MCNEIL REAL ESTATE FUND XXVI LP, 10-K405, 1997-03-28

MCNEIL REAL ESTATE FUND XXVI LP
10-K405, 1997-03-28
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, 1996
-------------------------------------------------

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

For the transition period from ______________ to_____________

Commission file number 0-15460
--------

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

California 33-0168395
- --------------------------------------------------------------------------------
(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. [ ]

83,583,671 of the registrant's 86,530,671 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 38

TOTAL OF 40 PAGES

<PAGE>
PART I

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

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

McNeil Real Estate Fund XXVI, L.P., (the "Partnership"), formerly known as
Southmark Equity Partners III, Ltd., was organized on March 4, 1985 as a limited
partnership under the provisions of the California Revised Limited Partnership
Act to acquire and operate residential and commercial 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 30, 1992,
at which time an amended and restated partnership agreement (the "Amended
Partnership Agreement") was adopted. Prior to March 30, 1992, the general
partner of the Partnership was Southmark Investment Group 86, Inc. (the
"Original General Partner"), a wholly-owned subsidiary 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 July 22, 1986, the Partnership registered with the Securities and Exchange
Commission ("SEC") under the Securities Act of 1933 (File No. 33-5568) and
commenced a public offering for sale of $90,000,000 of limited partnership units
("Units"). The Units represent equity interests in the Partnership and entitle
the holders thereof to participate in certain allocations and distributions of
the Partnership. The sale of Units closed on July 21, 1987 with 86,553,913 Units
sold at one dollar each, or gross proceeds of $86,553,913 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.
0-15460). In 1995 and 1996, 4,930 and 15,312 Units, respectively, were
relinquished leaving 86,533,671 Units outstanding as of December 31, 1996.

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.

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. On March 13, 1991,
McREMI commenced management of the Partnership's properties pursuant to an
assignment of the existing property management agreements from the Southmark
affiliates.

<PAGE>
On March 30, 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 XXVI, L.P. Under the Amended Partnership Agreement, the Partnership began
accruing an asset management fee, retroactive to March 13, 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 30, 1992 meeting were
implemented as of that date.

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, $45,263 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 $14,611, which combined with the cash proceeds from Southmark,
resulted in a gain on legal settlement of $59,874.

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

General:

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.

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.

<PAGE>
Business Plan:

The Partnership determined to evaluate market and other economic conditions to
establish the optimum time to commence an orderly liquidation of the
Partnership's assets in accordance with the terms of the Amended Partnership
Agreement. Taking such conditions as well as other pertinent information into
account, the Partnership has determined to begin orderly liquidation of all its
assets. Although there can be no assurance as to the timing of the liquidation
due to real estate market conditions, the general difficulty of disposing of
real estate, and other general economic factors, it is anticipated that such
liquidation would result in the dissolution of the Partnership followed by a
liquidating distribution to Unit holders by December 1998. In this regard, the
Partnership has placed Edison Ford Square on the market for sale. Until such
time as the Partnership's assets are liquidated, the Partnership's plan of
operations is to preserve or increase the net operating income of its assets
whenever possible, while at the same time making whatever capital expenditures
are reasonable under the circumstances in order to preserve and enhance the
value of the Partnership's assets.

Competitive Conditions:

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

Partnership, including losses from operations and foreclosures of the
Partnership's properties, is described in Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations. For a detailed
discussion of the competitive conditions for the Partnership's properties see
Item 2 - 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, 1996. All of these statements are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These statements are not
historical and involve risks and uncertainties. The Partnership's actual
occupancy trends, financial condition, results of operations, and cash flows for
future periods may differ materially due to several factors. These factors
include, but are not limited to, the Partnership's ability to control costs,
make necessary capital improvements, negotiate sales or refinancings of its
properties and respond to changing economic and competitive factors.

<PAGE>
Other Information:

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

In September 1996, High River Limited Partnership, a Delaware limited
partnership controlled by Carl C. Icahn ("High River") made an unsolicited
tender offer (the "HR Offer") to purchase any and all of the outstanding Units
of the Partnership for a purchase price of $0.092 (the original offer price of
$0.096 was reduced by the August 1996 distribution of $0.004 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 HR Offer made with respect to the Partnership
and not tender their Units pursuant to the HR Offer. The HR Offer terminated,
after numerous extensions, on November 22, 1996. The General Partner believes
that as of January 31, 1997, High River has purchased approximately 1.01% of the
Partnership's outstanding Units. In addition, all litigation filed by High
River, Mr. Icahn and his affiliates in connection with the HR Offer has been
dismissed without prejudice.

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

The following table sets forth the real estate investment portfolio of the
Partnership at December 31, 1996. All of the buildings and the land on which
they are located are owned by the Partnership in fee and are encumbered by
mortgage indebtedness, with the exception of Edison Ford Square and Continental
Plaza. See Item 8 - Note 5 "Mortgage Notes Payable". See also Item 8 - Note 4 -
"Real Estate Investments" and Schedule III - "Real Estate Investments and
Accumulated Depreciation and Amortization." In the opinion of management, the
properties are adequately covered by insurance.

<TABLE>
<CAPTION>
Net Basis of 1996 Date
Property Description Property Debt Property Taxes Acquired
- -------- ----------- ------------- ---- -------------- --------
<S> <C> <C> <C> <C> <C>
Real Estate Investments:

Amargosa Creek Apartments
Lancaster, CA 216 units $ 5,668,135 $ 4,759,298 $ 73,931 12/86

Continental Plaza Office Building
Scottsdale, AZ 54,533 sq. ft. 2,211,351 - 43,542 11/86

Northway Mall Retail Center
Pittsburgh, PA 390,045 sq. ft. 23,794,216 14,805,922 353,388 6/87

Westwood Center Office Building
Tampa, FL 126,479 sq. ft. 7,305,414 2,250,526 146,979 3/87

Asset Held for Sale:

Edison Ford
Square Retail Center
Fort Myers, FL 144,069 sq. ft. 3,008,374 - 55,913 7/87
------------- ------------ ------------
$ 41,987,490 $ 21,815,746 $ 673,753
============= ============ ============
</TABLE>
- -----------------------------------------
Total: Apartments - 216 Units
Retail Centers - 534,114 sq. ft.
Office Buildings - 181,012 sq. ft.

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

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------- ------------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Amargosa Creek
Occupancy Rate............ 91% 92% 89% 86% 95%
Rent Per Square Foot...... $ 6.96 $ 7.15 $ 7.17 $ 6.94 $ 6.87

Edison Ford Square
Occupancy Rate............ 56% 46% 54% 80% 83%
Rent Per Square Foot...... $ 4.50 $ 4.80 $ 5.84 $ 6.43 $ 6.28

Continental Plaza
Occupancy Rate............ 100% 100% 98% 98% 72%
Rent Per Square Foot...... $ 12.55 $ 12.03 $ 10.50 $ 10.30 $ 8.68

Northway Mall
Occupancy Rate............ 90% 87% 61% 53% 78%
Rent Per Square Foot...... $ 11.19 $ 8.97 $ 5.74 $ 6.59 $ 8.37

Westwood Center
Occupancy Rate............ 99% 92% 90% 95% 88%
Rent Per Square Foot...... $ 13.44 $ 11.95 $ 11.78 $ 11.58 $ 8.77
</TABLE>

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

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

Amargosa Creek Apartments
- -------------------------

Amargosa Creek Apartments, built in 1984, is located in the Mojave Desert, east
of the Antelope Valley Freeway, south of downtown Lancaster, California. The
major industry in the Antelope Valley is aerospace and Edward's Air Force Base
is located 26 miles from the property. During the past three years the property
has had interior and exterior upgrades that were necessary to compete with the
market as well as to overcome the negative reputation created by being located
in a high-crime locale. These improvements have proven to be effective, as the
property ended the year at an occupancy rate of 91% which is three percent ahead
of the market average. Amargosa Creek is expected to continue to demonstrate
stabilized economic growth during 1997 and beyond; however, since the market is
strongly affected by the aerospace industry; any layoffs or growth would
significantly impact the property's performance.

<PAGE>
Continental Plaza
- -----------------

Continental Plaza is an office building located in prestigious north Scottsdale,
Arizona, an eastern suburb of Phoenix. The garden-style property consists of two
Spanish style buildings surrounding a courtyard. Continental Plaza ended the
year at a 100% occupancy rate as compared to a market average of 97%. Rental
rates in the Scottsdale market declined in the early 1990's due to an oversupply
of office space. Minimal commercial growth since then is allowing the market to
recover. Occupancy rates at Continental Plaza are expected to remain at current
levels during 1997 and revenue growth is expected due to escalating lease rates.

