MCNEIL REAL ESTATE FUND XXV LP, 10-K405, 1998-03-30

MCNEIL REAL ESTATE FUND XXV LP
10-K405, 1998-03-30
REAL ESTATE

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

FORM 10-K405

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

For the fiscal year ended December 31, 1997
-----------------------------------------------

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

For the transition period from ______________ to_____________

Commission file number 0-15446
---------

McNEIL REAL ESTATE FUND XXV, L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

California 33-0120335
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

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

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

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

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

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

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

82,916,363 of the registrant's 82,943,685 limited partnership units are held by
non-affiliates. The aggregate market value of units held by non-affiliates is
not determinable since there is no public trading market for limited partnership
units and transfers of units are subject to certain restrictions.

Documents Incorporated by Reference: See Item 14, Page 37

TOTAL OF 39 PAGES
<PAGE>

PART I

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

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

McNeil Real Estate Fund XXV, L.P. (the "Partnership"), formerly known as
Southmark Equity Partners II, Ltd., was organized on February 15, 1985 as a
limited partnership under the provisions of the California Revised Limited
Partnership Act to acquire and operate commercial office, retail and residential
properties. The general partner of the Partnership is McNeil Partners, L.P. (the
"General Partner"), a Delaware limited partnership, an affiliate of Robert A.
McNeil ("McNeil"). The General Partner was elected at a meeting of limited
partners on March 26, 1992, at which time an amended and restated partnership
agreement (the "Amended Partnership Agreement") was adopted. Prior to March 26,
1992, the general partner of the Partnership was Equity Partners (the "Original
General Partner"), a Texas general partnership, which was formed by affiliates
of Southmark Corporation ("Southmark"). The principal place of business for the
Partnership and the General Partner is 13760 Noel Road, Suite 600, LB70, Dallas,
Texas, 75240.

On December 23, 1985, the Partnership registered with the Securities and
Exchange Commission ("SEC") under the Securities Act of 1933 (File No. 33-746)
and commenced a public offering for sale of $72,000,000 of limited partnership
units ("Units"), with the general partner's right to increase the offering to
$84,000,000. The Units represent equity interests in the Partnership and entitle
the holders thereof to participate in certain allocations and distributions of
the Partnership. The sale of Units closed on August 8, 1986 with 84,000,000
Units sold at one dollar each, or gross proceeds of $84,000,000 to the
Partnership. The Partnership subsequently filed a Form 8-A Registration
Statement with the SEC and registered its Units under the Securities Exchange
Act of 1934 (File No. 0-15446). 50,000, 49,473 and 5,879 Units were rescinded in
1986, 1991 and 1995, respectively. In 1996, an additional 950,963 Units were
rescinded, leaving 82,943,685 Units outstanding at December 31, 1997.

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

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

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

<PAGE>
On February 14, 1991, pursuant to the asset purchase agreement as amended on
that date, McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of
McNeil, acquired the assets relating to the property management and partnership
administrative business of Southmark and its affiliates and commenced management
of the Partnership's properties pursuant to an assignment of the existing
property management agreements from the Southmark affiliates.

On March 26, 1992, the limited partners approved a restructuring proposal that
provided for (i) the replacement of the Original General Partner with a new
general partner, McNeil Partners, L.P.; (ii) the adoption of the Amended
Partnership Agreement which substantially alters the provisions of the original
partnership agreement relating to, among other things, compensation,
reimbursement of expenses and voting rights; (iii) the approval of an amended
property management agreement with McREMI, the Partnership's property manager;
and (iv) the approval to change the Partnership's name to McNeil Real Estate
Fund XXV, L.P. Under the Amended Partnership Agreement, the Partnership began
accruing an asset management fee, retroactive to February 14, 1991, which is
payable to the General Partner. For a discussion of the methodology for
calculating the asset management fee, see Item 13 Certain Relationships and
Related Transactions. The proposals approved at the March 26, 1992 meeting were
implemented as of that date.

Concurrent with the approval of the restructuring, the General Partner acquired
from Southmark and its affiliates, for aggregate consideration of $29,065, the
general partner interest of the Original General Partner. The General Partner
and its affiliates own in the aggregate less than 1% of the Units.

Settlement of Claims:

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

An Order Granting Motion to Distribute Funds to Class 8 Claimants dated April
14, 1995 was issued by the Bankruptcy Court. In accordance with the Order, in
May 1995 the Partnership received in full satisfaction of its claims, $73,122 in
cash, and common and preferred stock in the reorganized Southmark which
represents the Partnership's pro-rata share of Southmark assets available for
Class 8 Claimants. The Partnership sold the Southmark common and preferred stock
in May 1995 for $23,609, which combined with the cash proceeds from Southmark,
resulted in a gain on legal settlement of $96,731.

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

General:

The Partnership is engaged in the ownership, operation and management of
commercial office, retail and residential real estate. At December 31, 1997, the
Partnership owned five revenue-producing properties as described in Item 2 -
Properties.

The Partnership does not directly employ any personnel. The General Partner
conducts the business of the Partnership directly and through its affiliates.
The Partnership reimburses affiliates of the General Partner for such services
rendered in accordance with the Amended Partnership Agreement. See Item 8 - Note
2 "Transactions With Affiliates."
<PAGE>
The business of the Partnership to date has involved only one industry segment.
See Item 8 - Financial Statements and Supplementary Data. The Partnership has no
foreign operations. The business of the Partnership is not seasonal.

Business Plan:

Pursuant to the Partnership's previously announced liquidation plans, the
Partnership has recently retained PaineWebber, Incorporated as its exclusive
financial advisor to explore alternatives to maximize the value of the
Partnership. The alternatives being considered by the Partnership include,
without limitation, a transaction in which limited partnership interests in the
Partnership are converted into cash. The General Partner of the Partnership or
entities or persons affiliated with the General Partner will not be involved as
a purchaser in any of the transactions contemplated above. Any transaction will
be subject to certain conditions including (i) approval by the limited partners
of the Partnership, and (ii) receipt of an opinion from an independent financial
advisory firm as to the fairness of the consideration received by the
Partnership pursuant to such transaction. Finally, there can be no assurance
that any transaction will be consummated, or as to the terms thereof.

The Partnership has placed Northwest Plaza on the market for sale effective
August 1, 1997.

Competitive Conditions:

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

Forward-Looking Information:

Within this document, certain statements are made as to the expected occupancy
trends, financial condition, results of operations, and cash flows of the
Partnership for periods after December 31, 1997. All of these statements are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These statements are not
historical and involve risks and uncertainties. The Partnership's actual
occupancy trends, financial condition, results of operations, and cash flows for
future periods may differ materially due to several factors. These factors
include, but are not limited to, the Partnership's ability to control costs,
make necessary capital improvements, negotiate sales or refinancings of its
properties and respond to changing economic and competitive factors.
<PAGE>
Environmental Matters:

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

Other Information:

In August 1995, High River Limited Partnership, a Delaware limited partnership
controlled by Carl C. Icahn ("High River") made an unsolicited tender offer to
purchase from holders of Units up to approximately 45% of the outstanding Units
of the Partnership for a purchase price of $0.24 per Unit. In September 1996,
High River made another unsolicited tender offer to purchase any and all of the
outstanding Units of the Partnership for a purchase price of $0.252 per Unit. In
addition High River made unsolicited tender offers for certain other
partnerships controlled by the General Partner. The Partnership recommended that
the limited partners reject the tender offers made with respect to the
Partnership and not tender their Units. The General Partner believes that as of
January 31, 1998, High River has purchased approximately 9.08% of the
outstanding Units pursuant to the tender offers. In addition, all litigation
filed by High River, Mr. Icahn and his affiliates in connection with the tender
offers has been dismissed without prejudice.

Management has begun to review its information technology infrastructure to
identify any systems that could be affected by the year 2000 problem. The year
2000 problem is the result of computer programs being written using two digits
rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in major systems failure or
miscalculations. The information systems used by the Partnership for financial
reporting and significant accounting functions were made year 2000 compliant
during recent systems conversions. The Partnership is in the process of
evaluating the computer systems at the various properties. The Partnership also
intends to communicate with suppliers, financial institutions and others to
coordinate year 2000 issues. Management believes that the remediation of any
outstanding year 2000 conversion issues will not have a material or adverse
effect on the Partnership's operations.

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

The following table sets forth the real estate investment portfolio of the
Partnership at December 31, 1997. All of the buildings and the land on which
they are located are owned by the Partnership in fee and are unencumbered by
mortgage indebtedness, with the exception of Harbour Club I Apartments, which is
subject to a first lien deed of trust as described more fully in Item 8 - Note 6
- - "Mortgage Note Payable" and Fidelity Plaza which is subject to four ground
leases as described more fully in Item 8 - Note 5 - "Leases." See also Item 8 -
Note 4 - "Real Estate Investments" and Schedule III - Real Estate Investments
and Accumulated Depreciation and Amortization. In the opinion of management, the
properties are adequately covered by insurance.

<TABLE>
<CAPTION>
Net Basis 1997 Date
Property Description of Property Debt Property Taxes Acquired
- -------- ----------- ----------- ---- -------------- --------
Real Estate Investments:
<S> <C> <C> <C> <C> <C>
Century Park Office Building
Las Vegas, NV 113,459 sq. ft. $ 8,260,114 $ - $ 76,624 5/86

Fidelity Plaza Office Building
Long Beach, CA 124,155 sq. ft. 5,010,020 205,902 72,935 12/85

Harbour Club I Apartments
Belleville, MI (1) 294 units 6,315,271 7,155,626 207,603 6/86

Kellogg Office Building
Littleton, CO 112,766 ft. 5,417,776 - 176,057 12/85
-------------- ------------ ------------
$ 25,003,181 $ 7,361,528 $ 533,219
============== ============ ============

Asset Held for Sale:

Northwest Plaza Retail Center
Dayton, OH 443,551 sq. ft. $ 8,989,818 $ - $ 297,892 6/86
============== ============ ============
</TABLE>

- -----------------------------------------
Total: Apartments - 294 units
Retail Center - 443,551 sq. ft.
Office Buildings - 350,380 sq. ft.

