BODDIE NOELL PROPERTIES INC, 424B4, 1997-12-17

BODDIE NOELL PROPERTIES INC
424B4, 1997-12-17
REAL ESTATE INVESTMENT TRUSTS

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<PAGE>
PROSPECTUS

2,500,000 SHARES

(logo) 424(b)(4)
333-39803
COMMON STOCK
------------------------

Boddie-Noell Properties, Inc. is a real estate investment trust focused
on owning and operating apartment communities. We currently own nine apartment
communities containing 2,208 apartment units and have the right to acquire an
additional 476 apartment units in three apartment communities currently under
construction. We also own 47 restaurant properties and manage seven other
apartment communities and two shopping centers owned by other parties.

We are offering and selling 2,500,000 shares of common stock with this
prospectus. The company's shares are listed for trading on the American Stock
Exchange under the symbol "BNP." On December 16, 1997, the last reported sale
price of our common stock on the American Stock Exchange was $14.125 per share.
------------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN
FACTORS THAT YOU SHOULD CONSIDER BEFORE YOU INVEST IN THE COMMON STOCK BEING
SOLD WITH THIS PROSPECTUS.
------------------------

<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public Price................................................................ $14.125 $35,312,500
Underwriting Discounts...................................................... $ 0.99 $ 2,475,000
Proceeds to the Company..................................................... $13.135 $32,837,500
</TABLE>

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CIBC OPPENHEIMER

J.C. BRADFORD & CO.

INTERSTATE/JOHNSON LANE
CORPORATION

DAVENPORT & COMPANY LLC

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

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE
SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. NEITHER
HAS ANY STATE SECURITIES COMMISSION APPROVED OR DISAPPROVED OF THESE SECURITIES,
OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS ILLEGAL FOR ANY
PERSON TO TELL YOU OTHERWISE.

This Prospectus is dated December 16, 1997.

<PAGE>
Inside Front Cover contains a map of Virginia and North Carolina (the Company's
markets) showing locations of owned and managed properties and three charts that
show historical:

1. Number of apartment units owned;

2. Breakdown of revenues between restaurants and apartments; and

3. Cost of properties (excluding accumulated depreciation).

Inside Back Cover contains pictures of properties.

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IN CONNECTION WITH AN UNDERWRITTEN OFFERING, THE SEC RULES PERMIT THE
UNDERWRITERS TO ENGAGE IN TRANSACTIONS THAT STABILIZE THE PRICE OF OUR COMMON
STOCK. THESE TRANSACTIONS MAY INCLUDE PURCHASES FOR THE PURPOSE OF FIXING OR
MAINTAINING THE PRICE OF THE COMMON STOCK AT A LEVEL THAT IS HIGHER THAN THE
MARKET WOULD DICTATE IN THE ABSENCE OF SUCH TRANSACTIONS.

<PAGE>
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IMPORTANT NOTE TO READERS
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Before you read any further we want to tell you about our approach and
some of the conventions we used in writing this prospectus.

(Bullet) We wrote this prospectus using the Securities and Exchange
Commission's proposed "Plain English" rule. This rule requires
that we write without the "legalese" typically found in most
documents filed with the SEC in order to provide you with a
more meaningful and understandable document. Although the tone
and wording may differ from what you are familiar with, we are
not alone in adopting this progressive approach. Other
well-known companies, including Detroit Diesel Corporation,
Ford Motor Company and Honeywell Inc., have started preparing
their documents using plain English. We voluntarily followed
the plain English initiative because we are very committed to
providing you with useful and understandable information.

(Bullet) For purposes of calculating pro forma information appearing
throughout this prospectus, we assumed we issued 2,500,000
shares in this offering at an offering price of $14 1/8 per
share and that we received $32.3 million of net proceeds after
deductions for underwriting discounts and offering expenses.
The actual net proceeds may differ. The pro forma information
reflects the acquisition of a portfolio of four apartment
communities by adjusting historical operating amounts for
activities of the "stabilized" apartment communities acquired.
The pro forma information does not, therefore, represent the
entire portfolio of four apartment communities. We consider
"stabilized" properties to be those properties or phases of
properties which have achieved occupancy levels of 90% or
greater for 90 consecutive days. Applying the definition of
"stabilized" properties, we have excluded one apartment
community and the second phase of another apartment community
from our pro forma information for 1996 and the nine month
period ended September 30, 1997. These properties have since
achieved "stabilization."

Our mailing address and telephone number are:

Boddie-Noell Properties, Inc.
3710 One First Union Center
Charlotte, North Carolina 28202-6032
(704) 333-1367

TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary......................... 7
Boddie-Noell Properties, Inc............. 7
Our Strategy............................. 7
Dividends................................ 9
The Offering............................. 9
Summary Financial Information............ 10
Risk Factors............................... 11
Possible Inability to Meet and Manage
Growth Objectives..................... 11
Uncertainty with Respect to Restaurant
Properties............................ 11
Real Estate Investment Risks............. 12
General Risks......................... 12
Lack of Geographic Diversification.... 13
Financing Risks.......................... 13
Risks Associated with Debt
Financing........................... 13
Variable Interest Rates............... 14
Possible Inability to Refinance
Debt................................ 14
Regulatory Matters....................... 14
Environmental Matters................. 14
Americans with Disabilities Act
Compliance.......................... 15
Conflicts of Interest.................... 16
Enterprises' Option to Close Poorly
Performing Restaurants................ 16
Tax Risks................................ 17
Consequences of the Failure to Qualify
as a REIT........................... 17
Effect of Distribution Requirements... 17
Other Tax Liabilities................. 17
Possible Adverse Consequences of Limits
on Ownership of Shares................ 18
Limitations on Acquisition and Change in
Control............................... 18
Ownership Limit....................... 18
Required Consent of the Operating
Partnership for Significant
Corporate Action.................... 19
Operating Partnership Agreement....... 19
Preferred Stock....................... 19
Maryland Business Combination
Statute............................. 19
Maryland Control Share Acquisition
Statute............................. 20
Dependence on Key Personnel.............. 21
History and Formation of the Company....... 21
Early History............................ 21
Acquisition of BT Venture Corporation.... 22
Formation of BNP Management, Inc......... 22
Renegotiation of Master Lease............ 22
Other Activity........................... 23
Conversion to UPREIT..................... 23
Chrysson Acquisition..................... 23
The Company................................ 24

<CAPTION>
PAGE
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<S> <C>
Current Operations....................... 24
Principal Investment Objectives.......... 25
Operating Philosophy..................... 25
Market Focus.......................... 26
Intensive Management Focus............ 26
Dedication to Customer Service........ 26
Flat Operational Structure............ 27
Our Growth Strategy...................... 27
Internal Growth Strategy.............. 27
External Growth Strategy.............. 30
Financing Strategy....................... 31
Use of Proceeds............................ 32
Market Price of the Company's Common Stock,
Distributions and Related Shareholder
Matters.................................. 33
Capitalization............................. 35
Selected Financial Data.................... 36
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 39
Overview................................. 39
Results of Operations.................... 41
Nine Months Ended September 30, 1997
Compared to 1996.................... 41
1996 Compared to 1995................. 44
1995 Compared to 1994................. 46
Funds From Operations.................... 48
Capital Resources and Liquidity.......... 49
Capital Resources..................... 49
Cash Flows and Liquidity.............. 51
Short- and Long-term Liquidity
Requirements........................ 52
Inflation............................. 53
Environmental Matters................. 53
Our Properties............................. 54
General.................................. 54
Market Information....................... 54
Greensboro and Winston-Salem, North
Carolina............................ 55
Charlotte, North Carolina............. 56
Virginia Beach, Virginia.............. 57
Growth in our Company's Principal
Markets............................. 59
Apartment Communities.................... 59
Restaurant Properties.................... 62
Other Information About Our Properties... 62
Certain Policies........................... 62
Short-term Investments................... 62
Investments in Other Real Estate
Entities.............................. 63
Loans to Other Persons................... 63
Borrowings............................... 63
Policies on Certain Investments And
Activities............................ 64
Conflicts of Interest.................... 65
Policy Changes........................... 66
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
PAGE
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Directors and Executive Officers........... 67
<S> <C>
Certain Relationships and Related
Transactions............................. 69
Boddie-Noell Properties and B. Mayo
Boddie and Nicholas B. Boddie......... 69
Boddie-Noell Properties and Boddie-Noell
Enterprises........................... 70
Boddie-Noell Properties and Boddie
Investment Company.................... 71
Chrysson Acquisition..................... 72
Transactions with Management............. 73
Employment Contracts and Termination
of Employment and Change-in-Control
Arrangements........................ 73
Loans to Officers..................... 74
Security Ownership of Certain Beneficial
Owners and Management.................... 74
Description of Capital Stock............... 75
General.................................. 75
Common Stock............................. 75
Preferred Stock.......................... 76
Ownership Limitations and Restrictions on
Transfers............................. 76
Limitations of Liability and
Indemnification of Directors and
Officers.............................. 77
Shares Available For Future Sale......... 78
Partnership Agreement of the Operating
Partnership.............................. 80
General.................................. 80
Allocation of Distributions, Profits and
Losses................................ 80
Transferability of Interests............. 81
Additional Capital Contributions;
Issuance of Additional Partnership
Interests............................. 81
Redemption of Operating Partnership
Units................................. 81
Indemnifications and Fiduciary
Standards............................. 82
Tax Matters Partner...................... 82
Operations............................... 82
<CAPTION>
PAGE
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<S> <C>
Term..................................... 83
Exercises of Stock Options............... 83
Other.................................... 83
Federal Income Tax Considerations.......... 83
General.................................. 84
Federal Income Taxation of Boddie-Noell
Properties, Inc....................... 85
Requirements for Qualification........... 86
Organizational Requirements........... 86
Income Tests.......................... 87
Asset Tests........................... 89
Annual Distribution Requirements......... 90
Earnings and Profits..................... 91
Failure to Qualify....................... 92
Taxation of U.S. Shareholders............ 93
Distributions Generally............... 93
Capital Gain Distributions............ 93
Certain Dispositions of Shares........ 94
Passive Activity Loss and Investment
Interest Limitations................ 94
Treatment of Tax-Exempt
Shareholders........................ 94
Special Tax Considerations for Non-U.S.
Shareholders.......................... 95
Information Reporting Requirements and
Requirements and Backup Withholding
Tax................................... 97
Other Tax Considerations................. 97
General............................... 97
Tax Allocations With Respect to Our
Properties.......................... 98
BNP Management, Inc................... 99
Recent Legislation....................... 99
State and Local Tax...................... 100
Legal Proceedings.......................... 101
Underwriting............................... 101
Experts.................................... 103
Legal Opinions............................. 103
Available Information...................... 104
Incorporation of Certain Documents By
Reference................................ 104
Index to the Financial Statements.......... F-1
</TABLE>

PROSPECTUS SUMMARY
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This summary highlights some information from this prospectus. It may not
contain all of the information that is important to you. To understand this
offering fully, you should read the entire prospectus carefully, including the
risk factors and the financial statements.

BODDIE-NOELL PROPERTIES, INC.

Boddie-Noell Properties, Inc. is a self-administered and self-managed
REIT which owns and operates apartment communities in North Carolina and
Virginia. We own nine apartment communities containing 2,208 apartment units and
have the right to acquire three additional apartment communities, containing 476
apartment units, that are currently under construction. We also manage seven
other apartment communities, containing 1,713 apartment units, and two shopping
centers that are owned by other parties.

We manage these apartment communities and shopping centers through an
unconsolidated subsidiary, BNP Management, Inc. To avoid confusion with the
Company, whose initials are BNP, we refer to BNP Management, Inc. in this
prospectus as the Management Company.

We also own 47 Hardee's restaurant properties, which we lease to Boddie-
Noell Enterprises, Inc. Because the name of this company is similar to our own,
we refer to it simply as Enterprises throughout this prospectus.

OUR STRATEGY

Our goal is to provide our shareholders with current income and capital
appreciation by increasing funds from operations and funds available for
distribution on a per share basis. To accomplish these goals, we have refocused
our business on the acquisition, ownership and operation of apartment
communities. As a consequence, we may elect to sell our restaurant properties
and reinvest the proceeds in additional apartment communities. However, no sale
of the restaurants is pending, and management only intends to divest the
restaurants when we believe such a transaction will enhance shareholder value.

We intend to become a leading operator of mid- to high-end apartment
communities in Virginia and the Carolinas. Since 1993, we have been acquiring
apartment communities, and we now intend to accelerate the pace of our
acquisitions. The following table sets forth certain apartment operating data
for the periods indicated:

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1993 1994 1995 1996 1997
----- ----- ------ ------ -------------
<S> <C> <C> <C> <C> <C>
Apartment units owned at end of period......... 336 946 1,130 1,328 1,328
Average monthly rental per unit................ $576 $624 $657 $684 $692
Average economic occupancy..................... 94.4% 94.6% 95.3% 94.1% 95.5%
</TABLE>

<PAGE>
We recently signed an agreement with Paul and James Chrysson and certain
of their affiliates, all of whom together we refer to as the Chrysson Parties.
Under this acquisition agreement, we have acquired the first four of seven
apartment communities, all of which are located in North Carolina; we refer to
the acquisition of these Chrysson properties as the Chrysson acquisition, and we
refer to the acquisition of the first four properties as Phase I of the Chrysson
acquisition. When we acquire the remaining Chrysson properties, which are still
under construction, we will have doubled the number of apartment units we own.

Concurrent with Phase I of the Chrysson acquisition, we reorganized to an
UPREIT structure, a structure which many REITs currently use. UPREIT stands for
"Umbrella Partnership Real Estate Investment Trust." An UPREIT is a real estate
investment trust that controls and holds most of its properties through an
umbrella limited partnership. The umbrella limited partnership in our UPREIT is
Boddie-Noell Properties Limited Partnership.

Prior to the reorganization, most property owners who sold us properties
recognized gain on their sale. However, through our UPREIT structure we can
acquire properties in exchange for the limited partnership interests in
Boddie-Noell Properties Limited Partnership and trigger no immediate tax
obligations for certain sellers. We believe that our conversion to an UPREIT
will therefore enable us to acquire properties not otherwise available or at
lower prices because of the tax advantages to certain property sellers of
receiving limited partnership interests instead of cash as consideration.

An UPREIT's limited partnership interests are generally referred to as
"Units," and the limited partnership in an UPREIT is generally referred to as
the "Operating Partnership." In keeping with industry convention and to help
avoid confusion between Boddie-Noell Properties, Inc. and Boddie-Noell
Properties Limited Partnerhsip, we have adopted those terms for use in this
prospectus. Unless the context indicates otherwise, when we write about the
Company, we are including the Operating Partnership and the Management Company.

We intend to continue to grow primarily through the acquisition of
income-producing apartment communities located in secondary markets throughout
the southeastern United States. When evaluating potential acquisitions, our
primary consideration will be a property's ability to increase our current and
future ability to pay dividends. We will generally only acquire properties that
immediately increase our funds from operations and funds available for
distribution on a per share basis. We also may utilize our development expertise
to develop properties ourselves or invest in properties being developed by other
parties. Members of our management team have directed over $114 million of
development or redevelopment projects, including 13 apartment communities
containing over 2,500 apartment units.

We seek to enhance the value of our apartment communities through
superior property management. To do so, we strongly emphasize autonomy at the
property level and delegate significant property management responsibilities to
our on-site managers. We believe that they are in the best position to increase
rents, offer leasing incentives or alter our marketing strategy in order to
maintain high occupancy levels and rental rates. We also expect our on-site
managers to provide superior customer service to our residents and to achieve
consistently high levels of customer

<PAGE>
satisfaction. Our commitment to customer service is evidenced by our resident
service guarantees and on-site maintenance personnel who are available to our
residents 24 hours a day.

DIVIDENDS

We are currently paying a dividend of $0.31 per quarter, or $1.24 per
year. Historically, a portion of our dividend has been treated as a return of
capital for Federal income tax purposes and, therefore, has been excluded from
taxable income. In 1996, 43.7% of our dividend was treated as a return of
capital. We expect a portion of future distributions to continue to be treated
as a return of capital for tax purposes, although we cannot predict what portion
will be so treated.

THE OFFERING

<TABLE>
<S> <C>
Securities offered.................................... 2,500,000 shares of our common stock
Over-allotment option................................. Up to 375,000 shares; if the over-
allotment option is exercised in full by
the underwriters, the total public price,
underwriting discounts, and proceeds to
the Company will be $40,609,375,
$2,846,250 and $37,763,125, respectively.
Shares to be outstanding after the offering........... 5,630,775. This does not include an
aggregate of 950,032 shares of common
stock issuable upon redemption of
outstanding Operating Partnership Units.
This figure also assumes that the
underwriters do not exercise their
over-allotment option.
Use of Proceeds....................................... Repayment of debt.
RISK FACTORS.......................................... YOU SHOULD READ THE "RISK FACTORS"
SECTION, BEGINNING ON PAGE 11, AS WELL AS
THE OTHER CAUTIONARY STATEMENTS THROUGHOUT
THE ENTIRE PROSPECTUS, TO ENSURE YOU
UNDERSTAND THE RISKS ASSOCIATED WITH AN
INVESTMENT IN OUR STOCK.
</TABLE>

<PAGE>
SUMMARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------------------------------ -----------------------------
PRO PRO
HISTORICAL FORMA (3) HISTORICAL FORMA (3)
------------------------------------------- --------- ------------------ ---------
1992 1993 1994 1995 1996 1996 1996 1997 1997
------- ------- ------- ------- ------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PROPERTY DATA)
OPERATING DATA:
Revenue:
Apartment rental income..... $ -- $ 1,245 $ 3,889 $ 8,476 $ 9,791 $14,222 $ 7,209 $ 7,898 $ 11,128
Restaurant rental income.... 5,333 5,165 5,047 4,649 4,500 4,500 3,375 3,375 3,375
Equity and other income..... 40 16 322 600 217 225 160 336 348
------- ------- ------- ------- ------- --------- -------- -------- ---------
Total revenue................. 5,373 6,426 9,258 13,726 14,508 18,947 10,745 11,609 14,851
Expenses:
Depreciation and
amortization.............. 798 1,065 1,648 2,609 2,975 3,949 2,181 2,362 3,092
Other operating expenses.... 381 862 1,988 3,767 3,871 5,157 2,892 3,271 4,282
Interest expense............ 1,035 1,442 2,802 5,362 5,946 5,517 4,395 4,684 4,318

Minority interest in Operating
Partnership................. -- -- -- -- -- 405 -- -- 292
Net income before
extraordinary item.......... 3,159 2,455 2,302 1,628 1,716 3,919 1,278 1,292 2,867
Net income.................... $ 3,159 $ 2,455 $ 2,302 $ 1,628 $ 1,716 N/A $ 1,278 $ 1,292 N/A
------- ------- ------- ------- ------- --------- -------- -------- ---------
------- ------- ------- ------- ------- --------- -------- -------- ---------
Funds from operations (1)..... 3,943 4,029 4,291 4,450 4,472 8,176 3,295 3,391 6,079
Funds available for
distribution (1)............ 3,957 4,055 4,253 3,961 3,835 7,287 2,825 2,986 5,486

BALANCE SHEET DATA:
Real estate assets
Apartment communities....... $ -- $14,352 $54,724 $55,316 $66,610 -- $ 66,458 $ 67,141 $128,001
Restaurant properties....... 43,205 43,205 43,205 43,205 43,205 -- 43,205 43,205 43,205
Total assets.................. 40,465 54,643 95,954 94,352 103,436 -- 104,183 104,206 166,389
Total debt.................... 12,000 26,894 66,884 67,162 77,352 -- 77,471 78,397 92,912
Shareholders' equity.......... $28,331 $27,252 $27,968 $26,200 $24,902 -- $ 24,778 $ 23,950 $ 56,078

APARTMENT PROPERTY DATA:
Apartment communities
owned (2)................... -- 1 3 4 5 8 5 5 9
Apartment units owned (2)..... -- 336 946 1,130 1,328 1,848 1,328 1,328 2,208
Average apartment economic
occupancy................... -- 94.4% 94.6% 95.3% 94.1% -- 94.3% 95.5% --
Average monthly revenue/unit.. -- $576 $624 $657 $684 -- $684 $692 --
</TABLE>

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(1) Funds from operations is defined by the National Association of Real Estate
Investment Trusts as "net income (computed in accordance with generally
accepted accounting principles), excluding gains (losses) from debt
restructuring and sales of property, plus depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures." We
define funds available for distribution as funds from operations plus
non-cash expense for amortization of loan costs, less scheduled principal
payments on our debt and less recurring capital expenditures.

(2) At period end.

(3) Pro forma amounts on an as-converted basis, as if 571,000 Operating
Partnership Units had been issued for contribution of three stabilized
apartment communities.

RISK FACTORS
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BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE THAT THERE ARE
VARIOUS RISKS, INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD CONSIDER CAREFULLY
THESE RISK FACTORS TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS
PROSPECTUS BEFORE YOU DECIDE TO PURCHASE SHARES OF OUR COMMON STOCK.

SOME OF THE INFORMATION IN THIS PROSPECTUS MAY CONTAIN FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE,"
"CONTINUE" OR OTHER SIMILAR WORDS. THESE STATEMENTS DISCUSS FUTURE EXPECTATIONS,
CONTAIN PROJECTIONS OF RESULTS OF OPERATIONS OR OF FINANCIAL CONDITION OR STATE
OTHER "FORWARD-LOOKING" INFORMATION. WHEN CONSIDERING SUCH FORWARD-LOOKING
STATEMENTS, YOU SHOULD KEEP IN MIND THE RISK FACTORS AND OTHER CAUTIONARY
STATEMENTS IN THIS PROSPECTUS. THE RISK FACTORS NOTED IN THIS SECTION AND OTHER
FACTORS NOTED THROUGHOUT THIS PROSPECTUS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTAINED IN ANY FORWARD-LOOKING STATEMENT.

POSSIBLE INABILITY TO MEET AND MANAGE GROWTH OBJECTIVES

Our conversion to an UPREIT may allow us to grow more rapidly. Our
ability to successfully integrate a large number of new properties into our
portfolio depends upon our ability to:

(Bullet) identify, acquire and finance new properties;

(Bullet) effectively manage properties;

(Bullet) attract and retain quality personnel;

(Bullet) develop procedures and practices necessary to generate high
occupancy levels and rental rates; and

(Bullet) operate such new properties in a cost effective manner.

We can provide no assurances that we will be able to accomplish these
necessary prerequisites for the successful integration of any acquired
properties.

UNCERTAINTY WITH RESPECT TO RESTAURANT PROPERTIES

Since our inception in 1987, we have had a large portion of our assets
invested in 47 Hardee's restaurant properties that are leased to Enterprises.
Under the master lease for these properties, we are paid annual rent equal to
the greater of $4.5

<PAGE>
million or 9.875% of food sales. From 1987 through 1995, Enterprises paid us
more than $4.5 million per year. However, restaurant sales have declined each
year since 1992 when our restaurant related revenues peaked at $5.3 million.
Accordingly, the revenue we have received from them has declined since that time
as well. In 1996, the revenues of those Hardee's restaurants fell below the
level requiring payments in excess of the minimum.

In order to protect our shareholders from these declining revenues, in
1993 we began to acquire apartment communities. We believe that we can more
effectively enhance the value of our common stock by acquiring and operating
apartment communities. Accordingly, we have decided to focus our business
primarily on the ownership and operation of apartment communities.

As a consequence of this refocused strategy, we may elect to sell our
restaurant properties and reinvest the proceeds in additional apartment
communities. No sale of the restaurants is pending, and we will only divest the
restaurants if we believe doing so will enhance shareholder value.

If we do dispose of the restaurant properties, it is possible that we may
incur a loss on the disposition of the properties. It is also possible that we
may invest such sale proceeds in properties that yield significantly less than
the $4.5 million we received from Enterprises in 1996.

Further, in the event we were to find a buyer, Enterprises has the right
to purchase the restaurants from us on the same terms as that offer. This right
may make it more difficult to find a suitable buyer or could adversely affect
the price we might realize on any such sale.

For 1996, the restaurant properties accounted for 31.0% of our total
revenues and 42.3% of net operating income on a historical basis. All of the
restaurant property revenue comes from Enterprises. The inability of Enterprises
to pay us rent would adversely affect funds from operations and funds available
for distribution. Until we are able to significantly increase our apartment
portfolio or dispose of the restaurant properties, they will continue to account
for a sizeable portion of our revenues. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Capital Resources
and Liquidity -- SHORT- AND LONG-TERM LIQUIDITY REQUIREMENTS" on page 52.

REAL ESTATE INVESTMENT RISKS

GENERAL RISKS

Our ability to make distributions to you depends on our ability to
generate funds from operations in excess of scheduled principal payments on debt
and capital expenditure requirements. Funds from operations and the value of our
properties may be adversely affected by events or conditions which are beyond
our control. Such events or conditions could include:

<PAGE>
(Bullet) competition from other apartment communities and alternative
housing due in part to low interest rates, both nationally and
in our principal markets, which may make home purchasing an
attractive alternative to renting;

(Bullet) new construction of comparable properties which might adversely
affect apartment occupancy or rental rates;

(Bullet) increases in operating costs (including real estate taxes) due
to inflation and other factors, which may not necessarily be
offset by increased rents;

(Bullet) the inability to rent properties on favorable economic terms;

(Bullet) changes in governmental regulations and the related costs of
compliance;

(Bullet) changes in tax laws and housing laws including the enactment of
rent control laws or other laws regulating multifamily housing;

(Bullet) changes in interest rate levels and the availability of
financing; and

(Bullet) the relative illiquidity of real estate investments.

LACK OF GEOGRAPHIC DIVERSIFICATION

All of our properties are located in Virginia and North Carolina. Adverse
economic developments in these states could adversely impact the operations of
our properties and therefore our profitability. The concentration of properties
in a limited number of markets may expose us to risks of adverse economic
developments which are greater than the risks of owning properties in more
markets.

FINANCING RISKS

RISKS ASSOCIATED WITH DEBT FINANCING

At the conclusion of this offering, we will have a significant level of
debt. Payments of principal and interest on borrowings may leave us with
insufficient cash resources to operate the apartment communities or pay
distributions required to be paid in order for us to maintain our qualification
as a REIT.

Further, a high debt level creates an increased risk that we may default
on our obligations. If we default, the banks who lent us funds could foreclose
on the properties securing their loans. As we discuss on page 32 in the "Use of
Proceeds" section, we plan to use the net proceeds of this offering to reduce
our debt. As the pro forma balance sheet appearing on page F-21 indicates, had
this offering and Phase I of the Chrysson acquisition occurred on September 30,
1997, our debt-to-total market capitalization ratio (I.E., debt divided by the
sum of debt and the market value of our outstanding Units and shares of common
stock) would have been 50.0%. While not required by our Articles of
Incorporation or bylaws, we intend to keep our

<PAGE>
debt-to-total market capitalization ratio below 60% following the offering,
although circumstances may cause us to exceed that target from time to time.

VARIABLE INTEREST RATES

At September 30, 1997, $18.4 million of our debt bore interest at a
variable rate. We expect to repay approximately $1.4 million of this amount with
the net proceeds from this offering. In addition, we may incur additional debt
in the future that also bears interest at variable rates. Variable-rate debt
creates higher debt service requirements if market interest rates increase,
which would adversely affect our cash flow and the amounts available to pay
dividends.

POSSIBLE INABILITY TO REFINANCE DEBT

We may obtain financing with "due-on-encumbrance" or "due-on-sale"
clauses in which future refinancing or sale of properties could cause the
maturity dates of the mortgages to accelerate and the financing to become due
immediately. Thus, we could be required to sell properties on an all-cash basis,
or the purchaser might be required to obtain new financing in connection with a
sale. Alternatively or additionally, we may obtain mortgages that have balloon
payments. Such mortgages involve greater risks than mortgages with principal
amounts amortized over the term of the loan since our ability to repay the
outstanding principal amount at maturity may depend on obtaining adequate
refinancing or selling the property. The efficacy of either option would depend
on economic conditions in general and the value of the underlying properties in
particular. We cannot guarantee that we could refinance or repay any such
mortgages at maturity. Further, a significant decline in the value of the
underlying property could result in a loss of the property through foreclosure.

REGULATORY MATTERS

ENVIRONMENTAL MATTERS

Various Federal, state and local laws subject property owners or
operators to liability for the costs of removal or remediation of certain
hazardous substances released on a property. Such laws often impose liability
without regard to whether the owner or operator knew of, or was responsible for,
the release of the hazardous substances. The presence of, or the failure to
properly remediate, hazardous substances may adversely affect occupancy of any
contaminated apartment communities, the ability of Enterprises to operate
restaurants, and our ability to sell or borrow against contaminated properties.
In addition to the costs associated with investigation and remediation actions
brought by governmental agencies, the presence of hazardous wastes on a property
could result in personal injury or similar claims by private plaintiffs.

<PAGE>
Various laws also impose, on persons who arrange for the disposal or
treatment of hazardous or toxic substances, liability for the cost of removal or
remediation of hazardous substances at the disposal or treatment facility. These
laws often impose liability whether or not the person arranging for the disposal
ever owned or operated the disposal facility.

Enterprises has agreed to pay for the costs of complying with applicable
environmental laws, ordinances and regulations on the restaurant properties.
However, the obligation to pay for such costs with respect to our other
properties, or Enterprises' inability to pay for such costs on the restaurant
properties, may adversely affect our operating costs and the value of our
properties.

Phase I environmental site assessments have been obtained on all of our
owned apartment communities. The purpose of Phase I environmental site
assessments is to identify potential sources of contamination for which a
company may be responsible and to assess the status of environmental regulatory
compliance. All of the restaurant properties were subjected to transaction
screens in December 1995. A transaction screen involves a review of a property
for the purpose of recommending whether we should perform a Phase I
environmental site assessment. A transaction screen is significantly less
thorough in scope than a Phase I environmental site assessment.

Neither the transaction screens nor the environmental site assessments
revealed any environmental condition, liability or compliance concern that we
believe would have a material adverse affect on our business, assets or results
of operations. Nor are we aware of any such condition, liability or concern by
any other means. However, it is possible that the transaction screens and the
environmental site assessments relating to any one of the properties did not
reveal all environmental conditions, liabilities or compliance concerns. It is
also possible that there are material environmental conditions, liabilities or
compliance concerns that arose at a property after the related review was
completed.

AMERICANS WITH DISABILITIES ACT COMPLIANCE

Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations and commercial facilities must meet certain Federal requirements
related to access and use by disabled persons. Compliance with the ADA
requirements could require removal of access barriers, and non-compliance could
result in the U.S. government imposing fines or private litigants winning
damages. We believe that our properties are substantially in compliance with
these requirements. Further, under the terms of the master lease agreement with
Enterprises, Enterprises is financially responsible for upgrading the restaurant
properties should such properties not be in compliance with the ADA. However, in
the event Enterprises fails to properly upgrade the restaurants and there is a
determination that the restaurant properties are not in compliance with the ADA,
we could still face the imposition of fines or an award of damages to private
litigants. If we were required to make

<PAGE>
unanticipated expenditures to comply with the ADA, our cash flow and the amounts
available for distributions to you may be adversely affected.

CONFLICTS OF INTEREST

We have been, and continue to be, involved in various transactions with a
number of our affiliates, including executive officers, directors, major
shareholders and entities sharing common ownership with us. We describe such
relationships and transactions beginning on page 69 under the heading "Certain
Relationships and Related Transactions."

ENTERPRISES' OPTION TO CLOSE POORLY PERFORMING RESTAURANTS

Under certain agreements with Enterprises and the bank holding the
mortgage on the restaurant properties, Enterprises has the option to close
restaurants that are performing poorly, as defined in such agreements.

Under the master lease, Enterprises has the option to close a poorly
performing location by offering us a choice of three of its own restaurants that
meet certain performance criteria as a substitute for the restaurant Enterprises
wishes to close. In our sole discretion, we may accept or reject any one of the
three alternatives they propose. If we reject all three, at our option, we may
(i) keep the property and cancel the portion of the master lease relating to
that property or (ii) sell the property to Enterprises for $920,000. Beginning
on January 1, 2008, Enterprises may close up to five poorly performing locations
per year. We will have the option to keep the property and cancel the portion of
the master lease relating to that property or sell the property to Enterprises
for cash equal in amount to the property's net book value (I.E., our original
cost of $920,000 less the depreciation we have recorded since 1987).

Under the terms of a tri-party agreement among the Company, Enterprises
and the bank holding the mortgage on the restaurant properties, beginning on
January 1, 1998, Enterprises can close up to seven poorly performing locations
(but no more than five in any year) under the same terms and conditions
available to Enterprises beginning on January 1, 2008 under the master lease. If
the mortgage is canceled, the tri-party agreement terminates, and Enterprises
can only close restaurants in accordance with the provisions of the master
lease.

We cannot predict whether Enterprises will exercise its option to close
restaurants in accordance with the master lease and the tri-party agreement, and
we cannot accurately predict what impact such closures would have on our
financial condition or results of operations.

<PAGE>
TAX RISKS

CONSEQUENCES OF THE FAILURE TO QUALIFY AS A REIT

We believe that we operate in a manner that enables us to meet the
requirements for qualification as a REIT for Federal income tax purposes. We
have not requested, and do not plan to request, a ruling from the Internal
Revenue Service that we qualify as a REIT. We have, however, received an opinion
from the law firm of Alston & Bird LLP that we met the requirements for
qualification as a REIT for the taxable years ended December 31, 1987 through
1996, and that we are in a position to continue such qualification.

You should be aware that opinions of counsel are not binding on the IRS
or any court. Furthermore, the conclusions stated in the opinion are conditioned
on, and our continued qualification as a REIT will depend on, our meeting
various requirements. Such requirements are discussed in more detail under the
heading "Federal Income Tax Considerations -- Requirements for Qualification"
beginning on page 86.

If we fail to qualify as a REIT, we would not be allowed a deduction for
distributions to shareholders in computing our taxable income and would be
subject to Federal income tax at regular corporate rates. We also could be
subject to the Federal alternative minimum tax. Unless we are entitled to relief
under specific statutory provisions, we could not elect to be taxed as a REIT
for four taxable years following the year during which we were disqualified.
Therefore, if we lose our REIT status, the funds available for distribution to
you would be reduced substantially for each of the years involved. See "Federal
Income Tax Considerations -- Failure to Qualify," on page 92.

EFFECT OF DISTRIBUTION REQUIREMENTS

As a REIT, we are subject to annual distribution requirements, which
limit the amount of cash we have available for other business purposes,
including amounts to fund our growth. See "Federal Income Tax
Considerations -- Annual Distribution Requirements" on page 90.

OTHER TAX LIABILITIES

Even if we qualify as a REIT, we and our subsidiaries may be subject to
certain Federal, state, and local taxes on our income and property that could
reduce operating cash flow.

<PAGE>
POSSIBLE ADVERSE CONSEQUENCES OF LIMITS ON OWNERSHIP OF SHARES

Our Articles of Incorporation limit ownership of our capital stock by any
single shareholder to 9.8% of the outstanding shares. The Articles also prohibit
anyone from buying shares if the purchase would result in us losing our REIT
status. This could happen if a share transaction results in fewer than 100
persons owning all of our shares or in five or fewer persons, applying certain
broad attribution rules of the Internal Revenue Code, owning 50% or more of our
shares. If you or anyone else acquires shares in excess of the ownership limit
or in violation of the ownership requirements of the Internal Revenue Code for
REITs, we:

(Bullet) will consider the transfer to be null and void;

(Bullet) will not reflect the transaction on our books;

(Bullet) may institute legal action to enjoin the transaction;

(Bullet) will not pay dividends or other distributions with respect to
those shares;

(Bullet) will not recognize any voting rights for those shares;

(Bullet) will consider the shares held in trust for the benefit of the
Company; and

(Bullet) will either direct the affected person to sell the shares and
turn over any profit to us, or we will redeem the shares. If we
redeem the shares, it will be at a price equal to the lesser
of:

(a) the price paid by the transferee of the shares or

(b) the average of the last reported sales prices on the American
Stock Exchange on the ten trading days immediately preceding
the date fixed for redemption by our Board of Directors.

An individual who acquires shares that violate the above rules bears the risk
that (i) he may lose control over the power to dispose of the shares, (ii) he
may not recognize profit from the sale of such shares if the market price of the
shares increases and (iii) he may be required to recognize a loss from the sale
of such shares if the market price decreases.

LIMITATIONS ON ACQUISITION AND CHANGE IN CONTROL

OWNERSHIP LIMIT

The 9.8% ownership limit discussed above may have the effect of
precluding acquisition of control of us by a third party without the consent of
our Board of Directors. See "Description of Capital Stock -- Ownership
Limitations and Restrictions on Transfer" on page 76.

