment; therefore, presentation of information about
industry segments is not applicable.

The Partnership owns a shopping center in Clearwater, Florida and office
buildings in Phoenix, Arizona and Manhattan Beach, California. The Partnership's
revenue is subject to changes in the economic environments of these areas.

The General Partner, USAA Properties III, Inc., is a wholly-owned
subsidiary of USAA Real Estate Company (Realco), which is a wholly-owned
subsidiary of USAA Capital Corporation, which is a wholly-owned subsidiary of
United Services Automobile Association (USAA).

Rental properties are valued at cost. The carrying amount of a property is
not changed for temporary fluctuations in value unless the carrying value is
believed to be permanently impaired. In 1995, the Partnership adopted the
provisions of Financial Accounting Standards Board Statement No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," ("Statement 121"). Statement 121 provides guidance for determining
impairment of long-lived assets utilizing undiscounted future cash flows. The
assessment for and measurement of impairment is based upon the undiscounted cash
flows and fair value, respectively, of the individual properties. Based on the
provisions of Statement 121, the Partnership's long-lived assets, real estate
and improvements are not considered impaired. The adoption of Statement 121 had
no financial statement impact.

Depreciation is provided over the estimated useful lives of the properties
using the straight-line method. The estimated useful lives of the buildings and
improvements are 30 years (19-39 years for Federal income tax purposes).

Rental income is recognized under the operating method, whereby aggregate
rentals are reported on a straight-line basis as income over the life of the
lease. Rental income recognized was $1,048,477 more, $874,036 more and $399,737
less than the amount due per the lease agreements for the years ended December
31, 1996, 1995 and 1994, respectively.

Deferred rent results from recognition of income as required by generally
accepted accounting principles.

A land lease receivable, arising from the sale of improvements at a rental
property, was accounted for in accordance with generally accepted accounting
principles, whereby the carrying amount of the receivable was reduced by a
portion of the payment received on the ground lease.

No provision or credit for income taxes has been made as the liability for
such taxes is that of the Partners rather than the Partnership. The Partnership
files its tax return on an accrual basis.

For the purposes of the Statements of Cash Flows, all highly liquid
marketable securities that have a maturity at purchase of three months or less,
and money market mutual funds are considered to be cash equivalents.

For financial reporting purposes, net income (loss) is allocated 1% to the
General Partner and 99% to the Limited Partners. Net income (loss) per limited
partnership unit is based upon the limited partnership units outstanding at the
end of each year and the net income (loss) allocated to the Limited Partners.

F-58
<PAGE> 267

Cash distributions per limited partnership unit were $9.75 for 1996 and
$15.00 for 1995 and 1994, and were based on the limited partnership units
outstanding at each quarter end and the cash distributions allocated to Limited
Partners.

Certain 1995 balances have been reclassified to conform to the 1996
presentation.

2. PARTNERSHIP AGREEMENT

Pursuant to the terms of the Partnership Agreement, all Distributable Cash
shall be distributed in the ratio of 1% to the General Partner and 99% to the
Limited Partners within 60 days after the close of each fiscal quarter.

Generally, net taxable income or losses not arising from the sale or
refinancing of properties of the Partnership and Distributable Cash are
allocated 99% to the Limited Partners and 1% to the General Partner. Cash
Distributions from the sale or refinancing of property are allocated first to
the Limited Partners until the Limited Partners shall receive an amount equal to
their adjusted capital contributions; second, to the Limited Partners until the
Limited Partners shall receive a cumulative amount from cash distributions from
operations, sales or refinancings equal to 6% per annum of their adjusted
capital contributions; third, to all Partners, in an amount equal to their
respective positive capital account balances to the extent such balances exceed
the amounts provided for in the Partnership Agreement; and fourth, the balance,
90% to the Limited Partners and 10% to the General Partner.

Generally, all items of income, gain, loss, deduction and credit from
operations will be allocated 99% to the Limited Partners and 1% to the General
Partner. Net gain or net loss from the sale or other disposition of a property
shall be allocated as described in the Partnership Agreement.

3. RENTAL PROPERTIES

Rental properties at December 31 consisted of the following:

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Buildings and improvements.............................. $ 54,041,957 $ 52,405,717
Land.................................................... 8,970,396 8,961,025
------------ ------------
63,012,353 61,366,742
Less accumulated depreciation........................... (23,750,104) (22,240,995)
------------ ------------
$ 39,262,249 $ 39,125,747
============ ============
</TABLE>

4. PROVISION FOR INVESTMENT PROPERTY WRITE-DOWN

On October 31, 1994, after lengthy negotiations with the third-party
lender, the $40,800,000 non-recourse loan was purchased from the lender for
$20,000,000 by Las Colinas Management Company ("LCMC"), an affiliate of the
General Partner. Effective with the loan acquisition, LCMC modified the terms of
the loan to the Partnership whereby $20,800,000 of the loan balance was
forgiven, resulting in a loan principal balance of $20,000,000. The Partnership
recognized an extraordinary income item for the gain on debt forgiveness in the
amount of $20,800,000. Other modifications in loan terms included extension of
the loan maturity date from March 15, 1995 to August 31, 1996, the date of
expiration of the single-tenant lease at Manhattan Towers. Payment terms were
revised from semi-annual payments of interest-only to monthly payments including
principal of approximately $227,000 plus interest at a floating rate based on
the London Interbank Offered Rate ("LIBOR") plus .625%. On October 31, 1994, the
Partnership reimbursed LCMC for fees paid to the third-party lender, legal fees
and filing fees of approximately $693,000, in addition to accrued interest of
approximately $309,000 for the period from September 16, 1994, the date of the
previous semi-annual interest payment, to October 31, 1994.

Under generally accepted accounting principles, a review of an asset's
value is required when events indicate that the carrying amount of the asset may
not be recoverable. Acquisition of the loan by an affiliate of

F-59
<PAGE> 268

the General Partner at a $20,800,000 discount resulted in a review of value of
the Manhattan Towers property. Through analysis it was determined that a
permanent impairment of value had occurred on Manhattan Towers. Accordingly, a
provision for investment property write-down was recorded at December 31, 1994
for $21,164,478, the amount by which the carrying value of the asset exceeded
$20,000,000, the amount determined to be the fair value of the property.

5. MINIMUM FUTURE RENTALS

Operating leases with tenants have remaining terms from eight months to 26
years. Minimum future rentals are cash payments to be received under
non-cancelable leases over the lease terms and do not necessarily represent
rental income under generally accepted accounting principles. Rental income
reported in the Statements of Income is recognized under the operating method,
whereby aggregate rentals are reported on a straight-line basis as income over
the life of the lease. Approximate minimum future rentals are as follows:

<TABLE>
<S> <C>
1997.................................................... $ 4,076,000
1998.................................................... 3,600,000
1999.................................................... 3,411,000
2000.................................................... 3,049,000
2001.................................................... 3,039,000
Thereafter.............................................. 20,979,000
-----------
$38,154,000
===========
</TABLE>

6. TRIPLE NET LEASES

During 1995 and 1994, lease agreements between the Partnership and tenants
at two properties were absolute triple net lease arrangements whereby the lessee
was required to make all payments for expenses related to the use and occupation
of the leased premises including real estate taxes and assessments, property and
liability insurance, repairs and maintenance, utilities and other operating
costs associated with the property. Accordingly, net operating income for 1995
and 1994 reflects only rental income and excludes all expenses directly related
to the operations of the properties as payments for such expenses are made
directly by the respective lessees.

7. MORTGAGES PAYABLE

Mortgages payable to affiliates at December 31 consisted of the following:

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
First mortgage note payable, interest at 8.25%, due March
31, 1998, interest only payable monthly; secured by
rental property with a depreciated cost of approximately
$7,590,000.............................................. $11,000,000 $11,000,000
First mortgage note payable, interest at 9.57%, due
September 30, 1998, interest only payable monthly;
secured by rental property with a depreciated cost of
approximately $18,842,000............................... 15,000,000 16,818,182
----------- -----------
$26,000,000 $27,818,182
=========== ===========
</TABLE>

Cash payments for interest expense were $2,105,667, $2,420,902 and
$5,422,625 for 1996, 1995 and 1994, respectively.

8. TRANSACTIONS WITH AFFILIATES

USAA Real Estate Company (the Adviser) may receive property acquisition
fees of up to 4% of the gross offering proceeds, real estate brokerage
commissions of up to 1% of the aggregate selling prices of

F-60
<PAGE> 269

property sold and management fees equal to 4% of Cash Receipts from Operations
not to exceed 9% of adjusted cash flow from the Partnership.

Through January 1995, the Partnership had funds invested in USAA Mutual
Fund, Inc. and earned interest thereon at market rates.

Quorum Real Estate Services Corporation (also known as USAA Realty
Company), an affiliate of the General Partner, provides property management and
leasing services for the properties and may receive fees of up to 6% of the
property cash receipts for those services.

A summary of transactions with affiliates follows:

<TABLE>
<CAPTION>
REIMBURSEMENT INTEREST MANAGEMENT LEASE INTEREST
OF EXPENSES(1) INCOME FEES COMMISSIONS EXPENSE(2) TOTAL
--------------- -------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1996............................. $ -- $ -- $ -- $ -- $ -- $ --
1995............................. -- (1,262) -- -- -- (1,262)
1994............................. -- (36,253) -- -- -- (36,253)
USAA Real Estate Company:
1996............................. 200,417 -- 60,523 -- 964,529 1,225,469
1995............................. 162,493 -- 168,389 -- 1,191,014 1,521,896
1994............................. 174,407 -- 149,216 -- 1,005,973 1,329,596
Las Colinas Management Company:
1996............................. -- -- -- -- 1,141,138 1,141,138
1995............................. -- -- -- -- 1,229,888 1,229,888
1994............................. -- -- -- -- 208,656 208,656
Quorum Real Estate Services
Corporation:
1996............................. 85,876 -- 63,446 30,541 -- 179,863
1995............................. 47,548 -- 46,628 22,816 -- 116,992
1994............................. 41,652 -- 46,501 24,824 -- 112,977
</TABLE>

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

(2) Represents interest expense at market rate on mortgage loans (note 7).

9. INCOME TAXES

A reconciliation of financial statement net income to taxable income (loss)
follows:

<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net income -- financial statement basis............... $ 3,280,065 $ 5,298,841 $ 1,742,181
Adjusted by:
Excess tax depreciation over financial statement
depreciation..................................... (2,677,702) (2,695,639) (1,849,019)
Increase (decrease) in prepaid rent................. (521,993) 569,123 (687,208)
Decrease (increase) in deferred rent and land
costs............................................ (557,275) 525,592 147,025
Investment property write-down...................... -- -- 21,164,478
Book bad debt expense in excess of tax bad debt
expense.......................................... 78,000 12,000 --
Other reconciling items............................. 19,673 (68,354) 31,271
----------- ----------- -----------
Taxable income (loss)................................. $ (379,232) $ 3,641,563 $20,548,728
=========== =========== ===========
</TABLE>

F-61
<PAGE> 270

10. MAJOR CUSTOMER INFORMATION

During 1996, the Partnership recorded approximately $1,644,000 and
$4,869,000 of rental income from two major tenants which represented
approximately 21% and 62% respectively of total rental income for 1996.

During 1995, the Partnership recorded approximately $1,246,000 and
$6,679,000 of rental income from two major tenants which represented
approximately 13% and 69% respectively of total rental income for 1995.

During 1994, the Partnership recorded approximately $1,652,000 and
$6,241,000 of rental income from two major tenants which represented
approximately 18% and 67% respectively of total rental income for 1994.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents approximates fair value
because of the short maturities of these instruments.

The carrying amount of the mortgages payable at December 31, 1996
approximates fair value since these two mortgages payable were re-negotiated
during 1996 to interest rates currently being offered for mortgage loans with
similar characteristics and maturities.

The current fair value of the mortgages payable at December 31, 1995 was
approximately $27,395,000, estimated by discounting the future cash flows using
interest rates currently being offered for mortgage loans with similar
characteristics and maturities.

F-62
<PAGE> 271

SCHEDULE III

USAA INCOME PROPERTIES III LIMITED PARTNERSHIP

REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
COST CAPITALIZED
INITIAL COST TO SUBSEQUENT TO
PARTNERSHIP ACQUISITION
-------------------------- -----------------------

BUILDINGS
YEAR OF DATE AND CARRYING
CONSTRUCTION ACQUIRED DESCRIPTION LAND IMPROVEMENTS IMPROVEMENTS COSTS
- ------------ ------------- ------------------- ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
1985 Mar. 31, 1986 Curlew Crossing
Shopping Center
Clearwater, FL $ 3,700,000 15,717,762 2,394,250 --
1985 Nov. 24, 1986 Manhattan Towers
Office Bldg.
Complex
Manhattan Beach, CA 6,500,000 60,062,552 432,558 --
1964-1973 Dec. 5, 1986 Ramada World
Headquarters Office
Bldg. Complex
Phoenix, AZ 4,000,000 11,443,225 1,213,637 --
----------- ---------- --------- -------
$14,200,000 87,223,539 4,040,445 --
=========== ========== ========= =======

GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF PERIOD
-------------------------------------
TOTAL
BUILDINGS INVESTMENT ACCUMULATED RELATED
YEAR OF AND PROPERTIES DEPRECIATION MORTGAGES
CONSTRUCTION LAND IMPROVEMENTS (2)(4)(6) (1)(3) PAYABLE(5)
- ------------ --------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
1985

2,339,065 7,807,193 10,146,258 2,556,035 11,000,000
1985

2,580,438 33,577,902 36,158,340 17,316,013 15,000,000
1964-1973

4,050,893 12,656,862 16,707,755 3,878,056
--------- ---------- ---------- ---------- ----------
8,970,396 54,041,957 63,012,353 23,750,104 26,000,000
========= ========== ========== ========== ==========
</TABLE>

F-63
<PAGE> 272

USAA INCOME PROPERTIES III LIMITED PARTNERSHIP

NOTES TO SCHEDULE III
DECEMBER 31, 1996

(2) Reconciliation of real estate:

<TABLE>
<CAPTION>
<S> <C> <C>
Balance at December 31, 1993............................. $ 82,577,687
Additions during period-improvements................... 22,771
Deductions during period
Retirements......................................... (4,158)
Investment property write-down(6)................... (21,164,478) (21,168,636)
----------- ------------
Balance at December 31, 1994............................. 61,431,822
Deductions during period-retirements................... (65,080)
------------
Balance at December 31, 1995............................. 61,366,742
Additions during period-improvements................... 1,718,757
Deductions during period-retirements................... (73,146)
------------
Balance at December 31, 1996............................. $ 63,012,353
============
</TABLE>

(3) Reconciliation of accumulated depreciation:

<TABLE>
<S> <C> <C>
Balance at December 31, 1993............................. $ 18,501,282
Depreciation during period............................. 2,324,394
Deductions during period-retirements................... (4,158)
------------
Balance at December 31, 1994............................. 20,821,518
Depreciation during period............................. 1,477,439
Deductions during period-retirements................... (57,962)
------------
Balance at December 31, 1995............................. 22,240,995
Depreciation during period............................. 1,509,109
------------
Balance at December 31, 1996............................. $ 23,750,104
============
</TABLE>

(4) The aggregate cost of real estate owned by the Partnership at December 31,
1996 for Federal Income Tax purposes is $95,052,180.

(5) The investment property is pledged as security for the mortgage payable for
which there is no recourse to the Partnership.

(6) During 1994, it was determined that a permanent impairment of value was
sustained at Manhattan Towers and the property was written down. See note 4
in the Notes to Financial Statements.

F-64
<PAGE> 273

USAA INCOME PROPERTIES III LIMITED PARTNERSHIP

CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Rental properties, net...................................... $40,627,652 $39,262,249
Temporary investments, at cost which approximates market
value --
Money market fund......................................... 1,390,304 9,301,147
Cash........................................................ 5,132,002 118,000
----------- -----------
Cash and cash equivalents................................. 6,522,306 9,419,147
Accounts receivable, net of allowance for doubtful accounts
of $90,000................................................ 627,677 555,959
Deferred rent............................................... 2,981,111 2,882,064
Deferred charges and other assets, at amortized cost........ 1,871,847 1,646,751
----------- -----------
$52,630,593 $53,766,170
=========== ===========

LIABILITIES AND PARTNERS' EQUITY
Mortgages payable to affiliates............................. $26,000,000 $26,000,000
Accounts payable, including amounts due to affiliates of
$97,602 and $101,194...................................... 420,218 414,274
Accrued expenses and other liabilities...................... 980,786 344,651
----------- -----------
Total liabilities................................. 27,401,004 26,758,925
----------- -----------
Partners' equity:
General Partner:
Capital contribution................................... 1,000 1,000
Cumulative net income.................................. 1,712 14,982
Cumulative distributions............................... (273,707) (269,199)
----------- -----------
(270,995) (253,217)
----------- -----------
Limited Partners (111,549 units):
Capital contributions, net of offering costs........... 52,428,030 52,428,030
Cumulative net income.................................. 169,499 1,483,181
Cumulative distributions............................... (27,096,945) (26,650,749)
25,500,584 27,260,462
----------- -----------
Total Partners' equity............................ 25,229,589 27,007,245
----------- -----------
$52,630,593 $53,766,170
=========== ===========
</TABLE>

See accompanying notes to condensed financial statements.

F-65
<PAGE> 274

USAA INCOME PROPERTIES III LIMITED PARTNERSHIP

CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
------------ ------------
<S> <C> <C>
Income
Rental income............................................... $1,311,410 $2,561,957
Gain on disposal of rental property......................... -- 157,852
Interest income, $37,208 from affiliate for 1997............ 99,884 155,290
---------- ----------
Total income...................................... 1,411,294 2,875,099
---------- ----------
Expenses
Direct expenses, $98,969 and $24,856 to affiliate (note
1)........................................................ 878,649 222,860
Depreciation................................................ 434,031 369,781
General and administrative, $86,573 and $41,059 to
affiliates (note 1)....................................... 166,253 89,390
Management fee to affiliate (note 1)........................ 56,083 (12,685)
Interest, $584,145 and $469,845 to affiliates (note 1)...... 584,145 555,892
---------- ----------
Total expenses.................................... 2,119,161 1,225,238
---------- ----------
Net income (loss)........................................... $ (707,867) $1,649,861
========== ==========
Net income (loss) per limited partnership unit.............. $ (6.28) $ 14.64
========== ==========
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
------------ ------------
<S> <C> <C>
Income
Rental income............................................... $ 2,489,832 $5,180,821
Gain on disposal of rental property......................... -- 157,852
Interest income, $37,208 from affiliate for 1997............ 205,948 322,880
----------- ----------
Total income...................................... 2,695,780 5,661,553
----------- ----------
Expenses
Direct expenses, $192,899 and $49,359 to affiliate (note
1)........................................................ 1,608,039 447,299
Depreciation................................................ 831,597 738,932
General and administrative, $180,764 and $100,584 to
affiliates (note 1)....................................... 333,719 239,313
Management fee to affiliate (note 1)........................ 87,506 66,137
Interest, $1,161,871 and $1,008,211 to affiliates (note
1)........................................................ 1,161,871 1,180,304
----------- ----------
Total expenses.................................... 4,022,732 2,671,985
----------- ----------
Net income (loss)........................................... $(1,326,952) $2,989,568
=========== ==========
Net income (loss) per limited partnership unit.............. $ (11.78) $ 26.53
=========== ==========
</TABLE>

See accompanying notes to condensed financial statements.

F-66
<PAGE> 275

USAA INCOME PROPERTIES III LIMITED PARTNERSHIP

CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)

<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(1,326,952) $ 2,989,568
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation........................................... 831,597 738,932
Amortization........................................... 100,010 51,300
Gain on disposal of rental property.................... -- (157,852)
Loss on early retirement of assets..................... -- 10,600
Increase in accounts receivable........................ (71,718) (73,326)
Increase in deferred charges and other assets.......... (424,153) (257,717)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities....................... 642,079 (2,043,219)
----------- -----------
Cash provided by (used in) operating activities...... (249,137) 1,258,286
----------- -----------
Cash flows from investing activities:
Additions to rental properties............................ (2,197,000) (617,415)
Proceeds from disposal of real estate property............ -- 220,400
----------- -----------
Cash used in investing activities...................... (2,197,000) (397,015)
----------- -----------
Cash flows from financing activities:
Repayment of mortgages payable............................ -- (1,363,637)
Distributions to partners................................. (450,704) (647,885)
----------- -----------
Cash used in financing activities...................... (450,704) (2,011,522)
----------- -----------
Net decrease in cash and cash equivalents................... (2,896,841) (1,150,251)
Cash and cash equivalents at beginning of period............ 9,419,147 12,775,043
----------- -----------
Cash and cash equivalents at end of period.................. $ 6,522,306 $11,624,792
=========== ===========
</TABLE>

See accompanying notes to condensed financial statements.

F-67
<PAGE> 276

USAA INCOME PROPERTIES III LIMITED PARTNERSHIP

NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)

1. TRANSACTIONS WITH AFFILIATES

A summary of transactions with affiliates follows for the six-month period
ended June 30, 1997:

<TABLE>
<CAPTION>
QUORUM
USAA USAA LAS COLINAS REAL ESTATE
CAPITAL REAL ESTATE MANAGEMENT SERVICES
CORPORATION COMPANY COMPANY CORPORATION
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Reimbursement of expenses(a)........ $ -- $142,329 $ -- $111,308
Interest income..................... (37,208) -- -- --
Management fees..................... -- 87,506 -- 81,591
Lease commissions................... -- -- -- 38,435
Interest expense(b)................. -- 450,020 711,851 --
-------- -------- -------- --------
Total..................... $(37,208) $679,855 $711,851 $231,334
======== ======== ======== ========
</TABLE>

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

(b) Represents interest expense at market rate on a mortgage loan.

2. OTHER

Reference is made to the financial statements in the Annual Report filed as
part of the Form 10-K for the year ended December 31, 1996 with respect to
significant accounting and financial reporting policies as well as to other
pertinent information concerning the Partnership. Information furnished in this
report reflects all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. Further, the operating results presented for these interim
periods are not necessarily indicative of the results which may occur for the
remaining six months of 1997 or any other future period.

The financial information included in this interim report as of June 30,
1997 and for the three months and six months ended June 30, 1997 and 1996 has
been prepared by management without audit by independent certified public
accountants who do not express an opinion thereon. The Partnership's annual
report includes audited financial statements.

Certain 1996 balances have been reclassified to conform to the 1997
presentation.

F-68
<PAGE> 277

INDEPENDENT AUDITORS' REPORT

The Partners
USAA Income Properties IV Limited Partnership:

We have audited the accompanying consolidated balance sheets of USAA Income
Properties IV Limited Partnership and majority-owned joint venture as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, partners' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of USAA Income
Properties IV Limited Partnership and majority-owned joint venture as of
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
information included in Schedule III is presented for purposes of additional
analysis and is not a required part of the basic consolidated financial
statements. Such information has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.

/s/ KPMG PEAT MARWICK LLP
------------------------------------
KPMG PEAT MARWICK LLP

San Antonio, Texas
January 31, 1997

F-69
<PAGE> 278

USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995

ASSETS

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Rental properties, net (notes 3, 4 and 7)................... $ 45,409,746 $ 46,218,351
Temporary investments, at cost which approximates market
value --
Money market fund......................................... 977,512 2,217,339
Cash........................................................ 226,365 61,643
------------ ------------
Cash and cash equivalents................................. 1,203,877 2,278,982
Accounts receivable......................................... 32,715 81,956
Deferred charges and other assets........................... 260,706 193,842
------------ ------------
$ 46,907,044 $ 48,773,131
============ ============

LIABILITIES AND PARTNERS' EQUITY
Mortgages payable (note 7).................................. $ 16,419,083 $ 16,638,886
Note payable to affiliate (notes 4, 7 and 8)................ 6,000,000 6,000,000
Accounts payable, including amounts due to affiliates of
$29,663 and $44,323....................................... 89,097 57,801
Other liabilities........................................... 269,410 251,595
------------ ------------
Total liabilities................................. 22,777,590 22,948,282
------------ ------------
Minority interest in joint venture (note 4)................. 4,098,771 4,310,989
Partners' equity:
General Partner:
Capital contribution................................... 1,000 1,000
Cumulative net income.................................. 43,804 52,678
Cumulative distributions............................... (127,834) (121,876)
------------ ------------
(83,030) (68,198)
------------ ------------
Limited Partners (60,495 interests):
Capital contributions, net of offering costs........... 28,432,650 28,432,650
Cumulative net income.................................. 4,336,617 5,215,136
Cumulative distributions............................... (12,655,554) (12,065,728)
------------ ------------
20,113,713 21,582,058
------------ ------------
Total Partners' equity............................ 20,030,683 21,513,860
------------ ------------
$ 46,907,044 $ 48,773,131
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-70
<PAGE> 279

USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
INCOME
Rental income....................................... $ 4,011,487 $4,450,502 $5,276,560
Interest income, including $27 for 1995 and $542 for
1994 to affiliate (note 8)........................ 110,173 144,048 73,388
----------- ---------- ----------
Total income.............................. 4,121,660 4,594,550 5,349,948
----------- ---------- ----------
EXPENSES
Direct expenses, including $83,936, $89,361, and
$85,674 to affiliate (note 8)..................... 581,830 395,143 268,768
Depreciation........................................ 1,852,360 1,873,494 1,866,275
General and administrative, including
$145,118, $118,372, $119,812
to affiliates (note 8)............................ 224,443 197,963 233,198
Management fee to affiliate (note 8)................ 50,134 90,376 91,449
Interest, including $600,000 to affiliate (notes 7 &
8)................................................ 2,115,064 2,134,420 2,152,088
Minority interest in joint venture earnings (note
4)................................................ 185,222 170,664 180,975
----------- ---------- ----------
Total expenses............................ 5,009,053 4,862,060 4,792,753
----------- ---------- ----------
Net income (loss)................................... $ (887,393) $ (267,510) $ 557,195
=========== ========== ==========
Net income (loss) per limited partnership
interest.......................................... $ (14.52) $ (4.38) $ 9.12
=========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-71
<PAGE> 280

USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
-------- ----------- -----------
<S> <C> <C> <C>
Balances at December 31, 1993........................... $(52,763) $23,110,121 $23,057,358
Net income............................................ 5,572 551,623 557,195
Distributions......................................... (9,166) (907,426) (916,592)
-------- ----------- -----------
Balances at December 31, 1994........................... (56,357) 22,754,318 22,697,961
Net loss.............................................. (2,675) (264,835) (267,510)
Distributions......................................... (9,166) (907,425) (916,591)
-------- ----------- -----------
Balances at December 31, 1995........................... (68,198) 21,582,058 21,513,860
Net loss.............................................. (8,874) (878,519) (887,393)
Distributions......................................... (5,958) (589,826) (595,784)
-------- ----------- -----------
Balances at December 31, 1996........................... $(83,030) $20,113,713 $20,030,683
======== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-72
<PAGE> 281

USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $ (887,393) $ (267,510) $ 557,195
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation....................................... 1,852,360 1,873,494 1,866,275
Amortization....................................... 20,184 24,108 24,108
Loss on early retirement of assets................. 49,395 -- --
Decrease (increase) in accounts receivable......... 49,241 (18,451) 12,959
Decrease (increase) in deferred charges and other
assets........................................... (87,048) 133,239 144,745
Increase (decrease) in accounts payable, accrued
expenses and other liabilities................... 49,111 (1,427) 127,383
Minority interest in joint venture earnings........ 185,222 170,664 180,975
----------- ----------- -----------
Cash provided by operating activities......... 1,231,072 1,914,117 2,913,640
----------- ----------- -----------
Cash flows used in investing activities --
Additions to rental properties........................ (1,093,150) (285,241) (39,306)
Cash flows from financing activities:
Repayment of mortgages payable........................ (219,803) (200,448) (182,780)
Distributions to co-venturer.......................... (397,440) (441,599) (574,080)
Distributions to partners............................. (595,784) (916,591) (916,592)
----------- ----------- -----------
Cash used in financing activities............. (1,213,027) (1,558,638) (1,673,452)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.... (1,075,105) 70,238 1,200,882
Cash and cash equivalents at beginning of year.......... 2,278,982 2,208,744 1,007,862
----------- ----------- -----------
Cash and cash equivalents at end of year................ $ 1,203,877 $ 2,278,982 $ 2,208,744
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-73
<PAGE> 282

USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994

1. ORGANIZATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER

USAA Income Properties IV Limited Partnership is engaged solely in the
business of real estate investment; therefore, presentation of information about
industry segments is not applicable.

The Partnership owns office buildings in Milpitas, California; San Diego,
California; St. Louis, Missouri and a joint venture interest in a research and
development property in Chelmsford, Massachusetts. The Partnership's revenue is
subject to changes in the economic environments of these areas.

The General Partner, USAA Properties IV, Inc., is a wholly-owned subsidiary
of USAA Real Estate Company (Realco), which is a wholly-owned subsidiary of USAA
Capital Corporation, which is a wholly-owned subsidiary of United Services
Automobile Association (USAA).

Depreciation is provided over the estimated useful lives of the properties
using the straight-line method. The estimated lives of the buildings and
improvements is 30 years (31.5-39 years for Federal income tax purposes).

Rental income is recognized under the operating method, whereby aggregate
rentals are reported on a straight-line basis as income over the life of the
lease. Rental income recognized was $96,237, $142,781 and $148,920 less than the
amount due per the lease agreements for the years ended December 31, 1996, 1995
and 1994, respectively.

No provision or credit for income taxes has been made as the liability for
such taxes is that of the Partners rather than the Partnership. The Partnership
files its tax return on an accrual basis.

For purposes of the Consolidated Statements of Cash Flows, all highly
liquid marketable securities that have a maturity at purchase of three months or
less, and money market mutual funds are considered to be cash equivalents.

The consolidated financial statements include the accounts of the
Partnership and its majority-owned joint venture. All significant intercompany
accounts have been eliminated in consolidation.

For financial reporting purposes, net income is allocated 1% to the General
Partner and 99% to the Limited Partners. Net income per limited partnership
interest is based upon the limited partnership interests outstanding at the end
of the period and net income allocated to the Limited Partners.

F-74
<PAGE> 283

Cash distributions per limited partnership interest were $9.75 for 1996 and
$15.00 for 1995 and 1994, and were based on the limited partnership interests
outstanding at each quarter end and the cash distributions allocated to Limited
Partners.

2. PARTNERSHIP AGREEMENT

Pursuant to the terms of the Partnership Agreement, Net Cash from
Operations shall be allocated and paid 1% to the General Partner and 99% to the
Limited Partners. Any Net Cash from Operations received by a Limited Partner
shall count toward his 6% cumulative Preferred Return, as defined in the
Partnership Agreement. Net Proceeds from Sales or Refinancings, shall be
allocated and paid 1% to the General Partner and 99% to the Limited Partners
until the Limited Partners have been returned their Original Invested Capital
from Net Proceeds from Sales or Refinancings, plus their Preferred Return.
Second, Net Proceeds from Sales or Refinancings shall be allocated and paid to
the Adviser in payment of any unpaid Subordinated Disposition Fee. Third, Net
Proceeds from Sales or Refinancings shall be allocated and paid 90% to the
Limited Partners and 10% to the General Partner.

3. RENTAL PROPERTIES

Rental properties at December 31 consisted of the following:

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Buildings and improvements.............................. $ 51,856,859 $ 50,831,721
Land.................................................... 9,020,016 9,020,016
------------ ------------
60,876,875 59,851,737
Less accumulated depreciation........................... (15,467,129) (13,633,386)
------------ ------------
$ 45,409,746 $ 46,218,351
============ ============
</TABLE>

4. INVESTMENT IN JOINT VENTURE

On May 31, 1988, the Partnership entered into the USAA Chelmsford
Associates Joint Venture with USAA Real Estate Company, the parent company of
the Partnership's General Partner, for the ownership and operation of the Apollo
Computer Research and Development Headquarters Building. The Partnership
contributed $9,000,000 for its 55.8% joint venture interest. The contribution
consisted of $3,000,000 in remaining offering proceeds and $6,000,000 in
proceeds from a note payable to USAA Real Estate Company (note 7). The
Partnership is consolidating the joint venture as it exercises significant
control, both directly and indirectly, over the joint venture.

F-75
<PAGE> 284

Summary financial information for the joint venture as of December 31, 1996
and 1995 and for the years ended December 31, 1996, 1995 and 1994 follows:

<TABLE>
<CAPTION>
ASSETS
1996 1995
----------- -----------
<S> <C> <C>
Cash........................................................ $ 416,888 $ 346,262
Property, net............................................... 24,288,391 24,957,807
Account receivable.......................................... 27,115 74,356
Deferred rent and other assets.............................. 4,663 64,102
----------- -----------
$24,737,057 $25,442,527
=========== ===========

LIABILITIES AND EQUITY
Liabilities:
Mortgage payable.......................................... $15,287,583 $15,446,788
Accounts payable.......................................... 167,247 232,946
----------- -----------
15,454,830 15,679,734
----------- -----------
Equity:
USAA Income Properties IV
Limited Partnership.................................... 5,183,456 5,451,804
Co-venturer-affiliate..................................... 4,098,771 4,310,989
----------- -----------
Total equity...................................... 9,282,227 9,762,793
----------- -----------
$24,737,057 $25,442,527
=========== ===========
</TABLE>

<TABLE>
<CAPTION>
OPERATIONS
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues............................................ $ 2,789,770 $ 2,771,135 $ 2,771,501
Operating expenses.................................. (28,054) (63,018) (30,885)
Other expenses...................................... (9,802) (8,967) (5,484)
Depreciation........................................ (929,510) (895,877) (895,877)
Interest expense.................................... (1,402,970) (1,416,805) (1,429,437)
----------- ----------- -----------
Net income................................ $ 419,434 $ 386,468 $ 409,818
=========== =========== ===========
Equity in net income:
USAA Income Properties IV
Limited Partnership............................ $ 234,212 $ 215,804 $ 228,843
Co-venturer-affiliate............................. 185,222 170,664 180,975
----------- ----------- -----------
$ 419,434 $ 386,468 $ 409,818
=========== =========== ===========
Cash distributions:
USAA Income Properties IV
Limited Partnership............................ $ 502,560 $ 558,401 $ 725,920
Co-venturer-affiliate............................. 397,440 441,599 574,080
----------- ----------- -----------
$ 900,000 $ 1,000,000 $ 1,300,000
=========== =========== ===========
</TABLE>

5. MINIMUM FUTURE RENTALS

Operating leases with tenants have remaining terms from one year to five
years. Minimum future rentals are cash payments to be received under
non-cancelable leases over the lease terms and do not necessarily represent
rental income under generally accepted accounting principles. Rental income
reported in the Consolidated Statements of Operations is recognized under the
operating method, whereby aggregate rentals

F-76
<PAGE> 285

are reported on a straight-line basis as income over the life of the lease.
Approximate minimum future rentals are as follows:

<TABLE>
<S> <C>
1997.................................................... $ 3,750,000
1998.................................................... 3,519,000
1999.................................................... 3,458,000
2000.................................................... 2,102,000
2001.................................................... 984,000
Thereafter.............................................. 66,000
-----------
$13,879,000
===========
</TABLE>

6. TRIPLE NET LEASES

During 1996, 1995 and 1994, the Partnership had ownership interests in two
office buildings occupied by single tenants. The lease agreements between the
tenants and the Partnership were absolute triple net lease arrangements whereby
the lessee is required to make all payments for expenses related to the use and
occupation of the leased premises including real estate taxes and assessments,
property and liability insurance, repairs and maintenance, utilities and other
operating costs associated with the property. Accordingly, net operating income
reflected only rental income and excluded all expenses directly related to the
operations of the property as payments for such expenses are made directly by
the lessee.

7. MORTGAGES AND NOTE PAYABLE

Mortgages payable at December 31:

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
9.625% first mortgage note, payable in monthly installments
of $14,391, including interest, due August 1, 2008;
secured by rental property with a depreciated cost of
approximately $5,902,000.................................. $ 1,131,500 $ 1,192,098
9.125% first mortgage note, due August 1, 2001, interest
only payable monthly for the first five years; interest
and principal of $130,181 are payable monthly for the
remaining term with a balloon payment of $14,361,580;
secured by rental property with a depreciated cost of
approximately $24,667,000................................. 15,287,583 15,446,788
----------- -----------
$16,419,083 $16,638,886
=========== ===========
</TABLE>

On May 31, 1988, $6,000,000 of the total $9,000,000 Partnership investment
in USAA Chelmsford Associates Joint Venture was borrowed from USAA Real Estate
Company (note 4). The original unsecured demand note payable had a maturity date
of September 1, 1997 and included monthly interest only payments at 10%.
Subsequent to year-end, the note was increased to $7,200,000 and was extended to
March 1, 1999 with a decrease in the interest rate from 10% to 9%.

Aggregate maturities of mortgages and note payable for 1997 through 2001
are $241,000, $264,374, $7,489,934, $317,946 and $14,582,029 respectively.

Cash payments for interest expense were $2,115,064, $2,134,420 and
$2,152,088 for 1996, 1995 and 1994, respectively.

8. TRANSACTIONS WITH AFFILIATES

USAA Real Estate Company (the Adviser) may receive property acquisition
fees of up to 5% of gross offering proceeds, real estate brokerage commissions
of up to 2% of the aggregate selling prices of properties sold and management
fees of 9% of adjusted cash flow from operations.

Through January 1995, a portion of the Partnership's working capital
reserve and other available funds were invested in USAA Mutual Fund, Inc. and
earned interest thereon at market rates.

F-77
<PAGE> 286

Quorum Real Estate Services Corporation (also known as USAA Realty
Company), an affiliate of the General Partner, provides property management and
leasing services for the properties and may receive fees of up to 6% of property
cash receipts for those services.

A summary of transactions with affiliates follows:

<TABLE>
<CAPTION>
REIMBURSEMENT INTEREST MANAGEMENT LEASE INTEREST
OF EXPENSES(1) INCOME FEES COMMISSIONS EXPENSE(2) TOTAL
--------------- -------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1996...................... $ -- $ -- $ -- $ -- $ -- $ --
1995...................... -- (27) -- -- -- (27)
1994...................... -- (542) -- -- -- (542)
USAA Real Estate Company:
1996...................... 114,171 -- 50,134 -- 600,000 764,305
1995...................... 108,885 -- 90,376 -- 600,000 799,261
1994...................... 110,947 -- 91,449 -- 600,000 802,396
Quorum Real Estate Services
Corporation:
1996...................... 33,042 -- 50,894 30,947 -- 114,883
1995...................... 36,559 -- 52,802 9,487 -- 98,848
1994...................... 22,556 -- 63,118 8,865 -- 94,539
</TABLE>

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

(2) Represents interest expense incurred on a note payable (note 7).

9. INCOME TAXES

A reconciliation of financial statement net income (loss) to taxable income
(loss) follows:

<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
Net income (loss) -- financial statement basis...... $(887,393) $(267,510) $ 557,195
Adjusted by:
Taxable income over financial statement income --
USAA Chelmsford Associates..................... 72,054 99,037 227,432
Increase in deferred rent......................... 36,947 77,506 83,647
Excess financial statement depreciation over tax
depreciation................................... 166,438 233,836 230,903
Other reconciling items........................... 114,633 (20,780) (46,070)
--------- --------- ----------
Taxable income (loss)............................... $(497,321) $ 122,089 $1,053,107
========= ========= ==========
</TABLE>

10. MAJOR CUSTOMER INFORMATION

During 1996, the Partnership recorded approximately $2,763,000 and $379,000
of rental income from single-tenant leases which represented approximately 72%
and 10% of total rental income, respectively.

During 1995, the Partnership recorded approximately $2,759,000, $537,000
and $459,000 of rental income from single-tenant leases which represented
approximately 65%, 13% and 11% of total rental income, respectively.

During 1994, the Partnership recorded approximately $2,761,000, $1,306,000
and $561,000 of rental income from single-tenant leases which represented
approximately 54%, 26% and 11% of total rental income, respectively.

F-78
<PAGE> 287

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents approximates fair value due
to the short maturity of these instruments.

The fair value of mortgages and note payable at December 31, 1996 and 1995
was $21,767,785 and $21,677,908, respectively, and was estimated by discounting
the future cash flows using interest rates currently being offered for mortgage
loans and notes with similar characteristics and maturities.

F-79
<PAGE> 288

SCHEDULE III

USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP

CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
COST CAPITALIZED
INITIAL COST SUBSEQUENT TO
TO PARTNERSHIP ACQUISITION
------------------------- -----------------------
BUILDINGS
YEAR OF AND CARRYING
CONSTRUCTION DATE ACQUIRED DESCRIPTION LAND IMPROVEMENTS IMPROVEMENTS COSTS
- ------------ -------------- ----------- ---------- ------------ ------------ --------
<C> <S> <C> <C> <C> <C> <C>
1986 July 20, 1987 Linear Technology
Office Bldg.,
Milpitas, CA $ 777,000 $ 4,936,164 $ -- $--
1987 Oct. 26, 1987 Eastman Kodak
Office Bldg.,
San Diego, CA 2,425,416 4,419,437 1,543,630 --
1987 Dec. 31, 1987 1881 Pine Street
Office Bldg.,
St. Louis, MO 500,000 12,428,162 1,563,482 --
1987 May 31, 1988 Apollo Computer
Research and Development
Headquarters Building,
Chelmsford, MA 4,800,000 26,952,547 783,775 --
---------- ----------- ---------- ---
$8,502,416 $48,736,310 $3,890,887 $--
========== =========== ========== ===

GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF PERIOD
--------------------------------------------
BUILDINGS RELATED
YEAR OF AND TOTAL INVESTMENT ACCUMULATED MORTGAGES
CONSTRUCTION LAND IMPROVEMENTS PROPERTIES(2)(4) DEPRECIATION(1)(3) PAYABLE(5)
- ------------ ---------- ------------ ---------------- ------------------ -----------
<C> <C> <C> <C> <C> <C>
1986

$ 777,000 $ 4,936,164 $ 5,713,164 $ 1,549,380 $ --
1987

2,425,416 5,778,341 8,203,757 2,302,058 1,131,500
1987

1,012,600 13,411,031 14,423,631 3,745,877 --
1987

4,805,000 27,731,323 32,536,323 7,869,814 15,287,583
---------- ----------- ----------- ----------- -----------
$9,020,016 $51,856,859 $60,876,875 $15,467,129 $16,419,083
========== =========== =========== =========== ===========
</TABLE>

F-80
<PAGE> 289

USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP

NOTES TO SCHEDULE III
DECEMBER 31, 1996

(1) Depreciation is based on a 30 year life, straight-line method for buildings.
Tenant improvements are amortized over the life of the related lease,
straight-line method.