(1) Harbour Club I Apartments is owned by Van Buren Associates Limited
Partnership, which is wholly-owned by the Partnership and the General
Partner.

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

<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------- ------------- -------------- ------------- -------

Real Estate Investments:
<S> <C> <C> <C> <C> <C>
Century Park
Occupancy Rate............ 93% 93% 95% 92% 81%
Rent Per Square Foot...... $16.75 $17.93 $15.41 $15.21 $14.40

Fidelity Plaza
Occupancy Rate............ 93% 83% 79% 83% 76%
Rent Per Square Foot...... $13.96 $13.99 $14.04 $14.79 $15.24

Harbour Club I
Occupancy Rate............ 87% 93% 91% 90% 90%
Rent Per Square Foot...... $7.28 $7.11 $6.91 $6.39 $6.16

Kellogg
Occupancy Rate............ 100% 98% 99% 83% 99%
Rent Per Square Foot...... $15.50 $14.91 $12.53 $13.38 $13.37

Asset Held for Sale:

Northwest Plaza
Occupancy Rate............ 87% 87% 98% 97% 88%
Rent Per Square Foot...... $4.11 $4.53 $4.59 $5.24 $5.31
</TABLE>

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

Competitive Conditions
- ----------------------

Real Estate Investments:

Century Park
- ------------

Century Park consists of twin two-story office buildings located in the heart of
the East Flamingo Corridor in southeast Las Vegas. The area surrounding the
building is abundant with commercial activity. A series of professional
buildings line the busy thoroughfare. Development of new office space began
toward the end of 1994 and Century Park is currently competing with existing
buildings that lost tenants to the new buildings. The average occupancy rate in
the area has declined and is currently 82%. Century Park's occupancy was 93% at
the end of 1997 and the Partnership anticipates maintaining occupancy in the mid
90% range in 1998. 25% of the leases at Century Park are scheduled to expire in
1998. The Partnership expects approximately 8% of the leases to be renewed and
new leases to be signed for the remaining vacated space.
<PAGE>
Fidelity Plaza
- --------------

Fidelity Plaza is a ten-story office building located in downtown Long Beach,
California, on Ocean Boulevard, parallel to the Pacific Ocean. The area is a
strong business mix of legal and maritime businesses due to its close proximity
to the Ports of Long Beach and Los Angeles. With extensive lobby and courtyard
capital improvements completed in 1995, management was able to increase
occupancy in 1996 and 1997. Fidelity Plaza's occupancy is currently above the
average occupancy rate for the area. However, several competing properties are
currently undergoing extensive renovations and aggressive leasing campaigns, and
are offering rental rates that approximate the rates being charged by Fidelity
Plaza. The Partnership anticipates maintaining occupancy around 90% in 1998 by
offering responsive management, competitive rental rates and a prestigious
address.

Harbour Club I
- --------------

Harbour Club I, located in Belleville, Michigan, was built in 1969 as a part of
a four-phase apartment complex. The property offers a complete package of
amenities including a golf course, clubhouse, exercise room, tanning beds,
tennis courts, saunas, boat docks and launch, and playgrounds. The apartments
located in this phase of the complex offer lake and golf course views. Harbour
Club I's occupancy was below the market average of 92% at December 31, 1997 and
its rental rates are slightly below that of its nearest competitor. During the
four years prior to 1996, management's limited capital expenditures
significantly affected the property's ability to effectively compete in the
marketplace. In 1996, approximately $272,000 of escrow funds held by the
mortgagee were released and the property was able to complete approximately
$445,000 of capital improvements, which allowed the property to increase rents
for the first time in five years. However, security concerns are prompting
demands from tenants for improved lighting, limited access gates and fencing, as
offered by competitors. With the improving economy and planned capital
expenditures, management expects to increase rental rates in 1998 while
maintaining occupancy in the high 80% to low 90% range.

Kellogg
- -------

Kellogg Building is located southwest of Denver and is the only high-rise office
building in the Littleton area. The building is located within a mile of one of
the strongest housing developments in the nation, with projected growth of over
100,000 residents expected over the next few years. The quality of lifestyle in
Colorado is placing higher demands for professionals to work closer to home.
Professionals are looking for nearby office space that replaces former downtown
locations. Two small office buildings were built in the area in 1997 and another
building with convenient highway access is being constructed. With occupancy
rates averaging 99% in the area, the Partnership does not believe the additional
office space will have a negative impact on the Kellogg Building's occupancy in
1998. Rental rates are scheduled to increase for all tenants under signed lease
agreements and rental rate increases are projected for any new or renewing
tenants. Due to the strong growth in the surrounding area and the great demand
for office space, the Partnership expects to maintain occupancy in the high 90%
range throughout 1998.

<PAGE>
Asset Held for Sale:

Northwest Plaza
- ---------------

Northwest Plaza, located in Dayton, Ohio, is a retail strip shopping center with
three anchor tenants that occupy 64% of the total leasable area. Management has
increased security and lighting in the parking areas in response to increased
criminal activity in the area. In late 1993, an anchor tenant vacated and the
space was re-leased at a lower rate. Another anchor tenant's lease was
restructured to provide for lower rent based on sales volume. The tenant
declared bankruptcy in late 1995 and relinquished 50,000 square feet in 1996.
Due to these factors, lower rental revenue was realized in 1997 and is expected
for 1998. On August 1, 1997, the General Partner placed Northwest Plaza on the
market for sale when it became evident that economic factors will not allow for
the Partnership to recover its costs over a reasonable period of time. Based
upon projected cash flows over the reduced holding period, the Partnership
revised its estimated net realizable value of the property; and accordingly, a
write-down for impairment of $3,130,000 was recorded in the fourth quarter of
1997.

The following schedule shows lease expirations for each of the Partnership's
commercial properties for 1998 through 2007:

<TABLE>
<CAPTION>
Number of Annual % of Gross
Expirations Square Feet Rent Annual Rent
----------- ----------- ------ -----------

Real Estate Investments:
<C> <C> <C> <C> <C>
Century Park
1998 11 27,045 $ 489,986 25%
1999 11 16,844 310,593 16%
2000 15 31,438 593,145 31%
2001 3 10,140 188,953 10%
2002 8 16,749 308,942 16%
2003 1 1,872 34,819 2%
2004-2007 - - - -

Kellogg
1998 12 31,740 $ 427,574 27%
1999 11 27,251 382,959 25%
2000 14 36,191 526,053 34%
2001 3 5,108 87,275 6%
2002 2 5,451 97,553 6%
2003 - - - -
2004 1 1,921 32,177 2%
2005-2007 - - - -

Fidelity Plaza
1998 15 17,830 $ 280,248 17%
1999 12 23,048 348,329 21%
2000 9 22,219 343,168 21%
2001 9 24,301 339,019 21%
2002 4 6,205 97,668 6%
2003 1 6,300 88,893 6%
2004-2006 - - - -
2007 2 7,263 135,600 8%
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
Number of Annual % of Gross
Expirations Square Feet Rent Annual Rent
----------- ----------- ------ -----------
Asset Held for Sale:
<C> <C> <C> <C> <C>
Northwest Plaza
1998 7 23,191 $ 184,841 12%
1999 7 17,541 161,975 10%
2000 2 2,100 25,309 2%
2001 4 18,810 126,006 8%
2002 6 17,402 135,488 9%
2003 2 8,806 87,467 5%
2004 1 24,358 73,100 5%
2005 1 6,000 49,440 3%
2006 1 42,130 315,000 20%
2007 - - - -
</TABLE>

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

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

Real Estate Investments:
<S> <C> <C> <C>
Century Park
- ------------

None

Kellogg
- -------

General Office 14,522 $ 196,337 2000

Fidelity Federal Plaza
- ----------------------

None

Asset Held for Sale:

Northwest Plaza
- ---------------

Department Store 217,077 $ 434,148 2012
</TABLE>

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

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

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

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

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

Defendants filed a demurrer to the consolidated and amended complaint and a
motion to strike on February 14, 1997, seeking to dismiss the consolidated
and amended complaint in all respects. A hearing on Defendant's demurrer
and motion to strike was held on May 5, 1997. The Court granted Defendants'
demurrer, dismissing the consolidated and amended complaint with leave to
amend. On October 31, 1997, the Plaintiffs filed a second consolidated and
amended complaint. Defendants must move, answer or otherwise respond to the
second consolidated and amended complaint by June 30, 1998.

<PAGE>
2) HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young, BDO Seidman et
al. (Case #92-06560-A). This suit was filed on behalf of the Partnership
and other affiliated partnerships (as defined in this Section 1, the
"Affiliated Partnerships") on May 26, 1992, in the 14th Judicial District
Court of Dallas County. The petition sought recovery against the
Partnership's former auditors, Ernst & Young, for negligence and fraud in
failing to detect and/or report overcharges of fees/expenses by Southmark,
the former general partner. The former auditors initially asserted
counterclaims against the Affiliated Partnerships based on alleged
fraudulent misrepresentations made to the auditors by the former management
of the Affiliated Partnerships (Southmark) in the form of client
representation letters executed and delivered to the auditors by Southmark
management. The counterclaims sought recovery of attorneys' fees and costs
incurred in defending this action. The counterclaims were later dismissed
on appeal, as discussed below.