Edison Ford Square
- ------------------

Edison Ford Square, built in 1960 and located in downtown Fort Myers, Florida,
has evolved from primarily a retail center to more of a service center. This
transformation occurred as a result of demographic changes that reduced major
retailers' interest in this location. Formerly known as Boulevard Plaza, the
property was renamed to Edison Ford Square in 1993 due to the property's
proximity to the Thomas Edison and Henry Ford estates. The property is located
within walking distance of this historical attraction; thus the name was changed
to capitalize on the tourism market. Plans for a major renovation that would
capture the architecture and style of the Edison home began in 1993; however the
loss of two major anchors in 1994 made this renovation impractical. The
property, located in the center of the downtown entertainment district, offers
easy access, high visibility and expansive parking; however the property is
dated in appearance and has a lot of deferred maintenance. On April 1, 1996, the
Partnership placed Edison Ford Square on the market for sale.

Northway Mall
- -------------

Northway Mall, built in the early 1960's and opened in 1962, is a multi-level
facility consisting of approximately 397,000 square feet of retail space and
mezzanine level office suites. It is located 12 miles south of the Pennsylvania
State Turnpike in the North Hills area of Pittsburgh, Pennsylvania. In August
1994 after the construction financing was secured, the mall was renovated and
had a grand opening and ribbon cutting on May 6, 1995. Management is currently
searching for one tenant to occupy approximately 11,000 square feet. The
occupancy rate at December 31, 1996 was 90% and is projected to reach 97% during
1997. The greater Pittsburgh area is very stable with occupancies approaching
the 90% mark and shopping centers adjacent to Northway Mall are currently 92%
occupied.

<PAGE>
Westwood Center
- ---------------

Westwood Center, an eight-story office building built in 1984, is located in the
Westshore Business District of Tampa, Florida. Improvements over the past few
years have allowed the property to maintain competitiveness with the local
market. Overall, the Westshore Business District continues to hold stable
occupancies of 91% and Westwood Center ended the year with a 99% occupancy.
Current market concerns include the property's location near a declining
neighborhood and the area's higher than average crime rate. Presently, there is
no new office building construction in the Westshore Business District, and the
property is positioned for steady growth in the coming years. Management is
currently working on renewing the leases that expire during 1997. Westwood
Center is located in a stable market and management does not anticipate any
difficulty in releasing the space that may come available during the year.

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

<TABLE>
<CAPTION>
Number of Annual % of Gross
Expirations Square Feet Rent Annual Rent
----------- ----------- ----------- -----------
<C> <C> <C> <C> <C>
Continental Plaza
1997 10 14,077 $ 189,595 28%
1998 8 14,570 183,025 27%
1999 3 4,237 53,676 8%
2000 5 18,279 205,799 30%
2001 2 3,374 43,886 7%
2002-2006 - - - -

Edison Ford Square
1997 4 32,646 $ 65,863 8%
1998 4 11,179 85,477 10%
1999 12 37,603 226,058 28%
2000 2 6,029 37,057 5%
2001 3 3,960 31,718 4%
2002 2 7,430 56,273 7%
2003 - - - -
2004 2 5,028 60,238 7%
2005 - - - -
2006 1 1,673 11,711 1%
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Number of Annual % of Gross
Expirations Square Feet Rent Annual Rent
----------- ----------- ------ -----------
Northway Mall
<C> <C> <C> <C> <C>
1997 5 5,623 $ 57,148 2%
1998 3 8,656 70,107 2%
1999 7 84,615 445,458 12%
2000 10 20,099 231,689 6%
2001 10 34,844 419,503 11%
2002 5 14,409 165,136 5%
2003 2 7,019 77,690 2%
2004 1 69,639 405,299 11%
2005 3 39,304 436,390 12%
2006 - - - -

Westwood Center
1997 15 40,054 $ 556,690 32%
1998 2 2,392 33,151 2%
1999 11 41,405 590,588 34%
2000 - - - -
2001 7 36,264 498,179 29%
2002-2006 - - - -

</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:

Nature of
Business Square Footage Lease
Use Leased Annual Rent Expiration
- --------- -------------- ----------- ----------
Continental Plaza
<S> <C> <C> <C>
General Business 5,952 $ 72,912 2000
General Business 10,433 109,547 2000

Edison Ford Square
Office Storage 25,546 $ 60,000 1997

Northway Mall
Department Store 73,500 $ 275,625 1999
Department Store 69,639 405,299 2004

Westwood Center
General Office 13,009 $ 167,426 1997
General Office 14,640 209,352 1999
General Office 17,225 241,152 2001
</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) 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.

2) 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>
"Defendants") breached their fiduciary duties and certain obligations under
the respective Amended Partnership Agreement. Plaintiffs allege that
Defendants have rendered such Units highly illiquid and artificially
depressed the prices that are available for Units on the resale market.
Plaintiffs also allege that Defendants engaged in a course of conduct to
prevent the acquisition of Units by an affiliate of Carl Icahn by
disseminating purportedly false, misleading and inadequate information.
Plaintiffs further allege that Defendants acted to advance their own
personal interests at the expense of the Partnerships' public unit holders
by failing to sell Partnership properties and failing to make distributions
to unitholders.

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

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

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

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 7,023 as of January 31, 1997

(C) Distributions of $374,965 were paid to the limited partners in 1996. No
distributions were made to the partners in 1995 and 1994. 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 notes to the
Partnership's financial statements appearing in Item 8 - Financial Statements
and Supplementary Data.

<TABLE>
<CAPTION>
Statements of Years Ended December 31,
Operations 1996 1995 1994 1993 1992
- ------------------ ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Rental revenue............... $ 8,579,073 $ 7,568,361 $ 6,385,998 $ 6,708,736 $ 6,942,367
Write-down for impair-
ment of real estate....... (1,087,000) (2,200,000) - (7,239,353) (4,602,377)
Loss before extraordinary
items..................... (2,347,920) (5,063,046) (1,938,063) (8,843,767) (6,795,983)
Extraordinary items.......... - - - - 91,952
Net loss..................... (2,347,920) (5,063,046) (1,938,063) (8,843,767) (6,704,031)

Loss per thousand limited
partnership units:
Loss before
extraordinary items..... $ (26.86)$ (57.91) $ (22.17) $ (101.15) $ (77.73)
Extraordinary items....... - - - - 1.05
------------ ------------ ------------- ----------- ------------
Net loss.................. $ (26.86) $ (57.91) $ (22.17) $ (101.15) $ (76.68)
============ ============ ============= =========== ============

Distributions per thousand
limited partnership
units..................... $ 4.33 $ - $ - $ - $ -
============ ============ ============= =========== ============

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

Real estate investments,
net....................... $ 38,979,116 $ 44,629,001 $ 41,738,690 $ 39,917,222 $ 48,201,116
Asset held for sale.......... 3,008,374 - - - -
Total assets................. 47,124,512 54,217,223 45,208,188 45,097,635 49,921,437
Mortgage notes payable....... 21,815,746 23,097,459 9,350,045 8,343,376 4,871,326
Partners' equity............. 24,615,924 27,338,809 32,401,855 34,339,918 43,183,685
</TABLE>

<PAGE>
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
income-producing real properties, and holding the properties for investment.
Since completion of its capital formation and property acquisition phases in
1987, when it completed the purchase of five properties, the Partnership has
operated its properties for production of income. The original acquisitions of
properties were all cash. In 1993, the Partnership obtained refinancing on
Amargosa Creek Apartments, financing on Westwood Center and also obtained
financing on Continental Plaza from an affiliate of the General Partner. The
affiliate loan was paid off in January 1996. In 1994, the Partnership obtained a
construction loan to finance the major capital improvement program at Northway
Mall. The capital improvement program at Northway Mall was completed during 1995
and the property obtained permanent financing in December 1995, as discussed
below.