(2) Reconciliation of real estate:

<TABLE>
<S> <C>
Balance at December 31, 1993................................ $59,527,190
Additions during period-improvements...................... 39,306
-----------
Balance at December 31, 1994................................ 59,566,496
Additions during period-improvements...................... 285,241
-----------
Balance at December 31, 1995................................ 59,851,737
Additions during period-improvements...................... 1,093,150
Deductions during period-retirements...................... (68,012)
-----------
Balance at December 31, 1996................................ $60,876,875
===========
</TABLE>

(3) Reconciliation of accumulated depreciation:

<TABLE>
<S> <C>
Balance at December 31, 1993................................ $ 9,893,617
Depreciation during period................................ 1,866,275
-----------
Balance at December 31, 1994................................ 11,759,892
Depreciation during period................................ 1,873,494
-----------
Balance at December 31, 1995................................ 13,633,386
Depreciation during period................................ 1,852,360
Deductions during period-retirements...................... (18,617)
-----------
Balance at December 31, 1996................................ $15,467,129
===========
</TABLE>

(4) The aggregate cost of real estate owned by the Partnership at December 31,
1996 for Federal Income Tax purposes is $60,813,121, including $32,028,062
of the Partnership's share of real estate owned by joint venture.

(5) The investment property is pledged as security for the mortgages payable for
which there is no recourse to the Partnership.

F-81
<PAGE> 290

USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP

CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Rental properties, net...................................... $ 45,365,342 $ 45,409,746
Temporary investments, at cost which approximates market
value --
Money market fund......................................... 1,097,639 977,512
Cash........................................................ 66,601 226,365
------------ ------------
Cash and cash equivalents................................. 1,164,240 1,203,877
Accounts receivable......................................... 49,045 32,715
Deferred charges and other assets, at amortized cost........ 373,884 260,706
------------ ------------
$ 46,952,511 $ 46,907,044
============ ============

LIABILITIES AND PARTNERS' EQUITY

Mortgages payable........................................... $ 16,300,890 $ 16,419,083
Note payable to affiliate................................... 7,200,000 6,000,000
Accounts payable, including amounts due to affiliates of
$15,713 and $29,663....................................... 80,459 89,097
Accrued expenses and other liabilities...................... 309,489 269,410
------------ ------------
Total liabilities................................. 23,890,838 22,777,590
------------ ------------
Minority interest in joint venture.......................... 3,912,740 4,098,771
Partners' equity:
General Partner:
Capital contribution................................... 1,000 1,000
Cumulative net income.................................. 37,431 43,804
Cumulative distributions............................... (130,278) (127,834)
------------ ------------
(91,847) (83,030)
------------ ------------
Limited Partners (60,495 interests):
Capital contributions, net of offering costs........... 28,432,650 28,432,650
Cumulative net income.................................. 3,705,664 4,336,617
Cumulative distributions............................... (12,897,534) (12,655,554)
------------ ------------
19,240,780 20,113,713
------------ ------------
Total Partners' equity............................ 19,148,933 20,030,683
------------ ------------
$ 46,952,511 $ 46,907,044
============ ============
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-82
<PAGE> 291

USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
------------ ------------
<S> <C> <C>
Income
Rental income............................................. $1,023,300 $ 991,558
Interest income........................................... 17,822 28,659
---------- ----------
Total income...................................... 1,041,122 1,020,217
---------- ----------
Expenses
Direct expenses, $16,269 and $20,059 to affiliate (note
1)..................................................... 241,872 160,474
Depreciation.............................................. 565,836 453,384
General and administrative, $48,698 and $26,331 to
affiliates (note 1).................................... 77,934 40,050
Management fee to affiliate (note 1)...................... 811 10,875
Interest, $161,556 and $149,180 to affiliate (note 1)..... 535,643 528,440
Minority interest in joint venture earnings............... (52,364) 49,440
Total expenses.................................... 1,369,732 1,242,663
---------- ----------
Net loss.................................................... $ (328,610) $ (222,446)
========== ==========
Net loss per limited partnership interest................... $ (5.38) $ (3.64)
========== ==========
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
---------- ----------
<S> <C> <C>
Income
Rental income............................................. $2,029,736 1,952,601
Interest income........................................... 30,127 57,371
---------- ----------
Total income...................................... 2,059,863 2,009,972
---------- ----------
Expenses
Direct expenses, $39,152 and $45,085 to affiliate (note
1)..................................................... 460,211 269,568
Depreciation.............................................. 1,086,096 928,309
General and administrative, $117,168 and $63,312 to
affiliates (note 1).................................... 180,238 121,465
Management fee to affiliate (note 1)...................... 14,368 22,540
Interest, $313,578 and $298,361 to affiliate (note 1)..... 1,062,819 1,058,120
Minority interest in joint venture earnings............... (106,543) 92,588
---------- ----------
Total expenses.................................... 2,697,189 2,492,590
---------- ----------
Net loss.................................................... $ (637,326) $ (482,618)
========== ==========
Net loss per limited partnership interest................... $ (10.43) $ (7.90)
========== ==========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-83
<PAGE> 292

USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (637,326) $ (482,618)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation........................................... 1,086,096 928,309
Amortization........................................... 30,368 9,884
(Increase) decrease in accounts receivable............. (16,330) 38,347
(Increase) decrease in deferred charges and other
assets................................................ (143,546) 88,371
Increase (decrease) in accounts payable, accrued
expenses and other liabilities........................ 31,441 (233,339)
Minority interest in joint venture earnings............ (106,543) 92,588
----------- ----------
Cash provided by operating activities................ 244,160 441,542
----------- ----------
Cash flows used in investing activities --
Additions to rental properties............................ (1,041,692) (623)
----------- ----------
Cash flows from financing activities:
Repayment of mortgages payable............................ (118,193) (107,674)
Distributions to co-venturer.............................. (79,488) (132,480)
Distributions to partners................................. (244,424) (351,360)
Proceeds from issuance of note payable.................... 1,200,000 --
----------- ----------
Cash provided by (used in) financing activities........ 757,895 (591,514)
----------- ----------
Net decrease in cash and cash equivalents................... (39,637) (150,595)
Cash and cash equivalents at beginning of period............ 1,203,877 2,278,982
----------- ----------
Cash and cash equivalents at end of period.................. $ 1,164,240 $2,128,387
=========== ==========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-84
<PAGE> 293

USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)

1. TRANSACTIONS WITH AFFILIATES

A summary of transactions with affiliates follows for the six-month period
ended June 30, 1997:

<TABLE>
<CAPTION>
QUORUM
USAA REAL ESTATE
REAL ESTATE SERVICES
COMPANY CORPORATION
----------- -----------
<S> <C> <C>
Reimbursement of expenses(a)................................ $ 69,786 $18,185
Management fees............................................. 14,368 20,967
Lease commissions........................................... -- 47,382
Interest expense(b) 313,578 --
-------- -------
Total................................................ $397,732 $86,534
======== =======
</TABLE>

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

(b) Represents interest expense at market rate on a note payable.

2. OTHER

Reference is made to the consolidated financial statements in the Annual
Report filed as part of the Form 10-K for the year ended December 31, 1996 with
respect to significant accounting and financial reporting policies as well as to
other pertinent information concerning the Partnership. Information furnished in
this report reflects all normal recurring adjustments which are, in the opinion
of management, necessary for a fair presentation of the results for the interim
periods presented. Further, the operating results presented for these interim
periods are not necessarily indicative of the results which may occur for the
remaining six months of 1997 or any other future period.

Certain 1996 balances have been reclassified to conform to the 1997
presentation.

F-85
<PAGE> 294

REPORT OF INDEPENDENT AUDITORS

Board of Trust Managers

American Industrial Properties REIT

We have audited the accompanying Combined Historical Summary of Gross
Income and Direct Operating Expenses of Merit Texas Properties Portfolio, which
is comprised of eight industrial properties (the "Properties"), as described in
Note 1 for the year ended December 31, 1996. This Combined Historical Summary is
the responsibility of the Properties' management. Our responsibility is to
express an opinion on this Combined Historical Summary based on our audit.

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

In our opinion, the Combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Registration Statement on Form S-4, and
the related Joint Proxy Statement/Prospectus, of American Industrial Properties
REIT, as described in Note 1 and are not intended to be a complete presentation
of the income and expenses of the Properties.

In our opinion, the Combined Historical Summary referred to above presents
fairly, in all material respects, the combined gross income and direct operating
expenses of Merit Texas Properties Portfolio, as described in Note 1, for the
year ended December 31, 1996, in conformity with generally accepted accounting
principles.

/s/ ERNST & YOUNG LLP

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

ERNST & YOUNG LLP

Dallas, Texas

September 16, 1997

F-86
<PAGE> 295

MERIT TEXAS PROPERTIES PORTFOLIO

COMBINED HISTORICAL SUMMARY OF

GROSS INCOME AND DIRECT OPERATING EXPENSES

<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
(UNAUDITED)
<S> <C> <C>
GROSS INCOME
Rental.................................................... $1,680,202 $3,145,502
Reimbursements............................................ 402,811 782,366
Other..................................................... 10,609 24,605
---------- ----------
Total gross income................................ 2,093,622 3,952,473
DIRECT OPERATING EXPENSES
Repairs and maintenance................................... 151,444 320,226
Utilities and other property operating.................... 90,928 196,148
General and administrative................................ 43,984 108,901
Real estate taxes......................................... 272,414 529,645
Management fees........................................... 99,555 185,894
---------- ----------
Total direct operating expenses................... 658,325 1,340,814
---------- ----------
Excess of gross income over direct operating expenses....... $1,435,297 $2,611,659
========== ==========
</TABLE>

See accompanying notes.

F-87
<PAGE> 296

MERIT TEXAS PROPERTIES PORTFOLIO

NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS INCOME

AND DIRECT OPERATING EXPENSES

YEAR ENDED DECEMBER 31, 1996 AND

SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

Merit Texas Properties Portfolio is not a legal entity but rather a
combination of affiliated properties that have common ownership and common
management. The accompanying Combined Historical Summary of Gross Income and
Direct Operating Expenses include the accounts of eight industrial properties
located in the Dallas, Texas, metropolitan area (the "Properties"). The
Properties are owned by three limited partnerships (the "Partnerships") all of
which Merit Texas Properties, Inc. is the general partner. The Partnerships and
Properties are as follows:

<TABLE>
<CAPTION>
TOTAL
PROPERTY SQUARE FEET
-------- -----------
<S> <C>
Merit Industrial Properties L.P.
Northgate III............................................. 257,505
DFW IV.................................................... 72,918
Merit 1995 Industrial Portfolio L.P.
Valwood II................................................ 52,607
Walnut Oaks............................................... 67,945
Carpenter Center.......................................... 44,114
Carrier Place............................................. 82,100
Parkway Tech Center....................................... 69,010
Merit VV 1995 Industrial Portfolio L.P.
Valley View Commerce Park................................. 137,581
-------
Portfolio totals............................................ 783,780
=======
</TABLE>

The accompanying Combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Registration Statement on Form S-4, and
the related Joint Proxy Statement/Prospectus, of American Industrial Properties
REIT. The Combined Historical Summary is not intended to be a complete
presentation of income and expenses of the Properties for the year ended
December 31, 1996, and the six months ended June 30, 1997, as certain costs such
as depreciation, amortization, interest, and other debt service costs have been
excluded. These costs are not considered to be direct operating expenses.

Interim Unaudited Financial Information

The accompanying interim unaudited Combined Historical Summary has been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and was prepared on the same basis as the Combined Historical Summary
for the year ended December 31, 1996. In the opinion of management of the
Properties, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for this interim period
have been made. The excess of combined gross income over direct operating
expenses for such interim period is not necessarily indicative of the excess of
gross income over direct operating expenses for the full year.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of the Properties' Combined Historical Summary in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported

F-88
<PAGE> 297

MERIT TEXAS PROPERTIES PORTFOLIO

NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS INCOME

AND DIRECT OPERATING EXPENSES -- (CONTINUED)

amounts included in the Combined Historical Summary and accompanying notes
thereto. Actual results could differ from those estimates.

Revenue Recognition

Minimum rents are recognized on a straight-line basis; as such, the rental
revenues for leases which contain rent abatements and contractual increases are
recognized on a straight-line basis over the initial term of the related lease.
Property operating cost recoveries from tenants of common area maintenance, real
estate taxes and other recoverable costs, are recognized in the period when the
recoveries are earned.

Capitalization Policy

Ordinary reports and maintenance are expensed as incurred; major
replacements and betterments are capitalized.

3. TRANSACTIONS WITH AFFILIATES

Management Fees

Merit Texas Properties, Inc. currently receives an asset management fee,
operating management fee and a professional fee on all the Properties. The asset
management fee is $1,500 to $6,000 per Property per year. Combined asset
management fees were $12,750 and $25,500, for the six months ended June 30, 1997
and for the year ended December 31, 1996, respectively. The operating management
fee is four percent of cash receipts per Property per year. Combined operating
management fees were $86,805 and $160,394, for the six months ended June 30,
1997 and the year ended December 31, 1996, respectively. The professional fee is
$900 per Property per year. Combined professional fees were $5,850 and $11,700,
for the six months ended June 30, 1997 and for the year ended December 31, 1996,
respectively, and are included in general and administrative expense in the
accompanying Combined Historical Summary.

4. OPERATING LEASES

The Properties have operating leases with terms ranging from one to 10
years. The minimum future rentals under operating leases as of December 31, 1996
are as follows:

<TABLE>
<S> <C>
1997........................................................ $2,681,009
1998........................................................ 1,802,248
1999........................................................ 1,341,298
2000........................................................ 1,113,392
2001........................................................ 803,794
Thereafter.................................................. 735,578
----------
$8,477,319
==========
</TABLE>

5. SUBSEQUENT EVENT

On October 3, 1997, the Properties were sold for a combined purchase price
of $36.8 million to a partnership of which American Industrial Properties REIT
is the general partner and holds a general partner interest of 98%.

F-89
<PAGE> 298

ANNEX I

AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER

THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"),
dated as of June 30, 1997, is entered into by and between American Industrial
Properties REIT, a Texas real estate investment trust ("AIP") , and
, a limited partnership ("RELP"). USAA Real Estate
Company, a Delaware corporation ("Realco"), is a party to this Agreement solely
for the purpose of binding itself to the provisions of Section 7.10 hereunder.

RECITALS

A. The Board of Trust Managers of AIP (the "Board of Trust Managers") and
the general partner of RELP have each determined that a business combination
between AIP and RELP is in the best interests of their shareholders and
partners, respectively, and presents an opportunity for their respective
businesses to achieve strategic and financial benefits, and accordingly have
agreed to effect a merger subject to the terms and conditions set forth herein.

B. AIP and RELP desire to make certain representations, warranties and
agreements in connection with the merger.

NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, AIP and
RELP hereby agree as follows:

ARTICLE I. THE MERGER

1.1. The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), RELP shall be merged with and
into AIP in accordance with this Agreement and the Plan of Merger (the "Plan of
Merger") in substantially the form attached hereto as Exhibit A, with such
completions, additions and substitutions conforming to the terms of this
Agreement as the parties shall approve, such approval to be conclusively
evidenced by their causing the Plan of Merger containing such completions,
additions or substitutions to be filed in accordance with applicable laws; and
the separate existence of RELP shall thereupon cease (the "Merger"). AIP shall
be the surviving entity in the Merger (sometimes hereinafter referred to as the
"Survivor"). The Merger shall have the effects specified in Section 23.60 of the
Texas Real Estate Investment Trust Act, as amended (the "Texas REIT Act") and
Section 17-211 of the Delaware Revised Uniform Limited Partnership Act (the "LP
Act").

1.2. The Closing. Subject to the terms and conditions of this Agreement,
the closing of the Merger (the "Closing") shall take place at the offices of
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. ("Liddell, Sapp"), located at 2200
Ross Avenue, Suite 900, Dallas, Texas at 10:00 a.m., local time, within five
business days after receipt of approval of the Merger by AIP's shareholders and
RELP's partners, or at such other time, date or place as AIP and RELP may agree.
The date on which the Closing occurs is hereinafter referred to as the "Closing
Date."

1.3. Effective Time. If all the conditions to the Merger set forth in
Article VIII shall have been fulfilled or waived (and this Agreement shall not
have been terminated as provided in Article IX), AIP and RELP shall cause
Articles of Merger satisfying the requirements of the Texas REIT Act and
Articles of Merger satisfying the requirements of the LP Act to be properly
executed, verified and delivered for filing in accordance with the LP Act and
the Texas REIT Act on the Closing Date. The Merger shall become effective for
accounting and all other purposes to the fullest extent permitted by law as of
the close of business on December 31, 1997 (the "Effective Time") or such other
date as may be agreed to by the parties. For state law purposes, the Merger
shall become effective upon the issuance of a certificate of merger by the
Secretary of State of the State of Delaware in accordance with the LP Act or at
such later time which AIP and RELP shall have agreed upon and designated in such
filings in accordance with applicable law.

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ARTICLE II. DECLARATION OF TRUST
AND BYLAWS OF THE SURVIVOR

2.1. Declaration of Trust. The Declaration of Trust of AIP in effect
immediately prior to the Effective Time shall be the Declaration of Trust of the
Survivor until duly amended in accordance with applicable law.

2.2. Bylaws. The Bylaws of AIP in effect immediately prior to the Effective
Time shall be the Bylaws of the Survivor until duly amended in accordance with
applicable law.

ARTICLE III. TRUST MANAGERS AND OFFICERS OF AIP

3.1. Trust Managers. The Trust Managers of AIP immediately prior to the
Effective Time shall be the Trust Managers of AIP as of the Effective Time.

3.2. Officers. The officers of AIP immediately prior to the Effective Time
shall be the officers of AIP as of the Effective Time.

ARTICLE IV. RELP PARTNERSHIP INTERESTS

4.1. Conversion of the RELP Partnership Interest. (a) At the Effective
Time, each Common Share of Beneficial Interest of AIP outstanding immediately
prior to the Effective Time shall remain outstanding and shall represent one
Common Share of Beneficial Interest of AIP.

(b) At the Effective Time, the general and limited partnership interests of
RELP (each a "RELP Interest"), issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of holder thereof, be converted into the right to receive Common Shares of
Beneficial Interest, $0.10 par value per share (the "AIP Common Shares"), of
AIP. The aggregate number of AIP Common Shares to be issued to the RELP partners
in connection with the Merger shall be equal to $ (the "Purchase Price")
divided by the Share Price (the "Total Shares"). If, during the period from the
date hereof to and including the Closing Date, (i) the RELP pays any mortgage
indebtedness existing on the date hereof or (ii) the outstanding AIP Common
Shares shall have been changed to a different number of shares by reason of any
share dividend, subdivision, reclassification, recapitalization, share split,
reverse share split, combination, exchange of shares or the like, the Purchase
Price shall be appropriately adjusted. The term "Share Price" shall mean
$ . The number of AIP Common Shares to be received by a partner shall
be equal to the Total Shares multiplied by such partner's percentage interest in
RELP plus each limited partner's pro rata portion of the general partnership
interest of the RELP's general partner.

(c) As a result of the Merger and without any action on the part of the
holder thereof, at the Effective Time, all RELP Interests shall cease to be
outstanding and shall be canceled and retired, and each holder of a RELP
Interest shall thereafter cease to have any rights with respect to such RELP
Interest, except the right to receive, without interest, the AIP Common Shares
and cash for fractional shares of AIP Common Shares in accordance with Sections
4.1(b) and 4.2(e).

4.2. Exchange of RELP Interests. (a) As of the Effective Time, AIP shall
deposit, or shall cause to be deposited, with an exchange agent selected by AIP,
which shall be AIP's Transfer Agent or such other party reasonably satisfactory
to RELP (the "Exchange Agent"), for the benefit of the holders of RELP
Interests, for exchange in accordance with this Article IV, certificates
representing the Total Shares and the cash in lieu of fractional shares (such
cash and certificates for the Total Shares together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") to be issued pursuant to Section 4.1 and paid pursuant to this
Section 4.2 in exchange for outstanding RELP Interests.

(b) Promptly after the Effective Time, AIP shall cause the Exchange Agent
to mail to each holder of record of a RELP Interest (x) a certificate
representing the number of whole shares of AIP Common Shares and (y) a check
representing the amount of cash in lieu of fractional shares, if any, and unpaid
dividends and distributions, if any, which such holder has the right to receive
in respect of the RELP Interest surrendered pursuant to the provisions of this
Article IV, after giving effect to any required withholding tax. No interest

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will be paid or accrued on the cash in lieu of fractional shares and unpaid
dividends and distributions, if any, payable to holders of RELP Interests. In
the event of a transfer of ownership of RELP Interests which is not registered
in the transfer records of RELP, a certificate representing the proper number of
AIP Common Shares, together with a check for the cash to be paid in lieu of
fractional shares, may be issued to such a transferee if such holder presents to
the Exchange Agent, all documents required to evidence and effect such transfer
and to evidence that any applicable transfer taxes have been paid.

(c) At and after the Effective Time, there shall be no transfers on the
transfer books of RELP of RELP Interests which were outstanding immediately
prior to the Effective Time.

(d) No fractional AIP Common Shares shall be issued pursuant hereto. In
lieu of the issuance of any fractional AIP Common Shares pursuant to Section
4.1(b), cash adjustments will be paid to holders in respect of any fractional
AIP Common Shares that would otherwise be issuable, and the amount of such cash
adjustment shall be equal to such fractional proportion of the Share Price.

(e) Any portion of the Exchange Fund (including the proceeds of any
investments thereof and any AIP Common Shares) that remains unclaimed by the
former partners of RELP one year after the Effective Time shall be delivered to
AIP. Any former partners of RELP who have not theretofore complied with this
Article IV shall thereafter look only to AIP for delivery of their AIP Common
Shares, and payment of cash in lieu of fractional shares and unpaid dividends
and distributions on the AIP Common Shares deliverable in respect of each RELP
Interest such partners hold as determined pursuant to this Agreement, in each
case, without any interest thereon.

(f) None of AIP, RELP, the Exchange Agent or any other person shall be
liable to any former holder of RELP Interests for any amount properly delivered
to a public official pursuant to applicable abandoned property, escheat or
similar laws.

ARTICLE V. REPRESENTATIONS AND WARRANTIES OF RELP

RELP represents and warrants to AIP as set forth below. As contemplated
below, a "RELP Disclosure Letter" will be delivered to AIP on or before
September 20, 1997. The RELP Disclosure Letter shall provide the information or
exceptions described below and shall list all of the assets of the RELP that
will not be transferred in connection with the Merger. The RELP Disclosure
Letter shall be amended prior to Closing to cause such representations and
warranties to be materially true and correct on the Closing Date, but RELP shall
remain liable for any material breach of such representations and warranties
reflected in such amendment only as provided in Section 9.5(d), below.

5.1. Existence; Good Standing; Authority; Compliance with Law. (a) RELP is
a limited partnership, duly formed, validly existing and in good standing under
the laws of the State of . To its actual knowledge, RELP is duly licensed
or qualified to do business as a foreign limited partnership and is in good
standing under the laws of any other state of the United States in which the
character of the properties owned or leased by it therein or in which the
transaction of its business makes such qualification necessary, except where the
failure to be so qualified would not have a material adverse effect on the
business, results of operations or financial condition of RELP (a "RELP Material
Adverse Effect"). RELP has all requisite power and authority to own, operate,
lease and encumber its properties and carry on its business as now conducted.

(b) To the RELP's actual knowledge, it is not in violation of any order of
any court, governmental authority or arbitration board or tribunal, or any law,
ordinance, governmental rule or regulation to which RELP or any of its
properties or assets is subject, where such violation would have a RELP Material
Adverse Effect. RELP has obtained all licenses, permits and other authorizations
and has taken all actions required by applicable law or governmental regulations
in connection with its business as now conducted, where the failure to obtain
any such item or to take any such action would have a RELP Material Adverse
Effect. A copy of RELP's Agreement of Limited Partnership and Certificate of
Limited Partnership (collectively, the "RELP Organizational Documents") have
been delivered or made available to AIP and its counsel and such documents will
be listed in the RELP Disclosure Letter and were or will be true and correct
when delivered or made available.

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5.2. Authorization, Validity and Effect of Agreements. RELP has the
requisite power and authority to enter into the transactions contemplated hereby
and to execute and deliver this Agreement and all other documents, agreements
and instruments related to the transactions contemplated by this Agreement (the
"RELP Ancillary Agreements"). Subject only to the approval of this Agreement and
the transactions contemplated hereby in accordance with the Agreement of Limited
Partnership of the RELP, the consummation by RELP of this Agreement, the RELP
Ancillary Agreements and the transactions contemplated hereby have been duly
authorized by all requisite action on the part of RELP. In reliance upon the
legal opinion described in Section 8.2(e), RELP believes this Agreement
constitutes, and the RELP Ancillary Agreements (when executed and delivered
pursuant hereto for value received) will constitute, the valid and legally
binding obligations of RELP, enforceable against RELP in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity (collectively, "Equitable Remedies").

5.3. Future Issuances. To RELP's actual knowledge, there are not at the
date of this Agreement any existing options, warrants, calls, subscriptions,
convertible securities, or other rights, agreements or commitments which
obligate RELP to issue, transfer or sell any RELP Interests. After the Effective
Time, AIP will have no obligation to issue, transfer or sell any RELP Interest.

5.4. Other Interests. Except as set forth in the RELP Disclosure Letter,
RELP does not own directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or entity (other than investments in short-term investment securities).

5.5. No Violation. To RELP's actual knowledge, neither the execution and
delivery by RELP of this Agreement nor the consummation by RELP of the
transactions contemplated hereby in accordance with the terms hereof, will: (i)
conflict with or result in a breach of any provisions of the Agreement of
Limited Partnership of RELP; (ii) except as contemplated by the RELP Ancillary
Agreements or as will be set forth in the RELP Disclosure Letter, violate, or
conflict with, or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination or in a right of
termination or cancellation of, or accelerate the performance required by, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties of RELP under, or result in being declared void,
voidable or without further binding effect, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust or any license,
franchise, permit, lease, contract, agreement or other instrument, commitment or
obligation to which RELP is a party, or by which RELP or any of its properties
is bound or affected, except for any of the foregoing matters which,
individually or in the aggregate, would not have a RELP Material Adverse Effect;
or (iii) other than the filings provided for in Article I, any filings required
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Securities Act or applicable state securities and "Blue Sky" laws (collectively,
the "Regulatory Filings"), require any consent, approval or authorization of, or
declaration, filing or registration with, any domestic governmental or
regulatory authority, except where the failure to obtain any such consent,
approval or authorization of, or declaration, filing or registration with, any
governmental or regulatory authority would not have an RELP Material Adverse
Effect.

5.6. SEC Documents. (a) RELP has made available or will make available to
AIP prior to September 30, 1997, each registration statement, report, proxy
statement or information statement and all exhibits thereto prepared by it or
relating to its properties (including registration statements covering mortgage
pass-through certificates) since January 1, 1994, each in the form (including
exhibits and any amendments thereto) filed with the SEC (collectively, the "RELP
Reports"). The RELP Reports, which were or will be filed with the SEC in a
timely manner, constitute all forms, reports and documents required to be filed
by RELP under the Securities Act of 1933, as amended (the "Securities Act"), the
Exchange Act and the rules and regulations promulgated thereunder (collectively
the "Securities Laws") for the periods stated above.

(b) To the RELP's actual knowledge, as of their respective dates, the RELP
Reports (i) complied as to form in all material respects with the applicable
requirements of the Securities Laws and (ii) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in the light of
the circumstances under which they were

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made, not misleading. To the RELP's actual knowledge, each of the balance sheets
of RELP included in or incorporated by reference into the RELP Reports
(including the related notes and schedules) fairly presents the financial
position of RELP as of its date and each of the consolidated statements of
income, retained earnings and cash flows of RELP included in or incorporated by
reference into the RELP Reports (including any related notes and schedules)
fairly presents the results of operations, retained earnings and cash flows, as
the case may be, of RELP for the periods set forth therein (subject, in the case
of unaudited statements, to normal year-end audit adjustments which would not be
material in amount or effect), in each case in accordance with generally
accepted accounting principles consistently applied during the periods involved,
except as may be noted therein and except, in the case of the unaudited
statements, as permitted by the Securities Laws.

(c) Except as and to the extent set forth on the balance sheet of RELP at
March 31, 1997, including all notes thereto, or as set forth in the RELP
Reports, RELP has no material liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) that would be required to be
reflected on, or reserved against in, a balance sheet of RELP or in the notes
thereto, prepared in accordance with generally accepted accounting principles
consistently applied, except liabilities arising in the ordinary course of
business since such date which would not have a RELP Material Adverse Effect.

5.7. Litigation. To the RELP's actual knowledge, there are (i) no
continuing orders, injunctions or decrees of any court, arbitrator or
governmental authority to which RELP is a party or by which any of its
properties or assets are bound or to which (the "General Partner") or
the General Partner's, directors, officers, or affiliates is a party or by which
any of their properties or assets are bound, and (ii) except as will be set
forth in the RELP Disclosure Letter, no actions, suits or proceedings pending
against RELP or against the General Partner or the General Partner's directors,
officers or affiliates or, to the knowledge of the General Partner, threatened
against RELP or against the General Partner or the General Partner's directors,
officers or affiliates, at law or in equity, or before or by any federal or
state commission, board, bureau, agency or instrumentality, that in the case of
clauses (i) or (ii) above are reasonably likely, individually or in the
aggregate, to have a RELP Material Adverse Effect.

5.8. Absence of Certain Changes. Except as disclosed in the RELP Reports
filed prior to the date hereof, since March 31, 1997, (i) RELP conducted its
business only in the ordinary course of such business (which for purposes of
this section only, shall include all acquisitions of real estate properties and
financing arrangements made in connection therewith or otherwise will be set
forth in the RELP Disclosure Letter); (ii) there has not been any RELP Material
Adverse Effect; (iii) there has not been any distribution, setting aside or
payment of any distribution with respect to any RELP Interest, and (iv) there
has not been any material change in RELP's accounting principles, practices or
methods.

5.9. Taxes. (a) Except as may be set forth in the RELP Disclosure Letter,
RELP (i) has timely filed all federal, state and foreign tax returns including,
without limitation, information returns and reports required to be filed by it
for tax periods ended prior to the date of this Agreement or requests for
extensions have been timely filed and any such request has been granted and has
not expired and all such returns are accurate and complete in all material
respects, (ii) has paid or accrued all taxes shown to be due and payable on such
returns or which have become due and payable pursuant to any assessment,
deficiency notice, 30-day letter or other notice received by it and (iii) has
properly accrued all taxes for such periods and periods subsequent to the
periods covered by such returns. RELP has not received notice that the federal,
state and local income and franchise tax returns of RELP has been or will be
examined by any taxing authority. RELP has not executed or filed with the
Internal Revenue Service (the "IRS") or any other taxing authority any agreement
now in effect extending the period for assessment or collection of any income or
other taxes.

(b) Except as may be set forth in the RELP Disclosure Letter, RELP is not a
party to any pending action or proceeding by any governmental authority for
assessment or collection of taxes, and no claim for assessment or collection of
taxes has been asserted against it. True, correct and complete copies of all
federal, state and local income or franchise tax returns filed by RELP since
January 1, 1991 and all communications relating thereto have been delivered to
AIP or made available to representatives of AIP or will be so delivered or made
available prior to September 30, 1997. RELP does not hold any asset (i) the
disposition of which

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could be subject to rules similar to Section 1374 of the Internal Revenue Code
of 1986, as amended (the "Code") as a result of an election under IRS Notice
88-19 or (ii) that is subject to a consent filed pursuant to Section 341(f) of
the Code and regulations thereunder. For purposes of this Section 5.9, "taxes"
includes any interest, penalty or additional amount payable with respect to any
tax.

5.10. Books and Records. The books of account and other financial records
of RELP are in all material respects true, complete and correct, have been
maintained in accordance with good business practices, and are accurately
reflected in all material respects in the financial statements included in the
RELP Reports.

5.11. Properties. (a) RELP owns fee simple title to each of the real
properties reflected on the most recent balance sheet of RELP included in the
RELP Reports or as may be identified in the RELP Disclosure Letter (the "RELP
Properties"), which are all of the real estate properties owned by it, free and
clear of liens, mortgages or deeds of trust, claims against title, charges which
are liens or security interests ("Encumbrances") except as will be noted in the
RELP Disclosure Letter. To RELP's actual knowledge, the RELP Properties are not
subject to any rights of way, written agreements, laws, ordinances and
regulations affecting building use or occupancy, or reservations of an interest
in title (collectively, "Property Restrictions"), except for (i) Encumbrances
and Property Restrictions that will be set forth in the RELP Disclosure Letter,
(ii) Property Restrictions imposed or promulgated by law or any governmental
body or authority with respect to real property, including zoning regulations,
provided they do not materially adversely affect the current use of the
property, (iii) Encumbrances and Property Restrictions disclosed on existing
title reports or current surveys (in either case copies of which title reports
and surveys have been or will be delivered or made available to AIP September
30, 1997), (iv) mechanics', carriers', workmen's, repairmen's liens and other
Encumbrances, Property Restrictions and other limitations of any kind, if any,
which have heretofore been bonded (and that will be listed in the RELP
Disclosure Letter) or which individually or in the aggregate do not exceed
$100,000, do not materially detract from the value of or materially interfere
with the present use of any of the RELP Properties subject thereto or affected
thereby, and do not otherwise materially impair business operations conducted by
RELP and which have arisen or been incurred only in its construction activities
or in the ordinary course of business.

(b) Valid policies of title insurance have been issued insuring either (a)
RELP's fee simple title to the RELP Properties or (b) first mortgage liens
thereon, subject only to the matters disclosed above and as may be set forth in
the RELP Disclosure Letter, and such policies are, at the date hereof, in full
force and effect and no claim has been made against any such policy. To RELP's
actual knowledge, except as will be set forth in the RELP Disclosure Letter: (i)
there is no certificate, permit or license from any governmental authority
having jurisdiction over any of the RELP Properties or any agreement, easement
or other right which is necessary to permit the lawful use and operation of the
buildings and improvements on any of the RELP Properties or which is necessary
to permit the lawful use and operation of all driveways, roads and other means
of egress and ingress to and from any of the RELP Properties that has not been
obtained and is not in full force and effect, or of any pending threat of
modification or cancellation of any of same; (ii) RELP has not received written
notice of any material violation of any federal, state or municipal law,
ordinance, order, regulation or requirement affecting any portion of any of the
RELP Properties issued by any governmental authority; (iii) there are no
structural defects relating to the RELP Properties and no RELP Properties whose
building systems are not in working order in any material respect; and (iv)
there is (A) no physical damage to any RELP Property in excess of $100,000 for
which there is no insurance in effect covering the cost of the restoration, (B)
no current renovation to any RELP Property the cost of which exceeds $100,000
and (C) no current restoration (excluding tenant improvements) of any RELP
Property, the cost of which exceeds $100,000.

(c) Except as will be set forth in the RELP Disclosure Letter, RELP has not
received notice to the effect that and there are no (A) condemnation or rezoning
proceedings that are pending or threatened with respect to any of the RELP
Properties or (B) zoning, building or similar laws, codes, ordinances, orders or
regulations that are or will be violated by the continued maintenance, operation
or use of any buildings or other improvements on any of the RELP Properties or
by the continued maintenance, operation or use of the parking areas. All work to
be performed, payments to be made and actions to be taken by RELP prior to the
date hereof pursuant to any agreement entered into with a governmental body or
authority in connection with

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a site approval, zoning reclassification or other similar action relating to the
RELP Properties (e.g., Local Improvement District, Road Improvement District,
Environmental Mitigation) has been performed, paid or taken, as the case may be,
and RELP is not aware of any planned or proposed work, payments or actions that
may be required after the date hereof pursuant to such agreements, except as
will be set forth in the RELP Disclosure Letter.

5.12. Environmental Matters. To RELP's actual knowledge, RELP has not
caused (i) the unlawful presence of any hazardous substances, hazardous
materials, toxic substances or waste materials (collectively, "Hazardous
Materials") on any of the RELP Properties, or (ii) any unlawful spills,
releases, discharges or disposal of Hazardous Materials to have occurred or be
presently occurring on or from the RELP Properties as a result of any
construction on or operation and use of such properties, which presence or
occurrence would, individually or in the aggregate, have a RELP Material Adverse
Effect; and in connection with the construction on or operation and use of the
RELP Properties, RELP has not failed to comply, in any material respect, with
any applicable local, state and federal environmental laws, regulations,
ordinances and administrative and judicial orders relating to the generation,
recycling, reuse, sale, storage, handling, transport and disposal of any
Hazardous Materials.

5.13. Labor Matters. RELP is not a party to, or bound by, any collective
bargaining agreement, contract or other agreement or understanding with a labor
union or labor union organization. There is no unfair labor practice or labor
arbitration proceeding pending or, to the knowledge of the General Partner,
threatened against RELP relating to its business, except for any such proceeding
which would not have a RELP Material Adverse Effect. To the knowledge of the
General Partner, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or threatened
involving employees of RELP or any of its Subsidiaries.

5.14. No Brokers. Except the fee that is to be paid to Houlihan Lokey
Howard & Zukin ("Houlihan") by RELP as described in Section 5.15 below, RELP has
not entered into any contract, arrangement or understanding with any person or
firm which may result in the obligation of RELP or AIP to pay any finder's fees,
brokerage or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. RELP is not aware of any claim for payment of any finder's
fees, brokerage or agent's commissions or other like payments in connection with
the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby.

5.15. Opinion of Financial Advisor. RELP has retained Houlihan to review
the transaction contemplated by this Agreement and to issue an opinion to the
effect that, as of the date of such opinion, the Purchase Price is fair to the
holders of RELP Interests from a financial point of view.

5.16. Related Party Transactions. Except as set forth in the RELP
Disclosure Letter, there are no arrangements, agreements or contracts entered
into by RELP with (i) any consultant, (ii) any person who is an officer,
director or affiliate of RELP or its General Partner, any relative of any of the
foregoing or any entity of which any of the foregoing is an affiliate, or (iii)
any person who acquired RELP Interests in a private placement.

5.17. Contracts and Commitments. The RELP Disclosure Letter will set forth
(i) all unsecured notes or other obligations of RELP which individually may
result in total payments in excess of $100,000, (ii) all notes, debentures,
bonds and other evidence of indebtedness which are secured or collateralized by
mortgages, deeds of trust or other security interests in the RELP Properties or
personal property of RELP, and (iii) each commitment entered into by RELP which
may result in total payments or liability in excess of $100,000. Copies of the
foregoing will be delivered or made available to AIP prior to September 30,
1997, will be listed on the RELP Disclosure Letter and will be materially true
and correct when delivered or made available. RELP has not received any notice
of a default that has not been cured under any of the documents described in
clause (i) above or is in default respecting any payment obligations thereunder
beyond any applicable grace periods. All options of RELP to purchase real
property will be set forth on the RELP Disclosure Letter and such options and
RELP's rights thereunder are in full force and effect. All joint venture
agreements to which RELP is a party will be set forth on the RELP Disclosure
Letter and RELP is not in default with respect to any obligations, which
individually or in the aggregate are material, thereunder.

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5.18. Development Rights. Set forth in the RELP Disclosure Letter will be a
list of all material agreements entered into by RELP relating to the
development, rehabilitation, capital improvement or construction of office
buildings, industrial facilities or other real estate properties, which
development or construction has not been substantially completed as of the date
of this Agreement. Such agreements, true and correct copies of all of which will
be delivered or made available to AIP prior to September 30, 1997, will be
listed in the RELP Disclosure Letter, have not been modified and are valid and
binding in accordance with their respective terms.

5.19. Convertible Securities. To RELP's actual knowledge, RELP has no
outstanding options, warrants or other securities exercisable for, or
convertible into, RELP Interests, the terms of which would require any
anti-dilution adjustments by reason of the consummation of the transactions
contemplated hereby.

ARTICLE VI. REPRESENTATIONS AND WARRANTIES OF AIP

AIP represents and warrants to RELP as set forth below. As contemplated
below, an "AIP Disclosure Letter" will be delivered to RELP on or before
September 20, 1997. The AIP Disclosure Letter shall provide the information or
exceptions described below. The AIP Disclosure Letter shall be amended prior to
Closing to cause such representations and warranties to be materially true and
correct on the Closing Date, but AIP shall remain liable for any material breach
of such representations and warranties reflected in such amendment only as
provided in Section 9.5(d), below.

6.1. Existence; Good Standing; Authority; Compliance with Law. (a) AIP is a
real estate investment trust duly organized and validly existing under the laws
of the State of Texas. To AIP's actual knowledge, AIP is duly licensed or
qualified to do business and is in good standing under the laws of any other
state of the United States in which the character of the properties owned or
leased by it therein or in which the transaction of its business makes such
qualification necessary, except where the failure to be so qualified would not
have a material adverse effect on the business, results of operations or
financial condition of AIP and its subsidiaries taken as a whole (an "AIP
Material Adverse Effect"). AIP has all requisite power and authority to own,
operate, lease and encumber its properties and carry on its business as now
conducted. Each of AIP's Subsidiaries is a corporation, limited liability
company or partnership duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation or organization, has the
requisite power and authority to own its properties and to carry on its business
as it is now being conducted, and is duly qualified to do business and is in
good standing in each jurisdiction in which the ownership of its property or the
conduct of its business requires such qualification, except for jurisdictions in
which such failure to be so qualified or to be in good standing would not have
an AIP Material Adverse Effect.

(b) To AIP's actual acknowledge, neither AIP nor any AIP Subsidiary is in
violation of any order of any court, governmental authority or arbitration board
or tribunal, or any law, ordinance, governmental rule or regulation to which AIP
or any AIP Subsidiary or any of their respective properties or assets is
subject, where such violation would have an AIP Material Adverse Effect. AIP and
its Subsidiaries have obtained all licenses, permits and other authorizations
and have taken all actions required by applicable law or governmental
regulations in connection with their business as now conducted, where the
failure to obtain any such item or to take any such action would have an AIP
Material Adverse Effect. Copies of AIP's and its Subsidiaries' Declaration of
Trust, Articles of Incorporation, Bylaws, organizational documents and
partnership and joint venture agreements have been or will be prior to September
30, 1997, delivered or made available to RELP and such documents will be listed
in the AIP Disclosure Letter and were or will be true and correct when delivered
or made available. For the purposes of the immediately preceding sentence, the
term "Subsidiary" shall include the entities set forth in the AIP Disclosure
Letter, which are all of AIP's Subsidiaries.