The trial court granted summary judgment against the Affiliated
Partnerships based on the statute of limitations; however, on appeal, the
Dallas Court of Appeals reversed the trial court and remanded for trial the
Affiliated Partnerships' fraud claims against Ernst & Young. The Texas
Supreme Court denied Ernst & Young's application for writ of error on
January 11, 1996. Shortly before trial, the district court judge once again
granted summary judgment against the Affiliated Partnerships on December 2,
1996. The Partnership is continuing to pursue vigorously its claims against
Ernst & Young; however, the final outcome of this litigation cannot be
determined at this time.

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

None.
PART II

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

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

(B) Title of Class Number of Record Unit Holders

Limited partnership units 7,863 as of January 31, 1998

(C) Cash distributions paid to the limited partners totaled $999,995 in 1997
and $250,006 in 1996. No distributions have been paid to the General
Partner. During the last week of March 1998, the Partnership distributed
approximately $2,250,000 to the limited partners of record as of March
1, 1998. See Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations and Item 8 - Note 1 - "Organization
and Summary of Significant Accounting Policies - Distributions."

<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The following table sets forth a summary of certain financial data for the
Partnership. This summary should be read in conjunction with the Partnership's
financial statements and notes thereto appearing in Item 8 - Financial
Statements and Supplementary Data.

Statements of Years Ended December 31,
Operations 1997 1996 1995 1994 1993
- ------------------ ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Rental revenue............... $ 9,282,309 $ 9,494,477 $ 8,783,408 $ 9,110,749 $ 9,041,611
Write-down for impairment
of real estate............ 3,130,000 - 4,633,000 - -
Net loss..................... (3,192,087) (2,577,600) (5,943,886) (531,497) (183,926)

Net loss per thousand
limited partnership units. $ (38.10) $ (30.47) $ (70.14) $ (6.27) $ (2.17)
=========== ============ ============ ============ ===========

Distributions per thousand
limited partnership units. $ 12.06 $ 2.99 $ - $ 4.77 $ 17.80
=========== ============ ============ ============ ============

As of December 31,
Balance Sheets 1997 1996 1995 1994 1993
- -------------- ------------- ------------- -------------- ------------- -------------

Real estate investments, net... $ 25,003,181 $ 38,731,648 $ 40,620,473 $ 46,683,563 $ 47,668,916
Asset held for sale............ 8,989,818 - - - -
Total assets................... 38,562,904 44,105,856 47,723,941 53,432,562 54,109,784
Mortgage note payable.......... 7,155,626 7,381,507 7,381,507 7,381,507 7,366,449
Partners' equity............... 29,789,239 33,981,321 37,464,982 43,408,868 44,340,572
</TABLE>

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

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

The Partnership was formed to engage in the business of acquiring and operating
revenue-producing real properties and holding the properties for investment.
Since completion of its capital formation and property acquisition phases in
1986, when it completed the purchase of five properties, the Partnership has
operated its properties for production of income.

<PAGE>
Northwest Plaza, located in Dayton, Ohio, is a retail strip shopping center with
three anchor tenants that occupy 64% of the total leasable area. Management has
increased security and lighting in the parking areas in response to increased
criminal activity in the area. In late 1993, an anchor tenant vacated and the
space was re-leased at a lower rate. Another anchor tenant's lease was
restructured to provide for lower rent based on sales volume. The tenant
declared bankruptcy in late 1995 and relinquished 50,000 square feet in 1996.
Due to these factors, lower rental revenue was realized in 1997 and is expected
for 1998. On August 1, 1997, the General Partner placed Northwest Plaza on the
market for sale when it became evident that economic factors will not allow for
the Partnership to recover its costs over a reasonable period of time. Based
upon projected cash flows over the reduced holding period, the Partnership
revised its estimated net realizable value of the property; and accordingly, a
write-down for impairment of $3,130,000 was recorded in the fourth quarter of
1997.

Fidelity Plaza Office Building is located in downtown Long Beach, California, an
area that has experienced declining economic conditions over the past several
years. The Partnership had originally intended to hold the asset until such time
as the real estate market in the area and the performance of the property
improved to permit the Partnership to achieve its capital preservation and
capital gains objectives. While conditions had improved in 1995, the estimated
holding period of the asset was reduced as it became evident that economic
factors will not allow for the Partnership to recover its costs over a
reasonable period of time. Based upon projected cash flows over the reduced
holding period, as well as an analysis of comparable office buildings in the
Long Beach area, the Partnership revised its estimated net realizable value of
the property; and accordingly, a write-down for impairment of $4,633,000 was
recorded in 1995.

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

1997 compared to 1996

Revenue:

Total revenue decreased by $286,332 in 1997 as compared to 1996 due to a decline
in rental revenue and interest income, as discussed below.

Rental revenue in 1997 decreased by $212,168 in relation to 1996. Rental revenue
decreased by approximately $187,000 at Northwest Plaza, mainly due to a decline
in income based on sales volume of tenants and a decrease in average occupancy
in 1997. At Century Park, two tenants paid a total of approximately $164,000 in
lease termination fees in 1996 which was a large factor in the approximately
$134,000 decrease in rental revenue in 1997. These decreases were partially
offset by increases of approximately $48,000 and $67,000 at Harbour Club I and
Kellogg Building, respectively, due to increases in rental rates in 1997.

Interest income declined by $74,164 in 1997 as compared to 1996 due to a
decrease in cash available for short-term investment in 1997. The Partnership
held approximately$4 million of cash and cash equivalents at the beginning of
1996 which decreased to approximately $3.3 million at the end of 1996, mainly
due to the payment of approximately $1.77 million to limited partners for the
rescission of partnership units in late 1996. Cash and cash equivalents further
decreased to approximately $3 million at December 31, 1997.

<PAGE>
Expenses:

Total expenses increased by $328,155 in 1997 as compared to 1996. The increase
was due to a write-down for impairment of real estate in 1997, partially offset
by decreases in interest expense, depreciation and amortization, other property
operating expenses and general and administrative expenses, as discussed below.

In 1997, interest expense declined by $103,395 in relation to 1996. Interest on
both the Harbour Club I mortgage note payable and the Fidelity Plaza capital
lease is declining as the principal balance of the debt is reduced through
regular monthly debt service payments. In addition, the non-HUD lender that
purchased the Harbour Club I mortgage in January 1997 does not require the
Partnership to pay for mortgage insurance, which the Partnership had recorded as
interest expense.

In 1996, the Partnership paid approximately $1.77 million to the plaintiffs in a
lawsuit. Of this amount, $1,115,480 represented interest on limited partnership
units that were rescinded by the Partnership. No such interest was paid in 1997.

Depreciation and amortization expense decreased by $467,945 in 1997 as compared
to 1996. The decrease was mainly due to Northwest Plaza being classified as an
asset held for sale by the Partnership effective August 1, 1997. In accordance
with the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," the Partnership ceased
recording depreciation on the asset at the time it was placed on the market for
sale.

Other property operating expenses in 1997 declined by $105,516 in relation to
1996. In 1996, the Partnership accrued approximately $88,000 of delinquent
mortgage payment penalties relating to the Harbour Club I mortgage note payable.
In addition, there was a greater amount of leasing commission amortization
recorded in 1996 at Fidelity Plaza due to a tenant vacating prior to the
expiration of their lease. In this case, the balance of the tenant's prepaid
commission was fully amortized when the tenant vacated.

General and administrative expenses decreased by $947,166 in 1997 as compared to
1996. In 1996, the Partnership incurred $690,000 of attorney fees relating to a
lawsuit that resulted in the rescission of limited partnership units. In
addition, in 1996, the Partnership incurred a greater amount of costs relating
to evaluation and dissemination of information regarding an unsolicited tender
offer. These decreases were partially offset by approximately $50,000 of costs
incurred for investor services, which were paid to an unrelated third party in
1997. In 1996, such costs were paid to an affiliate of the General Partner and
were included in general and administrative - affiliates on the Statements of
Operations.

In 1997, the Partnership recorded a $3,130,000 write-down for impairment of
Northwest Plaza. No such write-down was recorded in 1996.

1996 compared to 1995

Revenue:

Total Partnership revenues increased by $634,402 in 1996 as compared to 1995,
mainly due to an increase in rental revenue, as discussed below.

<PAGE>
Rental revenue in 1996 increased by $711,069 in relation to 1995. The increase
was mainly due to increases of approximately $286,000, $56,000, $218,000 and
$153,000 at Century Park, Harbour Club I, Kellogg Building and Northwest Plaza,
respectively. Rental revenue generated at Fidelity Plaza in 1996 remained
comparable to 1995.

The increase in rental revenue at Century Park was mainly due to an increase in
average occupancy in 1996. Although occupancy at the end of 1996 was less than
the occupancy at December 31 of the prior year, average occupancy in 1996 was
97% as compared to 90% in 1995. In addition, two tenants paid a total of
approximately $164,000 in lease termination fees in 1996.

Harbour Club I's increase in rental revenue in 1996 was due an increase in
rental rates in 1996--the property's first rental rate increase in five years.

The increase in rental revenue at Kellogg Building was mainly due to an increase
in average occupancy in 1996. Kellogg Building had an occupancy rate in the high
90% range throughout 1996, while occupancy was in the low 80% range during the
first quarter of 1995 and then rose up to the high 90% range during the
remainder of 1995. In addition, there was an increase in reimbursements from
tenants for common area maintenance at Kellogg Building in 1996.