Edison Ford Square is a 141,000 sq. ft. retail center in Fort Myers, Florida
that has evolved from primarily retail to more of a service center use. It was
56%, 46% and 54% occupied at December 31, 1996, 1995 and 1994. The downtown
area, where the shopping center is located, has experienced decay due to a shift
in demographics. The center is within walking distance of the Thomas Edison and
Henry Ford estates, which are significant historical attractions in the area.
Plans for a major renovation that would have captured the architecture and style
of the Edison home began in 1993. However, with the loss of two major anchors in
1994, it was not viable to continue this project. During 1995, a full, in-depth
market analysis was performed to determine the center's highest and best use. It
was determined that the only viable alternative would be a complete
redevelopment and renovation of the center; however, the Partnership decided not
to pursue this alternative because of the inherent risks and economic
uncertainties. An unsolicited offer from an unaffiliated third party to purchase
the center was received during 1995. These facts led management to conclude that
the asset was impaired. Accordingly, the Partnership recorded a write-down for
impairment of $2.2 million against Edison Ford's building and improvements
during the fourth quarter of 1995, to record the property at its estimated fair
value. In accordance with management's plans to begin an orderly liquidation of
the Partnership, the property was placed on the market for sale effective April
1, 1996. During 1996, management was informed that a major tenant, occupying
approximately 10,900 sq. ft., was terminating its lease in 1997. Additionally,
based on a shorter holding period of the property established in management's
liquidation plans; it was determined that the Partnership could not ultimately
realize its adjusted carrying value through future cash flows. Accordingly, an
additional write-down for impairment in the amount of $1,087,000 was recorded
against the property's buildings and improvements during the fourth quarter of
1996.

<PAGE>
The Partnership has undergone a major capital improvements program to convert
Northway Mall into a value oriented retail shopping center specializing in brand
name merchandise at less-than-retail prices during 1994 and 1995. The decision
to renovate the mall was made after exhaustive analyses and studies conducted by
management to determine future cash flows of the mall based upon stabilized
leases. In the third quarter of 1994, management finalized a construction loan
on Northway Mall totaling $11 million to finance a portion of the capital
improvement program. The mortgage note allowed for monthly principal draws in
the amount of approved invoices. The principal amount was due August 1996 and
accrued interest at a variable rate. The interest rate at December 17, 1995 (the
date the mortgage note was repaid) was 9.75%. Interest payments were due from
the Partnership upon repayment of the note. During 1995, $91,000 of this
interest was capitalized as an addition to real estate investments, which was
the portion related to the vacant square footage of Northway Mall that was under
construction during the year. The Partnership incurred loan costs of $214,218 in
1994 related to the construction mortgage note financing, of which $70,000 were
capitalized in 1995 as an addition to real estate investments to be depreciated
over the life of the related asset. The remaining loan costs of $144,218 were
amortized over the life of the construction mortgage note. The Partnership was
provided cash flow of $1,121,473 during 1994 due to the construction mortgage
note as discussed above.

Management obtained permanent financing for the capital improvements program in
December 1995. The new mortgage note, in the amount of $15 million, bears an
interest rate of 7.5% with monthly principal and interest payments of $110,849
and matures in December 2002. The proceeds from the refinancing were used to pay
off the construction mortgage note, the affiliate mortgage note, the affiliate
advances from General Partner, as well as deferred payable to affiliates as
discussed below. The renovations were completed during 1995. As a part of the
renovations, assets valued at approximately $1,248,000 were demolished or
removed and written off in the fourth quarter of 1995.

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

1996 compared to 1995

Revenue:

Partnership revenues increased by $1,029,001 or 13% in 1996 as compared to
1995. Rental revenue increased $1,010,712 and interest income increased
$78,163.

Rental revenue increases were mainly due to increased occupancies at Northway
Mall and Westwood Center. Average occupancy at Northway Mall was 89% in 1996 and
79% in 1995 with rental income increasing approximately $865,000 in 1996 as
compared to prior year. Occupancy at Westwood Center increased to 99% at
December 31, 1996 from 92% at December 31, 1995 with rental income increasing
approximately $192,000.

Interest income increased $78,163 or 80% 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 payable to affiliates, repayments of advances from affiliates,
as well as distribution to limited partners.

<PAGE>
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 $59,874 gain during 1995 as a result of this
settlement. No such gain was recognized in 1996.

Expenses:

Total expenses decreased by $1,686,125 or 13% in 1996 as compared to 1995. The
decrease was mainly due to a loss on the Northway Mall renovation of $1,247,940
for the 1995 demolition and removal of assets previously capitalized in 1995.
During 1996 and 1995, Edison Ford Square recorded impairment write-downs of
$1,087,000 and $2,200,000, respectively.

Interest expense increased $622,386 or 54% in 1996 as compared to prior year
due to the December 1995 mortgage refinancing of Northway Mall.

Interest expense - affiliate decreased $104,675 or 87% due to the repayment of
the loan from McNeil Real Estate Fund XXVII, L.P. in January 1996, as well as
the repayment of all advances from affiliates in May 1996.

Property management fees - affiliates increased $62,829 or 14% due to the
increased rental income at Northway Mall and Westwood Center as discussed above.

General and administrative expenses increased $209,212 due to costs incurred by
the Partnership to evaluate and disseminate information regarding an unsolicited
1996 tender offer as discussed in Item 1 - Business.

General and administrative - affiliates expenses decreased $115,251 or 14% due
to decreased overhead reimbursement to McREMI for administering the
Partnership's affairs.

1995 compared to 1994

Revenue:

Partnership revenues increased by $1,271,972 or 20% in 1995 as compared to 1994.
Rental revenue and interest income increased by $1,182,363 and $29,735,
respectively.

Rental revenue for 1995 were $7,568,361 as compared to $6,385,998 for 1994. This
increase is primarily due to the increase in occupancy rates at four of the five
Partnership's properties, with the largest increase occurring at Northway Mall.

Interest income increased $29,735 for 1995 as compared to 1994 primarily due to
the Partnership's increased cash balance. The proceeds from the Northway Mall
refinancing of approximately $5,800,000 were deposited in December 1995
resulting in an increase of approximately $11,000 of interest income for
December 1995.

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 $59,874 gain during 1995 as a result of this
settlement. No such gain was recognized in 1994.

<PAGE>
Expenses:

Total expenses increased $4,396,955 or 52% in 1995 as compared 1994 primarily
due to an increase in interest, depreciation and amortization expense, the loss
on demolition and replacement of assets at Northway Mall, and the write-down for
impairment on Edison Ford Square, as discussed below.

Interest expense increased $469,121 or 69% in 1995 as compared 1994 due to the
construction financing at Northway Mall.

Interest expense - affiliates increased $26,553 or 28% in 1995 as compared to
1994 due to a higher interest rate on the affiliate mortgage.

Depreciation and amortization increased $241,374 or 10% in 1995 as compared to
1994 due to the renovation at Northway Mall.

Personnel expenses increased $66,274 or 9% in 1995 as compared to 1994, due to
an increase in personnel at Northway Mall because of the increased occupancy, as
well as higher compensation for property personnel at the Partnership's
remaining properties.

Property management fees - affiliates increased $51,890 or 13% in 1995 as
compared to 1994. The increased occupancy at Northway Mall led to an increase in
tenant receipts on which the management fee is based.

Bad debt expense decreased approximately $122,000 in 1995 as compared to 1994 at
Westwood Center, Edison Ford Square, and Northway Mall due to 1994's tenant
evictions and relocations.

Other property operating expenses increased $51,470 or 9% in 1995 as compared to
1994 due to an increase in marketing and leasing expenses at Northway Mall.

General and administrative expenses decreased $48,079 or 43% in 1995. During
1994, Westwood Center incurred $22,500 in professional fees for an appraisal; no
such fees were incurred during 1995. The decrease was also due to decreased
expenses relating to legal proceedings against an unaffiliated management
company for mismanagement and other causes of action at Northway Mall.

General and administrative - affiliates expenses increased $109,627 or 15% in
1995 as compared to 1994. There was an increase of $54,364 in asset management
fees in 1995 due to the increase in the tangible assets of the Partnership, on
which the fee is based. There was an increase of $55,263 in reimbursement to
affiliates due to an increase in services provided in connection with the
Northway Mall renovation.

The Partnership recognized a loss on Northway Mall renovation of $1,247,940 in
1995. This loss was due to the demolition or removal of assets that were
previously capitalized.

<PAGE>

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

Cash flow used in the Partnership operations was $1,588,873 in 1996 as compared
to $1,472,199 of cash provided in 1995 and $966,845 in 1994. The change in cash
flow from operations in 1996 as compared to 1995 was primarily due to an
increase of $3,671,320 in cash paid to affiliates. With the loan proceeds of
Northway Mall's financing, the Partnership was able to pay all deferred asset
management fees and overhead reimbursements to McREMI, bringing the balance of
payable to affiliates - General Partner to $91,462 as of December 31, 1996 from
$2,983,409 as of December 31,1995. Interest paid also increased with the
December 1995 mortgage refinancing of Northway Mall. The increased occupancy at
Northway Mall and Westwood Center led to an increase in tenant receipts and
partially offset the decrease in cash flow.