6.2. Authorization, Validity and Effect of Agreements. AIP has the
requisite power and authority to enter into the transactions contemplated hereby
and to execute and deliver this Agreement and all other documents, agreements
and instruments related to the transactions contemplated by this Agreement to
which it is a party (the "AIP Ancillary Agreements"). Subject only to the
approval of the issuance of AIP Common Shares pursuant to the Merger
contemplated hereby by the holders of two-thirds of the outstanding AIP Common

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Shares, present and voting thereon, the consummation by AIP of this Agreement,
the AIP Ancillary Agreements and the transactions contemplated hereby have been
duly authorized by all requisite action on the part of AIP. This Agreement
constitutes, and the AIP Ancillary Agreements (when executed and delivered
pursuant hereto for value received) will constitute, the valid and legally
binding obligations of AIP enforceable against AIP in accordance with their
respective terms, subject to Equitable Remedies.

6.3. Capitalization. On June 15, 1997, the authorized capital stock of AIP
consists of 10,000,000 Common Shares. As of the date hereof, all 10,000,000
Common Shares are outstanding. AIP has no outstanding bonds, debentures, notes
or other obligations (other than to Realco), the holders of which have the right
to vote (or which are convertible into or exercisable for securities having the
right to vote) with the shareholders of AIP on any matter. Except as set forth
in the AIP Disclosure Letter, all such issued and outstanding of AIP Common
Shares are duly authorized, validly issued, fully paid, nonassessable and free
of preemptive rights. Except as set forth in the AIP Disclosure Letter, there
are not at the date of this Agreement any existing options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments which obligate AIP or any of its Subsidiaries to issue, transfer or
sell any shares or other equity interest of AIP or any of its Subsidiaries
except under any employee incentive plan approved by AIP's shareholders. There
are no agreements or understandings to which AIP is a party with respect to the
voting of any AIP Common Shares or which restrict the transfer of any such
shares, except in order to protect its REIT status.

6.4. Subsidiaries. Except as set forth in the AIP Disclosure Letter, AIP
owns directly or indirectly each of the outstanding shares of capital stock or
all of the partnership or other equity interests of each of AIP's Subsidiaries
free and clear of all liens, pledges, security interests, claims or other
encumbrances other than liens imposed by local law which are not material.

6.5. Other Interests. Except as will be disclosed in the AIP Disclosure
Letter and except for interests in the AIP Subsidiaries, neither AIP nor any AIP
Subsidiary owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or entity (other than investments in short-term investment securities).

6.6. No Violation. Neither the execution and delivery by AIP of this
Agreement nor the consummation by AIP of the transactions contemplated hereby in
accordance with the terms hereof, will: (i) conflict with or result in a breach
of any provisions of AIP's Declaration of Trust; (ii) violate, or conflict with,
or result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination or in a right of termination or cancellation of, or
accelerate the performance required by, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties of AIP or
its Subsidiaries under, or result in being declared void, voidable or without
further binding effect, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust or any license, franchise, permit,
lease, contract, agreement or other instrument, commitment or obligation to
which AIP or any of its Subsidiaries is a party, or by which AIP or any of its
Subsidiaries or any of their properties is bound or affected, except for any of
the foregoing matters which, individually or in the aggregate, would not have an
AIP Material Adverse Effect; or (iii) other than the Regulatory Filings require
any consent, approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory authority, except
where the failure to obtain such consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority would not have an AIP Material Adverse Effect.

6.7. SEC Documents. (a) AIP has made available or will make available to
RELP prior to September 30, 1997, the registration statements of AIP filed with
the SEC in connection with public offerings of AIP securities since January 1,
1994 and all exhibits, amendments and supplements thereto (the "AIP Registration
Statements"), and each registration statement, report, proxy statement or
information statement and all exhibits thereto prepared by it or relating to its
properties since the effective date of the latest AIP Registration Statement,
each in the form (including exhibits and any amendments thereto) filed with the
SEC (collectively, the "AIP Reports"). The AIP Reports, which were or will be
filed with the SEC in a

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timely manner, constitute all forms, reports and documents required to be filed
by AIP under the Securities Laws.

(b) To AIP's actual knowledge, as of their respective dates, the AIP
Reports (i) complied as to form in all material respects with the applicable
requirements of the Securities Laws, and (ii) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in the light of
the circumstances under which they were made, not misleading. To AIP's actual
acknowledge, each of the consolidated balance sheets of AIP included in or
incorporated by reference into the AIP Reports (including the related notes and
schedules) fairly presents the consolidated financial position of AIP and the
AIP Subsidiaries as of its date and each of the consolidated statements of
income, retained earnings and cash flows of AIP included in or incorporated by
reference into the AIP Reports (including any related notes and schedules)
fairly presents the results of operations, retained earnings or cash flows, as
the case may be, of AIP and the AIP Subsidiaries for the periods set forth
therein (subject, in the case of unaudited statements, to normal year-end audit
adjustments which would not be material in amount or effect), in each case in
accordance with generally accepted accounting principles consistently applied
during the periods involved, except as may be noted therein and except, in the
case of the unaudited statements, as permitted by the Securities Laws.

(c) Except as and to the extent set forth on the consolidated balance sheet
of AIP and its Subsidiaries at March 31, 1997, including all notes thereto, or
as set forth in the AIP Reports, neither AIP nor any of the AIP Subsidiaries has
any material liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) that would be required to be reflected on, or
reserved against in, a balance sheet of AIP or in the notes thereto, prepared in
accordance with generally accepted accounting principles consistently applied,
except liabilities arising in the ordinary course of business since such date
which would not have an AIP Material Adverse Effect.

6.8. Litigation. To AIP's actual knowledge, there are (i) no continuing
orders, injunctions or decrees of any court, arbitrator or governmental
authority to which AIP or any AIP Subsidiary is a party or by which any of its
properties or assets are bound or, to which any of its directors, officers, or
affiliates is a party or by which any of their properties or assets are bound,
and (ii) except as will be set forth in the AIP Disclosure Letter, no actions,
suits or proceedings pending against AIP or any AIP Subsidiary or, to the
knowledge of AIP, against any of its Trust Managers, officers, or affiliates or,
to the knowledge of AIP, threatened against AIP or any AIP Subsidiary or against
any of its Trust Managers, officers, or affiliates, at law or in equity, or
before or by any federal or state commission, board, bureau, agency or
instrumentality, that in the case of clauses (i) or (ii) above are reasonably
likely, individually or in the aggregate, to have an AIP Material Adverse
Effect.

6.9. Absence of Certain Changes. Except as disclosed in the AIP Reports
filed with the SEC prior to the date hereof, (i) AIP and its Subsidiaries have
conducted their business only in the ordinary course of such business (which,
for purposes of this section only, shall include all acquisitions of real estate
properties and financing arrangements made in connection therewith); (ii) there
has not been any AIP Material Adverse Effect; (iii) there has not been any
declaration, setting aside or payment of any dividend or other distribution with
respect to the AIP Common Shares; and (iv) there has not been any material
change in AIP's accounting principles, practices or methods.

6.10. Taxes. (a) Except as may be set forth in the AIP Disclosure Letter,
AIP and each of its Subsidiaries (i) has timely filed all federal, state and
foreign tax returns including, without limitation, information returns and
reports required to be filed by any of them for tax periods ended prior to the
date of this Agreement or requests for extensions have been timely filed and any
such request has been granted and has not expired and all such returns are
absolute and complete in all material respects, (ii) has paid or accrued all
taxes shown to be due and payable on such returns or which have become due and
payable pursuant to any assessment, deficiency notice, 30-day letter or other
notice received by it and (iii) has properly accrued all taxes for such periods
subsequent to the periods covered by such returns. Neither AIP nor any of its
Subsidiaries has received notice that the federal, state and local income and
franchise tax returns of AIP or any such Subsidiary has been or will be examined
by any taxing authority. Neither AIP nor any of its

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Subsidiaries has executed or filed with the IRS or any other taxing authority
any agreement now in effect extending the period for assessment or collection of
any income or other taxes.

(b) Except as will be disclosed in the AIP Disclosure Letter, neither AIP
nor any of its Subsidiaries is a party to any pending action or proceeding by
any governmental authority for assessment or collection of taxes, and no claim
for assessment or collection of taxes has been asserted against it. True,
correct and complete copies of all federal, state and local income or franchise
tax returns filed by AIP and each of its Subsidiaries and all communications
relating thereto have been delivered to RELP or made available to
representatives of RELP or will be so delivered or made available prior to
September 30, 1997. AIP (i) has qualified to be taxed as a REIT pursuant to
Sections 856 through 859 of the Code for its taxable years ended December 31,
1985 through 1996, inclusive (ii) has operated, and intends to continue to
operate, in such a manner as to qualify to be taxed as a REIT pursuant to
Sections 856 through 859 of the Code for its taxable year ended on the effective
date of the Merger, and (iii) has not taken or omitted to take any action which
could result in, and each of the executive officers of AIP, each acting in his
respective capacity as such, has no actual knowledge of, a challenge to its
status as a REIT. AIP represents that each of its Subsidiaries is a Qualified
REIT Subsidiary as defined in Section 856(i) of the Code. Neither AIP nor any of
its Subsidiaries holds any asset (i) the disposition of which could be subject
to rules similar to Section 1374 of the Code as a result of an election under
IRS Notice 88-19 or (ii) that is subject to a consent filed pursuant to Section
341(f) of the Code and regulations thereunder. For purposes of this Section
6.10, "taxes" includes any interest, penalty or additional amount payable with
respect to any tax.

6.11. Books and Records. (a) The books of account and other financial
records of AIP and its Subsidiaries are in all material respects true, complete
and correct, have been maintained in accordance with good business practices,
and are accurately reflected in all material respects in the financial
statements included in the AIP Reports.

(b) The minute books and other records of AIP and its Subsidiaries contain
in all material respects accurate records of all meetings and accurately reflect
in all material respects all other corporate action of the shareholders and
Trust Managers and any committees of the Board of Trust Managers of AIP and its
Subsidiaries.

6.12. Properties. (a) AIP and its Subsidiaries own fee simple title to each
of the real properties reflected on the most recent balance sheet of AIP
included in the AIP Reports or as may be identified in the AIP Disclosure Letter
(the "AIP Properties"), which are all of the real estate properties owned by
them, free and clear of Encumbrances. To AIP's actual knowledge, the AIP
Properties are not subject to any rights of way, written agreements, laws,
ordinances and regulations affecting building use or occupancy, or reservations
of an interest in title (collectively, "Property Restrictions"), except for (i)
Encumbrances and Property Restrictions that will be set forth in the AIP
Disclosure Letter, (ii) Property Restrictions imposed or promulgated by law or
any governmental body or authority with respect to real property, including
zoning regulations, provided they do not materially adversely affect the current
use of the property, (iii) Encumbrances and Property Restrictions disclosed on
existing title reports or surveys (in either case copies of which title reports
and surveys have been or will be delivered or made available to RELP prior to
September 30, 1997), and (iv) mechanics', carriers', workmen's, repairmen's
liens and other Encumbrances, Property Restrictions and other limitations of any
kind, if any, which have heretofore been bonded (and that will be listed in the
AIP Disclosure Letter) or which individually or in the aggregate, do not exceed
$100,000, do not materially detract from the value of or materially interfere
with the present use of any of the AIP Properties subject thereto or affected
thereby, and do not otherwise materially impair business operations conducted by
AIP and its Subsidiaries and which have arisen or been incurred only in its
construction activities or in the ordinary course of business.

(b) Valid policies of title insurance have been issued insuring AIP's or
any of its Subsidiaries' fee simple title to the AIP Properties, subject only to
the matters disclosed above and as may be set forth in the AIP Disclosure
Letter, and such policies are, at the date hereof, in full force and effect and
no material claim has been made against any such policy. To AIP's actual
knowledge, except as will be set forth in the AIP Disclosure Letter, (i) there
is no certificate, permit or license from any governmental authority having

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jurisdiction over any of the AIP Properties or any agreement, easement or other
right which is necessary to permit the lawful use and operation of the buildings
and improvements on any of the AIP Properties or which is necessary to permit
the lawful use and operation of all driveways, roads and other means of egress
and ingress to and from any of the AIP Properties that has not been obtained and
is not in full force and effect, or of any pending threat of modification or
cancellation of any of same; (ii) neither AIP nor its Subsidiaries has received
written notice of any material violation of any federal, state or municipal law,
ordinance, order, regulation or requirement affecting any portion of any of the
AIP Properties issued by any governmental authority; (iii) there are no
structural defects relating to the AIP Properties and no AIP Properties whose
building systems are not in working order in any material respect; and (iv)
there is (A) no physical damage to any AIP Property in excess of $100,000 for
which there is no insurance in effect covering the cost of the restoration, (B)
no current renovation to any AIP Property the cost of which exceeds $100,000 and
(C) no current restoration (excluding tenant improvements) of any AIP Property
the cost of which exceeds $100,000.

(c) Except as will be set forth in the AIP Disclosure Letter, AIP or its
Subsidiaries have received no notice to the effect that and there are no (A)
condemnation or rezoning proceedings that are pending or threatened with respect
to any of the AIP Properties or (B) any zoning, building or similar laws, codes,
ordinances, orders or regulations that are or will be violated by the continued
maintenance, operation or use of any buildings or other improvements on any of
the AIP Properties or by the continued maintenance, operation or use of the
parking areas in any material respect. All work to be performed, payments to be
made and actions to be taken by AIP or its Subsidiaries prior to the date hereof
pursuant to any agreement entered into with a governmental body or authority in
connection with a site approval, zoning reclassification or other similar action
relating to the AIP Properties (e.g., Local Improvement District, Road
Improvement District, Environmental Mitigation) has been performed, paid or
taken, as the case may be, and AIP is not aware of any planned or proposed work,
payments or actions that may be required after the date hereof pursuant to such
agreements, except as will be set forth in the AIP Disclosure Letter.

6.13. Environmental Matters. To the actual knowledge of AIP, none of AIP,
any of its Subsidiaries or, any other person has caused or permitted (i) the
unlawful presence of any Hazardous Materials on any of the AIP Properties, or
(ii) any unlawful spills, releases, discharges or disposal of Hazardous
Materials to have occurred or be presently occurring on or from the AIP
Properties as a result of any construction on or operation and use of such
properties, which presence or occurrence would, individually or in the
aggregate, have an AIP Material Adverse Effect; and in connection with the
construction on or operation and use of the AIP Properties, AIP and its
Subsidiaries have not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.

6.14. Labor Matters. Neither AIP nor any of its Subsidiaries is a party to,
or bound by, any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor union organization. There is no unfair
labor practice or labor arbitration proceeding pending or, to the knowledge of
the executive officers of AIP, threatened against AIP or its Subsidiaries
relating to their business, except for any such proceeding which would not have
an AIP Material Adverse Effect. To the knowledge of AIP, there are no
organizational efforts with respect to the formation of a collective bargaining
unit presently being made or threatened involving employees of AIP or any of its
Subsidiaries.

6.15. No Brokers. Except for the fee payable to Prudential Securities
Incorporated ("Prudential") as described in Section 6.16 below, AIP has not
entered into any contract, arrangement or understanding with any person or firm
which may result in the obligation of AIP or RELP to pay any finder's fees,
brokerage or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. AIP is not aware of any claim for payment of any finder's
fees, brokerage or agent's commissions or other like payments in connection with
the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby.

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6.16. Opinion of Financial Advisor. AIP has retained Prudential to review
the transaction contemplated by this Agreement and to issue an opinion as to the
fairness to AIP, from a financial point of view, of the consideration to be paid
by AIP pursuant to the Merger.

6.17. RELP Share Ownership. Except as may be set forth in the AIP
Disclosure Letter, neither AIP nor any of its Subsidiaries owns any RELP
Interests or other securities convertible into RELP interests.

6.18. AIP Common Shares. The issuance and delivery by AIP of AIP Common
Shares in connection with the Merger and this Agreement have been duly and
validly authorized by all necessary action on the part of AIP except for the
approval of its shareholders contemplated by this Agreement. The AIP Common
Shares to be issued in connection with the Merger and this Agreement, when
issued in accordance with the terms of this Agreement, will be validly issued,
fully paid and nonassessable, except that shareholders may be subject to further
assessment with respect to certain claims for tort, contract, taxes, statutory
liability and otherwise in some jurisdictions to the extent such claims are not
satisfied by AIP.

6.19. Convertible Securities. AIP has no outstanding options, warrants or
other securities exercisable for, or convertible into, shares of AIP Common
Shares, the terms of which would require any anti-dilution adjustments by reason
of the consummation of the transactions contemplated hereby, except the
preemptive rights held by certain clients of Morgan Stanley Asset Management,
Inc. and held by MS Real Estate Special Situations, Inc. and the convertible
debt securities held by Realco.

6.20. Related Party Transactions. Set forth in the AIP Disclosure Letter
will be a list of all arrangements, agreements and contracts entered into by AIP
or any of its Subsidiaries with (i) any person who is an officer, Trust Manager
or affiliate of AIP or any of its Subsidiaries, any relative of any of the
foregoing or any entity of which any of the foregoing is an affiliate or (ii)
any person who acquired AIP Common Shares in a private placement. The copies of
such documents, all of which have been or will be delivered or made available to
RELP prior to September 30, 1997, are or will be true, complete and correct when
delivered or made available.

6.21. Contracts and Commitments. The AIP Disclosure Letter will set forth
(i) all unsecured notes or other obligations of AIP and AIP Subsidiaries which
individually may result in total payments in excess of $100,000, (ii) notes,
debentures, bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security interests in the
AIP Properties or personal property of AIP and its Subsidiaries, and (iii) each
commitment entered into by AIP or any of its Subsidiaries which individually may
result in total payments or liability in excess of $100,000. Copies of the
foregoing have been or will be delivered or made available to RELP prior to
September 30, 1997, will be listed on the AIP Disclosure Letter and are or will
be materially true and correct when delivered or made available. None of AIP or
any of its Subsidiaries has received any notice of a default that has not been
cured under any of the documents described in clause (i) or (ii) above or is in
default respecting any payment obligations thereunder beyond any applicable
grace periods. All options of AIP or any of its Subsidiaries to purchase real
property will be set forth on the AIP Disclosure Letter and such options and
AIP's or its Subsidiaries' rights thereunder are in full force and effect. All
joint venture agreements to which AIP or any of its Subsidiaries is a party will
be set forth on the AIP Disclosure Letter and AIP or its Subsidiaries are not in
default with respect to any obligations, which individually or in the aggregate
are material, thereunder.

6.22. Development Rights. Set forth in the AIP Disclosure Letter will be a
list of all material agreements entered into by AIP or any of its Subsidiaries
relating to the development, rehabilitation, capital improvement or construction
of office buildings, industrial facilities or other real estate properties which
development or construction has not been substantially completed as of the date
of this Agreement. Such agreements, true, complete and correct copies of all of
which have been or will be delivered or made available to RELP prior to
September 30, 1997, will be listed in the AIP Disclosure Letter.

6.23. Certain Payments Resulting From Transactions. The execution of, and
performance of the transactions contemplated by, this Agreement will not (either
alone or upon the occurrence of any additional or subsequent events) (i)
constitute an event under any AIP Benefit Plan, policy, practice, agreement or
other arrangement or any trust or loan (the "Employee Arrangements") that will
or may result in any payment

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(whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any employee, director or consultant of AIP or any of
its Subsidiaries unless such rights have been waived by any such person, or (ii)
result in the triggering or imposition of any restrictions or limitations on the
right of AIP or RELP to amend or terminate any Employee Arrangement and receive
the full amount of any excess assets remaining or resulting from such amendment
or termination, subject to applicable taxes. No payment or benefit which will be
required to be made pursuant to the terms of any agreement, commitment or AIP
Benefit Plan, as a result of the transactions contemplated by this Agreement, to
any officer, director or employee of AIP or any of its Subsidiaries, will be
characterized as an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code.

ARTICLE VII. COVENANTS

7.1. Acquisition Proposals. Prior to the Effective Time, RELP and AIP each
agree (i) that neither of them nor any of their Subsidiaries shall, and each of
them shall direct and use its best efforts to cause its respective officers,
General Partner, limited partners, Trust Managers, employees, agents, affiliates
and representatives (including, without limitation, any investment banker,
attorney or accountant retained by it or any of its Subsidiaries), as
applicable, not to, initiate, solicit or encourage, directly or indirectly, any
inquiries or the making or implementation of any proposal or offer (including,
without limitation, any proposal or offer to its shareholders) with respect to a
merger, acquisition, tender offer, exchange offer, consolidation or similar
transaction involving, or any purchase of all or any significant portion of the
assets or any equity securities (or any debt securities convertible into equity
securities) of, such party or any of its Subsidiaries, other than the
transactions contemplated by this Agreement (any such proposal or offer being
hereinafter referred to as an "Acquisition Proposal") or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Acquisition Proposal, or
otherwise facilitate any effort or attempt to make or implement an Acquisition
Proposal; (ii) that it will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing and each will take the necessary
steps to inform the individuals or entities referred to above of the obligations
undertaken in this Section 7.1; and (iii) that it will notify the other party
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it; provided, however, that nothing
contained in this Section 7.1 shall prohibit the Board of Directors of the
General Partner of RELP (the "Board of Directors") or the Board of Trust
Managers from (x) furnishing information to or entering into discussions or
negotiations with, any person or entity that makes an unsolicited bona fide
Acquisition Proposal, if, and only to the extent that, (A) the Board of
Directors or Board of Trust Managers, as applicable, determines in good faith
that such action is required for it to comply with its fiduciary duties to
limited partners or shareholders, as applicable, imposed by law as advised by
counsel, (B) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity, such party provides
written notice to the other party to this Agreement to the effect that it is
furnishing information to, or entering into discussions with, such person or
entity, and (C) subject to any confidentiality agreement with such person or
entity (which such party determined in good faith was required to be executed in
order for the Board of Directors or Board of Trust Managers, as applicable, to
comply with its fiduciary duties to limited partners or shareholders, as
applicable, imposed by law as advised by counsel), such party keeps the other
party to this Agreement informed of the status (but not the terms) of any such
discussions or negotiations; and (y) to the extent applicable, complying with
Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition
Proposal.

Nothing in this Section 7.1 shall (i) permit any party to terminate this
Agreement (except as specifically provided in Article IX hereof), (ii) permit
any party to enter into any agreement with respect to an Acquisition Proposal
during the term of this Agreement (it being agreed that during the term of this
Agreement, no party shall enter into any agreement with any person that provides
for, or in any way facilitates, an Acquisition Proposal (other than a
confidentiality agreement in customary form)), or (iii) affect any other
obligation of any party under this Agreement.

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7.2. Conduct of Businesses.

(i) Prior to the Effective Time, except as may be set forth in the RELP
Disclosure Letter or the AIP Disclosure Letter or as contemplated by this
Agreement, unless the other party has consented in writing thereto, AIP and
RELP:

(a) Shall use their reasonable efforts, and shall cause each of their
respective Subsidiaries to use their reasonable efforts, to preserve
intact their business organizations and goodwill and keep available
the services of their respective officers and employees;

(b) Shall confer on a regular basis with one or more representatives of
the other to report operational matters of materiality and, subject
to Section 7.1, any proposals to engage in material transactions;

(c) Shall promptly notify the other of any material emergency or other
material change in the condition (financial or otherwise) of the
business, properties, assets or liabilities, or any material
governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or the
breach in any material respect of any representation, warranty,
covenant or agreement contained herein;

(d) Shall not pay quarterly dividends or make distributions payable with
respect to the AIP Common Shares and RELP Partnership Interests,
respectively; and

(e) Shall promptly deliver to the other true and correct copies of any
report, statement or schedule filed with the SEC subsequent to the
date of this Agreement.

(ii) Prior to the Effective Time, except as may be set forth in the RELP
Disclosure Letter, unless AIP has consented (such consent not to be unreasonably
withheld or delayed) in writing thereto, RELP:

(a) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as heretofore
conducted;

(b) Shall not amend the RELP Organizational Documents;

(c) Shall not (i) except pursuant to the exercise of options, warrants,
conversion rights and other contractual rights existing on the date
hereof and disclosed pursuant to this Agreement, issue any RELP
Interests, make any distribution, effect any recapitalization or
other similar transaction, (ii) grant, confer or award any option,
warrant, conversion right or other right not existing on the date
hereof to acquire any RELP Interest, (iii) increase any compensation
or enter into or amend any employment agreement with any of its
present or future officers or directors of the General Partner, or
(iv) adopt any new employee benefit plan or amend any existing
employee benefit plan in any material respect, except for changes
which are less favorable to participants in such plans;

(d) Shall not declare, set aside or make any distribution or payment
with respect to any RELP Interest or directly or indirectly redeem,
purchase or otherwise acquire any RELP Interest, or make any
commitment for any such action;

(e) Shall not sell or otherwise dispose of (i) any RELP Properties, or
(ii) except in the ordinary course of business, any of its other
assets which are material, individually or in the aggregate;

(f) Shall not make any loans, advances or capital contributions to, or
investments in, any other person;

(g) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent
or otherwise), other than the payment, discharge or satisfaction in
the ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent consolidated
financial statements (or the notes thereto) of RELP included in the
RELP Reports or incurred in the ordinary course of business
consistent with past practice;

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(h) Shall not enter into any commitment which individually may result in
total payments or liability by or to it in excess of $250,000 in the
case of any one commitment or in excess of $500,000 for all
commitments;

(i) Shall not, and shall not permit any of its Subsidiaries to, enter
into any commitment with any officer, director or affiliate of RELP
or its General Partner except to the extent the same occur in the
ordinary course of business consistent with past practice and would
not have a RELP Material Adverse Effect; and

(j) Shall not enter into or terminate any lease representing annual
revenues of $100,000 or more.

(iii) Prior to the Effective Time, except as may be set forth in the AIP
Disclosure Letter, unless RELP has consented (such consent not to be
unreasonably withheld or delayed) in writing thereto, AIP:

(a) Shall, and shall cause each of its Subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;

(b) Shall not amend its Declaration of Trust or Bylaws except as
contemplated by this Agreement;

(c) Shall not (i) except pursuant to the exercise of options, warrants,
conversion rights and other contractual rights (including AIP's
existing dividend reinvestment plan) existing on the date hereof and
disclosed pursuant to this Agreement, issue any shares of its
capital stock, effect any share split, reverse share split, share
dividend, recapitalization or other similar transaction, (ii) grant,
confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any shares of its capital
shares (except pursuant to any employee incentive plan approved by
shareholders), (iii) amend any employment agreement with any of its
present or future officers or Trust Managers, or (iv) adopt any new
employee benefit plan (including any share option, share benefit or
share purchase plan) except the employee incentive plan to be voted
on at its shareholder meeting for the fiscal year ended December 31,
1995;

(d) Shall not declare, set aside or pay any dividend or make any other
distribution or payment with respect to any Common Shares or
directly or indirectly redeem, purchase or otherwise acquire any
Common Shares or capital stock of any of its Subsidiaries, or make
any commitment for any such action;

(e) Except as will be set forth in the AIP Disclosure Letter, shall not,
and shall not permit any of its Subsidiaries to, sell or otherwise
dispose of (i) any AIP Properties or any of its capital stock of or
other interests in Subsidiaries or (ii) except in the ordinary
course of business, any of its other assets which are material,
individually or in the aggregate;

(f) Shall not, and shall not permit any of its Subsidiaries to, make any
loans, advances or capital contributions to, or investments in, any
other person other than in connection with the sale of properties;

(g) Shall not, and shall not permit any of its Subsidiaries to, pay,
discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent consolidated
financial statements (or the notes thereto) of AIP included in the
AIP Reports or incurred in the ordinary course of business
consistent with past practice;

(h) Shall not, and shall not permit any of its Subsidiaries to, enter
into any commitment which individually may result in total payments
or liability by or to it in excess of $500,000 in the case of any
one commitment or in excess of $500,000 for all commitments; and

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(i) Shall not, and shall not permit any of its Subsidiaries to, enter
into any commitment with any officer, Trust Manager or affiliate of
AIP or any of its Subsidiaries, except as herein or in the AIP
Disclosure Letter provided and except in the ordinary course of
business.

For purposes of this Section 7.2, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three days of request. Further, if no response is received by
the end of business on such third day, the party receiving the request shall be
deemed to have consented to such action.

7.3 Meetings of Shareholders and Partners. Each of AIP and RELP will take
all action necessary in accordance with applicable law and its organizational
documents to convene a meeting of its shareholders or partners, as applicable,
as promptly as practicable to consider and vote upon or otherwise to obtain the
consent of its shareholders or partners, as applicable, to (i) in the case of
AIP, approve this Agreement and the transactions contemplated hereby, and (ii)
in the case of RELP, approve this Agreement and the transactions contemplated
hereby. The Board of Trust Managers and the General Partner shall each recommend
such approval and AIP and RELP shall each take all lawful action to solicit such
approval, including, without limitation, timely mailing the Proxy
Statement/Prospectus (as defined in Section 7.7); provided, however, that such
recommendation or solicitation is subject to any action taken by, or upon
authority of, the Board of Trust Managers or the General Partner, as the case
may be, in the exercise of its good faith judgment as to its fiduciary duties to
its shareholders or partners, as applicable, imposed by law as advised by
counsel. AIP and RELP shall coordinate and cooperate with respect to the timing
of such meetings and shall use their best efforts to hold such meetings on the
same day.

7.4. Filings; Other Action. Subject to the terms and conditions herein
provided, RELP and AIP shall: (a) use all reasonable efforts to cooperate with
one another in (i) determining which filings are required to be made prior to
the Effective Time with, and which consents, approvals, permits or
authorizations are required to be obtained prior to the Effective Time from
governmental or regulatory authorities of the United States and the several
states in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals, permits or
authorizations; (b) use all reasonable efforts to obtain in writing any consents
required from third parties in form reasonably satisfactory to RELP and AIP
necessary to effectuate the Merger; and (c) use all reasonable efforts to take,
or cause to be taken, all other action and do, or cause to be done, all other
things necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement. If, at any time after the Effective
Time, any further action is necessary or desirable to carry out the purpose of
this Agreement, the proper officers and directors of AIP and the General Partner
shall take all such necessary action.

7.5. Inspection of Records. From the date hereof to the Effective Time,
each of RELP and AIP shall allow all designated officers, attorneys, accountants
and other representatives of the other access at all reasonable times to the
records and files, correspondence, audits and properties, as well as to all
information relating to commitments, contracts, titles and financial position,
or otherwise pertaining to the business and affairs of RELP and AIP and their
respective Subsidiaries.

7.6. Publicity. RELP and AIP shall, subject to their respective legal
obligations (including requirements of stock exchanges and other similar
regulatory bodies), consult with each other, and use reasonable efforts to agree
upon the text of any press release before issuing any such press release or
otherwise making public statements with respect to the transactions contemplated
hereby and in making any filings with any federal or state governmental or
regulatory agency or with any national securities exchange with respect thereto.

7.7. Registration Statement. AIP and RELP shall cooperate and promptly
prepare and AIP shall file with the SEC as soon as practicable a Registration
Statement on Form S-4 (the "Form S-4") under the Securities Act, with respect to
the AIP Common Shares issuable in the Merger, a portion of which Registration
Statement shall also serve as the joint proxy statement with respect to the
meetings of the shareholders and partners, respectively, of AIP and RELP in
connection with the Merger (the "Proxy Statement/Prospectus"). The respective
parties will cause the Proxy Statement/Prospectus and the Form S-4 to comply as
to form in all material respects with the applicable provisions of the
Securities Act, the Exchange Act and the rules and

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regulations promulgated thereunder. AIP shall use all reasonable efforts, and
RELP will cooperate with AIP to have the Form S-4 declared effective by the SEC
as promptly as practicable. AIP shall use its best efforts to obtain, prior to
the effective date of the Form S-4, all necessary state securities law or "Blue
Sky" permits or approvals required to carry out the transactions contemplated by
this Agreement and will pay all expenses incident thereto. AIP agrees that the
Proxy Statement/Prospectus and each amendment or supplement thereto, at the time
of mailing thereof and at the time of the respective meetings of shareholders
and partners, respectively, of AIP and RELP, or, in the case of the Form S-4 and
each amendment or supplement thereto, at the time it is filed or becomes
effective, will not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the foregoing shall not apply to the
extent that any such untrue statement of a material fact or omission to state a
material fact was made by AIP in reliance upon and in conformity with written
information concerning RELP furnished to AIP by RELP specifically for use in the
Proxy Statement/Prospectus. RELP agrees that the written information provided by
it specifically for inclusion in the Proxy Statement/Prospectus and each
amendment or supplement thereto, at the time of mailing thereof and at the time
of the respective meetings of shareholders and partners, respectively, of AIP
and RELP, or, in the case of written information provided by RELP specifically
for inclusion in the Form S-4 or any amendments or supplement thereto, at the
time it is filed or becomes effective, will not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. AIP will advise RELP, promptly after it
receives notice thereof, of the time when the Form S-4 has become effective or
any supplement or amendment has been filed, the issuance of any stop order, the
suspension of the qualification of the AIP Common Shares issuable in connection
with the Merger for offering or sale in any jurisdiction, or any request by the
SEC for amendment of the Proxy Statement/Prospectus or the Form S-4 or comments
thereon and responses thereto or requests by the SEC for additional information.

7.8. Listing Application. AIP shall promptly prepare and submit to the NYSE
a listing application covering the AIP Common Shares issuable in the Merger, and
shall use its reasonable efforts to obtain, prior to the Effective Time,
approval for the listing of such AIP Common Shares, subject to official notice
of issuance.

7.9. Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performances set forth
herein or the waiver thereof, perform such further acts and execute such
documents as may reasonably be required to effect the Merger.

7.10. Expenses. Subject to Section 9.5, if the Merger is approved by RELP's
partners, all transaction costs of the proposed consolidation shall be paid by
AIP. If three of the four limited partnerships party to the Proxy
Statement/Prospectus (the "Other RELPS") do not approve their proposed merger
into AIP, Realco shall reimburse AIP for AIP's expenses relating to the proposed
merger up to $ . If RELP and the Other RELPS approve their proposed
merger into AIP, but the shareholders of AIP do not approve the proposer merger,
and if Realco voted its AIP Common Shares in favor of such mergers, AIP will
reimburse RELP and the Other RELPS for all expenses they incurred in connection
with the proposed merger. Any expenses to be reimbursed hereunder shall include,
but not be limited to, costs of fairness opinions, property appraisals,
engineering and environmental reports, title policies, accounting fees, legal
fees, printing and solicitation expenses. RELP will bear the costs of preparing
its initial fairness opinion, with later reimbursement by AIP in the event the
Merger is approved by RELP's partners. If the limited partners of RELP fail to
approve the proposed Merger, then Realco will reimburse AIP for the RELP's
expenses (to the extent paid by AIP) as follows: the actual cost of such RELP's
fairness opinion, legal fees up to $80,000, and the actual cost or the Allocable
Share (if the actual cost is not separately determined), of RELP's accounting
fees, engineering and environmental reports, printing and solicitation expenses.
Allocable Share, for this purpose, shall be the ratio of such RELP's net book
value of assets at March 31, 1997 to the total net book value of all of the
assets of RELP and the Other RELPS at March 31, 1997.

7.11. Indemnification. For a period of six years from and after the
Effective Time, AIP shall indemnify the partners, or agents of RELP who at any
time prior to the Effective Time were entitled to indemnification

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under the Agreement of Limited Partnership of RELP existing on the date hereof
to the same extent as such partners or agents are entitled to indemnification
under such Agreement of Limited Partnership in respect of actions or omissions
occurring at or prior to the Effective Time (including, without limitation, the
transactions contemplated by this Agreement).

7.12. REIT Status. From and after the date and until the Effective Time,
neither AIP nor RELP nor any of their respective Subsidiaries or other
affiliates shall (i) knowingly take any action, or knowingly fail to take any
action, that would jeopardize qualification of AIP as a REIT within the meaning
of Sections 856 through 859 of the Code; or (ii) enter into any contract,
agreement, commitment or arrangement with respect to the foregoing.

7.13. Survival of RELP Obligations; Assumption of RELP Liabilities by AIP.
All of the obligations of RELP that are outstanding at the Closing shall survive
the Closing and shall not be merged therein. Upon the consummation of the
Merger, such obligations shall be assumed, automatically, by AIP; provided,
however, that such assumption shall not impose upon or expose AIP to any
liability for which RELP was not liable, and provided, further, that AIP shall
be entitled to the same defenses, offsets and counterclaims to which RELP would
have been entitled, but for the Merger.

7.14. Third Party Consents. AIP and RELP each shall take all necessary
corporate and other action and will use its commercially reasonable efforts to
obtain the consents and applicable approvals from third parties that may be
required to enable it to carry out the transactions contemplated by this
Agreement.

7.15. Efforts to Fulfill Conditions. AIP and RELP each shall use
commercially reasonable efforts to insure that all conditions precedent to its
obligations hereunder are fulfilled at or prior to the Closing.

7.16. Representations, Warranties and Conditions Prior to Closing. AIP and
RELP each shall use its commercially reasonable efforts to cause its
representations and warranties contained in this Agreement to be true and
correct on and as of the Closing Date in all material respects. Prior to
Closing, AIP and RELP each shall promptly notify the other in writing (i) if any
representation or warranty contained in this Agreement is discovered to be or
becomes untrue or (ii) if AIP or RELP fails to perform or comply with any of its
covenants or agreements contained in this Agreement or it is reasonably expected
that it will be unable to perform or comply with any of its covenants or
agreements contained in this Agreement.

7.17. Cooperation of the Parties. AIP and RELP each will cooperate with the
other in supplying such information as may be reasonably requested by the other
in connection with obtaining consents or approvals to the transactions
contemplated by this Agreement.

7.18. Lock-Ups. The General Partner shall use its best efforts prior to the
Closing to have each of its directors and officers and Realco execute a 90-day
lock-up agreement in a form (reasonably acceptable to RELP) supplied to RELP by
AIP. The executed agreements will be delivered to AIP at the Closing. AIP shall
use its best efforts prior to the Closing to have each of its Trust Managers and
officers execute a 90-day lock-up agreement, in a form (reasonably acceptable to
AIP) supplied to AIP by RELP. The agreements will be delivered to RELP at the
Closing.

ARTICLE VIII. CONDITIONS

8.1. Conditions to Each Party's Obligations to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:

(a) This Agreement and the transactions contemplated hereby shall have
been approved in the manner required by the Declaration of Trust and
Bylaws and Agreement of Limited Partnership of AIP and RELP,
respectively, and by applicable law or by applicable regulations of
any stock exchange or other regulatory body by the holders of the
AIP Common Shares and RELP Interests entitled to vote thereon.

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(b) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In
the event any such order or injunction shall have been issued, each
party agrees to use its reasonable efforts to have any such
injunction lifted.

(c) The Form S-4 shall have become effective and all necessary state
securities law or "Blue Sky" permits or approvals required to carry
out the transactions contemplated by this Agreement shall have been
obtained and no stop order with respect to any of the foregoing
shall be in effect.

(d) AIP shall have obtained the approval for the listing of the AIP
Common Shares issuable in the Merger on the NYSE, subject to
official notice of issuance.

(e) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board, other
regulatory body or third parties required in connection with the
execution, delivery and performance of this Agreement shall have
been obtained or made, except for filings in connection with the
Merger and any other documents required to be filed after the
Effective Time and except where the failure to have obtained or made
any such consent, authorization, order, approval, filing or
registration would not have a material adverse effect on the
business, results of operations or financial condition of AIP and
RELP (and their respective Subsidiaries), taken as a whole,
following the Effective Time.

8.2 Conditions to Obligations of RELP to Effect the Merger. The obligation
of RELP to effect the Merger shall be subject to the fulfillment at or prior to
the Closing Date of the following conditions, unless waived by RELP:

(a) AIP shall have performed its agreements contained in this Agreement
required to be performed on or prior to the Closing Date and the
representations and warranties of AIP contained in this Agreement
shall be true and correct in all material respects as of the Closing
Date as if made on the Closing Date, and RELP shall have received a
certificate of the President or an Executive or Senior Vice
President of AIP, dated the Closing Date, certifying to such effect.

(b) RELP shall have received the opinion of Liddell, Sapp or another
recognized law firm selected by AIP and approved by RELP, dated the
Closing Date, to the effect that AIP met the requirements for
qualification and taxation as a REIT for its taxable year ended
December 31, 1985 and has met the requirements for qualification and
taxation as a REIT for its taxable years 1986 through 1996; AIP's
diversity of equity ownership, operations through the Closing Date
and proposed method of operation for future periods should allow it
to qualify as a REIT for its taxable year ending December 31, 1997;
and the discussion contained under the caption "Material Federal
Income Tax Consequences" in the Joint Proxy Statement/Prospectus
accurately reflects existing law and fairly addresses the material
Federal income tax issues described therein. In rendering its
opinion, said counsel shall be entitled to rely as to any factual
matter upon certificates given by executive officers and other duly
authorized representatives of RELP and AIP and shall be entitled to
assume that the covenants set forth in Article VII shall be fully
complied with.

(c) From the date of the Agreement through the Effective Time, there
shall not have occurred any change in the financial condition,
business or operations of AIP and its Subsidiaries, taken as a
whole, that would have or would be reasonably likely to have an AIP
Material Adverse Effect other than any such change that affects both
RELP and AIP in a substantially similar manner.

(d) The opinion of Houlihan addressed to RELP that the Purchase Price is
fair, from a financial point of view, to the partners of RELP shall
not have been withdrawn or materially modified.

(e) RELP shall have received the opinion of Liddell, Sapp or another
recognized law firm selected by AIP and approved by RELP, dated the
Closing Date, as to such customary matters as RELP may reasonably
request, such opinion to be reasonably satisfactory to RELP.

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8.3 Conditions to Obligation of AIP to Effect the Merger. The obligations
of AIP to effect the Merger shall be subject to the fulfillment at or prior to
the Closing Date of the following conditions, unless waived by AIP:

(a) RELP shall have performed its agreements contained in this Agreement
required to be performed on or prior to the Closing Date and the
representations and warranties of RELP contained in this Agreement
shall be true and correct in all material respects as of the Closing
Date as if made on the Closing Date and AIP shall have received a
certificate of the Chief Executive Officer, President or an
Executive Vice President of the General Partner dated the Closing
Date, certifying to such effect.