Rental revenue increased at Northwest Plaza due to increased income based on
sales volume of tenants, partially offset by a decrease in rental revenue due to
a decrease in occupancy in 1996. See Item 2 - Properties for a more detailed
analysis of occupancy and rents per square foot.

Interest income increased by $20,064 in 1996 as compared to 1995 due to a
greater amount of cash available for short-term investment during most of 1996.
Although there was a decrease in total cash and cash equivalents in 1996, the
decrease was mainly due to the payment of approximately $1.77 million to the
limited partners in late October 1996 for the rescission of partnership units.

As discussed in Item 1 - Business, in 1995 the Partnership received cash and
common and preferred stock in the reorganized Southmark in settlement of its
bankruptcy claims against Southmark. The Partnership recognized a $96,731 gain
in 1995 as a result of this settlement. No such gain was recognized in 1996.

Expenses:

Total expenses decreased by $2,731,884 in 1996 as compared to 1995 primarily due
to the Partnership recording a $4,633,000 write-down for impairment of Fidelity
Plaza Office Building to its estimated fair value in 1995 (see Item 8 - Note 4 -
"Real Estate Investments"). The decrease was partially offset by $1,115,480 of
interest paid on rescinded partnership units and an increase in general and
administrative expenses during 1996, as discussed below.

Property taxes increased by $138,804 in 1996 as compared to 1995. In 1995, the
Partnership received an $84,000 refund of property taxes due to a successful
appeal of the property tax assessments on Harbour Club I Apartments. No such
refund was received in 1996. Also, property taxes at Northwest Plaza and Kellogg
Building increased in 1996 due to an increase in the assessed taxable values of
those properties.

<PAGE>
Personnel expenses increased by $95,409 in 1996 as compared to 1995. The
increase was mainly due to the addition of two maintenance technicians at
Fidelity Plaza Office Building and the addition of temporary maintenance
technicians at Northwest Plaza Shopping Center.

Repairs and maintenance expense decreased by $115,779 in 1996 as compared to
1995. The decrease was mainly the result of a decrease in contracted repairs at
Fidelity Plaza due to the hiring of two maintenance technicians in 1996.

General and administrative expenses in 1996 increased by $714,707 in relation to
1995. The increase was mainly due to the Partnership incurring $690,000 of legal
fees relating to the rescission of limited partnership units.

In 1995, the Partnership recorded a $4,633,000 write-down for impairment of real
estate relating to Fidelity Plaza Office Building. No such write-down was
recorded in 1996.

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

The Partnership generated $2,313,018 of cash through operating activities in
1997 as compared to $1,652,784 in 1996 and $2,949,445 in 1995. The increase in
1997 as compared to 1996 was primarily due to $1,115,480 of interest paid to
limited partners in 1996 to rescind partnership units. This was partially offset
by an increase in cash paid to suppliers in 1997, mainly due to the payment of
$690,000 of attorney fees related to the rescission of partnership units.

The decrease in 1996 as compared to 1995 was mainly due to the $1,115,480 paid
to rescind partnership units, previously discussed. In addition, cash paid to
suppliers increased due to a general increase in the related expense accounts.
Additionally, in 1995 the Partnership received $96,731 in connection with the
settlement of the Southmark bankruptcy.

The Partnership expended $1,258,789, $1,446,558 and $2,044,998 on capital
additions to its real estate investments and asset held for sale in 1997, 1996
and 1995, respectively. The decrease in 1997 as compared to 1996 was mainly due
to a greater amount of improvements completed at Harbour Club I Apartments in
1996 which were partially made possible by the release of funds from an escrow
account held by the mortgagee. The decrease in 1996 as compared to 1995 was
partially due to fewer capital improvements made at Kellogg Building in 1996
since there was little tenant turnover at the building during 1996. In addition,
there was a greater amount of lobby and courtyard improvements at Fidelity Plaza
Office Building in 1995. Approximately $327,000 of improvements were made at
Northwest Plaza Shopping Center for asbestos remediation in 1995. These
decreases were partially offset by an increase in improvements at Harbour Club I
Apartments, previously discussed.

In 1997, the Partnership made $225,881 of principal payments on its mortgage
note payable. No such payments were made in 1996 or 1995. Effective January 1,
1993, the Partnership ceased making regularly scheduled payments on its loan and
began funding debt service with the excess cash flow of the property. In July
1997, monthly debt service payments were resumed after the Partnership made all
delinquent payments and paid all accrued late charges.

In 1996, the Partnership paid $656,055 to the limited partners to rescind
limited partnership units. This amount represents the return of the limited
partners' equity investments, net of all distributions previously paid to them.

<PAGE>
The Partnership distributed $999,995 and $250,006 to the limited partners in
1997 and 1996, respectively. No distributions were paid to the limited partners
in 1995.

Short-term liquidity:

At December 31, 1997, the Partnership held cash and cash equivalents of
$3,044,669. This balance provides a reasonable level of working capital for the
Partnership's immediate needs in operating its properties.

For the Partnership as a whole, management projects positive cash flow from
operations in 1998. Only one property, Harbour Club I Apartments, is encumbered
with mortgage debt and another property, Fidelity Plaza, is encumbered with
lease obligations. The Partnership has budgeted approximately $1,179,000 for
necessary capital improvements for all properties in 1998, which are expected to
be funded from available cash reserves or from operations of the properties.

Additional efforts to maintain and improve Partnership liquidity have included
continued attention to property management activities. The objective has been to
obtain maximum occupancy rates while holding expenses to levels necessary to
maximize cash flows. The Partnership has made capital expenditures on its
properties where improvements were expected to increase the competitiveness and
marketability of the properties.

During the last week of March 1998, the Partnership distributed approximately
$2,250,000 to the limited partners of record as of March 1, 1998.

Long-term liquidity:

While the outlook for maintenance of adequate levels of liquidity is favorable,
should operations deteriorate and present cash resources be insufficient for
current needs, the Partnership would require other sources of working capital.
No such sources have been identified. The Partnership has no established lines
of credit from outside sources. Other possible actions to resolve cash
deficiencies include refinancings, deferral of capital expenditures on
Partnership properties except where improvements are expected to increase the
competitiveness and marketability of the properties, arranging financing from
affiliates or the ultimate sale of the properties.
Sales and refinancings are possibilities only.

The Partnership has placed Northwest Plaza on the market for sale effective
August 1, 1997.

<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------

<TABLE>
<CAPTION>
Page
Number
-------
INDEX TO FINANCIAL STATEMENTS
- -----------------------------

Financial Statements:

<S> <C>
Report of Independent Public Accountants....................................... 17

Balance Sheets at December 31, 1997 and 1996................................... 18

Statements of Operations for each of the three years in the period
ended December 31, 1997..................................................... 19

Statements of Partners' Equity (Deficit) for each of the three years in the
period ended December 31, 1997.............................................. 20

Statements of Cash Flows for each of the three years in the period
ended December 31, 1997..................................................... 21

Notes to Financial Statements.................................................. 23

Financial Statement Schedule -

Schedule III - Real Estate Investments and Accumulated Depreciation
and Amortization......................................................... 32

</TABLE>

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

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of McNeil Real Estate Fund XXV, L.P.:

We have audited the accompanying balance sheets of McNeil Real Estate Fund XXV,
L.P. (a California limited partnership) as of December 31, 1997 and 1996, and
the related statements of operations, partners' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements and the schedule referred to below are the responsibility
of the Partnership's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of McNeil Real Estate Fund XXV,
L.P. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.

/s/ Arthur Andersen LLP

Dallas, Texas
March 20, 1998

<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.

BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
--------------- ---------------
ASSETS
- ------
<S> <C> <C>
Real estate investments:
Land..................................................... $ 4,205,425 $ 5,524,462
Buildings and improvements............................... 47,835,062 65,777,015
-------------- -------------
52,040,487 71,301,477
Less: Accumulated depreciation and amortization......... (27,037,306) (32,569,829)
-------------- -------------
25,003,181 38,731,648

Asset held for sale ........................................ 8,989,818 -

Cash and cash equivalents................................... 3,044,669 3,256,746
Cash segregated for security deposits....................... 340,879 314,762
Note receivable............................................. - 344,225
Accounts receivable, net of allowance for doubtful
accounts of $730,668 and $677,123 at
December 31, 1997 and 1996, respectively................. 539,431 791,836
Escrow deposits............................................. 56,758 75,327
Deferred borrowing costs, net of accumulated
amortization of $85,887 and $76,755 at
December 31, 1997 and 1996, respectively................. 232,863 241,995
Prepaid expenses and other assets........................... 355,305 349,317
-------------- -------------
$ 38,562,904 $ 44,105,856
============== =============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
- ------------------------------------------

Mortgage note payable....................................... $ 7,155,626 $ 7,381,507
Accounts payable and accrued expenses....................... 126,854 995,763
Accrued interest............................................ 61,121 178,277
Accrued property taxes...................................... 561,973 502,142
Payable to affiliates....................................... 279,505 146,998
Land lease obligation....................................... 205,902 246,332
Deferred gain............................................... - 344,225
Security deposits and deferred rental revenue............... 382,684 329,291
-------------- -------------
8,773,665 10,124,535
-------------- -------------

Partners' equity (deficit):
Limited partners - 84,000,000 limited partnership
units authorized; 82,943,685 limited partnership
units issued and outstanding at December 31, 1997
and 1996............................................... 30,280,535 34,440,696
General Partner.......................................... (491,296) (459,375)
-------------- -------------
29,789,239 33,981,321
-------------- -------------
$ 38,562,904 $ 44,105,856
============== =============
</TABLE>