The change in cash provided by operations in 1995 as compared to 1994 is
primarily due to an increase in tenant receipts, a decrease in property taxes
paid and a gain on the settlement of bankruptcy claims against Southmark as
discussed in Item 1 - Business - "Southmark Bankruptcy and Change in General
Partner". These cash changes were offset by an increase in interest paid. The
increased occupancy at Northway Mall and Continental Plaza was substantially
responsible for the increase in tenant receipts. The decrease in property tax
payments is primarily due to a change in the due date of the tax payments for
Edison Ford Square. The 1993 taxes were paid in February 1994 and the 1994 taxes
were paid in December 1994.

Expenditures related to additions to real estate in 1996 utilized $1,158,736 of
Partnership cash flows as compared to $9,732,038 during 1995 and $3,551,769
during 1994. The increase in the additions to real estate in 1995 was primarily
due to the capital improvement program at Northway Mall. In the third quarter of
1994, management finalized a construction loan on Northway Mall totaling $11
million to finance the capital improvement program. The mortgage note allowed
for monthly withdrawals of principal in the amount of approved invoices. The
principal amount was due August 1996 and accrued interest at a variable rate.
The interest rate at December 17, 1995 (the date the mortgage note was repaid)
was 9.75%. Interest payments were due from the Partnership upon repayment of the
note. During 1995, $91,000 of this interest was capitalized as an addition to
real estate investments, which is the portion related to the vacant square
footage of Northway Mall that was under construction during the year. The
Partnership incurred loan costs of $214,218 in 1994 related to the construction
mortgage note financing, of which $70,000 were capitalized in 1995 as an
addition to real estate investments to be depreciated over the life of the
related asset. The remaining loan costs of $144,218 were amortized over the life
of the construction mortgage note. The Partnership was provided cash flow of
$1,121,473 during 1994 due to the construction mortgage note as discussed above.

Principal payments on mortgage notes payable were $329,175 in 1996 as compared
to $131,113 in 1995 and $114,804 in 1994. The increase in 1996 was due to
Northway Mall's December 1995 permanent financing for the capital improvements
program. The new mortgage note, in the amount of $15 million, bears an interest
rate of 7.5% with monthly principal and interest payments of $110,849 and
matures in December 2002.

The proceeds from the Northway Mall refinancing were used to pay off the
construction mortgage note, a $952,538 mortgage loan from McNeil Real Estate
Fund XXVII, L.P., as well as $130,517 advances from affiliates - General
Partner.

<PAGE>
The Partnership distributed $374,965 to the limited partners in 1996 of cash
from operations.

Short-term liquidity:

At December 31, 1996, the Partnership held cash and cash equivalents of
$2,211,029. The present cash balance plus cash to be provided by operating
activities is considered adequate to meet the Partnership's needs for debt
service, normal amounts of repairs and maintenance and capital improvements to
preserve and enhance the value of the properties. The Partnership has budgeted
$2,041,000 for necessary capital improvements for all properties in 1997.

The General Partner has, at its discretion, advanced funds to the Partnership to
fund working capital requirements. All outstanding advances from affiliates and
the related accrued interest were repaid in 1996. The General Partner is not
obligated to advance funds to the Partnership and there is no assurance that the
Partnership will receive additional funds.

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

1996 1995
------------- ------------
Advances from General Partner $ - $ 130,518
Accrued interest payable - 37,812
------------ -----------
$ - $ 168,330
============ ===========

The advances were unsecured, due on demand and accrued interest at the prime
lending rate of Bank of America plus 1%. The prime lending rate was 8.25% at May
20, 1996, when the Partnership repaid the advances and 8.5% at December 31,
1995.

Long-term liquidity:

While the present outlook for Partnership's liquidity is favorable, market
conditions may change and property operations could deteriorate. In that event,
the Partnership would require other sources of working capital. No such other
sources have been identified, and the Partnership has no established lines of
credit. Other possible actions to resolve working capital deficiencies include
refinancing or renegotiating terms of existing loans, deferring major capital
expenditures on Partnership properties except where improvements are expected to
enhance the competitiveness or marketability of the properties, or arranging
working capital support from affiliates. There is no assurance that affiliate
support could be arranged, since neither the General Partner nor any affiliates
have any obligation in this regard.

The Partnership has significant mortgage maturities during 1998, and management
expects to refinance these mortgage notes as they mature. However, if management
is unable to refinance the mortgage notes as they mature, the Partnership will
require other sources of cash. No such sources have been identified.

<PAGE>
The Partnership determined to evaluate market and other economic conditions to
establish the optimum time to commence an orderly liquidation of the
Partnership's assets in accordance with the terms of the Amended Partnership
Agreement. Taking such conditions as well as other pertinent information into
account, the Partnership has determined to begin orderly liquidation of all its
assets. Although there can be no assurance as to the timing of the liquidation
due to real estate market conditions, the general difficulty of disposing of
real estate, and other general economic factors, it is anticipated that such
liquidation would result in the dissolution of the Partnership followed by a
liquidating distribution to Unit holders by December 1998. In this regard, the
Partnership has placed Edison Ford Square on the market for sale.

Distributions:

In 1996, the Partnership distributed $374,965 to the limited partners. The
General Partner will continue to monitor the cash reserves and working capital
needs of the Partnership to determine when cash flows will support distributions
to the limited partners.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------

Page
Number
------

<S> <C>
INDEX TO FINANCIAL STATEMENTS

Financial Statements:

Report of Independent Public Accountants....................................... 18

Balance Sheets at December 31, 1996 and 1995................................... 19

Statements of Operations for each of the three years in the period
ended December 31, 1996..................................................... 20

Statements of Partners' Equity (Deficit) for each of the three years in
the period ended December 31, 1996.......................................... 21

Statements of Cash Flows for each of the three years in the period
ended December 31, 1996..................................................... 22

Notes to Financial Statements.................................................. 24

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

</TABLE>

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

<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

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

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of McNeil Real Estate Fund XXVI,
L.P. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.

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

/s/ Arthur Andersen LLP

Dallas, Texas
March 17, 1997

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

BALANCE SHEETS

December 31,
-----------------------------------
1996 1995
--------------- --------------
<S> <C> <C>
ASSETS
- ------

Real estate investments:

Land..................................................... $ 6,750,456 $ 9,189,092
Buildings and improvements............................... 53,911,061 56,695,050
-------------- -------------
60,661,517 65,884,142
Less: Accumulated depreciation and amortization......... (21,682,401) (21,255,141)
-------------- -------------
38,979,116 44,629,001

Asset held for sale......................................... 3,008,374 -

Cash and cash equivalents................................... 2,211,029 6,761,516
Cash segregated for security deposits....................... 233,426 202,396
Accounts receivable, net of allowance for doubtful
accounts of $572,392 and $596,156 at
December 31, 1996 and 1995, respectively................. 1,276,997 1,096,937
Prepaid commissions......................................... 349,018 379,444
Prepaid expenses and other assets........................... 709,030 716,091
Deferred borrowing costs, net of accumulated
amortization of $215,640 and $125,641 at
December 31, 1996 and 1995, respectively................. 357,522 431,838
-------------- -------------
$ 47,124,512 $ 54,217,223
============== =============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
- ------------------------------------------

Mortgage notes payable...................................... $ 21,815,746 $ 22,144,921
Mortgage note payable - affiliate........................... - 952,538
Accounts payable and accrued expenses....................... 306,284 358,856
Accrued property taxes...................................... 58,660 59,864
Payable to affiliates - General Partner..................... 91,462 2,983,409
Advances from affiliates - General Partner.................. - 168,330
Security deposits and deferred rental income................ 236,436 210,496
-------------- -------------
22,508,588 26,878,414
-------------- -------------

Partners' equity (deficit):
Limited partners - 90,000,000 limited partnership
units authorized; 86,533,671 and 86,548,983
limited partnership units issued and outstanding
at December 31, 1996 and 1995, respectively............ 25,016,816 27,716,222
General Partner.......................................... (400,892) (377,413)
-------------- -------------
24,615,924 27,338,809
-------------- -------------
$ 47,124,512 $ 54,217,223
============== =============
</TABLE>
See accompanying notes to financialstatements.
<PAGE>

McNEIL REAL ESTATE FUND XXVI, L.P.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1996 1995 1994
-------------- -------------- ---------------
<S> <C> <C> <C>
Revenue:
Rental revenue.......................... $ 8,579,073 $ 7,568,361 $ 6,385,998
Interest ............................... 176,370 98,207 68,472
Gain on legal settlement................ - 59,874 -
------------- ------------- --------------
Total revenue......................... 8,755,443 7,726,442 6,454,470
------------- ------------- --------------