(b) AIP shall have received the opinion of Liddell, Sapp or another
recognized law firm selected by RELP and approved by AIP, dated the
Closing Date, to the effect that the consummation of the Merger will
not result in AIP's failure to continue to satisfy the requirements
for qualification as a REIT for federal income tax purposes. In
rendering its opinion, said counsel shall be entitled to rely as to
any factual matter upon certificates given by executive officers and
other duly authorized representatives of AIP and RELP and shall be
entitled to assume that the covenants of Article VII shall be fully
complied with.

(c) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition,
business or operations of RELP and its Subsidiaries, taken as a
whole, that would have or would be reasonably likely to have an RELP
Material Adverse Effect, other than any such change that affects
both RELP and AIP in a substantially similar manner.

(d) Each person listed on Exhibit 8.3(d) attached hereto shall have
delivered to AIP a written agreement to the effect that such person
will not offer to sell, sell or otherwise dispose of any shares of
AIP Common Stock issued in the Merger, except, in each case,
pursuant to an effective registration statement or in compliance
with Rule 145, as amended from time to time, or in a transaction
which, in the opinion of legal counsel reasonably satisfactory to
AIP, is exempt from the registration requirements of the Securities
Act and that the certificates representing the AIP shares issued to
him or her in the Merger may bear a legend to such effect.

(e) The opinion of Prudential addressed to the Board of Trust Managers
of AIP that the consideration to be paid by AIP pursuant to the
Merger is fair, from a financial point of view, to AIP shall not
have been withdrawn or materially modified.

(f) AIP shall have received the opinion of Liddell, Sapp or another
recognized law firm selected by RELP and approved by AIP, dated the
Closing Date, as to such customary matters as AIP may reasonably
request, such opinion to be reasonably satisfactory to AIP.

(g) The limited partners of at least two of the Other RELPS shall have
approved the merger of such limited partnership with and into AIP.

ARTICLE IX. TERMINATION

9.1 Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the approval of this Agreement by the partners of RELP or the shareholders of
AIP or by the mutual written consent of AIP and RELP, with the prior approval of
their respective Board of Trust Managers and General Partner.

9.2 Termination by Either AIP or RELP. This Agreement may be terminated and
the Merger may be abandoned by action of the General Partner of RELP or the
Board of Trust Managers of AIP if (i) the Merger shall not have been consummated
by March 31, 1998, (ii) a meeting of RELP's partners shall have been duly
convened and held and the approval of RELP's partners required by Section 8.1(a)
shall not have been obtained at such meeting or at any adjournment thereof,
(iii) a meeting of AIP's shareholders shall have

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been duly convened and held and the approval of AIP's shareholders required by
Section 8.1(a) shall not have been obtained at such meeting or at any
adjournment thereof, (iv) as a result of due diligence investigation by one of
the parties hereto, it is determined in good faith by such party that certain
facts or circumstances not previously known by such party constitute a Material
Adverse Effect on the business, results of operations or financial condition of
the other party, (v) a United States federal or state court of competent
jurisdiction or United States federal or state governmental, regulatory or
administrative agency or commission shall have issued an order, decree or ruling
or taken any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and non-appealable,
provided that the party seeking to terminate this Agreement pursuant to this
clause (v) shall have used all reasonable efforts to remove such order, decree,
ruling or injunction, or (vi) any of the conditions set forth in Article VIII
shall not have been satisfied, and provided, in the case of a termination
pursuant to clause (i) or (vi) above, that the terminating party shall not have
breached in any material respect its obligations under this Agreement in any
manner that shall have proximately contributed to the occurrence of the failure
referred to in said clause. AIP and RELP each shall (i) deliver its Disclosure
Letter to one another not later than 5:00 P.M., Central Time, September 20,
1997, and (ii) shall complete its due diligence investigations not later than
5:00 P.M., Central Time, on September 30, 1997. Until October 7, 1997 (the
period from the date of this Agreement through October 7, 1997 being hereinafter
referred to as the "Due Diligence Period"), either party may terminate this
Agreement without liability or penalty due to the discovery of a fact or
circumstance that reasonably could be expected to constitute a Material Adverse
Effect on the business, results of operations or financial condition of the
other party. Unless objected to by the party receiving the Disclosure Letter in
writing prior to the expiration of the Due Diligence Period, the receiving party
shall be deemed to have approved the other party's Disclosure Letter.

9.3 Termination by RELP. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, before or after the
adoption and approval by the partners of RELP referred to in Section 8.1(a), by
action of the General Partner, if (i) in the exercise of its good faith judgment
as to its fiduciary duties to its partners imposed by law, as advised by
counsel, the General Partner determines that such termination is required by
reason of a RELP Acquisition Proposal being made, (ii) the Board of Trust
Managers withdraws, materially modifies or changes in a manner materially
adverse to RELP its recommendations to AIP's shareholders of this Agreement or
the Merger, other than as a result of the occurrence of an event that in the
good faith judgment of the Board of Trust Managers has or is reasonably likely
to have a RELP Material Adverse Effect, (iii) the Board of Trust Managers
postpones the date scheduled for the meeting of shareholders of AIP to approve
this Agreement and the transactions contemplated hereby beyond March 31, 1998 or
fails to set a date for such meeting by such date, except with the written
consent of RELP, (iv) there has been a breach by AIP of any representation or
warranty contained in this Agreement which would have or would be reasonably
likely to have an AIP Material Adverse Effect, which breach is not curable by
March 31,1998, or (v) there has been material breach of any of the covenants or
agreements set forth in this Agreement on the part of AIP, which breach is not
curable or, if curable, is not cured within 30 days after written notice of such
breach is given by RELP to AIP, or (vi) the condition set forth in Section
8.3(g) is not satisfied.

9.4 Termination by AIP. This Agreement may be terminated and the Merger may
be abandoned at any time prior to the Effective Time, before or after the
approval by the shareholders of AIP referred to in Section 8.1(a), by action of
the Board of Trust Managers, if (i) in the exercise of its good faith judgment
as to its fiduciary duties to its shareholders imposed by law, as advised by
counsel, the Board of Trust Managers determines that such termination is
required by reason of an AIP Acquisition Proposal being made, (ii) the General
Partner withdraws, materially modifies or changes in a manner materially adverse
to AIP its recommendation to RELP's partners of this Agreement or the Merger,
other than as a result of the occurrence of an event that in the good faith
judgment of the General Partner has or is reasonably likely to have an AIP
Material Adverse Effect, (iii) the General Partner postpones the date scheduled
for the meeting of partners of RELP to approve this Agreement and the
transactions contemplated hereby beyond March 31, 1998, or fails to set a date
for such meeting by such date, except with the written consent of AIP, (iv)
there has been a breach by RELP of any representation or warranty contained in
this Agreement which would have or would be

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reasonably likely to have a RELP Material Adverse Effect, which breach is not
curable by March 31, 1998, or (v) there has been a material breach of any of the
covenants or agreements set forth in this Agreement on the part of RELP, which
breach is not curable or, if curable, is not cured within 30 days after written
notice of such breach is given by AIP to RELP.

9.5. Effect of Termination and Abandonment. (a) If an election to terminate
this Agreement is made pursuant to (i) Section 9.2(i) (except as a result of a
default or breach hereunder by AIP) or Section 9.2(ii), and a RELP Acquisition
Proposal relating to RELP shall have been made and, within one year from the
date of such termination, RELP consummates a RELP Acquisition Proposal or enters
into an agreement to consummate a RELP Acquisition Proposal which is
subsequently consummated, or (ii) Section 9.3(i), RELP shall pay to AIP,
provided that AIP was not in material breach of its obligations hereunder at the
time of such termination, as liquidated damages and not as a penalty or
forfeiture, an amount equal to the lesser of (m) $ (the "Liquidated
Damages Amount") and (n) the sum of (1) the maximum amount that can be paid to
AIP without causing AIP to fail to meet the requirements of Sections 856(c)(2)
and (3) of the Code determined as if the payment of such amount did not
constitute income described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of
the Code ("Qualifying Income"), as determined by AIP's certified public
accountants, plus (2) an amount equal to the Liquidated Damages Amount less the
amount payable under clause (1) above in the event AIP receives a letter from
AIP's counsel indicating that AIP has received a ruling from the IRS to the
effect that Liquidated Damages Amount payments constitute Qualifying Income. In
addition to the Liquidated Damages Amount, AIP shall be entitled to receive from
RELP (or its successor in interest) all documented out-of-pocket costs and
expenses, up to a maximum of $ in connection with this Agreement and
the transactions contemplated hereby (the "AIP Expenses") incurred by AIP. The
payments to which AIP is entitled under this Section 9.5(a) shall be its sole
remedy with respect to the termination of the Agreement under the circumstances
contemplated in this Section 9.5(a).

(b) If an election to terminate this Agreement is made pursuant to Section
9.2(i) (as a result of the condition set forth in Section 8.3(c) not being
satisfied), RELP shall, provided that AIP was not in material breach of its
obligations hereunder at the time of such termination, pay AIP for the AIP
Expenses, up to a maximum of $ , although it shall not be required to
pay the Liquidated Damages Amount, which payment of the AIP Expenses shall be
AIP's sole remedy for termination of the Agreement in such circumstances.

(c) If an election to terminate this Agreement is made pursuant to (i)
Section 9.2(i) (except as a result of a default or breach hereunder by RELP) or
Section 9.2(iii), and an AIP Acquisition Proposal relating to AIP shall have
been made and, within one year from the date of such termination, AIP
consummates an AIP Acquisition Proposal or enters into an agreement to
consummate an AIP Acquisition Proposal which is subsequently consummated, or
(ii) Section 9.4(i), AIP shall pay to RELP, provided that RELP was not in
material breach of its obligations hereunder at the time of such termination, as
liquidated damages and not as a penalty or forfeiture, an amount equal to the
Liquidated Damages Amount. In addition to the Liquidated Damages Amount, RELP
shall be entitled to receive from AIP (or its successor in interest) all
documented out-of-pocket costs and expenses, up to a maximum of $ , in
connection with this Agreement and the transactions contemplated hereby (the
"RELP Expenses" and, together with the AIP Expenses, the "Expenses") incurred by
RELP. The payments to which RELP is entitled under this Section 9.5(c) shall be
its sole remedy with respect to the termination of the Agreement under the
circumstances contemplated in this Section 9.5(c)

(d) If an election to terminate this Agreement is made pursuant to Section
9.2(i) (as a result of the condition set forth in Section 8.2(c) not being
satisfied), AIP shall, provided that RELP was not in material breach of its
obligations hereunder at the time of such termination, pay RELP for the RELP
Expenses, up to a maximum of $ , although it shall not be required to
pay the Liquidated Damages Amount, which payment of the RELP Expenses shall be
RELP's sole remedy for termination of the Agreement in such circumstances.

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(e) If this Agreement is terminated pursuant to Section 9.3(iv), Section
9.3(v), Section 9.4(iv), or Section 9.4(v), the non-terminating party shall,
provided that the terminating party was not in material breach of its
obligations hereunder at the time of such termination, pay the terminating party
all Expenses, up to a maximum of $ , incurred by it and the
non-terminating party shall remain liable to the terminating party for its
breach.

(f) If either party terminates this Agreement during the Due Diligence
Period described in Section 9.2 above other than for a due diligence related
reason, the non-terminating party shall be entitled to receive the Liquidated
Damages Amount and the Expenses as provided in this Article IX.

(g) RELP agrees to amend this Section 9.5 at the request of AIP in order to
(x) maximize the portion of the Liquidated Damages Amount that may be
distributed to AIP hereunder without causing AIP to fail to meet the
requirements of Sections 856(c)(2) and (3) of the Code or (y) improve AIP's
chances of securing a favorable ruling described in this Section 9.5, provided
that no such amendment may result in any additional cost or expense to such
other party.

(h) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Article IX, all obligations of the parties hereto
shall terminate, except the obligations of the parties pursuant to this Section
9.5 and Section 7.10 and except for the provisions of Section 10.3, 10.4, 10.5,
10.6, 10.7, 10.9, 10.10, 10.13, 10.14 and 10.16. In the event AIP or RELP has
received the Liquidated Damages Amount, such recipient shall not assert or
pursue in any manner, directly or indirectly, any claim or cause of action
against the other party hereto or any of its officers, Trust Managers, or
General Partners, as applicable, based in whole or part upon its or their
receipt, consideration, recommendation or approval of an Acquisition Proposal or
the exercise by AIP of its right to termination under Section 9.4(i) or the
exercise by RELP of its right to termination under Section 9.3(i).
Notwithstanding the foregoing, in the event AIP or RELP is required to file suit
to seek all or a portion of such Liquidated Damages Amount, and it ultimately
succeeds, it shall be entitled to all expenses, including attorney's fees and
expenses, which it has incurred in enforcing its right hereunder.

(i) If either party willfully fails to perform its duties and obligations
under this Agreement, the nonbreaching party is additionally entitled to all
remedies available to it at law or in equity and to recover its expenses from
the breaching party.

9.6 Extension; Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by its Board of Trust Managers or General Partner, as
applicable, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.

ARTICLE X. GENERAL PROVISIONS

10.1. Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Merger;
provided, however, that the agreements contained in Article IV, the last
sentence of Section 7.4 and Sections 7.10, 7.11, 7.12, 7.13, 7.14, 7.15 and 7.16
and this Article X shall survive the Merger.

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10.2. Notices. Any notice required to be given hereunder shall be in
writing and shall be sent by facsimile transmission (confirmed by any of the
methods that follow), courier service (with proof of service), hand delivery or
certified or registered mail (return receipt requested and first-class postage
prepaid) and addressed as follows:

If to AIP:
American Industrial Properties REIT
6220 N. Beltline Road, Suite 205
Irving, Texas 75063
Attention: Charles W. Wolcott, President
Telecopy: (972) 550-6037

If to RELP:
USAA Real Estate Company
8000 I-H 10 West, Suite 600
San Antonio, Texas 78230
Attention: Patrick Duncan, Senior Vice-President
Telecopy: (210) 498-6214

or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
delivered.

10.3. Assignment; Binding Effect; Benefit. Neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except as provided in the following
sentence, nothing in this Agreement, expressed or implied, is intended to confer
on any person other than the parties hereto or their respective heirs,
successors, executors, administrators and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement. The provisions
of Article IV and Sections 7.11, 7.12, 7.13, 7.14 and 7.15 (collectively, the
"Third Party Provisions") shall benefit the persons identified therein, but the
aggregate liability of AIP with respect thereto shall not exceed the amount
specified in Article IX.

10.4. Entire Agreement. This Agreement, the Exhibits, the RELP Disclosure
Letter, the AIP Disclosure Letter, the RELP Ancillary Agreements, the AIP
Ancillary Agreements and any documents delivered by the parties in connection
herewith constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings
among the parties with respect thereto. No addition to or modification of any
provision of this Agreement shall be binding upon any party hereto unless made
in writing and signed by all parties hereto.

10.5. Confidentiality. (a) As used herein, "Confidential Material" means,
with respect to either party hereto (the "Providing Party"), all information
(written or oral) furnished (whether before or after the date hereof) by the
Providing Party and its directors, officers, employees, affiliates or
representatives of advisors, including counsel, lenders and financial advisors
(collectively, the "Providing Party Representatives") to the other party hereto
(the "Receiving Party") or such Receiving Party's directors, officers,
employees, affiliates or representatives of advisors, including counsel, lenders
and financial advisors or the Receiving Party's potential sources of financing
for the transactions contemplated by this Agreement (collectively "the Receiving
Party Representatives") and all analyses, compilations, forecasts and other
studies or other documents prepared by the Providing Party or the Providing
Party Representatives in connection with its or their review of the transactions
contemplated by this Agreement which contain or reflect such information. The
term "Confidential Material" does not include, however, information which (i) at
the time of disclosure or thereafter is generally available to and known by the
public other than as a result of a disclosure directly or indirectly by the
Receiving Party or the Receiving Party Representatives in violation of this
Agreement, (ii) at the time of disclosure was available on a nonconfidential
basis from a source other than the Providing Party or the Providing Party
Representatives, providing that such source is not and was not bound by a
confidentiality

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agreement with the Providing Party, (iii) was known by the Receiving Party prior
to receiving the Confidential Material from the Providing Party or has been
independently acquired or developed by the Receiving Party without violating any
of its obligations under this Agreement, or (iv) is contained in any RELP
Reports or AIP Reports or Proxy Statement/Prospectus.

(b) Subject to paragraph (c) below or except as required by law, the
Confidential Material will be kept confidential and will not, without the prior
written consent of the Providing Party, be disclosed by the Receiving Party or
its Representatives, in whole or in part and will not be used by the Receiving
Party or its Representatives, directly or indirectly, for any purpose other than
in connection with this Agreement, the Merger or the evaluating, negotiating or
advising with respect to a transaction contemplated herein. Moreover, each
Receiving Party agrees to transmit Confidential Material to its Representatives
only if and to the extent that such Representatives need to know the
Confidential Material for purposes of such transaction and are informed by such
Receiving Party of the confidential nature of the Confidential Material and of
the terms of this Section.

(c) In the event that either Receiving Party, its Representatives or anyone
to whom such Receiving Party or its Representatives supply the Confidential
Material, are requested or required (by oral questions, interrogatories,
requests for information or documents, subpoena, civil investigative demand, any
informal or formal investigation by any government or governmental agency or
authority or otherwise in connection with legal processes) to disclose any
Confidential Material, such Receiving Party agrees (i) to immediately notify the
Providing Party of the existence, terms and circumstances surrounding such a
request, (ii) to consult with the Providing Party on the advisability of taking
legally available steps to resist or narrow such request and (iii) if disclosure
of such information is required, to furnish only that portion of the
Confidential Material which, in the opinion of such Receiving Party's counsel,
such Receiving Party is legally compelled to disclose and to cooperate with any
action by the Providing Party to obtain an appropriate protective order or
otherwise reliable assurances that confidential treatment will be accorded the
Confidential Material (it being agreed that the Providing Party shall reimburse
the Receiving Party for all reasonable out-of-pocket expenses incurred by the
Receiving Party in connection with such cooperation).

(d) In the event of the termination of this Agreement in accordance with
its terms, promptly upon request from either Providing Party, the Receiving
Party shall, except to the extent prevented by law, redeliver to the Providing
Party or destroy all tangible Confidential Material and will not retain any
copies, extracts or other reproductions thereof in whole or in part. Any such
destruction shall be certified in writing to the Providing Party by an
authorized officer of the Receiving Party supervising the same. Notwithstanding
the foregoing, each Receiving Party and one Representative designated by each
Receiving Party shall be permitted to retain one permanent file copy of each
document constituting Confidential Material.

(e) Each party hereto further agrees that if this Agreement is terminated
in accordance with its terms, until one year from the date of termination, (1)
it will not offer to hire or hire any person currently or formerly employed by
the other party with whom such party has had contact prior hereto other than
persons whose employment shall have been terminated by such other party prior to
the date of such offer to hire or hiring and (2) neither it nor its affiliates
shall directly or indirectly, (a)(w) solicit, seek or offer to effect or effect,
(x) negotiate with or provide any information to the Board of Trust Managers or
General Partner, as applicable, of the other party, or officer of the other
party or any shareholder or partner, as applicable, of the other party with
respect to, (y) make any statement or proposal, whether written or oral, either
alone or in concert with others, to the Board of Trust Managers or Board of
Directors of the General Partner of the other party, any director, Trust Manager
or officer of the other party or any shareholder or partner of the other party
or any other person with respect to, or (z) make any public announcement (except
as required by law in respect of actions permitted hereby) or proposal or offer
whatsoever (including, but not limited to, any "solicitation" of "proxies" as
such terms are defined or used in Regulation 14A of the Exchange Act) with
respect to, (i) any form of business combination or similar or other
extraordinary transaction involving the other party or any affiliate thereof,
including, without limitation, a merger, tender or exchange offer or liquidation
of the other party's assets, (ii) any form of restructuring, recapitalization or
similar transaction with respect to the other party or any affiliate thereto,
(iii) any purchase of any securities or assets, or rights or options to acquire
any securities or assets (through purchase, exchange, conversion or otherwise),
of the other

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party or any affiliate thereof, (iv) any proposal to seek representation on the
Board of Trust Managers or the Board of Directors of the General Partner, as
applicable, or otherwise to seek to control or influence the management, Board
of Trust Managers or the Board of Directors of the General Partner, as
applicable, or policies of the other party or any affiliate thereof, (v) any
request or proposal to waive, terminate or amend the provisions of this Section
10.5 or (vi) any proposal or other statement inconsistent with the terms of this
Section 10.5 or (b) instigate, encourage, join, act in concert with or assist
(including, but not limited to, providing or assisting in any way in the
obtaining of financing for, or acting as a joint or co-bidder for the other
party with) any third party to do any of the foregoing, unless and until such
party has received the prior written invitation or approval of a majority of the
Board of Trust Managers or the General Partner, as applicable, to do any of the
foregoing; provided that without such invitation or approval, either party may
at any time, on a confidential non-public basis, submit to the Chief Executive
Officer of AIP or the General Partner, as applicable, a proposal to (a) amend
any of the provisions of this Section 10.5(e) or (b) effect a business
combination or other extraordinary transaction with the other party providing
for the acquisition of all or substantially all of the assets or the securities
of the other party, including, without limitation, a merger, tender offer or
exchange offer. Each party hereto agrees that it will not agree with any third
party to waive its rights under this Section 10.5.

10.6. Amendment. This Agreement may be amended by the parties hereto, by
action taken by the Board of Trust Managers or the Board of Directors of the
General Partner, as applicable, at any time before or after approval of this
Agreement or any other matter presented in connection with the Merger by the
shareholders of AIP and partners of RELP, but after any such approval, no
amendment shall be made which by law requires the further approval of
shareholders or partners, as applicable, without obtaining such further
approval. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.

10.7. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its rules of
conflict of laws. Each of AIP and RELP hereby irrevocably and unconditionally
consents to submit to the exclusive jurisdiction of the courts of the State of
Texas and of the United States District Court, Northern District of Texas (the
"Texas Courts") for any litigation arising out of or relating to this Agreement
and the transactions contemplated hereby (and agrees not to commence any
litigation relating thereto except in such courts), waives any objection to the
laying of venue of any such litigation in the Texas Courts and agrees not to
plead or claim in any Texas Court that such litigation brought therein has been
brought in an inconvenient forum.

10.8. Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.

10.9. Headings. Heading of the Articles and Sections of this Agreement are
for the convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.

10.10. Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.

10.11. Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.

10.12. Incorporation. The RELP Disclosure Letter and the AIP Disclosure
Letter and all Exhibits and Schedules attached hereto and thereto and referred
to herein and therein are hereby incorporated herein and made a part hereof for
all purposes as if fully set forth herein.

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10.13. Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any current or future law, and if the
rights or obligations of the parties under this Agreement would not be
materially and adversely affected thereby, such provision shall be fully
separable, and this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part thereof,
and the remaining provisions of this Agreement shall remain in full force and
effect and shall not be affected by the illegal, invalid or unenforceable
provision or by its severance therefrom. In lieu of such illegal, invalid or
unenforceable provision, there shall be added automatically as a part of this
Agreement, a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible, and the parties
hereto request the court or any arbitrator to whom disputes relating to this
Agreement are submitted to reform the otherwise illegal, invalid or
unenforceable provision in accordance with this Section 10.13.

10.14. Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any Texas Court, this being in addition to
any other remedy to which they are entitled at law or in equity.

10.15. Subsidiaries. As used in this Agreement, the word "Subsidiary" when
used with respect to any party means any corporation, partnership, joint
venture, business trust or other entity, of which such party directly or
indirectly owns or controls at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of the
board of directors or others performing similar functions with respect to such
corporation or other organization.

10.16. Non-Recourse. Neither the officers, Trust Managers nor shareholders
of AIP shall be personally bound or have any personal liability hereunder. RELP
shall look solely to the assets of AIP for satisfaction of any liability of AIP
with respect to this Agreement and the Ancillary Agreements to which it is a
party. RELP will not seek recourse or commence any action against any of the
shareholders of AIP or any of their personal assets, and will not commence any
action for money judgments against any of the Trust Managers or officers of AIP
or seek recourse against any of their personal assets, for the performance or
payment of any obligation of AIP hereunder or thereunder. The partners of RELP
shall not be personally bound or have any personal liability hereunder. AIP
shall look solely to the assets of RELP for satisfaction of any liability of
RELP with respect to this Agreement and the Ancillary Agreements to which it is
a party. AIP will not seek recourse or commence any action against any of the
partners of RELP or any of their personal assets, and will not commence any
action for money judgments against any of the directors or officers of RELP or
seek recourse against any of their personal assets, for the performance or
payment of any obligation of RELP hereunder or thereunder.

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IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.

AMERICAN INDUSTRIAL PROPERTIES REIT

------------------------------------
Charles W. Wolcott, President and
Chief Executive Officer

By:
----------------------------------
Its General Partner

------------------------------------
T. Patrick Duncan
Senior Vice President -- Operations

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ANNEX II-A

Trust Managers
American Industrial Properties REIT
6220 North Beltline
Irving, Texas 75063 July 10, 1997

Gentlemen:

We understand that American Industrial Properties REIT, a Texas Real Estate
Investment Trust ("AIP"), USAA Real Estate Income Investments I Limited
Partnership, a California limited partnership ("USAA I"), USAA Real Estate
Income Investments II Limited Partnership, a Texas limited partnership ("USAA
II"), USAA Income Properties III Limited Partnership, a Delaware limited
partnership ("USAA III") and USAA Income Properties IV Limited Partnership, a
Delaware limited partnership ("USAA IV") (each, a "RELP" and collectively, the
"RELPs"), propose to enter into four separate merger agreements (collectively,
the "Merger Agreements") pursuant to which, among other things, each RELP will
merge into AIP and substantially all of the properties and operations of the
RELPs will be merged with and into AIP (the "Transaction").

The partnership interests of the RELPs issued and outstanding prior to the
closing of the Transaction shall be converted into the right to receive
22,064,147 common shares of beneficial interest, $0.10 par value per share (the
"Common Stock"). The aggregate number of shares of Common Stock to be issued to
the partners of each RELP in connection with the Transaction shall be equal to
the net asset value for such RELP (agreed upon by AIP and the RELP) divided by
$2.625 (the "Total Shares per RELP"). The number of shares of Common Stock to be
received by a limited partner of each RELP shall be equal to such partner's
respective percentage interest in the individual RELP multiplied by the Total
Shares per RELP for such RELP. The general partner will not receive any shares
to which it may be entitled in exchange for its general partner's interest.

You have asked us whether, in our opinion, the consideration to be paid by
the Trust pursuant to the Transaction is fair to the Trust from a financial
point of view.

In conducting our analysis and arriving at the opinion set forth below, we
have reviewed such materials and considered such financial and other factors as
we deemed relevant under the circumstances, including:

1. the Form 10-K and related financial information for the fiscal year
ended December 31, 1996 and the Form 10-Q and the related unaudited
financial information for the quarterly period ended March 31, 1997 for
the Trust;

2. the Form 10-K and related financial information for the fiscal year
ended December 31, 1996 and the Form 10-Q and the related unaudited
financial information for the quarterly period ended March 31, 1997 for
each of USAA I, USAA III and USAA IV and the Form 10-K and related
financial information for the fiscal year ended June 30, 1996 and the
Form 10-Q and the related unaudited financial information for the
quarterly period ended March 31, 1997 for USAA II;

3. certain information, including projections, relating to the business,
earnings, cash flow, assets and prospects of the Trust, furnished to us
by the Trust;

4. certain information, including projections, relating to the business,
earnings, cash flow, assets and prospects regarding the properties of
each RELP provided to us by the RELPs;

5. certain information provided by AIP management relating to the
properties of the RELPs, including projections of net operating income
for 1998 and 1999 based on AIP's review and analysis of the properties
and lease profiles of the RELPs;

6. the historical market prices and trading activity for the Common Stock
and certain publicly traded companies we deemed to be reasonably
similar to the Trust, the historical and projected results of

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operations of the Trust, and historical and certain future earnings
estimates of selected companies we deemed to be reasonably similar to
the Trust;

7. publicly available financial, operating and stock market data
concerning certain companies engaged in businesses we deemed comparable
to the Trust or otherwise relevant to our inquiry;

8. the financial terms of certain recent transactions we deemed relevant;

9. drafts, dated July 3, 1997, of the Merger Agreements; and

10. such other financial studies, analyses and investigations and such
other matters we deemed necessary.

We have assumed, with your consent, that the drafts of the Merger
Agreements which we reviewed will conform in all material respects to those
documents when in final form.

We have met with senior management of the Trust to discuss: (i) the
prospects for their business, (ii) their estimate of such business' future
financial performance, (iii) the financial impact of the Transaction on the
Trust, and (iv) such other matters as we deemed relevant. We have also visited
selected RELP properties.

In preparing our opinion, we have relied on the accuracy and completeness
of publicly available information and all of the information supplied or
otherwise made available to us by the Trust and the RELPs, including the
financial projections for the Trust and of each of the properties owned by the
RELPs and we have not independently verified such information or undertaken an
independent appraisal of the assets of the Trust or the RELPs. With respect to
the projections furnished by the Trust and the RELPs, we have assumed that they
have been reasonably prepared and reflect the best currently available estimates
and judgment of the Trusts' and the RELPs' management as to the expected future
financial performance of the respective entities. Further, our opinion is based
on economic, financial and market conditions as they exist and can be evaluated
as of the date hereof.

As you know, we have been retained by the Trust to render this opinion in
connection with the Transaction and will receive a fee for such service. We may
actively trade the Common Stock for our own account and for the accounts of
customers and accordingly, may at any time hold a long or short position in such
securities. This letter and the opinion expressed herein may not be reproduced,
summarized, excerpted from or otherwise publicly referred to or disclosed in any
manner, without our prior written consent; provided, the Trust may set forth in
full this letter in any proxy statement relating to the Transaction sent to the
Trust's shareholders.

Our opinion expressed herein is provided for the use of the Trust Managers
of the Trust in the evaluation of the Transaction, and our opinion is not
intended to be, and does not, constitute a recommendation to any shareholder of
the Trust as to how such shareholder should vote in connection with the
Transaction.

On the basis of, and subject to, the foregoing, we are of the opinion that,
as of the date hereof, the consideration to be paid by the Trust pursuant to the
Transaction is fair to the Trust from a financial point of view.

Very truly yours,

Prudential Securities Incorporated

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ANNEX II-B

June 30, 1997

To The General Partner of
USAA Real Estate Income Investments I, A California Limited Partnership

We understand the following regarding American Industrial Properties REIT
("AIP"), USAA Real Estate Income Investments I, A California Limited Partnership
(the "Partnership"), and USAA Real Estate Company ("Realco").

(i) AIP is an equity real estate investment trust which owns and
operates 14 industrial properties in eight states and one retail mall in
Colorado.

(ii) AIP has ten million (10,000,000) common shares of beneficial
interest authorized and outstanding prior to the transactions described
here; such common shares are listed on the New York Stock Exchange.

(iii) In November 1996 and January 1997 Realco acquired a total of a
31.8 percent interest in AIP at a price of two dollars seventy five cents
($2.75) per common share. Realco's acquisition of the AIP common shares was
made in connection with AIP entering into a settlement agreement resolving
all litigation which had arisen between AIP and its former shareholder,
Pure World, Inc., and AIP's rejection of an offer from Black Bear Realty,
Ltd. to purchase 30 percent of AIP. Realco's acquisition of AIP shares is
referred to as the "Realco Share Acquisition". As a result of the Realco
Share Acquisition, AIP's largest shareholder is Realco.

(iv) On May 2, 1997 Morgan Stanley Asset Management Inc. ("MSAM"), on
behalf of certain of its clients, and an affiliate of MSAM (collectively
"Morgan Stanley") agreed to purchase twenty million ($20,000,000) of senior
convertible debt securities (the "Securities") of AIP, with such Securities
convertible into AIP common shares at a price of two dollars forty five
cents ($2.45) per share. The final documentation for such agreement between
Morgan Stanley and AIP was executed on June 27, 1997, but effective as of
June 20, 1997 and shareholder approval is expected as of the date of this
letter. Upon such shareholder approval, Morgan Stanley will acquire up to
8,163,265 AIP common shares. Morgan Stanley's investment in AIP common
shares is referred to herein as the "Morgan Stanley Transaction." The terms
of the Morgan Stanley Transaction are the result of arm's-length
negotiations between Morgan Stanley and AIP.

(v) AIP has also conducted arm's-length negotiations with an
additional institutional investor (the "Institutional Investor") with such
negotiations resulting in the Institutional Investor offering to purchase
fifteen million ($15,000,000) of AIP's common shares at a price per common
share of $2.45 per share (the "Institutional Investor Transaction"). Formal
announcement of the Institutional Investor Transaction is expected shortly
after the date of this letter, AIP expects to promptly close the
Institutional Investor Transaction thereafter.

(vi) AIP plans to enter into a series of transactions involving four
partnerships (the "RELP Partnerships"), each of which has a separate entity
serving as the General Partner, with each General Partner being a
wholly-owned subsidiary of Realco. Pursuant to the planned series of
transactions, the RELP Partnerships shall merge with and into AIP, (the
"AIP/RELP Partnership Mergers"). In connection with the AIP/RELP
Partnership Mergers AIP will issue a total of 22,064,147 AIP common shares
to the aggregate limited partners of the RELP Partnerships. The General
Partners of the four partnerships will assign their respective general
partner interests in the RELP Partnerships to AIP without receiving
consideration for such general partner interests. Any shares they are
entitled to receive will be divided among the Limited Partners.

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Specifically, with respect to the Partnership, we understand the following:

(i) The Partnership owns two properties (the "Properties") consisting
of:

-- a retail center in Daytona Beach, Florida known as Volusia Point,
and

-- an office and research and development building in San Diego,
California known as the Systech Building.

(ii) The limited partners of the Partnership (the "Limited Partners")
will exchange their partnership units in the Partnership for the right to
receive 4,342,855 Common Shares of Beneficial Interest, $0.10 par value per
share (the "AIP Common Shares"), of AIP, (the "Exchange"). Concurrent with
or shortly after the Exchange, the Partnership will distribute all of its
cash (and cash realized from short term investments), net of expenses, to
the Partnership's General Partners and Limited Partners in accordance with
the terms of the Partnership Agreement (defined herein), (the "Cash
Distribution"). The Cash Distribution, the Partnership's merger with AIP
and the related Exchange of the Limited Partners' units for the AIP Common
Shares are referred to collectively herein as the "Transaction."

You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address AIP's, the General Partners', the RELP
Partnerships', or Realco's underlying business decision to effect the
Transaction. We have not been requested to, and did not, solicit third party
indications of interest in acquiring all or any part of AIP, Realco, the
Partnership, or the other RELP Partnerships, or any interests therein. We have
also not been asked to opine on and are not expressing any opinion as to: (i)
tax consequences of the Transaction, including but not limited to tax
consequences of the Exchange to the Limited Partners, (ii) the public market
values or realizable value of the AIP Common Shares or the prices at which the
AIP Common Shares may trade in the future following the Transaction, (iii)
alternatives to the Transaction, or (iv) the fairness of any aspect of the
Transaction not expressly addressed in this Opinion. Furthermore, at your
request, we have not negotiated the AIP/RELP Partnership Mergers or the
Transaction or advised you with respect to alternatives to them. Additionally,
you have advised us that the Partnership and the other RELP Partnerships have
indicated that, subject to General Partner's fiduciary duties, they have no
intention of engaging in any alternative to the AIP/RELP Partnership Mergers and
the Transaction.

In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:

1. reviewed the Partnership's annual reports to partners for the five
fiscal years ended December 31, 1996;

2. reviewed AIP's annual reports to shareholders and on Form 10-K for
the three fiscal years ended December 31, 1996 and quarterly reports on
Form 10-Q for the quarter ended March 31, 1997;

3. reviewed the draft Agreement and Plan of Merger dated June 17,
1997;

4. met with certain members of the senior management of Realco to
discuss Realco's, the Partnership's, the other RELP Partnerships', and
AIP's operations, financial condition, future prospects, projected
operations and performance, the AIP/RELP Partnership Mergers, and the
Transaction;

5. held discussions with senior management of AIP to discuss the
history and nature of AIP's business, AIP's operations, financial
condition, future prospects, projected operations and performance, the
Realco Share Acquisition, the Morgan Stanley Transaction, the Institutional
Investor Transaction, and the AIP/RELP Partnership Mergers;

6. visited certain facilities and business offices of Realco and the
Partnership, and visited certain real property owned by the RELP
Partnerships and the Partnership;

7. reviewed forecasts and projections prepared by Realco's management
with respect to the Partnership's Properties for the years ended 1997
through 2007;

8. reviewed the historical market prices and trading volume for AIP's
publicly traded securities;

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9. reviewed certain other publicly available financial data for
certain companies that we deem comparable to the Partnership, the other
RELP Partnerships, and AIP, and publicly available prices and premiums paid
in other transactions that we considered similar to the Transaction; and

10. conducted such other studies, analyses and inquiries as we have
deemed appropriate.

We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of AIP and the Partnership, and that there has been no
material change in the assets, financial condition, business or prospects of AIP
or the Partnership since the date of the most recent financial statements made
available to us.

We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Partnership or AIP and do not
assume any responsibility with respect to it. Other than as set forth above, we
have not made any physical inspection or independent appraisal of any of the
properties or assets of the Partnership or AIP. Our opinion is necessarily based
on business, economic, market and other conditions as they exist and can be
evaluated by us at the date of this letter.

This Opinion does not constitute a recommendation to any holder of
Partnership units as to whether such holder should exchange such units for AIP
Common Shares.

In our analysis of the Partnership, the other RELP Partnerships, and AIP,
we have taken into consideration their income- and cash-generating capabilities.
Often, an investor contemplating an investment in a company with income- and
cash-generating capabilities similar to the Partnerships, the other RELP
Partnerships, and AIP will evaluate the risks and returns of its investment on a
going-concern basis. However, because the Partnership, the other RELP
Partnerships, and AIP are primarily real estate holding entities, an investor
contemplating an investment in such an entity will also evaluate the value which
would be realized in a liquidation value of such real estate assets.
Accordingly, in our analyses we have also considered such liquidation values.

Additionally, with respect to AIP, we have considered the price and trading
history of AIP's common shares. Moreover, with respect to AIP, we have taken
into consideration both the Morgan Stanley Transaction and the Institutional
Investor Transaction and assumed that the indicated price per AIP Common Share
resulting from these transactions of two dollars forty five cents ($2.45) is the
result of arm's-length negotiations involving sophisticated, institutional
investors who are willing buyers (Morgan Stanley and the Institutional Investor)
and AIP who is a willing seller, with all parties having reasonable knowledge of
all relevant facts, with no parties having compulsion to act, and with equity to
all parties.

Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate number of AIP Common Shares to be received as consideration by all
of the Limited Partners of USAA Real Estate Income Investments I, A California
Limited Partnership in connection with the Transaction is fair to the Limited
Partners as a group from a financial point of view.

HOULIHAN, LOKEY, HOWARD & ZUKIN FINANCIAL ADVISORS, INC.

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June 30, 1997

To The General Partner of
USAA Income Investments II Limited Partnership

We understand the following regarding American Industrial Properties REIT
("AIP"), USAA Income Investments II Limited Partnership (the "Partnership"), and
USAA Real Estate Company ("Realco").

(i) AIP is an equity real estate investment trust which owns an
operates 14 industrial properties in eight states and one retail mall in
Colorado.

(iv) On May 2, 1997 Morgan Stanley Asset Management Inc. ("MSAM"), on
behalf of certain of its clients, and an affiliate of MSAM (collectively
"Morgan Stanley") agreed to purchase twenty million ($20,000,000) of senior
convertible debt securities (the "Securities") of AIP, with such Securities
convertible into AIP common shares at a price of two dollars forty five
cents ($2.45) per share. The final documentation for such agreement between
Morgan Stanley and AIP was executed on June 27, 1997, but effective as of
June 20, 1997 and shareholder approval is expected as of the date of this
letter. Upon such shareholder approval, Morgan Stanley will acquire up to
8,163,265 AIP common shares. Morgan Stanley's investment in AIP common
shares is referred to herein as the "Morgan Stanley Transaction." The terms
of the Morgan Stanley Transaction are the result of arms length
negotiations between Morgan Stanley and AIP.

(v) AIP has also conducted arms length negotiations with an additional
institutional investor (the "Institutional Investor") with such
negotiations resulting in the Institutional Investor offering to purchase
fifteen million ($15,000,000) of AIP's common shares at a price per common
share of $2.45 per share (the "Institutional Investor Transaction"). Formal
announcement of the Institutional Investor Transaction is expected shortly
after the date of this letter, AIP expects to promptly close the
Institutional Investor Transaction thereafter.

(vi) AIP plans to enter into a series of transactions involving four
partnerships (the "RELP Partnerships"), each of which has a separate entity
serving as the General Partner, with each General Partner having an
affiliation with Realco. Pursuant to the planned series of transactions,
the RELP Partnerships shall merge with and into AIP, (the "AIP/RELP
Partnership Mergers"). In connection with the AIP/RELP Partnership Mergers
AIP will issue a total of 22,064,147 AIP common shares to the aggregate
limited partners of the RELP Partnerships. The General Partners of the four
partnerships will assign their respective general partner interests in the
RELP Partnerships to AIP without receiving consideration for such general
partner interests. Any shares they are entitled to receive will be divided
among the Limited Partners.

Specifically, with respect to the Partnership, we understand the following:

(i) The Partnership owns three properties (the "Properties")
consisting of:

-- a single story industrial building in Elk Grove Village, Illinois
known as Continental Plastics,

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-- a single story industrial building in Lakeland, Florida known a
the CST Office Products Building, and

-- a 7.275 percent interest in a retail center Arlington, Virginia
known as Sequoia Plaza.

(ii) The Partnership plans to sell its interest in Sequoia Plaza I to
Realco or an affiliate of Realco for cash consideration of $2,250,000 (the
"Property Sale").