See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------
1997 1996 1995
------------- ------------- --------------
Revenue:
<S> <C> <C> <C>
Rental revenue.......................... $ 9,282,309 $ 9,494,477 $ 8,783,408
Interest................................ 153,614 227,778 207,714
Gain on legal settlement................ - - 96,731
------------- ------------- --------------
Total revenue......................... 9,435,923 9,722,255 9,087,853
------------- ------------- --------------

Expenses:
Interest................................ 781,344 884,739 826,447
Interest - rescission of limited
partnership units..................... - 1,115,480 -
Depreciation and amortization........... 2,867,438 3,335,383 3,475,088
Property taxes.......................... 831,111 785,113 646,309
Personnel expenses...................... 814,264 808,310 712,901
Repairs and maintenance................. 1,049,909 1,065,820 1,181,599
Property management fees -
affiliates............................ 541,462 544,865 523,338
Utilities............................... 789,895 826,634 832,683
Other property operating expenses....... 829,833 935,349 876,510
General and administrative.............. 153,202 1,100,368 385,661
General and administrative -
affiliates............................ 839,552 897,794 938,203
Write-down for impairment of
real estate........................... 3,130,000 - 4,633,000
------------- ------------- --------------
Total expenses........................ 12,628,010 12,299,855 15,031,739
------------- ------------- --------------

Net loss................................... $ (3,192,087) $ (2,577,600) $ (5,943,886)
============= ============= ==============

Net loss allocable to limited partners..... $ (3,160,166) $ (2,551,824) $ (5,884,447)
Net loss allocable to General Partner...... (31,921) (25,776) (59,439)
------------- ------------- ---------------
Net loss................................... $ (3,192,087) $ (2,577,600) $ (5,943,886)
============= ============= ==============

Net loss per weighted average
thousand limited partnership
units................................... $ (38.10) $ (30.47) $ (70.14)
============= ============= ==============

Distributions per weighted
average thousand limited
partnership units....................... $ 12.06 $ 2.99 $ -
============= ============= ==============
</TABLE>

See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.

STATEMENTS OF PARTNERS' EQUITY (DEFICIT)

For the Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
Total
General Limited Partners'
Partner Partners Equity
------------- -------------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1994.............. $ (374,160) $ 43,783,028 $ 43,408,868

Net loss.................................. (59,439) (5,884,447) (5,943,886)
------------- -------------- ---------------

Balance at December 31, 1995.............. (433,599) 37,898,581 37,464,982

Rescission of 950,963 limited
partnership units (net of distributions
previously paid of $294,908)........... - (656,055) (656,055)

Net loss.................................. (25,776) (2,551,824) (2,577,600)

Distributions to limited partners......... - (250,006) (250,006)
------------- -------------- ---------------

Balance at December 31, 1996.............. (459,375) 34,440,696 33,981,321

Net loss.................................. (31,921) (3,160,166) (3,192,087)

Distributions to limited partners......... - (999,995) (999,995)
------------- -------------- ---------------

Balance at December 31, 1997.............. $ (491,296) $ 30,280,535 $ 29,789,239
============= ============== ===============

</TABLE>

See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.

STATEMENTS OF CASH FLOWS

Increase (Decrease) in Cash and Cash Equivalents

For the Years Ended December 31,
---------------------------------------------------
1997 1996 1995
------------- ------------- --------------
Cash flows from operating activities:
<S> <C> <C> <C>
Cash received from tenants.............. $ 9,507,421 $ 9,467,928 $ 9,129,170
Cash paid to suppliers.................. (4,456,481) (4,048,866) (3,488,428)
Cash paid to affiliates................. (1,248,507) (1,394,068) (1,445,561)
Interest received....................... 153,614 227,778 207,714
Interest paid........................... (889,368) (784,518) (685,155)
Interest paid to limited partners for
rescission of partnership units....... - (1,115,480) -
Property taxes paid and escrowed........ (753,661) (699,990) (865,026)
Cash received from legal settlement..... - - 96,731
------------- ------------- --------------
Net cash provided by operating
activities.............................. 2,313,018 1,652,784 2,949,445
------------- ------------- --------------

Cash flows from investing activities:
Additions to real estate investments
and asset held for sale............... (1,258,789) (1,446,558) (2,044,998)
------------- ------------- --------------

Cash flows from financing activities:
Principal payments on mortgage note
payable............................... (225,881) - -
Payments on capitalized land
lease obligation...................... (40,430) (30,800) (43,003)
Rescission of limited partnership
units................................. - (656,055) -
Distributions to limited partners....... (999,995) (250,006) -
------------- ------------- --------------
Net cash used in financing activities...... (1,266,306) (936,861) (43,003)
------------- ------------- --------------

Net increase (decrease) in cash
and cash equivalents.................... (212,077) (730,635) 861,444

Cash and cash equivalents at
beginning of year....................... 3,256,746 3,987,381 3,125,937
------------- ------------- --------------

Cash and cash equivalents at end
of year................................. $ 3,044,669 $ 3,256,746 $ 3,987,381
============= ============= ==============
</TABLE>

See discussion of noncash investing and financing activities in Note 4 - "Real
Estate Investments" and Note 8 "Deferred Gain."

See accompanying notes to financial statements.
<PAGE>

McNEIL REAL ESTATE FUND XXV, L.P.

STATEMENTS OF CASH FLOWS

Reconciliation of Net Loss to Net Cash Provided by
Operating Activities
<TABLE>
<CAPTION>

For the Years Ended December 31,
---------------------------------------------------
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Net loss................................... $ (3,192,087) $ (2,577,600) $ (5,943,886)
------------- ------------- --------------

Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization........... 2,867,438 3,335,383 3,475,088
Amortization of deferred borrowing
costs................................. 9,132 9,132 9,132
Amortization of deferred gain........... - - (4,115)
Allowance for doubtful accounts......... 53,545 (36,927) 152,624
Write-down for impairment of
real estate........................... 3,130,000 - 4,633,000
Changes in assets and liabilities:
Cash segregated for security deposits. (26,117) (14,539) (16,430)
Accounts receivable................... 198,860 47,517 214,838
Escrow deposits....................... 18,569 904,611 175,339
Prepaid expenses and other
assets.............................. (5,988) 88,831 (28,528)
Accounts payable and accrued
expenses............................ (868,909) 301,139 519,605
Accrued interest...................... (117,156) (508,225) 132,160
Accrued property taxes................ 59,831 51,612 (407,770)
Payable to affiliates................. 132,507 48,591 15,980
Security deposits and deferred
rental revenue...................... 53,393 3,259 22,408
------------- ------------- --------------

Total adjustments................. 5,505,105 4,230,384 8,893,331
------------- ------------- --------------

Net cash provided by operating
activities.............................. $ 2,313,018 $ 1,652,784 $ 2,949,445
============= ============= ==============
</TABLE>

See accompanying notes to financial statements.

<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

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

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

McNeil Real Estate Fund XXV, L.P. (the "Partnership"), formerly known as
Southmark Equity Partners II, Ltd., was organized on February 15, 1985 as a
limited partnership under the provisions of the California Revised Limited
Partnership Act to acquire and operate commercial and residential properties.
The general partner of the Partnership is McNeil Partners, L.P. (the "General
Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil. The
General Partner was elected at a meeting of limited partners on March 26, 1992,
at which time an amended and restated partnership agreement (the "Amended
Partnership Agreement") was adopted. The principal place of business for the
Partnership and the General Partner is 13760 Noel Road, Suite 600, LB70, Dallas,
Texas, 75240.

The Partnership is engaged in diversified real estate activities including the
ownership, operation and management of commercial office, retail and residential
real estate. At December 31, 1997, the Partnership owned five revenue-producing
properties as described in Note 4 - "Real Estate Investments."

The Partnership has placed Northwest Plaza on the market for sale effective
August 1, 1997.

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

The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

<PAGE>
The Partnership's financial statements include the accounts of Van Buren
Associates Limited Partnership ("Van Buren"), a single asset limited partnership
formed to accommodate the refinancing of Harbour Club I Apartments. The
Partnership is the general partner of Van Buren, and holds a 99.99% interest in
Van Buren. The Partnership exercises effective control of Van Buren. The
minority interest is not presented as it is both negative and immaterial.

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

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

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

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

Asset Held for Sale
- -------------------

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

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

Buildings and improvements are depreciated using the straight-line method over
the estimated useful lives of the assets, ranging from 5 to 25 years. Tenant
improvements are capitalized and are amortized over the terms of the related
tenant lease, using the straight-line method.

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

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

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

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

<PAGE>
Deferred Borrowing Costs
- ------------------------

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

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

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

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

Income Taxes
- ------------

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

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

The Amended Partnership Agreement generally provides that net income and net
loss (other than net income arising from sales or refinancing) shall be
allocated 1% to the General Partner and 99% to the limited partners.

For financial statement purposes, net income arising from sales or refinancing
shall be allocated 1% to the General Partner and 99% to the limited partners.

For tax reporting purposes, net income arising from sales or refinancing shall
be allocated as follows: (a) first, amounts of such net income shall be
allocated among the General Partner and limited partners in proportion to, and
to the extent of, the portion of such partners' share of the net decrease in
Partnership Minimum Gain determined under Treasury Regulations, (b) second, to
the General Partner and limited partners in proportion to, and to the extent of,
the amount by which their respective capital account balances are negative by
more than their respective remaining shares of the Partnership's Minimum Gain
attributable to properties still owned by the Partnership and (c) third, 1% of
such net income shall be allocated to the General Partner and 99% of such net
income shall be allocated to the limited partners.