<PAGE>
REQUIRED CONSENT OF THE OPERATING PARTNERSHIP FOR SIGNIFICANT CORPORATE ACTION

A provision in the Operating Partnership agreement prohibits us from
engaging in certain transactions which could result in a change of control
without the approval of the holders of a majority of the outstanding Units,
including Units that we own. While we expect that we will always hold a majority
of the outstanding Units, we cannot guarantee that this will be the case. If we
ever own less than a majority of the outstanding Units, this voting requirement
might limit the possibility for an acquisition or change in control of the
Company, even if such acquisition or change in control would be in your (the
shareholders') best interests. At the closing of this offering, we will own
approximately 85.6% of the Operating Partnership Units, and following completion
of the acquisition of the remaining Chrysson properties, we will own
approximately 76.9% of the Operating Partnership Units.

OPERATING PARTNERSHIP AGREEMENT

The Operating Partnership agreement contains provisions relating to
limited partners' redemption rights in the event of certain changes of control
of the Company. These provisions require an acquiror to maintain the Operating
Partnership structure and to maintain a limited partner's right to continue to
hold Units with future redemption rights. Such provision could have the effect
of discouraging a third party from making an acquisition proposal, even if such
proposal were in our shareholders' best interests.

PREFERRED STOCK

Our Articles of Incorporation authorize our Board of Directors to issue
up to 10.0 million shares of preferred stock. The Board of Directors may
establish the preferences and rights of any preferred shares issued. The
issuance of preferred stock could have the effect of delaying or preventing
someone from taking control of us, even if a change in control were in our
shareholders' best interests. As of the date of this offering, we have not yet
issued any preferred stock. See "Description of Capital Stock -- Preferred
Stock" on page 76.

MARYLAND BUSINESS COMBINATION STATUTE

The Maryland General Corporation Law establishes special requirements for
"business combinations" between a Maryland corporation and "interested
shareholders" unless exemptions are applicable. An interested shareholder is any
person who beneficially owns ten percent or more of the voting power of our
then-outstanding voting stock. Among other things, the law prohibits for a
period of five years a merger and other similar transactions between us and an
interested shareholder unless the Board approved the transaction prior to the
party becoming an interested shareholder. The five year period runs from the
most recent date on which the interested shareholder became an interested
shareholder. The law also requires a

<PAGE>
supermajority shareholder vote for such transactions after the end of the five
year period. This means that the transaction must be approved by at least:

(Bullet) 80% of the votes entitled to be cast by holders of outstanding
voting shares and

(Bullet) 66% of the votes entitled to be cast by holders of outstanding
voting shares other than shares held by the interested
shareholder with whom the business combination is to be
effected.

The business combination statute could have the effect of discouraging
offers to acquire us and of increasing the difficulty of consummating any such
offers, even if our acquisition would be in our shareholders' best interests.

MARYLAND CONTROL SHARE ACQUISITION STATUTE

Maryland law provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a shareholder vote. Two-thirds of the shares eligible to vote
must vote in favor of granting the "control shares" voting rights. "Control
shares" are shares of stock that, taken together with all other shares of stock
the acquiror previously acquired, would entitle the acquiror to exercise at
least 20% of the voting power in electing directors. Control shares do not
include shares of stock the acquiring person is entitled to vote as a result of
having previously obtained shareholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.

If a person who has made (or proposes to make) a control share
acquisition satisfies certain conditions (including agreeing to pay expenses),
he may compel the Board of Directors to call a special meeting of shareholders
to be held within 50 days to consider the voting rights of the shares. If such a
person makes no request for a meeting, we have the option to present the
question at any shareholders' meeting.

If voting rights are not approved at a meeting of shareholders, then we
may redeem any or all of the control shares (except those for which voting
rights have previously been approved) for fair value. We will determine the fair
value of the shares, without regard to voting rights, as of the date of either:

(Bullet) the last control share acquisition or

(Bullet) any meeting where shareholders considered and did not approve
voting rights of the control shares.

If voting rights for control shares are approved at a shareholders'
meeting and the acquiror becomes entitled to vote a majority of the shares of
stock entitled to vote, all other shareholders may exercise appraisal rights.
This means that you would be able to redeem your stock back to us for fair
value. Under Maryland law, the fair value may not be less than the highest price
per share paid in the control share

<PAGE>
acquisition. Furthermore, certain limitations otherwise applicable to the
exercise of dissenters' rights would not apply in the context of a control share
acquisition.

The control share acquisition statute would not apply to shares acquired
in a merger, consolidation or share exchange if we were a party to the
transaction.

The control share acquisition statute could have the effect of
discouraging offers to acquire us and of increasing the difficulty of
consummating any such offers, even if our acquisition would be in our
shareholders' best interests.

DEPENDENCE ON KEY PERSONNEL

We are dependent on the efforts of our executive officers, particularly
Mr. Wilkerson, Mr. Payne and Ms. Novak. While we believe that we could find
replacements for these key personnel, if necessary, the loss of their services
could have an adverse effect on our operations. Messrs. Wilkerson and Payne and
Ms. Novak have entered into employment contracts with us. We tell you more about
these employment contracts under the heading "Certain Relationships and Related
Transactions -- Transactions with Management -- EMPLOYMENT CONTRACTS AND
TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS" appearing on page
73.

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HISTORY AND FORMATION OF THE COMPANY
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EARLY HISTORY

In 1987 we purchased 47 existing Hardee's restaurant properties from BNE
Realty Partners, Limited Partnership, an affiliate of Enterprises, for an
aggregate purchase price of $43.2 million. From 1987 through 1992, our
investment strategy was limited to the ownership of these 47 restaurant
properties leased to Enterprises, a Hardee's franchisee. During this period we
operated as an externally administered and externally managed REIT, with an
affiliate of Enterprises performing all management and administrative functions
under an advisory contract. We leased the restaurants to Enterprises under a
master lease on a triple-net basis. A master lease is a single lease that covers
multiple properties, while a triple-net lease is one where the lessee pays all
operating expenses, maintenance, property insurance and real estate taxes. In
order to provide for growth in funds from operations and enhance shareholder
value, we began in 1993 to diversify our investments into apartment communities
by first purchasing the 336-unit Paces Commons in June 1993 followed by the
162-unit Oakbrook in June 1994. Both of these apartment communities are located
in Charlotte, North Carolina.

<PAGE>
ACQUISITION OF BT VENTURE CORPORATION

We continued our diversification with our acquisition in October 1994 of
BT Venture Corporation, an integrated real estate management, development and
acquisition company, which we acquired from two of our affiliates, B. Mayo
Boddie and Nicholas B. Boddie. With this acquisition, we became a
self-administered and self-managed REIT. BT Venture Corporation owned the
448-unit Latitudes in Virginia Beach, Virginia and managed 12 apartment
communities (including Latitudes and the two that we owned) and three retail
shopping centers. See also "Certain Relationships and Related
Transactions -- Boddie-Noell Properties and B. Mayo Boddie and Nicholas B.
Boddie" on page 69. After the acquisition of BT Venture Corporation, we also
acquired the 184-unit Harris Hill in Charlotte in December 1994.

FORMATION OF BNP MANAGEMENT, INC.

In May 1995, we reorganized our third-party management operations to
better enable us to comply with certain provisions of the Internal Revenue Code
that limit the amount of revenues that a REIT can earn from third-party property
management contracts. In the reorganization we transferred all of our
third-party management contracts, which we assumed when we acquired BT Venture
Corporation, to our newly formed management company, BNP Management, Inc. an
unconsolidated taxable subsidiary of the Company. In exchange we received a 95%
economic interest in the Management Company (represented by 100% of the
non-voting equity and one percent of the voting equity of the Management
Company). Officers of the Management Company, who are also officers of the
Company or its affiliates, own the remaining equity interests. Rules regarding
the ownership of assets by REITs keep the Company (in this case we are referring
to the REIT only, as opposed to the REIT, the Operating Partnership and the
Management Company) from owning stock or securities of corporations in certain
ways. These rules could adversely affect the Company, causing it to fail to be a
REIT. See "Federal Income Tax Considerations -- Requirements for
Qualification -- ASSET TESTS" on page 89 and " -- Other Tax
Considerations -- BNP MANAGEMENT, INC." on page 99.

The Management Company employs the on-site personnel at each of our
managed properties and pays all the related expenses of operating the managed
properties. The property owners generally pay a management fee of five percent
of a property's gross revenues and reimburse the Management Company for all
operating expenses, including the salaries and benefits of employees performing
work on behalf of such properties.

RENEGOTIATION OF MASTER LEASE

We renegotiated and amended the lease agreement with Enterprises in
December 1995. It now has a primary term expiring in December 2007 but grants
Enterprises three five-year renewal options. Under the amended lease,
Enterprises pays annual rent equal to the greater of $4.5 million or 9.875% of
food sales from the restaurants.

<PAGE>
OTHER ACTIVITY

Following the acquisition of Harris Hill, we continued to seek attractive
acquisition opportunities, and, in April 1996, we purchased Paces Village, a
198-unit apartment community located in Greensboro, North Carolina.

On February 27, 1997, we entered into a participating loan agreement with
The Villages of Chapel Hill Limited Partnership, whose primary asset is The
Villages of Chapel Hill, a 264-unit apartment community in Chapel Hill, North
Carolina. The Villages of Chapel Hill Limited Partnership is a North Carolina
limited partnership managed by the Management Company. The general partner of
this limited partnership is Boddie Investment Company, which is one of our
affiliates. We describe this transaction in greater detail under the heading
"Certain Relationships and Related Transactions -- Boddie-Noell Properties and
Boddie Investment Company" on page 71.

CONVERSION TO UPREIT

As previously noted, we recently converted to an UPREIT structure where
the Company is the Operating Partnership's sole general partner. We contributed
our presently owned properties, our interest in the Management Company and all
other assets and liabilities to a limited liability company wholly owned by the
Operating Partnership. In exchange, we received a number of Units equal to the
number of then outstanding shares of our common stock. We currently own a
majority of the Units. With the exception of the general partner (us),
Unitholders will generally be able to redeem their Units for cash or, at our
option as general partner, for shares of common stock of the Company on a
one-for-one basis. UPREITs are structured so that distributions of cash from the
Operating Partnership are allocated between the REIT (I.E., the Company) and the
other limited partners based upon their respective Unit ownership. The Operating
Partnership was organized as a Delaware limited partnership on September 18,
1997.

CHRYSSON ACQUISITION

On September 22 of this year, we signed an agreement to acquire a
portfolio of seven apartment communities containing 1,356 apartment units
located in North Carolina. All of these properties were owned by the Chrysson
Parties, developers of mid- to high-end apartment communities based in
Winston-Salem, North Carolina.

Under the terms of the Chrysson acquisition agreement, we will issue up
to 1.7 million Units in the Operating Partnership. Phase I of the Chrysson
acquisition closed on December 1, 1997. Of the approximately 1.2 million Units
attributable to Phase I of the acquisition, 950,032 Units have already been
issued, 100,000 Units will be issued on December 1, 1998, and 100,000 Units will
be issued on December 1, 1999. We will issue the remaining Units upon the
acquisition of each of the remaining three apartment communities. The Chrysson
properties are currently encumbered by approximately $70.3 million of debt. We
intend to refinance this debt

<PAGE>
as we acquire each of the Chrysson properties. We expect the acquisition to be
immediately accretive to our funds from operations and funds available for
distribution per share.

Phase I of the acquisition consisted of 880 apartment units in four
apartment communities. The Chrysson Parties are still developing the other three
apartment communities containing 476 apartment units. We will acquire them for
Units only when they are completed and achieve predetermined occupancy and
rental levels. The number of Units we will issue is based on those predetermined
measures, which are specified for each property in the acquisition agreement.
All have estimated completion dates within the next 12 months.

Additionally, under the terms of the acquisition agreement, we will have
a right of first refusal to purchase any project developed in the future by the
development entity owned by the Chrysson Parties. Any such acquisition must be
approved, however, by a majority of the directors who are disinterested with
respect to the proposed transaction. As a further condition of the acquisition
agreement, the Chrysson Parties have agreed to refrain from developing any
apartment communities within a three mile radius of any apartment community we
own now or in the future.

THE COMPANY
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CURRENT OPERATIONS

Boddie-Noell Properties, Inc. is a corporation organized under the laws
of the State of Maryland. It was incorporated on April 1, 1987 under the laws of
Delaware, and it was reincorporated in Maryland on July 31, 1997.

We currently operate as a self-administered and self-managed REIT in
accordance with the provisions of Sections 856 through 860 of the Internal
Revenue Code. Qualifying as a real estate investment trust for federal income
tax purposes means that we substantially eliminate the federal "double taxation"
that usually results from investment in a corporation. The impact of failing to
qualify as a REIT is discussed in the "Risk Factors -- Tax Risks -- Consequences
of the Failure to Qualify as a REIT" section beginning on page 17. See also,
"Federal Income Tax Considerations" beginning on page 83.

We currently own nine apartment communities in Charlotte, Greensboro and
Winston-Salem, North Carolina and Virginia Beach, Virginia, containing a total
of 2,208 apartment units. Upon completion of our acquisition of all of the
Chrysson properties (discussed under "History and Formation of
Company -- Chrysson Acquisition" on page 23), we will also own an additional
three apartment communities with 476 apartment units in Greensboro,
Winston-Salem and Burlington, North Carolina. Our apartments' rental rates are
in the moderate to moderately high

<PAGE>
range for apartments available within these markets. Despite a substantial
amount of new construction, especially in Charlotte and Greensboro, apartment
occupancies and rental rates in these markets have remained relatively strong.
This strength is primarily attributable to demand for apartments created by
continued population and job growth. See "Our Properties -- Market Information"
on page 54.

We own 95% of the economic interest of the Management Company. As we
noted under "History and Formation of the Company -- Formation of BNP
Management, Inc." on page 22, we do not consolidate the Management Company for
financial statement purposes. The Management Company manages an additional seven
apartment communities containing a total of 1,713 apartment units and two
shopping centers containing a total of 113,800 square feet. All of the managed
properties are located in North Carolina and Virginia.

We also own the 47 restaurant properties which we lease to Enterprises
under a triple-net master lease. In addition to all operating expenses,
Enterprises is responsible for the cost of any improvement, expansion,
remodeling or replacement required to keep the properties competitive or in
conformity with Hardee's Food Systems, Inc.'s building standards. The decision
to modify a particular restaurant property is based on a number of factors,
including the date of its last modification and the number, age and design
features of competing restaurants located in the market area of the particular
property. Enterprises is required to make any renovations at its own expense.

We employ approximately 110 persons, including management, accounting,
legal, acquisitions, development, property management, leasing, maintenance and
administrative personnel.

PRINCIPAL INVESTMENT OBJECTIVES

Our principal investment objectives are to provide our shareholders with
current income and to increase the value of the Company's shares of common
stock. To accomplish these goals, we will focus on increasing long-term growth
in funds from operations and funds available for distribution per share and on
increasing the value of our portfolio through effective management, growth,
financing and investment strategies. We expect to implement our strategies
primarily through the acquisition, operation, leasing and management of
apartment communities.

OPERATING PHILOSOPHY

We have developed an operating philosophy to assist us in achieving our
goals. We focus on identifying our market (both geographic and consumer), on
effectively managing our properties, on offering the highest possible level of
customer service to our residents and on streamlining our management structure.
This philosophy defines how we position ourselves in the apartment rental
market.

<PAGE>
MARKET FOCUS

We seek to acquire properties in areas within the southeastern United
States exhibiting substantial economic growth and a rapidly expanding job base
in which we can establish a significant market presence in the apartment
community marketplace. We believe apartment communities in these markets offer
attractive long-term investment returns. We also believe there are attractive
opportunities both within and beyond the markets in which we currently operate.

Our residents are typically high-end "residents by
necessity" -- individuals or families with moderate to high levels of income
that live in apartments by necessity. They typically include retirees, young
professionals, manager-level white collar workers, medical personnel, teachers,
members of the military and young families. This category of "residents by
necessity" includes older residents who choose not to live in an assisted living
facility and younger residents who cannot afford to move into a house until they
accumulate enough money for a down payment. These residents generally prefer,
and our apartment units typically offer:

(Bullet) good locations relative to shopping, job corridors and health
care providers;

(Bullet) modern and well-maintained amenities;

(Bullet) a sense of community;

(Bullet) a number of external amenities (such as a clubhouse, tennis
courts, a swimming pool and well-maintained lawns);

(Bullet) reasonable prices in relation to similar apartment communities
in the same geographical area; and

(Bullet) a high square footage to cost ratio.

INTENSIVE MANAGEMENT FOCUS

We strongly emphasize on-site property management. We seek opportunities
to increase rents, reduce resident turnover, raise average occupancy rates and
control costs. On-site community managers have responsibility for monitoring
market trends and, together with our regional property managers, have the
discretion to react to such trends.

DEDICATION TO CUSTOMER SERVICE

Our experience is that maintaining a consistently high level of customer
satisfaction leads to greater demand for our apartment units, higher occupancy
and rental rates, reduced turnover and increased long-term profitability.
Accordingly, we strive to attain the highest levels of customer service by
properly training our

<PAGE>
personnel, personalizing relations with our residents and quickly responding to
residents' requests.

FLAT OPERATIONAL STRUCTURE

Each apartment community is operated by an on-site community manager
assisted by staff trained in marketing, management, accounting, maintenance and
other procedures. On-site community managers report directly to regional
property managers who are based at one of the locations for which they have
responsibility but who regularly visit each of the apartment communities in
their region. Our property managers have overall operating responsibility for
their specific communities. We believe that our "flat" operating structure
allows us to:

(Bullet) capitalize on the benefits of a decentralized structure (I.E.,
specific market knowledge and increased personal
accountability);

(Bullet) efficiently staff our operations;

(Bullet) achieve a cohesive corporate culture; and

(Bullet) reduce costs through operating efficiencies and economies of
scale inherent in the management of a large portfolio of
properties in a limited geographic region.

OUR GROWTH STRATEGY

We seek to increase earnings, funds from operations and funds available
for distribution per share to maximize shareholder value through a balanced
strategy of internal and external growth.

INTERNAL GROWTH STRATEGY

Our goal is to maximize our return on investment in each apartment
community by maximizing rental revenues through careful attention to both rental
rates and occupancy levels while reducing or controlling operating expenses. We
(i) seek higher net rental revenues by physically enhancing and maintaining the
competitiveness of our communities and (ii) manage expenses through our system
of detailed management reporting and accountability in order to achieve
increases in operating cash flow. We have adopted several programs and policies
to achieve these ends.

In an attempt to achieve the optimal balance between rental rates and
occupancy, we have authorized our community managers, acting in concert with our
regional property managers, to adjust rents in response to local market
conditions and to concentrate resident turnover in peak rental demand months.
The community

<PAGE>
managers are also responsible for developing and implementing marketing plans
for their communities.

We have also invested heavily in training programs for our property-level
personnel. We believe that a comprehensive program for the continued training of
all employees, a commitment to "promoting from within" and the development of
professional, long-term career paths for our employees enhance the performance
of our personnel and reduce employee turnover. Our "corporate office" personnel
also spend time at our communities because we believe doing so fosters a sense
of cohesiveness and a uniform corporate culture and provides valuable
information and experience for employees throughout our organization.

We compensate all on-site employees in part through performance-based
compensation programs. These include monthly bonuses based on resident renewals
and quarterly bonuses tied to both net operating income for the employee's
respective community(ies) and our overall performance. Our senior management is
eligible for discretionary bonuses and incentive stock options as determined by
the Board of Directors.

Our on-site personnel are charged with the task of making residents
comfortable in their communities through personal attention, which includes
organizing social functions and activities as well as responding promptly to any
resident problems that may arise in conjunction with an apartment unit or the
community. We believe social functions foster a sense of community by
encouraging residents to meet one another and that this sense of community helps
reduce turnover (discussed below) and increases the effectiveness of community
watch programs.

We also try to enhance the living experience in our communities by
guaranteeing that we will respond to maintenance calls within 24 hours. If we do
not respond within that time frame, we will rebate rent for that day. We believe
this puts our on-site personnel in a customer-service frame of mind. We also
conduct frequent resident surveys in order to measure customer satisfaction, and
we use residents' responses to form our annual plans for each community,
evaluate personnel and measure property performance.

For the first several years we operated apartment communities, we
experienced approximately a two-thirds turnover rate, which we believe is about
average in our markets. The turnover rate is the rate at which residents move
out of apartment units during the year. For example, if we had 100 apartment
units and the residents of 75 of them moved out during the year, then we would
have a 75% turnover rate. If we had 100 apartment units and the residents of 50
of them moved out, and then, in the same year, 25 of the new residents also
moved out, we would still have a 75% turnover rate even though there was
activity only in 50% of the apartment units.

When a resident leaves, we incur two major costs. First, we must clean,
paint and sometimes replace carpeting or appliances to prepare the apartment
unit for a new resident. Second, until a new resident moves in, the apartment
unit is vacant, and we

<PAGE>
will not collect rent. We estimate that each apartment unit that turns over
costs us the equivalent of five weeks' rent.

In partial response to this turnover issue, we initiated the
above-described monthly bonus program based on resident renewals. We are also
reducing turnover rates by offering longer term leases. We were one of the first
companies in our industry to offer 24 month leases on apartment units. As of
September 30, 1997, over one-third of our apartment units were leased for 13 or
more months. Further, to induce residents to remain in our communities, we offer
them incentives to renew their leases. We provide them with a list of options,
and they can select the options they would like, with the number of options they
can select based on the length of their renewal. For example, if a resident
renews for a six month term, he may choose one free upgrade, such as a free
carpet cleaning, paint touch-up or shelving. A 24 month renewal provides the
resident with two options from a more extensive list that includes a porcelain
bath sink with a designer fixture, a wallpaper change or a decorative border. In
addition to helping to reduce turnover, these upgrades enhance the value of our
properties. Through programs such as these, as well as our commitment to
customer service and our attempt to foster a sense of community, we believe we
have begun to reduce turnover and its associated costs.

In an effort to reduce long-term operating costs, we annually review each
apartment community and promptly attend to maintenance and recurring capital
needs. In addition, we conduct a periodic program of preventive maintenance in
each apartment unit, whereby our personnel inspect, clean, service or repair
appliances, heating and cooling systems, smoke alarms and apartment interiors on
a regularly scheduled basis. Our Senior Service Supervisor oversees all aspects
of our maintenance procedures and is responsible for the implementation of all
capital projects, training of new service personnel, troubleshooting and
monitoring our preventive maintenance programs and personnel. We anticipate we
will spend between $275 and $300 per apartment unit in 1997 for recurring
capital expenditures. We believe that these programs lower operating costs over
the life of the communities, increase the long-term value of the communities and
contribute to maintaining the higher-end market position of our communities.

We maintain a hands-on management style and "flat" organizational
structure that emphasizes our senior management's continued close contact with
the markets and employees. Our flat organizational structure enables us to keep
abreast of local market trends and allows us to quickly respond to the needs of
residents and on-site employees and to control overhead costs.

We have also implemented programs to control expenses. For example, we
have contracted with one roofing contractor and one paving contractor to perform
all roof maintenance, repairs and replacements and all parking lot maintenance
at most of our communities. This approach allows us to take advantage of
economies of scale in negotiating contracts and to focus on managing our
properties instead of having to make multiple calls to a contractor in order to
ensure a job is completed in a timely and satisfactory manner.

<PAGE>
EXTERNAL GROWTH STRATEGY

We intend to build upon the acquisition of the five initial apartment
communities, BT Venture Corporation and the Chrysson properties. Our goal is to
continue to invest in additional apartment communities in secondary markets
throughout the southeastern United States. Through our UPREIT structure, we have
the ability to acquire apartment communities by issuing Units in tax-deferred
exchanges with owners of such properties. We expect that we will finance future
acquisitions of apartment communities principally with such Units as well as
loans and funds from additional offerings of common stock, preferred stock or
debt.

Upon the acquisition of an apartment community, we seek to improve both
operating results and the physical property through a preventive maintenance
policy and selective improvements which may include new roofs, new exterior
siding, exterior painting, clubhouse renovation and/or interior refurbishment.
We believe that such renovations have permitted us to increase rental rates and
improve occupancy rates at our properties after we have completed such
renovations.

In evaluating properties for potential acquisition, our primary
consideration is a property's current and anticipated cash flow, particularly
with respect to the cash flow's adequacy to meet operational needs and other
obligations, and its impact on our ability to pay dividends. We also put
emphasis on the geographic area in which the apartment community is located and
the demographic profile of the residents. We obtain this information from market
studies and discussions with brokers, other owners and developers of apartment
communities located in the apartment market and the publishers of apartment
rental guide books. Within a geographic area, we also look for apartment
communities with locations close to where people work, shop and receive
healthcare. Other factors we consider include:

(Bullet) the construction quality, condition and design of the property;

(Bullet) the potential for increasing cash flow by means of increasing
rental rates and occupancies, as well as reducing operating
expenses;

(Bullet) the potential for capital appreciation of the property;

(Bullet) the growth, tax and regulatory environment of the community in
which the property is located;

(Bullet) occupancy and demand for the property; and

(Bullet) prospects for future sale or refinancing.

Generally we will acquire an apartment community only where its operating
history indicates that it will contribute immediately to our cash flow and there
is a strong likelihood that its cash flow will increase.

We will selectively consider opportunities to develop new apartment
communities and to acquire and rehabilitate older apartment communities. Members

<PAGE>
of our management team have directed over $114 million of development or
redevelopment projects, including 13 apartment communities containing over 2,500
apartment units. This development and redevelopment experience will enable us to
build additional apartment communities and to rehabilitate existing communities
when economic conditions and available capital make such opportunities
attractive.

While many of our competitors prefer not to purchase apartment
communities that are more than ten years old, we will consider doing so if such
communities are well located and otherwise meet our quality standards and
operating model. We believe we can purchase such apartment communities at fair
prices and make necessary capital expenditures to bring them up to our high
standards.

FINANCING STRATEGY

Consistent with our stated policy of maintaining a ratio of debt-to-total
market capitalization (total debt divided by the sum of our total debt and the
market value of our outstanding shares of common stock and Operating Partnership
Units) of 60% or less, we intend to pursue our growth strategy through the
utilization of our flexible capital structure -- this may include the issuance
of Units, common stock and/or preferred stock and the incurrence of additional
debt. We may use our line of credit or fixed-rate, long-term debt to acquire
apartment communities. While the debt we incurred to finance each of the Phase I
Chrysson properties will all be due at the same time, we will, in the future,
attempt to vary the maturities of our debt, thereby avoiding a significant
portion of our debt coming due in any given year. After this offering closes and
we apply the net cash proceeds, as we describe on page 32 under the heading "Use
of Proceeds," we will have approximately $17.0 million in variable rate debt
(with an effective annual interest rate of 7.5% based on interest rates in
effect on September 30, 1997) and $75.9 million of fixed-rate debt (with a
weighted average annual interest rate of 7.6% based on interest rates in effect
on September 30, 1997). At the close of this offering, we will have a
debt-to-total market capitalization ratio of approximately 50.0%.

USE OF PROCEEDS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

We estimate the net cash proceeds from the sale of the 2,500,000 shares
of common stock we are offering to be approximately $32.3 million. "Net cash
proceeds" is what we will receive after payment of all underwriting discounts
(approximately $2.5 million) and the expenses of the offering (such as legal,
accounting and printing costs, which we estimate will total approximately
$500,000). If the underwriters' over-allotment option is exercised in full, the
net cash proceeds will be approximately $37.3 million, which we calculated as
2,875,000 shares times the offering price, or gross proceeds of $40.6 million,
less underwriting discounts and commissions of approximately $2.8 million and
offering expenses of approximately $500,000. We will contribute the net cash
proceeds to the Operating Partnership in exchange for Units in the Operating
Partnership. The Operating Partnership will use the net cash proceeds to repay
certain mortgage indebtedness secured by our apartment communities and
restaurant properties and our line of credit as follows:

<TABLE>
<CAPTION>
PRINCIPAL PRO FORMA
BALANCE PRINCIPAL BALANCE INTEREST RATE
PROPERTY/DEBT AS OF 9/30/97 PAYMENT 9/30/97 AT 9/30/97 MATURITY DATE
- -------------------------------- ------------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Chrysson Phase I acquisition
debt.......................... $ 0 $ 8,785 $ 0 -- May 1999(1)
Paces Village, 2nd mortgage..... 1,400 1,400 0 8.0% April 1999(1)
Line of credit.................. 23,900 22,156 1,744 8.0% Dec. 1999
------------- --------- ---------
Total...................... $25,300 $ 32,341 $ 1,744
</TABLE>

- ---------------
(1) Due on the earlier of a public offering of equity or the maturity date
shown.

If the underwriters' over-allotment option to purchase 375,000 shares is
exercised in full, we expect to use the additional net cash proceeds of
approximately $4.9 million to repay additional debt or to establish working
capital reserves. Pending such application of the net cash proceeds, we will
invest the net cash proceeds in interest-bearing accounts and short-term,
interest-bearing securities, which are consistent with our policies disclosed on
page 62 under the heading "Certain Policies -- Short-term Investments."

MARKET PRICE OF THE COMPANY'S COMMON STOCK,
DISTRIBUTIONS AND RELATED SHAREHOLDER MATTERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

Our common stock is traded on the American Stock Exchange under the
symbol "BNP". There were approximately 1,630 shareholders of record on December
16, 1997. The table below shows, for the periods indicated, the range of high,
low and closing sale prices of our common stock as reported by the American
Stock Exchange and the dividends paid per share. As of December 16, 1997, the
closing price of the Company's Common Stock was $14.125 per share.

<TABLE>
<CAPTION>
STOCK PRICE DIVIDENDS
----------------------------------------- PAID
HIGH LOW CLOSE PER SHARE
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
1997
Fourth quarter*.................... $ 17 1/8 $ 13 3/4 $ 14 1/8 $0.31**
Third quarter...................... 16 1/2 12 1/2 16 1/2 0.31
Second quarter..................... 13 11 7/8 12 7/8 0.31
First quarter...................... 13 1/8 12 3/8 12 5/8 0.31

1996
Fourth quarter..................... 13 1/4 12 1/8 12 1/2 0.31
Third quarter...................... 13 1/4 12 3/8 12 7/8 0.31
Second quarter..................... 13 3/8 11 1/2 12 5/8 0.31
First quarter...................... 13 3/4 12 1/4 13 1/4 0.31

1995
Fourth quarter..................... 13 1/8 12 1/8 12 1/2 0.31
Third quarter...................... 13 5/8 12 1/4 12 7/8 0.31
Second quarter..................... 13 5/8 11 1/4 12 7/8 0.31
First quarter...................... 13 7/8 12 1/8 13 3/8 0.31
</TABLE>

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

* October 1, 1997 through December 16, 1997.

** Declared on October 17, 1997 and paid on November 14, 1997 to shareholders of
record as of October 31, 1997.

As of September 30, 1997, we had reserved 280,000 shares to be issued
upon exercise of stock options we granted to some of our key employees.

We have paid regular quarterly dividends to holders of our common stock
since our inception, and we intend to continue to do so. We anticipate that we
will pay all dividends from current funds from operations. We expect to continue
to pay a dividend of $0.31 per share per quarter. On an annualized basis, this
would be $1.24 per share, which is approximately 8.8% of the current stock
price. We do not intend to change our estimated distribution per share if the
underwriters exercise their over-allotment option. We expect distributions to
substantially exceed the 95% annual distribution requirement for a REIT;
however, all future dividends are at the discretion of our Board of Directors.
See "Federal Income Tax Considerations -- Annual Distribution Requirements" on
page 90.

<PAGE>
Historically, a portion of the dividends has been considered a "return of
capital" for Federal income tax purposes. In 1996, 43.7% of the $1.24 dividend
per share was treated as a return of capital, while the percentage was 51.8% in
1995 and was 49.3% in 1994. We anticipate that we will continue making
distributions in excess of earnings and profits and, therefore, a portion of
future distributions also would be considered a "return of capital." If that is
the case, the portion of such distributions that is a return of capital should
not be subject to Federal income taxes. See "Federal Income Tax
Considerations -- Taxation of U.S. Shareholders" on page 93.

We have a dividend reinvestment plan which is available to you if you
become a shareholder. Under this plan, as amended in July 1996, the plan
administrator, First Union National Bank of North Carolina, reinvests dividends
on behalf of plan participants in our common stock. First Union will either
issue new shares or purchase shares on the open market, at our direction. In
addition, shareholders who participate in the plan may elect to make direct cash
investments or supplement their reinvestment program with additional cash
investments of any amount from $25 to $10,000 per quarter. If you participate,
you will not need to pay any commissions on stock purchased under the plan.

CAPITALIZATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

The following table sets forth:

(Bullet) the capitalization of the Company as of September 30, 1997
(unaudited) and

(Bullet) the capitalization of the Company on a pro forma basis as of
September 30, 1997 assuming the completion of this offering,
the use of the net proceeds as described under the heading "Use
of Proceeds" on page 32, the completion of Phase I of the
Chrysson acquisition and our restructuring to an UPREIT.

You should read the information in the following table in conjunction with:

(Bullet) the financial statements and notes to the financial statements
beginning on page F-1;

(Bullet) the pro forma financial information and notes to the pro forma
financial information beginning on page F-20; and

(Bullet) the discussion set forth in "Management's Discussion and
Analysis of Financial Condition and Results of
Operations -- Capital Resources and Liquidity" beginning on
page 49.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------
COMPANY
HISTORICAL PRO FORMA (1)
---------- -------------
<S> <C> <C>
(IN THOUSANDS)
Debt:
Mortgages and other notes payable.................................... $ 71,341 $ 85,856
Notes payable to affiliates.......................................... 7,056 7,056
---------- -------------
Total debt........................................................ $ 78,397 $ 92,912
Minority Interest In Operating Partnership............................. -- 12,350
Shareholders' Equity:
Common Stock, $0.01 par value, 100,000,000 authorized, 3,123,741
outstanding before the offering and 5,623,741 outstanding after
the offering...................................................... 31 56
Additional paid-in capital........................................... 35,163 67,479
Dividend distributions in excess of net income....................... (11,244) (11,457)
---------- -------------
Total shareholders' equity........................................ 23,950 56,078
---------- -------------
Total capitalization.............................................. $ 102,347 $ 161,340
---------- -------------
---------- -------------
</TABLE>

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

(1) Pro forma reflects this offering, the application of the proceeds of this
offering, our conversion to an UPREIT and Phase I of the Chrysson
acquisition, including the deferred issuance of 200,000 Units, as described
under the heading "History and Formation of the Company -- Chrysson
Acquisition" beginning on page 23.

SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

We present below selected historical financial information. We encourage
you to read the financial statements and the notes accompanying the financial
statements; this information is not intended to be a replacement for the
financial statements. We derived the historical financial and balance sheet data
for the five years ended December 31, 1996 from the audited historical financial
statements of the Company and the financial and balance sheet data for the nine
month periods ended September 30, 1996 and 1997 from unaudited historical
financial statements of the Company. Our management believes that the unaudited
historical financial statements contain all adjustments needed to present fairly
the information included in such statements, and that the adjustments made
consist only of normal recurring adjustments.

Historical financial and operating information includes all restaurant
properties and apartment communities we owned. While the number of restaurant
properties has remained constant, you should note in reviewing this information
that we acquired apartment properties throughout the periods presented.
Therefore, the information is not comparable between periods. See "History and
Formation of the Company" beginning on page 21. You should also recognize that
historical operating results may not be comparable to future operating results.

We have also provided pro forma financial information. Pro forma
financial information is derived by adjusting the historical financial
statements to give retroactive effect to the Chrysson acquisition, this
offering, the application of the net cash proceeds from this offering and our
conversion to an UPREIT, and assumes all such transactions occurred as of the
beginning of the period (for operating statement purposes) or the end of the
period (for balance sheet purposes).

The pro forma adjustments related to Phase I of the Chrysson acquisition
represent only activities of the "stabilized" Chrysson properties and do not
reflect the impact of the entire Phase I portfolio. We consider "stabilized"
properties to be those properties or phases of properties which have achieved
occupancy levels of 90% or greater for 90 consecutive days. Applying this
definition of "stabilized" properties, we have excluded one apartment community
and the second phase of another apartment community from our pro forma
information for 1996 and the nine month period ended September 30, 1997. For a
more detailed description of how we derived the pro forma information, you
should refer to the description of the unaudited pro forma condensed
consolidated financial information on page F-20.

No one has audited this pro forma information, and it may not represent
how we would have performed and what our financial position would have been had
the Chrysson acquisition, the UPREIT conversion and this offering really
occurred at the times assumed for purposes of deriving the pro forma
information. We encourage you to read the unaudited pro forma information in
conjunction with the unaudited pro forma financial statements that begin on page
F-21 of this prospectus.