Expenses:
Interest................................ 1,770,932 1,148,546 679,425
Interest - affiliates................... 16,090 120,765 94,212
Depreciation and amortization........... 2,713,247 2,682,731 2,441,357
Property taxes.......................... 673,753 654,260 614,985
Bad debt................................ 13,759 (13,025) 109,404
Personnel expenses...................... 799,842 781,301 715,027
Utilities............................... 996,025 1,060,645 1,003,866
Repairs and maintenance................. 971,273 962,791 955,631
Property management fees -
affiliates............................ 499,835 437,006 385,116
Other property operating expenses....... 584,823 623,705 572,235
General and administrative.............. 271,913 62,701 110,780
General and administrative -
affiliates............................ 704,871 820,122 710,495
Write-down for impairment
of real estate........................ 1,087,000 2,200,000 -
Loss on demolition and replacement
of assets............................. - 1,247,940 -
------------- ------------- --------------
Total expenses........................ 11,103,363 12,789,488 8,392,533
------------- ------------- --------------

Net loss................................... $ (2,347,920) $ (5,063,046) $ (1,938,063)
============= ============= ==============

Net loss allocable to limited
partners................................ $ (2,324,441) $ (5,012,416) $ (1,918,682)
Net loss allocable to General
Partner................................. (23,479) (50,630) (19,381)
------------- ------------- --------------
Net loss................................... $ (2,347,920) $ (5,063,046) $ (1,938,063)
============= ============= ==============

Net loss per thousand limited
partnership units....................... $ (26.86) $ (57.91) $ (22.17)
============= ============= ==============

Distribution per thousand limited
partnership units....................... $ 4.33 $ - $ -
============= ============= ==============
</TABLE>

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

STATEMENTS OF PARTNERS' EQUITY (DEFICIT)

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

<TABLE>
<CAPTION>
Total
General Limited Partners'
Partner Partners Equity
---------------- ---------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1993.............. $ (307,402) $ 34,647,320 $ 34,339,918

Net loss.................................. (19,381) (1,918,682) (1,938,063)
-------------- -------------- --------------

Balance at December 31, 1994.............. (326,783) 32,728,638 32,401,855

Net loss.................................. (50,630) (5,012,416) (5,063,046)
-------------- -------------- --------------

Balance at December 31, 1995.............. (377,413) 27,716,222 27,338,809

Net loss.................................. (23,479) (2,324,441) (2,347,920)

Distributions............................. - (374,965) (374,965)
-------------- -------------- --------------

Balance at December 31, 1996.............. $ (400,892) $ 25,016,816 $ 24,615,924
============== ============== ==============
</TABLE>

See accompanying notes to financial statements.

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

STATEMENTS OF CASH FLOWS

Increase (Decrease) in Cash and Cash Equivalents

<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1996 1995 1994
-------------- --------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from tenants.............. $ 8,380,164 $ 7,284,225 $ 6,369,873
Cash received from legal settlement..... - 59,874 -
Cash paid to suppliers.................. (3,723,971) (3,729,096) (3,625,342)
Cash paid to affiliates................. (4,096,653) (425,333) (408,803)
Interest received....................... 176,370 98,207 68,472
Interest paid........................... (1,587,720) (1,008,659) (581,020)
Interest paid to affiliates............. (53,903) (107,937) (98,941)
Property taxes paid..................... (683,160) (699,082) (757,394)
------------- ------------- --------------
Net cash provided by (used in)
operating activities.................. (1,588,873) 1,472,199 966,845
------------- ------------- --------------

Net cash used in investing activities:
Additions to real estate
investments........................... (1,158,736) (9,732,038) (3,551,769)
------------- ------------- --------------

Cash flows from financing activities:
Principal payments on mortgage
notes payable......................... (329,175) (131,113) (114,804)
Proceeds from mortgage notes
refinancing........................... - 13,878,527 1,121,473
Retirement of mortgage note -
affiliate............................. (952,538) - -
Repayment of advances from
affiliates - General Partner.......... (130,517) - -
Deferred borrowing costs paid........... (15,683) (199,909) (214,218)
Distributions........................... (374,965) - -
------------- ------------- --------------
Net cash provided by (used in)
financing activities.................. (1,802,878) 13,547,505 792,451
------------- ------------- ---------------

Net increase (decrease) in cash and
cash equivalents........................ (4,550,487) 5,287,666 (1,792,473)

Cash and cash equivalents at
beginning of year..................... 6,761,516 1,473,850 3,266,323
------------- ------------- --------------

Cash and cash equivalents at end
of year............................... $ 2,211,029 $ 6,761,516 $ 1,473,850
============= ============= ==============
</TABLE>

See discussion of noncash investing and financing activities in Note 4

See accompanying notes to financial statements.

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

STATEMENTS OF CASH FLOWS

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

<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------
1996 1995 1994
--------------- --------------- ----------------
<S> <C> <C> <C>
Net loss................................... $ (2,347,920) $ (5,063,046) $ (1,938,063)
------------- ------------- --------------

Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization........... 2,713,247 2,682,731 2,441,357
Amortization of deferred borrowing
costs................................. 89,999 156,331 99,166
Allowance for doubtful accounts......... (23,764) (267,858) 28,391
Interest added to advances from
affiliates - General Partner, net..... (37,813) 12,828 10,624
Write-down for impairment
of real estate........................ 1,087,000 2,200,000 -
Loss on demolition and replacement
of assets............................ - 1,247,940 -
Changes in assets and liabilities:
Cash segregated for security
deposits............................ (31,030) 31,363 (14,079)
Accounts receivable................... (156,296) (39,438) 72,453
Prepaid commissions................... 30,426 25,099 (65,834)
Prepaid expenses and other
assets.............................. 7,061 (536,646) 12,563
Accounts payable and accrued
expenses............................ (52,572) 187,789 (215,007)
Accrued property taxes................ (1,204) 24,539 (142,695)
Payable to affiliates - General
Partner............................. (2,891,947) 831,795 671,455
Security deposits and deferred
rental income....................... 25,940 (21,228) 6,514
------------- ------------- --------------

Total adjustments................. 759,047 6,535,245 2,904,908
------------- ------------- --------------

Net cash provided by (used in)
operating activities.................. $ (1,588,873) $ 1,472,199 $ 966,845
============= ============= ==============
</TABLE>

See accompanying notes to financialstatements.

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

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996

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

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

McNeil Real Estate Fund XXVI, L.P., (the "Partnership"), formerly known as
Southmark Equity Partners III, Ltd., was organized on March 4, 1985 as a limited
partnership under the provisions of the California Revised Limited Partnership
Act to acquire and operate residential and commercial 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 30, 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 residential, commercial office and retail
real estate. The Partnership has determined to evaluate market and other
economic conditions to established the optimum time to commence an orderly
liquidation of the Partnership's assets in accordance with the terms of the
Amended Partnership Agreement. At December 31, 1996, the Partnership owned five
income-producing properties as described in Note 4 - Real Estate Investments.

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

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

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

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

<PAGE>
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 this asset ceased at the time it was placed
on the market for sale.

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

Buildings and improvements are depreciated using the straight-line method over
the estimated useful lives of the assets, ranging from 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.

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

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

Prepaid Commissions
- -------------------

Leasing commissions incurred to obtain leases on commercial properties are
capitalized and amortized using the straight-line method over the term of the
related leases. Amortization of leasing commissions is included in other
property operating expenses in the Statement 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 income
is recognized as earned.

<PAGE>
The Partnership leases its commercial properties under non-cancelable operating
leases. Certain leases provide concessions and/or periods of escalating or free
rent. Rental income 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 one percent (1%) to the General Partner and ninety-nine percent (99%)
to the limited partners.

For financial statement purposes, net income and net loss arising from sales or
refinancing shall be allocated one percent (1%) to the General Partner and
ninety-nine percent (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 partner's 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 1996, 1995 and 1994 have been made
in accordance with these provisions.

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

At the discretion of the General Partner, distributable cash (other than cash
from sales or refinancings) 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.
Also at the discretion of the General Partner, the limited partners will receive
100% of distributable cash from sales or refinancings with such distributions
first paying the limited partners Priority Return; as defined, then the limited

<PAGE>
partners' Additional 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 8 1/4% cumulative return on their
Adjusted Invested Capital balance, as defined. The limited partners' Additional
Priority Return represents a 1% cumulative return on their Adjusted Invested
Capital balance, as defined.