Federal income tax law provides that the allocation of loss to a partner will
not be recognized unless the allocation is in accordance with a partner's
interest in the partnership or the allocation has substantial economic effect.
Internal Revenue Code Section 704(b) and accompanying Treasury Regulations
establish criteria for allocation of Partnership deductions attributable to
debt. The Partnership's tax allocations for 1997, 1996 and 1995 have been made
in accordance with these provisions.
<PAGE>
Distributions
- -------------

At the discretion of the General Partner, distributable cash (other than cash
from sales or refinancing) shall be distributed 100% to the limited partners,
with such distributions first paying the limited partners' Priority Return and
then to all limited partners on a per limited partnership unit ("Unit") basis.
At the discretion of the General Partner, the limited partners will receive 100%
of distributable cash from sales or refinancing with such distributions first
paying the limited partners' Priority Return, then repayment of Original
Invested Capital, and of the remainder, to the limited partners on a per Unit
basis. The limited partners' Priority Return represents a 9.25% cumulative
return on their Adjusted Invested Capital balance, as defined.

In connection with a Terminating Disposition, as defined, cash from sales or
refinancing and any remaining reserves shall be allocated among, and distributed
to, the General Partner and limited partners in proportion to, and to the extent
of, their positive capital account balances after the net income has been
allocated pursuant to the above.

The Partnership distributed $999,995 of cash from operations to the limited
partners in 1997 and $250,006 in 1996. No distributions were paid to the limited
partners in 1995 and no distributions have been paid to the General Partner.

During the last week of March 1998, the Partnership plans to distribute
approximately $2,250,000 to the limited partners of record as of March 1, 1998.

Net Loss Per Thousand Limited Partnership Units
- ------------------------------------------------

Net loss per thousand limited partnership units is computed by dividing net loss
allocated to the limited partners by the weighted average number of Units
outstanding expressed in thousands. Per thousand Unit information has been
computed based on 82,944, 83,736, and 83,895 weighted average thousand Units
outstanding in 1997, 1996 and 1995, respectively.

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

The Partnership pays property management fees equal to 5% of the gross rental
receipts for its residential property and 6% of gross rental receipts for
commercial properties to McNeil Real Estate Management, Inc. ("McREMI"), an
affiliate of the General Partner, for providing property management services for
the Partnership's residential and commercial properties and leasing services for
its residential properties. McREMI may also choose to provide leasing services
for the Partnership's commercial properties, in which case McREMI will receive
property management fees from such commercial properties equal to 3% of the
property's gross rental receipts plus leasing commissions based on the
prevailing market rate for such services where the property is located.

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

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

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

<TABLE>
For the Years Ended December 31,
-------------------------------------------------------
1997 1996 1995
----------------- -------------- ---------------
<S> <C> <C> <C>
Property management fees - affiliates ..... $ 541,462 $ 544,865 $ 523,338
Charged to general and
administrative - affiliates:
Partnership administration.............. 168,639 225,956 290,839
Asset management fee.................... 670,913 671,838 647,364
---------------- ------------- --------------
$ 1,381,014 $ 1,442,659 $ 1,461,541
================ ============= ==============
</TABLE>

Payable to affiliates at December 31, 1997 and 1996 consisted primarily of
unpaid property management fees, Partnership general and administrative expenses
and asset management fees and is due and payable from current operations.

NOTE 3 - TAXABLE INCOME
- -----------------------

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

The Partnership's net assets and liabilities for tax purposes exceeded the net
assets and liabilities for financial reporting purposes by $21,953,215 in 1997,
$22,409,365 in 1996 and $21,873,312 in 1995.

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

The basis and accumulated depreciation and amortization of the Partnership's
real estate investments at December 31, 1997 and 1996 are set forth in the
following tables:

<TABLE>
<CAPTION>
Accumulated
Buildings and Depreciation Net Book
1997 Land Improvements and Amortization Value
---- -------------- ------------ ---------------- ---------------
<S> <C> <C> <C> <C>
Century Park
Las Vegas, NV $ 1,439,077 $ 15,134,798 $ (8,313,761) $ 8,260,114
Fidelity Plaza
Long Beach, CA 553,946 12,985,775 (8,529,701) 5,010,020
Harbour Club I
Belleville, MI 1,069,513 9,638,815 (4,393,057) 6,315,271
Kellogg Office Building
Littleton, CO 1,142,889 10,075,674 (5,800,787) 5,417,776
------------- ------------- ------------- -------------
$ 4,205,425 $ 47,835,062 $ (27,037,306) $ 25,003,181
============= ============= ============ =============

Accumulated
Buildings and Depreciation Net Book
1996 Land Improvements and Amortization Value
---- -------------- ------------ ---------------- ---------------

Century Park $ 1,439,077 $ 14,775,849 $ (7,525,841) $ 8,689,085
Fidelity Plaza 553,946 12,501,920 (7,897,655) 5,158,211
Harbour Club I 1,069,513 9,450,779 (3,918,017) 6,602,275
Kellogg Office Building 1,142,889 9,912,810 (5,316,049) 5,739,650
Northwest Plaza (a) 1,319,037 19,135,657 (7,912,267) 12,542,427
------------- ------------- ------------- -------------
$ 5,524,462 $ 65,777,015 $ (32,569,829) $ 38,731,648
============= ============= ============ =============
</TABLE>
(a) On August 1, 1997, the General Partner placed Northwest Plaza, located in
Dayton, Ohio, on the market for sale. Northwest Plaza was classified as
such at December 31, 1997 with a net book value of $8,989,818.

The results of operations for the asset held for sale at December 31, 1997 were
$401,153, $244,207 and $150,415 for the years ended December 31, 1997, 1996 and
1995, respectively. Results of operations are operating revenues less operating
expenses including depreciation and amortization and interest expense.

<PAGE>
Due to these factors, lower rental revenue was realized in 1997 and is expected
for 1998. On August 1, 1997, the General Partner placed Northwest Plaza on the
market for sale when it became evident that economic factors will not allow for
the Partnership to recover its costs over a reasonable period of time. Based
upon projected cash flows over the reduced holding period, the Partnership
revised its estimated net realizable value of the property; and accordingly, a
write-down for impairment of $3,130,000 was recorded in the fourth quarter of
1997.

The Partnership leases its commercial properties under non-cancelable operating
leases. Future minimum rents to be received as of December 31, 1997 are as
follows:

Real Estate Asset Held
Investments For Sale
------------ ----------

1998.................................... $ 4,513,760 $ 1,490,582
1999.................................... 3,510,268 1,321,093
2000.................................... 2,156,331 1,242,372
2001.................................... 1,211,648 1,157,350
2002.................................... 632,907 1,011,332
Thereafter.............................. 831,162 5,495,706
------------ ----------
Total................................. $ 12,856,076 $11,718,435
=========== ==========

Future minimum rentals do not include contingent rentals based on sales volume
of tenants. Contingent rentals amounted to $91,143, $227,311 and $0 for the
years ended December 31, 1997, 1996 and 1995, respectively. Future minimum rents
also do not include expense reimbursements for common area maintenance, property
taxes and other expenses. These expense reimbursements amounted to $244,032,
$401,820 and $320,960 for the years ended December 31, 1997, 1996 and 1995,
respectively. These contingent rents and expense reimbursements are included in
rental revenue on the Statements of Operations.

Harbour Club I Apartments is encumbered by mortgage indebtedness as discussed in
Note 6 - "Mortgage Note Payable." Fidelity Plaza is subject to four ground
leases as discussed in Note 5 - "Leases."

<PAGE>
NOTE 5 - LEASES
- ---------------

The Partnership leases the land on which Fidelity Plaza is located under four
ground leases (one capital lease and three noncancelable operating leases). At
December 31, 1997, minimum rental payments under such leases were as follows.

Capital Operating
Lease Leases
---------- -----------

1998............................... $ 103,538 $ 204,396
1999............................... 103,538 204,396
2000............................... 94,910 204,396
2001............................... - 204,396
2002............................... - 204,396
Thereafter......................... - 11,647,965
--------- -----------
Total minimum payments due......... $ 301,986 $ 12,669,945
========= ===========

Less amount representing
interest......................... $ (96,084)
---------

Present value of land lease
obligation....................... $ 205,902
=========

Monthly payments are required under the terms of the leases. The capital lease
expires in December 2000. The largest operating lease expires in December 2065,
while the other two operating leases expire in June and August 2021.

Land recorded under the capital lease totaled $553,946 at December 31, 1997 and
1996. The lease contains an option to purchase the land for $1 in 2001.

Ground lease expense of $206,096, $203,704 and $201,544 relating to the three
operating leases is included in the Statements of Operations with other property
operating expenses for the years ended December 31, 1997, 1996 and 1995,
respectively.

The ground leases contain certain provisions that may give the lessor the right
to terminate the leases as a result of the March 1992 restructuring of the
Partnership. The lessors have been requested to waive their right to terminate
the leasehold, and they may require the payment of fees as a condition to
granting such waiver. If the waivers are not obtained, the leases could be
terminated. However, management believes the likelihood of this outcome is
remote.

<PAGE>
NOTE 6 - MORTGAGE NOTE PAYABLE
- ------------------------------

The following sets forth the mortgage note payable of the Partnership at
December 31, 1997 and 1996. The mortgage note payable is secured by the related
real estate investment.

<TABLE>
<CAPTION>
Mortgage Annual Monthly
Lien Interest Payments/ December 31,
Property Position (a) Rate Maturity 1997 1996
- -------- ------------------ ------------------ --------------- -----------

<S> <C> <C> <C> <C> <C> <C>
Harbour Club I First 10.25 $66,011 06/23 $ 7,155,626 $ 7,381,507
============ ==========
</TABLE>

(a) The debt is non-recourse to the Partnership.