<PAGE>
SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------------------------------- -----------------------------
HISTORICAL PRO HISTORICAL PRO
-------------------------------------------- FORMA (3) ------------------ FORMA (3)
1992 1993 1994 1995 1996 1996 1996 1997 1997
------- ------- ------- ------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY DATA)
OPERATING DATA:
Revenue:
Apartment rental
income................ $ -- $ 1,245 $ 3,889 $ 8,476 $ 9,791 $14,222 $ 7,209 $ 7,898 $ 11,128
Restaurant rental
income................ 5,333 5,165 5,047 4,649 4,500 4,500 3,375 3,375 3,375
Equity and other
income................ 40 16 322 600 217 225 160 336 348
------- ------- ------- ------- -------- --------- -------- -------- ---------
Total revenue............. 5,373 6,426 9,258 13,726 14,508 18,947 10,745 11,609 14,851
Expenses:
Depreciation............ 778 973 1,415 2,204 2,440 3,536 1,787 1,923 2,745
Amortization............ 20 92 233 405 535 413 394 439 347
Apartment operations.... -- 360 1,101 2,481 2,977 4,182 2,190 2,537 3,473
Corporate
administration........ 381 502 887 1,286 894 975 702 734 809
Interest................ 1,035 1,442 2,802 5,362 5,946 5,517 4,395 4,684 4,318
Write-off of deferred
costs................. -- 600 518 359 -- -- -- -- --
------- ------- ------- ------- -------- --------- -------- -------- ---------
Total expenses............ 2,215 3,970 6,956 12,097 12,792 14,623 9,467 10,317 11,692
------- ------- ------- ------- -------- --------- -------- -------- ---------
Income before minority
interest of
Unitholders............. 3,159 2,455 2,302 1,628 1,716 4,324 1,278 1,292 3,159
Minority interest in
Operating Partnership... -- -- -- -- -- 405 -- -- 292
------- ------- ------- ------- -------- --------- -------- -------- ---------
Net income before
extraordinary item...... $ 3,159 $ 2,455 $ 2,302 $ 1,628 $ 1,716 $ 3,919 $ 1,278 $ 1,292 $ 2,867
------- ------- ------- ------- -------- --------- -------- -------- ---------
Net income................ $ 3,159 $ 2,455 $ 2,302 $ 1,628 $ 1,716 N/A $ 1,278 $ 1,292 N/A
------- ------- ------- ------- -------- --------- -------- -------- ---------
------- ------- ------- ------- -------- --------- -------- -------- ---------
Net income per share...... $ 1.11 $ 0.86 $ 0.80 $ 0.54 $ 0.57 $ 0.71 $ 0.42 $ 0.42 $ 0.51
------- ------- ------- ------- -------- --------- -------- -------- ---------
------- ------- ------- ------- -------- --------- -------- -------- ---------
BALANCE SHEET DATA:
Real estate assets (before
accumulated
depreciation)
Apartment communities... $ -- $14,352 $54,724 $55,316 $ 66,610 -- $ 66,458 $ 67,141 $128,001
Restaurant properties... 43,205 43,205 43,205 43,205 43,205 -- 43,205 43,205 43,205
Real estate assets, net... 38,762 52,140 91,101 89,500 98,354 -- 98,856 96,962 157,822
Total assets.............. 40,465 54,643 95,954 94,352 103,436 -- 104,183 104,206 166,389
Total debt................ 12,000 26,894 66,884 67,162 77,352 -- 77,471 78,397 92,912
Minority interest......... -- -- -- -- -- -- -- -- 12,350
Shareholders' equity...... $28,331 $27,252 $27,968 $26,200 $ 24,902 -- $ 24,778 $ 23,950 $ 56,078

APARTMENT PROPERTY DATA:
Apartment communities
owned (1)............... -- 1 3 4 5 8 5 5 9
Apartment units owned
(1)..................... -- 336 946 1,130 1,328 1,848 1,328 1,328 2,208
Average apartment economic
occupancy............... -- 94.4% 94.6% 95.3% 94.1% -- 94.3% 95.5% --
Average monthly
revenue/unit............ -- $ 576 $ 624 $ 657 $ 684 -- $ 684 $ 692 --

OTHER DATA:
EBITDA.................... $ 4,992 $ 4,963 $ 6,751 $ 9,600 $ 10,637 $13,790 $ 7,853 $ 8,339 $ 10,569
Funds from operations
(2)..................... 3,943 4,029 4,291 4,450 4,472 8,176 3,295 3,391 6,079
Funds available for
distribution (2)........ 3,957 4,055 4,253 3,961 3,835 7,287 2,825 2,986 5,486
Net cash provided by (used
in):
Operating activities.... 3,854 4,066 4,496 4,476 4,800 -- 3,929 3,711 --
Investing activities.... (134) (16,157) (18,729) (832) (11,020) -- (10,966) (1,696) --
Financing activities.... $(3,534) $11,152 $15,063 $(3,895) $ 6,361 -- $ 7,288 $ (1,451) --
Weighted average number of
shares outstanding...... 2,850 2,850 2,855 3,006 3,027 6,097 3,018 3,107 6,177
</TABLE>

<PAGE>
- ---------------

(1) At period end.

(2) Funds from operations is defined by the National Association of Real Estate
Investment Trusts ("NAREIT") as "net income (computed in accordance with
generally accepted accounting principles), excluding gains (losses) from
debt restructuring and sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and
joint ventures."

We define funds available for distribution as funds from operations
plus non-cash expense for amortization of loan costs, less scheduled
principal payments on our debt and less recurring capital expenditures.

We consider funds from operations and funds available for
distribution to be useful in evaluating potential property acquisitions and
measuring the operating performance of an equity REIT because, together with
net income and cash flows, funds from operations and funds available for
distribution provide investors with additional measures to evaluate the
ability of the REIT to incur and service debt and to fund acquisitions and
other capital expenditures. Funds from operations and funds available for
distribution do not represent net income or cash flows from operations as
defined by generally accepted accounting principles. You should not consider
funds from operations or funds available for distribution:

(Bullet) to be alternatives to net income as reliable measures of
the Company's operating performance or

(Bullet) to be alternatives to cash flows as
measures of liquidity.

Funds from operations and funds
available for distribution do not measure
whether cash flow is sufficient to fund
all of our cash needs, including principal
amortization, capital improvements and
distributions to shareholders. Funds from
operations and funds available for
distribution do not represent cash flows
from operating, investing or financing
activities as defined by generally
accepted accounting principles. Further,
funds from operations and funds available
for distribution as disclosed by other
REITs may not be comparable to our
calculation of funds from operations or
funds available for distribution.

(3) Pro forma amounts on an as-converted basis, as if 571,000 Operating
Partnership Units had been issued for contribution of three stabilized
apartment communities.

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

THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF FEDERAL SECURITIES LAW. SUCH STATEMENTS CAN BE IDENTIFIED BY THE USE
OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"ESTIMATE," "CONTINUE" OR OTHER SIMILAR WORDS. THESE STATEMENTS DISCUSS FUTURE
EXPECTATIONS, CONTAIN PROJECTIONS OF RESULTS OF OPERATIONS OR OF FINANCIAL
CONDITION OR STATE OTHER "FORWARD-LOOKING" INFORMATION. WHEN CONSIDERING SUCH
FORWARD-LOOKING STATEMENTS, YOU SHOULD KEEP IN MIND THE RISK FACTORS AND OTHER
CAUTIONARY STATEMENTS IN THIS PROSPECTUS. ALTHOUGH MANAGEMENT BELIEVES THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON
REASONABLE ASSUMPTIONS, THERE ARE CERTAIN FACTORS SUCH AS GENERAL ECONOMIC
CONDITIONS, LOCAL REAL ESTATE CONDITIONS, OR WEATHER CONDITIONS THAT MIGHT CAUSE
A DIFFERENCE BETWEEN ACTUAL RESULTS AND THOSE FORWARD-LOOKING STATEMENTS. THIS
DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE BALANCE SHEETS, STATEMENTS OF
OPERATIONS, STATEMENTS OF CASH FLOWS, NOTES TO THE FINANCIAL STATEMENTS, PRO
FORMA FINANCIAL INFORMATION AND NOTES TO PRO FORMA FINANCIAL INFORMATION
INCLUDED IN THIS PROSPECTUS BEGINNING ON PAGE F-1.

OVERVIEW

This discussion analyzes our operations for the full years of 1994, 1995
and 1996 and for the nine month periods ending September 30, 1997 and 1996. We
did not complete our acquisition of Phase I of the Chrysson properties until
December 1, 1997 and have not included its impact in this discussion.
Information concerning the Chrysson acquisition can be found on page 23.

During the time period covered by this discussion, we have undergone a
number of significant changes. These changes have resulted in a marked increase
in our total assets, revenues, expenses and debt. In reading this discussion, it
will help if you keep certain key events and general trends in mind:

(Bullet) From our inception in 1987 to 1992, our assets primarily
consisted of 47 restaurant properties. In 1993, we changed our
focus from restaurant properties to apartment communities. We
purchased our first apartment community in 1993 and purchased a
total of four more apartment communities during 1994, 1995 and
1996. As of September 30, 1997, we owned five apartment
communities and the original 47 restaurant properties.

(Bullet) Prior to 1994, we operated as an externally administered and
externally managed REIT. Day to day management and operations
were provided by a paid advisor. We had no paid employees and
minimal corporate overhead

<PAGE>
expenses. Essentially, our only management or operating expense
was the fee paid to the advisor. In October 1994, we purchased
BT Venture Corporation (see page 22) and its apartment
management business. We terminated our relationship with the
advisor, thus becoming self-administered and self-managed. As
of September 30, 1997, we had 86 employees to oversee all
aspects of our operations.

(Bullet) As part of the purchase of BT Venture Corporation in 1994, we
acquired its apartment management business. We began to receive
management fee income from, and incur the expenses associated
with, the property management business. In May 1995, we formed
the Management Company (see page 22) and transferred all of the
apartment management business we had acquired from BT Venture
Corporation to the Management Company. All of our property
management activities are now conducted through the Management
Company. The Management Company currently manages seven
apartment communities and two shopping centers owned by other
parties.

As a result of the creation of the Management Company, we no
longer receive property management fees nor do we incur the
expenses associated with providing these services. Because we
do not control the voting stock of the Management Company, we
account for our investment in the Management Company using the
equity method of accounting. This means that instead of adding
the Management Company's revenues, expenses, assets and
liabilities to our revenues, expenses, assets and liabilities,
we show our portion of the net income of the Management Company
as a line item on our income statement and the amount we have
invested in the Management Company as a line item on our
balance sheet. Because of our substantial economic ownership
interest, our portion of the net income of the Management
Company represents substantially all of the Management
Company's net income.

(Bullet) Restaurant sales and restaurant rental income have been
declining since 1992. The decline in restaurant sales appears
to be the result of increasing competition and widespread price
discounting in the fast food industry. Also contributing to the
decline has been the lack of a strong hamburger product on the
Hardee's menu. Enterprises, the restaurant operator, and
Hardee's Food Systems, Inc., the restaurant franchisor, are
taking steps to improve restaurant sales. These steps include a
new advertising campaign, the introduction of several new food
items and a return to the charbroil cooking method. To date, we
have not seen improvement in restaurant sales. In August 1997,
CKE Restaurants, Inc. purchased Hardee's Food Systems. CKE is
the owner and operator of "Carl's Jr.," a fast food hamburger
chain with approximately 680 restaurants.

(Bullet) The acquisition of Phase I of the Chrysson properties and the
offering will have a significant impact on our operations and
operating results. The pro forma operating statements included
in this prospectus were derived by adjusting historical
operations to reflect only the activity of the Phase I

<PAGE>
Chrysson properties for which construction and lease up had
been completed during the time period covered by the
statements. As a result, the pro forma statements do not
include all of the Phase I Chrysson properties and, therefore,
understate the increased revenues and expenses associated with
these properties now that all of the Phase I Chrysson
properties are complete and operating. In reading the pro forma
statements you should keep in mind that they do not fully
reflect the impact of Phase I of the Chrysson acquisition on
the Company.

Summary amounts related to apartment properties occupancy and revenue per
occupied unit are as follows:

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------
1997
----------------------------------------------------------- 1996
HARRIS PACES PACES -------
HILL LATITUDES OAKBROOK COMMONS VILLAGE OVERALL OVERALL
------ --------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of units....................... 184 448 162 336 198 1,328 1,328
Average physical occupancy............ 94.0% 94.6% 94.2% 97.1% 94.3% 95.0% 93.9%
Average economic occupancy............ 95.2% 94.8% 95.1% 97.3% 94.3% 95.5% 94.3%
Average monthly revenue/unit.......... $710 $655 $768 $702 $682 $692 $684
</TABLE>

We receive revenues from two principal sources -- apartment rents and
restaurant rents. In addition, we have other income which consists primarily of
revenue from the Management Company and interest income. As a result of our
apartment acquisitions, our total revenue has increased significantly. In
addition, the percentage of our total revenue which comes from apartments has
increased. The following table shows our total revenue for each period and the
percentage of revenue which comes from each source.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997 YEAR ENDED DECEMBER 31,
----------------------------------- -------------------------------------------------------------------
PRO 1996 PRO
FORMA % HISTORICAL % FORMA % 1996 % 1995 % 1994 %
------- ------ ---------- ------ -------- ------ ------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Apartment
revenues.. $11,128 75.0% $ 7,898 68.0% $14,222 75.1% $ 9,791 67.5% $ 8,476 61.8% $ 3,889 42.0%
Restaurant
revenues.. $ 3,375 22.7% $ 3,375 29.1% $ 4,500 23.8% $ 4,500 31.0% $ 4,649 33.9% $ 5,047 54.5%
Other
revenues.. $ 348 2.3% $ 336 2.9% $ 225 1.1% $ 217 1.5% $ 600 4.3% $ 322 3.5%
------- ------ ---------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total
revenues.. $14,851 100.0% $ 11,609 100.0% $18,947 100.0% $14,508 100.0% $13,726 100.0% $ 9,258 100.0%
</TABLE>

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO 1996

Revenues

Revenue increased by 8.0% to $11.6 million for the nine months ended
September 30, 1997, as compared to the same period in 1996. The increase in

<PAGE>
revenue was due to improved apartment operations and the effect of the
acquisition of Paces Village in April 1996.

Apartment rental income for the first nine months of 1997 increased to
$7.9 million, a 9.6% increase over the same period in 1996. For apartment
properties held throughout the entire nine month periods of both 1997 and 1996,
apartment rental income increased by 3.0%.

On a same-units basis, average economic occupancy improved by 1.3% for
the first nine months of 1997 as compared to the first nine months of 1996 while
average monthly revenue per unit improved by 1.3% for the first nine months of
1997 as compared to the same period in 1996. For the first nine months of 1997,
average economic occupancy at our apartment communities was 95.5% and average
monthly revenue per unit was $692.

As of September 30, 1997, we owned apartment properties in Charlotte and
Greensboro, North Carolina and Virginia Beach, Virginia. Our apartments are
priced in the moderate to moderately high range for apartments available within
these markets. Despite a substantial amount of new construction, especially in
Charlotte and Greensboro, we believe these markets have remained relatively
strong. This strength is primarily attributable to demand for apartments created
by continued population and job growth. While we experienced a nominal reduction
in our average economic occupancy during 1996, we have successfully maintained a
slight increase in average monthly revenue per unit, and we have increased
physical occupancy to 95.0% for the first nine months of 1997 as compared to
93.9% in the same period in 1996.

We have utilized three techniques to achieve these results: (i)
monitoring and managing lease expiration dates; (ii) encouraging residents to
sign longer term leases, up to 24 months; and (iii) providing incentives for
residents who renew their leases. At September 30, 1997, approximately one-third
of our leases in effect were for a duration of 13 months or more. While we
expect some competitive pressure in our markets through 1997, we do not expect
this will have a material adverse effect on our operations or cash flows.

Restaurant rental income was the minimum rent for the first nine months
of 1997. This was unchanged from the same period in 1996. Under the terms of the
lease agreement, restaurant rental income is the greater of the minimum rent of
$4.5 million per year or 9.875% of food sales. For the first nine months of
1997, sales at our restaurant properties totaled $33.4 million, a decrease of
1.5% compared to the same period in 1996. For rent payments based on the
percentage of sales to resume, restaurant sales would have to increase by 1.3%
over 1996 sales levels.

Our interest in the net income of the Management Company increased by
64.0% to $183,000 for the first nine months of 1997 as compared to the same
period in 1996. This increase was primarily due to the Management Company's
receipt during the first quarter of 1997 of refinancing fees from two managed
properties and certain one-time sales commissions from two managed properties.
Also contributing to the increase were fees the Management Company received for
its planning and

<PAGE>
supervision of a substantial rehabilitation project at The Villages of Chapel
Hill, one of its managed properties (see "History and Formation of the
Company -- Other Activity" on page 23). We do not expect the operation of the
Management Company to have a significant effect on our financial position,
operating results or cash flows in future periods.

Interest and other income increased by 214.1% to $153,000 for the first
nine months of 1997 as compared to the same period in 1996 and was primarily due
to interest and fees earned on loans made to facilitate the rehabilitation of
The Villages of Chapel Hill, on which we earned interest income of approximately
$68,000 on advances of approximately $1.4 million through September 30, 1997.
During this period, we incurred interest expense of approximately $37,000 on the
borrowings we used to fund these advances.

Expenses

Total expenses for the first nine months of 1997 were $10.3 million, an
increase of 9.0% over the same period in 1996. This increase was due to the
acquisition of Paces Village in April 1996 and an overall increase in apartment
operations expense.

Apartment operations expense increased by 15.8% to $2.5 million for the
first nine months of 1997 as compared to the same period in 1996. These
increases reflect the impact of the Paces Village acquisition in April 1996, as
well as increased costs associated with attracting and retaining residents in a
more competitive apartment market. In order to increase the visibility of our
apartment communities, we have substantially increased the amount we spend on
advertising. We have also increased our spending on preventive maintenance. We
believe that, in order to preserve our competitive position, it is essential to
maintain our apartment communities in the best possible condition. Apartment
operations expense totaled 32.1% of related income during the first nine months
of 1997 as compared to 30.4% during the comparable period in 1996.

Depreciation expense increased by 7.6% to $1.9 million for the first nine
months of 1997 as compared to the same period in 1996. The increase in
depreciation reflects the acquisition of Paces Village in April 1996, along with
capital improvements to other apartment communities. Amortization expense
increased by 11.5% to $439,000 for the first nine months of 1997 as compared to
the same period in 1996. The increase in amortization expense is primarily
attributable to quarterly additions to the intangible asset related to the
earn-out provision of the 1994 BT Venture Corporation acquisition agreement.

Operating expenses relating to restaurant properties are insignificant
because of the restaurant properties' triple-net lease arrangement that requires
Enterprises to pay virtually all of the expenses associated with the restaurant
properties.

<PAGE>
Interest expense for the first nine months of 1997 compared to the same
period in 1996 increased by 6.6% to $4.7 million. The increase in interest
expense is primarily due to the addition of $10.7 million of debt related to the
acquisition of Paces Village in the second quarter of 1996. Weighted average
interest rates were 8.0% for the nine month periods ending September 30, 1997
and 1996. At September 30, 1997, we had $60.0 million of long-term, fixed-rate
debt with an average interest rate of 8.2% and $18.4 million of long-term,
variable-rate debt with an average interest rate of 7.5%.

Net Income

Net income for the first nine months of 1997 increased by 1.1% over the
first nine months of 1996 to $1.3 million. The increase was primarily the result
of improved apartment revenues and the substantial increase in equity and other
income.

1996 COMPARED TO 1995

Revenues

Total revenue for 1996 was $14.5 million, an increase of 5.7% over 1995.
This increase was primarily due to the acquisition of Paces Village in April
1996 and continued improvement in apartment operations. Apartment rents
accounted for 67.5% of our total revenue in 1996 as compared to 61.8% in 1995.

Income from our apartments increased by 15.5% to $9.8 million in 1996
compared to 1995. While these increases are primarily the result of the
acquisition of Paces Village in April 1996, apartment operations also showed
improvement. Income from apartments owned for the full year in both 1996 and
1995 increased by 3.3% in 1996, reflecting a 4.1% increase in average monthly
rental revenue per occupied unit that was offset by a 1.1% decline in average
occupancy at these apartments. Average economic occupancy for the four
properties owned for the full year in both 1996 and 1995 was 94.2% for 1996 and
95.3% for 1995; average rental revenue per occupied unit was $684 in 1996 and
$657 in 1995. From its acquisition in April 1996 through year end, Paces Village
had average economic occupancy of 93.5% and average revenue per occupied unit of
$693 per month.

Increases in income attributable to apartment operations for 1996 were
partially offset by the creation of the Management Company in 1995. As a result
of the creation of the Management Company, we did not receive any property
management fees in 1996 as compared to $515,000 in 1995. We did, however,
receive equity income from the Management Company of approximately $149,000 in
1996 as compared to $48,000 for 1995.

Also offsetting the increase in apartment rental income was a decline in
restaurant rental income. In 1996, restaurant rental income declined by 3.2% as
compared to 1995. Related restaurant food sales declined by 4.4% to $45.0
million in

<PAGE>
1996 compared to 1995. All of the restaurants were open throughout 1996 and
1995. The decline in restaurant sales appeared to be a continuation of the trend
which began in 1993. Severe weather in January 1996 also contributed to the
decline. The difference in restaurant rental revenue and related sales was the
result of the minimum rent provision of the restaurant lease. Under the
restaurant lease, annual restaurant rent is the greater of the $4.5 million or
9.875% of food sales. In December 1995, we entered into a modification of the
lease with Enterprises which increased the minimum rent from $3.46 million per
year to $4.5 million per year. For 1996, the restaurant rent was the $4.5
million minimum rent.

Expenses

Total expenses in 1996 were $12.8 million, an increase of 5.7% over 1995.
This increase was primarily due to the acquisition of Paces Village in April
1996.

Apartment operating expenses increased by 20.0% to $3.0 million in 1996
compared to 1995. Apartment operating expenses equaled 30.4% of apartment rental
income in 1996, as compared to 29.3% in 1995. The increases in apartment
operating expenses in 1996 were primarily attributable to increased costs
associated with attracting and retaining residents in a softening apartment
market as well as an increased emphasis on preventative maintenance.

Operating expenses associated with our restaurant properties are
insignificant, because the restaurant properties' lease requires that
Enterprises pay virtually all of the expenses associated with the restaurant
properties.

Administrative expense declined by 30.4% to $894,000 in 1996 as compared
to 1995. This decrease reflects the transfer of our property management
activities to the Management Company in 1995.

Depreciation expense for 1996 was $2.4 million, an increase of 10.7% over
1995. This increase was due to the acquisition of Paces Village in 1996.
Depreciation expense associated with our restaurant properties was $778,000 in
both 1996 and 1995. Depreciation expense associated with apartment communities
was approximately $1,662,000 compared to $1,426,000 in 1995.

Amortization expense for 1996 increased by 32.0% over 1995 to $535,000.
This increase was related to the acquisition of Paces Village and an intangible
asset recorded in conjunction with the acquisition of BT Venture Corporation in
October 1994. Amortization of the intangible asset related to management
operations increased 22.1% in 1996 to $315,000 compared to $258,000 in 1995. The
balance of amortization expense relates to loan costs.

Interest expense increased by 10.9% to $5.9 million in 1996 as compared
to 1995. This increase was primarily due to an additional $10.7 million of
indebtedness incurred in connection with the acquisition of Paces Village in
1996.

<PAGE>
Net Income

Net income for 1996 was $1.7 million, an increase of 5.4% over 1995. This
increase was due to the write-off of $359,000 in deferred costs in 1995 (I.E.,
we reduced our assets on the balance sheet and increased expenses on the income
statement). If the write-off had not occurred in 1995, our net income for 1996
as compared to 1995 would have declined primarily as the result of increased
depreciation and amortization related to apartment property acquisitions.

1995 COMPARED TO 1994

Revenues

Our total revenue in 1995 was $13.7 million. This was a 48.3% increase
over 1994 and was primarily due to the acquisition of Oakbrook, Latitudes and
Harris Hill in 1994. Improvements in apartment operations also contributed to
the increase.

Apartment rental income increased to $8.5 million, a 117.9% increase over
1994. Apartment rents accounted for 61.8% of our total revenue in 1995 as
compared to 42.0% in 1994.

Management fee income earned after the acquisition of BT Venture
Corporation in October 1994, but before the formation of the Management Company
in May 1995, was $515,000 in 1995 and $276,000 in 1994. After formation of the
Management Company, we received net income distributions (equity income) of
$48,000 for 1995.

In 1995, restaurant rental income declined by 7.9% to $4.6 million as
compared to 1994. "Same-store" restaurant sales for locations open for the full
periods in both years declined by 9.1% for the year. The slight difference in
the trends for rental income and "same-store" sales was due to several
restaurants being closed for brief periods of time for scheduled remodeling
during 1994. All of the restaurants were open throughout 1995.

Expenses

Total expenses in 1995 were $12.1 million, an increase of 73.9% over
1994. This increase reflects a full year's operations of four apartment
communities, three of which were acquired in 1994. Also contributing to the
increase was our conversion to a self-administered and self-managed REIT and the
assumption of the property management functions of BT Venture Corporation.

While apartment operating expenses increased by 125.3% to $2.5 million,
the increase was principally due to the increased number of properties owned by
us in 1995 as compared to 1994. As a percentage of apartment rental income,
apartment operating expense increased to 29.3% in 1995 from 28.3% in 1994. This
increase was primarily due to an increased emphasis on attracting and retaining
residents.

<PAGE>
Operating expenses associated with our restaurant properties are
insignificant, because the restaurant properties' lease requires that the
restaurant operator pay virtually all of the expenses associated with the
restaurant properties.

Administrative expense for 1995 increased by 44.9% over 1994 to $1.3
million. This increase was the result of our conversion to a self-administered
and self-managed REIT and the assumption of the property management activities
of BT Venture Corporation. Through the third quarter of 1994, we paid property
management fees (five percent of rental revenues collected) to BT Venture
Corporation for management of our apartment properties and advisory fees (4.65%
of net cash available for distribution as defined by the advisory agreement) to
an affiliate of Enterprises. With the acquisition of BT Venture Corporation, we
terminated our advisory contract and became self-administered, thereby
eliminating property management and advisory fees.

Depreciation expense for 1995 increased by 55.8% over 1994 to $2.2
million. This increase was due to the acquisition of three apartment communities
in 1994. Depreciation expense for the restaurant properties in both 1995 and
1994 was $778,000. Depreciation expense for apartment properties was
approximately $1,426,000 in 1995 and $637,000 in 1994.

Amortization expense for 1995 increased by 74.0% over 1994 to $405,000.
This increase was related to the acquisition of the three apartment communities
in 1994 and an intangible asset recorded in conjunction with the acquisition of
BT Venture Corporation in October 1994. The balance of amortization expense
relates to loan costs.

Interest expense for 1995 was $5.4 million. This 91.4% increase in
interest expense for 1995 over 1994 was primarily due to the $40 million
increase in outstanding indebtedness incurred in connection with the 1994
acquisitions of BT Venture Corporation and Oakbrook, Latitudes, and Harris Hill.

During the fourth quarters of 1995 and 1994 we recorded non-cash
write-offs of $321,000 and $377,000, respectively, related to deferred
acquisition costs. Significantly all of these costs arose in 1992 and 1993 in
conjunction with a restructuring transaction we began in 1993 and ultimately
abandoned in December 1995.

Net Income

Net income for 1995 declined by 29.3% from 1994 to $1.6 million. This
decline reflected the effect of non-cash charges for depreciation and
amortization related to apartment community acquisitions in 1993 and 1994.

<PAGE>
FUNDS FROM OPERATIONS

Funds from operations is defined in footnote 2 on page 38. A
reconciliation of net income to funds from operations follows (all amounts in
thousands):

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -----------------------------
1996 1997
1994 1995 1996 PRO FORMA 1996 1997 PRO FORMA
------ ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (before
minority interest)..... $2,302 $1,628 $1,716 $ 4,324 $1,278 $1,292 $ 3,159
Depreciation............. 1,415 2,204 2,440 3,536 1,787 1,923 2,745
Amortization of
management
intangible............. 56 258 315 316 231 279 278
Non-recurring equity
income items........... 519 359 -- -- -- (103) (103)
------ ------ ------ --------- ------ ------ ---------
Funds from operations.... $4,291 $4,450 $4,472 $ 8,176 $3,295 $3,391 $ 6,079
------ ------ ------ --------- ------ ------ ---------
------ ------ ------ --------- ------ ------ ---------
</TABLE>

We define funds available for distribution as funds from operations plus
non-cash expense for amortization of loan costs, less payments for scheduled
amortization of debt principal and recurring capital expenditures.

A reconciliation of funds from operations to funds available for
distribution follows (all amounts in thousands):

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1994 1995 1996 1996 1996 1997 1997
------ ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Funds from operations.... $4,291 $4,450 $4,472 $ 8,176 $3,295 $3,391 $ 6,079
Amortization of loan
costs.................. 177 147 219 97 163 161 69
Scheduled debt principal
payments............... (167) (397) (460) (460) (341) (368) (368)
Recurring capital
expenditures........... (49) (239) (396) (526)* (293) (300) (398)*
Non-recurring equity
income items........... -- -- -- -- -- 103 103
------ ------ ------ --------- ------ ------ ---------
Funds available for
distribution........... $4,253 $3,961 $3,835 $ 7,287 $2,825 $2,986 $ 5,486
------ ------ ------ --------- ------ ------ ---------
------ ------ ------ --------- ------ ------ ---------
</TABLE>

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

* Assumes an annual expenditure of $250 per unit for stabilized acquired
properties.

<PAGE>
Other information about our historical cash flows follows:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
-------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in):
Operating activities...................... $ 4,496 $ 4,476 $ 4,800 $ 3,929 $ 3,711
Investing activities...................... (18,729) (832) (11,020) (10,966) (1,696)
Financing activities...................... 15,063 (3,895) 6,361 7,288 (1,451)
Dividends and distributions paid to
shareholders............................ $ 3,578 $ 3,729 $ 3,751 $ 2,806 $ 2,885

Non-recurring capital expenditures:
Acquisition improvements and
replacements............................ $ 113 $ 285 $ 143 $ 122 $ 57
Other apartment property improvements..... -- 2 22 11 124
</TABLE>

The addition of apartment communities and improvement in apartment
operations have more than offset the decline in restaurant rental income,
producing increases in funds from operations. For the first nine months of 1997,
funds from operations increased by 2.9% over the first nine months of 1996 to
$3.4 million. Funds from operations for 1996 increased by 0.5% over 1995 to
$4.47 million. For 1995, funds from operations increased by 3.7% over 1994 to
$4.45 million.

CAPITAL RESOURCES AND LIQUIDITY

CAPITAL RESOURCES

Prior to acquiring our first apartment community, our capital
requirements were minimal, as all capital expenses related to the restaurant
properties were borne by Enterprises under the terms of the master lease. In
order to acquire Paces Commons, Oakbrook, BT Venture Corporation, Latitudes,
Harris Hill and Paces Village, we incurred additional debt and issued additional
common stock. The additional debt consists of first and second mortgages,
secured by the acquired apartment communities, and draws against our credit
lines. As we continue to acquire apartment communities, it is likely that we
will incur additional long-term debt and seek additional equity capital.

Consistent with our plan to reduce our exposure to variable-rate debt,
during the fourth quarter of 1994 and the second quarter of 1995, we refinanced
$37.6 million in variable-rate debt related to apartment communities to fixed
rate loans with maturities ranging from 2000 through 2020. In December 1995, we
established a credit line with SouthTrust Bank of Alabama in the amount of $25.5
million at a fixed rate of 8.0% for a term of three years (recently modified to
extend maturity to December 1999). We used an initial draw of $23.3 million to
retire our existing short-term, variable-rate credit facility. During 1996, we
financed the purchase of Paces Village through variable-rate debt totaling $10
million along with a draw of $650,000 from our existing credit facility. In
addition, deeds of trust related to two apartment properties were modified to
extend the terms of each note by five years. The balance of the credit line is
available for general corporate purposes. As of September 30,

<PAGE>
1997, $23.9 million was outstanding on this line, but we anticipate repaying the
majority of this balance with the proceeds of this offering. Any balances
outstanding will be due in December 1999.

We are currently negotiating to increase our line of credit and to
convert the loan to a revolving line of credit. The current line of credit
agreement contains the following restrictions:

(Bullet) Each quarter, income available for service on the line of
credit must be at least $4.7 million. Income available for
service on the line of credit is defined as net income plus
depreciation and amortization and interest expense on the line
of credit for the previous 12 months.

(Bullet) Each quarter, the adjusted leverage ratio must not exceed
66.7%. The adjusted leverage ratio is defined as the ratio of
(a) $25.5 million plus all debt other than the balance
outstanding under the line of credit and notes payable to
affiliates to (b) total assets plus accumulated deprecation and
amortization.

(Bullet) At each quarter's end, our net worth must not be less than
$20.5 million in 1997 and $18.1 million in 1998.

To date, we have met all applicable requirements.

During the first nine months of 1997, we advanced approximately $1.4
million to The Villages of Chapel Hill under the participating loan agreement
(see "History and Formation of the Company -- Other Activity" on page 23), which
provides for interest at the greater of 12.5% or the 30-day London Interbank
Offer Rate ("LIBOR") plus 6.125% plus shared income interest and shared
appreciation interest. These advances were funded by draws under the Company's
1996 credit facility with a bank for borrowings at 30-day LIBOR plus 2.25%,
secured by second deeds of trust on three apartment properties.

At September 30, 1997, the weighted average interest rate on outstanding
debt was 8.0%, with long-term debt comprised of $60.0 million at fixed interest
rates and $18.4 million at variable rates indexed on 30-day LIBOR rates. A one
percent increase in variable rates would increase annual interest expense by
approximately $167,000, while a one percent decrease in variable rates would
decrease annual interest expense by approximately $185,000.

From our inception in 1987 through September 1994, we had 2.9 million
shares of common stock outstanding. On October 1, 1994, an additional 140,990
shares were issued in conjunction with the acquisition of BT Venture
Corporation. Between March 1995 and January 1997, the Company issued a total of
80,750 shares of common stock to the former BT Venture Corporation shareholders
in conjunction with an earn-out provision of that acquisition agreement. At
September 30, 1997, the former BT Venture Corporation shareholders were due
additional consideration totaling approximately $572,000, payable at our option
in up to 43,438 shares of

<PAGE>
common stock or in cash. The earn-out period ended on September 30, 1997. By
agreement, we are prohibited from issuing the earn-out shares if such issuance
would cause us to become disqualified as a REIT. See "Certain Relationships and
Related Transactions -- Boddie-Noell Properties and B. Mayo Boddie and Nicholas
B. Boddie" on page 69.

In July 1996, we amended our Dividend Reinvestment and Stock Purchase
Plan ("DRIP Plan") to give us the option of issuing new shares directly to Plan
participants. The Plan allows shareholders to reinvest their dividends in
additional shares of our stock and to make additional investments of $25 to
$10,000 per quarter directly with us. During 1996 we issued 19,207 shares
through the DRIP Plan, including 11,151 shares for reinvested dividends and
8,056 shares for optional additional investment. During the first nine months of
1997, we issued 32,794 shares through the DRIP Plan, including 17,492 shares for
reinvested dividends and 15,302 shares for optional additional investment.

At September 30, 1997, we had 3,123,741 shares of common stock
outstanding.

CASH FLOWS AND LIQUIDITY

We will capitalize expenditures if we make them to acquire a new asset,
to materially enhance the value of an existing asset, or to substantially extend
the useful life of an existing asset. In 1996 and 1995 we capitalized all carpet
and vinyl replacements (including $29,000 in 1996 and $120,000 in 1995 included
in acquisition improvements and replacements). In 1994, we generally expensed as
incurred apartment carpet and vinyl replacements ($23,000 expensed in 1994),
except when we made those replacements in conjunction with an acquisition
($91,000 in 1994 included in acquisition improvements and replacements). We
generally funded additions to apartment properties from cash provided by
operating activities and proceeds of common stock issued through our Dividend
Reinvestment and Stock Purchase Plan.

We paid dividends of $0.31 per share per quarter in each quarter of 1994,
1995, 1996 and 1997. The following table shows the total dividends and our
dividend payout ratio (the ratio of dividends paid to funds from operations) for
1994, 1995, 1996 and the first nine months of 1997.

<TABLE>
<CAPTION>
PERIOD DIVIDEND PAYOUT RATIO
- ---------------------------------------------------- ---------------------
<S> <C>
Twelve months ended September 30, 1997.............. 83.9%
Year ended December 31, 1996........................ 83.9%
Year ended December 31, 1995........................ 83.8%
Year ended December 31, 1994........................ 83.4%
</TABLE>

We intend to pay dividends quarterly, expect that these dividends will
substantially exceed the 95% distribution requirement as discussed on page 90,
and anticipate that all dividends will be paid from current funds from
operations.

<PAGE>
In February 1997 the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which they require we adopt on December
31, 1997. At that time, we will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. We do not expect the impact of Statement 128 on
the calculation of primary and fully diluted earnings per share to be material.

SHORT- AND LONG-TERM LIQUIDITY REQUIREMENTS

A summary of scheduled principal payments on long-term debt is included
in the Notes to the Financial Statements. Significant scheduled balloon payments
include maturities of:

(Bullet) two loans payable to affiliates in May 1999 ($7.1 million);

(Bullet) our credit line in December 1999 ($23.9 million outstanding at
September 30, 1997); and

(Bullet) the note payable secured by a deed of trust on Latitudes in
January 2000 (balloon of approximately $12.5 million).