(iii) The limited partners of the Partnership (the "Limited Partners")
will exchange their partnership units in the Partnership for the right to
receive 3,885,715 Common Shares of Beneficial Interest, $0.10 par value per
share (the "AIP Common Shares"), of AIP, (the "Exchange"). Prior to or
concurrent with the Exchange, the Partnership shall distribute all cash
associated with the Property Sale to the Limited Partners of the
Partnership on a pro-rata basis. Additionally, concurrent with or shortly
after the Exchange, the Partnership will distribute all of its cash (and
cash realized from short term investments), net of expenses, to the
Partnership's General Partner and Limited Partners in accordance with the
terms of the Partnership Agreement (defined herein), (the "Cash
Distribution"). The Property Sale, Cash Distribution, the Partnership's
merger with AIP and the related Exchange of the Limited Partners' units for
the AIP Common Shares are referred to collectively herein as the
"Transaction."

In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:

1. reviewed USAA Income Investments II Limited Partnership's annual
reports to partners for the five fiscal years ended June 30, 1996;

2. reviewed AIP's annual reports to shareholders and on Form 10-K for
the three fiscal years ended December 31, 1996 and quarterly reports on
Form 10-Q for the quarter ended March 31, 1997;

3. reviewed the draft Agreement and Plan of Merger dated June 17,
1997;

6. visited certain facilities and business offices of Realco and USAA
Income Investments II Limited Partnership, including certain real property
owned by the RELP Partnerships and the Partnership;

7. reviewed forecasts and projections prepared by Realco's management
with respect to the Partnership's Properties for the years ended 1997
through 2007;

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8. reviewed the historical market prices and trading volume for AIP's
publicly traded securities;

10. reviewed drafts of certain documents to be delivered at the
closing of the Transaction; and

11. conducted such other studies, analyses and inquiries as we have
deemed appropriate.

This Opinion does not constitute a recommendation to any holder of
Partnership units as to whether such holder should exchange such units for AIP
Common Shares.

In our analysis of the Partnerships, the other RELP Partnerships, and AIP,
we have taken into consideration their income- and cash-generating capabilities.
Often, an investor contemplating an investment in a company with income- and
cash-generating capabilities similar to the Partnerships, the other RELP
Partnerships, and AIP will evaluate the risks and returns of its investment on a
going-concern basis. However, because the Partnership, the other RELP
Partnerships, and AIP are primarily real estate holding entities, an investor
contemplating an investment in such an entity will also evaluate the value which
would be realized in a liquidation value of such real estate assets.
Accordingly, in our analyses we have also considered such liquidation values.

Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate number of AIP Common Shares to be received as consideration by all
of the Limited Partners of USAA Income Investments II Limited Partnership in
connection with the Transaction and the cash consideration received in
connection with the Property Sale is fair to the Limited Partners as a group
from a financial point of view.

HOULIHAN, LOKEY, HOWARD & ZUKIN FINANCIAL ADVISORS, INC.

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June 30, 1997

To The General Partner of
USAA Income Properties III Limited Partnership

We understand the following regarding American Industrial Properties REIT
("AIP"), USAA Income Properties III Limited Partnership (the "Partnership"), and
USAA Real Estate Company ("Realco").

(i) AIP is an equity real estate investment trust which owns an
operates 14 industrial properties in eight states and one retail mall in
Colorado.

(iv) On May 2, 1997 Morgan Stanley Asset Management Inc. ("MSAM"), on
behalf of certain of its clients, and an affiliate of MSAM (collectively
"Morgan Stanley") agreed to purchase twenty million ($20,000,000) of senior
convertible debt securities (the "Securities") of AIP, with such Securities
convertible into AIP common shares at a price of two dollars forty five
cents ($2.45) per share. The final documentation for such agreement between
Morgan Stanley and AIP was executed on June 27, 1997, but effective as of
June 20, 1997 and shareholder approval is expected as of the date of this
letter. Upon such shareholder approval, Morgan Stanley will acquire up to
8,163,265 AIP common shares. Morgan Stanley's investment in AIP common
shares is referred to herein as the "Morgan Stanley Transaction." The terms
of the Morgan Stanley Transaction are the result of arms length
negotiations between Morgan Stanley and AIP.

Specifically, with respect to the Partnership, we understand the following:

(i) The Partnership owns three properties (the "Properties")
consisting of:

-- a retail center in Clearwater, Florida known as Curlew Crossing
Shopping Center,

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-- two office buildings in Manhattan Beach, California known as
Manhattan Towers, and

-- three office buildings in Phoenix, Arizona known as Skygate Commons.

(ii) The Partnership plans to sell Curlew Crossing Shopping Center to
Realco or an affiliate of Realco for cash consideration of $11,150,000,
(the "Property Sale").

(iii) The limited partners (the "Limited Partners") of the Partnership
will exchange their partnership units in the Partnership for the right to
receive 9,257,145 Common Shares of Beneficial Interest, $0.10 par value per
share (the "AIP Common Shares"), of AIP, (the "Exchange"). Prior to or
concurrent with the Exchange, the Partnership shall distribute all cash
associated with the Property Sale to the Limited Partners of the
Partnership on a pro-rata basis. Additionally, concurrent with or shortly
after the Exchange, the Partnership will distribute all of its cash (and
cash realized from short term investments), net of expenses, to the
Partnership's General Partner and Limited Partners in accordance with the
terms of the Partnership Agreement (defined herein), (the "Cash
Distribution"). The Property Sale, Cash Distribution, the Partnership's
merger with AIP and the related Exchange of the Limited Partners' units for
the AIP Common Shares are referred to collectively herein as the
"Transaction."

In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:

1. reviewed USAA Income Properties III Limited Partnership's annual
reports to shareholders for the five fiscal years ended December 31, 1996;

2. reviewed AIP's annual reports to shareholders and on Form 10-K for
the three fiscal years ended December 31, 1996 and quarterly reports on
Form 10-Q for the quarter ended March 31, 1997;

3. reviewed the draft Agreement and Plan of Merger dated June 17,
1997;

4. met with certain members of the senior management of Realco to
discuss Realco's, the Partnership's, the RELP Partnerships', and AIP's
operations, financial condition, future prospects, projected operations and
performance, the AIP/RELP Partnership Mergers, and the Transaction;

6. visited certain facilities and business offices of Realco and USAA
Income Properties III Limited Partnership, including certain real property
owned by the RELP Partnerships and the Partnership;

7. reviewed forecasts and projections prepared by Realco's management
with respect to USAA Income Properties III Limited Partnership's real
properties for the years ended 1997 through 2007;

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8. reviewed the historical market prices and trading volume for AIP's
publicly traded securities;

10. reviewed drafts of certain documents to be delivered at the
closing of the Transaction; and 11. conducted such other studies, analyses
and inquiries as we have deemed appropriate.

11. conducted such other studies, analyses and inquiries as we have
deemed appropriate.

This Opinion does not constitute a recommendation to any holder of
Partnership units as to whether such holder should exchange such units for AIP
Common Shares.

In our analysis of the Partnership, the other RELP Partnerships, and AIP,
we have taken into consideration their income- and cash-generating capabilities.
Often, an investor contemplating an investment in a company with income- and
cash-generating capabilities similar to the Partnership, the other RELP
Partnerships, and AIP will evaluate the risks and returns of its investment on a
going-concern basis. However, because the Partnership, the other RELP
Partnerships, and AIP are primarily real estate holding entities, an investor
contemplating an investment in such an entity will also evaluate the value which
would be realized in a liquidation value of such real estate assets.
Accordingly, in our analyses we have also considered such liquidation values.

Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate number of AIP Common Shares to be received as consideration by all
of the Limited Partners of USAA Income Properties III Limited Partnership in
connection with the Transaction and the cash consideration received in
connection with the Property Sale is fair to the Limited Partners as a group
from a financial point of view.

HOULIHAN, LOKEY, HOWARD & ZUKIN FINANCIAL ADVISORS, INC.

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<PAGE> 338

June 30, 1997

To The General Partner of
USAA Income Properties IV Limited Partnership

We understand the following regarding American Industrial Properties REIT
("AIP"), USAA Income Properties IV Limited Partnership (the "Partnership"), and
USAA Real Estate Company ("Realco").

(i) AIP is an equity real estate investment trust which owns and
operates 14 industrial properties in eight states and one retail mall in
Colorado.

(vi) AIP plans to enter into a series of transactions involving four
partnerships (the "RELP Partnerships"), each of which has a separate entity
serving as the General Partner, with each General Partner having an
affiliation with Realco. Pursuant to the planned series of transactions,
the RELP Partnerships shall merge with and into AIP, (the "AIP/RELP
Partnership Mergers"). In connection with the AIP/RELP Partnership Mergers
AIP will issue a total of 22,064,147 AIP common shares to the aggregate
limited partners of the RELP Partnerships. The General Partners of the four
partnerships will assign their respective general partner interests in the
RELP Partnerships to AIP without receiving consideration for such general
partner interests. Any shares they are entitled to receive will be divided
among the Limited Partners.

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Specifically, with respect to the Partnership, we understand the following:

(i) The Partnership owns four properties (the "Properties") consisting
of:

-- an office and research and development building in Chelmsford,
Massachusetts known as Apollo Computer,

-- a single story office and research and development building in San
Diego, California known as the Eastman Kodak Building,

-- a two story office and research and development building in San
Diego, California known as the Linear Technology Building, and

-- a five story office building in St. Louis, Missouri known as 1881
Pine Street.

(ii) The limited partners (the "Limited Partners") of the Partnership
will exchange their partnership units in the Partnership for the right to
receive 4,578,430 Common Shares of Beneficial Interest, $0.10 par value per
share (the "AIP Common Shares"), of AIP, (the "Exchange"). Concurrent with
or shortly after the Exchange, the Partnership will distribute all of its
cash (and cash realized from short term investments), net of expenses, to
the Partnership's General Partner and Limited Partners in accordance with
the terms of the Partnership Agreement (defined herein), (the "Cash
Distribution"). The Cash Distribution, the Partnership's merger with AIP
and the related Exchange of the Limited Partners' units for the AIP Common
Shares are referred to collectively herein as the "Transaction."

In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:

1. reviewed USAA Income Properties IV Limited Partnership's annual
reports to shareholders for the five fiscal years ended December 31, 1996;

2. reviewed AIP's annual reports to shareholders and on Form 10-K for
the three fiscal years ended December 31, 1996 and quarterly reports on
Form 10-Q for the quarter ended March 31, 1997;

3. reviewed the draft Agreement and Plan of Merger dated June 17,
1997;

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6. visited certain facilities and business offices of Realco and the
Partnership, and visited certain real property owned by the RELP
Partnerships;

7. reviewed forecasts and projections prepared by Realco's management
with respect to RELP Income Properties IV Limited Partnership's real
properties for the years ended 1997 through 2007;

8. reviewed the historical market prices and trading volume for AIP's
publicly traded securities;

10. conducted such other studies, analyses and inquiries as we have
deemed appropriate.

This Opinion does not constitute a recommendation to any holder of
Partnership units as to whether such holder should exchange such units for AIP
Common Shares.

In our analysis of the Partnership, the other RELP Partnerships, and AIP,
we have taken into consideration their income- and cash-generating capabilities.
Often, an investor contemplating an investment in a company with income- and
cash-generating capabilities similar to the Partnership, the other RELP
Partnerships, and AIP will evaluate the risks and returns of its investment on a
going-concern basis. However, because the Partnership, the other RELP
Partnerships, and AIP are primarily real estate holding entities, an investor
contemplating an investment in such an entity will also evaluate the value which
would be realized in a liquidation value of such real estate assets.
Accordingly, in our analyses we have also considered such liquidation values.

Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate number of AIP Common Shares to be received as consideration by all
of the Limited Partners of USAA Income Properties IV Limited Partnership in
connection with the Transaction is fair to the Limited Partners as a group from
a financial point of view.

HOULIHAN, LOKEY, HOWARD & ZUKIN FINANCIAL ADVISORS, INC.

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[REALCO LETTERHEAD]
, 199

Fellow Partners:

We are seeking your approval to merge (the "Merger") USAA Real Estate
Income Investments I, A California Limited Partnership ("RELP I"), USAA Real
Estate Income Investments II Limited Partnership ("RELP II"), USAA Income
Properties III Limited Partnership ("RELP III") and USAA Income Properties IV
Limited Partnership ("RELP IV" and, together with RELP I, RELP II and RELP III,
the "RELPS") with and into American Industrial Properties REIT (the "Trust").

The Merger is described in detail in the accompanying Joint Proxy
Statement/Prospectus, which I urge you to read carefully. For the definition of
capitalized terms used in this letter, which are not separately defined herein,
see "Glossary" in the Joint Proxy Statement/Prospectus. YOUR VOTE ON THIS MATTER
IS IMPORTANT -- NOT VOTING COUNTS AS A NO VOTE, SO PLEASE SEND IN YOUR PROXY.

WHAT IS THE PURPOSE OF THE MERGER? The purpose of the merger is to give
limited partners the ability to participate in a strategic business combination
with a publicly-traded real estate investment trust ("REIT") with compatible
properties in existing and new markets in order to take advantage of the growth
in the REIT industry and real estate markets in general, with the opportunity to
liquidate their investment through the sale of the publicly-traded shares or
retain their investment indefinitely. The limited partners of each RELP that
participates in the Merger ("Participating RELPS") will receive common shares of
beneficial interest of the Trust ("Shares") in exchange for their units of
limited partnership interest ("Units") in a RELP. The Shares will be traded on
the New York Stock Exchange under the symbol "IND."

WHAT IS A REIT? A REIT is a vehicle for the pooling of common funds for
investment in real estate. A REIT may deduct the amount of distributions paid
from its taxable income thus effectively eliminating the "double taxation" on
its distributions. REITs also afford shareholders the same limited liability for
the REIT's debts and obligations as are afforded all corporate shareholders and
limited partners. REITs generally permit the free transferability of equity
interests and are generally recognized in the capital markets as an appropriate
vehicle for real estate ownership.

WHY HAVE THE GENERAL PARTNERS PROPOSED THE MERGER? For some time, the
general partners have been exploring ways to enhance the value and/or achieve
liquidity and/or replace the current investment with a growth oriented
investment for the limited partners. Numerous alternatives were considered and
evaluated, including a strategic combination with a publicly-traded REIT to take
advantage of the growth of the REIT industry and real estate markets in general,
completely liquidating the RELPS, continuing the RELPS through an orderly
liquidation (estimated at up to six years), or reorganizing the RELPS into one
REIT or four separate REITs. The outcome of these different alternatives is
discussed in detail in the Joint Proxy Statement/Prospectus under the section
entitled "The Merger -- The RELPS' Reasons for the Merger and Recommendation."
The Board of Directors of each of the general partners and USAA Real Estate
Company ("Realco") believe that a strategic combination with the Trust should
provide the limited partners with the most viable option for enhancement of
value, growth and liquidity.

WILL I STILL BE RECEIVING A SCHEDULE K-1 FROM THE TRUST TO PREPARE MY TAX
RETURN AFTER THE MERGER? The RELPs, as partnerships under federal tax law, are
required to report the distributive share of tax items to each partner on a
Schedule K-1. An investment in a REIT will remove this cumbersome K-1 reporting
restriction and instead allow the more simplified reporting on Form 1099
(similar to the reporting of dividends from corporations).

WILL I BE ABLE TO MORE EASILY SELL MY INVESTMENT AFTER THE MERGER? The
Units are not listed on any national securities exchange or quoted on Nasdaq,
and there is no established public trading market for the Units. Secondary sales
activity for the Units has been limited and sporadic. The Shares of the Trust
are traded on the New York Stock Exchange. It is therefore anticipated that you
will be able to freely transfer the Shares you receive in the Merger, which will
enable you to liquidate your investment through the sale of the publicly-traded
Shares if you so wish.
<PAGE> 342

WHAT ARE THE POTENTIAL BENEFITS AND RISKS OF THE MERGER? The Merger should
afford the limited partners a number of potential benefits while at the same
time posing certain investment risks. These benefits and risks are discussed in
detail in the Joint Proxy Statement/Prospectus, which you are urged to read
carefully. In particular, limited partners should review "Risk Factors" in its
entirety for a discussion of the risks related to the Merger and "The
Merger -- The RELPS' Reasons for the Merger and Recommendation" for a discussion
of the benefits and detriments of the Merger as well as the benefits and
detriments of alternatives to the Merger that could have been pursued by the
general partners.

DO LIMITED PARTNERS HAVE A SAY IN THEIR RELP'S PARTICIPATION IN THE MERGER?
Yes. Each RELP participates in the Merger only if (i) the holders of at least a
majority of the outstanding Units of that RELP and (ii) the general partner vote
in favor of the Merger. The partnership agreements of RELP II, RELP III and RELP
IV each provide that in the event that the general partner (and its affiliates)
of such RELP owns any Units, such general partner is not entitled to vote for
the Merger as a limited partner with respect to any such Units. In accordance
with this prohibition, Units held by the general partner (and its affiliates) of
each of RELP II, RELP III and RELP IV will not be entitled to vote at the
special meeting of such RELPS. The partnership agreement of RELP I does not
contain such a prohibition. Consequently, the Units in RELP I held by the RELP I
general partner (and its affiliates) are entitled to vote at the special meeting
of RELP I, and the holders of such Units will vote their 6,039 Units
(approximately 11.06% of the outstanding Units in RELP I) in favor of the Merger
Agreement.

WHAT WILL THE UNIT HOLDERS RECEIVE AS CONSIDERATION IN THE MERGER? In the
Merger, the Trust will issue an aggregate of up to 4,412,829 Shares to the
limited partners as consideration for the assets of the RELPS that will be
transferred to the Trust in connection with the Merger. Each limited partner of
a RELP that participates in the Merger will receive Shares in exchange for Units
as follows: each Unit in RELP I will be converted into the right to receive
15.90 Shares, each Unit in RELP II will be converted into the right to receive
28.63 Shares, each Unit in RELP III will be converted into the right to receive
16.60 Shares and each Unit in RELP IV will be converted into the right to
receive 15.14 Shares.

HOW WAS THE CONSIDERATION ALLOCATED AMONG THE RELPS? Based upon the value
of each RELP's real estate assets, as adjusted for the RELP's known liabilities
(the "Net Asset Value"), the Shares were allocated to the limited partners in
each RELP as follows: (i) the limited partners in RELP I will receive an
aggregate of 868,571 Shares (valued at $11,400,000 based upon the agreed upon
price of $13.125 per Share (the "Exchange Price") and $ based upon
$ , the closing price of the Shares on the New York Stock Exchange on
, 199 (the "Closing Price")), (ii) the limited partners of RELP II
will receive an aggregate of 777,142 Shares (valued at $10,200,000 based upon
the Exchange Price and $ based upon the Closing Price), (iii) the
limited partners of RELP III will receive an aggregate of 1,851,428 Shares
(valued at $24,300,000 based upon the Exchange Price and $ based upon
the Closing Price) and (iv) the limited partners of RELP IV will receive an
aggregate of 915,686 Shares (valued at $12,018,000 based upon the Exchange Price
and $ based upon the Closing Price). Net Asset Values were initially
determined for each RELP by its general partner utilizing several factors,
including the current and projected net operating income and cash flow,
capitalization rate, market rental rates, lease expirations and anticipated
capital expenditures for leasing and tenant improvements for each RELP property.
The Net Asset Values were then finally determined for each RELP through
negotiations between the common management of each of the RELPS and the Trust.
More information regarding this matter is set forth in the Joint Proxy
Statement/Prospectus under the section entitled "Allocation of Consideration."

WHY SHOULD I VOTE FOR THE MERGER IF THE EXCHANGE VALUE PROVIDES ME LESS
THAN 50% OF MY ORIGINAL INVESTMENT? Based on the proposed exchange ratio of
$13.125 per Share in the Merger, an original $500 per Unit investment, an owner
would receive less than 50% of a limited partner's original investment. Taking
into consideration the total distributions, proceeds from sales and the
appreciation in the per Share value, an original limited partner will be
receiving a total amount equal to or greater than his original investment. The

<PAGE> 343

summary chart does not consider any tax benefits realized by individual limited
partners or any additional cash in excess of any settlement of outstanding
payables which would be distributed prior to the Merger.

RETURN ANALYSIS OF AN ORIGINAL $500.00 PER UNIT INVESTOR

<TABLE>
<CAPTION>
PROPOSED AIP PROCEEDS
SHARES SHARE FROM
PER LP MERGER VALUE JV TOTAL ORIGINAL %
UNIT(1) VALUE APPREC.(2) INTEREST DISTRIBUTIONS CONSIDERATION INVESTMENT RETURNED
---------- ------- ---------- -------- ------------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RELP I............... 15.90 208.74 39.76 0 437.84 686.34 500.00 137.27%
RELP II.............. 28.63 375.82 71.59 74.61 279.50 801.52 500.00 160.30%
RELP III............. 16.60 217.85 41.49 0 244.90 504.24 500.00 100.85%
RELP IV.............. 15.14 198.66 37.84 0 215.20 451.70 500.00 90.34%
</TABLE>

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

(1) Exchange ratio at $13.125 per value for LP Unit.

(2) Per share value at September 30, 1997.

CAN I DO ANYTHING IF MY RELP PARTICIPATES IN THE MERGER BUT I DON'T THINK
THAT THE CONSIDERATION I'LL RECEIVE IS FAIR? Yes. The Trust has voluntarily
granted the limited partners the right to dissent with respect to the Merger
and, subject to certain conditions, receive payment in Shares of the "fair
value" of their Units. Any limited partner who wishes to exercise his
dissenters' rights or preserve his rights to do so should review the discussion
in the Joint Proxy Statement/Prospectus entitled "Dissenters' Rights" carefully,
because failure to timely and properly comply with the procedures specified will
result in the loss of such dissenters' rights.

HAVE ANY INDEPENDENT THIRD PARTIES EXAMINED THE TERMS OF THE MERGER? Yes.
The general partners, on behalf of each RELP, retained Houlihan, Lokey, Howard &
Zukin Financial Advisors, Inc. ("Houlihan") to render an opinion as to whether
the consideration to be received by the limited partners in connection with the
Merger was fair from a financial point of view to the RELP's respective limited
partners. Houlihan was not requested to, and did not make, any recommendation to
the RELPS as to the consideration to be received by the limited partners in
connection with the Merger, which consideration was determined through
negotiations between the Trust, Realco and the general partners. On June 30,
1997, Houlihan delivered its written opinions to the Boards of Directors of the
general partners to the effect that, as of the date of such opinion, based on
Houlihan's review and subject to the limitations described below, the
consideration to be received by the limited partners in connection with the
Merger was fair, from a financial point of view, to the RELP's respective
limited partners. A copy of each such opinion is attached as Annex II-B to the
Joint Proxy Statement/Prospectus. Limited partners are urged to read such
opinions in their entirety.

WHO WILL MANAGE THE RELPS' PROPERTIES AFTER THE MERGER? An affiliate of
Realco will manage and lease the Participating RELPS' former properties on
behalf of the Trust after the Merger. The management agreement relating to this
arrangement will provide for management fees on terms substantially similar to
the terms governing management arrangements the Trust typically uses in managing
its current properties and will be terminable at will by either party upon 30
days prior notice. For a further discussion of this matter, as well as other
conflicts of interest that are inherent in the relationships among the RELPS,
the general partners, Realco and the Trust and its Trust Managers and Officers,
see "Conflicts of Interest" in the Joint Proxy Statement/Prospectus. These
conflicts of interest should be considered by the limited partners when making
their decision on whether to vote for or against the Merger.

WILL I RECEIVE QUARTERLY DISTRIBUTIONS FROM THE TRUST? The Trust is not
currently making distributions and has not made distributions for four
consecutive quarters since 1993. The Trust has informed us that it intends to
evaluate future distributions on a quarterly basis. Limited partners of each
Participating RELP will receive distributions when and if the Trust declares a
future distribution.

WILL I FACE ANY TAX CONSEQUENCES FROM THE MERGER? Yes. The Merger will
result in taxable income or loss to each limited partner who receives Shares in
the Merger. No limited partner will receive cash in the Merger (other than cash
received in lieu of fractional Shares) to pay any taxes due on any taxable
income arising as a result of the Merger. Thus, a limited partner may be
required to sell Shares or liquidate other investments in

<PAGE> 344

order to pay the taxes arising from such taxable income. The tax consequences of
the Merger are discussed in more detail in the Joint Proxy Statement/Prospectus
in the section entitled "Material Federal Income Tax Consequences."

HOW DO THE GENERAL PARTNERS RECOMMEND THAT YOU VOTE? The Board of Directors
of each general partner of each RELP and Realco unanimously determined that the
terms of the Merger, including the consideration to be received by the limited
partners in the Merger, are fair to and in the best interests of the respective
limited partners. Accordingly, such Boards have approved the Merger and
recommend that the respective limited partners vote for approval of the Merger.

If you have any additional questions or need assistance with the proper
completion and return of the accompanying proxy, please contact Randal R.
Seewald at (800) 531-8876. Thank you for your consideration of the Merger.

Sincerely,

EDWARD B. KELLEY
Chairman of the Board, President and
Chief Executive Officer of USAA
Investors I, Inc., USAA Investors
II, Inc., USAA Properties III, Inc.
and USAA Properties IV, Inc.
<PAGE> 345

AMERICAN INDUSTRIAL PROPERTIES REIT

SUPPLEMENT TO PROSPECTUS

FOR

USAA REAL ESTATE INCOME INVESTMENTS I, A CALIFORNIA LIMITED PARTNERSHIP

The General Partner of USAA Real Estate Income Investments I, A California
Limited Partnership (herein referred to as "RELP I" or the "Partnership") is
soliciting the Limited Partners' approval of the merger with and into American
Industrial Properties REIT, a Texas real estate investment trust (the "Trust"),
as part of which Limited Partners of RELP I will exchange Units of Limited
Partnership Interests ("Units") in RELP I for Shares of Beneficial Interests
("Shares") in the Trust. This solicitation is being made in conjunction with the
proposed merger with and into the Trust of up to four publicly-held limited
partnerships, including RELP I (the "Merger"). The proposal is described in
detail in the Joint Proxy Statement/ Prospectus dated , 199 (the
"Prospectus"). For the definition of capitalized terms used in the Supplement,
which are not separately defined herein, see "Glossary" in the Prospectus.
Cross-references in this Supplement also refer to the cited discussions in the
Prospectus, unless specifically noted to the contrary.

The effects of the Merger may be different for Limited Partners in each of
the RELPS. This Supplement to the Prospectus has been prepared to highlight the
risks, effects and fairness of the Merger for the Limited Partners of RELP I. It
does not purport to provide an overall summary of the Merger or to highlight all
of its material terms, conditions, risks or effects. See "Summary" and "The
Merger" in the Prospectus. Furthermore, to the extent this Supplement summarizes
portions of the Prospectus, such discussions are qualified in their entirety by
the more detailed discussions of those matters appearing in the Prospectus.
Supplements have also been prepared for each of the other RELPS and copies of
such supplements will be provided promptly without charge to each Limited
Partner or his representative who has been so designated in writing upon written
request to Randal R. Seewald at 8000 Robert F. McDermott Fwy., IH 10 West, Suite
600, San Antonio, Texas 78230-3884.

Limited Partners of RELP I participating in the Merger will be subject to
various risks, and these should be taken into account by the Limited Partners in
deciding how to cast their votes. These risks are briefly summarized below:

RISKS RELATED TO THE MERGER

- The Trust has generated losses from operations every year since 1988.

- Limited Partners who become shareholders of the Trust may not receive the
same level of distributions as previously received from RELP I. Limited
Partners may initially receive no distributions because the Trust
currently is not paying distributions. The Trust has not made
distributions for four consecutive quarters since 1993.

<PAGE> 346

- The Net Asset Values assigned to RELP I may not reflect the true value of
RELP I's assets because the Net Asset Values were the result of
negotiation between the common management of the Trust and the General
Partners of the RELPS. Had independent representation been arranged for
each RELP, the Net Asset Value assigned to each RELP may have been
different.

- The General Partners, through wholly-owned subsidiaries, are owned and
controlled by Realco. Realco currently owns 13.74% of the Trust's
outstanding Shares and two of Realco's designees are Trust Managers. An
Affiliate of Realco will manage and lease the former RELP properties
after the Merger. All of these factors may have influenced a General
Partner's decision to recommend the Merger to its Limited Partners. After
the Merger, assuming conversion of the Trust's debt to Realco, Realco
will own approximately 17.39% of the Trust's outstanding Shares.

- Taxable income or loss will be recognized by each taxable Limited Partner
of RELP I in the Merger in an amount equal to the Limited Partner's
allocable share of the income or loss recognized by RELP I from the
transfer of RELP I's assets to the Trust through the Merger and Limited
Partners will receive no cash from the Merger (other than cash received
in lieu of fractional Shares) to pay taxes arising from any taxable
income (see "The Merger -- Material Federal Income Tax Consequences").

- The General Partners are prohibited by the Merger Agreement from
initiating, soliciting or encouraging competing proposals with the
Merger. As a result, the RELPS may miss the opportunity to receive a
competing proposal.

- Limited Partners who become shareholders will have fundamentally changed
the nature of their initial investment from an entity that is a
traditional pass-through entity for federal income tax purposes to an
investment in a REIT, which in general is not a pass-through entity for
federal income tax purposes with the exception of certain undistributed
long-term gains.

- The Trust will have potential liability for unknown, undisclosed or
contingent liabilities of the Participating RELPS including claims
against the Trust for indemnification, environmental liabilities, and
title defects, which could adversely affect the cash liquidity of the
Trust and its future ability to make distributions to shareholders.

- Neither the management of the Trust nor the General Partners can predict
whether the Shares will trade at a price lower than the Exchange Price or
lower than the value of the Trust's assets after the Merger. The Shares
may trade at prices substantially below trading prices on the date of
execution of the Merger Agreement, the date hereof or the date of the
Special Meetings. Consequently, a Limited Partner in a Participating RELP
desiring to liquidate his investment after the Merger may receive a price
per Share that is lower than the Exchange Price.

- Shareholders of the Trust will be diluted if there is an issuance of
additional equity securities at what may be less than their fair market
value.

2
<PAGE> 347

- The majority vote of the Limited Partners of RELP I binds all Limited
Partners; if the Merger is approved, Limited Partners who voted against
the Merger will have their Units converted into Shares based on the
Exchange Price unless they properly exercise their dissenters' rights.

- Approval of the Merger will require the Limited Partners to forego
certain alternatives to the Merger, such as liquidating RELP I's assets
or continuing its operations as a limited partnership.

- The Trust has different business objectives than RELP I, including the
intent to acquire new properties and, from time to time, to dispose of
existing properties and reinvest the proceeds therefrom, to the extent a
distribution is not required to maintain REIT status.

- Increases in market interest rates may adversely affect the price of the
Shares.

- Approval of the Merger by the Limited Partners will result in the loss of
their respective rights under the RELP I Partnership Agreement and the
partnership law of the State of California.

- The investment and financing policies of the Trust are determined by the
Trust Managers and may be amended or revised at any time without a vote
of the shareholders of the Trust.

- The Trust may experience occurrences of uninsured liability or casualty,
reducing the Trust's capital and adversely affecting anticipated profits.

- The Trust may incur the potential expense of compliance with the
Americans With Disabilities Act, fire and safety, and other regulatory
requirements applicable to the operation of the Trust's properties.

- The Trust will be taxed as a corporation if it fails to qualify as a REIT
and the Trust will be liable for increased federal, state and local
income taxes in such event.

3
<PAGE> 348

GENERAL REAL ESTATE INVESTMENT RISKS

- The illiquidity of real estate investments will limit the Trust's ability
to vary its portfolio in response to changes in economic or other
conditions.

- Competition from competing properties could decrease the occupancy levels
and rental rates of the Trust's investments.

The Merger involves numerous federal income tax consequences to the Limited
Partners and the shareholders of the Trust. For a complete discussion describing
these consequences, see "The Merger -- Material Federal Income Tax
Considerations" in the Prospectus. The material federal income tax issues
include the following:

- The amount of gain or loss recognized by a Limited Partner will be based
upon the deemed sale of assets owned by RELP I and, as applicable, the
extent to which the fair market value of the Shares distributed to the
Limited Partner exceeds the Limited Partner's adjusted basis in its
Units.

4
<PAGE> 349

THE MERGER

The purpose of the Merger is to strategically unite the Trust with four
entities with compatible properties in existing and new markets for the Trust,
and to give the Limited Partners the ability to participate in a strategic
business combination with a publicly traded REIT in order to take advantage of
the growth in the REIT industry and real estate markets in general, with the
opportunity to liquidate their investment through the sale of the
publicly-traded Shares or retain their investment indefinitely.

If the Merger Agreement is approved, RELP I will cease to exist and all of
its properties will be transferred to the Trust. The Limited Partners will
receive Shares based upon the relative Net Asset Values of the RELPS
renegotiated by the common management of the RELPS and the Trust. The Shares
received by the Limited Partners will be listed for trading on the New York
Stock Exchange (the "NYSE"). If the requisite number of Limited Partners of only
one of the RELPS approves the Merger Agreement, the Trust has the right, but not
the obligation, to consummate the Merger with the one Participating RELP.

Any Limited Partner may abstain from or vote against the Merger and, if the
Merger is approved, the Limited Partner can still participate in the Merger, so
long as the Limited Partner does not exercise dissenters' rights. For a
discussion of the effect of abstaining from or voting against the Merger, the
rights of Limited Partners who do so, and the effects of exercising dissenters'
rights, see "Dissenters' Rights" and "The Special Meetings -- RELP Meeting."

The General Partner is proposing amendments to the Partnership Agreement to
permit the closing of the transactions contemplated by the Merger Agreement.
Limited Partners voting in favor of the Merger will be deemed to have voted in
favor of each of these proposed amendments. A majority vote of Limited Partners
is required to approve the proposed amendments and to approve the Merger
Agreement. The proposed amendments authorize the following: (i) the Merger of
the RELP with and into the Trust, whether or not the Trust would be regarded as
an Affiliate of the General Partners; and (ii) such other actions as may be
necessary under or contemplated by the Merger Agreement or the Prospectus,
irrespective of any provision in the Partnership Agreement which might otherwise
prohibit such actions. See "The Merger -- Proposed Amendments to Partnership
Agreements." As of August 31, 1997, the General Partner of RELP I owned 6,039
Units in RELP I, or approximately 11.06% of all outstanding Units of RELP I. The
General Partner will vote all Units it holds in favor of the Merger.

Each of the General Partners of the RELPS has agreed to waive any right to
receive Shares to which it may otherwise have been entitled in exchange for its
general partnership interest.

5
<PAGE> 350

ALLOCATION OF CONSIDERATION

NET ASSET VALUE

The Trust is offering 15.90 Shares in consideration for each Unit in RELP
I. The following table sets forth the methodology utilized in determining the
number of Shares to be offered by the Trust for each Unit:

<TABLE>
<S> <C>
Asset Value of Partnership Properties
Systech................................................... $ 4,400,000
Volusia................................................... 7,000,000
-----------
$11,400,000
-----------
Cash and Cash Equivalents(1)................................ $ 0
Mortgages and Other Long-Term Debt.......................... $ 0
Other Liabilities........................................... $ 0
Net Asset Value of Partnership(2)........................... $11,400,000
Percentage of Aggregate Net Asset Value of All RELPS........ 19.68%
Net Asset Value Per Original $500 Investment(3),(4)......... $ 208.75
Number of Shares Allocable to Partnership................... 868,571
Percentage of Total Shares to be issued in the Merger....... 19.68%
Percentage of Total Shares of the Trust after the Merger.... 9.58%
Allocation of Shares to Limited Partners(4)................. 772,527
Allocation of Shares to General Partner(4),(5).............. 96,044
-----------
868,571
-----------
Allocation of Shares Per Original $500 Investment by Limited
Partners(4)............................................... 15.90
Total Shares in the Trust after the Merger(4)..... 9,070,803
===========
</TABLE>

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

(1) All cash and cash equivalents held by RELP I, net of related payables,
liabilities or other contingencies, will be distributed to the Limited
Partners immediately prior to the Merger pursuant to a special distribution.

(2) Such amounts were determined by negotiation between common management of the
RELPS and the Trust.

(3) "Net Asset Value Per Original $500 Investment" is computed by dividing that
portion of the Net Asset Value allocable to the Limited Partners by the
number of outstanding Units. This is not intended to be an estimate of the
value of the Shares exchangeable for each Unit or the price at which such
Shares may trade in the market. See "Risk Factors."

(4) The Share amounts and number of Shares outstanding have been restated to
reflect the impact of the one for five reverse Share split approved by the
Trust Managers on July 30, 1997, which is subject to shareholder approval on
October 15, 1997.

(5) The General Partner of RELP I has agreed to waive any right to receive
Shares to which it may otherwise have been entitled in exchange for its
general partnership interest. The amount reflected above includes the Shares
to be received for the 6,039 limited partnership units owned by the General
Partner. The General Partner will not be receiving any other compensation or
reimbursement for claims against or interests in the RELP.

CONSIDERATIONS UNIQUE TO RELP I

Due to the substantial similarities among the RELPS, such as their similar
investment portfolios, common investment objectives and policies, the fact that
the RELPS' assets are managed by the General Partners or Affiliates and
substantial similarities in the language and scope of their Partnership
Agreements, many of the consequences of participating in the Merger are common
to the Limited Partners of each of the RELPS. The purpose of this section is,
however, to highlight features of RELP I which may distinguish the

6
<PAGE> 351

situation of this Partnership from that of the other RELPS and which should be
taken into account by RELP I Limited Partners when evaluating the merits and
risks of the proposed Merger.

STATUS OF THE PORTFOLIO. At the time of RELP I's formation, the General
Partner anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within six to
eight years after the acquisition of the properties. Accordingly, based on the
completion of the acquisition of RELP I's portfolio in 1986, it was anticipated
that the portfolio would be liquidated by 1994. Of the three investments made by
RELP I, the mortgage loan receivable was repaid in January 1996 as scheduled.
Volusia Point Shopping Center has been offered for sale at a price of $7.05
million. An offer of $6.8 million was received and the counter-offer declined in
June, 1997. The Systech Building has been offered for sale for $4.5 million. Two
offers, one in April, 1997 for $4.19 million and one in June, 1997 for $3.67
million, have been received, and counter-offers declined. See "Business of
RELPS -- RELP I" in the Prospectus for additional information regarding the RELP
I portfolio. The General Partner believes that the Net Asset Value of $11.4
million for the portfolio which was negotiated by common management of the RELPS
and the Trust is fair to the Limited Partners. See "The Merger -- Background and
Reasons for the Merger" in the Prospectus.

INCREASED DEBT SERVICE. As of December 31, 1996, RELP I had no
indebtedness. As a group, the RELPS had, as of that same date, aggregate
outstanding indebtedness of $30,668,087, representing approximately 34% of the
total portfolio value of all of the RELPS' real estate investments. Excluding
interests in RELP properties that will not be transferred to the Trust pursuant
to the Merger Agreement, as of December 31, 1996, the Trust had indebtedness of
$53,818,000, representing approximately 57% of its real estate assets.
Therefore, if the Limited Partners of RELP I approve the Merger, they will
exchange Units in an entity with no debt for Shares in a REIT with significant
indebtedness. In that the Trust will be more leveraged than RELP I, this will
result in an increase in the debt service payments that must be made by the
Trust, increase the Trust's risk of losing its assets through foreclosure and
increase the risk that the Trust may not be able to make distributions to
shareholders.

MERGER AS A TAXABLE EVENT. Limited Partners of RELP I will realize a
taxable loss on the Merger in an amount equal to their allocable share of the
excess of the sum of the fair market value of the Shares received by the
Partnership over the Partnership's adjusted tax basis of the Partnership assets.
Assuming that the value of the Shares reflects the Net Asset Values of the
assets acquired in the Merger, if RELP I participates in the Merger, each of its
Limited Partners would have recognized taxable loss of approximately 8.3% (as of
December 31, 1997) for every Unit held, representing an original investment of
$500. The actual amount of loss recognized by each Limited Partner will depend
upon the value ascribed to the Shares for federal tax purposes. Because the
value of the Shares will fluctuate immediately after the Merger, and the 1997
operating results have not been included, it is possible that such values used
for purposes of calculating the taxable income or loss and that the taxable
income or loss per Unit will differ from the calculation stated above.

INVESTMENT STRATEGY. The principal investment objectives of RELP I are to
(i) preserve and protect the Limited Partners' capital; (ii) provide the Limited
Partners with quarterly cash distributions from operations; (iii) obtain
long-term appreciation in the value of its properties; and (iv) provide
increased cash distributions to the Limited Partners as the cash flow from its
investments increases over the life of the Partnership. The Partnership acquired
the Volusia Point Shopping Center in 1985, the Systech Building (formerly called
the Computer Associates Building) in 1986 and funded a first mortgage loan
secured by the Plaza on the Lake property in 1986. The loan held by RELP I was
paid in full in January 1996. RELP I's properties had a average occupancy level
of 99% at an average annual rent of $20.52 per square foot for fiscal 1996 and
96% at an average annual rent of $20.88 per square foot in the six months ended
June 30, 1997. RELP I has a history of making regular quarterly distributions to
its Limited Partners. See "Miscellaneous -- Distributions to Limited Partners"
below in this Supplement.

MANAGEMENT COMPENSATION. RELP I has no employees but its operations are
managed by Realco. Under the Advisory Agreement pursuant to which Realco manages
the operations of RELP I, Realco is entitled to annual management fees equal to
the lesser of 4% of gross revenues from operations or 9% of adjusted cash flow
from operations of the Partnership. Realco may also receive annually up to 1/4
of 1% of

7
<PAGE> 352

amounts funded by RELP I in mortgage loans which are serviced by Realco. This
relationship will terminate after the Merger if RELP I merges into the Trust.
USAA Realty Company, an Affiliate of Realco, currently provides property
management and leasing services for the properties and may receive fees up to 6%
of property cash receipts for those services. If RELP I participates in the
Merger, neither the General Partner nor any of its Affiliates will receive any
compensation for services rendered in connection the Merger. The Trust intends
to retain the services of an Affiliate of Realco to provide property management
and leasing services. It is anticipated that fees for these services will be at
a market rate typically paid by the Trust in managing its current properties.
Such fees may be higher than those currently paid by RELP I. See "Comparative
Compensation, Fees and Distributions -- New Compensation" below.

OFFERS FROM THIRD PARTIES. All offers received during the past twelve
months by the General Partner of the RELP I from unaffiliated third parties are
described below in addition to a brief discussion of why such offers were not
accepted. Conditions placed on each of the offers which are considered
significant are also described. In all of these instances, the General Partner
assessed each offer in light of the current market and property conditions
prevalent at the time. Counteroffers were made when the initial offer was
considered too low or the other terms were inadequate and there was reason to
believe further price negotiations were possible.