Effective January 1, 1993, the Partnership ceased making regularly scheduled
debt service and escrow payments. In lieu of the aforementioned payments, the
Partnership funded debt service with the excess cash flow of the property. The
Partnership was notified that the mortgage note payable was in default. During
1996, the mortgagee applied approximately $599,000 of mortgagee held escrow
funds to the outstanding interest payable balance. Effective January 23, 1997,
the mortgage note payable was sold by the mortgagee to an unaffiliated lender.
In July 1997, the mortgage note was brought current after the Partnership made
all delinquent payments and paid all accrued late charges. Regular monthly
payments were resumed in July 1997.

Scheduled principal maturities of the mortgage note payable under existing
agreements are as follows:

1998.................................... $ 61,515
1999.................................... 68,125
2000.................................... 75,446
2001.................................... 83,553
2002.................................... 92,531
Thereafter.............................. 6,774,456
----------
$ 7,155,626
==========

Based on borrowing rates currently available to the Partnership for a mortgage
loan with similar terms and average maturities, the fair value of the mortgage
note payable was approximately $9,163,000 at December 31, 1997 and $8,675,000 at
December 31, 1996.

NOTE 7 - ACCOUNTS RECEIVABLE
- -----------------------------

The accounts receivable balance includes amounts due from tenants for base rent,
common area maintenance, percentage rents and other miscellaneous amounts. In
addition, accounts receivable includes amounts relating to rental guarantees
from the seller of Century Park Office Building of approximately $470,000 at
December 31, 1997 and 1996 which are not expected to be collected. The reserve
for this amount is included in allowance for doubtful accounts.
<PAGE>
NOTE 8 - DEFERRED GAIN
- ----------------------

In October 1992, the Partnership agreed to restructure a lease with a major
tenant of Kellogg Office Building. Under the terms of the restructuring, the
tenant relinquished approximately 20,000 square feet of office space, of which
approximately 10,000 square feet was subleased to another tenant, and retained
existing space at a reduced rate. In connection with the restructuring, the
tenant signed a promissory note in the amount of $500,000 secured by an interest
in a coal mine, assigned an interest in a sublease with a third party, and
transferred 50,000 shares of Confertech International, Inc. common stock to the
Partnership. In 1992, the Partnership recorded a deferred gain of $628,938 as a
result of this transaction. In 1993, the Partnership sold all 50,000 shares of
the stock for $243,855 and recognized a $43,855 gain on sale of marketable
securities. The Partnership also recognized the portion of the deferred gain
that related to the common stock. The portion of the deferred gain that related
to the promissory note was amortized as payments on the note were received. No
amortization of deferred gain was recognized in 1996 or 1995 since no payments
were received on the promissory note. The balance of the note and the
corresponding deferred gain were $344,225 at December 31, 1996. In July 1997,
the Partnership received $60,000 in full settlement of the promissory note,
which was recognized as rental revenue on the Statement of Operations at
December 31, 1997.

NOTE 9 - LEGAL PROCEEDINGS
- --------------------------

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

<PAGE>
resale market. Plaintiffs also allege that Defendants engaged in a course
of conduct to prevent the acquisition of Units by an affiliate of Carl
Icahn by disseminating purportedly false, misleading and inadequate
information. Plaintiffs further allege that Defendants acted to advance
their own personal interests at the expense of the Partnerships' public
unit holders by failing to sell Partnership properties and failing to make
distributions to unitholders.

2) HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young, BDO Seidman et
al. (Case #92-06560-A). This suit was filed on behalf of the Partnership
and other affiliated partnerships (as defined in this Section 1, the
"Affiliated Partnerships") on May 26, 1992, in the 14th Judicial District
Court of Dallas County. The petition sought recovery against the
Partnership's former auditors, Ernst & Young, for negligence and fraud in
failing to detect and/or report overcharges of fees/expenses by Southmark
Corporation ("Southmark"), the former general partner. The former auditors
initially asserted counterclaims against the Affiliated Partnerships based
on alleged fraudulent misrepresentations made to the auditors by the former
management of the Affiliated Partnerships (Southmark) in the form of client
representation letters executed and delivered to the auditors by Southmark
management. The counterclaims sought recovery of attorneys' fees and costs
incurred in defending this action. The counterclaims were later dismissed
on appeal, as discussed below.

<PAGE>

NOTE 10 - RESCISSION OF LIMITED PARTNERSHIP UNITS
- -------------------------------------------------

On October 26, 1996, a judgment was entered against the Partnership which
effectively rescinded 950,963 Units of the Partnership as of October 31, 1996.
Pursuant to the court order, the Partnership made settlement payments to an
escrow agent on behalf of the plaintiff limited partners totaling $1,771,535 on
October 30, 1996. The payments consisted of two components. The first component
of $656,055, which was recorded as a rescission of limited partnership units on
the Statements of Partners' Equity (Deficit), represented the return of the
limited partners' equity investments, net of all distributions previously paid
to them. The second component of $1,115,480, which was recorded as interest -
rescission of limited partnership units on the Statements of Operations,
represented interest paid on the rescinded Units pursuant to the court judgment.
Additionally, on February 6, 1997, the Partnership agreed to pay the plaintiffs
$690,000 for attorney fees in exchange for a release of all claims against the
Partnership and General Partner. This attorney fees settlement amount was
accrued at December 31, 1996, and was recorded as a general and administrative
expense on the Statements of Operations. The settlement was paid in full during
1997.

<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1997

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

APARTMENTS:
<S> <C> <C> <C> <C> <C>
Harbour Club I
Belleville, MI $ 7,155,626 $ 763,364 $ 8,792,575 $ (338,092) $ 1,490,481

OFFICE BUILDINGS:

Century Park
Las Vegas, NV - 1,549,077 12,537,373 (1,000,000) 3,487,425

Fidelity Plaza
Long Beach, CA 205,902 541,239 13,172,687 (4,633,000) 4,458,795

Kellogg Office Building
Littleton, CO - 1,743,070 12,804,735 (5,003,041) 1,673,799
------------- ------------ ------------- ------------- ------------
$ 7,361,528 $ 4,596,750 $ 47,307,370 $ (10,974,133) $ 11,110,500
============= ============= ============= ============= =============
</TABLE>
Asset Held for Sale (d):

Northwest Plaza
Dayton, OH

(b) The carrying value of Century Park and Kellogg Office Building were
reduced by $1,000,000 and $4,000,000, respectively, in 1989. In 1992, the
carrying value of Kellogg Office Building was further reduced by $1,003,041
and the carrying value of Harbour Club I Apartments was reduced by
$338,092. The carrying value of Fidelity Plaza was reduced by $4,633,000 in
1995.

(d) The asset held for sale is stated at lower of cost or fair value less costs
to sell. Historical cost, net of accumulative depreciation and amortization
and write-downs, becomes the new cost basis when the asset is classified as
"Held for Sale." Depreciation ceases at the time the asset is placed on the
market for sale.

See accompanying notes to Schedule III.
<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1997

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

APARTMENTS:
<S> <C> <C> <C> <C>
Harbour Club I
Belleville, MI $ 1,069,513 $ 9,638,815 $ 10,708,328 $ (4,393,057)

OFFICE BUILDINGS:

Century Park
Las Vegas, NV 1,439,077 15,134,798 16,573,875 (8,313,761)

Fidelity Plaza
Long Beach, CA 553,946 12,985,775 13,539,721 (8,529,701)

Kellogg Office Building
Littleton, CO 1,142,889 10,075,674 11,218,563 (5,800,787)
------------- ------------- --------------- --------------
$ 4,205,425 $ 47,835,062 $ 52,040,487 $ (27,037,306)
============= ============= =============== ==============

Asset Held for Sale (d):

Northwest Plaza
Dayton, OH $ 8,989,818
===============
</TABLE>

(a) For Federal income tax purposes, the properties are depreciated over lives
ranging from 5-39 years using ACRS or MACRS methods. The aggregate cost of
real estate investments for Federal income tax purposes was $83,828,119 and
accumulated depreciation was $36,558,262 at December 31, 1997.

See accompanying notes to Schedule III.
<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1997

Date of Date Depreciable
Description Construction Acquired Lives (Years)
- ----------- ------------ -------- -------------

APARTMENTS:
<S> <C> <C> <C>
Harbour Club I
Belleville, MI 1969 06/86 5-25

OFFICE BUILDINGS:

Century Park
Las Vegas, NV 1984 05/86 5-25

Fidelity Plaza
Long Beach, CA 1968 12/85 5-25

Kellogg Office Building
Littleton, CO 1983 12/85 5-25

Asset Held for Sale (d):

Northwest Plaza
Dayton, OH 1964/1980 06/86

</TABLE>

See accompanying notes to Schedule III.
<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.