We continue to produce sufficient cash flow to fund our regular dividend
and have positioned the Company for future growth. We generally expect to meet
our short-term liquidity requirements through net cash provided by operations
and utilization of credit facilities. We believe that net cash provided by
operations is, and will continue to be, adequate to meet the REIT operating
requirements in both the short- and the long-term. We anticipate funding our
future acquisition activities, if any, primarily by using short-term credit
facilities as an interim measure to be replaced by funds from equity offerings
or long-term debt. We expect to meet our long-term liquidity requirements, such
as scheduled debt maturities and repayment of short-term financing of possible
property acquisitions, through long-term secured and unsecured borrowings and
the issuance of debt securities or additional equity securities. We believe we
have sufficient resources to meet our short-term liquidity requirements.

Approximately 29.1% of our revenue for the first nine months of 1997 was
derived from Enterprises' payment of rent for the use of our restaurant
properties. In addition, Enterprises is responsible for all of the costs
associated with the maintenance and operations of these properties.

While we expect our reliance on Enterprises to decrease over time, it is
likely that Enterprises' rent payments will still represent a significant
portion of our revenue. On a pro forma basis, giving effect to the completion of
Phase I of the Chrysson acquisition (discussed in more detail on page 23 under
the heading "History and Formation of the Company -- Chrysson Acquisition"), the
restaurant properties accounted for approximately 23.8% of our total revenues
and 32.6% of our net operating income. We expect Enterprises' rent payments to
represent approximately 20% of our revenue on a going forward basis. As a
result, until we are able to

<PAGE>
significantly increase our apartment portfolio or dispose of the restaurant
properties, the financial well being of the Company will be, to a large extent,
dependent on Enterprises' ability to meet its obligations under the terms of the
master lease. The ability of Enterprises to satisfy the requirements of the
master lease depends on its liquidity and capital resources. Historically,
Enterprises has been able to meet its liquidity needs through cash flow
generated from operations and through reliance on its credit facility.

Enterprises' principal line of business is the operation of approximately
360 Hardee's restaurants, 47 of which are owned by the Company. The continued
decline in its restaurant sales (discussed above) has had a material negative
impact on Enterprises' operating cash flow. We have had extensive discussions
with management of Enterprises and have reviewed Enterprises' financial
statements, cash flow analysis, restaurant contribution analysis, sales trend
analysis and projections, and believe that Enterprises will have sufficient
liquidity and capital resources to meet its obligations under the master lease
and credit facility as well as its general corporate operating needs.

The table below shows certain information with respect to the liquidity
and capital resources of Enterprises. The information is derived from
Enterprises' audited financial statements for the fiscal year ended December 31,
1996. Enterprises is an S Corporation for Federal and state income tax purposes;
therefore, its cash flow generated from operations does not include a deduction
for corporate income tax payments.

<TABLE>
<S> <C>
Current assets............................................ $ 10,312,000
Total assets.............................................. 269,524,000
Current liabilities....................................... 37,467,000
Total debt, including current portion of $8,232,000....... 117,116,000
Shareholders' equity...................................... 87,682,000
Net cash provided by operating activities................. 12,391,000
</TABLE>

INFLATION

We do not believe that inflation poses a material risk to the Company.
The leases at our apartment properties are short-term in nature. None are longer
than two years. The restaurant properties are leased on a triple-net basis,
which places the risk of rising operating and maintenance costs on the lessee.

ENVIRONMENTAL MATTERS

Phase I environmental studies performed on the apartment communities did
not identify any problems that we believe would have a material adverse effect
on our results of operations, liquidity or capital resources. Environmental
transaction screens we obtained for each of the restaurant properties in 1995
did not indicate existence of any environmental problems that warranted further
investigation. Enterprises has indemnified us for environmental problems
associated with the restaurant properties under the master lease.

OUR PROPERTIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

GENERAL

We own nine apartment communities containing 2,208 apartment units. Our
apartment communities are located in Charlotte, North Carolina (three
communities), Greensboro, North Carolina (four communities), Winston-Salem,
North Carolina (one community) and Virginia Beach, Virginia (one community).

We believe that resident demand for our apartment communities is
primarily dependant on the general condition of each market's economy and
employment climate, as well as the rate of household formation and the number of
available apartment units in that market. Accordingly, prior to any acquisition,
we become familiar with a market's demographics and historic and projected
employment and population growth rates.

MARKET INFORMATION

We believe that the demographic and economic trends and conditions in our
principal markets indicate a potential for long-term growth in funds from
operations and funds available for distribution from our apartment communities.
Based on information obtained from The Carolinas Real Data and the Tidewater
Multifamily Housing Council, the average physical occupancy rate for apartment
communities in our existing markets approximates 95.1% compared to 94.4% for our
apartment communities. The following table illustrates our presence in each of
our current markets for the time periods indicated.

<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL APARTMENT
COMPANY OWNED UNITS IN
NUMBER OF APARTMENT MARKET OWNED COMPANY MARKET
METROPOLITAN AREA COMMUNITIES UNITS BY THE COMPANY OCCUPANCY(1) OCCUPANCY
- --------------------- ----------- ------------- --------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Charlotte, NC........ 3 682 1.2% 96.0% 94.7%(2)
Greensboro, NC....... 4 906 4.4% 93.7% 94.3%(3)
Virginia Beach, VA... 1 448 1.2% 91.1% 95.6%(4)
Winston-Salem, NC.... 1 172 1.4% 96.8% 95.8%(3)
-
------------- --- ------------ ---------
Total/Average...... 9 2,208 1.8% 94.4% 95.1%
</TABLE>

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

(1) Economic occupancy, defined as gross potential rents less vacancy divided by
gross potential rent, for the month ended September 30, 1997.

(2) Carolinas Real Data, CHARLOTTE APARTMENT REPORT, September 1997.

(3) Carolinas Real Data, GREENSBORO WINSTON-SALEM APARTMENT REPORT, October
1997.

(4) Tidewater Multifamily Housing Council, VACANCY SURVEY, September 1997.

These cities fall into three metropolitan statistical areas, each of
which is characterized by a diverse economic base. We believe that the economies
of these

<PAGE>
areas will result in continued job growth and therefore increased demand for
apartments.

GREENSBORO AND WINSTON-SALEM, NORTH CAROLINA

Greensboro and Winston-Salem, each a point of North Carolina's tri-city
metropolitan area known as the Triad, are located in the central Piedmont area
of North Carolina. Originally known as a center of heavy industry, the job base
has expanded to include higher-paying, higher-skilled jobs in the government,
services, healthcare, retail, distribution and technical fields. The
non-manufacturing work force currently comprises approximately three-quarters of
the total work force (National Decision Systems, Inc., 1997), and those
manufacturers in the area are generally high technology operations paying wages
to their employees that are above average for the local market. Unemployment has
remained consistently below four (and frequently below three) percent
(Employment Security Commission of North Carolina).

The Triad's population has been increasing in recent years at nearly 1.5%
per year and is second in North Carolina only to Charlotte. (Carolinas Real
Data, GREENSBORO WINSTON-SALEM APARTMENT REPORT, October 1997). The 1997
population is estimated to be 1.15 million and is projected to increase to 1.22
million in five years, for an average annual increase of 1.1% (based on
information provided by National Decision Systems), compared to a historical
increase of 1.0% from 1980 to 1990 (based on the U.S. Census). Household
formation is projected to increase over the next five years by 1.4% annually
compared to 1.9% annually from 1980 to 1990.

The relatively strong economy in Greensboro and its surrounding areas has
resulted in increased construction of new apartment units. From April through
September of this year, 1,255 new apartment units were placed in service in the
Triad, 1,666 new apartment units are currently under construction and there are
an additional 1,869 apartment units proposed to be built (Carolinas Real Data).
Despite this high level of new construction, however, absorption has been strong
(1,445 units during the six months ending September 1997).

However, economic growth is moderating, and we expect new construction
will begin to slow down until the units currently under and planned for
construction are absorbed into the market. Since 1994, the Triad's employment
has increased by approximately 1.8% annually, which has resulted in
approximately 900 apartment units per year being absorbed into the market,
although, as noted above, 1,445 apartment units were absorbed into the market
during the six months ended September 30, 1997 alone (Carolinas Real Data).

Average monthly rental rates have increased at a 5.5% annual rate since
1993 and currently average $543 (Carolinas Real Data). Despite these increases,
the area maintains a favorable cost of living, which, in combination with the
business-friendly environment, location and transportation options, we believe
will result in continued, albeit moderate, expansion of the Triad's economic
base and therefore a stable, long-term outlook for apartment demand.

<PAGE>
CHARLOTTE, NORTH CAROLINA

Charlotte and surrounding Mecklenburg County are located in the southwest
Piedmont region of North Carolina on the South Carolina border. Charlotte is
best known as a major banking center; it is the second largest in the country
with over $450 billion in total assets and is home to NationsBank and First
Union. Charlotte is also the sixth largest wholesale center and the 11th largest
distribution center in the United States (Carolinas Real Data, CHARLOTTE
APARTMENT REPORT, September 1997). Charlotte and the surrounding seven counties
are the largest metropolitan statistical area in North Carolina and the 43rd
largest in the United States.

Throughout the 1990's, the economy in the Charlotte metropolitan
statistical area has been strong and remains on the upswing, inspired by a
strong pro-business attitude among city and business leaders. In the past six
months alone, this attitude has led the Vanguard Group, a Pennsylvania based
financial institution, to announce the opening of a customer service center in
Charlotte, the Metropolitan Property & Casualty Insurance Company to open a
field claims office, and several smaller companies to open, relocate or expand
in Charlotte, such as Alydaar Software Corp., a software company focusing on
solving the Year 2000 problem, which recently announced plans to hire 250 more
people in Charlotte before the end of 1997.

The job base has increased at an annual rate of 3.7% from 619,000 in 1991
to 742,000 in 1996. (U.S. Housing Markets Research Report, 1997) Unemployment
has remained low and was 4.3% as of September 1997 according to the Employment
Security Commission of North Carolina.

The Charlotte area's population has increased by nearly 20% since 1990.
Mecklenburg County's population has increased by approximately 14,000 per year
since 1990, and the Charlotte area's job growth has averaged 7,000 to 9,000 per
year (Carolinas Real Data). The 1997 population has been estimated to be 1.3
million and is projected to increase to 1.5 million in five years, for an
average annual increase of 1.9% (based on information provided by National
Decision Systems), compared to a historical average annual increase of 1.8% from
1980 to 1990 (based on the U.S. Census). Household formation is projected to
increase even faster over the next five years by 2.1% annually, although this is
slightly lower than the 2.6% historical annual rate from 1980 to 1990 (National
Decision Systems).

Historically, approximately 2,000 to 2,400 apartment units per year have
been absorbed into the Charlotte apartment market, although 1996 and 1997 saw a
much higher rate of approximately 3,100 units absorbed into the market annually.
From February through August of this year, despite 2,240 new apartment units
being placed into service in the Charlotte-Mecklenburg area, the area enjoyed
net absorption with approximately 2,700 units being absorbed into the market
(Carolinas Real Data). Given that economic growth remains strong, we do not
expect market absorption to lag significantly behind current and planned
construction.

Average monthly rental rates increased by 5% for the 12 month period
ended September 30, 1997, and currently average $629 (Carolinas Real Data). This

<PAGE>
somewhat sharp upswing in rents, however, followed a three year period in the
early 1990s when rental rates increased slower than the overall inflation rate.
Based on the continued expansion of the financial services sector, the
business-friendly environment, and Charlotte's location and transportation
options, we believe the Charlotte area's economy has the underpinnings for
stable, long-term growth. If this is the case, the long-term demand for
apartment units should remain healthy.

VIRGINIA BEACH, VIRGINIA

Virginia Beach, Virginia is one of Virginia's largest and fastest growing
cities. Located in the southeast corner of the state, it is the largest
municipality comprising the Hampton Roads Metropolitan Statistical Area.
Virginia Beach is bordered on the south by North Carolina, on the east by the
Atlantic Ocean, on the north by Hampton Roads and on the west by the cities of
Norfolk and Chesapeake. Dominant industries in the area have been
shipbuilding/repair, the military, port activities and tourism, but the last
decade has seen financial firms, distribution companies, telemarketing and
customer service operations make their way to the Hampton Roads area.

One of the area's most important industries is rail transport. Shippers
can reach every major distribution center east of the Mississippi via a one-line
haul. Norfolk is the eastern terminus for the Norfolk Southern Railroad, running
east-west through Virginia and connecting the industrial centers of the Midwest
to international trade. Norfolk Southern, which is headquartered in Norfolk,
also owns North American Van Lines, Inc. CSX Transportation, Inc., headquartered
in Richmond, has its eastern terminus in Newport News.

Claiming to be the largest resort city in the world, Virginia Beach is
best known for its 30 miles of Atlantic oceanfront and resort strip; the Hampton
Roads area in general, however, is best known for the high concentration of
military establishments including the Norfolk Naval Base, the world's largest
naval base.

This concentration of military establishments, and the resulting
dependence on Federal defense spending to fuel growth in the area, has long been
recognized as contributing to volatility in the region's economy. Through
economic development initiatives, area leaders responded in an effort to
minimize this reliance on defense spending, and the region's economy has
diversified substantially (Hampton Roads Chamber of Commerce).

Recent years have seen Virginia Beach emerge as a national distribution
and customer service center. For example, Lillian Vernon, a mail order company,
relocated there in 1988 and expanded in 1994 to include substantially all of its
non-manufacturing operations there. CIGNA Corporation, a national financial
services firm, opened its customer service center in Virginia Beach in 1991.
Avis, the second largest car rental company in the world, also has its customer
service center in Virginia Beach. And Capital Research and Management Company, a
Los Angeles mutual funds company, moved its service center to neighboring
Norfolk in 1992. Ford Motor Company also has a truck vehicle assembly plant in
Norfolk, and Newport

<PAGE>
News Shipbuilding, the state's largest private employer, is the country's
largest ship design and construction company and has produced over 800 ships
over the past 111 years (Hampton Roads Chamber of Commerce).

The 1997 population of the metropolitan statistical area that includes
Virginia Beach has been estimated to be 1.56 million and is projected to
increase to 1.64 million in five years, for an average annual increase of nearly
one percent (based on information provided by National Decision Systems). This
compares to a historical average annual increase of 1.9% from 1980 to 1990
(based on the U.S. Census). Household formation is projected to increase over
the next five years by 1.6% annually, compared to a 2.5% historical rate from
1980 to 1990.

Since the 1980s, most new development has been institutionally or
municipally related. It is a stated goal in Virginia Beach's comprehensive plan
to increase the current level of office and industrial uses to supplement the
tax base. We believe that the efforts of economic development officials will
likely result in a continuation of employer relocations into the city and the
area. The area continues to have a low unemployment rate. The metropolitan
statistical area's unemployment rate for 1996 was 5.0% and for 1997 is projected
to be 4.9% (Virginia Employment Security Commission). Virginia Beach's
unemployment rate is even lower, with a 4.3% rate in 1996 and a 3.9% rate
projected for 1997.

According to the Hampton Roads Statistical Digest, the area offers
reasonable wage rates, a large labor pool, inexpensive land, the Port of Hampton
Roads and the limited influence of labor unions (Virginia is a right to work
state). The number of company relocations and the emergence of the port of
Hampton Roads into one of the most important shipping centers on the East Coast
attest to these factors. We expect Virginia Beach and the Hampton Roads area to
experience slow but continued growth into the future. Local government attitudes
toward expanding commerce and luring tourism should act as a vehicle for
attracting businesses to the area and provide a steady demand for apartment
units.

<PAGE>
GROWTH IN OUR COMPANY'S PRINCIPAL MARKETS

<TABLE>
<CAPTION>
1997-2002(2)
1991-1996(1) -----------------------
----------------------- PROJECTED
HOUSEHOLD PROJECTED HOUSEHOLD
POPULATION FORMATION POPULATION FORMATION
METROPOLITAN AREA GROWTH GROWTH GROWTH GROWTH
- -------------------------------------------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Charlotte, NC..................................... 11.3% 11.1% 9.7% 11.2%
Greensboro/Winston-Salem, NC...................... 7.3% 7.0% 5.8% 7.2%
Virginia Beach, VA................................ 4.1% 4.5% 4.8% 8.0%

Company's principal markets....................... 7.6% 7.5% 6.8% 8.8%
United States..................................... 5.1% 6.2% 4.3% 5.7%
</TABLE>

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

(1) U.S. Housing Markets -- Research Report, November 1997

(2) National Decision Systems -- Fall Data Report -- October 1997

We believe that the trends illustrated above will increase demand for
apartment units in the markets in which we own apartment communities. However,
we can provide no assurances that such projected future conditions or projected
growth rates will materialize.

APARTMENT COMMUNITIES

Through the Operating Partnership, we own and manage nine apartment
communities consisting of 2,208 apartment units. The average age of the
apartment communities is approximately 6.7 years. The average economic occupancy
rate for all 2,208 apartment units for the month of September 1997 was 94.4%.
The buildings in our apartment communities are generally wood-framed,
vinyl-sided two- and three-story buildings, with exterior entrances,
individually metered gas and electric service and individual heating and cooling
systems. Our combined apartment units are comprised of 37.2% one bedroom units,
55.3% two bedroom units and 7.5% three bedroom units. The units average 996
square feet in area and are well equipped with modern appliances and other
conveniences. All include swimming pools, tennis courts and club rooms, and most
have exercise facilities.

The tables on the following pages summarize information about each of our
apartment communities.

<PAGE>
INFORMATION ABOUT APARTMENT COMMUNITIES
<TABLE>
<CAPTION>
APARTMENT UNIT
TOTAL
RENTABLE TYPE
NO. OF AREA ----------------
APT. YEAR DATE TOTAL (SQ. 1 2 3
PROPERTY LOCATION UNITS COMPLETED ACQUIRED ACREAGE FT.) BR BR BR
---------------------------- ------------------ ------ --------- -------- ------- -------- --- --- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EXISTING COMMUNITIES
Harris Hill............... Charlotte, NC 184 1988 12/94 18.4 167,920 67 117 --
Latitudes................. Virginia Beach, VA 448 1989 10/94 24.9 358,700 269 159 20
Oakbrook.................. Charlotte, NC 162 1985 6/94 16.4 178,668 32 120 10
Paces Commons............. Charlotte, NC 336 1988 6/93 24.8 322,046 154 142 40
Paces Village............. Greensboro, NC 198 1988 4/96 15.5 167,886 88 110 --

CHRYSSON COMMUNITIES
ACQUIRED
Abbington Place (1)....... Greensboro, NC 360 1994(5) 12/97 37.4 400,728 96 216 48
Pepperstone (1)........... Greensboro, NC 108 1992 12/97 10.1 113,076 -- 108 --
Savannah Place (1)........ Winston-Salem, NC 172 1991 12/97 15.4 182,196 44 128 --
Waterford Place (1)....... Greensboro, NC 240 1997 12/97 20.6 277,296 72 120 48

CHRYSSON COMMUNITIES UNDER
CONSTRUCTION
Allerton Place (2)........ Greensboro, NC 228 -- -- 19.2 241,530 54 126 48
Summerlyn Place (2)....... Burlington, NC 140 -- -- 12.1 154,116 48 84 8
Brookford Place (2)....... Winston-Salem, NC 108 -- -- 6.3 103,392 36 72 --

WEIGHTED MONTHLY RENT
AVERAGE ---------------------------
APT. ECONOMIC AVERAGE ECONOMIC PERCENTAGE AVERAGE
SIZE OCCUPANCY OCCUPANCY(3) TURNOVER(4) AS OF ANNUAL AVERAGE
(SQ. SEPTEMBER ------------------- ------------------- SEPT. 30 ----------------
FT.) 1997 1996 1995 1994 1997 1996 1995 1997 1996 1995 1994
-------- -------------- ---- ---- ---- ---- ---- ---- -------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

912 96% 93% 96% -- 72% 71% 65% $710 $717 $683 --
800 91% 94% 95% 93% 64% 59% 64% $655 $637 $613 $606
1,100 94% 94% 98% 98% 59% 65% 59% $768 $780 $750 $712
958 98% 95% 94% 95% 51% 55% 68% $702 $685 $655 $614
848 92% 94% -- -- 55% 60% -- $682 $693 -- --

1,113 96% 97% (5) 62% (5) -- 62% (5) 70% (5) -- $767(5) $770 -- --
1,047 97% 98% 98% 98% 67% 53% 64% $653 $660 -- --
1,059 97% 98% 98% 98% 62% 80% 63% $734 $717 -- --
1,155 91% -- -- -- -- -- -- -- -- -- --

1,064 -- -- -- -- -- -- -- -- -- -- --
1,101 -- -- -- -- -- -- -- -- -- -- --
957 -- -- -- -- -- -- -- -- -- -- --
</TABLE>

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

(1) Added as part of Phase I of the Chrysson acquisition. For the Phase
I Chrysson properties, the "Monthly Rent" reflects the weighted
average rent, taking into account the dates on which individual
apartment units within a community were placed in service.

(2) To be acquired upon completion and lease up.

(3) "Average Economic Occupancy" is calculated as gross potential rent
less vacancy divided by gross potential rent.

(4) "Percentage Turnover" reflects, on an annual basis, the number of
residents who move out of the property. Percentage Turnover for 1997
reflects turnover through September 30, 1997 on an annualized basis.

(5) Phase I of Abbington Place only.

<PAGE>
SUMMARY OF APARTMENT UNIT AMENITIES

<TABLE>
<CAPTION>
LARGE PATIO
STORAGE DECK,
WASHER & OR CABLE BALCONY
MINI- REFRIG. & DRYER VAULTED WALK- IN TV OR
PROPERTY BLINDS CARPETING DISHWASHER HOOK-UPS CEILINGS FIREPLACES CLOSET READY SUNROOM
- --------------------- ------- ---------- ----------- --------- --------- ----------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EXISTING COMMUNITIES
Harris Hill........ All All All All Select Select All All All
Latitudes.......... All All All All Select Select All All All
Oakbrook........... All All All All Select All All All All
Paces Commons...... All All All All Select Select All All All
Paces Village...... All All All All Select Select All All All
CHRYSSON COMMUNITIES
ACQUIRED
Abbington Place.... All All All All Select Select All All All
Pepperstone........ All All All All Select Select All All All
Savannah Place..... All All All All Select Select All All All
Waterford Place.... All All All All Select Select All All All
CHRYSSON COMMUNITIES
UNDER CONSTRUCTION
Allerton Place..... All All All All Select Select All All All
Summerlyn Place.... All All All All Select Select All All All
Brookford Place.... All All All All Select Select All All All
</TABLE>

SUMMARY OF RECREATIONAL AMENITIES

<TABLE>
<CAPTION>
FITNESS TENNIS TOT LOT/ SAUNA OR
PROPERTY CLUBHOUSE CENTER POOL COURT(S) TOT POOL WHIRLPOOL OTHER
- ------------------------- ---------- -------- ----- --------- --------- ---------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EXISTING COMMUNITIES
Harris Hill............ Yes Yes Yes Yes Yes Yes Basketball court; car
wash
Latitudes.............. Yes Yes Yes Yes Yes Yes Basketball court; sand
volleyball court; car
wash
Oakbrook............... Yes No Yes Yes No Yes Carports; car wash
Paces Commons.......... Yes Yes Yes Yes Yes Yes Two pools; car wash;
exercise trail
Paces Village.......... Yes Yes Yes Yes No Yes Car wash

CHRYSSON COMMUNITIES
ACQUIRED
Abbington Place........ Yes Yes Yes Yes Yes No Garages; putting green
Pepperstone............ Yes Yes Yes Yes Yes No
Savannah Place......... Yes Yes Yes Yes Yes No Garages; putting green
Waterford Place........ Yes Yes Yes Yes Yes No Garages; putting green

CHRYSSON COMMUNITIES
UNDER CONSTRUCTION
Allerton Place......... Yes Yes Yes Yes Yes No Garages; mini storage
facility available
Summerlyn Place........ Yes Yes Yes Yes Yes No Garages; putting green
Brookford Place........ Yes Yes Yes Yes Yes No Garages
</TABLE>

<PAGE>
RESTAURANT PROPERTIES

Our 47 restaurant properties are listed in Schedule III to the financial
statements on page F-17. We paid an average of $920,000 for each restaurant
property. The details of our lease arrangement with Enterprises is discussed
under "History and Formation of the Company -- Early History" on page 21 and
" -- Renegotiation of Master Lease" on page 22.

The restaurant properties are operated by Enterprises as Hardee's
restaurants pursuant to franchise agreements with Hardee's Food Systems, Inc.
These agreements require that the properties conform to a standard design
specified by Hardee's. The current design consists of a one-story brick, stucco
or wood building that embodies a contemporary style with substantial plate glass
window areas. The buildings average 3,300 square feet and are located on sites
ranging from 1 to 1.3 acres. The buildings are suitable for conversion to a
number of uses, but the interiors would have to be substantially modified prior
to their use in non-restaurant applications. Hardee's owns a design patent on
certain elements of the building and requires franchisees to make certain
exterior modifications if the location is discontinued as a Hardee's restaurant.

OTHER INFORMATION ABOUT OUR PROPERTIES

We present information concerning the location of all 47 restaurant
properties, as well as information regarding the encumbrances, cost and
depreciation on all of our properties owned prior to the Chrysson acquisition on
Schedule III to the financial statements appearing on page F-17 of this
prospectus.

CERTAIN POLICIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SHORT-TERM INVESTMENTS

Prior to making any acquisitions and during the periods between the
receipt of revenues and their distribution to you, we will invest our liquid
assets in certain short-term investments. These may include:

(Bullet) interest-bearing bank accounts;

(Bullet) certificates of deposit;

(Bullet) short-term money-market securities;

(Bullet) short-term government securities;

(Bullet) mortgage-backed securities guaranteed by the Government
National Mortgage Association;

<PAGE>
(Bullet) mortgages insured by the Federal Housing Administration or
guaranteed by the Veterans Administration; or

(Bullet) mortgage loan participations purchased from banks or other
financial institutions.

We may also invest in other similar types of instruments. While we reserve the
right to invest in these types of securities, we have no immediate plans to do
so.

The yield on such interim investments may be higher or lower than the
yield we receive on our real estate properties.

INVESTMENTS IN OTHER REAL ESTATE ENTITIES

As we have discussed earlier, we recently converted our organizational
structure to an UPREIT. In doing so, we contributed our net assets to the
Operating Partnership in exchange for Units in the Operating Partnership. See
the discussion under "History and Formation of the Company -- Other Activity" on
page 23. We also own 95% of the economic interest of the Management Company.

We have no other ownership interests in entities primarily engaged in
real estate activities. We have no immediate plans to make any such investments,
other than investments in wholly owned subsidiaries of the Operating
Partnership, which may own certain of our assets. If economically attractive
opportunities arise, we may also invest in joint venture or "DownREIT"
partnerships or other entities in order to acquire interests in specific
apartment communities.

LOANS TO OTHER PERSONS

We do not generally make loans to third parties. However, we did make a
participating loan to the limited partnership that owns one of our managed
apartment communities. See "History and Formation of the Company -- Other
Activity" on page 23.

BORROWINGS

We have the authority to negotiate lines of credit and arrange for other
short-term or long-term borrowings from commercial lenders. In addition, we may
also:

(Bullet) obtain credit through the public issuance of debt;

(Bullet) obtain credit through the private placement of debt securities
with institutional investors;

(Bullet) incur mortgage indebtedness on real estate which we acquire;

<PAGE>
(Bullet) invest in properties subject to existing secured loans;

(Bullet) obtain other mortgage financing for unleveraged properties in
our portfolio; and

(Bullet) refinance properties acquired on a leveraged basis.

There is no limitation on the number of mortgages which may be placed on
any one property. Our bylaws prohibit us from incurring debt in excess of 300%
of our net assets. For these purposes, net assets are defined as total assets at
cost, excluding intangible assets, before deducting depreciation or other
non-cash reserves, less total liabilities. However, the bylaws allow us to
exceed this limit if we obtain approval from a majority of our directors,
including a majority of the independent directors. We must also disclose to you
in our next quarterly report that we exceeded this limit and provide a
justification for doing so. Further, we intend to maintain a ratio of
debt-to-total market capitalization of 60% or less, even though none of our
governing documents provide such a restriction.

POLICIES ON CERTAIN INVESTMENTS AND ACTIVITIES

While we expect to acquire other apartment communities in North Carolina,
South Carolina and Virginia, we may make future investments outside of these
states. We will not have any limit on the amount or percentage of our assets
invested in any single apartment community or group of related properties. While
we intend to invest primarily in existing income-producing properties, we may
develop properties ourselves or invest in properties being developed by others
if we believe that the risk-adjusted return on such an investment would exceed
returns available from the acquisition of existing apartment communities.

Our bylaws impose certain prohibitions and restrictions on various
investment practices and activities. We cannot:

(Bullet) invest in mortgage loans unless an appraisal is obtained
concerning the underlying property;

(Bullet) invest in commodity or commodity future contracts other than
interest rate futures used solely for hedging purposes;

(Bullet) issue debt securities unless the historical debt service
coverage for the most recently completed fiscal year is
sufficient to service the higher level of debt (without regard
to any applicable balloon principal payments);

(Bullet) invest in real estate contracts for sale, unless such real
estate contracts are recordable in the chain of title; or

(Bullet) act in any way that would disqualify us from being a real
estate investment trust under the Internal Revenue Code, unless
we obtain proper shareholder approval.

<PAGE>
The bylaws contain a provision noting that "the Company does not intend
to" do the following:

(Bullet) invest in the securities of issuers for the purpose of
exercising control (except with respect to wholly-owned
subsidiaries);

(Bullet) engage in the trading of securities of other issuers;

(Bullet) underwrite securities of other issuers;

(Bullet) engage in the purchase and sale (or turnover) of investments
other than as described in the Registration Statement; or

(Bullet) offer securities in exchange for property unless deemed prudent
by a majority of our directors.

However, we believe that the above-noted provision does not prohibit us from
engaging in any of these activities if performing these activities would benefit
us and would not disqualify us from qualifying as a REIT. Of the items that "the
Company does not intend to" do, we have made an investment in the Management
Company (described under "History and Formation of the Company -- Formation of
BNP Management, Inc." on page 22) for the purpose of helping to maintain our
REIT status. We own 95% of the economic interest, which includes 1% of the
voting interest, of the Management Company.

The only other item in which we have engaged or intend to engage is the
issuance of securities in exchange for property. As described under the heading
"Certain Relationships and Related Transactions -- Boddie-Noell Properties and
B. Mayo Boddie and Nicholas B. Boddie" on page 69, the earn-out consideration
for the acquisition of BT Venture Corporation could be paid in the form of cash
or, at our option, shares of our common stock. We have elected to make such
payments with common stock. Additionally, we will issue Units in exchange for
property as part of the Chrysson acquisition and for future apartment community
acquisitions. We tell you about this on page 30 under the heading "The
Company -- Our Growth Strategy -- EXTERNAL GROWTH STRATEGY."

CONFLICTS OF INTEREST

The Boddies have significant ownership or control positions in the
Company, Enterprises and Boddie Investment Company. As we note under "Certain
Relationships and Related Transactions -- Boddie-Noell Properties and
Boddie-Noell Enterprises" on page 70, Enterprises has a right of first refusal
to purchase the restaurant properties. If we negotiate the sale of the
restaurant properties to a third party, Enterprises has the right to purchase
the restaurants on the same terms and conditions as the third party. Boddie
Investment Company is the general partner of the limited partnerships owning the
properties we manage. It is also the general partner of the limited partnership
to which we have made a loan (see "History and Formation of the Company -- Other
Activity" on page 23). Accordingly, there are

<PAGE>
inherent conflicts of interest in our relationship with Enterprises and in our
management of the properties owned by those limited partnerships.

In addition, the bylaws specify that any contract or transaction between
us and one or more of our directors or officers, or between us and any affiliate
of any of those persons, must be approved by a majority of both the board of
directors and the independent directors who are independent of the transaction.
Our bylaws specify the criteria that the independent directors must use.
Generally, the independent directors must determine that:

(Bullet) the transaction is fair and reasonable to us and on terms as
favorable to us as those available from unaffiliated third
parties;

(Bullet) if an acquisition of property other than mortgage loans is
involved, the total consideration we will pay for the property
must be less than or equal to the appraised or fair value of
such property. If the price exceeds the cost of the asset to
the seller, the independent directors must justify such excess;
and

(Bullet) if the transaction involves the making of loans or the
borrowing of money, the transaction must be fair, competitive,
and commercially reasonable when compared to transactions
between unaffiliated lenders and borrowers under the same
circumstances.

Maryland law contains similar restrictions on a director or officer's ability to
transact business with us. However, our bylaw provisions are more restrictive.
Under Maryland law:

(Bullet) either the independent directors or independent shareholders
can approve a related-party transaction. Our bylaws do not
provide for disinterested shareholder approval; and

(Bullet) a transaction need either be fair and reasonable or otherwise
approved as described in the preceding point. Our bylaws
require that the transaction be both fair and reasonable and be
approved by a majority of the independent directors.

POLICY CHANGES

The prohibitions and restrictions described under " -- Policies on
Certain Investments and Activities" are contained in our bylaws and cannot be
changed without shareholder approval. Our directors can change, without
shareholder approval, all of the other policies we told you about above.

DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

We currently have five members on our Board of Directors. Upon completion
of the Chrysson acquisition, two of our previous board members -- Nicholas B.
Boddie and Richard A. Urquhart, Jr. -- resigned as directors. As required by the
agreement with the Chrysson Parties, they have appointed two directors to
replace Messrs. Boddie and Urquhart. The initial appointees are Paul G. Chrysson
and W. Michael Gilley. Upon completion of the offering, our Board will be
expanded to seven members and will include D. Scott Wilkerson and Philip S.
Payne, our two most senior executive officers. Under the agreement with the
Chrysson Parties, after the Board is expanded to seven, the Chrysson Parties
have the right to require the resignation of another Board member and to
nominate another person unaffiliated with them, subject to our Board's approval.
Initially, the Chrysson Parties have agreed to have Donald R. Pesta, Jr., a
current board member, fill this independent director position. In the future,
they may choose to nominate someone else, subject again to our Board's approval.

We have set forth below a listing and brief biography of each person who
will be a Director or Executive Officer following completion of the offering.

<TABLE>
<CAPTION>
DIRECTOR/OFFICER
NAME AGE POSITION SINCE
- -------------------- --- --------------------------------------------- ----------------
<S> <C> <C> <C>
B. Mayo Boddie 67 Chairman of the Board, Director April 1987
D. Scott Wilkerson 40 Director, President and Chief Executive
Officer October 1994
Philip S. Payne 46 Director, Executive Vice President, Treasurer
and Chief Financial Officer October 1994
William H. Stanley 72 Director April 1987
Donald R. Pesta, Jr. 44 Director January 1996
Paul G. Chrysson 42 Director December 1997
W. Michael Gilley 42 Director December 1997
Pamela B. Novak 44 Vice President, Controller and Chief
Accounting Officer October 1994
Douglas E. Anderson 50 Vice President, Secretary April 1987
</TABLE>

B. Mayo Boddie -- Chairman of the Board of Directors. Mr. Boddie was one
of our founders and a co-founder of Enterprises in 1961. He serves as Chairman
of the Board of Directors of both companies. Mr. Boddie served as chief
executive officer of the Company from its inception until April 1995. Mr. Boddie
serves as a director of First Union National Bank of North Carolina.

D. Scott Wilkerson -- Director, President and Chief Executive Officer.
Mr. Wilkerson joined BT Venture Corporation in 1987 and served in various
officer level positions, including Vice President of Administration and Finance
and Vice President for Acquisitions and Development before becoming President in
January 1994. He was named Chief Executive Officer in April 1995. From 1980 to
1986,

<PAGE>
Mr. Wilkerson was with Arthur Andersen LLP, in Charlotte, North Carolina,
serving as tax manager from 1985 to 1986. His specialization was in the
representation of real estate syndicators, developers and management companies.
Mr. Wilkerson received a B.S. degree in accounting from the University of North
Carolina at Charlotte in 1980. He is a licensed certified public accountant and
licensed real estate broker. He is a member of the Board of Directors of the
Apartment Association of North Carolina and the Charlotte Apartment Association.
He is active in various professional, civic and charitable activities.

Philip S. Payne -- Director, Executive Vice President, Treasurer and
Chief Financial Officer. Mr. Payne joined BT Venture Corporation in 1990 as Vice
President of Capital Market Activities and became Executive Vice President and
Chief Financial Officer in January 1993. He was named Treasurer in April 1995.
From 1987 to 1990 he was a principal in Payne Knowles Investment Group, a
financial planning firm. From 1983 to 1987 he was a registered representative
with Legg Mason Wood Walker. From 1978 to 1983, Mr. Payne practiced law, and he
currently maintains his license to practice law in Virginia. He received a B.S.
degree from the College of William and Mary in 1973 and a J.D. degree in 1978
from the same institution.