In connection with a Terminating Disposition, as defined, cash from sales or
refinancings 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.

In 1996, the Partnership distributed $374,965 to the limited partners. There
were no distributions to partners in 1995 and 1994.

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

Net loss per thousand Units is computed by dividing net loss allocated to the
limited partners by the weighted average number of Units outstanding expressed
in thousands. Per Unit information has been computed based on 86,534 thousand
Units outstanding in 1996, 86,549 thousand Units outstanding in 1995, and 86,554
thousand Units outstanding in 1994.

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 its
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% to the annualized net
operating income of each property or (ii) a value of $10,000 per apartment unit
for residential property and $50 per gross square foot for commercial property
to arrive at the property tangible asset value. The property tangible asset
value is then added to the book value of all other assets excluding intangible
items. The fee percentage decreases subsequent to 1999.

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

<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1996 1995 1994
-------------- -------------- ---------------
<S> <C> <C> <C>
Property management fees - affiliates...... $ 499,835 $ 437,006 $ 385,116
Charged to interest - affiliates:
Interest on mortgage note payable -
affiliate............................. 11,398 107,937 83,588
Interest on advances from
affiliates - General Partner.......... 4,692 12,828 10,624
Charged to general and administrative -
affiliates:
Partnership administration.............. 198,810 300,846 245,583
Asset management fee.................... 506,061 519,276 464,912
------------- ------------- --------------
$ 1,220,796 $ 1,377,893 $ 1,189,823
============= ============= ==============
</TABLE>

The payable to affiliates - General Partner at December 31, 1996 and 1995
consisted primarily of unpaid property management fees, Partnership general and
administrative expenses and asset management fees and is due and payable from
current operations. During 1996, the Partnership paid a total of $3,599,772 to
McREMI, which included repayment of all deferred asset management fees and
overhead reimbursements.

The General Partner has, at its discretion, advanced funds to the Partnership to
meet its working capital requirements. The advances were repaid during 1996. The
General Partner is not obligated to advance funds to the Partnership and there
is no assurance that the Partnership will receive additional funds.

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

1996 1995
------------- ------------
Advances from General Partner $ - $ 130,518
Accrued interest payable - 37,812
------------ -----------
$ - $ 168,330
============ ===========

The advances were unsecured, due on demand and accrued interest at the prime
lending rate of the Bank of America plus 1%. The prime lending rate was 8.5% at
December 31, 1995 and 8.25% on May 20, 1996, the date when the Partnership
repaid all outstanding affiliate advances and the related accrued interest.

In 1993, the Partnership obtained a loan from McNeil Real Estate Fund XXVII,
L.P., an affiliate of the General Partner, totaling $952,538. The note was
secured by Continental Plaza and required monthly interest-only payments equal
to the prime lending rate of Bank of America plus 2 1/2% with the principal
balance due March 1, 1996. On January 8, 1996, the Partnership repaid the
mortgage loan.
<PAGE>
NOTE 3 - TAXABLE INCOME
- -----------------------

McNeil Real Estate Fund XXVI, 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 $38,453,377 in 1996,
$39,813,538 in 1995 and $35,628,694 in 1994.

NOTE 4 - REAL ESTATE INVESTMENTS
- --------------------------------

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

<TABLE>
<CAPTION>
Accumulated
Buildings and Depreciation Net Book
1996 Land Improvements & Amortization Value
---- -------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C>
Amargosa Creek
Lancaster, CA $ 794,635 $ 8,591,890 $ (3,718,390) $ 5,668,135
Continental Plaza
Scottsdale, AZ 1,975,324 2,036,191 (1,800,164) 2,211,351
Northway Mall
Pittsburgh, PA 2,965,329 30,680,454 (9,851,567) 23,794,216
Westwood Center
Tampa, FL 1,015,168 12,602,526 (6,312,280) 7,305,414
------------- -------------- -------------- -------------
$ 6,750,456 $ 53,911,061 $ (21,682,401) $ 38,979,116
============= ============== ============== =============

Accumulated
Buildings and Depreciation Net Book
1995 Land Improvements & Amortization Value
---- -------------- ------------ -------------- ----------------

Amargosa Creek $ 794,635 $ 8,517,021 $ (3,340,699) $ 5,970,957
Edison Ford Square 2,438,636 3,786,804 (2,243,237) 3,982,203
Continental Plaza 1,975,324 1,955,198 (1,669,636) 2,260,886
Northway Mall 2,965,329 29,897,021 (8,393,175) 24,469,175
Westwood Center 1,015,168 12,539,006 (5,608,394) 7,945,780
------------- -------------- -------------- -------------
$ 9,189,092 $ 56,695,050 $ (21,255,141) $ 44,629,001
============= ============== ============== =============
</TABLE>

<PAGE>
Edison Ford Square is a 141,000 sq. ft. retail center in Fort Myers, Florida
that has evolved from primarily retail, to more of a service center use. It was
56%, 46% and 54% occupied at December 31, 1996, 1995 and 1994. The downtown
area, where the shopping center is located, has experienced decay due to a shift
in demographics. The center is within walking distance of the Thomas Edison and
Henry Ford estates, which are significant historical attractions in the area.
Plans for a major renovation that would have captured the architecture and style
of the Edison home began in 1993. However, with the loss of two major anchors in
1994, it was not viable to continue this project. During 1995, a full, in-depth
market analysis was performed to determine the center's highest and best use. It
was determined that the only viable alternative would be a complete
redevelopment and renovation of the center; however, the Partnership decided not
to pursue this alternative because of the inherent risks and economic
uncertainties. An unsolicited offer from an unaffiliated third party to purchase
the center was received during 1995. These facts led management to conclude that
the asset was impaired. Accordingly, the Partnership recorded a write-down for
impairment of $2.2 million against Edison Ford's building and improvements
during the fourth quarter of 1995, to record the property at its estimated fair
value. In accordance with management's plans to begin an orderly liquidation of
the Partnership, the property was placed on the market for sale effective April
1, 1996. During 1996, management was informed that a major tenant, occupying
approximately 10,900 square feet, was terminating its lease in 1997.
Additionally, based on a shorter holding period of the property established in
management's liquidation plans; it was determined that the Partnership could not
ultimately realize its adjusted carrying value through future cash flows.
Accordingly, an additional write-down for impairment in the amount of $1,087,000
was recorded against the property's buildings and improvements during the fourth
quarter of 1996. The net book value of Edison Ford Square was $3,008,374 at
December 31, 1996.

The results of operations for the asset held for sale at December 31, 1996 are
$312,321, $89,164 and $161,170 for 1996, 1995 and 1994, respectively. Results of
operations are operating revenues less operating expenses including depreciation
and interest expense.

During the third quarter of 1994, management finalized a construction loan on
Northway Mall totaling $11 million to finance a capital improvement program. The
decision to renovate the mall was made after exhaustive analyses and studies
conducted by management to determine future cash flows of the mall based upon
stabilized leases. The mortgage note allowed for monthly principal draws in the
amount of approved invoices. The principal amount was due August 1996 and
accrued interest at a variable rate. The interest rate at December 17, 1995 (the
date the mortgage note was repaid) was 9.75%. Interest payments were due from
the Partnership upon repayment of the note. During 1995, $91,000 of this
interest was capitalized as an addition to real estate investments, which is the
portion related to the vacant square footage of Northway Mall that was under
construction during the year. The Partnership incurred loan costs of $214,218 in
1994 related to the construction mortgage note financing, of which $70,000 was
capitalized in 1995 as an addition to real estate investments to be depreciated
over the life of the related asset. The remaining loan costs of $144,218 were
amortized over the life of the construction mortgage note. The Partnership was
provided cash flow of $1,121,473 during 1994 due to the construction mortgage
note as discussed above.

<PAGE>
Management obtained permanent financing for the capital improvements program in
December 1995. The new mortgage note, in the amount of $15 million, bears an
interest rate of 7.5% with monthly principal and interest payments of $110,849
and matures in December 2002. The proceeds from the refinancing were used to pay
off the construction mortgage note, as well as the affiliate mortgage note which
was secured by Continental Plaza. The renovations were completed during 1995. As
a part of the renovation, assets valued at approximately $1,248,000 were
demolished or removed and written off in the fourth quarter of 1995.