Notes to Schedule III

Real Estate Investments and Accumulated Depreciation and Amortization

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

<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------
1997 1996 1995
------------- ------------- --------------

Real estate investments:
<S> <C> <C> <C>
Balance at beginning of year............... $ 71,301,477 $ 69,854,919 $ 72,442,921

Improvements............................... 1,221,917 1,446,558 2,044,998

Reclassification to asset held for sale.... (20,482,907) - -

Write-down for impairment of real
estate.................................. - - (4,633,000)
------------- ------------- --------------

Balance at end of year..................... $ 52,040,487 $ 71,301,477 $ 69,854,919
============= ============= ==============

Accumulated depreciation and amortization:

Balance at beginning of year............... $ 32,569,829 $ 29,234,446 $ 25,759,358

Depreciation and amortization.............. 2,867,438 3,335,383 3,475,088

Reclassification to asset held for
sale.................................... (8,399,961) - -
-------------- ------------- --------------

Balance at end of year..................... $ 27,037,306 $ 32,569,829 $ 29,234,446
============= ============= ==============

Asset held for sale:

Balance at beginning of year............... $ - $ - $ -

Reclassification to asset held for sale.... 12,082,946 - -

Improvements............................... 36,872 - -

Write-down for impairment of real
estate.................................. (3,130,000) - -
------------- ------------- --------------

Balance at end of year..................... $ 8,989,818 $ - $ -
============= ============= ==============
</TABLE>

<PAGE>

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------

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

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

<S> <C> <C>
Robert A. McNeil, 77 Mr. McNeil is also Chairman of the
Chairman of the Board and Director of McNeil Real Estate
Board and Director Management, Inc. ("McREMI") which is an
affiliate of the General Partner. He has
held the foregoing positions since the
formation of such entity in 1990. Mr.
McNeil received his B.A. degree from
Stanford University in 1942 and his
L.L.B. degree from Stanford Law School
in 1948. He is a member of the State Bar
of California and has been involved in
real estate financing since the late
1940's and in real estate acquisitions,
syndications and dispositions since
1960. From 1986 until active operations
of McREMI and McNeil Partners, L.P.
began in February 1991, Mr. McNeil was a
private investor. Mr. McNeil is a member
of the International Board of Directors
of the Salk Institute, which promotes
research in improvements in health care.

Carole J. McNeil 54 Mrs. McNeil is Co-Chairman, with
Co-Chairman of the husband Robert A. McNeil, of McNeil
Board Investors, Inc. Mrs. McNeil has twenty
years of real estate experience, most
recently as a private investor from 1986
to 1993. In 1982, she founded Ivory &
Associates, a commercial real estate
brokerage firm in San Francisco, CA.
Prior to that, she was a commercial real
estate associate with the Madison
Company and, earlier, a commercial sales
associate and analyst with Marcus and
Millichap in San Francisco. In 1978,
Mrs. McNeil established Escrow Training
Center, California's first accredited
commercial training program for title
company escrow officers and real estate
agents needing college credits to
qualify for brokerage licenses. She
began in real estate as Manager and
Marketing Director of Title Insurance
and Trust in Marin County, CA. Mrs.
McNeil serves on the International Board
of Directors of the Salk Institute.
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
Other Principal Occupations and Other
Name and Position Age Directorships During the Past 5 Years
- ----------------- --- -------------------------------------
<S> <C> <C>
Ron K. Taylor 40 Mr. Taylor is the President and Chief
President and Chief Executive Officer of McNeil Real Estate
Executive Officer Management which is an affiliate of the
General Partner. Mr. Taylor has been in
this capacity since the resignation of
Donald K. Reed on March 4, 1997. Prior
to assuming his current
responsibilities, Mr. Taylor served as a
Senior Vice President of McREMI. Mr.
Taylor has been in this capacity since
McREMI commenced operations in 1991.
Prior to joining McREMI, Mr. Taylor
served as an Executive Vice President
for a national syndication/property
management firm. In this capacity, Mr.
Taylor had the responsibility for the
management and leasing of a 21,000,000
square foot portfolio of commercial
properties. Mr. Taylor has been actively
involved in the real estate industry
since 1983.
</TABLE>

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

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

No direct compensation was paid or payable by the Partnership to directors or
officers (since it does not have any directors or officers) for the year ended
December 31, 1997, nor was any direct compensation paid or payable by the
Partnership to directors or officers of the general partner of the General
Partner for the year ended December 31, 1997. The Partnership has no plans to
pay any such remuneration to any directors or officers of the general partner of
the General Partner in the future.

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

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

(A) Security ownership of certain beneficial owners.

No individual or group, as defined by Section 13(d)(3) of the Securities
Exchange Act of 1934, was known by the Partnership to own more than 5% of the
Units, other than High River Limited Partnership which owns 7,534,383 Units at
January 31, 1998 (approximately 9.08% of the outstanding Units). The business
address for High River Limited Partnership is 100 South Bedford Road, Mount
Kisco, New York 10549.

(B) Security ownership of management.

The General Partner and the officers and directors of its general partner,
collectively own 27,322 limited partnership units, which represents less than 1%
of the outstanding limited partnership units at January 31, 1998.

None.

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

The amendments to the Partnership compensation structure included in the Amended
Partnership Agreement provide for an asset management fee to replace all other
forms of general partner compensation other than property management fees and
reimbursements of certain costs. Through 1999, the asset management fee is
calculated as 1% of the Partnership's tangible asset value. Tangible asset value
is determined by using the greater of (i) an amount calculated by applying a
capitalization rate of 9 percent to the annualized net operating income of each
property or (ii) a value of $10,000 per apartment unit for residential
properties and $50 per gross square foot for commercial properties to arrive at
the property tangible asset value. The property tangible asset value is then
added to the book value of all other assets excluding intangible items. The fee
percentage decreases subsequent to 1999. For the year ended December 31, 1997,
the Partnership paid or accrued $670,913 of such asset management fees.

The Partnership pays property management fees equal to 5% of the gross rental
receipts of residential properties and 6% for commercial properties to McREMI,
an affiliate of the General Partner, for providing property management services.
Additionally, the Partnership reimburses McREMI for its costs, including
overhead, of administering the Partnership's affairs. For the year ended
December 31, 1997, the Partnership paid or accrued $710,101 of such property
management fees and reimbursements. See Item 1 - Business, Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Item 8 - Note 2 - "Transactions With Affiliates."

<PAGE>
PART IV

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

See accompanying Index to Financial Statements at Item 8 - Financial Statements
and Supplementary Data.

(A) Exhibits

<TABLE>
<CAPTION>
Exhibit
Number Description
------- ------------

<S> <C>
4. Amended and Restated Limited
Partnership Agreement dated March
26, 1992 (incorporated by reference
to the Current Report of the
registrant on Form 8-K dated March
26, 1992, as filed on April 9,
1992).

4.1 Amendment No. 1 to the Amended
and Restated Limited Partnership
Agreement of McNeil Real Estate Fund
XXV, L.P. dated June 1995
(incorporated by reference to the
Quarterly Report of the registrant
on Form 10-Q for the period ended
June 30, 1995, as filed on August
14, 1995).

4.2 Certificate and Agreement of Van
Buren Associates Limited Partnership
(incorporated by reference to the
Annual Report of the registrant on
Form 10-K for the period ended
December 31, 1991, as filed on March
24, 1992).

10.3 Mortgage note dated May 6, 1988,
among Van Buren Associates Limited
Partnership, Southmark Equity
Partners II, Ltd. and DRG Funding
Corporation relating to Harbour Club
I. (1)

10.4 Property Management Agreement dated
March 26, 1992, between McNeil Real
Estate Fund XXV, L.P. and McNeil
Real Estate Management, Inc. (2)

</TABLE>

Exhibit
Number Description
------- ------------
<S> <C>
10.5 Amendment of Property Management
Agreement dated March 5, 1993 by
McNeil Real Estate Fund XXV, L.P.
and McNeil Real Estate Management,
Inc. (2)

10.6 Property Management Agreement dated
March 26, 1992 between Van Buren
Associates Limited Partnership and
McNeil Real Estate Management, Inc.
(2)

10.7 Amendment of Property Management
Agreement dated March 5, 1993, by
Van Buren Associates Limited
Partnership and McNeil Real Estate
Management, Inc. (2)

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

</TABLE>
22. Following is a list of subsidiaries
of the Partnership:

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

<S> <C> <C>
Van Buren Associates
Limited Partnership Michigan None

</TABLE>
(1) Incorporated by reference to the
Quarterly Report of the registrant
on Form 10-Q for the period ended
March 31, 1991, as filed on May 14,
1991.

(2) Incorporated by reference to the
Annual Report of the registrant on
Form 10-K for the period ended
December 31, 1992, as filed on March
30, 1993.

(B) Reports on Form 8-K. There were no reports on Form 8-K filed during the
quarter ended December 31, 1997.

<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.
A Limited Partnership

SIGNATURE PAGE

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

McNEIL REAL ESTATE FUND XXV, L.P.

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

By: McNeil Investors, Inc., General Partner

March 30, 1998 By: /s/ Robert A. McNeil
- -------------- -----------------------------------------

Date Robert A. McNeil
Chairman of the Board and Director
Principal Executive Officer

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

March 30, 1998 By: /s/ Ron K. Taylor
- -------------- -----------------------------------------

Date Ron K. Taylor
President and Director of McNeil
Investors, Inc.
(Principal Financial Officer)

March 30, 1998 By: /s/ Carol A. Fahs
- -------------- -----------------------------------------
Date Carol A. Fahs
Vice President of McNeil Investors, Inc.
(Principal Accounting Officer)

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,044,669
<SECURITIES> 0
<RECEIVABLES> 1,270,099
<ALLOWANCES> (730,668)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 52,040,487
<DEPRECIATION> (27,037,306)
<TOTAL-ASSETS> 38,562,904
<CURRENT-LIABILITIES> 0
<BONDS> 7,155,626
0
0
<COMMON> 0
<OTHER-SE> 29,789,239
<TOTAL-LIABILITY-AND-EQUITY> 38,562,904
<SALES> 9,282,309
<TOTAL-REVENUES> 9,435,923
<CGS> 4,856,474
<TOTAL-COSTS> 7,723,912
<OTHER-EXPENSES> 992,754
<LOSS-PROVISION> 3,130,000
<INTEREST-EXPENSE> 781,344
<INCOME-PRETAX> (3,192,087)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,192,087)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,192,087)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>