William H. Stanley -- Director. Mr. Stanley is retired from the positions
of Chairman of the Board of Directors and Chief Executive Officer of Peoples
Bank and Trust Company. Mr. Stanley serves as a director of Ellett Bros., Inc.

Donald R. Pesta, Jr. -- Director. Mr. Pesta is a certified public
accountant with extensive experience in real estate related matters. Mr. Pesta
is the founding partner of the accounting firm of Pesta, Finnie & Associates. He
is a former partner of Arthur Andersen & Co.

Paul G. Chrysson -- Director. Mr. Chrysson is President of C.B.
Development Company, Inc., a developer of single family and multi-family
residential properties. Mr. Chrysson is on the Board of Directors of Amos
Cottage Children's Hospital and Greenbriar Corporation. He is also on the Board
of Advisors of Wachovia Bank (Forsyth County). He is a former director of Triad
Bank and United Carolina Bank (North Carolina). He has also served on the boards
of various other charitable organizations. He has been a licensed real estate
broker since 1974 and a licensed contractor since 1978.

W. Michael Gilley -- Director. Mr. Gilley is President of Bartram
Investment Properties, Inc., a position he has held for over five years. From
January 1995 to January 1997 he was Executive Vice President of Greenbriar
Corporation. He also served on their Board of Directors from September 1994 to
September 1996. He has been a licensed real estate broker since 1984.

Pamela B. Novak -- Vice President and Controller. A licensed certified
public accountant, Ms. Novak joined BT Venture Corporation in 1993 as
controller. From 1984 to 1993, she was employed by Ernst & Young, LLP and served
as an audit manager from 1987 through 1993. She received a B.S. in accounting
from the University of North Carolina at Charlotte in 1984.

<PAGE>
Douglas E. Anderson -- Vice President and Secretary. Mr. Anderson has
served as Vice President and Secretary since our inception in 1987. He has been
with Enterprises since 1977 and is currently a director, Executive Vice
President and Secretary of Enterprises. Mr. Anderson is also president of BNE
Land and Development Company, the real estate development division of
Enterprises. He serves as a director of Wachovia Bank of Rocky Mount, North
Carolina. He received a B.S. degree in finance and accounting from the
University of North Carolina at Chapel Hill in 1970.

Under our Articles of Incorporation, a majority of the directors must be
independent. Our Articles define an independent director as a director who is
not:

(Bullet) an officer or employee of the Company or one of its
subsidiaries;

(Bullet) a spouse, parent, child or relative living in the same
household of a principal executive officer of the Company; or

(Bullet) an individual member of an organization that acts as an
advisor, consultant, legal counsel or in some similar capacity
and that receives compensation on a continuing basis from the
Company, other than director's fees.

Upon completion of the offering, Mr. Boddie, Mr. Stanley, Mr. Pesta, Mr.
Chrysson and Mr. Gilley will be our independent directors.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

BODDIE-NOELL PROPERTIES AND B. MAYO BODDIE AND NICHOLAS B. BODDIE

B. Mayo Boddie, Chairman of our Board of Directors, is Chairman of the
Board of Directors and Chief Executive Officer of Enterprises. Nicholas B.
Boddie is his brother and was a former Vice Chairman and a director of the
Company prior to his resignation concurrent with the closing of Phase I of the
Chrysson acquisition. He is also the Vice President and a director of
Enterprises. The Boddies and certain of their family members are the sole owners
of Enterprises. We lease our 47 restaurant properties to Enterprises. See
" -- Boddie-Noell Properties and Boddie-Noell Enterprises" below.

The Boddies are the sole shareholders and directors of Boddie Investment
Company. See " -- Boddie-Noell Properties and Boddie Investment Company" below.

The Boddies were the sole shareholders and directors of BT Venture
Corporation. On October 1, 1994, we acquired BT Venture Corporation. As a result
of the acquisition, the Boddies received consideration comprised of cash, shares
of our common stock and relief from certain debt and contractual and contingent
obligations. The contract purchase price for BT Venture Corporation was $23.2
million. This

<PAGE>
consideration consisted of a cash payment of $91,000, the issuance of 134,610
shares of our common stock and the assumption of $21.3 million in debt and other
payables. In addition, the Boddies were entitled to receive additional
compensation valued at up to $1.7 million, based on whether we met certain
performance criteria. We refer to this latter consideration as "earn-out
consideration."

At our election, we may pay the earn-out consideration by issuing shares
of common stock or by paying cash. Through October 1, 1997, we issued a total of
80,750 shares of common stock to the Boddies in payment of the earn-out
consideration. Under the terms of the acquisition agreement, the Boddies are due
earn-out consideration of approximately $572,000, which we can pay in cash or
43,438 shares of common stock, if permitted under the Internal Revenue Code. We
have not issued these remaining earn-out shares because of certain ownership
limitations in the Internal Revenue Code; however, as a result of a change in
the tax laws governing affiliated ownership, which will become effective on
January 1, 1998, we intend to issue these shares at that time.

As part of the acquisition, the Boddies have indemnified the Company,
subject to certain limitations, against any claim against us which we assume as
a result of our being the successor-in-interest to BT Venture Corporation.

B. Mayo Boddie and Nicholas B. Boddie have not received any compensation
for their services as Chairman and Vice Chairman, respectively, or as Directors
of the Company.

BODDIE-NOELL PROPERTIES AND BODDIE-NOELL ENTERPRISES

As we noted under the heading "History and Formation of the Company --
Early History" on page 21, we purchased 47 existing Hardee's restaurant
properties from BNE Realty Partners, Limited Partnership, an affiliate of
Enterprises, in 1987. We discussed the franchise agreement between Enterprises
and Hardee's Food Systems, Inc. under the heading "Our Properties -- Restaurant
Properties" on page 62 and the terms of our triple-net, master lease agreement
with Enterprises under the heading "History and Formation of the
Company -- Early History" on page 21. Further, Enterprises has a right of first
refusal to purchase the 47 restaurant properties. This means that if we
negotiate the sale of the restaurant properties to a third party, Enterprises
has the right to purchase the restaurants on the same terms and conditions. This
may make it more difficult to sell the restaurants.

For the year ended December 31, 1996, the master lease with Enterprises
resulted in rental income of $4.5 million, or approximately 31.0% of total
revenues. For the nine months ended September 30, 1997 such revenues accounted
for approximately 29.1% of total revenues on a historical basis and 22.7% on a
pro forma basis. We expect such percentages to decline on a going forward basis.
Enterprises is responsible for all property insurance, real estate taxes,
utilities, maintenance, and alteration expenses relating to the operation of the
restaurant properties.

<PAGE>
In connection with the acquisition of BT Venture Corporation, we assumed
a note payable to Enterprises in the amount of $6.1 million. The note bears
interest at a floating rate equal to the 30-day LIBOR rate plus 150 basis points
capped at 8.0%. Payments are interest only and paid quarterly. The note is due
in full on May 1, 1999. During 1996, we recorded interest on this note to
Enterprises in the amount of $432,000, and during the first nine months of 1997
we recorded interest of $329,000. At September 30, 1997, the effective interest
rate on this note was 7.3%.

BODDIE-NOELL PROPERTIES AND BODDIE INVESTMENT COMPANY

With the acquisition of BT Venture Corporation in October 1994, we
assumed fee management of nine apartment properties and three shopping centers
of which we currently manage seven apartment communities and two shopping
centers. Boddie Investment Company is the general partner of the limited
partnerships that own the apartment properties and shopping centers we manage
but do not own. The Boddies are the sole shareholders of Boddie Investment
Company. The Boddies may determine that Boddie Investment Company's interests
would be better served by the sale of Boddie Investment Company's apartment or
shopping center properties or the renegotiation of the management contracts. The
sale of the properties could result in the Management Company's loss of the
management contracts. We recognized $149,000 of revenue from the Management
Company during 1996 and $183,000 through the first nine months of 1997. Any
renegotiated management contract would have to be approved by a majority of the
directors of the Management Company (currently Philip S. Payne and D. Scott
Wilkerson). The Boddies' positions within our Company and within Boddie
Investment Company may provide them with information they could use to their
advantage in such contract negotiations. The Boddies, however, have stated that
they have no intentions of canceling the existing management contracts.

In connection with the acquisition of BT Venture Corporation, we assumed
a note payable to Boddie Investment Company in the amount of $956,000. The note
bears interest at a floating rate equal to the 30-day LIBOR rate plus 150 basis
points capped at 8.0%. Payments are interest only and paid quarterly. The note
is due in full on May 1, 1999. During 1996, we recorded interest on this note to
Boddie Investment Company in the amount of $68,000, and during the first nine
months of 1997 we recorded interest of $52,000. On September 30, 1997, the
effective interest rate on this note was 7.3%.

On February 27, 1997, we entered into a participating loan agreement with
The Villages of Chapel Hill Limited Partnership, a limited partnership whose
general partner is Boddie Investment Company. Under the terms of the agreement,
we have committed to loaning The Villages up to $2.6 million to fund a
substantial rehabilitation of the apartment community. We also guaranteed a $1.5
million bank loan. In exchange, we received or will receive the following:

(Bullet) control over selection of the property management provider
(which currently is the Management Company);

<PAGE>
(Bullet) interest on our loan at the greater of 12.5% or the 30 day
LIBOR rate plus 6.125%;

(Bullet) 25% of the increase in gross revenue in excess of $146,333 per
month from the property over the next seven years; and

(Bullet) 25% of the value of the property in excess of $10 million at
the earlier of the end of seven years or upon its sale.

We will fund advances to The Villages through draws on an existing credit
facility, which currently bears interest at the 30 day LIBOR rate plus 2.25% and
is secured by deeds of trust on three of our apartment properties. Through
September 30, 1997, we had advanced The Villages $1.4 million. Under this
arrangement, we will earn interest at a rate higher than we could otherwise
obtain from the investment of funds in the ownership of apartment communities
and at a rate in excess of our borrowing rate under our credit facility.

Under our bylaws, transactions with Enterprises or Boddie Investment
Company must be approved by directors who are independent of the transactions.
B. Mayo Boddie and Nicholas B. Boddie, the owners of Enterprises and Boddie
Investment Company, have been directors of the Company. B. Mayo Boddie will
continue to be a director and our Chairman of the Board after completion of the
offering. As such, he may be able to influence the Board's actions to the
benefit of Enterprises or Boddie Investment Company.

CHRYSSON ACQUISITION

We described the Chrysson acquisition to you in detail on page 23 under
the heading "History and Formation of the Company -- Chrysson Acquisition." The
owners of the Chrysson properties received Units as partial consideration for
the sale of their properties. As part of the acquisition agreement, the Chrysson
Parties appointed two members to our Board of Directors following the
resignation of two of our then current directors. Upon closing of this offering,
the size of our Board will be increased from five to seven members, and D. Scott
Wilkerson and Philip S. Payne, executive officers of the Company, will be
appointed to the Board. At that time the Chrysson Parties will have the right to
ask a current director to resign and to nominate another director for
appointment subject to our Board's approval. Further, such nominee may not be an
affiliate of the Chrysson Parties. Initially, the Chrysson Parties have agreed
to have Donald R. Pesta, Jr., a current board member, fill this position. In the
future, they may choose to nominate someone else, subject again to our Board's
approval. These Chrysson directors, due to their ownership of Units, as opposed
to shares of our common stock, will suffer different and more adverse tax
consequences than shareholders of the Company upon the sale of any of the
Chrysson properties or upon the repayment or refinancing of associated
indebtedness. As a result they may have objectives that are different from those
of the other directors with respect to property sales or the appropriate pricing
and timing of any refinancing or prepayment of indebtedness. Similar conflicts
may develop in the future as we acquire more properties.

<PAGE>
In addition, assuming completion of this offering, the Chrysson Parties
will initially own 14.4% of the Units of the Operating Partnership. We have also
contracted for, and our Board of Directors has already approved, the
acquisition, subject to certain preconditions, of three additional apartment
communities from the Chrysson Parties. These properties are currently under
development, and we expect that they will be completed and acquired within the
next twelve months. Assuming completion of this offering and the second phase of
the Chrysson acquisition, the Chrysson Parties will own 23.1% of the Units of
the Operating Partnership.

Further, we did not seek an independent third party appraisal of the
Chrysson properties prior to purchase. While no assurances can be given that the
price we paid for the Chrysson properties represents their fair market value,
based on our management's experience, we believe that the agreed-upon price for
the Chrysson properties does reflect their fair market value.

As noted on page 24 under the heading "History and Formation of the
Company -- Chrysson Acquisition," we have a right of first refusal to acquire
any properties that the Chrysson Parties may develop in the future. We may
acquire such properties, but only if a majority of the members of our Board of
Directors who have no interest in the transaction approve such an acquisition.

TRANSACTIONS WITH MANAGEMENT

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

In July 1997, we entered into substantially identical employment
agreements with D. Scott Wilkerson (President) and Philip S. Payne (Executive
Vice President and Chief Financial Officer). These four year agreements, subject
to automatic annual renewal for additional one year periods extending the term
to a maximum of ten years, provide for initial annual base salaries of $139,920,
annual discretionary bonuses as determined by the Board of Directors, and
participation in an incentive compensation plan we intend to establish, along
with specified death and disability benefits. The agreements provide for
severance payments equal to base salary for the remaining term of the contract
(excluding any unexercised renewal periods) in the event of termination without
cause. Alternatively, in the event of a change in control of the Company, the
agreements provide for payments of three times base salary, discretionary bonus
and annual bonus, along with a lump sum cash payment of the benefit the
executive would otherwise have received had all stock options and other stock
based compensation been fully vested, been exercised and become due and payable.

Also in July 1997, we entered into an employment agreement with Pamela B.
Novak, Vice President, Controller and Chief Accounting Officer of the Company.
The two year agreement is substantially identical to the agreements signed by
Messrs. Wilkerson and Payne, except that such agreement provides for a base
salary of $90,000 and limits severance payments to no more than the greater of
the then remaining term of the agreement or one year's total compensation.

<PAGE>
LOANS TO OFFICERS

The Company loaned $27,000 each to two executive officers to enable them
to purchase shares of our common stock. These amounts are outstanding as of
September 30, 1997.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

The following table sets forth certain information regarding beneficial
ownership of our common stock as of November 30, 1997, (i) by each person who we
know to own beneficially more than 5% of our common stock (none), (ii) by each
of our directors as of the close of this offering, (iii) by each of the Named
Executive Officers (D. Scott Wilkerson and Philip S. Payne) and (iv) by all
directors and executive officers as a group as of the close of this offering.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
----------------------------------------
BEFORE OFFERING AFTER OFFERING
DIRECTORS, OFFICERS AND ------------------ ------------------
FIVE PERCENT SHAREHOLDERS NUMBER PERCENT NUMBER PERCENT
- ---------------------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
B. Mayo Boddie............................................ 88,930 2.8% 88,930 1.6%
D. Scott Wilkerson (1).................................... 77,070 2.4% 77,070 1.3%
Philip S. Payne (1)....................................... 77,070 2.4% 77,070 1.3%
William H. Stanley........................................ 3,000 ** 3,000 **
Donald R. Pesta, Jr....................................... 500 ** 500 **
Paul G. Chrysson (2)...................................... -- ** -- **
W. Michael Gilley (2)..................................... 3,000 ** 3,000 **
All directors and executive officers as a group (9
persons) (3)............................................ 298,251 9.2% 298,251 5.2%
</TABLE>

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

** Less than 1%.

(1) Number and percent of shares beneficially owned includes exercisable options
for 37,500 shares. Messrs. Payne and Wilkerson each own 41 shares
(representing in the aggregate a 2.5% economic interest) of the Class A
(voting) stock of BNP Management, Inc., our unconsolidated subsidiary.

(2) Number and percent of shares beneficially owned excludes 173,360 Units owned
by Mr. Chrysson and 156,466 Units owned by Mr. Gilley, which are convertible
at the option of the holder into shares of common stock following the
expiration of a one year lock-up period. Also excludes the Units that will
be issued to Mr. Chrysson and Mr. Gilley in December 1998 and December 1999,
all of which will be issued subject to a one year lock-up period.

(3) Number and percent of shares beneficially owned includes exercisable options
for 105,000 shares, of which 82,500 are held by directors and officers.

DESCRIPTION OF CAPITAL STOCK
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GENERAL

Our Articles of Incorporation give us the authority to issue up to 100.0
million shares of common stock and 10.0 million shares of preferred stock. The
par value of both the common and preferred stock is $.01 per share. Under
Maryland law, shareholders generally are not responsible for a corporation's
debts or obligations. Upon completion of this offering, we will have 5,630,775
shares of common stock issued and outstanding (6,005,775 shares if the
underwriters exercise their over-allotment option in full). This does not
include shares issuable upon the redemption of any Units or shares issuable
under currently outstanding options or warrants held by officers and directors
or shares which may be issued under our Dividend Reinvestment and Stock Purchase
Plan. No shares of preferred stock are issued or outstanding.

COMMON STOCK

Our Board of Directors previously authorized us to issue all of the
currently outstanding common stock. The Board has also authorized the issuance
of the stock we are now selling. The common stock we have previously sold has
been fully paid for and is nonassessable. When we issue the stock in this
offering and you pay for it, we will also consider the common stock you are
buying to be fully paid for and nonassessable. Nonassessable means that we
cannot ask you for more money for the stock after you have purchased it.

As a holder of common stock, you will be entitled to receive
distributions based on common stock if our Board of Directors declares such
distributions. However, because we have the authority under our Articles of
Incorporation to issue preferred stock, your rights to receive distributions may
be subordinated to the rights of any preferred stock we issue in the future. In
any liquidation, each outstanding common share entitles its holder to share
(based on the percentage of shares held) in the assets that remain after we pay
our liabilities and any preferential distributions owed to preferred
shareholders. We have paid quarterly distributions on our common stock since the
period ending June 30, 1987, and we intend to continue to pay quarterly
distributions.

Holders of common stock are entitled to one vote for each share on all
matters submitted to a shareholder vote. Unless a law requires otherwise, or as
our Articles of Incorporation may provide with respect to preferred stock, the
holders of common stock will possess exclusive voting power. See " -- Ownership
Limitations and Restrictions on Transfers." There is no cumulative voting in the
election of directors. This means that the holders of a majority of the common
stock can elect all of the directors and the holders of the remaining common
stock could not elect any director.

<PAGE>
As a common shareholder in the Company, you will have no conversion,
sinking fund or redemption rights, or preemptive rights. A conversion feature is
one where a shareholder has the option to convert his shares to a different
security, such as debt or preferred stock. A sinking fund or redemption right is
one where a shareholder will have the right to redeem his shares (for cash or
other securities) at some point in the future. Sometimes a redemption right is
paired with an obligation of the company to create an account into which such
company must deposit money into to fund the redemption (I.E., a sinking fund).
Preemptive rights are rights granted to shareholders to subscribe for a
percentage of any other securities we may offer in the future based on the
percentage of shares owned.

We will furnish you with annual reports containing audited consolidated
financial statements. The financial statements will contain an opinion of our
independent public accountants. We will also furnish you quarterly reports for
the first three quarters of each year. These reports will contain unaudited
financial information.

All common stock will have equal distribution, liquidation and voting
rights.

The Maryland General Corporate Law generally prohibits us from merging
with another corporation if we will not be the surviving entity in the merger.
Maryland law also generally prohibits us from selling all or most of our assets.
We can enter into these transactions, however, if our Board of Directors adopts
a resolution declaring the proposed transaction advisable and a majority of
shareholders entitled to vote approves the transaction.

The common stock is listed on the American Stock Exchange. The transfer
agent and registrar for the common stock is First Union National Bank of North
Carolina.

PREFERRED STOCK

Under our Articles of Incorporation, our Board of Directors has the
authority to issue one or more series of preferred stock. Prior to issuing
shares of each series, the Maryland General Corporate Law and our Articles of
Incorporation require the Board of Directors to fix the terms for each series.
Such terms could include the right to receive distributions and liquidation
payments before such can be made on the common stock. The Board of Directors
could authorize terms that could discourage a takeover or other transaction that
might be in the common shareholders' best interests. As of the date of this
prospectus, we have not issued any preferred stock, and we have no present plans
to do so.

OWNERSHIP LIMITATIONS AND RESTRICTIONS ON TRANSFERS

To maintain our REIT qualification, no less than six persons can own 50%
or more in value of our outstanding common stock during the last half of a
taxable year. Additionally, at least 100 persons must own the common stock
during at least 335 days per year. See "Federal Income Tax
Considerations -- Requirements for

<PAGE>
Qualification" beginning on page 86. To help ensure we meet these tests, our
Articles of Incorporation provide that no person may own more than 9.8% of our
issued and outstanding capital stock. For purposes of this provision, the
Company treats corporations, partnerships, groups within Section 13(d)(3) of the
Securities Exchange Act of 1934 and other entities as single persons. The Board
of Directors has discretion to waive this ownership limit if they receive
evidence that the changes in ownership will not jeopardize our REIT status. The
consequences of violating these limits are spelled out under the heading "Risk
Factors -- Possible Adverse Consequences of Limits on Ownership of Shares" on
page 18.

The restrictions on transferability and ownership will not apply if the
Board of Directors and the shareholders holding two-thirds of our outstanding
shares of capital stock determine that it is no longer in our best interest to
be a REIT. We have no intention to seek to change our REIT status.

All certificates representing shares of common stock bear a legend
referring to the restrictions described above.

If you own more than 5% of our common stock or preferred stock, you must
file a written notice with us no later than January 30 of each year. This notice
should contain your name and address, the number of shares of common stock or
preferred stock you own and a description of how you hold the shares. In
addition, you will be required, if we ask, to disclose to us in writing any
information we need in order to determine the effect of your ownership of such
shares on our status as a REIT.

These ownership limitations could have the effect of precluding a third
party from obtaining control over the Company unless the Board of Directors and
the shareholders determine that maintaining REIT status is no longer desirable.

LIMITATIONS OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

Maryland corporation law and our Articles of Incorporation exculpate each
director and officer in actions by the Company or by shareholders in derivative
actions from liability unless the director or officer has received an improper
personal benefit in money, property or service or he has acted dishonestly, as
established by a final judgment of a court.

The Articles of Incorporation also provide that we will indemnify a
present or former director or officer against expense or liability in an action
to the fullest extent permitted by Maryland law. Maryland law permits a
corporation to indemnify its present and former directors and officers, among
others, against judgments, penalties, fines, settlements and reasonable expenses
they incur in connection with any proceeding to which they are a party because
of their service as an officer, director or other similar capacity. However,
Maryland law prohibits indemnification if it is established that:

<PAGE>
(Bullet) the act or omission of the director or officer was material to
the matter giving rise to the proceeding and was committed in
bad faith or was the result of active and deliberate
dishonesty;

(Bullet) the director or officer actually received an improper personal
benefit in money, property or services; or

(Bullet) in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was
unlawful.

In addition, under Maryland law, to indemnify a director or officer we would
also have to obtain (i) a written affirmation by the director or officer of his
or her good faith belief that he or she has met the standard of conduct
necessary for indemnification and (ii) a written statement that he will repay
the amounts we advance if it shall ultimately be determined that the standard of
conduct was not met.

The exculpation and indemnification provisions in the Articles of
Incorporation have been adopted to help induce qualified individuals to agree to
serve on behalf of the Company by providing a degree of protection from
liability for alleged mistakes in making decisions and taking actions. Such
exculpation and indemnification provisions have been adopted, in part, in
response to a perceived increase in shareholders' litigation alleging director
and officer misconduct. You should be aware, however, that these provisions in
our Articles of Incorporation and Maryland law give you a more limited right of
action than you otherwise would have in the absence of such provisions.

The above indemnification provisions could operate to indemnify
directors, officers or other persons who exert control over us against
liabilities arising under the Securities Act of 1933. Insofar as the above
provisions may allow that type of indemnification, the Securities and Exchange
Commission has informed us that, in their opinion, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is
therefore unenforceable.

SHARES AVAILABLE FOR FUTURE SALE

As of December 16, 1997, we had 3,130,775 shares of our common stock
issued and outstanding. After we issue all of the shares we sell in this
offering, we will have 5,630,775 shares of common stock issued and outstanding.
If the underwriters exercise their over-allotment in full, that figure will be
6,005,775. An additional 280,000 shares of common stock are subject to options
granted to some of our employees and directors. Furthermore, we have reserved
241,000 shares for issuance under the Dividend Reinvestment and Stock Purchase
Plan and 43,438 shares pursuant to the earn-out provision relating to the
purchase of BT Venture Corporation. We expect to issue these 43,438 shares on
January 2, 1998. We have also reserved 1,150,032 shares for issuance upon the
redemption of Units issued, or to be issued, in Phase I of the Chrysson
acquisition.

<PAGE>
After the close of this offering, all of our outstanding common stock
will be freely tradeable except for restricted shares and shares owned by
affiliates. A restricted share is one issued pursuant to an exemption from the
registration requirements of the Securities Act. An affiliate is any person who
directly or indirectly controls, is controlled by, or is under common control
with, an issuer. Boddie-Noell Properties' affiliates may include our directors,
executive officers and persons directly or indirectly owning 10% or more of our
outstanding common stock. Holders of restricted stock may sell their shares only
pursuant to an effective registration statement or an exemption from the
Securities Act's registration requirements and from applicable state securities
laws.

Absent an effective registration statement, resales by our affiliates of
restricted and unrestricted common stock, and sales by non-affiliates of
restricted stock, are subject to the SEC's Rule 144. Rule 144 contains:

(Bullet) volume limitations;

(Bullet) rules concerning the aggregation of shares for purposes of the
volume limitations;

(Bullet) a requirement that transactions occur through a broker;

(Bullet) a requirement that restricted shares be held for a certain
period;

(Bullet) notice filing requirements; and

(Bullet) requirements concerning publicly available information about
Boddie-Noell Properties.

Rule 144 provides that restricted shares must be held for at least one year
before a holder of restricted securities can sell his shares using the safe
harbor provided by Rule 144. The volume limitations provide that a person (or
persons who must aggregate their sales) cannot, within any three month period,
sell more than the greater of:

(i) one percent of the issuer's then outstanding shares or

(ii) the average weekly reported trading volume during the four calendar
weeks preceding each sale.

A person who is not deemed an "affiliate" of the Company and who has
beneficially owned shares for at least two years would be entitled to sell such
shares under Rule 144 without regard to the above requirements. An affiliate,
however, must always comply with the restrictions of Rule 144, unless a
registration statement registering the offering by such affiliate is current and
in effect.

We are unable to predict the effect that sales made under Rule 144 may
have on the prevailing market price of our the common stock. Sales of
substantial amounts

<PAGE>
of restricted stock in the public market (or the perception that such sales
could occur) might adversely affect prevailing market prices for the common
stock.

PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP
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WE ORGANIZED THE OPERATING PARTNERSHIP UNDER THE DELAWARE REVISED UNIFORM
LIMITED PARTNERSHIP ACT, AS AMENDED. THE FOLLOWING SUMMARY OF THE PARTNERSHIP
AGREEMENT IS QUALIFIED BY REFERENCE TO THE ACTUAL PARTNERSHIP AGREEMENT. WE HAVE
FILED A COPY OF THE PARTNERSHIP AGREEMENT AS AN EXHIBIT TO THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART.

GENERAL

Previously, on page 23, we told you about our conversion to an UPREIT
form of organization. We will conduct substantially all of our activities
through the Operating Partnership. The Operating Partnership is a Delaware
limited partnership. Boddie-Noell Properties, as the sole general partner, has
the exclusive power to manage and conduct the business of the Operating
Partnership, and has the rights and powers permitted to the general partner of a
Delaware limited partnership. In addition to other rights, investors who hold
Units in the Operating Partnership have such rights and powers as are reserved
to limited partners under Delaware law, but have no authority to transact
business for, or participate in the management activities or decisions of, the
Operating Partnership. The limited partners do not have the right to remove us
as the general partner.

The Operating Partnership agreement provides that we shall not, without
the consent of a majority of the holders of Units, engage in any transaction
that would cause it to terminate the Operating Partnership. Nor can we, in our
capacity as the general partner, authorize the partnership to make a general
assignment for the benefit of creditors. We cannot institute any proceeding for
bankruptcy or cause the Company to be dissolved or liquidated. We must hold
substantially all of our property through the Operating Partnership.

ALLOCATION OF DISTRIBUTIONS, PROFITS AND LOSSES

The Operating Partnership agreement provides, except as noted below, that
the net operating cash of the Operating Partnership available for distribution,
as well as net sales and refinancing proceeds, will be distributed from time to
time as determined by the Company (but not less frequently than quarterly), pro
rata in accordance with the partners' percentage interests. Profits and losses
for tax purposes will also generally be allocated among the partners in
accordance with their percentage interests, subject to compliance with
applicable laws, such as those noted

<PAGE>
under "Federal Income Tax Considerations -- Other Tax Considerations -- TAX
ALLOCATIONS WITH RESPECT TO OUR PROPERTIES" on page 98.

TRANSFERABILITY OF INTERESTS

The proposed Operating Partnership agreement generally provides that we
may not withdraw from the Operating Partnership, or transfer or assign our
interest in the Operating Partnership. The limited partners, on the other hand,
generally may transfer all or a portion of their interests in the Operating
Partnership to a transferee. No person receiving such a transfer, however, will
be admitted to the Operating Partnership as a substitute limited partner having
the rights of a limited partner without our consent. Additionally, the
transferee must meet certain other conditions, including agreeing to be bound by
the terms and conditions of the Operating Partnership agreement.

ADDITIONAL CAPITAL CONTRIBUTIONS; ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS

The Operating Partnership agreement does not require any limited partner
to make additional capital contributions to the Operating Partnership. We,
however, will be obligated to make certain additional capital contributions to
the Operating Partnership in connection with the issuance of additional Units to
the Company.

The proposed Operating Partnership agreement authorizes us to issue
additional Units for any partnership purpose and for such capital contributions
and other considerations as we shall determine. The issuance of additional Units
to us, however, is subject to certain limitations. First, we may not issue
additional Units to ourselves unless we issue the additional Units to all
partners in proportion to their respective partnership interests. Alternatively,
we may issue additional Units to ourselves in connection with our issuing
capital stock, provided that the proceeds of the capital stock issuance are
contributed to the Operating Partnership as an additional capital contribution.

If we issue additional capital stock and make a capital contribution to
the Operating Partnership, the capital contribution must be in an amount equal
to the proceeds we receive from the issuance of the additional capital stock.
The Operating Partnership will then issue additional Units with similar
designations, preferences and rights to the capital stock we issued. For
example, if we issue 6% preferred stock, the Operating Partnership must issue 6%
preferred Units. If additional partnership interests are issued, the partnership
interests of all existing partners of the Operating Partnership will be diluted
proportionately.

REDEMPTION OF OPERATING PARTNERSHIP UNITS

The Operating Partnership will be obligated to redeem each Unit at the
request of the holder after a period of at least one year from issuance for cash
equal

<PAGE>
to the then fair market value of each share of common stock at the time of such
redemption. The Company may, however, elect to acquire such Unit for one share
of common stock or an amount of cash of the same value. We presently anticipate
that we will elect to issue common stock in connection with each such
redemption, rather than having the Company or the Operating Partnership pay
cash. If, however, Units are redeemed for cash, such redemption will be at the
fair market value of the Units. With each such redemption, our percentage
ownership interest in the Operating Partnership will increase.

INDEMNIFICATIONS AND FIDUCIARY STANDARDS

The Operating Partnership agreement provides that the general partner,
and each person designated or delegated by the general partner, will discharge
his duties in a manner reasonably believed to be in the best interests of the
Operating Partnership. The agreement also provides that all such individuals
will be indemnified and held harmless by the Operating Partnership for any act
performed for or on behalf of the Operating Partnership, or in furtherance of
the Operating Partnership's business. However, such individual must have acted
in a manner which he believed to be in the best interests of the Operating
Partnership, and with respect to any criminal action, the individual must have
had no reasonable cause to believe his conduct was unlawful. No indemnification
will be made if such individual is adjudged liable to the Operating Partnership
unless a court shall determine that such individual is nevertheless entitled to
indemnity. The Operating Partnership agreement also provides that no such
individual will have personal liability to the Operating Partnership and its
partners for monetary damages for breach of a fiduciary duty except (i) for a
breach of a duty of loyalty or (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law.

TAX MATTERS PARTNER

As provided in the Operating Partnership agreement, the Company is the
tax matters partner of the Operating Partnership. This means that we make
whatever tax elections must be made under the Internal Revenue Code.

OPERATIONS

The Operating Partnership agreement requires the partnership to be
operated in a manner that will enable us to satisfy the requirements for being
classified as a REIT and to avoid any Federal income tax liability.

Under the Operating Partnership agreement, the Operating Partnership will
assume and pay, or reimburse us for payment of, all expenses incurred relating
to the ownership and operation of, or for the benefit of, the Operating
Partnership. The Operating Partnership will also be responsible for all costs
and expenses relating to the formation, continuity of existence and operations
of Boddie-Noell Properties.

<PAGE>
TERM

The term of the Operating Partnership continues until December 31, 2097,
or until sooner dissolved pursuant to the terms of the Operating Partnership
agreement.

EXERCISES OF STOCK OPTIONS

If options that we have granted are exercised, the Operating Partnership
Agreement requires us to contribute to the Operating Partnership as an
additional contribution the exercise price we receive. For any given number of
shares, we will thus receive less than their fair value (assuming the option
holder exercises when the fair value exceeds the option price). We will receive
from the Operating Partnership, in exchange for the proceeds we contribute,
additional Units equal to the number of shares we issued, even though we will
not be paying the full fair value for those Units. Under the terms of the
Operating Partnership agreement, we will be deemed to have contributed the fair
value of the Units.

OTHER

The Operating Partnership agreement provides that substantially all of
our business activities must be conducted through the Operating Partnership or
subsidiary partnerships or corporations.

The Operating Partnership is authorized to enter into transactions with
partners or their affiliates, as long as the terms of such transactions are fair
and reasonable, and no less favorable to the Operating Partnership than would be
obtained from an unaffiliated third party.

FEDERAL INCOME TAX CONSIDERATIONS
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The following summary of material federal income tax considerations to
Boddie-Noell Properties, Inc. and its shareholders relating to this Registration
Statement and the treatment of Boddie-Noell Properties, Inc. as a REIT is based
on current law, is for general purposes only, and is not tax advice. The summary
is not intended to represent a detailed description of the federal income tax
consequences applicable to a particular shareholder in view of such
shareholder's particular circumstances nor is it intended to represent a
detailed description of the federal income tax consequences applicable to
certain types of shareholders subject to special treatment under the federal
income tax laws (such as insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations, and persons who
are not citizens or residents of the United States). The summary is based on
current provisions of the Internal Revenue Code (the "Code"), current and
proposed

<PAGE>
Treasury Regulations, court decisions, and other administrative rulings and
interpretations. All of these sources are subject to change, and these changes
may be applied retroactively. We cannot provide any assurance that any such
change, future provisions of the Code or other legal authorities will not alter
significantly the tax considerations we describe in this summary.

FOR PURPOSES OF READING THIS SECTION ONLY, WHEN WE REFER TO BODDIE-NOELL
PROPERTIES, INC. OR TO OURSELVES IN THE FIRST PERSON, WE ARE REFERRING TO THE
REIT ENTITY INCORPORATED IN MARYLAND AND NOT THE OPERATING PARTNERSHIP AND THE
MANAGEMENT COMPANY.

EACH INVESTOR IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR REGARDING
THE TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
OFFERED STOCK, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, OR SALE AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.

GENERAL

Beginning with our taxable year ended December 31, 1987, we have elected
to be taxed as a REIT under Sections 856 through 860 of the Code. We believe
that beginning with such taxable year we have been organized and have operated
in a manner to qualify for taxation as a REIT under the Code, and we intend to
continue to operate in such a manner, though no assurance can be given that we
have operated or will operate in a manner so as to qualify or remain qualified
as a REIT.

The sections of the Code relating to the qualification and operation as a
REIT are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. This summary is qualified in its
entirety by the applicable Code provisions, relevant rules and regulations, and
administrative and judicial interpretations of Code provisions and regulations.
We have not requested a ruling from the Internal Revenue Service ("IRS") with
respect to any issues relating to our qualification as a REIT, and therefore, we
can provide no assurance that the IRS will not challenge our REIT status.

Alston & Bird LLP has acted as tax counsel to us in connection with this
offering and our election to be taxed as a REIT. Alston & Bird LLP is of the
opinion that we have been organized and operated in conformity with the
requirements for qualification and taxation as a REIT under the Code for our
taxable years ended December 31, 1987 through 1996, and that, based on our
proposed method of operation, we are in a position to continue our qualification
and taxation as a REIT within the definition of Section 856(a) of the Code for
the taxable year that will end December 31, 1997, and for each of our subsequent
taxable years. This opinion is based solely on (i) our factual representations,
which were made based on our best knowledge and belief, to Alston & Bird LLP
concerning our business operations and our properties and (ii) other due
diligence identified in their opinion. In addition, our

<PAGE>
qualification as a REIT at any time during 1997 and each subsequent year is
dependent, among other things, upon our meeting the requirements of Section
856(a) of the Code throughout the year and for the year as a whole. Accordingly,
no assurance can be given that our actual results of operations for any
particular taxable year will satisfy the REIT requirements.