The Partnership leases its commercial properties under non-cancelable operating
leases. Future minimum rents to be received as of December 31, 1996 are as
follows:

1997.................................... $ 5,747,000
1998.................................... 5,257,000
1999.................................... 4,317,000
2000.................................... 3,649,000
2001.................................... 2,778,000
Thereafter.............................. 11,970,000
-----------
Total $ 33,718,000
===========

Future minimum rents do not include contingent rentals based on sales volume of
tenants. Contingent rents amounted to $7,943, $15,094 and $11,793 for the years
ended December 31, 1996, 1995 and 1994, respectively. Future minimum rents also
do not include expense reimbursements for common area maintenance, property
taxes, and other expenses. These expense reimbursements amounted to $1,563,150,
$1,176,119 and $886,698 for the years ended December 31, 1996, 1995, and 1994,
respectively. These contingent rents and expense reimbursements, which are
include amounts for the asset held for sale, are included in rental revenue on
the Statement of Operations.

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

The following sets forth the mortgage notes payable of the Partnership at
December 31, 1996 and 1995. The mortgage notes are secured by the related real
estate investments.

<TABLE>
<CAPTION>
Mortgage Annual Monthly
Lien Interest Payments/ December 31,
Property Position (a)Rates % Maturity Date(c) 1996 1995
- -------- ------------------- ------------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Amargosa Creek First 7.875 $ 35,528 12/98 $ 4,759,298 $ 4,808,711
------------ -------------

Northway Mall (b) First 7.500 110,849 12/02 14,805,922 15,000,000
------------ -------------

Westwood Center First 8.000 22,457 12/98 2,250,526 2,336,210
------------ -------------
$ 21,815,746 $ 22,144,921
============ =============
</TABLE>

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

(b) In December 1995, the Partnership obtained permanent financing for the
capital improvements program at Northway Mall (see Note 6 - Refinancing of
Mortgage Note Payable).

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

Amargosa Creek $ 4,653,031 12/98
Westwood Center 2,074,545 12/98
Northway Mall 13,118,565 12/02

Scheduled principal maturities of the mortgage notes payable are as follows:

1997.................................... $ 373,700
1998.................................... 7,108,696
1999.................................... 264,144
2000.................................... 284,650
2001.................................... 306,749
Thereafter.............................. 13,477,807
-----------
Total $ 21,815,746
===========

Based on borrowing rates currently available to the Partnership for mortgage
loans with similar terms and average maturities, the fair value of the mortgage
notes payable was approximately $20,745,000 at December 31, 1996 and $22,871,000
at December 31, 1995.

NOTE 6 - REFINANCING OF MORTGAGE NOTE PAYABLE
- ---------------------------------------------

On December 17, 1995, the Partnership refinanced the mortgage note payable on
Northway Mall. The new mortgage loan bears an interest rate of 7.5%, requires
monthly principal and interest payments of $110,849 and matures in December
2002. The following is a summary of the transaction:

New loan proceeds....................... $ 15,000,000
Existing debt retired................... (9,153,530)
-------------
Cash proceeds from refinancing.......... $ 5,846,470
=============

The Partnership deposited $591,500 into property tax and deferred maintenance
escrows and incurred loan costs of $269,910.

In August 1994, the Partnership obtained financing for the capital improvements
program at Northway Mall. The construction mortgage note allowed for monthly
principal draws in the amount of approved invoices up to $11 million. Interest
payments were due from the Partnership to the extent of the excess cash flow
from the property with the remaining interest due upon repayment of the note.
The principal amount was due August 1996 and accrued interest at a variable
rate. During 1995, the Partnership received additional proceeds of $8,032,057
from the construction loan for Northway Mall's capital improvement program. On
December 17, 1995, the Partnership obtained permanent financing and repaid the
construction loan in full.
<PAGE>
NOTE 7 - MORTGAGE NOTE PAYABLE - AFFILIATE
- ------------------------------------------

The following sets forth the mortgage note payable - affiliate of the
Partnership at December 31, 1996 and 1995. The mortgage note was secured by the
underlying real estate investment.

<TABLE>
<CAPTION>
Mortgage Annual Monthly
Lien Interest Payments/ December 31,
Property Position(a) Rates % Maturity Date 1996 1995
- -------- ------------ ------- ------------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Continental Plaza (b) First (c) Variable 03/96 $ - $ 952,538
============ ===========
</TABLE>

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

(b) In 1993, the Partnership obtained a loan from McNeil Real Estate Fund
XXVII, L.P., an affiliate of the General Partner, totaling $952,538.
The principal balance was due March 1, 1996. On January 8, 1996, the
Partnership repaid the mortgage loan.

(c) The note required monthly payments of interest only equal to the prime
lending rate of the Bank of America plus 2 1/2%. The prime rate was 8.5%
both at December 31, 1995 and at January 8, 1996, the date when the
Partnership repaid the mortgage loan in full.

Under the terms of the Amended Partnership Agreement, borrowings from affiliates
approximate fair market value.

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

<PAGE>
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.

The action involves purported class and derivative actions brought by
limited partners of each of the fourteen limited partnerships that were
named as nominal defendants as listed above (as defined in this Section 2,
the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its
affiliate McNeil Real Estate Management, Inc. and three of their senior
officers and/or directors (as defined in this Section 2, 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.

<PAGE>

McNEIL REAL ESTATE FUND XXVI, L.P.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1996

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

Amargosa Creek
Lancaster, CA (b) $ 4,759,298 $ 947,277 $ 9,578,026 $ (1,696,024) $ 557,246

Office Buildings:

Continental Plaza
Scottsdale, AZ (c) - 4,211,854 4,059,113 (5,662,360) 1,402,908

Westwood Center
Tampa, FL (d) 2,250,526 1,465,168 14,814,477 (5,000,000) 2,338,049

Retail Center:

Northway Mall
Pittsburgh, PA (e) 14,805,922 4,523,305 17,186,915 (6,000,000) 17,935,563
-------------- -------------- -------------- ------------ -------------

$ 21,815,746 $ 11,147,604 $ 45,638,531 $ (18,358,384) $ 22,233,766
============== ============== ============== ============ =============

Asset Held for Sale:

Edison Ford
Square (f)(g)
Fort Myers, FL $ -
==============
</TABLE>

(b) The carrying value of Amargosa Creek apartments was reduced by $1,696,024
in 1992.

(c) The carrying value of continental Plaza was reduced by $1,239,353 in 1993,
$1,803,007 in 1992, $620,000 in 1991 and $2,000,000 in 1989.

(d) The carrying value of Westwood Center was reduced by $5,000,000 in 1989.

(e) The carrying value of Northway Mall was reduced by $6,000,000 in 1993.

(f) The carrying value of Edison Ford Square was reduced by $1,087,000 in 1996
and $2,200,000 in 1995.

(g) Asset held for sale is stated at the lower of depreciated cost or fair
value less cost to sell. Historical cost, net of accumulated depreciation
and cumulative write-downs, become the new cost basis when the asset is
classified as "Held for Sale."

See accompanying notes to Schedule III.

<PAGE>
McNEIL REAL ESTATE FUND XXVI, L.P.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1996

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

Amargosa Creek
Lancaster, CA (b) $ 794,635 $ 8,591,890 $ 9,386,525 $ (3,718,390)

Office Buildings:

Continental Plaza
Scottsdale, AZ (c) 1,975,324 2,036,191 4,011,515 (1,800,164)

Westwood Center
Tampa, FL (d) 1,015,168 12,602,526 13,617,694 (6,312,280)

Retail Center:

Northway Mall
Pittsburgh, PA (e) 2,965,329 30,680,454 33,645,783 (9,851,567)
-------------- -------------- ---------------- -------------
$ 6,750,456 $ 53,911,061 $ 60,661,517 $ (21,682,401)
============== ============== ================ =============

Asset Held for Sale:

Edison Ford
Square (f)(g)
Fort Myers, FL $ 3,008,374
================
</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
approximately $89,575,976 and accumulated depreciation was $20,548,121 at
December 31, 1996.

(b) The carrying value of Amargosa Creek apartments was reduced by $1,696,024
in 1992.

(c) The carrying value of Continental Plaza was reduced by $1,239,353 in 1993,
$1,803,007 in 1992, $620,000 in 1991 and $2,000,000 in 1989.

(d) The carrying value of Westwood Center was reduced by $5,000,000 in 1989.

(e) The carrying value of Northway Mall was reduced by $6,000,000 in 1993.

(e) The carrying value of Edison Ford Square was reduced by $1,087,000 in 1996
and $2,200,000 in 1995.