On June 19, 1997, the General Partner received an offer to purchase the
Systech Office Building for $3,850,000 (gross) in cash. Believing that the offer
was too low at the time, the General Partner declined and responded verbally
that offers would need to be approximately $4,500,000 (net) to be considered.
The purchaser did not increase his offer and negotiations ended.

VALUE OF SHARES. The value of the Shares to be received by the Limited
Partners in connection with the Merger compared to the values attributable to
Units in the alternatives considered by the General Partner is as follows:

<TABLE>
<CAPTION>
MERGER OFFER LIQUIDATION VALUE(1) GOING CONCERN(2)
------------ -------------------- ----------------
<C> <C> <C>
$209.00 $177.00 $194.00
</TABLE>

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

(1) Liquidation value was determined using the projected future cash flows of
the properties based on an assumed capitalization rate for the particular
property. The liquidation value is net of an assumed 3.0% for estimated
closing costs, a 5.0% adjustment for a liquidation discount and an estimate
of proxy costs for limited partner approval of the liquidation.

(2) Going concern value was determined using the projected cash flows of the
properties assuming an orderly liquidation of the properties over a five
year period. Projected sales values were discounted back to January 1998
using a discount factor of 12%. The going concern value is net of an assumed
3% for estimated closing costs.

RISK FACTORS AND OTHER CONSIDERATIONS

In evaluating the Merger, Limited Partners should carefully consider the
contents of the Prospectus and give particular attention to the discussion of
the risks in participating in the Merger. See "Risk Factors" and "The
Merger -- Material Federal Income Tax Considerations."

8
<PAGE> 353

FAIRNESS OF THE MERGER

Based upon its analysis of the Merger, the General Partner of RELP I and
Realco reasonably believe that:

(1) The terms of the Merger, when considered as a whole, are fair to
the Limited Partners of RELP I;

(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners of RELP I; and

(3) After comparing the potential benefits and detriments of the
Merger with those of several alternatives, the Merger is more attractive to
the Limited Partners of RELP I than such alternatives.

THE BOARD OF DIRECTORS OF THE GENERAL PARTNER OF RELP I AND REALCO
REASONABLY BELIEVE THAT THE TERMS OF THE MERGER AGREEMENT, INCLUDING THE
CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN CONNECTION WITH THE
MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE LIMITED PARTNERS.
ACCORDINGLY, THE BOARD HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT THE
LIMITED PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND AMENDMENT OF THE
PARTNERSHIP AGREEMENT.

For a full discussion of the RELPS' reasons for the Merger, see "The
Merger -- The RELPS' Reasons for the Merger and Recommendation" in the
Prospectus.

FAIRNESS OPINION. On June 16, 1997, the General Partners, on behalf of each
RELP, retained Houlihan to render an opinion as to whether the consideration to
be received by the Limited Partners in connection with the Merger was fair, from
a financial point of view, to its Limited Partners. Houlihan was not requested
to, and did not make, any recommendation to the RELPS as to the consideration to
be received by the Limited Partners in connection with the Merger, which
consideration was determined through negotiations between the common management
of the RELPS and the Trust. The General Partners, on behalf of each RELP,
retained Houlihan to render fairness opinions based upon Houlihan's experience
in the valuation of businesses and their securities in connection with mergers
and acquisitions, and valuations for corporate purposes especially with respect
to REITs and other real estate companies. On June 30, 1997, Houlihan delivered
its written opinion to the Board of Director of the General Partner of RELP I
(the "Houlihan Opinion"), to the effect that, as of the date of such opinion,
based on Houlihan's review and subject to the limitations described in the
Prospectus, see "The Merger -- Fairness Opinions," the consideration to be
received by the Limited Partners of RELP I, in connection with the Merger was
fair, from a financial point of view, to the Limited Partners. The Houlihan
Opinion does not constitute a recommendation to any Limited Partner as to how
any such Limited Partner should vote on the Merger.

COMPARISON OF BENEFITS AND DETRIMENTS. The General Partner's assessment of
the fairness of the proposed Merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included, but were not limited to, a strategic combination with a publicly
traded REIT to take advantage of the growth of the REIT industry and real estate
markets in general, completely liquidating the RELPS, continuing the RELPS or
reorganizing the RELPS into one REIT or four separate REITs. In order to
determine whether the Merger or one of its alternatives would be more attractive
to the Limited Partners, the General Partner compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. A detailed discussion of the potential benefits and detriments of
each of these alternatives is provided in "The Merger -- The RELPS' Reasons for
the Merger and Recommendation" and "-- Alternatives to the Merger" in the
Prospectus.

In the event the Merger is not consummated for any reason, RELP I will
continue to pursue its business objectives of maximizing the value of its
properties, in addition to the possible liquidation of its portfolio, another
strategic combination or another attractive alternative that may become
available.

9
<PAGE> 354

COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS

COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES

This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and its Affiliates under current RELP I arrangements with those that
would have been paid had the Merger been in place. The following table sets
forth the compensation, fees and distributions by RELP I to the General Partner
and its Affiliates during the three most recent fiscal years and the six-month
period ended June 30, 1997 and compares those payments against the amount that
would have been paid assuming the Merger had occurred January 1, 1995.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------- SIX MONTHS ENDED
1995 1996 JUNE 30, 1997
-------------------- -------------------- --------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Management Fees(1)........... $ 40,089 $40,089 $ 48,992 $48,992 $ 27,014 $27,014
Adviser Fees(2).............. 77,791 -- 67,893 -- 36,029 --
Leasing Commissions(3)....... 9,671 9,671 9,199 9,199 220 220
Cash Distributions(4)........ 104,826 19,210 634,946 19,210 52,693 9,605
-------- ------- -------- ------- -------- -------
$232,377 $68,970 $761,030 $77,401 $115,956 $36,839
======== ======= ======== ======= ======== =======
</TABLE>

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

(1) USAA Realty Company receives fees of up to 6% of the cash receipts of the
properties for managing and providing leasing services for the properties.

(2) Realco receives advisory fees of up to 4% of gross revenues from operations
or 9% of the RELP I's adjusted cash flow.

(4) Includes all cash distributions made to the General Partner and its
Affiliates resulting from ownership of Units and general partner interests.

NEW COMPENSATION

The Trust intends to engage an Affiliate of Realco to manage and lease the
properties obtained by the Trust from the RELPS pursuant to the Merger. The
terms of this engagement will be substantially similar to the terms governing
the management arrangements the Trust typically uses in managing its current
properties.

10
<PAGE> 355

MISCELLANEOUS

DISTRIBUTIONS TO LIMITED PARTNERS

Set forth below are distributions per Unit made by RELP I to the Limited
Partners during the most recent five fiscal years and the most recently
completed interim period:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
1992 1993 1994 1995 1996 JUNE 30, 1997
------ ------ ------ ------ ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Distributions............ $33.00 $20.00 $16.00 $16.00 $104.56(1) $8.00
Return of Capital........ $ 4.69 $20.00 $ 8.10 $ 4.27 $ 98.10 $5.51
</TABLE>

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

(1) Includes a special distribution of $91.56 per Unit that was paid in March
1996 in connection with the repayment of a mortgage note held by RELP I.

SELECTED FINANCIAL INFORMATION

Selected Financial Information and certain pro forma financial statements
with respect to the Partnership are set forth in "The Trust's Unaudited Pro
Forma Financial Information (Merger)" and "Index to Financial Information" in
the Prospectus.

LIST OF INVESTORS

Pursuant to the rules and regulations promulgated by the Commission, if a
Limited Partner entitled to vote at the RELP Special Meeting desires to obtain a
list of the other Limited Partners entitled to vote at the RELP Special Meeting
to enable the requesting Limited Partner to mail soliciting materials to the
other Limited Partners, the Limited Partner may request in writing a list of the
other Limited Partners. The request should be made in writing to the appropriate
General Partner, c/o Randal R. Seewald, 8000 Robert F. McDermott Freeway, IH10
West, Suite 600, San Antonio, Texas 78230-3884. Alternatively, the requesting
Limited Partner may request that the RELP mail copies of any proxy statement,
form of proxy or other soliciting material furnished by the requesting Limited
Partner to the other Limited Partners of the applicable RELP. The requesting
Limited Partner must reimburse the RELP for its reasonable expenses incurred in
connection with performing such services. At the time of making the request, the
requesting Limited Partner must, if the Units are held through a nominee,
provide the RELP with a statement from the nominee or other independent third
party confirming such Limited Partner's beneficial ownership. Additionally, the
requesting Limited Partner must provide the RELP with an affidavit or similar
document (i) identifying the proposal that will be the subject of the Limited
Partner's solicitation; (ii) stating that the Limited Partner will not use the
list for any purpose other than to solicit Limited Partners with respect to the
same action for which the RELP is soliciting votes; and (iii) stating that the
Limited Partner will not disclose the information provided to it to any person
other than a beneficial owner for whom the request was made and an employee or
agent to the extent necessary to effectuate the communication or solicitation.
Upon termination of the solicitation, the requesting Limited Partner must return
to the RELP, without keeping any copies thereof, the list of information
provided by the RELP and any information derived from such information. A
Limited Partner is only entitled to the foregoing information with respect to
the RELP in which the Limited Partner holds Units.

11
<PAGE> 356

[REALCO LETTERHEAD]
, 199

Fellow Partners:

<PAGE> 358

RETURN ANALYSIS OF AN ORIGINAL $500.00 PER UNIT INVESTOR

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

(1) Exchange ratio at $13.125 per value for LP Unit.

(2) Per share value at September 30, 1997.

<PAGE> 359

Sincerely,

EDWARD B. KELLEY
Chairman of the Board, President and
Chief Executive Officer of USAA
Investors I, Inc., USAA Investors
II, Inc., USAA Properties III, Inc.
and USAA Properties IV, Inc.
<PAGE> 360

AMERICAN INDUSTRIAL PROPERTIES REIT

SUPPLEMENT TO PROSPECTUS

FOR

USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP

The General Partner of USAA Real Estate Income Investments II Limited
Partnership (herein referred to as "RELP II" or the "Partnership") is soliciting
the Limited Partners' approval of the merger with and into American Industrial
Properties REIT, a Texas real estate investment trust (the "Trust"), as part of
which Limited Partners of RELP II will exchange Units of Limited Partnership
Interests ("Units") in RELP II for Shares of Beneficial Interests ("Shares") in
the Trust. This solicitation is being made in conjunction with the proposed
merger with and into the Trust of up to four publicly-held limited partnerships,
including RELP II (the "Merger"). The proposal is described in detail in the
Joint Proxy Statement/Prospectus dated , 199 (the "Prospectus"). For
the definition of capitalized terms used in the Supplement, which are not
separately defined herein, see "Glossary" in the Prospectus. Cross-references in
this Supplement also refer to the cited discussions in the Prospectus, unless
specifically noted to the contrary.

The effects of the Merger may be different for Limited Partners in each of
the RELPS. This Supplement to the Prospectus has been prepared to highlight the
risks, effects and fairness of the Merger for the Limited Partners of RELP II.
It does not purport to provide an overall summary of the Merger, or to highlight
all of its material terms, conditions, risks or effects. See "Summary" and "The
Merger" in the Prospectus. Furthermore, to the extent this Supplement summarizes
portions of the Prospectus, such discussions are qualified in their entirety by
the more detailed discussions of those matters appearing in the Prospectus.
Supplements have also been prepared for each of the other RELPS and copies of
such supplements will be provided promptly without charge to each Limited
Partner or his representative who has been so designated in writing upon written
request to Randal R. Seewald at 8000 Robert F. McDermott Fwy., IH 10 West, Suite
600, San Antonio, Texas 78230-3884.

Limited Partners of RELP II participating in the Merger will be subject to
various risks, and these should be taken into account by the Limited Partners in
deciding how to cast their votes. These risks are briefly summarized below:

RISKS RELATED TO THE MERGER

- The Trust has generated losses from operations every year since 1988.

- Limited Partners who become shareholders of the Trust may not receive the
same level of distributions as previously received from RELP II. Limited
Partners may initially receive no distributions because the Trust
currently is not paying distributions. The Trust has not made
distributions for four consecutive quarters since 1993.

- The Net Asset Values assigned to RELP II may not reflect the true value
of such RELP II's assets because the Net Asset Values were the result of
negotiation between the common management of the

<PAGE> 361

Trust and the General Partners of the RELPS. Had independent
representation been arranged for each RELP, the Net Asset Value assigned
to each RELP may have been different.

- The common management of the RELPS, who are also Affiliates of Realco,
negotiated the terms of the Merger on behalf of all the RELPS. Each RELP
was not separately represented by parties independent from Realco. Had
separate representation been arranged for a RELP, the terms of the Merger
might have been more favorable to such RELP. Further, issues unique to
the value of a RELP might have resulted in adjustments increasing or
decreasing the number of Shares allocable to such RELP.

- The General Partners, through wholly-owned subsidiaries, are owned and
controlled by Realco. Realco currently owns 13.74% of the Trust's
outstanding Shares and two of Realco's designees are Trust Managers. An
Affiliate of Realco will manage and lease the former RELP properties
after the Merger. All of these factors may have influenced a General
Partner's decision to recommend the Merger to its Limited Partners. After
the Merger, assuming conversion of the Trust's debt to Realco, Realco
will own approximately 17.39% of the Trust's outstanding Shares.

- Taxable income or loss will be recognized by each taxable Limited Partner
of RELP II in the Merger in an amount equal to the Limited Partner's
allocable share of the income or loss recognized by RELP II from the
transfer of RELP II's assets to the Trust through the Merger and Limited
Partners will receive no cash from the Merger (other than cash received
in lieu of fractional Shares) to pay taxes arising from any taxable
income (see "The Merger -- Material Federal Income Tax Consequences").

- Shareholders of the Trust will be diluted if there is an issuance of
additional equity securities at what may be less than their fair market
value.

2
<PAGE> 362

- The majority vote of the Limited Partners of RELP II binds all Limited
Partners; if the Merger is approved, Limited Partners who voted against
the Merger will have their Units converted into Shares based on the
Exchange Price unless they properly exercise their dissenters' rights.

- Approval of the Merger will require the Limited Partners to forego
certain alternatives to the Merger, such as liquidating RELP II or
continuing its operations as a limited partnership.

- Increases in market interest rates may adversely affect the price of the
Shares.

- Approval of the Merger by the Limited Partners will result in the loss of
their respective rights under the Partnership Agreement and the
partnership law of the State of Texas.

- The investment and financing policies of the Trust are determined by the
Trust Managers and may be amended or revised at any time without a vote
of the shareholders of the Trust.

- The Trust may experience occurrences of uninsured liability or casualty,
reducing the Trust's capital and adversely affecting anticipated profits.

- The Trust will be taxed as a corporation if it fails to qualify as a REIT
and the Trust will be liable for increased federal, state and local
income taxes in such event.

3
<PAGE> 363

GENERAL REAL ESTATE INVESTMENT RISKS

- The illiquidity of real estate investments will limit the Trust's ability
to vary its portfolio in response to changes in economic or other
conditions.

- Competition from competing properties could decrease the occupancy levels
and rental rates of the Trust's investments.

The Merger involves numerous federal income tax consequences to the Limited
Partners and the shareholders of the Trust. For a complete discussion describing
these consequences, see "The Merger -- Material Federal Income Tax
Considerations" in the Prospectus. The material federal income tax issues
include the following:

- The amount of gain or loss recognized by a Limited Partner will be based
upon the deemed sale of assets owned by RELP II and, as applicable, the
extent to which the fair market value of the Shares distributed to the
Limited Partner exceeds the Limited Partner's adjusted basis in its
Units.

4
<PAGE> 364

THE MERGER

If the Merger Agreement is approved, RELP II will cease to exist and all of
its properties, other than the interest in the joint venture that owns Sequoia
Plaza I, will be transferred to the Trust. The joint partnership interest will
be sold to Realco or one of its Affiliates, as described below under
"Considerations Unique to RELP II -- Status of the Portfolio." The Limited
Partners will receive Shares based upon the relative Net Asset Values of the
RELPS negotiated by the common management of the RELPS and the Trust. The Shares
received by the Limited Partners will be listed for trading on the New York
Stock Exchange (the "NYSE"). If the requisite number of Limited Partners of only
one of the RELPS approves the Merger Agreement, the Trust has the right, but not
the obligation, to consummate the Merger with the one Participating RELP.

The General Partners are proposing amendments to the Partnership Agreements
to permit the closing of the transactions contemplated by the Merger Agreement.
Limited Partners voting in favor of the Merger will be deemed to have voted in
favor of each of these proposed amendments. A majority vote of Limited Partners
is required to approve the proposed amendments and to approve the Merger. The
proposed amendments authorize the following: (i) the merger of each RELP with
and into the Trust, whether or not the Trust would be regarded as an Affiliate
of the General Partners; (ii) the sale to Realco or an Affiliate of Realco of
RELP II's interest in the joint venture which owns the Sequoia Plaza I Building
and (iii) such other actions as may be necessary under or contemplated by the
Merger Agreement or the Prospectus, irrespective of any provision in the
Partnership Agreement which might otherwise prohibit such actions. See "The
Merger -- Proposed Amendments to Partnership Agreements." As of August 31, 1997,
the General Partner of RELP II owned 6,691 Units in RELP II, or approximately
24.65% of all outstanding Units of RELP II. Pursuant to the RELP II Limited
Partnership Agreement, the Units held by the RELP II General Partner are not
eligible to vote at the RELP Special Meeting.

Each of the General Partners of the RELPS has agreed to waive any right to
receive Shares to which it may otherwise have been entitled in exchange for its
general partnership interest.

5
<PAGE> 365

ALLOCATION OF CONSIDERATION

NET ASSET VALUE

The Trust is offering 28.63 Shares in consideration for each Unit in RELP
II. The following table sets forth the methodology utilized in determining the
number of Shares to be offered by the Trust for each Unit:

<TABLE>
<S> <C>
Asset Value of Partnership Properties.......................
Continental Plastic....................................... $ 7,200,000
Bowater................................................... 3,000,000
-----------
$10,200,000
-----------
Cash and Cash Equivalents(1)................................ $ 0
Mortgages and Other Long-Term Debt.......................... $ 0
Other Liabilities........................................... $ 0
Net Asset Value of Partnership(2)........................... $10,200,000
Percentage of Aggregate Net Asset Value of All Relps........ 17.61%
Net Asset Value Per Original $500 Investment(3)............. $ 375.82
Number of Shares Allocable to Partnership(4)................ 777,143
Percentage of Total Shares to be issued in the Merger....... 17.61%
Percentage of Total Shares of the Trust after the Merger.... 8.57%
Allocation of Shares to
Limited Partners(4)....................................... 585,553
General Partner(4),(5).................................... 191,590
-----------
777,143
-----------
Allocation of Shares Per Original $500 Investment by Limited
Partners(4)............................................... 28.63
Total shares in the Trust after the Merger(4)..... 9,070,803
===========
</TABLE>

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

(1) All cash and cash equivalents held by RELP II, net of related payables,
liabilities or other contingencies, will be distributed to the Limited
Partners immediately prior to the Merger pursuant to a special distribution.

(2) Such amounts were determined by negotiations between common management of
the RELPS and the Trust.

(5) The General Partner of RELP II has agreed to waive any right to receive
Shares to which it may otherwise have been entitled in exchange for its
general partnership interest. The amount reflected above includes the Shares
to be received for the 6,691 limited partnership units owned by the General
Partner. The General Partner will not be receiving any other compensation or
reimbursement for claims against or interests in the RELP.

CONSIDERATIONS UNIQUE TO RELP II

6
<PAGE> 366

STATUS OF THE PORTFOLIO. At the time of RELP II's formation, the General
Partner anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within eight
years after the acquisition of the properties. Accordingly based on the
completion of the acquisition of RELP II's portfolio in 1989, it was anticipated
that the portfolio would be liquidated by 1997. Of the two investments made by
RELP II which will be included in the Merger, both have been offered for sale.
Bowater Communication Papers Building was offered for a price of $4.2 million.
During the twelve months ended June 30, 1997, three offers were received ranging
from $3.35 million to $3.9 million, but were not completed. The General Partner
has removed the property from the market due to the short time remaining on the
lease of the single tenant at the property. The Continental Plastic Containers
Buildings have been offered for sale at a price of $8.2 million. During the
twelve months ended June 30, 1997, offers ranging from $5 million to $7.4
million have been received, but not consummated.

The remaining investment in RELP II, a 7.275% interest in the joint venture
which owns Sequoia Plaza I, has not been offered for sale. However, the property
was externally appraised as of January 1, 1997, at a total value of $29.7
million. This joint venture interest will not be included in the Merger but will
be purchased by Realco or an Affiliate of Realco for $2,250,000, if the Merger
is approved by the Limited Partners of RELP II. During negotiation between the
General Partner and the Trust, it was determined at the outset that an asset
consisting of a 7.275% interests in a joint venture would not be an asset that
would be considered by the Trust for participation in a proposed transaction
because a minority interest in a joint venture did not meet the Trust's
investment policies and criteria. In addition, the majority member of the joint
venture is USAA Real Estate Equities Inc. which has a right of first refusal on
the sale of the joint venture interest. USAA Real Estate Equities Inc. is
considering purchasing the minority interest and it is likely that the Trust
would not be able to obtain the minority interest even if it met the Trust's
investment criteria. Considering these factors, the General Partner and the
Trust determined that the joint venture interest would not be included in the
assets to be transferred in the Merger. See "Business of RELPS -- RELP II" in
the Prospectus for additional information regarding the RELP II portfolio.

The General Partner believes that the Net Asset Value of $10.2 million for
the portfolio, excluding the joint venture interest which was negotiated by
common management of the RELPS and the Trust is fair to the Limited Partners.
See "The Merger -- The RELPS' Reasons for the Merger and Recommendation" in the
Prospectus.

INCREASED DEBT SERVICE. As of December 31, 1996, RELP II had no
indebtedness. As a group, the RELPS had, as of that same date, aggregate
outstanding indebtedness of $30,668,087, representing approximately 34% of the
total portfolio value of all of the RELPS' real estate investments. Excluding
interests in RELP properties that will not be transferred to the Trust pursuant
to the Merger Agreement, as of December 31, 1996, the Trust had indebtedness of
$53,818,000, representing approximately 57% of its real estate assets.
Therefore, if the Limited Partners of RELP II approve the Merger, they will
exchange Units in an entity with no debt for Shares in a REIT with significant
indebtedness. In that the Trust is more leveraged than the RELP II, this will
result in an increase in the debt service payments that must be made by the
Trust, increase the Trust's risk of losing its assets through foreclosure and
increase the risk that the Trust may not be able to make distributions to
shareholders.

MERGER AS A TAXABLE EVENT. Limited Partners of RELP II will realize taxable
income on the Merger in an amount equal to their allocable share of the excess
of the sum of the fair market value of the Shares received by the Partnership
over the Partnership's adjusted tax basis of the Partnership assets. Assuming
that the value of the Shares reflects the Net Asset Values of the assets
acquired in the Merger, if RELP II participates in the Merger, each of its
Limited Partners would have recognized taxable income of approximately 7% (as of
December 31, 1997) for every Unit held, representing an original investment of
$500. The actual amount of income or loss recognized by each Limited Partner
will depend upon the value ascribed to the Shares for federal tax purposes.
Because the value of the Shares will fluctuate immediately after the Merger and
the 1997 operations of RELP II have not been included, it is possible that such
values used for purposes of calculating the taxable income or loss and that the
taxable income or loss per Unit will differ from the calculation stated above.

7
<PAGE> 367

INVESTMENT STRATEGY. The principal investment objectives of RELP II are to
(i) preserve and protect RELP II's capital; (ii) provide the Limited Partners
with quarterly distributions of cash from operations; and (iii) obtain long-term
appreciation in the value of its properties. RELP II has attempted to achieve
these objectives through investment in a diversified portfolio of
income-producing real properties and by making first mortgage loans. In 1989,
the Partnership acquired the Continental Plastic Containers Buildings located in
Illinois and the Bowater Communication Papers Building located in Florida. RELP
II also formed the Combined Capital Resources Joint Venture with Realco in 1989,
which owned a participating first mortgage loan secured by the Sequoia Plaza I
Building in Virginia. The joint venture's investment in the mortgage loan was
converted to ownership of the underlying property in August 1991 through
foreclosure on the loan. RELP II's properties had an average occupancy level of
100% at an average annual rent of $7.67 per square foot for fiscal 1996 and 100%
at an average annual rent of $7.61 per square foot for fiscal 1997. RELP II has
a history of making regular quarterly distributions to its Limited Partners. See
"Miscellaneous -- Distributions to Limited Partners" below in this Supplement.

MANAGEMENT COMPENSATION. USAA Realty Company, an affiliate of Realco,
provides property management and leasing services for the properties and may
receive fees up to 6% of property cash receipts for those services. If RELP II
participates in the Merger, neither the General Partner nor any of its
Affiliates will receive any compensation for services rendered in connection the
Merger. The Trust intends to retain the services of an Affiliate of Realco to
provide property management services. It is anticipated that fees for these
services will be at a market rate typically paid by the Trust in managing its
current properties. Such fees may be higher than those currently paid by RELP
II. See "Comparative Compensation, Fees and Distributions -- New Compensation"
below.

OFFERS FROM THIRD PARTIES. All offers received during the past twelve
months by the General Partners of the RELPS from unaffiliated third parties are
described below in addition to a brief discussion of why such offers were not
accepted. Conditions placed on each of the offers which are considered
significant are also described. In all of these instances, the General Partner
assessed each offer in light of the current market and property conditions
prevalent at the time. Counteroffers were made when the initial offer was
considered too low or the other terms were inadequate and there was reason to
believe further price negotiations were possible.

Bowater / CST / Star Forms. On July 10, 1996, the General Partner received
an offer to purchase the Bowater / CST / Star Forms Building for $3,833,000
(gross) in cash. Believing that the offer was too low at that time, the General
Partner countered with an offer of $4,000,000 (gross) in cash. The purchaser
responded with an offer of $3,900,000 (gross) in cash which was accepted by the
General Partner, and a Purchase and Sale contract was executed. At the
completion of the contract's due diligence period, the purchaser executed its
right to cancel the contract. This sale would have provided net proceeds to RELP
II of approximately $3,800,000.

On October 29, 1996, the General Partner received an offer to purchase the
Bowater / CST / Star Forms Building for $3,250,000 (gross) with seller financing
at a minimum of 10 years. Believing that the offer was too low at the time, the
General Partner declined.

Continental Plastic Containers Buildings. On April 26, 1996, the General
Partner received an offer to purchase the Continental Plastic Containers
Buildings (the "Continental Buildings") for $6,450,000 (gross) in cash.
Believing that the offer was too low at the time, the General Partner countered
with an offer of $7,400,000 (gross) in cash. The purchaser did not increase its
offer and negotiations ended.

On September 30, 1996, the General Partner received an offer to purchase
the Continental Buildings for $6,300,000 (gross) in cash. Believing that the
offer was too low at the time, the General Partner declined.

On September 30, 1996, the General Partner received an offer to purchase
the Continental Buildings for $6,500,000 (gross) with seller financing.
Believing that the offer was too low at that time, the General Partner countered
with an offer of $7,600,000 with Realco financing. The purchaser responded with
an offer of $7,400,000 with Realco financing at below-market rates. Believing
that the offer was still too low, the General Partner countered with an offer of
$7,450,000 (gross) with Realco financing at market rates. The purchaser

8
<PAGE> 368

did not increase his offer and required below-market financing and certain
guarantees from Affiliates. The General Partner declined, and negotiations
ended.

On February 1, 1997, the General Partner received an offer to purchase the
Continental Buildings for $5,000,000 (gross) in cash. Believing that the offer
was too low at the time, the General Partner declined.

On February 1, 1997, the General Partner received an offer to purchase the
Continental Buildings for $6,250,000 (gross) in cash. Believing that the offer
was too low at the time, the General Partner declined.

On February 26, 1997, the General Partner received an offer to purchase the
Continental Buildings for $6,435,000 (gross) in cash. Believing that the offer
was too low at the time, the General Partner countered with an offer of
$7,585,000 (gross) in cash. The purchaser responded with an offer of $6,643,000
(gross) in cash. Believing that the offer was still too low, the General Partner
countered with an offer of $7,394,000 (gross) in cash. The purchaser did not
increase its offer, and negotiations ended.

On February 28, 1997, the General Partner received an offer to purchase the
Continental Buildings for $6,100,000 (gross) in cash. Believing that the offer
was too low at the time, the General Partner declined.

On April 8, 1997, the General Partner received an offer to purchase the
Continental Buildings for $7,080,000 (gross) in cash. Believing that the offer
was too low at the time, the General Partner countered with an offer of
$7,550,000 (gross) in cash. The purchaser did not increase its offer, and
negotiations ended.

On April 24, 1997, the General Partner received an offer to purchase the
Continental Buildings for $6,900,000 (gross) in cash. Believing that the offer
was too low at the time, the General Partner countered with an offer of
$7,575,000 (gross) in cash. The purchaser did not increase its offer, and
negotiations ended.

On April 22, 1997, the General Partner received an offer to purchase the
Continental Buildings for $7,300,000 (gross) in cash. Believing that the offer
was too low at the time, the General Partner countered with an offer of
$7,600,000 (gross) in cash. The purchaser responded on April 28, 1997, with an
offer of $7,320,000 (gross) in cash. Believing that the proceeds from the offer
were still too low, the General Partner countered with an offer of $7,490,000
(gross) in cash. The purchaser responded with its best and final offer on May
13, 1997, of $7,400,000 (gross) in cash. This offer would provide net proceeds
of approximately $7,225,000. The General Partner declined, and negotiations
ended.

<TABLE>
<CAPTION>
MERGER OFFER
AND NON-MERGER SALES LIQUIDATION VALUE(1) GOING CONCERN(2)
-------------------- -------------------- ----------------
<C> <C> <C>
$459.00 $419.00 $452.00
</TABLE>

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

(1) Liquidation value was determined using the projected future cash flows of
the properties based on an assumed capitalization rate for the particular
property. The liquidation value is net of an assumed 3.0% for estimated
closing costs, a 5.0% adjustment for a liquidation discount and an estimate
of proxy costs for limited partner approval of the liquidation.

RISK FACTORS AND OTHER CONSIDERATIONS

9
<PAGE> 369

FAIRNESS OF THE MERGER

Based upon its analysis of the Merger, the General Partner of RELP II and
Realco reasonably believe that:

(1) The terms of the Merger, when considered as a whole, are fair to
the Limited Partners of RELP II;

(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners of RELP II; and

(3) After comparing the potential benefits and detriments of the
Merger with those of several alternatives, the Merger is more attractive to
the Limited Partners of RELP II than such alternatives.

THE BOARD OF DIRECTORS OF THE GENERAL PARTNER OF RELP II AND REALCO
REASONABLY BELIEVE THAT THE TERMS OF THE MERGER AGREEMENT, INCLUDING THE
CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN CONNECTION WITH THE
MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE LIMITED PARTNERS.
ACCORDINGLY, THE BOARD HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT THE
LIMITED PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND AMENDMENT OF THE
PARTNERSHIP AGREEMENT AND FOR APPROVAL OF THE SALE OF THE JOINT VENTURE.

For a full discussion of the RELPS' reasons for the Merger, see "The
Merger -- The RELPS' Reasons for the Merger and Recommendation" in the
Prospectus.

FAIRNESS OPINION. On June 16, 1997, the General Partner, on behalf of each
RELP, retained Houlihan to render an opinion as to whether the consideration to
be received by the Limited Partners in connection with the Merger was fair, from
a financial point of view, to its Limited Partners. Houlihan was not requested
to, and did not make, any recommendation to the General Partner, on behalf of
each RELP, as to the consideration to be received by the Limited Partners in
connection with the Merger, which consideration was determined through
negotiations between the common management of the RELPS and the Trust. The RELPS
retained Houlihan to render fairness opinions based upon Houlihan's experience
in the valuation of businesses and their securities in connection with mergers
and acquisitions, and valuation for corporate purposes especially with respect
to REITs and other real estate companies. On June 30, 1997, Houlihan delivered
its written opinion to the Board of Directors of the General Partner of RELP II
(the "Houlihan Opinion"), to the effect that, as of the date of such opinion,
based on Houlihan's review and subject to the limitations described in the
Prospectus, see "The Merger -- Fairness Opinions," the consideration to be
received by the Limited Partners of RELP II in connection with the Merger and
the sale of the joint venture was fair, from a financial point of view, to the
Limited Partners. The Houlihan Opinion does not constitute a recommendation to
any Limited Partner as to how any such Limited Partner should vote on the
Merger.

In the event the Merger is not consummated for any reason, RELP II will
continue to pursue its business objectives of maximizing the value of its
properties, in addition to the possible liquidation of its portfolio, another
strategic combination or another attractive alternative that may become
available.

10
<PAGE> 370

COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS

COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES

This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and its Affiliates under current RELP II arrangements with those that
would have been paid had the Merger been in place. The following table sets
forth the compensation, fees and distributions by the RELP II to the General
Partner and its Affiliates during the four most recent fiscal years and compares
those payments against the amount that would have been paid assuming the Merger
had occurred July 1, 1996.

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------
1996 1997
--------------------- ---------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Management Fees(1).......................... $ 12,110 $12,110 $ 12,496 $12,496
Leasing Commissions(2)...................... -- -- -- --
Cash Distributions(3)....................... 270,471 38,260 339,208 38,318
-------- ------- -------- -------
$282,581 $50,370 $351,704 $50,814
======== ======= ======== =======
</TABLE>

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

(3) Includes all cash distributions made to the General Partner and its
Affiliates resulting from ownership of Units and general partner interests.

NEW COMPENSATION

MISCELLANEOUS

DISTRIBUTIONS TO LIMITED PARTNERS

Set forth below are distributions per Unit made by RELP II to the Limited
Partners during the most recent five fiscal years.

<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Distributions............................ $35.00 $35.00 $33.25 $28.00 $35.00
Return of Capital........................ $ 7.26 $ 6.87 $ 4.35 -- $ 1.19
</TABLE>

SELECTED FINANCIAL INFORMATION

11
<PAGE> 371

LIST OF INVESTORS

The RELP II Partnership Agreement provides that for any proper purpose, a
RELP II Limited Partner may obtain a copy of the list of RELP II Limited
Partners upon written request after payment of the reasonable expense of
duplication. Under Texas law, for a proper purpose, a RELP II Limited Partner
may inspect and copy at his expense, the list of RELP II Limited Partners.

12
<PAGE> 372

[REALCO LETTERHEAD]
, 199

Fellow Partners:

<PAGE> 374

RETURN ANALYSIS OF AN ORIGINAL $500.00 PER UNIT INVESTOR

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

(1) Exchange ratio at $13.125 per value for LP Unit.

(2) Per share value at September 30, 1997.

<PAGE> 375

Sincerely,

EDWARD B. KELLEY
Chairman of the Board, President and
Chief Executive Officer of USAA
Investors I, Inc., USAA Investors
II, Inc., USAA Properties III, Inc.
and USAA Properties IV, Inc.
<PAGE> 376

AMERICAN INDUSTRIAL PROPERTIES REIT

SUPPLEMENT TO PROSPECTUS

FOR

USAA INCOME PROPERTIES III LIMITED PARTNERSHIP

The General Partner of USAA Income Properties III Limited Partnership
(herein referred to as "RELP III" or the "Partnership") is soliciting the
Limited Partners' approval of the merger with and into American Industrial
Properties REIT, a Texas real estate investment trust (the "Trust"), as part of
which Limited Partners of RELP III will exchange Units of Limited Partnership
Interests ("Units") in RELP III for Shares of Beneficial Interests ("Shares") in
the Trust. This solicitation is being made in conjunction with the proposed
merger with and into the Trust of up to four publicly-held limited partnerships,
including RELP III (the "Merger"). The proposal is described in detail in the
Joint Proxy Statement/Prospectus dated , 199 (the "Prospectus").
For the definition of capitalized terms used in the Supplement, which are not
separately defined herein, see "Glossary" in the Prospectus. Cross-references in
this Supplement also refer to the cited discussions in the Prospectus, unless
specifically noted to the contrary.

The effects of the Merger may be different for Limited Partners in each of
the RELPS. This Supplement to the Prospectus has been prepared to highlight the
risks, effects and fairness of the Merger for the Limited Partners of RELP III.
It does not purport to provide an overall summary of the Merger or to highlight
all of its material terms, conditions, risks or effects. See "Summary" and "The
Merger" in the Prospectus. Furthermore, to the extent this Supplement summarizes
portions of the Prospectus, such discussions are qualified in their entirety by
the more detailed discussions of those matters appearing in the Prospectus.
Supplements have also been prepared for each of the other RELPS and copies of
such supplements will be provided promptly without charge to each Limited
Partner or his representative who has been so designated in writing upon written
request to Randal R. Seewald at 8000 Robert F. McDermott Fwy., IH 10 West, Suite
600, San Antonio, Texas 78230-3884.

Limited Partners of RELP III participating in the Merger will be subject to
various risks, and these should be taken into account by the Limited Partners in
deciding how to cast their votes. These risks are briefly summarized below:

RISKS RELATED TO THE MERGER

- The Trust has generated losses from operations every year since 1988.

- Limited Partners who become shareholders of the Trust may not receive the
same level of distributions as previously received from RELP III. Limited
Partners may initially receive no distributions because the Trust
currently is not paying distributions. The Trust has not made
distributions for four consecutive quarters since 1993.

- The Net Asset Values assigned to RELP III may not reflect the true value
of RELP III's assets because the Net Asset Values were the result of
negotiation between the common management of the

<PAGE> 377

Trust and the General Partners of the RELPS. Had independent
representation been arranged for each RELP, the Net Asset Value assigned
to each RELP may have been different.

- The General Partners, through wholly-owned subsidiaries, are owned and
controlled by Realco. Realco currently owns 13.74% of the Trust's
outstanding Shares and two of Realco's designees are Trust Managers. An
Affiliate of Realco will manage and lease the former RELP properties
after the Merger. All of these factors may have influenced a General
Partner's decision to recommend the Merger to its Limited Partners. After
the Merger, assuming conversion of the Trust's debt to Realco, Realco
will own approximately 17.39% of the Trust's outstanding Shares.

- Taxable income or loss will be recognized by each taxable Limited Partner
of RELP III in the Merger in an amount equal to the Limited Partner's
allocable share of the income or loss recognized by RELP III from the
transfer of the RELP III's assets to the Trust through the Merger and
Limited Partners will receive no cash from the Merger (other than cash
received in lieu of fractional Shares) to pay taxes arising from any
taxable income (see "The Merger -- Material Federal Income Tax
Consequences").

- Shareholders of the Trust will be diluted if there is an issuance of
additional equity securities at what may be less than their fair market
value.

2
<PAGE> 378

- The majority vote of the Limited Partners of RELP III binds all Limited
Partners; if the Merger is approved, Limited Partners who voted against
the Merger will have their Units converted into Shares based on the
Exchange Price unless they properly exercise their dissenters' rights.

- Approval of the Merger will require the Limited Partners to forego
certain alternatives to the Merger, such as liquidating RELP III's assets
or continuing its operating as a limited partnership.

- The Trust has different business objectives than RELP III, including the
intent to acquire new properties and, from time to time, to dispose of
existing properties and reinvest the proceeds therefrom, to the extent a
distribution is not required to maintain REIT status.

- Increases in market interest rates may adversely affect the price of the
Shares.

- Approval of the Merger by the Limited Partners will result in the loss of
their respective rights under the RELP III Partnership Agreement and the
partnership law of the State of Delaware.

- The investment and financing policies of the Trust are determined by the
Trust Managers and may be amended or revised at any time without a vote
of the shareholders of the Trust.

- The Trust may experience occurrences of uninsured liability or casualty,
reducing the Trust's capital and adversely affecting anticipated profits.

- The Trust will be taxed as a corporation if it fails to qualify as a REIT
and the Trust will be liable for increased federal, state and local
income taxes in such event.

3
<PAGE> 379

GENERAL REAL ESTATE INVESTMENT RISKS

- The illiquidity of real estate investments will limit the Trust's ability
to vary its portfolio in response to changes in economic or other
conditions.

- Competition from competing properties could decrease the occupancy levels
and rental rates of the Trust's investments.

The Merger involves numerous federal income tax consequences to the Limited
Partners and the shareholders of the Trust. For a complete discussion describing
these consequences, see "The Merger -- Material Federal Income Tax
Considerations" in the Prospectus. The material federal income tax issues
include the following:

- The amount of gain or loss recognized by a Limited Partner will be based
upon the deemed sale of assets owned by RELP III and, as applicable, the
extent to which the fair market value of the Shares distributed to the
Limited Partner exceeds the Limited Partner's adjusted basis in its
Units.

4
<PAGE> 380

THE MERGER

If the Merger Agreement is approved, RELP III will cease to exist and all
of its properties, other than Curlew Crossing Shopping Center, will be
transferred to the Trust. Curlew Crossing will be sold to Realco or one of its
Affiliates, as described below under "Considerations Unique to RELP
III -- Status of the Portfolio." The Limited Partners will receive Shares based
upon the relative Net Asset Values of the RELPS negotiated by the common
management of the RELPS, and the Trust. The Shares received by the Limited
Partners will be listed for trading on the New York Stock Exchange (the "NYSE").
If the requisite number of Limited Partners of only one of the RELPS approves
the Merger Agreement, the Trust has the right, but not the obligation, to
consummate the Merger with the one Participating RELP.

The General Partners are proposing amendments to the Partnership Agreements
to permit the closing of the transactions contemplated by the Merger Agreement.
Limited Partners voting in favor of the Merger will be deemed to have voted in
favor of each of these proposed amendments. A majority vote of Limited Partners
is required to approve the proposed amendments and to approve the Merger. The
proposed amendments authorize the following: (i) the merger of each RELP with
and into the Trust, whether or not the Trust would be regarded as an Affiliate
of the General Partners; (ii) the sale of the Curlew Crossing property by RELP
III to Realco; and (iii) such other actions as may be necessary under or
contemplated by the Merger Agreement or the Prospectus, irrespective of any
provision in the Partnership Agreement which might otherwise prohibit such
actions. See "The Merger -- Proposed Amendments to Partnership Agreements." As
of August 31, 1997, the General Partner of RELP III owned 6,469 Units in RELP
III, or approximately 5.80% of all outstanding Units of RELP III. Pursuant to
the RELP III Limited Partnership Agreement, the Units held by the RELP III
General Partner are not eligible to vote at the RELP Special Meeting.