FEDERAL INCOME TAXATION OF BODDIE-NOELL PROPERTIES, INC.

If we qualify for taxation as a REIT, we generally will not be subject to
federal corporate income tax on that portion of our ordinary income or capital
gain that is currently distributed to our shareholders. The REIT provisions of
the Code generally allow a REIT to deduct distributions paid to its
shareholders, substantially eliminating the federal "double taxation" on
earnings (once at the corporate level when earned and once again at the
shareholder level when distributed) that usually results from investments in a
corporation. Nevertheless, we will be subject to federal income tax as follows:

First, we will be taxed at regular corporate rates on our undistributed
REIT taxable income, including undistributed net capital gains.

Second, we may be subject to the "alternative minimum tax" as a
consequence of our items of tax preference under certain circumstances.

Third, if we have net income from "foreclosure property" held primarily
for sale to customers in the ordinary course of business, including income from
the sale or other disposition of such property, we will be subject to tax at the
highest corporate rate on such income to the extent that it does not constitute
qualifying income for purposes of the 75% income test (discussed below).

Fourth, if we have net income from prohibited transactions (which are, in
general, certain sales or other dispositions of property that is held primarily
for sale to customers in the ordinary course of business but that is not
foreclosure property), we will be subject to a 100% tax on such income.

Fifth, if we fail to satisfy either the 75% or 95% gross income test
(discussed below) but have nonetheless maintained our qualification as a REIT
because certain other safe harbor requirements have been met, we will be subject
to a 100% tax on the net income attributable to the greater of the amount by
which we fail either the 75% or 95% test multiplied by a fraction intended to
reflect our profitability.

Sixth, if we fail to distribute each year at least the sum of:

(i) 85% of our ordinary income for such year;

(ii) 95% of our capital gain net income for such year; and

(iii) any undistributed taxable income from prior periods, then
we will be subject to a 4% excise tax on the excess of the
required

<PAGE>
distribution over the "distributed amount" (I.E., the sum
of the deduction for dividends paid (computed without
regard to that portion of such deduction that is
attributable to the net income from foreclosure property)
and the amount of any tax imposed on our taxable income or
net capital gains).

Seventh, if we acquire any asset from a corporation generally subject to
full corporate-level tax in a carryover-basis transaction and we subsequently
recognize gain on the disposition of such asset during the 10-year period
beginning on the date on which we acquired the asset, then to the extent of the
excess of (i) the fair market value of the asset at the time we acquired it over
(ii) our adjusted basis in the asset at the time we acquired it, we will be
subject to tax at the highest regular corporate rate and will be required to
distribute to our shareholders at least 95% of the after-tax gain pursuant to
guidelines issued by the IRS.

REQUIREMENTS FOR QUALIFICATION

To qualify as a REIT, we must elect to be treated as a REIT and must meet
the requirements, discussed below, relating to our organization, sources of
income, and nature of assets.

ORGANIZATIONAL REQUIREMENTS

The Code defines a REIT as a corporation, trust or association that:

(i) is managed by one or more trustees or directors;

(ii) uses transferable shares or transferable certificates to
evidence beneficial ownership;

(iii) would be taxable as a domestic corporation but for
Sections 856 through 860 of the Code;

(iv) is neither a financial institution nor an insurance company
within the meaning of the applicable provisions of the
Code;

(v) has at least 100 persons as beneficial owners;

(vi) during the last half of each taxable year, is not closely
held, I.E., not more than 50% of the value of the
outstanding stock is owned, directly or indirectly, by five
or fewer shareholders;

(vii) files an election to be taxed as a REIT on its return for
each taxable year; and

(viii) satisfies the 95%, 75% and 30% income assets and the 75%,
25%, 10% and 5% asset tests, all of which are described
below.

<PAGE>
The Code provides that conditions (i) through (iv) must be met during the entire
taxable year and that condition (v) must be met during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a taxable year of
less than 12 months. For purposes of condition (v), certain pension funds and
other tax-exempt entities are treated as persons. For purposes of condition
(vi), on the other hand, the beneficiaries of a pension or profit-sharing trust
under Section 401(a) of the Code are treated as REIT shareholders. In addition,
our Articles of Incorporation currently include certain restrictions regarding
transfer of our common stock, which are intended (among other things) to assist
us in continuing to satisfy conditions (v) and (vi) noted above.

In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership retain the same character in the
hands of the REIT for purposes of satisfying the REIT criteria of Section 856 of
the Code, including the gross income tests and asset tests. Thus, after we
convert to an UPREIT, our proportionate share of the assets, liabilities, and
items of income of the Operating Partnership will be treated as our assets,
liabilities, and items of income for purposes of applying and meeting the
various REIT requirements. In addition, the Operating Partnership's
proportionate share of the assets, liabilities, and items of income with respect
to any partnership in which it holds an interest would be considered assets,
liabilities, and items of income of the Operating Partnership.

INCOME TESTS

To maintain qualification as a REIT, we must meet three gross income
requirements annually. First, we must derive directly or indirectly at least 75%
of our gross income (excluding gross income from prohibited transactions) from
investments relating to real property, including investments in other REITs or
mortgages on real property (including "rents from real property" and, in certain
circumstances, interest). Second, we must derive at least 95% of our gross
income (excluding gross income from prohibited transactions) from the real
property investments described in the preceding sentence or from dividends,
interest, or gain from the sale or disposition of stock or securities (or from
any combination of the foregoing). Third, short term gain from the sale or other
disposition of stock or securities, gain from prohibited transactions and gain
from the sale or other disposition of real property held for less than four
years (other than involuntary conversions and sales of foreclosure property)
must represent less than 30% of our gross income (including gain from prohibited
transactions). The Taxpayer Relief Act of 1997, enacted August 5, 1997 (the
"Taxpayer Relief Act"), repeals the 30% gross income test for taxable years
beginning after August 5, 1997. Accordingly, the 30% gross income test will not
apply to us beginning with our taxable year ending December 31, 1998.

Rents we receive or that we are deemed to receive will qualify as "rents
from real property" in satisfying the gross income requirements for a REIT
described above

<PAGE>
only if several conditions are met. First, the amount of rent must not be based
in whole or in part on the income or profits of any person from the property but
can be based on a fixed percentage of gross receipts or gross sales. Second, the
Code provides that "rents from real property" excludes any amount received
directly or indirectly from any corporation in which we own 10% or more of the
total combined voting power of all classes of voting stock or 10% or more of the
total number of shares of all classes of stock and from any other person in
which we own an interest of 10% or more in the assets or net profits of such
person. Third, rent attributable to personal property is generally excluded from
"rents from real property," except where such personal property is leased in
connection with such real property and the rent attributable to such personal
property is less than or equal to 15% of the total rent received under the
lease. Finally, amounts that are attributable to services furnished or rendered
in connection with the rental of real property, whether or not separately
stated, will not constitute "rents from real property" unless such services are
customarily provided in the geographic area. Customary services that are not
provided to a particular tenant (E.G., furnishing heat and light, the cleaning
of public entrances, and the collection of trash) can be provided directly by
the REIT. Where, however, such services are provided primarily for the
convenience of the tenants and are provided to such tenants, such services must
be provided by an independent contractor. However, pursuant to the Taxpayer
Relief Act, beginning with our taxable year ending December 31, 1998, if we
directly perform services to tenants of a property that are not usually and
customarily provided or are considered rendered to the occupant and the value of
such services (valued at not less than 150% of our direct cost of performing
such services) is less than 1% of the total income derived from such property,
then all rental income from such property other than such service income will
qualify as rents from real property. In the event that an independent contractor
provides such services, the REIT must adequately compensate any such independent
contractor. Furthermore, the REIT must not derive any income from the
independent contractor, and neither the independent contractor nor certain of
its shareholders may, directly or indirectly, own more than 35% of the REIT,
taking into consideration the applicable ownership rules.

We do not anticipate deriving rent attributable to personal property
leased in connection with real property that exceeds 15% of the total rent
attributable to such lease or receiving rent from related party tenants.

We currently provide certain services with respect to our properties.
Upon conversion to an UPREIT, we anticipate that the Operating Partnership will
provide these same services. We believe that the services are usually or
customarily rendered in connection with the rental of space for occupancy only
and are not otherwise rendered to the tenants. Therefore, we believe that the
provision of such customary services will not cause rents received with respect
to our properties to fail to qualify as "rents from real property." Services
provided to the tenants primarily for their convenience will be provided by an
independent contractor to avoid jeopardizing the qualification of rent as "rents
from real property."

Fees to perform property management services for apartment properties
that we do not own will not qualify under the 75% or the 95% gross income tests.
BNP

<PAGE>
Management, Inc., our unconsolidated subsidiary, receives these fees. In
addition, we (or the Operating Partnership) may receive certain other types of
income with respect to our properties that will not qualify for either of these
tests. We believe, however, that the aggregate amount of such fees and other
non-qualifying income in any taxable year will not cause us to exceed the limits
for non-qualifying income under the 75% and 95% gross income tests.

If we fail one or both of the 75% or 95% gross income tests for any
taxable year, we may nevertheless qualify as a REIT for that year if we are
eligible for relief under a certain provision of the Code. This relief provision
generally will be available if: (i) our failure to meet such gross income tests
is due to reasonable cause and not due to willful neglect; (ii) we attach a
schedule of the nature and amount of each item of income to our federal income
tax return; and (iii) the inclusion of any incorrect information on such
schedule is not due to fraud with the intent to evade tax. We, however, cannot
state whether in all circumstances we would be entitled to the benefit of this
relief provision. For example, if we fail to satisfy the gross income tests
because non-qualifying income that we intentionally receive exceeds the limits
on such income, the IRS could conclude that our failure to satisfy the tests was
not due to reasonable cause. As discussed above in "Federal Income Taxation of
Boddie-Noell Properties, Inc.," even if this relief provision applies, a 100%
tax would be imposed with respect to the part of our taxable income that fails
the 75% or 95% tests. No similar mitigation provision provides relief if we fail
the 30% gross income test for taxable years ending on or prior to December 31,
1997. The 30% gross income test has been repealed for taxable years beginning
after August 5, 1997 (our taxable year ending December 31, 1998).

ASSET TESTS

At the close of each quarter of our taxable year, we also must satisfy
four tests relating to the nature and diversification of our assets. First, at
least 75% of the value of our total assets must be represented by real estate
assets, cash and cash items (including receivables), and government securities.
Second, not more than 25% of the value of our total assets may consist of
securities (other than those securities includible in the 75% asset test).
Third, not more than 5% of the value of our total assets may consist of
securities of any one issuer (other than those securities includible in the 75%
asset test). Fourth, not more than 10% of the outstanding voting securities of
any one issuer may be held by us (other than those securities includible under
the 75% asset test).

Based on the foregoing, the 5% asset test generally must be met for any
quarter in which we acquire securities of an issuer. Thus, this requirement must
be satisfied not only on the date we acquire securities of BNP Management, Inc.,
but also each time we increase our ownership of securities of BNP Management,
Inc. (including as a result of increasing our interest in the Operating
Partnership as limited partners exercise their redemption rights).

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The Operating Partnership owns all of the nonvoting stock and 1% of the
voting stock of BNP Management, Inc., which represents 95% of the equity of BNP
Management, Inc. with the remaining equity interests currently owned by certain
officers of Boddie-Noell Properties, Inc. or affiliates thereof. We are
considered to own our pro rata share of the assets of the Operating Partnership,
including the securities of BNP Management, Inc. The Operating Partnership will
not own more than 10% of the voting securities of BNP Management, Inc. and,
therefore, we will not own more than 10% of the voting securities of BNP
Management, Inc. In addition, we believe that our pro rata share of the value of
the securities of BNP Management, Inc. will not exceed 5% of the total value of
our assets. Our belief is based in part upon our analysis of the anticipated
operating cash flows of BNP Management, Inc. No independent appraisals will be
obtained to support this conclusion, and Alston & Bird LLP, in rendering its
opinion regarding our qualification as a REIT, will rely on a representation by
us with respect to the value of BNP Management, Inc. There, however, can be no
assurance that the IRS will not contend that the value of the securities of BNP
Management, Inc. exceeds the 5% value limitation.

As noted above, the 5% value requirement must be satisfied at or within
30 days after the end of each quarter during which we increase our direct or
indirect ownership of securities of BNP Management, Inc. (including as a result
of increasing our interest in the Operating Partnership). Although we plan to
take steps to ensure that we will satisfy the 5% value test for any quarter with
respect to which retesting is to occur, there can be no assurance that such
steps always will be successful or will not require a reduction in the Operating
Partnership's overall interest in BNP Management, Inc.

After initially meeting the asset tests at the close of each quarter, we
will not lose our REIT status if we fail to satisfy the asset tests at the end
of a later quarter solely because of changes in the market values of our assets.
If we fail to satisfy the asset tests because of an acquisition of securities or
other property during a quarter, we have the opportunity to cure the failure by
disposition of sufficient securities (other than those securities includible in
the 75% asset test) within 30 days after the close of that quarter. We intend to
maintain adequate records of the value of our assets to ensure compliance with
the asset tests. We also will take any other actions within 30 days after the
close of any quarter as may be required to cure any noncompliance.

ANNUAL DISTRIBUTION REQUIREMENTS

To qualify for taxation as a REIT, we must meet the following annual
distribution requirement. We must make distributions (other than capital gain
distributions) to our shareholders in an amount at least equal to (a) the sum of
(i) 95% of our "REIT taxable income" (computed without regard to the dividends
paid deduction and by excluding our net capital gain) and (ii) 95% of the net
income, if any, from foreclosure property in excess of the excise tax on income
from foreclosure property, minus (b) the sum of certain items of non-cash
income. We must

<PAGE>
pay these distributions in the taxable year to which they relate. Dividends paid
in the subsequent year, however, will be treated as if paid in the prior year
for purposes of such prior year's 95% distribution requirement if one of the
following two sets of criteria are satisfied: (i) the dividends were declared in
October, November, or December, the dividends were payable to shareholders of
record on a specified date in such a month, and the dividends were actually paid
during January of the subsequent year; or (ii) the dividends were declared
before we timely file our federal income tax return for such year, the dividends
were distributed in the twelve month period following the close of the prior
year and not later than the first regular dividend payment after such
declaration, and we elected on our tax return for the prior year to have a
specified amount of the subsequent dividend treated as if paid in the prior
year. Even if we satisfy this annual distribution requirement, we will be
subject to tax at regular capital gains or ordinary corporate tax rates to the
extent that we do not distribute all of our net capital gain or "REIT taxable
income" as adjusted.

We intend to make timely distributions sufficient to satisfy the 95%
annual distribution requirement. In this regard, the Operating Partnership
Agreement authorizes us, as general partner, to take such steps as may be
necessary to cause the Operating Partnership to distribute to its partners an
amount sufficient to permit us to meet these distribution requirements.

We expect that our REIT taxable income will be less than our cash flow
due to the allowance of depreciation and other non-cash charges in computing
REIT taxable income. Accordingly, we anticipate that we generally will have
sufficient cash or liquid assets to enable us to satisfy the 95% distribution
requirement. It is possible, however, that we may not have sufficient cash or
other liquid assets to meet the 95% distribution requirement or to distribute
such greater amount as may be necessary to avoid income and excise taxation. In
such event, we may find it necessary to borrow funds to pay the required
distribution or, if possible, pay taxable stock dividends in order to meet the
distribution requirement.

EARNINGS AND PROFITS

Throughout the remainder of this discussion, we frequently will refer to
"earnings and profits." Earnings and profits is a concept used extensively
throughout corporate tax law, but it is undefined in the Code. Each corporation
maintains an "earnings and profits" account that helps to measure whether a
distribution originates from corporate earnings or from other sources.
Distributions generally decrease the earnings and profits while income generally
increases earnings and profits. If a corporation has positive earnings and
profits, the distributions generally will be considered to come from corporate
earnings. If a corporation has no earnings and profits, distributions generally
will be considered a return of capital and then capital gain.

There are current earnings and profits and accumulated earnings and
profits. Current earnings and profits are based on current year items of income
and expense. Accumulated earnings and profits generally represents the sum of
all current and prior

<PAGE>
earnings and profits less distributions. To the extent that a corporation has
both accumulated and current earnings and profits, distributions are deemed to
come first from the current earnings and profits. To the extent that a
corporation has a positive balance in current earnings and profits but not
accumulated earnings and profits, or vice versa, any distributions will be
deemed to reduce the positive earnings and profits balance.

A corporation's current earnings and profits and its taxable income
normally will not coincide. Generally, there are three main types of differences
in the computation of earnings and profits and taxable income. First, some items
that are excluded from taxable income are included in the earnings and profits
account because they represent an accretion to the corporation which can be
distributed without impairing the corporation's capital. For example, tax-free
interest on municipal securities excluded from taxable income by a corporation
is still available for distribution to shareholders and, therefore, increases a
corporation's earnings and profits account. Second, there are some items that
are deductible for purposes of computing taxable income but are not deductible
in computing earnings and profits. For example, accelerated methods of
depreciating property are available to many corporations. However, for purposes
of computing earnings and profits, a corporation must use the straight-line
depreciation method over an extended period of time. Third, some items that
cannot be deducted in computing taxable income are deductible for purposes of
determining earnings and profits. For example, a corporation may not deduct
fines and kickbacks, but may nevertheless deduct them in computing earnings and
profits because they impair a corporation's ability to make distributions.

A REIT cannot have, at the close of any taxable year, accumulated
earnings and profits attributable to any non-REIT year and remain qualified as a
REIT. Therefore, in rendering their opinion regarding our qualification as a
REIT, Alston & Bird LLP is relying on our representation that, when we acquired
BT Venture Corporation in October 1994, BT Venture Corporation did not have any
accumulated earnings and profits. In the event that BT Venture Corporation did
have accumulated earnings and profits and such earnings and profits were not
distributed in accordance with the applicable REIT provisions, we would have
ceased to qualify as a REIT upon our acquisition of BT Venture Corporation.

FAILURE TO QUALIFY

If we fail to qualify as a REIT in any year and the relief provisions do
not apply, we will be subject to tax (including any applicable alternative
minimum tax) on our taxable income at regular corporate rates. Distributions to
shareholders in any year in which we fail to qualify will not be deductible by
us nor will they be required to be made. In such event, to the extent of current
or accumulated earnings and profits, all distributions to shareholders will be
dividends, taxable as ordinary income, except that, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends-received deduction. Unless we are entitled to relief under specific
statutory provisions, we also will be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not

<PAGE>
possible to state whether in all circumstances we would be entitled to such
statutory relief.

TAXATION OF U.S. SHAREHOLDERS

When we use the term "U.S. Shareholder," we mean a holder of common stock
that, for federal income tax purposes: (i) is a citizen or resident of the
United States; (ii) is a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any of its political
subdivisions; or (iii) is an estate or, subject to certain limitations, a trust,
the income of which is subject to federal income taxation regardless of its
source. For any taxable year for which we qualify for taxation as a REIT,
amounts distributed to taxable U.S. Shareholders will be taxed as discussed
below.

DISTRIBUTIONS GENERALLY

Distributions to U.S. Shareholders, other than capital gain dividends
discussed below, will constitute dividends up to the amount of our current or
accumulated earnings and profits and, to that extent, will be taxable to
shareholders as ordinary income. Because a REIT is not subject to tax on income
distributed to its shareholders, the distributions made to corporate
shareholders are not eligible for the dividends-received deduction. To the
extent that we make a distribution in excess of our positive current and
accumulated earnings and profits, the distribution will be treated first as a
tax-free return of capital, reducing the tax basis in the U.S. Shareholder's
shares of common stock, and then the distribution in excess of the tax basis
will be taxable as gain realized from the sale of the common stock. Dividends we
declare in October, November, or December of any year payable to a shareholder
of record on a specified date in any such month shall be treated as both paid by
us and received by the shareholders on December 31 of the year, provided that we
actually pay the dividends during January of the following calendar year.
Shareholders are not allowed to include on their own federal income tax returns
any of our tax losses.

We will be treated as having sufficient earnings and profits to treat as
a dividend any distribution we make up to the amount required to be distributed
in order to avoid imposition of the 4% excise tax discussed in " -- Federal
Income Taxation of Boddie-Noell Properties, Inc." above.

CAPITAL GAIN DISTRIBUTIONS

Distributions to U.S. Shareholders that we properly designated as capital
gain distributions will be treated as capital gains from the sale or exchange of
a capital asset (to the extent they do not exceed our actual net capital gain)
for the taxable year without regard to the period for which the shareholder has
held his stock (see " -- Recent Legislation"). However, corporate shareholders
may be required to treat up to 20% of certain capital gain dividends as ordinary
income. Capital gain dividends are

<PAGE>
not eligible for the dividends-received deduction for corporations. Beginning
with our taxable year ending December 31, 1998, we may elect to retain and pay
income tax on any net long-term capital gain, in which case U.S. Shareholders
would include in their income as long-term capital gain their proportionate
share of such net long-term capital gain. A U.S. Shareholder also would receive
a refundable tax credit for such shareholder's proportionate share of the tax
paid by us on such retained capital gains and an increase in the basis of his or
her common stock in an amount equal to the difference between the undistributed
long-term capital gain and the amount of tax paid by us.

CERTAIN DISPOSITIONS OF SHARES

In general, you will realize capital gain or loss on the disposition of
common stock equal to the difference between (i) the amount of cash and the fair
market value of any property received on such disposition, and (ii) your
adjusted basis of such common stock. If you receive a capital gain dividend on
shares of our common stock that you held for less than six months prior to the
sale of such shares, any loss on the sale of such shares must be treated as a
long-term capital loss to the extent of such capital gain dividend. See
" -- Recent Legislation."

PASSIVE ACTIVITY LOSS AND INVESTMENT INTEREST LIMITATIONS

You may not treat distributions we make to you or any gain from disposing
of our common stock as passive activity income. Therefore, you will not be able
to apply any "passive losses" against such income. Dividends we pay (to the
extent they do not constitute a return of capital) generally will be treated as
investment income for purposes of the investment interest limitation. Net
capital gain from the disposition of our common stock (or capital gain
dividends) generally will be excluded from investment income unless you elect to
have such gain taxed at ordinary income rates.

TREATMENT OF TAX-EXEMPT SHAREHOLDERS

Distributions we make to a tax-exempt employee pension trust or other
domestic tax-exempt shareholder generally will not constitute "unrelated
business taxable income" ("UBTI") unless the shareholder has borrowed to acquire
or carry our shares of common stock. Qualified trusts that hold more than 10%
(by value) of the shares of pension-held REITs may be required to treat a
certain percentage of such REIT's distributions as UBTI. This requirement will
apply only if: (i) the REIT would not qualify as such for federal income tax
purposes but for the application of a "look-through" for qualified trusts in the
closely-held determination (see "Requirements for
Qualification -- ORGANIZATIONAL REQUIREMENTS"); and (ii) the REIT is
"predominantly held" by qualified trusts. For purposes of the preceding
sentence, a REIT is predominantly held by qualified trusts if either: (i) at
least one qualified trust holds more than 25% by value of the REIT interests; or
(ii) one or more qualified

<PAGE>
trusts, each owning more than 10% by value of the REIT interests, hold in the
aggregate more than 50% by value of the REIT interests. The percentage of any
REIT dividend treated as UBTI would equal the ratio of: (i) the gross income
(less certain expenses) of the REIT derived from unrelated trades or businesses
(treating the REIT as if it were a qualified trust and therefore subject to tax
on UBTI) to (ii) the gross income (less certain direct expenses) of the REIT. In
the event that this ratio is less than 5% for any year, then the qualified trust
will not treated as having received UBTI as a result of the REIT dividend. For
these purposes, a qualified trust is any trust described in Section 401(a) of
the Code and exempt from tax under Section 501(a) of the Code. The restriction
on ownership of common stock in our Articles of Incorporation generally will
prevent application of the provisions treating a portion of REIT distributions
as UBTI to tax-exempt entities purchasing common stock.

SPECIAL TAX CONSIDERATIONS FOR NON-U.S. SHAREHOLDERS

The rules governing United States income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and foreign trusts and
estates (collectively, "Non-U.S. Shareholders") are complex. We only intend the
following discussion to be a summary of these rules. This discussion is based on
current law, which is subject to change, and assumes we will qualify for
taxation as a REIT. Prospective Non-U.S. Shareholders should consult with their
own tax advisors to determine the impact of federal, state, local and foreign
income tax laws on an investment in our common stock, including any reporting
requirements.

If we make a distribution that is not attributable to gain from the sale
or exchange by us of a United States real property interest and that we do not
designate as a capital gain distribution, then a Non-U.S. Shareholder must treat
the distribution as an ordinary income dividend to the extent that it is made
out of current or accumulated earnings and profits. Generally, any ordinary
income dividend will be subject to a federal income tax equal to 30% of the
gross amount of the dividend unless this tax is reduced by an applicable tax
treaty. Such a distribution in excess of our earnings and profits will be
treated first as a return of capital that will reduce a Non-U.S. Shareholder's
basis in its common stock (but not below zero) and then as gain from the
disposition of such shares, the tax treatment of which is described under the
rules discussed below with respect to dispositions of common stock.

Distributions by us that are attributable to gain from the sale or
exchange of a United States real property interest will be taxed to a Non-U.S.
Shareholder under the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S. Shareholder
as if the distributions were gains "effectively connected" with a United States
trade or business. Accordingly, a Non-U.S. Shareholder will be taxed at the
normal capital gain rates applicable to a U.S. Shareholder (subject to any
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals). Distributions that are taxable under
FIRPTA also may be subject to a 30% branch profits tax when made to a foreign
corporation that is not entitled to an exemption or reduced branch profits tax
under an income tax treaty.

<PAGE>
Although tax treaties may reduce our withholding obligations, we
generally will be required to withhold from distributions to Non-U.S.
Shareholders, and remit to the IRS, (i) 35% of designated capital gain dividends
(or, if greater, 35% of the amount of any distributions that could be designated
as capital gain dividends) and (ii) 30% of ordinary dividends paid out of
earnings and profits. In addition, if we designate prior distributions as
capital gain dividends, subsequent distributions, up to the amount of such prior
distributions that were designated as capital gains dividends, will be treated
as capital gain dividends for withholding purposes. A distribution in excess of
our earnings and profits may be subject to 30% dividend withholding (unless such
Non-U.S. Shareholder is entitled to a lower rate under an income tax treaty) or
10% FIRPTA withholding. If the amount of tax withheld by us with respect to a
distribution to a Non-U.S. Shareholder exceeds the shareholder's United States
tax liability with respect to such distribution, the Non-U.S. Shareholder may
file for a refund of the excess from the IRS.

Unless the common stock constitutes a "United States real property
interest" within the meaning of FIRPTA, a sale of common stock by a Non-U.S.
Shareholder generally will not be subject to federal income taxation. The common
stock will not constitute a United States real property interest if we are a
"domestically controlled REIT." A domestically-controlled REIT is a REIT in
which at all times during a specified testing period Non-U.S. Shareholders held,
directly or indirectly, less than 50% in value of the REIT's shares. We
anticipate that we will be a domestically-controlled REIT and therefore that a
sale of common stock will not be subject to taxation under FIRPTA. However,
because the common stock will be publicly traded, we cannot give assurance that
we will continue to be a domestically-controlled REIT. If we were not a
domestically-controlled REIT, a Non-U.S. Shareholder's sale of our common stock
would be subject to tax under FIRPTA as a sale of a United States real property
interest unless the common stock were "regularly traded" on an established
securities market (such as the American Stock Exchange) on which the common
stock will be listed and the seller owned no more than 5% of the common stock
throughout the applicable testing period. If the gain on the sale of common
stock were subject to taxation under FIRPTA, the Non-U.S. Shareholder would be
subject to the same treatment as a U.S. Shareholder with respect to the gain
(subject to applicable alternative minimum tax or a special alternative minimum
tax in the case of nonresident alien individuals). Notwithstanding the
foregoing, capital gains not subject to FIRPTA will be taxable to a nonresident
alien individual who is present in the United States for 183 days or more during
the taxable year and if certain other conditions apply, in which case the
nonresident alien individual will be subject to a 30% tax on his or her U.S.
source capital gains.

A purchaser of common stock from a Non-U.S. Shareholder will not be
required to withhold under FIRPTA on the purchase price if our common stock is
"regularly traded" on an established securities market or if we are a
domestically-controlled REIT. Otherwise, a purchaser of common stock from a
Non-U.S. Shareholder may be required to withhold 10% of the purchase price and
remit this amount to the IRS. Our common stock is currently a "regularly traded"
security on the American Stock Exchange. We believe that we qualify under both
the "regularly

<PAGE>
traded" and the domestically-controlled REIT exceptions to withholding but
cannot provide any assurance to that effect.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX

Under certain circumstances, U.S. Shareholders may be subject to backup
withholding at a rate of 31% on payments made with respect to, or cash proceeds
of a sale or exchange of, our common stock. Backup withholding will apply only
if: (i) the payee fails to furnish his or her taxpayer identification number
(which, for an individual, would be his or her Social Security Number) to the
payor as required; (ii) the IRS notifies the payor that the taxpayer
identification number furnished by the payee is incorrect; (iii) the IRS has
notified the payee that such payee has failed to properly include reportable
interest and dividends in the payee's return or has failed to file the
appropriate return and the IRS has assessed a deficiency with respect to such
underreporting; or (iv) the payee has failed to certify to the payor, under
penalties of perjury, that the payee is not subject to withholding. In addition,
backup withholding will not apply with respect to payments made to certain
exempt recipients, such as corporations and tax-exempt organizations. Backup
withholding is not an additional tax. Rather, the amount of any backup
withholding with respect to a payment to a U.S. Shareholder will be allowed as a
credit against the U.S. Shareholder's federal income tax liability.

U.S. Shareholders should consult their own tax advisors regarding their
qualifications for exemption from backup withholding and the procedure for
obtaining such an exemption.

Additional issues may arise pertaining to information reporting and
backup withholding for Non-U.S. Shareholders. Non-U.S. Shareholders should
consult their tax advisors with regard to U.S. information reporting and backup
withholding.

OTHER TAX CONSIDERATIONS

GENERAL

We will make substantially all of our investments through the Operating
Partnership. The Operating Partnership may involve special tax considerations.
Such considerations include: (i) the allocations of income and expense items of
the Operating Partnership, which could affect the computation of our taxable
income; (ii) the status of the Operating Partnership as a partnership (as
opposed to an association taxable as a corporation) for income tax purposes; and
(iii) the taking of actions by the Operating Partnership that could adversely
affect our qualification as a REIT.

We intend for the Operating Partnership to be treated for federal income
tax purposes as a partnership (and not as an association taxable as a
corporation). Under recent regulations issued by the Treasury Department, an
unincorporated entity can elect to be taxed as a corporation or a partnership.
These regulations are referred to as

<PAGE>
the "check the box" regulations. We believe that the Operating Partnership will
be classified and taxed as a partnership. In the event that the Operating
Partnership were treated as an association taxable as a corporation, we would
fail to qualify as a REIT.

If the Operating Partnership qualifies as a partnership for federal
income tax purposes, the partners will be allocated their proportionate shares
of the items of income, gain, loss, deduction, and credit of a partnership and
are potentially subject to tax thereon without regard to whether the partners
receive a distribution from the partnership. Accordingly, we will include our
proportionate share of the foregoing Operating Partnership items in the various
REIT income tests and in the computation of our REIT taxable income. In
addition, we will include our proportionate share of assets held by the
Operating Partnership in the various REIT asset tests.

TAX ALLOCATIONS WITH RESPECT TO OUR PROPERTIES

When property is contributed to a partnership in exchange for an interest
in the partnership, the partnership generally takes a carryover basis in that
property for tax purposes. That carryover basis is equal to the adjusted basis
of the contributing partner in the property rather than a basis equal to the
fair market value of the property at the time of contribution. Pursuant to
Section 704(c) of the Code, income, gain, loss and deduction attributable to
such contributed property must be allocated in a manner such that the
contributing partner is charged with, or benefits from, respectively, the
unrealized gain or unrealized loss associated with the property at the time of
the contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (a "Book-Tax difference"). Such
allocations are solely for federal income tax purposes and do not affect the
book capital accounts or other economic or legal arrangements among the
partners. Book capital accounts are those maintained under Section 704(b), which
requires that allocations among partners have substantial economic effect.

The Operating Partnership has been formed by way of contributions of
appreciated property. We expect that future contributions to the Operating
Partnership in exchange for Units will take the form of appreciated property, as
well. Consequently, the proposed Operating Partnership Agreement requires tax
allocations to be made in a manner consistent with Section 704(c) of the Code.

Treasury Regulations under Section 704(c) of the Code provide
partnerships with a choice of several methods of accounting for Book-Tax
Differences. We plan to utilize the "traditional method" of determining Section
704(c) allocations. The Operating Partnership's Book-Tax Difference may be
substantial. With respect to properties contributed by partners other than us,
these Book-Tax Differences and the use of the traditional method may cause us to
recognize more taxable income each year than we would if transactions such as
the Chrysson acquisition were structured as purchases. This additional income
would equal the reduction in the annual depreciation deduction caused by the
Book-Tax Difference. In addition, if the

<PAGE>
Operating Partnership sells any property that has a Book-Tax Difference for an
amount less than its adjusted book value, any tax loss allocated to us may be
less than our economic loss. This could result in taxable income for us in
excess of our economic income. This may cause us to recognize taxable income in
excess of cash proceeds, which might adversely affect our ability to comply with
REIT distribution requirements. See " -- Requirements for Qualification" and
" -- Annual Distribution Requirements." The foregoing rules also apply with
respect to our computation of earnings and profits. The result of such rules
over time may result in a higher portion of our distributions being taxed as
dividend income.

BNP MANAGEMENT, INC.

We expect a portion of the amounts we will use to fund distributions to
come from distributions on the stock of BNP Management, Inc. BNP Management,
Inc. does not qualify as a REIT, and it will pay federal, state, and local
income taxes on its taxable income at normal corporate rates. Any federal,
state, or local income taxes that BNP Management, Inc. pays will reduce the cash
available for distribution.

As described above, the value of the stock of BNP Management, Inc. that
is attributed to us cannot exceed 5% of the value of our assets at any time when
a Unit holder in the Operating Partnership exercises his or her redemption
right. See " -- Requirements for Qualification -- ASSET TESTS." We believe that
we currently satisfy this limit though this limitation may restrict the ability
of BNP Management, Inc. to increase the size of its business unless the value of
our assets is also increasing.

RECENT LEGISLATION

You should be aware that the recently enacted Taxpayer Relief Act made
numerous changes to the Internal Revenue Code, including reducing the maximum
tax imposed on net capital gains from the sale of assets held for more than 18
months by individuals, trusts, and estates. As we have mentioned above, the
Taxpayer Relief Act also makes certain changes to the requirements to qualify as
a REIT and to the taxation of REITs and their shareholders.

For gains realized after July 28, 1997, and subject to certain
exceptions, the maximum rate of tax on net capital gains on individuals, trusts
and estates from the sale or exchange of assets held for more than 18 months has
been reduced to 20%, and such maximum rate is further reduced to 18% for assets
acquired after December 31, 2000 and held for more than five years. For 15%
bracket taxpayers, the maximum rate on net capital gains is reduced to 10%, and
such maximum rate is further reduced to 8% for assets acquired and sold after
December 31, 2000 and held for more than five years. The maximum rate for net
capital gains attributable to the sale of depreciable real property held for
more than 18 months is 25% to the extent of the deductions for depreciation with
respect to such property. Long-term capital gain allocated to a shareholder by
Boddie-Noell Properties, Inc. will be subject to the 25% rate to the extent that
the gain does not exceed depreciation on real property sold by

<PAGE>
Boddie-Noell Properties, Inc. The maximum rate of capital gains tax for capital
assets held more than one year but not more than 18 months remains at 28%. The
taxation of capital gains of corporations was not changed by the Taxpayer Relief
Act.

As a result of these changes to the capital gains rates, the IRS recently
issued Notice 97-64 outlining (i) when a REIT may designate its dividends as
either a 20% rate gain distribution, an unrecaptured section 1250 gain
distribution (taxed at 25% as noted in the preceding paragraph), or a 28% rate
gain distribution and (ii) how to calculate the amount of such distributions,
which may be subject to certain deferral or bifurcation adjustments. Where a
REIT designates a distribution as a capital gain dividend, which is attributable
to a taxable year ending after May 7, 1997, for purposes of the annual
distribution requirement, the REIT also may designate such dividend as a 20%
rate gain distribution, an unrecaptured section 1250 gain distribution, or a 28%
rate gain distribution. Where no such designation is provided, the dividend will
be treated as a 28% rate gain distribution. These additional designations by the
REIT are effective only to the extent that they do not exceed certain
limitations. For example, the maximum amount of each distribution that can be
classified as either a 20% rate gain distribution, an unrecaptured section 1250
gain distribution, or a 28% rate gain distribution must be calculated in
accordance with the Code and the IRS Notice. SHAREHOLDERS SHOULD CONSULT THEIR
OWN TAX ADVISORS WITH RESPECT TO THE IMPLICATIONS OF THE TAXPAYER RELIEF ACT.