(g) Asset held for sale is stated at the lower of depreciated cost or fair
value less costs to sell. Historical cost, net of accumulated depreciation
and cumulative write-downs, become 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 XXVI, L.P.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1996

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

Amargosa Creek
Lancaster, CA (b) 1984/85 12/86 5-25

Office buildings:

Continental Plaza
Scottsdale, AZ (c) 1984 11/86 5-25

Westwood Center
Tampa, FL (d) 1984 03/87 5-25

Retail center:

Northway Mall
Pittsburgh, PA (e) 1962 06/87 5-25

Asset Held for Sale:

Edison Ford Square
Fort Myers, FL 1960 07/87

</TABLE>

<PAGE>
McNEIL REAL ESTATE FUND XXVI, 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:

Balance at beginning of year............... $ 65,884,142 $ 60,934,261 $ 56,671,436

Improvements............................... 1,002,815 9,020,982 4,262,825

Reclassification to asset held for sale.... (6,225,440) - -

Write-down for impairment
of real estate.......................... - (2,200,000) -

Demolition and replacement of assets
due to capital improvements............. - (1,871,101) -
------------- ------------- --------------

Balance at end of year..................... $ 60,661,517 $ 65,884,142 $ 60,934,261
============= ============= ==============

Accumulated depreciation and amortization:

Balance at beginning of year............... $ 21,255,141 $ 19,195,571 $ 16,754,214

Depreciation and amortization.............. 2,713,247 2,682,731 2,441,357

Reclassification to asset held for sale.... (2,285,987) - -

Demolition and replacement of assets
due to capital improvements............. - (623,161) -
------------- ------------- --------------

Balance at end of year..................... $ 21,682,401 $ 21,255,141 $ 19,195,571
============= ============= ==============

Asset held for sale:

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

Reclassification to asset held for sale.... 3,939,453 - -

Improvements............................... 155,921 - -

Write-down for impairment
of real estate.......................... (1,087,000) - -
------------- ------------- --------------

Balance at end of year..................... $ 3,008,374 $ - $ -
============= ============= ==============
</TABLE>

<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------

None.

PART III

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

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

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

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

Carole J. McNeil 53 Mrs. McNeil is Co-Chairman, with
Co-Chairman of the husband Robert A. McNeil, of McNeil
Board Investors, Inc. Mrs. McNeil has twenty
years of real estate experience, most
recently as a private investor from 1986
to 1993. In 1982, she founded Ivory &
Associates, a commercial real estate
brokerage firm in San Francisco, CA.
Prior to that, she was a commercial real
estate associate with the Madison
Company and, earlier, a commercial sales
associate and analyst with Marcus and
Millichap in San Francisco. In 1978,
Mrs. McNeil established Escrow Training
Centers, California's first accredited
commercial training program for title
company escrow officers and real estate
agents needing college credits to
qualify for brokerage licenses. She
began in real estate as Manager and
Marketing Director of Title Insurance
and Trust in Marin County, CA. Mrs.
McNeil serves on the International Board
of Directors of the Salk Institute.
<PAGE>
Other Principal Occupations and Other
Name and Position Age Directorships During the Past 5 Years
- ----------------- --- -------------------------------------

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

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

Section 16 (a) of the Securities Exchange Act of 1934 requires the Partnership's
General Partner and the directors and executive offers of the General Partner
(Including McNeil Investors, Inc. as the general partner of the General Partner
and the officers and directors of McNeil Investors, Inc.) to file, with the SEC,
reports of ownership and changes in ownership of the Partnership's Units. The
Partnership is required to identify any of those persons who failed to file such
reports on a timely basis.

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

No direct compensation was paid or payable by the Partnership to directors or
officers (since it does not have any directors or officers) for the year ended
December 31, 1996, nor was any direct compensation paid or payable by the
Partnership to directors or officers of the general partner of the General
Partner for the year ended December 31, 1996. The Partnership has no plans to
pay any such remuneration to any directors or officers of the General Partner 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, known to the Partnership is the beneficial owner of
more than 5 percent of the Partnership's securities.

(B) Security ownership of Management.

The General Partner and the officers or directors of its general partner,
collectively, own 2,950,000 Units, which is 3% of the outstanding any
Units.

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 property
and $50 per gross square foot for commercial property to arrive at the property
tangible asset value. The property tangible asset value is then added to the
book value of all other assets excluding intangible items. The fee percentage
decreases subsequent to 1999. For the year ended December 31, 1996, the
Partnership paid or accrued $506,061 of such asset management fees.

The Partnership pays property management fees equal to 5% of the gross receipts
of its residential property 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, 1996, the Partnership paid or accrued $698,645 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".

The General Partner has, at its discretion, advanced funds to the Partnership to
meet working capital requirements. The advances, which were unsecured and due on
demand, accrued interest at a rate equal to the prime lending rate of the Bank
of America, plus 1%. All outstanding affiliate advances and the related accrued
interest were repaid on May 20, 1996.

In 1993, the Partnership obtained a loan from McNeil Real Estate Fund XXVII,
L.P., an affiliate of the General Partner, totaling $952,538. The note was
secured by Continental Plaza and required monthly interest-only payments equal
to the prime lending rate of Bank of America plus 2.5% with the principal
balance due March 1, 1996. On January 8, 1996, the Partnership repaid the
mortgage loan.

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

See accompanying Index to Financial Statements at Item 8.

(A) Exhibits

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

4. Amended and Restated Limited Partnership
Agreement dated March 30, 1992. (Incorporated
by reference to Current Report of the
Registrant on Form 8-K dated March 30, 1992,
as filed on April 10, 1992).

4.1 Amendment No. 1 to the Amended and Restated
Limited Partnership Agreement of McNeil Real
Estate Fund XXVI, 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).

10.1 Assignment of Partnership Advances dated March
13, 1991 between Southmark Investment Group
86, Inc. and McNeil Partners, L.P.
(Incorporated by reference to the Annual
Report of the registrant on Form 10-K for the
period ended December 31, 1990, as filed on
March 29, 1991).

10.5 Property Management Agreement dated March 30,
1992, between McNeil Real Estate Fund XXVI,
L.P. and McNeil Real Estate Management,
Inc.(1)

10.6 Amendment of Property Management Agreement
dated March 5, 1993 by McNeil Real Estate Fund
XXVI, L.P. and McNeil Real Estate Management,
Inc.(1)

10.7 Promissory Note dated October 7, 1993,
between McNeil Real Estate Fund XXVI, L.P.
.and John Hancock Mutual Life Insurance
Company relating to Amargosa Creek
Apartments.(2)

10.8 Secured Promissory Note dated October 27,
1993, between McNeil Real Estate Fund XXVI,
L.P. and Sun Life Assurance Company of Canada
(U.S.) relating to Westwood Center.(2)

10.9 Promissory Note dated March 1, 1993, between
McNeil Real Estate Fund XXVI, L.P. and McNeil
Real Estate Fund XXVII, L.P.(2)

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

10.10 Mortgage note payable dated August 24,1994
between McNeil Real Estate Fund XXVI L.P. and
PNC Bank, National Association relating to
Northway Mall.(Incorporated by reference to
the Quarterly Report of the registrant on Form
10-Q for the period ended September 30, 1994,
as filed on November 14, 1994).

10.11 Promissory note payable dated December 15,
1995, between McNeil Real Estate Fund XXVI,
L.P. and The Variable Annuity Life Insurance.
(Incorporated by reference to the Annual
Report of the registrant on Form 10-K for the
period ended December 31, 1995, as filed on
March 29, 1996).

11. Statement regarding computation of Net Loss
per Limited Partnership Unit (see Item 8 -
Note 1 - "Organization and Summary of
Significant Accounting Policies").

(1) 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.

(2) Incorporated by reference to the Annual
Report of the registrant on Form 10-K for the
period ended December 31, 1993, as filed on
March 31, 1994.

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

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

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

By: McNeil Investors, Inc., General Partner

March 28, 1997 By: /s/ Robert A. McNeil
- -------------- ---------------------------------------
Date Robert A. McNeil
Chairman of the Board and Director
Principal Executive Officer

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

March 28, 1997 By: /s/ Ron K. Taylor
- -------------- ---------------------------------------
Date Ron K. Taylor
President and Director of McNeil
Investors, Inc.
(Principal Financial Officer)

March 28, 1997 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-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,211,029
<SECURITIES> 0
<RECEIVABLES> 1,849,389
<ALLOWANCES> (572,392)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 40,661,517
<DEPRECIATION> (21,682,401)
<TOTAL-ASSETS> 47,124,512
<CURRENT-LIABILITIES> 0
<BONDS> 21,815,746
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 47,124,512
<SALES> 8,579,073
<TOTAL-REVENUES> 8,755,443
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,229,341
<LOSS-PROVISION> 1,087,000
<INTEREST-EXPENSE> 1,787,022
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,347,920)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,347,920)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>