Each of the General Partners of the RELPS has agreed to waive any right to
receive Shares to which it may otherwise have been entitled in exchange for its
general partnership interest.

5
<PAGE> 381

ALLOCATION OF CONSIDERATION

NET ASSET VALUE

The Trust is offering 16.60 Shares in consideration for each Unit in RELP
III. The following table sets forth the methodology utilized in determining the
number of Shares to be offered by the Trust for each Unit:

<TABLE>
<S> <C>
Asset Value of Partnership Properties
Manhattan Towers.......................................... $ 29,000,000
Skygate Commons........................................... 10,300,000
------------
$ 39,300,000
------------
Cash and Cash Equivalents(1)................................ 0
Mortgages and Other Long-Term Debt(2)....................... $(15,000,000)
Other Liabilities........................................... 0
Net Asset Value of Partnership Properties(3)................ $ 24,300,000
Percentage of Aggregate Net Asset Value of All RELPS........ 41.96%
Net Asset Value Per Original $500 Investment(4)............. $ 217.84
Number of Shares Allocable to Partnership(5)................ 1,851,429
Percentage of Total Shares to be issued in the Merger....... 41.96%
Percentage of Total Shares of the Trust after the Merger.... 20.41%
Allocation of Shares to
Limited Partners(5)....................................... 1,744,056
General Partner(5),(6).................................... 107,373
------------
1,851,429
------------
Allocation of Shares Per Original $500 Investment by Limited
Partners(5)............................................... 16.60
Total Shares in the Trust after the Merger(5)..... 9,070,803
</TABLE>

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

(1) All cash and cash equivalents held by RELP III, net of related payables,
liabilities and other contingencies, will be distributed to the Limited
Partners immediately prior to the Merger pursuant to a special distribution.

(2) Estimated balance as of December 31, 1997.

(3) Such amounts were determined by negotiations between common management of
the RELPS and the Trust.

(4) "Net Asset Value Per Original $500 Investment" is computed by dividing that
portion of the Net Asset Value allocable to the Limited Partners by the
number of outstanding Units. This is not intended to be an estimate of the
value of the Shares exchangeable for each Unit or the price at which such
Shares may trade in the market. See "Risk Factors."

(5) The Share amounts and number of Shares outstanding have been restated to
reflect the impact of the one for five reverse Share split approved by the
Trust Managers on July 30, 1997, which is subject to shareholder approval on
October 15, 1997.

(6) The General Partner of RELP III has agreed to waive any right to receive
Shares to which it may otherwise have been entitled in exchange for its
general partnership interest. The amount reflected above includes the Shares
to be received for the 6,469 limited partnership units owned by the General
Partner. The General Partner will not be receiving any other compensation or
reimbursement for claims against or interests in the RELP.

6
<PAGE> 382

CONSIDERATIONS UNIQUE TO RELP III

STATUS OF THE PORTFOLIO. At the time of RELP III's formation, the General
Partner anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within four to
eight years after the acquisition of the properties. Accordingly, based upon the
completion of the acquisition of RELP III's portfolio in 1986, it was
anticipated that the portfolio would be liquidated by 1994. Neither of the two
properties to be included in the Merger, Manhattan Towers or Skygate Commons,
have been offered for sale due to pending improvements in the surrounding real
estate markets and stabilization of occupancy and rental revenue through
re-leasing of the properties. The General Partner received three offers for the
Manhattan Towers from September 1996, to May 1997. The offers ranged from
$22,000,000 to $30,500,000 (gross). These offers were declined by the General
Partner as the property's leasing needed to be stabilized. On June 30, 1997, the
General Partner received an offer to purchase the Curlew Crossing Shopping
Center for $9,124,000 (gross) in cash. Believing that the offer was too low at
that time, the General Partner declined and responded verbally that offers would
need to provide net proceeds in excess of $10,500,000 to be considered. The
offeror increased its offer on July 16, 1997, to $10,000,000 (gross) in cash.
The General Partner declined and again responded verbally that offers would need
to provide net proceeds in excess of $10,500,000 to be considered. The offeror
did not increase its offer, and negotiations ended. No offers have been received
on Skygate Commons.

The remaining property, Curlew Crossing Shopping Center, is not included in
the Merger, but will be purchased by Realco for $11,200,000 if the Merger is
approved by the Limited Partners of RELP III. Realco currently has an
$11,000,000 loan secured by the property. Curlew Crossing is not included in the
Merger because the General Partner and the Trust could not agree on the value of
the property. Curlew Crossing has been offered for sale and one offer of
$9,124,000 has been received. The purchaser declined a counter-offer of $10.5
million, and the sale was not completed. See "Business of RELPS -- RELP III" in
the Prospectus for additional information regarding the RELP III portfolio. The
General Partner believes that the Net Asset Value of $39.3 million (including
$15 million in debt assumption) for the portfolio, not including Curlew
Crossing, which was negotiated by common management of the RELPS and the Trust
is fair to the Limited Partners. See "The Merger -- The RELPS' Reasons for the
Merger and Recommendation" in the Prospectus.

INCREASED DEBT SERVICE. As of December 31, 1996, RELP III had indebtedness
of $15,000,000, representing approximately 47% of the value of its real estate
investments. As a group, the RELPS had, as of that same date, aggregate
outstanding indebtedness of $30,668,087, representing approximately 34% of the
total portfolio value of all of the RELPS' real estate investments. Excluding
interests in RELP properties that will not be transferred to the Trust pursuant
to the Merger Agreement, as of December 31, 1996, the Trust had indebtedness of
$53,818,000, representing approximately 57% of its real estate assets. Thus, the
Trust's total indebtedness will be significantly greater, both in amount and as
a percentage of assets, than RELP III's current level of indebtedness. If the
Trust is more leveraged than the RELPS, this will result in an increase in the
debt service payments that must be made by the Trust, increase the Trust's risk
of losing its assets through foreclosure and increase the risk that the Trust
may not be able to make distributions to shareholders.

MERGER AS A TAXABLE EVENT. Limited Partners of RELP III will realize
taxable income or loss on the Merger in an amount equal to their allocable share
of the excess of the sum of the fair market value of the Shares received by the
RELP over the RELP's adjusted tax basis of the RELP's assets. Assuming that the
value of the Shares reflects the Net Asset Values of the assets acquired in the
Merger, if RELP III participates in the Merger, each of its Limited Partners
would have recognized taxable income or loss depending if the election to
exclude discharge of indebtedness in 1994 was taken by the limited partner. If
the

7
<PAGE> 383

Limited Partner elected to exclude the income from the discharge of
indebtedness, then the Limited Partners would have recognized taxable income of
approximately 6.1% (as of December 31, 1997) for every Unit held, representing
an original investment of $500. If the Limited Partner did not elect to exclude
the income, then a taxable loss of approximately 4.4% would have been recognized
(as of December 31, 1997) for every Unit held, representing an original
investment of $500. The actual amount of income or loss recognized by each
Limited Partner will depend upon the value ascribed to the Shares for federal
tax purposes. Because the value of the Shares will fluctuate immediately after
the Merger and since the 1997 operations of RELP III have not been included, it
is possible that such values may be used for purposes of calculating the taxable
income or loss and that the taxable income or loss per Unit will differ from the
calculation stated above.

INVESTMENT STRATEGY. The principal investment objectives of RELP III are to
(i) provide the Limited Partners with cash distributions which will not
constitute taxable income by reason of Partnership tax deductions and possibly
tax losses which may be used to offset other taxable income; (ii) preserve and
protect the Limited Partners' capital and related buying power; (iii) obtain
long-term appreciation in the value of the properties; and (iv) provide a
build-up of equity through the reduction of mortgage loans on the properties.
RELP III has attempted to achieve these objectives through investment in a
diversified portfolio of income-producing real properties and by making first
mortgage loans. In 1986, RELP III acquired the Curlew Crossing (formerly
Courtyard Shoppes) Shopping Center, Manhattan Towers (formerly Parkview Plaza
Office Buildings) and the Skygate Commons (formerly Ramada World Headquarters
Office Buildings). RELP III's properties had an average occupancy level of 76%
at an annual rent of $22.72 per square foot for fiscal 1996 and 76% at an annual
rent of $16.94 per square foot in the six months ended June 30, 1997. RELP III
has a history of making regular quarterly distributions to its Limited Partners.
See "Miscellaneous -- Distributions to Limited Partners" below in this
Supplement. Since the inception of RELP III, it has not sold any of its real
estate investments with the exception of receiving $220,400 as a condemnation
award from the Florida Department of Transportation for a small portion of the
Curlew Crossing property. As discussed in "Status of the Portfolio" above, the
Curlew Crossing property will not be transferred to the Trust if RELP III
approves the Merger but will be sold to Realco.

MANAGEMENT COMPENSATION. RELP III has no employees, rather its operations
are managed by Realco. Under the Advisory Agreement pursuant to which Realco
manages the operations of RELP III, Realco is entitled to management fees equal
to 4% of cash receipts from operations not to exceed 9% of adjusted cash flow
from operations of the Partnership. This relationship will terminate if RELP III
is merged into the Trust. USAA Realty Company, an Affiliate of Realco, provides
property management and leasing services for the properties and may receive fees
up to 6% of property cash receipts for those services. If RELP III participates
in the Merger, neither the General Partner nor any Affiliate of the Partnership
will receive any compensation for services rendered in connection the Merger.
The Trust intends to retain the services of an Affiliate of Realco to provide
property management and leasing services. It is anticipated that fees for these
services will be at a market rate typically paid by the Trust in managing its
current properties. Such fees may be higher than these currently paid by RELP
III. See "Comparative Compensation, Fees and Distribution -- New Compensation"
below.

<TABLE>
<CAPTION>
MERGER OFFER LIQUIDATION VALUE(1) GOING CONCERN(2)
------------ -------------------- ----------------
<C> <C> <C>
$218.00 $191.00 $212.00
</TABLE>

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

(1) Liquidation value was determined using the projected future cash flows of
the properties based on an assumed capitalization rate for the particular
property. The liquidation value is net of an assumed 3.0% for estimated
closing costs, a 5.0% adjustment for a liquidation discount and an estimate
of proxy costs for limited partner approval of the liquidation.

8
<PAGE> 384

RISK FACTORS AND OTHER CONSIDERATIONS

FAIRNESS OF THE MERGER

Based upon its analysis of the Merger, the General Partner of RELP III and
Realco reasonably believe that:

(1) The terms of the Merger, when considered as a whole, are fair to
the Limited Partners of RELP III;

(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners of RELP III; and

(3) After comparing the potential benefits and detriments of the
Merger with those of several alternatives, the Merger is more attractive to
the Limited Partners of RELP III than such alternatives.

THE BOARD OF DIRECTORS OF THE GENERAL PARTNER OF RELP III AND REALCO
REASONABLY BELIEVE THAT THE TERMS OF THE MERGER AGREEMENT, INCLUDING THE
CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN CONNECTION WITH THE
MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE LIMITED PARTNERS.
ACCORDINGLY, THE BOARD HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT THE
LIMITED PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND AMENDMENT OF THE
PARTNERSHIP AGREEMENT AND FOR APPROVAL OF THE SALE OF THE CURLEW CROSSING
PROPERTY.

For a full discussion of the RELPS' reasons for the Merger, see "The
Merger -- the RELPS' Reasons for the Merger and Recommendation."

FAIRNESS OPINION. On June 16, 1997, the General Partner, on behalf of each
RELP retained Houlihan to render an opinion as to whether the consideration to
be received by the Limited Partners in connection with the Merger was fair, from
a financial point of view, to its Limited Partners. Houlihan was not requested
to, and did not make, any recommendation to the General Partner, on behalf of
each RELPS as to the consideration to be received by the Limited Partners in
connection with the Merger, which consideration was determined through
negotiations between the common management of the RELPS and the Trust. The RELPS
retained Houlihan to render fairness opinions based upon Houlihan's experience
in the valuation of businesses and their securities in connection with mergers
and acquisitions, and valuation for corporate purposes especially with respect
to REITs and other real estate companies. On June 30, 1997, Houlihan delivered
its written opinion to the Board of Directors of the General Partner of RELP III
(the "Houlihan Opinion"), to the effect that, as of the date of such opinion,
based on Houlihan's review and subject to the limitations described in the
Prospectus, see "The Merger -- Fairness Opinion," the consideration to be
received by the Limited Partners of RELP III, in connection with the Merger and
the sale of the Curlew Crossing property was fair, from a financial point of
view, to the Limited Partners. The Houlihan Opinion does not constitute a
recommendation to any Limited Partner as to how any such Limited Partner should
vote on the Merger.

COMPARISON OF BENEFITS AND DETRIMENTS. The General Partner's assessment of
the fairness of the proposed Merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included, but were not limited to, a strategic combination with a publicly
traded REIT to take advantage of the growth of the REIT industry and real estate
markets in general, completely liquidating the RELPS, continuing the RELPS or
reorganizing the RELPS into one REIT or four separate REITs. In order to
determine whether the Merger or one or its alternatives would be more attractive
to the Limited Partners, the General Partner compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. A detailed discussion of the potential benefits and detriments of

9
<PAGE> 385

each of these alternatives is provided in "The Merger -- RELPS' Reasons for the
Merger and Recommendation" and "-- Alternatives to the Merger" in the
Prospectus.

In the event the Merger is not consummated for any reason, RELP III will
continue to pursue its business objectives of maximizing the value of its
properties, in addition to the possible liquidation of its portfolio, another
strategic combination or another attractive alternative that may become
available.

COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS

COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES

This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and its Affiliates under current RELP III arrangements with those that
would have been paid had the Merger been in place. The following table sets
forth the compensation, fees and distributions by RELP III to the General
Partner and its Affiliates during the three most recent fiscal years and the
six-month period ended June 30, 1997 and compares those payments against the
amount that would have been paid assuming the Merger had occurred January 1,
1995.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------- SIX MONTHS ENDED
1995 1996 JUNE 30, 1997
----------------------- ----------------------- -----------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Management Fees(1)........ $ -- $ -- $ 27,114 $ 39,117 $ 61,651 $ 102,751
Advisor Fees(2)........... 166,444 -- 67,148 -- 82,201 --
Leasing Commissions(3).... -- -- 62,699 62,699 288,133 288,133
Interest Expense(4)....... 1,229,888 1,298,049 1,141,138 1,264,892 711,851 749,042
Cash Distribution(5)...... 106,901 21,338 70,562 21,338 29,819 10,737
---------- ---------- ---------- ---------- ---------- ----------
$1,503,233 $1,319,387 $1,368,661 $1,388,046 $1,173,655 $1,150,663
========== ========== ========== ========== ========== ==========
</TABLE>

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

(1) There were no property management fees for 1994 and 1995 since the
properties were triple-net leased and managed by the respective single
tenants and Curlew was excluded since it is not part of the Merger. In 1996
as the triple-net leases expired and the properties became multi-tenanted,
the RELP began paying property management fees to USAA Realty Company an
Affiliate of Realco. USAA Realty Company receives fees of up to 6% of the
cash receipts for managing and leasing services for the properties. Pro
forma numbers assume a 5% property management fee. RELP III was limited to
paying a 3% property management fee and up to a 3% leasing fee.

(2) Realco receives an advisory fee equal to 4% of cash receipts from operations
not to exceed 9% of adjusted cash flow from the RELP.

(3) Actual numbers have been adjusted to represent the gross amount of
commissions due, which are presently earned when the monthly rent from the
lease contracts are collected under the current Partnership Agreement.
Payments of lease commissions to outside brokers were not included. It was
assumed for pro forma numbers that the services of an outside broker would
still have been utilized.

(4) Represents interest on a note payable. Pro forma numbers assume the interest
rate would have been .5% higher.

(5) Includes all cash distributions made to the General Partner and its
Affiliates resulting from ownership of Units and general partner interests.

NEW COMPENSATION

The Trust intends to engage an Affiliate to manage and lease the properties
obtained by the Trust from the RELPS pursuant to the Merger. The terms of this
engagement will be substantially similar to the terms governing the management
arrangements the Trust typically uses in managing its current properties.

10
<PAGE> 386

MISCELLANEOUS

DISTRIBUTIONS TO LIMITED PARTNERS

Set forth below are distributions per Unit made by RELP III to the Limited
Partners during the most recent five fiscal years and the most recently
completed interim period along with the portion of such distributions which
represented a return of capital:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
1992 1993 1994 1995 1996 JUNE 30, 1997
------ ------ ------ ------ ----- ----------------
<S> <C> <C> <C> <C> <C> <C>
Distributions.............. $24.95 $19.80 $15.00 $15.00 $9.75 $4.00
Return of Capital.......... $24.95 $19.80 -- -- -- $4.00
</TABLE>

SELECTED FINANCIAL INFORMATION

LIST OF INVESTORS

Pursuant to the RELP III Partnership Agreement, any RELP III Limited
Partner, upon paying the costs of collection, duplication and mailing, is
entitled to a copy of the list of RELP III Limited Partners. Under Delaware law,
a Limited Partner of RELP III may obtain a list of Limited Partners in
accordance with its Partnership Agreement.

11
<PAGE> 387

[REALCO LETTERHEAD]
, 199

Fellow Partners:

<PAGE> 389

RETURN ANALYSIS OF AN ORIGINAL $500.00 PER UNIT INVESTOR

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

(1) Exchange ratio at $13.125 per value for LP Unit.

(2) Per share value at September 30, 1997.

<PAGE> 390

Sincerely,

EDWARD B. KELLEY
Chairman of the Board, President and
Chief Executive Officer of USAA
Investors I, Inc., USAA Investors
II, Inc., USAA Properties III, Inc.
and USAA Properties IV, Inc.
<PAGE> 391

AMERICAN INDUSTRIAL PROPERTIES REIT

SUPPLEMENT TO PROSPECTUS

FOR

USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP

The General Partner of USAA Income Properties IV Limited Partnership
(herein referred to as "RELP IV" or the "Partnership") is soliciting the Limited
Partners' approval of the merger with and into American Industrial Properties
REIT, a Texas real estate investment trust (the "Trust"), as part of which
Limited Partners of RELP IV will exchange Units of Limited Partnership Interests
("Units") in RELP IV for Shares of Beneficial Interests ("Shares") in the Trust.
This solicitation is being made in conjunction with the proposed merger with and
into the Trust of up to four publicly-held limited partnerships, including RELP
IV (the "Merger"). The proposal is described in detail in the Joint Proxy
Statement/Prospectus dated , 199 (the "Prospectus"). For the
definition of capitalized terms used in the Supplement, which are not separately
defined herein, see "Glossary" in the Prospectus. Cross-references in this
Supplement also refer to the cited discussions in the Prospectus, unless
specifically noted to the contrary.

The effects of the Merger may be different for Limited Partners in each of
the RELPS. This Supplement to the Prospectus has been prepared to highlight the
risks, effects and fairness of the Merger for the Limited Partners of RELP IV.
It does not purport to provide an overall summary of the Merger or to highlight
all of its material terms, conditions, risks or effects. See "Summary" and "The
Merger" in the Prospectus. Furthermore, to the extent this Supplement summarizes
portions of the Prospectus, such discussions are qualified in their entirety by
the more detailed discussions of those matters appearing in the Prospectus.
Supplements have also been prepared for each of the other RELPS and copies of
such supplements will be provided promptly without charge to each Limited
Partner or his representative who has been so designated in writing upon written
request to Randal R. Seewald at 8000 Robert F. McDermott Fwy., IH 10 West, Suite
600, San Antonio, Texas 78230-3884.

Limited Partners of RELP IV participating in the Merger will be subject to
various risks, and these should be taken into account by the Limited Partners in
deciding how to cast their votes. These risks are briefly summarized below:

RISKS RELATED TO THE MERGER

- The Trust has generated losses from operations every year since 1988.

- Limited Partners who become shareholders of the Trust may not receive the
same level of distributions as previously received from RELP IV. Limited
Partners may initially receive no distributions because the Trust
currently is not paying distributions. The Trust has not made
distributions for four consecutive quarters since 1993.

- The Net Asset Values assigned to RELP IV may not reflect the true value
of such RELP IV's assets because the Net Asset Values were the result of
negotiation between the common management of the

<PAGE> 392

Trust and the General Partners of the RELPS. Had independent
representation been arranged for each RELP, the Net Asset Value assigned
to each RELP may have been different.

- The common management of the RELPS, who are also Affiliates of Realco,
negotiated the terms of the Merger on behalf of all the RELPS. Each RELP
was not separately represented by parties independent from Realco. Had
separate representation been arranged for a RELP, the terms of the Merger
might have been more favorable to such RELP. Further, issues unique to
the value of a RELP might have resulted in adjustments increasing or
decreasing the number of Shares allocable to such RELP.

- The General Partners, through wholly-owned subsidiaries, are owned and
controlled by Realco. Realco currently owns 13.74% of the Trust's
outstanding Shares and two of Realco's designees are Trust Managers. An
affiliate of Realco will manage and lease the former RELP properties
after the Merger. All of these factors may have influenced a General
Partner's decision to recommend the Merger to its Limited Partners. After
the Merger, assuming the conversion of the Trust's debt to Realco, Realco
will own approximately 17.39% of the Trust's outstanding Shares.

- Taxable income or loss will be recognized by each taxable Limited Partner
of RELP IV in the Merger in an amount equal to the Limited Partner's
allocable share of the income or loss recognized by RELP IV from the
transfer of RELP IV's assets to the Trust through the Merger and Limited
Partners will receive no cash from the Merger (other than cash received
in lieu of fractional Shares) to pay taxes arising from any taxable
income (see "The Merger -- Material Federal Income Tax Consequences").

- Shareholders of the Trust will be diluted if there is an issuance of
additional equity securities at what may be less than their fair market
value.

2
<PAGE> 393

- The majority vote of the Limited Partners of RELP IV binds all Limited
Partners; if the Merger is approved, Limited Partners who voted against
the Merger will have their Units converted into Shares based on the
Exchange Price unless they properly exercise their dissenters' rights.

- Approval of the Merger will require the Limited Partners to forego
certain alternatives to the Merger, such as liquidating RELP IV or
continuing its operations as a limited partnership.

- Increases in market interest rates may adversely affect the price of the
Shares.

- Approval of the Merger by the Limited Partners will result in the loss of
their respective rights under the Partnership Agreement and the
partnership law of the State of Delaware.

- The investment and financing policies of the Trust are determined by the
Trust Managers and may be amended or revised at any time without a vote
of the shareholders of the Trust.

- The Trust may experience occurrences of uninsured liability or casualty,
reducing the Trust's capital and adversely affecting anticipated profits.

- The Trust will be taxed as a corporation if it fails to qualify as a REIT
and the Trust will be liable for increased federal, state and local
income taxes in such event.

3
<PAGE> 394

GENERAL REAL ESTATE INVESTMENT RISKS

- The illiquidity of real estate investments will limit the Trust's ability
to vary its portfolio in response to changes in economic or other
conditions.

- Competition from competing properties could decrease the occupancy levels
and rental rates of the Trust's investments.

The Merger involves numerous federal income tax consequences to the Limited
Partners and the shareholders of the Trust. For a complete discussion describing
these consequences, see "The Merger -- Material Federal Income Tax
Considerations" in the Prospectus. The material federal income tax issues
include the following:

- The amount of gain or loss recognized by a Limited Partner will be based
upon the deemed sale of assets owned by RELP IV and, as applicable, the
extent to which the fair market value of the Shares distributed to the
Limited Partner exceeds the Limited Partner's adjusted basis in its
Units.

4
<PAGE> 395

THE MERGER

If the Merger Agreement is approved, RELP IV will cease to exist and all of
its properties will be transferred to the Trust. The Limited Partners will
receive Shares based upon the relative Net Asset Values of the RELPS negotiated
by the common management of the RELPS and the Trust. The Shares received by the
Limited Partners will be listed for trading on the New York Stock Exchange (the
"NYSE"). If the requisite number of Limited Partners of only one of the RELPS
approves the Merger Agreement, the Trust has the right, but not the obligation,
to consummate the Merger with the one Participating RELP.

The General Partners are proposing amendments to the Partnership Agreements
to permit the closing of the transactions contemplated by the Merger Agreement.
Limited Partners voting in favor of the Merger will be deemed to have voted in
favor of each of these proposed amendments. A majority vote of Limited Partners
is required to approve the proposed amendments and to approve the Merger. The
proposed amendments authorize the following: (i) the Merger of each RELP with
and into the Trust, whether or not the Trust would be regarded as an Affiliate
of the General Partners; and (ii) such other actions as may be necessary under
or contemplated by the Merger Agreement or the Prospectus, irrespective of any
provision in the Partnership Agreement which might otherwise prohibit such
actions. See "The Merger -- Proposed Amendments to Partnership Agreements." As
of August 31, 1997, the General Partner of RELP IV owned 6,140 Units in RELP IV,
or approximately 10.15% of all outstanding Units of RELP IV. Pursuant to the
RELP IV Limited Partnership Agreement, the Units held by the RELP IV General
Partner are not eligible to vote at the RELP Special Meeting.

Each of the General Partners of the RELPS has agreed to waive any right to
receive Shares to which it may otherwise have been entitled in exchange for its
general partnership interest.

5
<PAGE> 396

ALLOCATION OF CONSIDERATION

NET ASSET VALUE

The Trust is offering 15.14 Shares in consideration for each Unit in RELP
IV. The following table sets forth the methodology utilized in determining the
number of Shares to be offered by the Trust for each Unit:

<TABLE>
<S> <C>
Asset Value of Partnership Properties
Linear.................................................... $ 3,950,000
Kodak..................................................... 5,150,000
1881 Pine................................................. 6,500,000
Apollo.................................................... 13,122,400
------------
$ 28,722,400
------------
Cash and Cash Equivalents(1)................................ $ 0
Mortgages and Other Long-Term Debt(2)....................... $(16,704,013)
Other Liabilities........................................... $ 0
Net Asset Value of Partnership(3)........................... $ 12,018,387
Percentage of Aggregate Net Asset Value of All RELPS........ 20.75%
Net Asset Value Per Original $500 Investment(4)............. $ 198.67
Number of Shares Allocable to Partnership(5)................ 915,686
Percentage of Total Shares to be issued in the Merger....... 20.75%
Percentage of Total Shares of the Trust after the Merger.... 10.09%
Allocation of Shares to
Limited Partners(5)....................................... 822,752
General Partner(5)(6)..................................... 92,934
------------
915,686
------------
Allocation of Shares Per Original $500 Investment by Limited
Partners(5)............................................... 15.14
Total Shares in the Trust after the Merger(5)..... 9,070,803
============
</TABLE>

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

(1) All cash and cash equivalents held by RELP IV, net of related payables,
liabilities or other contingencies, will be distributed to the Limited
Partners immediately prior to the Merger pursuant to a special
distribution.

(2) Estimated balance as of December 31, 1997.

(3) Such amounts were determined by negotiation between management of the
RELPS and the Trust.

(4) "Net Asset Value Per Original $500 Investment" is computed by dividing
that portion of the Net Asset Value allocable to the Limited Partners
by the number of outstanding Units. This is not intended to be an
estimate of the value of the Shares exchangeable for each Unit or the
price at which such Shares may trade in the market. See "Risk Factors."

(5) The Share amounts and number of Shares outstanding have been restated
to reflect the impact of the one for five reverse Share split approved
by the Trust Managers on July 30, 1997, which is subject to shareholder
approval on October 15, 1997.

(6) The General Partner of RELP IV has agreed to waive any right to receive
Shares to which it may otherwise have been entitled in exchange for its
general partnership interest. The amount reflected above includes the
Shares to be received for the 6,140 limited partnership units owned by
the General Partner. The General Partner will not be receiving any
other compensation or reimbursement for claims against or interests in
the RELP.

6
<PAGE> 397

CONSIDERATIONS UNIQUE TO RELP IV

STATUS OF THE PORTFOLIO. At the time of RELP IV's formation, the General
Partner anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within ten
years after the acquisition of the properties. Accordingly, based upon the
completion of the acquisition of RELP IV's portfolio in 1988, it was anticipated
that the portfolio would be liquidated by 1998. The General Partner has not
offered any of the properties for sale due to pending improvements in the
surrounding real estate markets and stabilization of occupancy and rental
revenue through re-leasing of the properties. On January 30, 1997, the General
Partner received an unsolicited offer to purchase the Apollo Office Building for
$24,660,000 (gross) in cash. RELP IV owns a 55.84% interest in a joint venture
which beneficially owns the Apollo Building. Believing that the offer was too
low at that time, the General Partner declined and responded verbally that
offers would need to be approximately $29,000,000 to be considered. The offeror
did not increase its offer and negotiations ended. No offers have been received
on the other three properties. See "Business of RELPS -- RELP IV" in the
Prospectus for additional information regarding the RELP IV portfolio. The
General Partner believes that the valuation of $28,722,400 (including 55.84% of
Apollo and $16,704,013 in debt assumption) for the portfolio which was
negotiated by common management of the RELPS and the Trust is fair to the
Limited Partners. See "The Merger -- Background and Reasons for the Merger."

INCREASED DEBT SERVICE. As of December 31, 1996, RELP IV had indebtedness
of $15,668,087, representing approximately 40% of the value of its real estate
investments. Excluding interests in properties that will not be transferred to
the Trust pursuant to the Merger Agreement, as a group, the RELPS had, as of
that same date, aggregate outstanding indebtedness of $30,668,087, representing
approximately 34% of the total portfolio value of all of the RELPS' real estate
investments. As of December 31, 1996, the Trust had indebtedness of $53,818,000,
representing approximately 57% of its real estate assets. Thus, the Trust's
total indebtedness will be significantly greater, both in amount and as a
percentage of assets, than RELP IV's current level of indebtedness. If the Trust
is more leveraged than the RELPS, this will result in an increase in the debt
service payments that must be made by the Trust, increase the Trust's risk of
losing its assets through foreclosure and increase the risk that the Trust may
not be able to make distributions to shareholders.

MERGER AS A TAXABLE EVENT. Limited Partners of RELP IV will realize a
taxable loss on the Merger in an amount equal to their allocable share of the
excess of the sum of the fair market value of the Shares received by the
Partnership over the Partnership's adjusted tax basis of the Partnership assets.
Assuming that the value of the Shares reflects the Net Asset Values of the
assets acquired in the Merger, if RELP IV participates in the Merger, each of
its Limited Partners would have recognized taxable loss of approximately 34% (as
of December 31, 1997) for every Unit held, representing an original investment
of $500. The actual amount of loss recognized by each Limited Partner will
depend upon the value ascribed to the Shares for federal tax purposes. Because
the value of the Shares will fluctuate immediately after the Merger and the 1997
operations of RELP IV have not been included, it is possible that such values
may be used for purposes of calculating the taxable loss and that the taxable
loss per Unit will differ from the calculation stated above.

INVESTMENT STRATEGY. The principal investment objectives of RELP IV are, in
order of their priority, to (i) preserve and protect the Partnership's capital,
(ii) obtain long-term appreciation in the value of its properties, and (iii)
provide partially "tax sheltered" cash distributions from operations. RELP IV
has attempted to achieve these objectives through investment in a diversified
portfolio of income-producing real properties. The Partnership acquired the
Linear Technology Corporate Headquarters, the Eastman Kodak Building and the
1881 Pine Street Building (Century Electric Office Building) during 1987 and a
55.8% joint

7
<PAGE> 398

venture interest in USAA Chelmsford Associates Joint Venture, which beneficially
owns the Apollo Computer Research and Development Headquarters Building, during
1988. These properties had an average occupancy level of 83% at an average
annual rent of $31.68 per square foot for fiscal 1996 and 95% at an average
annual rent of $33.29 per square foot in the six months ended June 30, 1997.
RELP IV has a history of making regular quarterly distributions to its Limited
Partners. See "Miscellaneous -- Distributions to Limited Partners" below in this
Supplement.

MANAGEMENT COMPENSATION. RELP IV has no employees, rather its operations
are managed by Realco. Under the Advisory Agreement pursuant to which Realco
manages the operations of RELP IV, Realco is entitled to management fees equal
to 9% of adjusted cash flow from operations of the Partnership. This
relationship will terminate if RELP IV is merged into the Trust. USAA Realty
Company, an Affiliate of Realco provides property management and leasing
services for the properties and may receive fees up to 6% of property cash
receipts for those services. If RELP IV participates in the Merger, neither the
General Partner nor any of its Affiliates will receive any compensation for
services rendered in connection the Merger. The Trust intends to retain the
services of an Affiliate of Realco to provide property management and leasing
services. It is anticipated that fees for these services will be at a market
rate typically paid by the Trust in managing its current properties. Such fees
may be higher than those currently paid by RELP IV. See "Comparative
Compensation, Fees and Distributions -- New Compensation" below.

<TABLE>
<CAPTION>
MERGER OFFER LIQUIDATION VALUE(1) GOING CONCERN(2)
- ------------ -------------------- ----------------
<C> <C> <C>
$199.00 $175.00 $205.00
</TABLE>

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

(1) Liquidation value was determined using the projected future cash flows of
the properties based on an assumed capitalization rate for the particular
property. The liquidation value is net of an assumed 3.0% for estimated
closing costs, a 5.0% adjustment for a liquidation discount and an estimate
of proxy costs for limited partner approval of the liquidation.

RISK FACTORS AND OTHER CONSIDERATIONS

FAIRNESS OF THE MERGER

Based upon its analysis of the Merger, the General Partner of RELP IV and
Realco reasonably believes that:

(1) The terms of the Merger, when considered as a whole, are fair to
the Limited Partners of RELP IV;

(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners of RELP IV; and

(3) After comparing the potential benefits and detriments of the
Merger with those of several alternatives, the Merger is more attractive to
the Limited Partners of RELP IV than such alternatives.

8
<PAGE> 399

THE BOARD OF DIRECTORS OF THE GENERAL PARTNER OF RELP IV AND REALCO
REASONABLY BELIEVE THAT THE TERMS OF THE MERGER AGREEMENT, INCLUDING THE
CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN CONNECTION WITH THE
MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE LIMITED PARTNERS.
ACCORDINGLY, THE BOARD HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT THE
LIMITED PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND AMENDMENT OF THE
PARTNERSHIP AGREEMENT.

For a full discussion of the RELPS' reasons for the Merger, see "The
Merger -- The RELPS' Reasons for the Merger and Recommendation" in the
Prospectus.

FAIRNESS OPINION. On June 16, 1997, the General Partners, on behalf of each
RELP retained Houlihan to render an opinion as to whether the consideration to
be received by the Limited Partners in connection with the Merger was fair, from
a financial point of view, to its Limited Partners. Houlihan was not requested
to, and did not make, any recommendation to the General Partners, on behalf of
each RELP as to the consideration to be received by the Limited Partners in
connection with the Merger, which consideration was determined through
negotiations between the common management of the RELPS and the Trust. The RELPS
retained Houlihan to render fairness opinions based upon Houlihan's experience
in the valuation of businesses and their securities in connection with mergers
and acquisitions, and valuations for corporate purposes especially with respect
to REITs and other real estate companies. On June 30, 1997, Houlihan delivered
its written opinion to the Board of Directors of the General Partners of RELP IV
(the "Houlihan Opinion"), to the effect that, as of the date of such opinion,
based on Houlihan's review and subject to the limitations described is the
Prospectus, see "The Merger -- Fairness Opinions," the consideration to be
received by the Limited Partners of RELP IV, in connection with the Merger was
fair, from a financial point of view, to the Limited Partners. The Houlihan
Opinion does not constitute a recommendation to any Limited Partner as to how
any such Limited Partner should vote on the Merger.

In the event the Merger is not consummated for any reason, RELP IV will
continue to pursue its business objectives of maximizing the value of its
properties, in addition to the possible liquidation of its portfolio, another
strategic combination or another attractive alternative that may become
available.

9
<PAGE> 400

COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS

COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES

This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and its Affiliates under current RELP IV arrangements with those that
would have been paid had the Merger been in place. The following table sets
forth the compensation, fees and distributions by RELP IV to the General Partner
and its Affiliates during the three most recent fiscal years and the six-month
period ended June 30, 1997 and compares those payments against the amount that
would have been paid assuming the Merger had occurred January 1, 1995.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------- SIX MONTHS ENDED
1995 1996 JUNE 30, 1997
---------------------- -------------------- --------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
---------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Management Fees(1)............... $ 52,802 $ 57,512 $ 50,894 $ 54,536 $ 20,967 $ 22,845
Advisor Fees(2).................. 90,376 -- 50,134 -- 13,557 --
Leasing Commissions(3)........... 262,476 262,476 3,574 3,574 -- --
Interest Expense(4).............. 600,000 630,000 600,000 630,000 313,578 159,929
Cash Distributions(5)............ 100,516 18,557 65,575 18,557 27,244 9,294
---------- -------- -------- -------- -------- --------
$1,106,170 $968,545 $770,177 $706,667 $375,346 $192,068
========== ======== ======== ======== ======== ========
</TABLE>

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

(2) Realco receives an advisory fee equal to 9% of adjusted cash flow from
operations.

(3) Actual numbers have been adjusted to represent the gross amount of
commissions due, which are presently earned when the monthly rent from the
lease contracts are collected under the current Partnership Agreement.
Payments of lease commissions to outside brokers were not included. It was
assumed for the pro forma numbers that the services of an outside broker
would still have been utilized.

(4) Represents interest on a note payable. Pro forma number 5 assume the
interest rate would have been .5% higher.

(5) Includes all cash distributions made to the General Partner and its
Affiliates resulting from ownership of Units and general partner interests.

NEW COMPENSATION

MISCELLANEOUS

DISTRIBUTIONS TO LIMITED PARTNERS

Set forth below are distributions per Unit made by RELP IV to the Limited
Partners during the most recent five fiscal years and the most recently
completed interim period:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
1992 1993 1994 1995 1996 JUNE 30, 1997
------ ------ ------ ------ ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Distributions............. $27.00 $19.50 $15.00 $15.00 $ 9.75 $4.00
Return of Capital......... $15.03 $ 9.32 $ 5.88 -- -- $4.00
</TABLE>

SELECTED FINANCIAL INFORMATION

10
<PAGE> 401

LIST OF INVESTORS. Pursuant to the rules and regulations promulgated by the
Commission, if a Limited Partner entitled to vote at the RELP Special Meeting
desires to obtain a list of the other Limited Partners entitled to vote at the
RELP Special Meeting to enable the requesting Limited Partner to mail soliciting
materials to the other Limited Partners, the Limited Partner may request in
writing a list of the other Limited Partners. The request should be made in
writing to the appropriate General Partner, c/o Randal R. Seewald, 8000 Robert
F. McDermott Freeway, IH10 West, Suite 600, San Antonio, Texas 78230-3884.
Alternatively, the requesting Limited Partner may request that the RELP mail
copies of any proxy statement, form of proxy or other soliciting material
furnished by the requesting Limited Partner to the other Limited Partners of the
applicable RELP. The requesting Limited Partner must reimburse the RELP for its
reasonable expenses incurred in connection with performing such services. At the
time of making the request, the requesting Limited Partner must, if the Units
are held through a nominee, provide the RELP with a statement from the nominee
or other independent third party confirming such Limited Partner's beneficial
ownership. Additionally, the requesting Limited Partner must provide the RELP
with an affidavit or similar document (i) identifying the proposal that will be
the subject of the Limited Partner's solicitation; (ii) stating that the Limited
Partner will not use the list for any purpose other than to solicit Limited
Partners with respect to the same action for which the RELP is soliciting votes;
and (iii) stating that the Limited Partner will not disclose the information
provided to it to any person other than a beneficial owner for whom the request
was made and an employee or agent to the extent necessary to effectuate the
communication or solicitation. Upon termination of the solicitation, the
requesting Limited Partner must return to the RELP, without keeping any copies
thereof, the list of information provided by the RELP and any information
derived from such information. A Limited Partner is only entitled to the
foregoing information with respect to the RELP in which the Limited Partner
holds Units.

For any purpose reasonably related to a RELP IV Limited Partner's interest
as a limited partner of RELP IV, RELP IV Limited Partners shall be permitted
access to all records of RELP IV at the partnership's principal office during
reasonable business hours and to make copies thereof. Under Delaware law, a
Limited Partner in RELP IV may obtain a list of Limited Partners in accordance
with its respective Partnership Agreements.

11
<PAGE> 402

PART II. INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS

Subsection (B) of Section 9.20 of the Texas Real Estate Investment Trust
Act, as amended (the "Act"), authorizes a real estate investment trust ("REIT")
to indemnify any person who was, is, or is threatened to be made a named
defendant or respondent in any threatened, pending, or completed action, suit,
or proceeding, whether civil, criminal, administrative, arbitrative, or
investigative, any appeal in such an action, suit, or proceeding, or any inquiry
or investigation that can lead to such an action, suit or proceeding because the
person is or was a trust manager, officer, employee or agent of the REIT or is
or was serving at the request of the REIT as a trust manager, director, officer,
partner, venturer, proprietor, trustee, employee, agent, or similar functionary
of another REIT, corporation, partnership, joint venture, sole proprietorship,
trust, employee benefit plan, or other enterprise against expenses (including
court costs and attorney fees), judgments, penalties, fines and settlements if
he conducted himself in good faith and reasonably believed his conduct was in or
not opposed to the best interests of the REIT and, in the case of any criminal
proceeding, had no reasonable cause to believe that his conduct was unlawful.

The Act further provides that, except to the extent otherwise permitted by
the Act, a person may not be indemnified in respect of a proceeding in which the
person is found liable on the basis that personal benefit was improperly
received by him or in which the person is found liable to the REIT.
Indemnification pursuant to Subsection (B) of Section 9.20 of the Act is limited
to reasonable expenses actually incurred and may not be made in respect of any
proceeding in which the person has been found liable for willful or intentional
misconduct in the performance of his duty to the REIT.

Subsection (C) of Section 15.10 of the Act provides that a trust manager
shall not be liable for any claims or damages that may result from his acts in
the discharge of any duty imposed or power conferred upon him by the REIT if, in
the exercise of ordinary care, he acted in good faith and in reliance upon
information, opinions, reports, or statements, including financial statements
and other financial data, concerning the real estate investment trust, that were
prepared or presented by officers or employees of the real estate investment
trust, legal counsel, public accountants, investment bankers, or certain other
professionals, or a committee of trust manager of which the trust manager is not
a member. In addition, no trust manager shall be liable to the REIT for any act,
omission, loss, damage, or expense arising from the performance of his duty to a
REIT, save only for his own willful misfeasance, willful malfeasance or gross
negligence.