STATE AND LOCAL TAX

We may be subject to state and local tax in various states and
localities. Our shareholders also may be subject to state and local tax in
various states and localities. The tax treatment to us and to our shareholders
in such jurisdictions may differ from the federal income tax treatment described
above. Consequently, before you buy our common stock, you should consult your
own tax advisor regarding the effect of state and local tax laws on an
investment in our common stock.

100

LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

We are a party to a variety of legal proceedings arising in the ordinary
course of business. In addition, we have become a successor party-in-interest to
certain legal proceedings as a result of our acquisition of BT Venture
Corporation. These matters arose in the ordinary course of BT Venture
Corporation's business either as an owner of an apartment community or as a
property management company. All of these matters, individually and in
aggregate, are not expected to have a material adverse impact on the Company.

In the event a claim were successful, we believe that we are adequately
covered by insurance and indemnification agreements. We have insurance coverage
on each of our apartment properties. Our restaurant properties are subject to an
indemnification agreement whereby Enterprises, the lessee, is responsible for
all claims arising from a restaurant property; in addition, Enterprises is
required to provide insurance, which identifies the Company as a named insured,
on each restaurant property. Each apartment property which is managed but not
owned by us is covered by an insurance policy under which we are a named
insured. As to claims to which we have become a successor party-in-interest to
BT Venture Corporation, we received, as part of the acquisition of BT Venture
Corporation, an indemnification agreement from the shareholders of BT Venture
Corporation whereby we are, subject to certain limitations, indemnified from
loss arising out of a claim against BT Venture Corporation.

UNDERWRITING
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

Subject to the terms and conditions set forth in the underwriting
agreement (the "Underwriting Agreement") among the Company and the underwriters
(the "Underwriters"), each Underwriter named below has severally agreed to
purchase from the Company, and the Company has agreed to sell to each of the
Underwriters, the respective number of shares of common stock set forth opposite
its name.

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- -------------------------------------------------------- ----------------
<S> <C>
CIBC Oppenheimer Corp................................... 950,000
J.C. Bradford & Co...................................... 750,000
Interstate/Johnson Lane Corporation..................... 550,000
Davenport & Company LLC................................. 250,000
----------------
Total................................................. 2,500,000
----------------
----------------
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various

101

<PAGE>
other conditions. The nature of the Underwriters' obligations is such that they
are committed to purchase and pay for all of the above shares of common stock if
any are purchased.

The Underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus, and at such price less a concession not in excess of $0.56 per share
of common stock to certain other dealers who are members of the National
Association of Securities Dealers, Inc. The Underwriters may allow, and such
selected dealers may reallow, concessions not in excess of $0.10 per share to
certain other dealers.

The Underwriters have been granted a 30-day over-allotment option to
purchase from the Company up to an aggregate of 375,000 additional shares of
common stock, exercisable at the public offering price less the underwriting
discount. If the Underwriters exercise such over-allotment option, then each of
the Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof as the number of shares of
common stock to be purchased by it as shown on the above table bears to the
total number of shares of common stock offered hereby. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of common stock offered hereby.

Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters to
bid for and purchase shares of common stock. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions that stabilize the
price of the common stock. Such transactions may consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the common stock.

If the Underwriters create a short position in the common stock in
connection with the offering (I.E., if they sell more shares of common stock
than are set forth on the cover page of this prospectus), the Underwriters may
reduce the short position by purchasing common stock in the open market. The
Underwriters also may elect to reduce any short position by exercising all or
part of the over-allotment option described herein. In general, purchases of a
security for the purpose of stabilization or to reduce a syndicate short
position could cause the price of the security to be higher than it might
otherwise be in the absence of such purchases.

Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the common stock or that
such transactions, once commenced, will not be discontinued without notice.

Subject to certain exceptions, the Company and its executive officers and
directors have agreed that for a period of 180 days after the date hereof they
will not sell, or otherwise dispose of, directly or indirectly, any common
stock, any securities convertible into or exchangeable for common stock or any
rights to purchase or acquire common stock without the prior written consent of
the Underwriters.

102

<PAGE>
The Underwriters have agreed, however, that the Company does not need the
consent of the Underwriters to issue stock options under stock option plans,
common stock upon the exercise of stock options, warrants and SAR's previously
granted, common stock pursuant to our dividend reinvestment and stock purchase
plan and Units, exchangeable into shares of common stock, in connection with our
acquiring a property.

The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including those under the Securities Act of
1933, as amended, or to contribute to payments that the Underwriters may be
required to make in respect thereof.

CIBC Oppenheimer Corp. served as our financial advisor for the Chrysson
acquisition. We paid them fees of approximately $600,000 for their work on this
matter.

EXPERTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

The financial statements of Boddie-Noell Properties, Inc., at December
31, 1996 and for the year then ended and the Combined Statement of Revenue and
Certain Operating Expenses of Acquired Properties for the year ended December
31, 1996, appearing in this prospectus and registration statement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.

The Balance Sheet of Boddie-Noell Properties, Inc. at December 31, 1995
and the statements of operations and of cash flows for the years ended December
31, 1995 and 1994 appearing in this prospectus and registration statement have
been audited by Arthur Andersen LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.

LEGAL OPINIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

Alston & Bird LLP, Raleigh, North Carolina will issue an opinion to us
regarding certain legal matters. Rogers & Wells, New York, New York will issue
an opinion as to certain legal matters for the underwriters. Rogers & Wells will
rely upon the opinion of Alston & Bird LLP as to certain matters of Maryland
law.

103

AVAILABLE INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

Our company files annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy the reports,
statements or other information we file at the SEC's public reference room in
Washington, D.C. You can request copies of these documents, upon payment of
photocopying fees, by writing to the SEC. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the public reference rooms. Our SEC
filings are also available to the public on the SEC's internet site
(http://www.sec.gov). These documents are also available for viewing at the
offices of the American Stock Exchange in New York. For more information, you
may call the viewing room of the American Stock Exchange at (212) 306-1292.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

We have filed certain documents with the SEC, as required by the
Securities Exchange Act of 1934, and are incorporating them by reference into
this prospectus. Incorporating by reference means that we are making the
documents listed below a part of this prospectus by referring to these documents
and declaring that you should consider them to be part of this prospectus as if
they were fully copied in this prospectus.

A. Our Annual Report on Form 10-K for the year ended December 31,
1996;

B. Our Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997; and

C. The Company's Current Report on Form 8-K, dated December 1,
1997.

104

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

INDEX TO THE FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BODDIE-NOELL PROPERTIES INC.
Report of Independent Auditors.................................................................................... F-2
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (Unaudited)................................ F-4
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months Ended
September 30, 1996 and 1997 (Unaudited).......................................................................... F-5
Statements of Shareholders' Equity for the Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months
Ended September 30, 1997 (Unaudited)............................................................................. F-6
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months Ended
September 30, 1996 and 1997 (Unaudited).......................................................................... F-7
Notes to Financial Statements..................................................................................... F-8
Schedule III -- Real Estate amd Accumulated Depreciation.......................................................... F-17

BODDIE-NOELL PROPERTIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Consolidated Financial Information.................................................. F-20
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1997................................. F-21
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year Ended December 31, 1996........... F-24
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 1997... F-25

ACQUIRED PROPERTIES
Report of Independent Auditors.................................................................................... F-28
Combined Statements of Revenue and Certain Operating Expenses for the Year Ended December 31, 1996 and for the
Nine Months Ended September 30, 1996 and 1997 (Unaudited)........................................................ F-29
Notes to Combined Statements of Revenue and Certain Operating Expenses............................................ F-30
</TABLE>

F-1

<PAGE>
REPORT OF INDEPENDENT AUDITORS

TO THE SHAREHOLDERS OF
BODDIE-NOELL PROPERTIES, INC.

We have audited the accompanying balance sheet of Boddie-Noell Properties,
Inc. as of December 31, 1996, and the related statements of operations,
shareholders' equity, and cash flows for the year then ended. Our audit also
includes the financial statement schedule as of and for the year ended December
31, 1996 included on pages F-17-F-19. These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audit provides 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 Boddie-Noell Properties,
Inc. at December 31, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule as of
and for the year ended December 31, 1996 when considered in relation to the
basic 1996 financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

Ernst & Young LLP

Charlotte, North Carolina
January 9, 1997

F-2

<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE SHAREHOLDERS OF
BODDIE-NOELL PROPERTIES, INC.:

We have audited the accompanying balance sheet of Boddie-Noell Properties,
Inc. (a Delaware corporation) as of December 31, 1995, and the related
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 1995 and 1994. Our audits also include the financial schedule
as of and for the years ended December 31, 1995 and 1994 included on page F-19.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Boddie-Noell Properties,
Inc. as of December 31, 1995, and the results of its operation and its cash
flows for the years ended December 31, 1995 and 1994, in conformity with
generally accepted accounting principles.

Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The data on page F-19 is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. This information has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic 1995
and 1994 financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Charlotte, North Carolina,
January 31, 1996.

F-3

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31
--------------------------- SEPTEMBER 30
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Real estate investments at cost:
Apartment properties....................................................... $55,315,686 $ 66,610,048 $ 67,140,687
Restaurant properties...................................................... 43,205,075 43,205,075 43,205,075
----------- ------------ ------------
98,520,761 109,815,123 110,345,762
Less accumulated depreciation.............................................. (9,020,948) (11,461,365) (13,383,980)
----------- ------------ ------------
89,499,813 98,353,758 96,961,782
Cash and cash equivalents.................................................... 700,863 842,604 1,406,892
Rent and other receivables................................................... 244,817 12,695 34,734
Prepaid expenses and other assets............................................ 293,549 392,302 595,188
Investment in and advances to Management Company............................. 326,767 261,598 243,262
Notes receivable............................................................. -- -- 1,412,508
Other assets, net of applicable amortization:
Intangible related to acquisition of management operations................. 2,560,254 2,744,912 2,841,438
Deferred financing costs................................................... 725,713 828,113 709,794
----------- ------------ ------------
Total assets................................................................. $94,351,776 $103,435,982 $104,205,598
----------- ------------ ------------
----------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable............................................. $60,105,485 $ 70,295,957 71,340,252
Notes payable to affiliates.................................................. 7,056,300 7,056,300 7,056,300
Accounts payable and accrued expenses........................................ 129,908 15,549 556,475
Accrued interest on mortgages and other notes payable........................ 269,373 335,871 337,273
Accrued interest on notes payable to affiliates.............................. 132,231 125,518 128,933
Additional consideration due to former BTVC shareholders..................... 283,334 355,570 572,136
Escrowed security deposits and deferred revenue.............................. 175,207 348,779 263,929
----------- ------------ ------------
68,151,838 78,533,544 80,255,298
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized, shares issued
and outstanding: 3,123,741 at September 30, 1997; 3,074,647 at December 31,
1996; 3,016,740 at December 31, 1995....................................... 30,167 30,746 31,237
Additional paid-in capital................................................... 33,785,335 34,522,816 35,163,033
Dividend distributions in excess of net income............................... (7,615,564) (9,651,124) (11,243,970)
----------- ------------ ------------
Total shareholders' equity................................................... 26,199,938 24,902,438 23,950,300
----------- ------------ ------------
Total liabilities and shareholders' equity................................... $94,351,776 $103,435,982 $104,205,598
----------- ------------ ------------
----------- ------------ ------------
</TABLE>

See accompanying notes.

F-4

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------- --------------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES
Apartment rental income........................... $3,889,277 $ 8,476,268 $ 9,790,713 7,209,401 $ 7,897,982
Restaurant rental income.......................... 5,046,837 4,649,250 4,500,000 3,375,000 3,375,000
Management fees................................... 276,157 514,872 -- -- --
Equity in income of Management Company............ -- 48,063 149,298 111,432 182,747
Interest and other income......................... 45,975 37,185 67,813 48,875 153,526
---------- ----------- ----------- ----------- -----------
9,258,246 13,725,638 14,507,824 10,744,708 11,609,255
EXPENSES
Depreciation...................................... 1,414,800 2,204,199 2,440,417 1,786,771 1,922,765
Amortization...................................... 232,856 405,182 534,663 394,014 439,289
Apartment operations.............................. 1,101,370 2,480,920 2,976,876 2,189,679 2,536,564
Administrative.................................... 622,605 1,285,509 894,360 701,577 733,911
Property management and advisory fees............. 264,322 -- -- -- --
Interest on notes payable to affiliates........... 139,973 540,572 499,676 374,485 380,461
Interest -- other................................. 2,661,921 4,821,865 5,446,017 4,020,652 4,303,795
Write-off of deferred loan costs upon
refinancing..................................... 141,582 37,723 -- -- --
Write-off of deferred acquisition costs........... 376,898 321,400 -- -- --
---------- ----------- ----------- ----------- -----------
6,956,327 12,097,370 12,792,009 9,467,178 10,316,785
---------- ----------- ----------- ----------- -----------
NET INCOME........................................ $2,301,919 $ 1,628,268 $ 1,715,815 $ 1,277,530 $ 1,292,470
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
PER SHARE DATA:
NET INCOME...................................... $ 0.80 $ 0.54 $ 0.57 $ 0.42 $ 0.42
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
DIVIDENDS DECLARED.............................. $ 1.24 $ 1.24 $ 1.24 $ 0.93 $ 0.93
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING............. 2,885,248 3,005,809 3,026,901 3,018,155 3,106,503
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
</TABLE>

See accompanying notes.

F-5

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
DIVIDEND
COMMON STOCK ADDITIONAL DISTRIBUTIONS
--------------------- PAID-IN IN EXCESS OF
SHARES AMOUNT CAPITAL NET INCOME TOTAL
---------- ------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993.......................... 2,850,000 $28,500 $31,462,322 $ (4,238,826) $27,251,996
Common stock issued................................... 140,990 1,410 1,990,289 -- 1,991,699
Dividends paid........................................ -- -- -- (3,577,705) (3,577,705)
Net income............................................ -- -- -- 2,301,919 2,301,919
---------- ------- ----------- ------------- -----------
Balance at December 31, 1994.......................... 2,990,990 29,910 33,452,611 (5,514,612) 27,967,909
Common stock issued................................... 25,750 257 332,724 -- 332,981
Dividends paid........................................ -- -- -- (3,729,220) (3,729,220)
Net income............................................ -- -- -- 1,628,268 1,628,268
---------- ------- ----------- ------------- -----------
Balance at December 31, 1995.......................... 3,016,740 30,167 33,785,335 (7,615,564) 26,199,938
Common stock issued................................... 57,907 579 737,481 -- 738,060
Dividends paid........................................ -- -- -- (3,751,375) (3,751,375)
Net income............................................ -- -- -- 1,715,815 1,715,815
---------- ------- ----------- ------------- -----------
Balance at December 31, 1996.......................... 3,074,647 30,746 34,522,816 (9,651,124) 24,902,438
Common stock issued (unaudited)....................... 49,094 491 640,217 -- 640,708
Dividends paid (unaudited)............................ -- -- -- (2,885,316) (2,885,316)
Net income (unaudited)................................ -- -- -- 1,292,470 1,292,470
---------- ------- ----------- ------------- -----------
Balance at September 30, 1997 (unaudited)............. 3,123,741 $31,237 $35,163,033 $ (11,243,970) $23,950,300
---------- ------- ----------- ------------- -----------
---------- ------- ----------- ------------- -----------
</TABLE>

See accompanying notes.

F-6

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31 SEPTEMBER 30
-------------------------------------------- ---------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES
Net income.................................... $ 2,301,919 $ 1,628,268 $ 1,715,815 $ 1,277,530 $ 1,292,470
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in income of Management Company...... -- (48,063) (149,298) (111,432) (182,747)
Depreciation and amortization............... 1,647,656 2,609,381 2,975,080 2,180,785 2,362,054
Write-off of deferred costs................. 518,480 359,123 -- -- --
Changes in operating assets and liabilities:
Rent and other receivables............... (78,046) 248,489 232,122 237,345 (22,039)
Prepaid expenses and other assets........ (5,584) (66,088) (58,783) (130,466) (197,941)
Accounts payable and accrued expenses.... 150,443 (204,726) (54,574) 378,354 545,744
Security deposits and deferred revenue... (38,407) (50,656) 139,941 97,377 (86,396)
------------ ------------ ------------ ------------ -----------
Net cash provided by operating activities..... 4,496,461 4,475,728 4,800,303 3,929,493 3,711,145
INVESTING ACTIVITIES
Acquisitions of apartment properties.......... (18,055,659) -- (10,666,580) (10,666,580) --
Acquisition of BT Venture Corp.,net........... 164,838 -- -- -- --
Additions to apartment properties............. (161,294) (525,516) (561,114) (426,035) (480,788)
Payment of deferred acquisition costs......... (677,006) (156,401) -- -- --
Investment in Management Company.............. -- -- (165) (165) --
Dividends received from Management Company.... -- -- 158,293 126,977 97,687
Repayment from (advances to) Management
Company..................................... -- (150,000) 50,000 -- 100,000
Investment in notes receivable................ -- -- -- -- (1,412,508)
------------ ------------ ------------ ------------ -----------
Net cash used in investing activities......... (18,729,121) (831,917) (11,019,566) (10,965,803) (1,695,609)
FINANCING ACTIVITIES
Proceeds from common stock issued through
dividend reinvestment plan.................. -- -- 243,628 106,026 432,269
Payment of dividends.......................... (3,577,705) (3,729,220) (3,751,375) (2,805,568) (2,885,316)
Proceeds from notes payable................... 53,600,000 33,925,000 10,650,000 10,650,000 1,412,508
Principal payments on notes payable........... (34,449,203) (33,646,771) (459,528) (340,978) (368,213)
Payment of deferred financing costs........... (509,599) (444,320) (321,721) (321,721) (42,496)
------------ ------------ ------------ ------------ -----------
Net cash provided by (used in) financing
activities.................................. 15,063,493 (3,895,311) 6,361,004 7,287,759 (1,451,248)
------------ ------------ ------------ ------------ -----------
Net increase (decrease) in cash and cash
equivalents................................. 830,833 (251,500) 141,741 251,449 564,288
Cash and cash equivalents at beginning of
period...................................... 121,530 952,363 700,863 700,863 842,604
------------ ------------ ------------ ------------ -----------
Cash and cash equivalents at end of period.... $ 952,363 $ 700,863 $ 842,604 $ 952,312 $ 1,406,892
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
</TABLE>

See accompanying notes.

F-7

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES

ORGANIZATION AND HISTORY. Boddie-Noell Restaurant Properties, Inc. (the
"Company") was incorporated on April 1, 1987. On October 1, 1994, the Company
changed its name to Boddie-Noell Properties, Inc.

In April 1987, the Company acquired 47 existing Hardee's restaurant
properties located in Virginia and North Carolina, operated by Boddie-Noell
Enterprises, Inc. ("Enterprises") under franchise agreements with Hardee's Food
Systems, Inc. Simultaneously with their purchase, the properties were leased to
Enterprises under a master lease agreement.

In June 1993 the Company acquired Paces Commons Apartments, a 336-unit
apartment property in Charlotte, North Carolina. In June 1994 the Company
acquired Oakbrook Apartments, a 162-unit apartment property in Charlotte, North
Carolina. Effective October 1, 1994, the Company acquired by merger BT Venture
Corporation ("BTVC"), an integrated real estate management, development and
acquisition company and owner of the Latitudes Apartments, a 448-unit apartment
property in Virginia Beach, Virginia. As of October 1, 1994, the Company
succeeded to BTVC's third-party management business, terminated its advisory
agreement with BNE Advisory Group, Inc., and began operations as a
self-administered and self-managed real estate investment trust. In December
1994 the Company acquired Harris Hill Apartments, a 184-unit apartment property
in Charlotte, North Carolina. In June 1996 the Company acquired Paces Village
Apartments, a 198-unit apartment property in Greensboro, North Carolina.

In May 1995 the Company formed BNP Management, Inc. (the "Management
Company"). The Company has a 1 percent voting interest and 95 percent economic
interest. This investment is recorded using the equity method of accounting.

CAPITAL STOCK. In June 1995 the Company's shareholders approved amendments
to the Company's bylaws and certificate of incorporation to allow the Board of
Directors to authorize the issuance of up to an additional 90,000,000 shares of
Common Stock and 10,000,000 shares of Preferred Stock, issuable in series the
characteristics of which would be set by the Board of Directors. As of December
31, 1996, no such shares have been authorized or issued.

As of December 31, 1996, approximately 655,000 authorized shares of Common
Stock are reserved for future issuance under the Company's Stock Option and
Incentive Plan, Dividend Reinvestment and Stock Purchase Plan, and for
contingent purchase price payments related to the acquisition of BTVC.

REAL ESTATE INVESTMENTS. Apartment properties are carried at cost. Ordinary
repairs and maintenance costs are expensed as incurred while significant
improvements, renovations and replacements are capitalized. Depreciation is
computed using the straight-line method over the estimated useful lives of the
related assets, which are 40 years for buildings, 20 years for land
improvements, 10 years for fixtures and equipment, and five years for carpet,
vinyl, and wallpaper replacements. Restaurant properties, which include only
real property, are carried at cost. Cost of repairs and maintenance and capital
improvements are borne by Enterprises. Depreciation of the buildings is computed
using the straight-line method over the estimated useful lives (40 years) of the
respective properties.

CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments with maturities of three months or less when purchased to be cash
equivalents.

DEFERRED COSTS. The intangible asset related to the acquisition of
management operations acquired by merger is amortized using the straight-line
method over a period of ten years. Accumulated amortization on this asset
totaled $314,000 and $630,000 at December 31, 1995 and 1996, respectively.

Deferred acquisition costs represent costs incurred in connection with the
proposed acquisition of properties and the associated offering costs. Such costs
are deferred until the acquisition is consummated. Upon completion of the
acquisition, the costs will be capitalized to the underlying assets and/or
charged to shareholders' equity. When an acquisition is deemed not probable, the
costs are charged to expense.

Financing costs are deferred and amortized using the straight-line method
over the terms of the related notes. Accumulated amortization on these assets
totaled $61,000 and $280,000 at December 31, 1995 and 1996, respectively.

F-8

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES -- Continued
INCOME TAXES. The Company operates as and elects to be taxed as a Real
Estate Investment Trust ("REIT") under the Internal Revenue Code. Accordingly,
the Company will not be subject to federal or state income taxes on amounts
distributed to shareholders, provided it distributes at least 95 percent of its
REIT taxable income and meets certain other requirements for qualifying as a
REIT. Accordingly, no provision has been made for federal or state income taxes.

NET INCOME PER SHARE. Net income per share is calculated based on the
weighted average number of shares outstanding during each year. The potential
dilutive effect of stock options in the computation of earnings per share is not
material.

FAIR VALUES OF FINANCIAL INSTRUMENTS. The following methods and assumptions
are used by the Company in estimating its fair value disclosures for financial
instruments.

Cash and cash equivalents: The carrying amount reported on the balance
sheet for cash and cash equivalents approximates fair value.

Notes payable: The fair value of the Company's fixed rate mortgage notes
and variable rate notes payable is estimated using discounted cash flow
analysis, based on the Company's current incremental borrowing rates. The
carrying amounts of the Company's borrowings under notes payable approximate
fair value.

USE OF ESTIMATES. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Depreciation amounts included in these
financial statements reflect management's estimate of the life and related
depreciation rates for rental properties. In addition, the carrying amount of
the intangible asset related to acquisition of management operations reflects
management's evaluation of the continuing value and useful life of this asset.
Actual results could differ from these estimates.

RECLASSIFICATIONS. Certain amounts in the 1994 and 1995 financial
statements have been reclassified to conform to the 1996 presentation. These
reclassifications had no effect on net income or shareholders' equity as
previously reported.

INTERIM FINANCIAL DATA. The unaudited financial statements for the nine
months ended September 30, 1996 and 1997 include all adjustments (consisting of
normal recurring adjustments) that are, in the opinion of management, necessary
for a fair presentation of the balance sheet and income statement for such
interim periods. Operating results for the nine months ended September 30, 1997
are not necessarily indicative of the results to be expected for the entire year
ending December 31, 1997.

NOTE 2. REAL ESTATE INVESTMENTS

Real estate investments consist of the following:

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Apartment properties
Land......................................................................................... $ 6,642,291 $ 7,892,291
Buildings and land improvements.............................................................. 46,517,150 56,152,512
Fixtures, equipment and other personal property.............................................. 2,156,245 2,565,245
Less accumulated depreciation................................................................ (2,242,344) (3,904,353)
----------- -----------
53,073,342 62,705,695
Restaurant properties
Land......................................................................................... 12,068,737 12,068,737
Buildings and land improvements.............................................................. 31,136,338 31,136,338
Less accumulated depreciation................................................................ (6,778,604) (7,557,012)
----------- -----------
36,426,471 35,648,063
----------- -----------
$89,499,813 $98,353,758
----------- -----------
----------- -----------
</TABLE>

F-9

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

NOTE 2. REAL ESTATE INVESTMENTS -- Continued
The Company's policy is to capitalize those expenditures relating to
acquiring new assets, materially enhancing the value of an existing asset, or
substantially extending the useful life of an existing asset. Capitalized
apartment property additions, replacements and improvements are summarized as
follows:

<TABLE>
<CAPTION>
1994 1995 1996
----------- -------- -----------
<S> <C> <C> <C>
Property acquisitions through purchase..................... $18,243,374 $ -- $10,666,580
Property acquisitions through merger....................... 21,950,000 -- --
Allocation of additional consideration for property
acquisitions through merger.............................. 16,667 66,668 66,668
Capitalized carpet, vinyl and wallpaper.................... 91,434 210,430 201,776
Other property additions and improvements.................. 53,193 315,085 359,338
----------- -------- -----------
$40,354,668 $592,183 $11,294,362
----------- -------- -----------
----------- -------- -----------
</TABLE>

NOTE 3. INVESTMENT IN AND ADVANCES TO MANAGEMENT COMPANY

In May 1995 the Management Company was formed to provide management
services to non-Company owned properties. The Company contributed approximately
$119,000, primarily in office equipment, to the formation of the Management
Company, and transferred the rights to certain third-party property leasing and
management contracts to the Management Company for a 1 percent voting interest
and 95 percent economic interest. The remaining interest in the Management
Company is held by certain officers of the Company. Because the Company
exercises significant influence over, but does not control the financial and
operating policies of, the Management Company, the investment and related income
are reflected in the accompanying financial statements using the equity method.
At December 31, 1996, the Management Company provides leasing and property
management services to nine apartment properties and two shopping centers owned
by limited partnerships of which Boddie Investment Company ("BIC") is the
general partner.

During 1995 the Company advanced a total of $150,000 to the Management
Company, of which $50,000 was repaid in 1996. These advances accrue interest at
12 percent. Interest on these advances totaled $9,700 and $16,900 in 1995 and
1996, respectively.

Summary financial information of the Management Company at December 31 and
for the eight months and twelve months ended December 31, 1995 and 1996,
respectively, is as follows:

<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current assets................................................................ $221,758 $181,583
Property and equipment, net................................................... 122,430 98,139
Other assets.................................................................. 7,028 5,432
-------- --------
Total assets.................................................................. $351,216 $285,154
-------- --------
-------- --------

Current liabilities........................................................... $ 21,919 $ 13,168
Advances and accrued interest due to the Company.............................. 159,736 103,397
Shareholders' equity.......................................................... 169,561 168,589
-------- --------
Total liabilities and shareholders' equity.................................... $351,216 $285,154
-------- --------
-------- --------

Revenues...................................................................... $327,488 $862,368
Operating expenses............................................................ (254,659) (588,815)
Interest...................................................................... (9,736) (16,897)
-------- --------
Net income before income taxes................................................ 63,093 256,656
Provision for income taxes.................................................... (12,500) (99,500)
-------- --------
Net income.................................................................... $ 50,593 $157,156
-------- --------
-------- --------
</TABLE>

F-10

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

NOTE 4. NOTES PAYABLE

Notes payable consist of the following:

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Note payable to a bank in the principal sum of up to $25,500,000 due December 1998, interest on
the outstanding principal balance payable monthly at an effective rate of 8.11%, secured by
deeds of trust on 47 restaurant properties and assignment of rents under the Amended and
Restated Master Lease Agreement for those restaurants. The principal balance of the loan may
be prepaid, in whole or part, subject to certain restrictions and penalties.................. $23,250,000 $23,900,000
Fixed rate notes payable comprised of four loans, payable in monthly installments totaling
approximately $287,000 including principal and interest at rates ranging from 7.86% to 8.55%,
with maturities in 2000 (balloon of approximately $12,500,000) through 2025. The notes are
secured by deeds of trust and assignments of rents of four apartment properties.............. 36,855,485 36,441,534
Variable rate notes payable comprised of two loans ($8,600,000 and $1,400,000, respectively),
payable in monthly installments of $6,511 applied to the principal balance of the $8,600,000
loan and interest at 30-day LIBOR plus 1.75% and 2.25% (7.3% and 7.8% at December 31, 1996),
respectively, with maturities in 2002 and 1999, respectively. The notes are secured by deeds
of trust and assignment of rents of three apartment properties............................... -- 9,954,423
Variable rate notes payable to affiliates comprised of two loans due May 1999, interest at the
lower of 30-day LIBOR plus 1.5% (7.1% at December 31, 1996) or 8%, payable quarterly.
Liability for these notes was assumed at the acquisition of BTVC............................. 7,056,300 7,056,300
----------- -----------
$67,161,785 $77,352,257
----------- -----------
----------- -----------
</TABLE>

As of December 31, 1996, scheduled principal payments are approximately as
follows: 1997 -- $495,000; 1998 -- $24,431,000; 1999 -- $9,026,000;
2000 -- $12,858,000; 2001 -- $389,000; thereafter -- $30,153,000.

The loan agreement related to the $25,500,000 note payable to a bank
includes covenants and restrictions relating to, among other things, specified
levels of debt service coverage, leverage and net worth.

During December, 1995, the Company applied $29,425,000 proceeds from fixed
rate loans to retire a fixed rate mortgage note and pay off variable rate notes
payable and a variable rate revolving line of credit totaling approximately
$29,250,000. In conjunction with these refinancing transactions, unamortized
loan costs of approximately $38,000 were charged to expense. In conjunction with
these transactions the Company paid and recorded $266,000 and $183,000 in
deferred loan costs in 1995 and 1996, respectively.

During 1996 the Company financed the purchase of Paces Village Apartments
through first and second deed of trust loans totaling $10,000,000 along with a
draw of $650,000 from the Company's existing credit facility. In addition, deeds
of trust related to Paces Commons Apartments and Oakbrook Apartments were
modified to extend the terms of each note by five years. In conjunction with
these transactions the Company paid and recorded $139,000 in deferred loan costs
in 1996.

Interest payments were as follows:

<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Payments to affiliates...................................... $ 17,581 $ 530,733 $ 506,389
Payments to other lenders................................... 2,539,445 4,810,067 5,379,519
---------- ---------- ----------
$2,557,026 $5,340,800 $5,885,908
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

F-11

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

NOTE 5. DIVIDEND DISTRIBUTIONS

Dividend distributions totaling $1.24 per share were paid during 1994, 1995
and 1996. The allocation between non-taxable return of capital and taxable
ordinary dividend income to shareholders was as follows.

<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Non-taxable return of capital............................................. 49.3% 51.8% 43.7%
Taxable ordinary dividend income.......................................... 50.7% 48.2% 56.3%
</TABLE>

A regular quarterly dividend of $.31 per share was declared by the Board of
Directors on January 14, 1997, payable on February 14, 1997, to shareholders of
record on January 31, 1997.

NOTE 6. RENTAL OPERATIONS

APARTMENT PROPERTIES. The Company leases its residential apartments under
operating leases with monthly payments due in advance. The majority of the
apartment leases are for terms of one year or less, with none longer than two
years. Rental and other revenues are recorded as earned.

RESTAURANT PROPERTIES -- MASTER LEASE AGREEMENT. In conjunction with the
$25,500,000 loan agreement with a bank, in December 1995 the Company entered
into an Amended and Restated Master Lease Agreement with Enterprises which
extended the term of the original lease to an initial term ending in December
2007 and increased minimum annual rent to $4,500,000. Prior to amendment, the
master lease required the lessee to pay minimum annual rent equal to an
annualized rate of 8.0 percent of the aggregate purchase price of the properties
($3,459,433 in 1994 and 1995, respectively), and percentage rent of 9.875
percent of the quarterly aggregate net sales from restaurant operations on the
properties less the aggregate minimum rent payable for such calendar quarter.

As amended, the lease requires Enterprises to pay monthly installments of
minimum annual rent equal to $4,500,000 and percentage rent at 9.875 percent of
quarterly aggregate net sales from restaurant operations on the properties less
minimum rent paid for such calendar quarter, subject to an annual calculation of
the greater of minimum or percentage rent. In 1996 the Company received
approximately $122,000 of excess rental payments, which have been recorded as
deferred revenue at December 31, 1996.

Enterprises is responsible for all taxes, utilities, renovations, insurance
and maintenance expenses relating to the operation of the restaurant properties.
The lessee may extend the lease for a maximum of three five-year renewal terms.
Under certain conditions as defined in the agreement, Enterprises and the
Company each have the right to substitute another restaurant property for a
property covered by the lease. The master lease provides that after December 31,
2007 (the beginning of the first renewal period), Enterprises has the right to
terminate the lease on up to five restaurant properties per year by offering to
purchase them under specified terms. In addition, the Company and Enterprises
have entered into a separate agreement which, after December 31, 1997, allows
Enterprises to purchase under specified terms up to seven restaurant properties
deemed to be uneconomic.

The components of restaurant rental income were as follows:

<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Minimum rent................................................ $3,459,433 $3,459,433 $4,500,000
Percentage rent............................................. 1,587,404 1,189,817 --
---------- ---------- ----------
$5,046,837 $4,649,250 $4,500,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

Future minimum rental payments to be received by the Company under the
master lease agreement are $4,500,000 per year through 2007. This annual amount
does not include percentage rent which may be earned in addition to minimum
rent.

Approximately 31 percent of the Company's revenue in 1996 was derived from
Enterprises' payment of rent for the use of the Company's restaurant properties.
In addition, Enterprises is responsible for all of the costs associated with the
maintenance and operation of these properties. As a result, the financial well
being of the Company is, to a large extent, dependent on Enterprises' ability to
meet its obligations under the terms of the master lease. The ability of
Enterprises to satisfy the

F-12

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

NOTE 6. RENTAL OPERATIONS -- Continued
requirements of the master lease depends on its liquidity and capital resources.
Historically, Enterprises has been able to meet its liquidity needs through cash
flow generated from operations and through reliance on its credit facility.

Enterprises' principal line of business is the operation of approximately
360 Hardee's restaurants, 47 of which are owned by the Company. The continued
decline in its restaurant sales has had a material negative impact on
Enterprises' operating cash flow. Management has reviewed Enterprises' unaudited
financial statements, cash flow analysis, restaurant contribution analysis,
sales trend analysis and projections, and believes that Enterprises will have
sufficient liquidity and capital resources to meet its obligations under the
master lease and credit facility as well as its general corporate operating
needs.

NOTE 7. RELATED PARTY TRANSACTIONS

Certain directors and officers of the Company hold similar positions with
Enterprises and BNE Advisory Group, Inc. (an affiliate of Enterprises), and held
similar positions with BTVC.

The Company purchased the 47 Hardee's restaurant properties from BNE Realty
Partners, Limited Partnership (an affiliate of Enterprises) for $43,243,000 in
1987.

The Company had an agreement through September 30, 1994, under which BNE
Advisory Group, Inc. provided all administrative services and was responsible
for the day-to-day operations of the Company. The agreement provided for
compensation to BNE Advisory Group, Inc. at an annual fee equal to 4.65 percent
of the Company's net cash available for distribution (as defined in the
agreement) before the advisory fee. Advisory fee expense totaled $153,000 in
1994. Effective with the merger of BTVC on October 1, 1994, the agreement with
BNE Advisory Group, Inc. was terminated.

Prior to the Company's acquisition of BTVC, the Company paid BTVC $112,000
for property management services in 1994.

Enterprises had extended to the Company an unsecured revolving line of
credit up to $2,000,000. Draws totaling $1,100,000 were made and repaid in full
during 1994. At December 31, 1994, there was no obligation outstanding. In
conjunction with modification of the master lease agreement (see Note 6), this
line of credit was terminated in December 1995.

NOTE 8. ACQUISITIONS

On June 7, 1994, the Company acquired Oakbrook Apartments, a residential
apartment community located in Charlotte, North Carolina for a total purchase
cost of $9,372,000. The purchase was financed primarily through bank and
mortgage borrowings. The results of operations of Oakbrook are included in the
financial statements from June 7, 1994.