Article Sixteen of the Trust's Third Amended and Restated Declaration of
Trust provides that the Trust shall indemnify officers and trust managers as
follows:

"Indemnitee" means (A) any present or former Trust Manager or officer
of the Trust, (B) any person who while serving in any of the capacities
referred to in clause (A) hereof served at the Trust's request as a trust
manager, director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another real estate investment
trust or foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise and (C)
any person nominated or designated by (or pursuant to authority granted by)
the Trust Managers or any committee thereof to serve in any of the
capacities referred to in clauses (A) or (B) hereof.

"Official Capacity" means (A) when used with respect to a Trust
Manager, the office of Trust Manager of the Trust and (B) when used with
respect to a person other than a Trust Manager, the elective or appointive
office of the Trust held by such person or the employment or agency
relationship undertaken by such person on behalf of the Trust, but in each
case does not include service for any other real estate investment trust or
foreign or domestic corporation or any partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise.

"Proceeding" means any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative, arbitrative or
investigative, any appeal in such an action, suit or proceeding, and any
inquiry or investigation that could lead to such an action, suit or
proceeding.

II-1
<PAGE> 403

The Trust shall indemnify every Indemnitee against all judgments,
penalties (including excise and similar taxes), fines, amounts paid in
settlement and reasonable expenses actually incurred by the Indemnitee in
connection with any Proceeding in which he or she was, is or is threatened
to be named defendant or respondent, or in which he or she was or is a
witness without being named a defendant or respondent, by reason, in whole
or in part, of his or her serving or having served, or having been
nominated or designated to serve, in any of the capacities referred to in
paragraph (a)(i) of Article Six teen, to the fullest extent that
indemnification is permitted by Texas law. An Indemnitee shall be deemed to
have been found liable in respect of any claim, issue or matter only after
the Indemnitee shall have been so adjudged by a court of competent
jurisdiction after exhaustion of all appeals therefrom. Reasonable expenses
shall include, without limitation, all court costs and all fees and
disbursements of attorneys for the Indemnitee.

Without limitation of paragraph (b) of Article Sixteen and in addition
to the indemnification provided for in paragraph (b) of Article Sixteen,
the Trust shall indemnify every Indemnitee against reasonable expenses
incurred by such person in connection with any proceeding in which he or
she is a witness or a named defendant or respondent because he or she
served in any of the capacities referred to in paragraph (a)(i) of Article
Sixteen.

Reasonable expenses (including court costs and attorneys' fees)
incurred by an Indemnitee who was or is a witness or was, is or is
threatened to be made a named defendant or respondent in a Proceeding shall
be paid or reimbursed by the Trust at reasonable intervals in advance of
the final disposition of such Proceeding after receipt by the Trust of a
written undertaking by or on behalf of such Indemnitee to repay the amount
paid or reimbursed by the Trust if it shall ultimately be determined that
he or she is not entitled to be indemnified by the Trust as authorized in
Article Sixteen. Such written undertaking shall be an unlimited obligation
of the Indemnitee but need not be secured and it may be accepted without
reference to financial ability to make repayment. Notwithstanding any other
provision of Article Sixteen, the Trust may pay or reimburse expenses
incurred by an Indemnitee in connection with his or her appearance as a
witness or other participation in a Proceeding at a time when he or she is
not named a defendant or respondent in the Proceeding.

The indemnification provided by Article Sixteen shall (i) not be
deemed exclusive of, or to preclude, any other rights to which those
seeking indemnification may at any time be entitled under the Trust's
Bylaws, any law, agreement or vote of shareholders or disinterested Trust
Managers, or otherwise, or under any policy or policies of insurance
purchased and maintained by the Trust on behalf of any Indemnitee, both as
to action in his or her Official Capacity and as to action in any other
capacity, (ii) continue as to a person who has ceased to be in the capacity
by reason of which he or she was an Indemnitee with respect to matters
arising during the period he or she was in such capacity, and (iii) inure
to the benefit of the heirs, executors and administrators of such a person.

No amendment, modification or repeal of Article Sixteen or any
provision of Article Sixteen shall in any manner terminate, reduce or
impair the right of any past, present or future Indemnitee to be
indemnified by the Trust, nor the obligation of the Trust to indemnify any
such Indemnitee, under and in accordance with the provisions of Article
Sixteen as in effect immediately prior to such amendment, modification or
repeal with respect to claims arising from or relating to matters
occurring, in whole or in part, prior to such amendment, modification or
repeal, regardless of when such claims may be asserted.

If the indemnification provided in Article Sixteen is either (i)
insufficient to cover all costs and expenses incurred by any Indemnitee as
a result of such Indemnitee being made or threatened to be made a defendant
or respondent in a Proceeding by reason of his or her holding or having
held a position named in paragraph (a)(i) of this Article Sixteen or (ii)
not permitted by Texas law, the Trust shall indemnify, to the fullest
extent that indemnification is permitted by Texas law, every Indemnitee
with respect to all costs and expenses incurred by such Indemnitee as a
result of such Indemnitee being made or threatened to be made a defendant
or respondent in a Proceeding by reason of his or her holding or having
held a position named in paragraph (a)(i) of this Article Sixteen.

II-2
<PAGE> 404

Each officer and Trust Manager of the Trust is party to an
Indemnification Agreement with the Trust which provides that the Trust
shall indemnify such person to the fullest extent permitted by the Act.

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
2.1 -- Form of Amended and Restated Agreement and Plan of
Merger, dated as of June 30, 1997, by and between the
Trust and each of USAA Real Estate Income Investments I,
A California Limited Partnership, USAA Real Estate Income
Investments II Limited Partnership, USAA Income
Properties III Limited Partnership and USAA Income
Properties IV Limited Partnership (included as Annex I to
the Joint Proxy Statement/ Prospectus of the Trust).
3.1 -- Third Amended and Restated Declaration of Trust
3.2 -- Fourth Amended and Restated Bylaws (Incorporated herein
by reference from the Trust's Form 8-K dated October 3,
1995; File No. 1-9016)
3.3 -- Amendment to the Fourth Amended and Restated Bylaws of
Trust (Incorporated herein by reference to the Trust's
Form 8-K dated November 13, 1995, File No. 1-9016).
3.4 -- Amendment to the Fourth Amended and Restated Bylaws of
Trust (Incorporated herein by reference to the Trust's
Form 8-K dated December 23, 1996; File No. 1-9016).
3.5 -- Amendments to the Fourth Amended and Restated Bylaws of
Trust (Incorporated herein by reference to the Trust's
Form 8-K dated December 23, 1996; File No. 1-9016.
4.1 -- Indenture dated November 15, 1985, by and between
American Industrial Properties REIT (the "Trust") and IBJ
Schroder Bank & Trust Company (Incorporated herein by
reference from Exhibit 10.4 to Form S-4 of American
Industrial Properties REIT, Inc. ("AIP Inc.") dated March
16, 1994; File No. 33-74292)
5.1 -- Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
*8.1 -- Tax Opinion of Liddell, Sapp, Zivley, Hill & LaBoon,
L.L.P.
10.1 -- Form of Indemnification Agreement
10.2 -- Employee and Trust Manager Incentive Share Plan
10.3 -- Common Share Purchase Agreement dated as of July 3, 1997,
by and between the Trust and ABKB/LaSalle Securities
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.4 -- Common Share Purchase Agreement dated as of July 3, 1997,
by and between the Trust and ABKB/LaSalle Securities
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.5 -- Common Share Purchase Agreement dated as of July 3, 1997,
by and between the Trust and LaSalle Advisors Limited
Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
</TABLE>

II-3
<PAGE> 405
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
10.6 -- Registration Rights Agreement dated as of July 10, 1997,
by and between the Trust and ABKB/LaSalle Securities
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.7 -- Registration Rights Agreement dated as of July 10, 1997,
by and between the Trust and ABKB/LaSalle Securities
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.8 -- Registration Rights Agreement dated as of July 3, 1997,
by and between the Trust and LaSalle Securities Advisors
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.9 -- Common Share Purchase Agreement dated as of June 20,
1997, by and among the Trust, MS Real Estate Special
Situations, Inc. ("MSRE") and Morgan Stanley Asset
Management, Inc. ("MSAM") as agent and attorney-in-fact
for specified clients (the "MSAM Purchasers")
(Incorporated herein by reference from the Trust's Form
8-K dated July 22, 1997; File No. 1-9016)
10.10 -- Registration Rights Agreement dated as of June 20, 1997,
by and among the Trust, MSRE and MSAM on behalf of the
MSAM Purchasers (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.11 -- Renewal, Extension, Modification and Amendment Agreement
dated February 26, 1997, executed by the Trust in favor
of USAA Real Estate Company ("Realco") (Incorporated
herein by reference from Exhibit 10.1 to the Trust's Form
8-K dated March 4, 1997; File No. 1-9016)
10.12 -- Share Purchase Agreement dated as of December 20, 1996,
by and among the Trust, Realco and AIP (Incorporated by
reference from Exhibit 99.7 to the Trust's Form 8-K dated
December 23, 1996; File No. 1-9016)
10.13 -- Share Purchase Agreement dated as of December 13, 1996,
by and between the Trust and Realco (Incorporated herein
by reference from the Trust's Form 8-K dated December 23,
1996; File No. 1-9016)
10.14 -- Registration Rights Agreement dated as of December 20,
1996, by and between the Trust and Realco, as amended
(Incorporated herein by reference from Exhibit 99.9 to
the Trust's Form 8-K dated December 23, 1996; File No.
1-9016)
10.15 -- Registration Rights Agreement dated as of December 19,
1996, by and between the Trust and Realco (Incorporated
herein by reference from Exhibit 99.8 to the Trust's Form
8-K dated December 23, 1996; File No. 1-9016)
10.16 -- 401(k) Retirement and Profit Sharing Plan (Incorporated
herein by reference from Exhibit 10.5 to Amendment No. 1
to Form S-4 of AIP, Inc. dated March 4, 1994; File No.
33-74292)
10.17 -- Amendments to 401(k) Retirement and Profit Sharing Plan
(Incorporated herein by reference from Exhibit 10.4 to
Form 10-K of the Trust dated March 27, 1995)
10.18 -- Settlement Agreement by and between American Industrial
Properties REIT, Patapsco #1 Limited Partnership,
Patapsco #2 Limited Partnership, The Manufacturers Life
Insurance Company and The Manufacturers Life Insurance
Company (U.S.A.) dated as of May 22, 1996 (incorporated
herein by reference from Exhibit 99.1 to Form 8-K of the
Trust dated May 22, 1996; File No. 1-9016)
</TABLE>

II-4
<PAGE> 406
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
10.19 -- Agreement and Assignment of Partnership Interest, Amended
and Restated Agreement and Certificate of Limited
Partnership and Security Agreement for Patapsco
Center -- Linthicum Heights, Maryland (incorporated
herein by reference from Exhibit 10.8 to Amendment No. 1
to Form S-4 of AIP Inc. dated March 4, 1994; File No.
33-74292)
10.20 -- Note dated November 15, 1994 in the original principal
amount of $12,250,000 with AIP Properties #1 L.P. as
Maker and AMRESCO Capital Corporation as Payee
(Incorporated herein by reference from Exhibit 99.1 to
Form 8-K of the Trust dated November 22, 1994; File No.
1-9016)
10.21 -- Mortgage, Deed of Trust and Security Agreement dated
November 15, 1994 between AIP Properties #1 L.P. and
AMRESCO Capital Corporation (incorporated herein by
reference from Exhibit 99.2 to Form 8-K of the Trust
dated November 22, 1994; File No. 1-9016)
10.22 -- Loan Modification Agreement modifying the Note dated
November 15, 1994 in the original principal amount of
$12,250,000 (incorporated herein by reference from
Exhibit 99.2 to Form 8-K of the Trust dated June 23,
1995; File No. 1-9016)
10.23 -- Note dated November 15, 1994 in the original principal
amount of $2,150,000 with AIP Properties #2 L.P. as Maker
and AMRESCO Capital Corporation as Payee (Incorporated
herein by reference from Exhibit 99.3 to Form 8-K of the
Trust dated November 22, 1994; File No. 1-9016)
10.24 -- Mortgage, Deed of Trust and Security Agreement dated
November 15, 1994 between AIP Properties #2 L.P. and
AMRESCO Capital Corporation (Incorporated herein by
reference from Exhibit 99.4 to Form 8-K of the Trust
dated November 22, 1994; File No. 1-9016)
10.25 -- Loan Modification Agreement modifying the Note dated
November 15, 1994 in the original principal amount of
$2,250,000 (Incorporated herein by reference from Exhibit
99.1 to Form 8-K of the Trust dated June 23, 1995; File
No. 1-9016)
10.26 -- Promissory Note dated November 25, 1996, by and between
AIP Inc. and Realco (Incorporated herein by reference
from Exhibit No. 99.5 to Form 8-K of the Trust dated
December 23, 1996; File No. 1-9016)
10.27 -- Deed of Trust and Security Agreement dated November 15,
1996 between AIP Properties #3, L.P. and Life Investors
Insurance Company of America (Huntington Drive Center)
(Incorporated herein by reference from Exhibit 99.1 to
Form 8-K of the Trust dated November 20, 1996; File No.
1-9016)
10.28 -- Note dated November 15, 1996 in the original principal
amount of $4,575,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Huntington Drive Center) (Incorporated herein by
reference from Exhibit 99.2 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.29 -- Deed of Trust and Security Agreement dated November 15,
1996 between AIP Properties #3, L.P. and Life Investors
Insurance Company of America (Patapsco Industrial Center)
incorporated herein by reference from Exhibit 99.3 to
Form 8-K of the Trust dated November 20, 1996; File No.
1-9016)
10.30 -- Note dated November 15, 1996 in the original principal
amount of $3,112,500 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Patapsco Industrial Center) (Incorporated herein by
reference from Exhibit 99.4 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
</TABLE>

II-5
<PAGE> 407
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
10.31 -- Deed of Trust and Security Agreement dated November 15,
1996 between AIP Properties #3, L.P. and Life Investors
Insurance Company of America (Woodlake Distribution
Center) (incorporated herein be reference from Exhibit
99.5 to Form 8-K of the Trust dated November 20, 1996;
File No. 1-9016)
10.32 -- Note dated November 15, 1996 in the original principal
amount of $1,537,500 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Woodlake Distribution Center) (Incorporated herein by
reference from Exhibit 99.6 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.33 -- Deed of Trust and Security Agreement dated November 15,
1996 between AIP Properties #3, L.P. and Life Investors
Insurance Company of America (All Texas properties except
Woodlake) (Incorporated herein by reference from Exhibit
99.7 to Form 8-K of the Trust dated November 20, 1996;
File No. 1-9016)
10.34 -- Note dated November 15, 1996 in the original principal
amount of $1,162,500 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Meridian Street Warehouse) (Incorporated herein by
reference from Exhibit 99.8 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.35 -- Note dated November 15, 1996 in the original principal
amount of $2,775,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Beltline Business Center) (Incorporated herein by
reference from Exhibit 99.9 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.36 -- Note dated November 15, 1996 in the original principal
amount of $3,375,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Plaza South) (Incorporated herein by reference from
Exhibit 99.10 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.37 -- Note dated November 15, 1996 in the original principal
amount of $2,100,00 with AIP Properties #3, L.P. as Maker
and Life Investors Insurance Company as Payee (Commerce
North Park) (Incorporated herein by reference from
Exhibit 99.11 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.38 -- Note dated November 15, 1996 in the original principal
amount of $2,850,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Gateway 5 & 6) (Incorporated herein by reference from
Exhibit 99.12 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.39 -- Note dated November 15, 1996 in the original principal
amount of $5,175,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Northgate II) (Incorporated herein by reference from
Exhibit 99.13 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.40 -- Note dated November 15, 1996 in the original principal
amount of $1,327,500 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Westchase Park) (Incorporated herein by reference from
Exhibit 99.14 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.41 -- Bonus and Severance Agreement dated March 13, 1996, by
and between the Trust and Charles W. Wolcott
(Incorporated herein by reference from Exhibit 10.12 to
Form 10-K of the Trust for the year ended December 31,
1996)
10.42 -- Bonus and Severance Agreement dated March 13, 1996, by
and between the Trust and Marc Simpson (Incorporated
herein by reference from Exhibit 10.13 to Form 10-K of
the Trust for the year ended December 31, 1996)
10.43 -- Bonus and Severance Agreement dated March 13, 1996, by
and between the Trust and David B. Warner (Incorporated
herein by reference from Exhibit 10.14 to Form 10-K of
the Trust for the year ended December 31, 1996)
</TABLE>

II-6
<PAGE> 408

<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
10.44 -- Amendment No. 1 to Share Purchase Agreement dated as of
December 13, 1996 by and between the Trust and Realco
(Incorporated herein by reference from Exhibit 10.2 to
Form 8-K of the Trust dated March 4, 1997; File No.
1-9016)
21.1 -- Listing of Subsidiaries (incorporated herein by reference
from Exhibit 27.1 to Form 10-K for the year ended
December 31, 1996; File No. 1-9016)
*23.1 -- Consent of Ernst & Young LLP
*23.2 -- Consent of KPMG Peat Marwick LLP
27.1 -- Financial Data Schedule
99.1 -- Proxy card of the Trust
99.2 -- Proxy card of USAA Real Estate Income Investments I, A
California Limited Partnership
99.3 -- Proxy card of USAA Real Estate Income Investments II
Limited Partnership
99.4 -- Proxy card of USAA Income Properties III Limited
Partnership
99.5 -- Proxy card of USAA Income Properties IV Limited
Partnership
</TABLE>

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

* Filed herewith.

(b) Financial Statement Schedules

American Industrial Properties REIT
Schedule III -- Consolidated Real Estate and Accumulated Depreciation
Notes to Schedule III

USAA Real Estate Income Investments I Limited Partnership
Schedule III -- Real Estate and Accumulated Depreciation
Notes to Schedule III

USAA Real Estate Income Investments II Limited Partnership
Schedule III -- Real Estate and Accumulated Depreciation
Notes to Schedule III

USAA Income Properties III Limited Partnership
Schedule III -- Real Estate and Accumulated Depreciation
Notes to Schedule III

USAA Income Properties IV Limited Partnership
Schedule III -- Consolidated Real Estate and Accumulated Depreciation
Notes to Schedule III

The opinions of Prudential Securities Incorporated and Houlihan Lokey
Howard & Zukin are included as an Annex II-A and Annex II-B, respectively, to
the Joint Proxy Statement/Prospectus included in this Registration Statement.

ITEM 22. UNDERTAKINGS

(a) The undersigned registrant hereby undertakes as follows:

1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or for the most recent
post-effective amendment thereof) which, individually

II-7
<PAGE> 409

or in the aggregate, representing a fundamental change in the
information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.

2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

4. That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

5. That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.

6. That every prospectus (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

7. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this form, within one

II-8
<PAGE> 410

business day of receipt of such request, and to send the incorporated documents
by first-class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.

(c) The undersigned registrant hereby undertakes to supply by means of the
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.

II-9
<PAGE> 411

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas on
the 9th day of October, 1997.

AMERICAN INDUSTRIAL PROPERTIES REIT

/s/ CHARLES W. WOLCOTT
----------------------------------------
Charles W. Wolcott
President and Executive Officer

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on October 9, 1997.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>

/s/ CHARLES W. WOLCOTT Trust Manager, President and Chief Executive
- -------------------------------------------------------- Officer (Principal Executive Officer)
Charles W. Wolcott

/s/ MARC A. SIMPSON Vice President -- Finance, Chief Financial
- -------------------------------------------------------- Officer, Treasurer and Secretary (Principal
Marc A. Simpson Financial and Accounting Officer)

W.H. BRICKER* Trust Manager
- --------------------------------------------------------
W.H. Bricker

EDWARD B. KELLEY* Trust Manager
- --------------------------------------------------------
Edward B. Kelley

T. PATRICK DUNCAN* Trust Manager
- --------------------------------------------------------
T. Patrick Duncan

ROBERT E. GILES* Trust Manager
- --------------------------------------------------------
Robert E. Giles

STANLEY J. KRASKA, JR.* Trust Manager
- --------------------------------------------------------
Stanley J. Kraska, Jr.

RUSSELL C. PLATT* Trust Manager
- --------------------------------------------------------
Russell C. Platt

THEODORE R. BIGMAN* Trust Manager
- --------------------------------------------------------
Theodore R. Bigman

*By: /s/ CHARLES W. WOLCOTT
---------------------------------------------------
Charles Wolcott
Attorney-In-Fact
</TABLE>

II-10
<PAGE> 412

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>

2.1 -- Form of Amended and Restated Agreement and Plan of
Merger, dated as of June 30, 1997, by and between the
Trust and each of USAA Real Estate Income Investments I,
A California Limited Partnership, USAA Real Estate Income
Investments II Limited Partnership, USAA Income
Properties III Limited Partnership and USAA Income
Properties IV Limited Partnership (Included as Annex I to
the Joint Proxy Statement/ Prospectus of the Trust).
3.1 -- Third Amended and Restated Declaration of Trust
3.2 -- Fourth Amended and Restated Bylaws (Incorporated herein
by reference from the Trust Form 8-K dated October 3,
1995; File No. 1-9016
3.3 -- Amendment to the Fourth Amended and Restated Bylaws of
Trust Incorporated herein by reference to the Trust's
Form 8-K dated November 13, 1995; (File No. 1-9016).
3.4 -- Amendment to the Fourth Amended and Restated Bylaws of
Trust (Incorporated herein by reference to the Trust's
Form 8-K dated December 23, 1996; (File No. 1-9016).
3.5 -- Amendment to the Fourth Amended and Restated Bylaws of
Trust (Incorporated herein by reference to the Trust's
Form 8-K dated December 23, 1996; (File No. 1-9016).
4.1 -- Indenture dated November 15, 1985, by and between
American Industrial Properties REIT (the "Trust") and IBJ
Schroder Bank & Trust Company (Incorporated herein by
reference from Exhibit 10.4 to Form S-4 of American
Industrial Properties REIT, Inc. ("AIP Inc.") dated March
16, 1994; File No. 33-74292)
5.1 -- Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
*8.1 -- Tax Opinion of Liddell, Sapp, Zivley, Hill & LaBoon,
L.L.P.
10.1 -- Form of Indemnification Agreement
10.2 -- Employee and Trust Manager Incentive Share Plan
10.3 -- Common Share Purchase Agreement dated as of July 3, 1997,
by and between the Trust and ABKB/LaSalle Securities
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.4 -- Common Share Purchase Agreement dated as of July 3, 1997,
by and between the Trust and ABKB/LaSalle Securities
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.5 -- Common Share Purchase Agreement dated as of July 3, 1997,
by and between the Trust and LaSalle Advisors Limited
Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.6 -- Registration Rights Agreement dated as of July 10, 1997,
by and between the Trust and ABKB/LaSalle Securities
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
</TABLE>

<PAGE> 413
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
10.7 -- Registration Rights Agreement dated as of July 10, 1997,
by and between the Trust and ABKB/LaSalle Securities
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.8 -- Registration Rights Agreement dated as of July 3, 1997,
by and between the Trust and LaSalle Securities Advisors
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.9 -- Common Share Purchase Agreement dated as of June 20,
1997, by and among the Trust, MS Real Estate Special
Situations, Inc. ("MSRE") and Morgan Stanley Asset
Management, Inc. ("MSAM") as agent and attorney-in-fact
for specified clients (the "MSAM Purchasers")
(Incorporated herein by reference from the Trust's Form
8-K dated July 22, 1997; File No. 1-9016)
10.10 -- Registration Rights Agreement dated as of June 20, 1997,
by and among the Trust, MSRE and MSAM on behalf of the
MSAM Purchasers (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.11 -- Renewal, Extension, Modification and Amendment Agreement
dated February 26, 1997, executed by the Trust in favor
of USAA Real Estate Company ("Realco") (Incorporated
herein by reference from Exhibit 10.1 to the Trust's Form
8-K dated March 4, 1997; File No. 1-9016)
10.12 -- Share Purchase Agreement dated as of December 20, 1996,
by and among the Trust, Realco and AIP (Incorporated by
reference from Exhibit 99.7 to the Trust's Form 8-K dated
December 23, 1996; File No. 1-9016)
10.13 -- Share Purchase Agreement dated as of December 13, 1996,
by and between the Trust and Realco (Incorporated herein
by reference from the Trust's Form 8-K dated December 23,
1996; File No. 1-9016)
10.14 -- Registration Rights Agreement dated as of December 20,
1996, by and between the Trust and Realco, as amended
(Incorporated herein by reference from Exhibit 99.9 to
the Trust's Form 8-K dated December 23, 1996; File No.
1-9016)
10.15 -- Registration Rights Agreement dated as of December 19,
1996, by and between the Trust and Realco (Incorporated
herein by reference from Exhibit 99.8 to the Trust's Form
8-K dated December 23, 1996; File No. 1-9016)
10.16 -- 401(k) Retirement and Profit Sharing Plan (Incorporated
herein by reference from Exhibit 10.5 to Amendment No. 1
to Form S-4 of AIP, Inc. dated March 4, 1994; File No.
33-74292)
10.17 -- Amendments to 401(k) Retirement and Profit Sharing Plan
(Incorporated herein by reference from Exhibit 10.4 to
Form 10-K of the Trust dated March 27, 1995)
10.18 -- Settlement Agreement by and between American Industrial
Properties REIT, Patapsco #1 Limited Partnership,
Patapsco #2 Limited Partnership, The Manufacturers Life
Insurance Company and The Manufacturers Life Insurance
Company (U.S.A.) dated as of May 22, 1996 (incorporated
herein by reference from Exhibit 99.1 to Form 8-K of the
Trust dated May 22, 1996; File No. 1-9016)
10.19 -- Agreement and Assignment of Partnership Interest, Amended
and Restated Agreement and Certificate of Limited
Partnership and Security Agreement for Patapsco
Center -- Linthicum Heights, Maryland (incorporated
herein by reference from Exhibit 10.8 to Amendment No. 1
to Form S-4 of AIP Inc. dated March 4, 1994; File No.
33-74292)
</TABLE>
<PAGE> 414
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
10.20 -- Note dated November 15, 1994 in the original principal
amount of $12,250,000 with AIP Properties #1 L.P. as
Maker and AMRESCO Capital Corporation as Payee
(Incorporated herein by reference from Exhibit 99.1 to
Form 8-K of the Trust dated November 22, 1994; File No.
1-9016)
10.21 -- Mortgage, Deed of Trust and Security Agreement dated
November 15, 1994 between AIP Properties #1 L.P. and
AMRESCO Capital Corporation (incorporated herein by
reference from Exhibit 99.2 to Form 8-K of the Trust
dated November 22, 1994; File No. 1-9016)
10.22 -- Loan Modification Agreement modifying the Note dated
November 15, 1994 in the original principal amount of
$12,250,000 (incorporated herein by reference from
Exhibit 99.2 to Form 8-K of the Trust dated June 23,
1995; File No. 1-9016)
10.23 -- Note dated November 15, 1994 in the original principal
amount of $2,150,000 with AIP Properties #2 L.P. as Maker
and AMRESCO Capital Corporation as Payee (Incorporated
herein by reference from Exhibit 99.3 to Form 8-K of the
Trust dated November 22, 1994; File No. 1-9016)
10.24 -- Mortgage, Deed of Trust and Security Agreement dated
November 15, 1994 between AIP Properties #2 L.P. and
AMRESCO Capital Corporation (Incorporated herein by
reference from Exhibit 99.4 to Form 8-K of the Trust
dated November 22, 1994; File No. 1-9016)
10.25 -- Loan Modification Agreement modifying the Note dated
November 15, 1994 in the original principal amount of
$2,250,000 (Incorporated herein by reference from Exhibit
99.1 to Form 8-K of the Trust dated June 23, 1995; File
No. 1-9016)
10.26 -- Promissory Note dated November 25, 1996, by and between
AIP Inc. and Realco (Incorporated herein by reference
from Exhibit No. 99.5 to Form 8-K of the Trust dated
December 23, 1996; File No. 1-9016)
10.27 -- Deed of Trust and Security Agreement dated November 15,
1996 between AIP Properties #3, L.P. and Life Investors
Insurance Company of America (Huntington Drive Center)
(Incorporated herein by reference from Exhibit 99.1 to
Form 8-K of the Trust dated November 20, 1996; File No.
1-9016)
10.28 -- Note dated November 15, 1996 in the original principal
amount of $4,575,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Huntington Drive Center) (Incorporated herein by
reference from Exhibit 99.2 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.29 -- Deed of Trust and Security Agreement dated November 15,
1996 between AIP Properties #3, L.P. and Life Investors
Insurance Company of America (Patapsco Industrial Center)
incorporated herein by reference from Exhibit 99.3 to
Form 8-K of the Trust dated November 20, 1996; File No.
1-9016)
10.30 -- Note dated November 15, 1996 in the original principal
amount of $3,112,500 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Patapsco Industrial Center) (Incorporated herein by
reference from Exhibit 99.4 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.31 -- Deed of Trust and Security Agreement dated November 15,
1996 between AIP Properties #3, L.P. and Life Investors
Insurance Company of America (Woodlake Distribution
Center) (incorporated herein be reference from Exhibit
99.5 to Form 8-K of the Trust dated November 20, 1996;
File No. 1-9016)
10.32 -- Note dated November 15, 1996 in the original principal
amount of $1,537,500 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Woodlake Distribution Center) (Incorporated herein by
reference from Exhibit 99.6 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
</TABLE>
<PAGE> 415

<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
10.33 -- Deed of Trust and Security Agreement dated November 15,
1996 between AIP Properties #3, L.P. and Life Investors
Insurance Company of America (All Texas properties except
Woodlake) (Incorporated herein by reference from Exhibit
99.7 to Form 8-K of the Trust dated November 20, 1996;
File No. 1-9016)
10.34 -- Note dated November 15, 1996 in the original principal
amount of $1,162,500 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Meridian Street Warehouse) (Incorporated herein by
reference from Exhibit 99.8 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.35 -- Note dated November 15, 1996 in the original principal
amount of $2,775,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Beltline Business Center) (Incorporated herein by
reference from Exhibit 99.9 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.36 -- Note dated November 15, 1996 in the original principal
amount of $3,375,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Plaza South) (Incorporated herein by reference from
Exhibit 99.10 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.37 -- Note dated November 15, 1996 in the original principal
amount of $2,100,00 with AIP Properties #3, L.P. as Maker
and Life Investors Insurance Company as Payee (Commerce
North Park) (Incorporated herein by reference from
Exhibit 99.11 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.38 -- Note dated November 15, 1996 in the original principal
amount of $2,850,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Gateway 5 & 6) (Incorporated herein by reference from
Exhibit 99.12 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.39 -- Note dated November 15, 1996 in the original principal
amount of $5,175,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Northgate II) (Incorporated herein by reference from
Exhibit 99.13 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.40 -- Note dated November 15, 1996 in the original principal
amount of $1,327,500 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Westchase Park) (Incorporated herein by reference from
Exhibit 99.14 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.41 -- Bonus and Severance Agreement dated March 13, 1996, by
and between the Trust and Charles W. Wolcott
(Incorporated herein by reference from Exhibit 10.12 to
Form 10-K of the Trust for the year ended December 31,
1996)
10.42 -- Bonus and Severance Agreement dated March 13, 1996, by
and between the Trust and Marc Simpson (Incorporated
herein by reference from Exhibit 10.13 to Form 10-K of
the Trust for the year ended December 31, 1996)
10.43 -- Bonus and Severance Agreement dated March 13, 1996, by
and between the Trust and David B. Warner (Incorporated
herein by reference from Exhibit 10.14 to Form 10-K of
the Trust for the year ended December 31, 1996)
10.44 -- Amendment No. 1 to Share Purchase Agreement dated as of
December 13, 1996 by and between the Trust and Realco
(Incorporated herein by reference from Exhibit 10.2 to
Form 8-K of the Trust dated March 4, 1997; File No.
1-9016)
21.1 -- Listing of Subsidiaries (incorporated herein by reference
from Exhibit 27.1 to Form 10-K for the year ended
December 31, 1996; File No. 1-9016)
*23.1 -- Consent of Ernst & Young LLP
</TABLE>

<PAGE> 416

<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
*23.2 -- Consent of KPMG Peat Marwick LLP
27.1 -- Financial Data Schedule
99.1 -- Proxy card of the Trust
99.2 -- Proxy card of USAA Real Estate Income Investments I, A
California Limited Partnership
99.3 -- Proxy card of USAA Real Estate Income Investments II
Limited Partnership
99.4 -- Proxy card of USAA Income Properties III Limited
Partnership
99.5 -- Proxy card of USAA Income Properties IV Limited
Partnership
</TABLE>

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

* Filed herewith.

<PAGE> 1
[LIDDELL, SAPP, ZIVLEY, HILL & LABOON, L.L.P. LETTERHEAD]

EXHIBIT 8.1

October 7, 1997

American Industrial Properties REIT
6224 N. Beltline Road, Suite 205
Irving, Texas 75063
Attention: Charles W. Wolcott, President

USAA Real Estate Income Investments I, A California Limited Partnership
USAA Real Estate Income Investments II Limited Partnership
USAA Income Properties III Limited Partnership
USAA Income Properties IV Limited Partnership
USAA Real Estate Company
8000 I-H 10 West, Suite 600
San Antonio, Texas 78230
Attention: Patrick Duncan, Senior Vice-President

Ladies and Gentlemen:

We have acted as counsel to American Industrial Properties REIT (the
"Trust"), a Texas real estate investment trust, in connection with the
execution and delivery of the Amended and Restated Agreement and Plan of Merger
(the "Agreement") dated as of June 30, 1997, by and among the Trust and USAA
Real Estate Income Investments I, A California Limited Partnership, USAA Real
Estate Income Investments II Limited Partnership, a Texas limited partnership,
USAA Income Properties III Limited Partnership, a Delaware limited partnership,
and USAA Income Properties IV Limited Partnership, a Delaware limited
partnership (each a "RELP" and collectively, the "RELPS"). Pursuant to Sections
8.2(b) and 8.3(b) of the Agreement, we have been asked to provide an opinion on
certain federal income tax matters related to the Trust. Capitalized terms used
in this letter and not otherwise defined herein have the meaning set forth in
the Proxy Statement/Prospectus (as hereinbelow defined).

The opinions set forth in this letter are based on relevant provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations promulgated thereunder (including proposed and temporary
Regulations), and interpretations of the foregoing as expressed in court
decisions, the legislative history and existing administrative rulings and
practices of the Internal Revenue Service ("IRS") (including its practices and
policies in issuing private letter rulings, which

<PAGE> 2

October 7, 1997
Page 2

are not binding on the IRS except with respect to a taxpayer that receives such
a ruling), all as of the date hereof. These provisions and interpretations are
subject to change, which may or may not be retroactive in effect, that might
result in modifications of our opinion.

In rendering the following opinion, we have examined such statutes,
regulations, records, certificates and other documents as we have considered
necessary or appropriate as a basis for such opinion, including the following:
(1) the Agreement, (2) the Registration Statement on Form S-4, containing the
Joint Proxy Statement/Prospectus of the Trust, filed with the Securities and
Exchange Commission on July 22, 1997, as amended through the date hereof (the
"Proxy Statement/Prospectus"); (3) the Agreement of Limited Partnership of each
RELP; (4) the Declaration of Trust and Bylaws of the Trust as amended to date
(collectively, the "Charter"); (5) certain written representations of the Trust
contained in an Officer's Certificate to Counsel for American Industrial
Properties REIT Regarding Certain Income Tax Matters, dated on or about the
date hereof (the "Trust Certificate"); and (6) certain written representations
of each RELP contained in those certain General Partner's Certificates to
Counsel for American Industrial Properties REIT Regarding Certain Matters,
dated on or about the date hereof ("RELPS' Certificates").

In our review, we have assumed, with your consent, that all of the
representations and statements set forth in the documents we reviewed are true
and correct, and all of the obligations imposed under such documents including
without limitation the Charter, have been and will be performed or satisfied in
accordance with their terms. In connection with rendering the opinion herein,
we have also assumed (without any independent investigation or review thereof)
that:

1. The Trust is a validly organized real estate investment trust
("REIT") existing under the laws of the State of Texas.

2. Each RELP is a validly organized limited partnership existing
under the laws of the state of its organization; and further,
that each RELP is properly classified and taxable as a
partnership for federal income tax purposes and has been
properly classified and taxable as a partnership for federal
income tax purposes throughout the entire period of its
existence.

3. No RELP has an interest in any stock in any other corporation.

4. Each entity formed as a partnership under applicable state
law, in which each RELP owns a direct or indirect interest,
is, for federal income tax purposes, properly classified as a
partnership; and further, that each such entity has been
classified as a partnership for federal income tax purposes
during the entire period of its existence during which RELP
has owned such direct or indirect interest therein.
<PAGE> 3
October 7, 1997
Page 3

5. The Merger will be consummated in accordance with the
Agreement and as described in the Proxy Statement/Prospectus
(including satisfaction of all covenants and conditions to
the obligations of the parties without amendment or waiver
thereof); each of the Trust and RELP will comply with all
reporting obligations with respect to the Merger required
under the Code, and the Treasury Regulations thereunder; and
the Agreement and all other documents and instruments
referred to therein or in the Proxy Statement/Prospectus are
valid and binding in accordance with their terms.

For purposes of rendering our opinion, we have not made an independent
investigation or audit of any of the facts set forth in any of the
above-referenced documents, including the Proxy Statement/Prospectus, the
Trust's Certificate, and the RELPS' Certificates or with regard to the
assumptions set forth above. Consequently, we have relied upon your
representations and have assumed that the information presented in such
documents or otherwise furnished to us accurately and completely describes all
material facts relevant to our opinions. No facts have come to our attention,
however, that would cause us to conclude that such facts or documents are
inaccurate or incomplete in any material way.

Any inaccuracy in, or breach of, any of the aforementioned statements,
representations, warranties and assumptions or any change after the date hereof
in applicable law could adversely affect our opinion. No ruling has been (or
will be) sought from the IRS by the Trust or any RELP as to the federal income
tax matters addressed in this opinion.

Based upon our examination of the foregoing items and subject to and
limited by the assumptions, exceptions, limitations and qualifications set
forth herein, we are of the opinion that the Trust met the requirements for
qualification and taxation as a REIT under the Code for its taxable year ended
December 31, 1985, and has met the requirements for qualification and taxation
as a REIT for its taxable years 1986 through 1996; the Trust's diversity of
equity ownership, operations through the Closing Date and proposed method of
operation for future periods should allow it to qualify as a REIT for its
taxable year ending December 31, 1997; the discussion contained under the
caption "Material Federal Income Tax Consequences" in the Proxy
Statement/Prospectus accurately reflects existing law and fairly addresses the
material federal income tax issues described therein; and the consummation of
the Merger will not result in the Trust's failure to continue to satisfy the
requirements for qualification as a REIT for federal income tax purposes.

We assume no obligation to advise you of any changes in our opinion
subsequent to the delivery of this opinion letter. The Trust's qualification as
a REIT depends upon the Trust's ability to meet on a continuing basis, through
actual annual operating and other results, the various

<PAGE> 4
October 7, 1997
Page 4

requirements under the Code with regard to, among other things, the sources of
its gross income, the composition of its assets, the level of its distributions
to stockholders, and the diversity of its stock ownership. We have not
undertaken to review or audit the Trust's compliance with these requirements on
a continuing basis. Accordingly, no assurance can be given that the actual
operating results of the Trust, and the entities in which the Trust owns
interests, the sources of their income, the nature of their assets, the level
of distributions to shareholders and the diversity of stock ownership for any
given taxable year has satisfied or will satisfy the requirements under the
Code for qualification and taxation as a REIT.

An opinion of counsel merely represents counsel's best judgment with
respect to the probable outcome on the merits and is not binding on the IRS or
the courts. There can be no assurance that positions contrary to our opinions
will not be taken by the IRS, or that a court considering the issues would not
hold contrary to such opinions.

This opinion letter has been prepared pursuant to Section 8.2(b) and
8.3(b) of the Agreement. The opinion may not be used or relied upon by any
other person or for any other purpose and may not be disclosed, quoted, filed
with a governmental agency or otherwise referred to without our prior written
consent. Notwithstanding the foregoing, we hereby consent to the filing of this
opinion letter as Exhibit 8.1 to the Proxy Statement/Prospectus and to the
reference to this firm under the caption "Legal Opinions" in the Proxy
Statement/Prospectus. In giving such consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.

Sincerely yours,

/s/LIDDELL, SAPP, ZIVLEY, HILL & LABOON, L.L.P.

Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to the
use of our reports (i) dated February 13, 1997 (except for Note 14, as to which
the date is October 15, 1997) with respect to the Consolidated Financial
Statements of American Industrial Properties REIT as of December 31, 1996 and
1995 and for the three years in the period ended December 31, 1996; and (ii)
dated September 16, 1997 with respect to the Combined Historical Summary of
Gross Income and Direct Operating Expenses of Merit Texas Properties Portfolio
for the year ended December 31, 1996 in Amendment No. 2 to the Registration
Statement on Form S-4 (No. 333-31823) and the related Joint Proxy
Statement/Prospectus of American Industrial Properties REIT.

ERNST & YOUNG LLP

Dallas, Texas

The foregoing consent is in the form that will be signed upon the
completion of the one for five reverse share split described in Note 14 to the
financial statements.

/s/ ERNST & YOUNG LLP

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ERNST & YOUNG LLP

Dallas, Texas

October 8, 1997

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EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

The Partners

USAA Real Estate Income Investments I Limited Partnership

USAA Real Estate Income Investments II Limited Partnership

USAA Income Properties III Limited Partnership
USAA Income Properties IV Limited Partnership:

We consent to the use of our reports dated January 29, 1997 and February 3,
1997 on the financial statements and financial statement schedules of USAA Real
Estate Income Investments I Limited Partnership and USAA Income Properties III
Limited Partnership, respectively, and the report dated January 31, 1997 on the
consolidated financial statements and financial statement schedules of USAA
Income Properties IV Limited Partnership all as of December 31, 1996 and 1995,
and for each of the years in the three-year period ended December 31, 1996, and
the report dated July 25, 1997, except for note 10, as to which the date is
August 20, 1997, on the financial statements and financial statement schedules
of USAA Real Estate Income Investments II Limited Partnership as of June 30,
1997 and 1996, and for each of the years in the three-year period ended June 30,
1997, included herein and to the reference to our firm under the heading
"Experts" in the joint proxy statement/prospectus.

/s/ KPMG PEAT MARWICK LLP
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KPMG Peat Marwick LLP

San Antonio, Texas
October 9, 1997