On October 1, 1994, the Company acquired by merger BTVC, including
Latitudes Apartments, for an initial purchase price including $91,000 in cash,
$21,251,000 through assumption of liabilities, and 134,610 shares of the
Company's common stock valued at $1,899,000. The acquisition agreement provides
for contingent purchase price payments ("additional consideration") of up to
$1,700,000 if certain future financial targets are attained. The additional
consideration is payable in shares of common stock or cash, at the option of the
Company, on a quarterly basis over a period of up to 14 quarters commencing with
the quarter ended December 31, 1994. The acquisition was accounted for by the
purchase method of accounting, and the total acquisition cost of $26,326,000
(assuming full earn-out of additional consideration and including approximately
$1,385,000 in acquisition costs) approximates the fair value of assets acquired.
Significant assets acquired include the Latitudes Apartments and an intangible
related to management operations, initially recorded at $21,950,000 and
$2,250,000, respectively. Additional consideration payments will be allocated
primarily to the intangible related to management operations and amortized over
ten years. The results of operations of Latitudes and management operations are
included in the financial statements from October 1, 1994.

On December 28, 1994, the Company acquired Harris Hill Apartments, a
residential apartment community located in Charlotte, North Carolina for a total
purchase cost of $8,871,000. The purchase was financed primarily through bank
and

F-13

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

NOTE 8. ACQUISITIONS -- Continued
mortgage borrowings. The results of operations of Harris Hill are included in
the financial statements from December 28, 1994.

On April 29, 1996, the Company acquired Paces Village Apartments, a
residential apartment community located in Greensboro, North Carolina for a
total purchase cost of $10,667,000. The purchase was financed primarily through
bank and mortgage borrowings. The results of operations of Paces Village are
included in the financial statements from April 29, 1996.

In conjunction with the BTVC acquisition and based on an earlier estimate,
the Company issued 140,990 shares, including 6,380 "excess shares" to the BTVC
shareholders in October 1994. During the fourth quarter of 1994 and in each
quarter of 1995 and 1996 the financial targets for additional consideration were
met; the Company recorded additional consideration totaling approximately
$1,275,000, paid in part by issuance of 81,129 shares of common stock. At
December 31, 1996, the BTVC shareholders are due additional consideration
totaling approximately $356,000.

At December 31, 1996, assuming the full contingent purchase price is earned
and paid in common stock, it is anticipated that the Company would issue
approximately 62,000 additional shares of common stock in conjunction with the
acquisition.

The following unaudited pro forma summary presents the results of
operations as if the acquisition of Paces Village Apartments in 1996 had
occurred at the beginning of periods presented and does not purport to be
indicative of what would have occurred had the acquisitions been made as of
those dates or of results which may occur in the future.

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Total revenue.......................................................... $15,193,000 $15,006,000
Net income............................................................. 1,489,000 1,690,000
Net income per common share............................................ 0.50 0.56
</TABLE>

NOTE 9. PROFIT SHARING PLAN

The employees of the Company are participants in a profit sharing plan
pursuant to Section 401 of the Internal Revenue Code. The Company makes limited
matching contributions based on the level of employee participation as defined.

NOTE 10. STOCK OPTION AND INCENTIVE PLAN

In 1994 the Company established an employee Stock Option and Incentive Plan
("Stock Option Plan") under which 280,000 shares of the Company's common stock
are reserved for issuance. On October 17, 1994, options to purchase 160,000
shares were granted to certain eligible employees at $13.75 per share, the fair
value of the Company's stock on the date the options were granted. The options
vest and are exercisable one-fourth per year beginning October 17, 1995, and
expire October 17, 2004. During 1996 options for 10,000 shares were forfeited.
In January 1996 the options were repriced at $12.50, the fair value of the
Company's common stock on the date of repricing. At December 31, 1996, options
for 75,000 shares have vested, and no options have been exercised. The remaining
contractual life of all options outstanding is 8.75 years.

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" ("FAS 123"), which establishes
financial accounting and reporting standards for stock-based compensation plans.
FAS 123 defines a fair value based method of accounting for an employee stock
option or similar equity instrument and encourages the adoption of that method
of accounting. However, FAS 123 also allows entities to continue to account for
such plans under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). Entities electing to remain with the
accounting in APB 25 must make pro forma disclosures of net income and earnings
per share as if the fair value based method of accounting defined in FAS 123 had
been applied.

The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of repricing, no compensation expense is recognized.

F-14

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

NOTE 10. STOCK OPTION AND INCENTIVE PLAN -- Continued
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value of these options was estimated at the date of repricing using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996: risk-free interest rate of 6.5 percent; dividend yield of
9.9 percent; volatility factor of the expected market price of the Company's
common stock of .09; and a weighted-average expected life of the option of 8.75
years. The weighted average fair value of options as repriced in 1996 was $.06.
No options were granted in 1995.

The effect of applying the FAS 123 fair value method to the Company's
stock-based compensation results in net income and net income per share that is
not materially different from the amounts reported.

NOTE 11. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN

In July 1996 the Company's Dividend Reinvestment and Stock Purchase Plan
("DRIP Plan") was amended to allow the Company, at its option, to issue shares
directly to Plan participants. During 1996 the Company issued 19,207 shares
through the DRIP Plan.

NOTE 12. COMMITMENTS AND CONTINGENCIES

The Company has agreements with two of its executive officers which provide
for cash compensation and other benefits in the event that a change in control
of the Company occurs.

The Company is a party to a variety of legal proceedings arising in the
ordinary course of its business. Management believes that such matters will not
have a material effect on the financial position of the Company.

On December 29, 1996, the Company experienced a fire which destroyed 20
units at the Latitudes Apartments. The Company believes that it has adequate
insurance coverage and does not expect this event to have a material adverse
effect on the Company's financial condition, results of operations, or cash
flows.

NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)

Set forth below is selected financial data (unaudited) for the years ended
December 31, 1995 and 1996:

<TABLE>
<CAPTION>
NET INCOME
REVENUES NET INCOME PER SHARE
----------- ---------- ----------
<S> <C> <C> <C>
1995
First quarter................................... $ 3,353,182 $ 388,106 $ 0.13
Second quarter.................................. 3,528,028 526,125 0.18
Third quarter................................... 3,530,374 467,140 0.16
Fourth quarter (1).............................. 3,314,054 246,897 0.08
----------- ---------- ----------
$13,725,638 $1,628,268 $ 0.54
----------- ---------- ----------
----------- ---------- ----------

1996
First quarter................................... $ 3,307,505 $ 379,174 $ 0.13
Second quarter.................................. 3,623,992 435,338 0.14
Third quarter................................... 3,813,211 463,018 0.15
Fourth quarter.................................. 3,763,116 438,285 0.14
----------- ---------- ----------
$14,507,824 $1,715,815 $ 0.57
----------- ---------- ----------
----------- ---------- ----------
</TABLE>

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

(1) Net income includes a special charge of $321,000 to write off certain
deferred acquisition costs and an adjustment to capitalize approximately
$85,000 of expenditures for carpet, vinyl and wallpaper previously charged
to expense in the first three quarters.

F-15

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

NOTE 14. SUBSEQUENT EVENTS (UNAUDITED)

The Company has entered into an agreement to acquire a portfolio of seven
apartment communities containing 1,356 apartment units located in North
Carolina.

The Company currently plans to issue approximately 2,800,000 shares of its
Common Stock at an estimated price of $15.00 during the fourth quarter of 1997.

The Company is also in the process of converting to an umbrella partnership
real estate investment trust ("UPREIT"). An UPREIT is a real estate investment
trust that controls and holds most of its properties through an umbrella limited
partnership.

F-16

<PAGE>

BODDIE-NOELL PROPERTIES, INC.

SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION

YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF PERIOD
INITIAL COSTS COSTS (2)
--------------------------- CAPITALIZED ---------------------------
BUILDINGS & SUBSEQUENT BUILDINGS &
DESCRIPTION ENCUMB. LAND IMPROVEMN'TS TO ACQUISITION LAND IMPROVEMN'TS
- ---------------------------------- ----------- ----------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
APARTMENT PROPERTIES:
NORTH CAROLINA:
Paces Commons, Charlotte.......... $10,717,740 $ 1,430,157 $12,871,424 $ 435,611 $ 1,430,157 $13,307,035
Oakbrook, Charlotte............... 6,496,448 848,835 8,523,384 262,909 848,835 8,786,293
Harris Hill, Charlotte............ 6,104,161 1,003,298 7,867,857 291,284 1,003,298 8,159,141
Paces Village, Greensboro......... 9,954,423 1,250,000 9,416,580 56,408 1,250,000 9,472,988
----------- ------------- -------------- ----------- -------------
4,532,290 38,679,245 1,046,212 4,532,290 39,725,457
VIRGINIA:
Latitudes, Virginia Beach......... 13,123,185 3,360,000 18,606,667 385,634 3,360,000 18,992,301
----------- ----------- ------------- -------------- ----------- -------------
TOTAL APARTMENT PROPERTIES........ 46,395,957 7,892,290 57,285,912 1,431,846 7,892,290 58,717,758

HARDEE'S RESTAURANT PROPERTIES:
NORTH CAROLINA:
Bessemer City..................... (1) 152,079 391,060 -- 152,079 391,060
Burlington........................ (1) 162,411 417,629 -- 162,411 417,629
Chapel Hill....................... (1) 273,556 703,430 -- 273,556 703,430
Denver............................ (1) 275,484 708,387 -- 275,484 708,387
Eden.............................. (1) 253,282 651,296 -- 253,282 651,296
Fayetteville (Ramsey)............. (1) 260,135 668,919 -- 260,135 668,919
Fayetteville (N. Eastern)......... (1) 308,271 792,696 -- 308,271 792,696
Fayetteville (Bragg).............. (1) 235,951 606,730 -- 235,951 606,730
Gastonia (E. Franklin)............ (1) 230,421 592,511 -- 230,421 592,511
Gastonia (N. Chester)............. (1) 199,133 512,055 -- 199,133 512,055
Hillsborough...................... (1) 290,868 747,948 -- 290,868 747,948
Kinston (W. Vernon)............... (1) 237,135 609,777 -- 237,135 609,777
Kinston (Richlands)............... (1) 231,678 595,743 -- 231,678 595,743
Mt. Airy.......................... (1) 272,205 699,955 -- 272,205 699,955
Newton............................ (1) 223,453 574,594 -- 223,453 574,594
Siler City........................ (1) 268,312 689,945 -- 268,312 689,945
Spring Lake....................... (1) 218,925 562,949 -- 218,925 562,949
Thomasville (E. Main)............. (1) 253,716 652,411 -- 253,716 652,411
Thomasville (Randolph)............ (1) 327,727 842,726 -- 327,727 842,726
----------- ------------- -------------- ----------- -------------
4,674,742 12,020,761 -- 4,674,742 12,020,761
VIRGINIA:
Ashland........................... (1) 296,509 762,452 -- 296,509 762,452
Blackstone........................ (1) 275,565 708,596 -- 275,565 708,596
Bluefield......................... (1) 205,700 528,947 -- 205,700 528,947
Chester........................... (1) 300,165 771,852 -- 300,165 771,852
Clarksville....................... (1) 211,545 543,972 -- 211,545 543,972
Clintwood......................... (1) 222,673 572,588 -- 222,673 572,588
Dublin............................ (1) 364,065 936,168 -- 364,065 936,168
Franklin.......................... (1) 287,867 740,230 -- 287,867 740,230
Galax............................. (1) 309,578 796,057 -- 309,578 796,057
Hopewell.......................... (1) 263,939 678,701 -- 263,939 678,701
Lebanon........................... (1) 266,340 684,876 -- 266,340 684,876
Lynchburg (Langhorne)............. (1) 249,865 642,509 -- 249,865 642,509
Lynchburg (Timberlake)............ (1) 276,153 710,107 -- 276,153 710,107
Norfolk........................... (1) 325,822 837,829 -- 325,822 837,829
Orange............................ (1) 244,883 629,699 -- 244,883 629,699
Petersburg........................ (1) 357,984 920,531 -- 357,984 920,531

ACCUMULATED DATE OF DATE LIFE
DESCRIPTION TOTAL DEPRECIATION CONSTR. ACQUIRED (YEARS)
- ---------------------------------- ------------ ----------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
APARTMENT PROPERTIES:
NORTH CAROLINA:
Paces Commons, Charlotte.......... $ 14,737,192 $1,285,494 1988 Jun-93 40
Oakbrook, Charlotte............... 9,635,128 614,332 1985 Jun-94 40
Harris Hill, Charlotte............ 9,162,439 499,924 1988 Dec-94 40
Paces Village, Greensboro......... 10,722,988 193,187 1988 Apr-96 40
------------ -----------
44,257,747 2,592,937
VIRGINIA:
Latitudes, Virginia Beach......... 22,352,301 1,311,416 1989 Oct-94 38
------------ -----------
TOTAL APARTMENT PROPERTIES........ 66,610,048 3,904,353
HARDEE'S RESTAURANT PROPERTIES:
NORTH CAROLINA:
Bessemer City..................... 543,139 94,914 Nov-77 Apr-87 40
Burlington........................ 580,040 101,361 Oct-85 Apr-87 40
Chapel Hill....................... 976,986 170,728 Aug-64 Apr-87 40
Denver............................ 983,871 171,931 Jul-83 Apr-87 40
Eden.............................. 904,578 158,074 Jun-73 Apr-87 40
Fayetteville (Ramsey)............. 929,054 162,352 Oct-73 Apr-87 40
Fayetteville (N. Eastern)......... 1,100,967 192,393 Sep-83 Apr-87 40
Fayetteville (Bragg).............. 842,681 147,258 Jan-85 Apr-87 40
Gastonia (E. Franklin)............ 822,932 143,807 Apr-63 Apr-87 40
Gastonia (N. Chester)............. 711,188 124,279 Jan-78 Apr-87 40
Hillsborough...................... 1,038,816 181,532 Mar-78 Apr-87 40
Kinston (W. Vernon)............... 846,912 147,997 Jul-62 Apr-87 40
Kinston (Richlands)............... 827,421 144,591 Dec-81 Apr-87 40
Mt. Airy.......................... 972,160 169,884 May-73 Apr-87 40
Newton............................ 798,047 139,459 Mar-76 Apr-87 40
Siler City........................ 958,257 167,455 May-79 Apr-87 40
Spring Lake....................... 781,874 136,632 Mar-76 Apr-87 40
Thomasville (E. Main)............. 906,127 158,345 Feb-66 Apr-87 40
Thomasville (Randolph)............ 1,170,453 204,535 Apr-74 Apr-87 40
------------ -----------
16,695,503 2,917,526
VIRGINIA:
Ashland........................... 1,058,961 185,053 Apr-87 Apr-87 40
Blackstone........................ 984,161 171,982 Sep-79 Apr-87 40
Bluefield......................... 734,647 128,379 Feb-85 Apr-87 40
Chester........................... 1,072,017 187,334 May-73 Apr-87 40
Clarksville....................... 755,517 132,026 Oct-85 Apr-87 40
Clintwood......................... 795,261 138,971 Jan-81 Apr-87 40
Dublin............................ 1,300,233 227,214 Jul-83 Apr-87 40
Franklin.......................... 1,028,097 179,660 Feb-75 Apr-87 40
Galax............................. 1,105,635 193,208 Jun-74 Apr-87 40
Hopewell.......................... 942,640 164,726 Jun-78 Apr-87 40
Lebanon........................... 951,216 166,225 Jun-83 Apr-87 40
Lynchburg (Langhorne)............. 892,374 155,941 Sep-82 Apr-87 40
Lynchburg (Timberlake)............ 986,260 172,348 Aug-83 Apr-87 40
Norfolk........................... 1,163,651 203,347 Aug-84 Apr-87 40
Orange............................ 874,582 152,832 Aug-74 Apr-87 40
Petersburg........................ 1,278,515 223,420 Mar-74 Apr-87 40
</TABLE>

F-17

<PAGE>

BODDIE-NOELL PROPERTIES, INC.

SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION

YEAR ENDED DECEMBER 31, 1996 -- (CONTINUED)
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF PERIOD
INITIAL COSTS COSTS (2)
--------------------------- CAPITALIZED ---------------------------
BUILDINGS & SUBSEQUENT BUILDINGS &
DESCRIPTION ENCUMB. LAND IMPROVEMN'TS TO ACQUISITION LAND IMPROVEMN'TS
- ---------------------------------- ----------- ----------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richmond (Forest Hill)............ (1) 196,084 504,216 -- 196,084 504,216
Richmond (Midlothian)............. (1) 270,736 696,179 -- 270,736 696,179
Richmond (Myers).................. (1) 321,946 827,861 -- 321,946 827,861
Roanoke (Hollins)................. (1) 257,863 663,076 -- 257,863 663,076
Roanoke (Abenham)................. (1) 235,864 606,507 -- 235,864 606,507
Rocky Mount....................... (1) 248,434 638,829 -- 248,434 638,829
Smithfield........................ (1) 223,070 573,608 -- 223,070 573,608
Staunton.......................... (1) 260,569 670,035 -- 260,569 670,035
Verona............................ (1) 191,631 492,765 -- 191,631 492,765
Virginia Beach (Lynnhaven)........ (1) 271,570 698,322 -- 231,731 698,322
Virginia Beach (Holland).......... (1) 277,943 714,710 -- 277,943 714,710
Wise.............................. (1) 219,471 564,355 -- 219,471 564,355
----------- ------------- -------------- ----------- -------------
7,433,834 19,115,577 -- 7,393,995 19,115,577
----------- ----------- ------------- -------------- ----------- -------------
TOTAL RESTAURANT PROPERTIES....... 23,900,000 12,108,576 31,136,338 -- 12,068,737 31,136,338
----------- ----------- ------------- -------------- ----------- -------------
TOTAL REAL ESTATE................. $70,295,957 $20,000,866 $88,422,250 $1,431,846 $19,961,027 $89,854,096
----------- ----------- ------------- -------------- ----------- -------------
----------- ----------- ------------- -------------- ----------- -------------

ACCUMULATED DATE OF DATE LIFE
DESCRIPTION TOTAL DEPRECIATION CONSTR. ACQUIRED (YEARS)
- ---------------------------------- ------------ ----------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Richmond (Forest Hill)............ 700,300 122,377 Nov-74 Apr-87 40
Richmond (Midlothian)............. 966,915 168,967 Jan-74 Apr-87 40
Richmond (Myers).................. 1,149,807 200,928 Apr-83 Apr-87 40
Roanoke (Hollins)................. 920,939 160,934 Feb-73 Apr-87 40
Roanoke (Abenham)................. 842,371 147,204 Nov-82 Apr-87 40
Rocky Mount....................... 887,263 155,048 May-80 Apr-87 40
Smithfield........................ 796,678 139,218 Apr-77 Apr-87 40
Staunton.......................... 930,604 162,623 Sep-83 Apr-87 40
Verona............................ 684,396 119,597 Jan-85 Apr-87 40
Virginia Beach (Lynnhaven)........ 930,053 169,488 Jun-80 Apr-87 40
Virginia Beach (Holland).......... 992,653 173,466 Aug-83 Apr-87 40
Wise.............................. 783,826 136,971 Jun-80 Apr-87 40
------------ -----------
26,509,572 4,639,486
------------ -----------
TOTAL RESTAURANT PROPERTIES....... 43,205,075 7,557,012
------------ -----------
TOTAL REAL ESTATE................. $109,815,123 $11,461,365
------------ -----------
------------ -----------
</TABLE>

- ---------------
(1) Indicates the 47 restaurants encumbered by the bank term loan of
up to $25,500,000; $23,900,000 outstanding at 12/31/96

(2) Aggregate cost at December 31, 1996, for Federal income tax
purposes was $106,878,323

F-18

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------
1994 1995 1996
------------- ------------ -------------
<S> <C> <C> <C>
Real estate investments:
Balance at beginning of year............................................... $ 57,557,243 $ 97,928,578 $ 98,520,761
Additions during year
Acquisitions by merger.................................................. 21,966,667 -- --
Other acquisitions...................................................... 18,243,374 -- 10,666,580
Improvements, etc....................................................... 161,294 592,183 627,782
Deductions during year..................................................... -- -- --
------------- ------------ -------------
Balance at close of year................................................... $ 97,928,578 $ 98,520,761 $ 109,815,123
------------- ------------ -------------
------------- ------------ -------------
Accumulated depreciation:
Balance at beginning of year............................................... $ 5,416,818 $ 6,827,337 $ 9,020,948
Provision for depreciation................................................. 1,410,519 2,193,611 2,440,417
Deductions during year..................................................... -- -- --
------------- ------------ -------------
Balance at close of year................................................... $ 6,827,337 $ 9,020,948 $ 11,461,365
------------- ------------ -------------
------------- ------------ -------------
</TABLE>

F-19

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The unaudited pro forma condensed consolidated balance sheet as of
September 30, 1997, is presented as if the acquisition of the four Initial
Properties to be acquired under the Master Agreement of Merger and Acquisition
related to the Chrysson Properties, the Offering, and the application of the net
proceeds of the Offering all had occurred on September 30, 1997.

The unaudited pro forma condensed consolidated statements of operations for
the year ended December 31, 1996, and for the nine months ended September 30,
1997, are presented as if the acquisition of the three Stabilized Properties,
the Offering, and the application of the net proceeds of the Offering all had
occurred on January 1 of each period presented.

You should read these unaudited statements in conjunction with our audited
financial statements and notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in this Prospectus. We
believe the pro forma condensed consolidated financial information provides all
adjustments necessary to reflect the effects of the above transactions.

No one has audited these pro forma condensed consolidated financial
statements. These pro forma statements may not represent what our financial
position would have been if the purchase of the Initial Properties and the
Offering really occurred on September 30, 1997, or how we would have performed
if the purchase of the Stabilized Properties and the Offering had really
occurred at the beginning of the periods presented. In addition, they do not
purport to project our financial position or results of operations at any future
date or for any future period.

The unaudited pro forma condensed consolidated statements of operations for
the year ended December 31, 1996, and for the nine months ended September 30,
1997, do not include operations, depreciation, or financing expense for one
apartment community and the second phase of another apartment community because
these properties had not reached "stabilized" status prior to September 30,
1997. An apartment community is considered stabilized when construction of all
buildings has been completed and the community has attained 90% occupancy for 90
days. Under the terms of the Master Agreement of Merger and Acquisition and the
expected financing for the purchase, these conditions must be met before
purchase of the property. These two properties reached stabilized status in
October, 1997.

F-20

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------
CHRYSSON PROCEEDS OTHER
INITIAL FROM THE PRO FORMA
HISTORICAL ACQUISITION OFFERING ADJUSTMENTS
(A) (B) (C) (D)
---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
ASSETS
Real estate assets, net....................................... $ 96,962 $60,860 $ -- $ --
Cash and cash equivalents..................................... 1,407 498 32,341 (32,312)
Rent and other receivables.................................... 35 -- --
Prepaid expenses and other assets............................. 595 590 -- --
Investment in and advances to Management Company.............. 243 -- -- --
Notes receivable.............................................. 1,413 -- -- --
Intangible related to acquisition of mgmt operations, net..... 2,841 -- -- --
Deferred financing costs, net................................. 710 448 -- (242)
---------- ----------- -------- -----------
Total assets.................................................. $ 104,206 $62,396 $ 32,341 $ (32,554)
---------- ----------- -------- -----------
---------- ----------- -------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable.............................. $ 78,397 $46,856 $ -- $ (32,341)
Accounts payable and accrued expenses......................... 557 405 -- --
Accrued interest on mortgages and other notes payable......... 466 -- -- --
Consideration due for acquisitions............................ 572 2,600 -- --
Escrowed security deposits and deferred revenue............... 264 185 -- --
---------- ----------- -------- -----------
80,256 50,046 -- (32,341)

Minority interest in operating partnership.................... -- 12,350 -- --
Shareholders' equity:
Common stock.................................................. 31 -- 25 --
Additional paid-in capital.................................... 35,163 -- 32,316 --
Dividend distributions in excess of net income................ (11,244) -- -- (213)
---------- ----------- -------- -----------
Total shareholders' equity.................................... 23,950 -- 32,341 (213)
---------- ----------- -------- -----------
Total liabilities and shareholders' equity.................... $ 104,206 $62,396 $ 32,341 $ (32,554)
---------- ----------- -------- -----------
---------- ----------- -------- -----------

CONSOLIDATED
PRO FORMA
------------
<S> <C>
ASSETS
Real estate assets, net....................................... $157,822
Cash and cash equivalents..................................... 1,934
Rent and other receivables.................................... 35
Prepaid expenses and other assets............................. 1,185
Investment in and advances to Management Company.............. 243
Notes receivable.............................................. 1,413
Intangible related to acquisition of mgmt operations, net..... 2,841
Deferred financing costs, net................................. 916
------------
Total assets.................................................. $166,389
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable.............................. $ 92,912
Accounts payable and accrued expenses......................... 962
Accrued interest on mortgages and other notes payable......... 466
Consideration due for acquisitions............................ 3,172
Escrowed security deposits and deferred revenue............... 449
------------
97,961
Minority interest in operating partnership.................... 12,350
Shareholders' equity:
Common stock.................................................. 56
Additional paid-in capital.................................... 67,479
Dividend distributions in excess of net income................ (11,457)
------------
Total shareholders' equity.................................... 56,078
------------
Total liabilities and shareholders' equity.................... $166,389
------------
------------
</TABLE>

See accompanying notes.

F-21

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

(A) Reflects our historical balance sheet contained in our Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997.

(B) Reflects the acquisition of the Initial Properties specified in the
Master Agreement of Merger and Acquisition related to the Chrysson properties,
which we expect to complete by December 31, 1997.

The Initial Properties are:

<TABLE>
<CAPTION>
PROPERTY LOCATION # UNITS COMPLETED STABILIZED
- ------------------ ----------------- ------- ------------ -------------
<S> <C> <C> <C> <C>
Abbington Phase I Greensboro, NC 240 1995 1995
Pepperstone Greensboro, NC 108 1992 1992
Savannah Place Greensboro, NC 172 1991 1991
Abbington Phase II Greensboro, NC 120 June, 1997 October, 1997
Waterford Place Winston-Salem, NC 240 August, 1997 October, 1997
</TABLE>

We expect this acquisition to cost approximately:

<TABLE>
<S> <C>
Contract price:
Issue of 950,032 operating partnership units at $13.00 per unit at closing........... $12,350,000
Issue of 100,000 operating partnership units at $13.00 per unit, due one year after
closing........................................................................... 1,300,000
Issue of 100,000 operating partnership units at $13.00 per unit, due two years after
closing........................................................................... 1,300,000
Cash payments to retire existing debt................................................ 44,941,000
-----------
59,891,000
Other costs............................................................................ 969,000
-----------
$60,860,000
-----------
-----------
</TABLE>

We expect to finance this purchase with net proceeds from mortgage
financing. We have obtained a loan commitment for first mortgages for 65% of
value, with interest fixed at 6.97%, for a term of ten years, with payments of
interest only; and for an unsecured loan for 15% of value, with variable
interest at the 30-day LIBOR rate plus 2.00% for the first six months, for a
term of 18 months, with payments of interest only.

<TABLE>
<S> <C>
First mortgages on initial properties.................................................. $38,070,500
Unsecured loan......................................................................... 8,785,500
-----------
$46,856,000
-----------
-----------
</TABLE>

We expect loan fees and other costs related to obtaining the mortgages to
be approximately:

<TABLE>
<S> <C>
Loan fees.............................................................................. $ 300,000
Legal and other costs.................................................................. 148,000
-----------
$ 448,000
-----------
-----------
</TABLE>

F-22

<PAGE>
We will assume liability for payment of real property taxes and resident
security deposits held in trust at closing.

We expect to receive cash at closing for the contributors' portion of
prorated real property taxes, resident security deposits held in trust, and the
excess of mortgage proceeds over cash payments made to retire contributors' debt
on the Initial Properties. Amounts received for the contributor's portion of
prorated real property taxes will be placed in escrow with the mortgage lender.

<TABLE>
<S> <C>
Proceeds from sale of 2,500,000 shares based on initial price
of $14.125 per share................................................................... $35,313,000
Less estimated costs associated with the Offering...................................... 2,972,000
-----------
$32,341,000
-----------
-----------
</TABLE>

(D) Reflects expected application of proceeds from the Offering to repay
certain mortgages and notes payable, and write-off of deferred financing costs
related to those notes payable.

F-23

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
-------------------------
STABILIZED OTHER
CHRYSSON PRO FORMA
HISTORICAL PROPERTIES ADJUSTMENTS
(E) (G) (H)
---------- ---------- -----------
<S> <C> <C> <C>
REVENUES
Apartment rental income.................................................... $ 9,791 $4,431 $ --
Restaurant rental income................................................... 4,500 -- --
Equity in income of Management Company..................................... 149 -- --
Interest and other income.................................................. 68 8 --
---------- ---------- -----------
14,508 4,439 --
EXPENSES
Depreciation............................................................... 2,440 -- 1,096(a)
Amortization -- mgmt intangible............................................ 316 -- --
Amortization -- finance costs.............................................. 219 -- (122)(b)
Apartment operations....................................................... 2,977 1,177 28(c)
Administrative............................................................. 894 -- 81(d)
Interest................................................................... 5,946 -- (429)(e)
---------- ---------- -----------
12,792 1,177 654
---------- ---------- -----------
INCOME BEFORE MINORITY INTEREST............................................ 1,716 3,262 (654)
Minority interest in operating partnership................................. -- -- 405(f)
---------- ---------- -----------
INCOME BEFORE EXTRAORDINARY ITEM........................................... $ 1,716 $3,262 $(1,059)
---------- ---------- -----------
---------- ---------- -----------
PER SHARE DATA:
INCOME BEFORE EXTRAORDINARY ITEM......................................... $ 0.57 -- --
----------
----------
WEIGHTED AVERAGE SHARES OUTSTANDING...................................... 3,027 -- --
----------
----------

CONSOLIDATED
PRO FORMA
------------
<S> <C>
REVENUES
Apartment rental income.................................................... $ 14,222
Restaurant rental income................................................... 4,500
Equity in income of Management Company..................................... 149
Interest and other income.................................................. 76
------------
18,947
EXPENSES
Depreciation............................................................... 3,536
Amortization -- mgmt intangible............................................ 316
Amortization -- finance costs.............................................. 97
Apartment operations....................................................... 4,182
Administrative............................................................. 975
Interest................................................................... 5,517
------------
14,623
------------
INCOME BEFORE MINORITY INTEREST............................................ 4,324
Minority interest in operating partnership................................. 405
------------
INCOME BEFORE EXTRAORDINARY ITEM........................................... $ 3,919
------------
------------
PER SHARE DATA:
INCOME BEFORE EXTRAORDINARY ITEM......................................... $ 0.71
------------
------------
WEIGHTED AVERAGE SHARES OUTSTANDING...................................... 5,527
------------
------------
</TABLE>

See accompanying notes.

F-24

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
-------------------------
STABILIZED OTHER
CHRYSSON PRO FORMA
HISTORICAL PROPERTIES ADJUSTMENTS
(F) (G) (H)
---------- ---------- -----------
<S> <C> <C> <C>
REVENUES
Apartment rental income.................................................... $ 7,898 $3,230 $ --
Restaurant rental income................................................... 3,375 -- --
Equity in income of Management Company..................................... 183 -- --
Interest and other income.................................................. 153 12 --
---------- ---------- -----------
11,609 3,242 --
EXPENSES
Depreciation............................................................... 1,923 -- 822(a)
Amortization -- management intangible...................................... 278 -- --
Amortization -- finance costs.............................................. 161 -- (92)(b)
Apartment operations....................................................... 2,537 911 25(c)
Administrative............................................................. 734 -- 75(d)
Interest................................................................... 4,684 -- (366)(e)
---------- ---------- -----------
10,317 911 464
---------- ---------- -----------
INCOME BEFORE MINORITY INTEREST............................................ 1,292 2,331 (464)
Minority interest in operating partnership................................. -- -- 292(f)
---------- ---------- -----------
INCOME BEFORE EXTRAORDINARY ITEM........................................... $ 1,292 $2,331 $ (756)
---------- ---------- -----------
---------- ---------- -----------
PER SHARE DATA:
INCOME BEFORE EXTRAORDINARY ITEM......................................... $ 0.42 -- --
----------
----------
WEIGHTED AVERAGE SHARES OUTSTANDING...................................... 3,107 -- --
----------
----------

CONSOLIDATED
PRO FORMA
------------
<S> <C>
REVENUES
Apartment rental income.................................................... $ 11,128
Restaurant rental income................................................... 3,375
Equity in income of Management Company..................................... 183
Interest and other income.................................................. 165
------------
14,851
EXPENSES
Depreciation............................................................... 2,745
Amortization -- management intangible...................................... 278
Amortization -- finance costs.............................................. 69
Apartment operations....................................................... 3,473
Administrative............................................................. 809
Interest................................................................... 4,318
------------
11,692
------------
INCOME BEFORE MINORITY INTEREST............................................ 3,159
Minority interest in operating partnership................................. 292
------------
INCOME BEFORE EXTRAORDINARY ITEM........................................... $ 2,867
------------
------------
PER SHARE DATA:
INCOME BEFORE EXTRAORDINARY ITEM......................................... $ 0.51
------------
------------
WEIGHTED AVERAGE SHARES OUTSTANDING...................................... 5,607
------------
------------
</TABLE>

See accompanying notes.

F-25

<PAGE>
BODDIE-NOELL PROPERTIES, INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(E) Reflects our historical statement of operations contained in our Annual
Report on Form 10-K for the year ended December 31, 1996.

(F) Reflects our historical statement of operations contained in our
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.

(G) Reflects the revenues and expenses directly related to apartment
operations of three of the five "Initial Properties"specified in the Master
Agreement of Merger and Acquisition related to the Chrysson properties for the
periods presented. We have included only the operations of properties which were
completed and had attained 90% occupancy for at least 90 days during the periods
presented.

<TABLE>
<CAPTION>
SAVANNAH
ABBINGTON I PEPPERSTONE PLACE TOTAL
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996:
Apartment rental income............................................... $ 2,146,000 $ 837,000 $1,448,000 $4,431,000
Interest and other income............................................. 4,000 2,000 2,000 8,000
----------- ----------- ---------- ----------
2,150,000 839,000 1,450,000 4,439,000
Apartment operations expense.......................................... 558,000 243,000 376,000 1,177,000
----------- ----------- ---------- ----------
Revenue in excess of certain expenses................................. $ 1,592,000 $ 596,000 $1,074,000 $3,262,000
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Nine Months Ended September 30, 1997:
Apartment rental income............................................... $ 1,519,000 $ 613,000 $1,098,000 $3,230,000
Interest and other income............................................. 6,000 2,000 4,000 12,000
----------- ----------- ---------- ----------
1,525,000 615,000 1,102,000 3,242,000
Apartment operations expense.......................................... 423,000 187,000 301,000 911,000
----------- ----------- ---------- ----------
Revenue in excess of certain expenses................................. $ 1,102,000 $ 428,000 $ 801,000 $2,331,000
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>

We have not included the operations of Abbington II and Waterford Place in
the pro forma statements of operations for the year ended December 31, 1996, and
for the nine months ended September 30, 1997. Construction of Abbington II was
completed in June, 1997, and 90% occupancy was first attained during August,
1997. Construction of Waterford Place was completed in August, 1997, and 90%
occupancy was first attained during August, 1997. Under the terms of the Master
Agreement of Merger and Acquisition, we would not acquire these properties until
construction was completed and the property was in full operation. Our expected
mortgage lender requires that the properties attain 90% occupancy for at least
90 days before mortgage financing can be completed.

F-26

<PAGE>
(H) Reflects adjustments to our historical statements of operations and the
pro forma revenues and expenses directly related to apartment operations of the
three stabilized Chrysson properties as follows:

<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
(a) Estimated depreciation expense for the three stabilized properties using the straight- $ 1,096,000 $ 822,000
line method over the estimated useful lives of the related assets, which are 40 years for
buildings, 20 years for land improvements, 10 years for fixtures and equipment, and 5
years for carpet and vinyl................................................................
------------ -------------
------------ -------------
(b) Estimated net decrease in amortization expense of deferred financing costs, calculated
as follows:
Amortization of approximately $240,000 deferred financing costs related to acquisition of
the three completed Chrysson properties................................................... $ 42,000 $ 32,000
Elimination of amortization of deferred financing costs related to certain existing
mortgages and notes payable and unsecured loan related to acquisition of the three
stabilized Chrysson properties that would be repaid with proceeds from the Offering....... (164,000 ) (124,000)
------------ -------------
$ (122,000 ) $ (92,000)
------------ -------------
------------ -------------
(c) Estimated increase in apartment operations expense for property accounting staff and
supplies.................................................................................. $ 28,000 $ 25,000
------------ -------------
------------ -------------
(d) Estimated increase in general and administrative expense for management staff and
supplies.................................................................................. $ 81,000 $ 75,000
------------ -------------
------------ -------------
(e) Estimated net decrease in interest expense related to mortgages and notes payable,
calculated as follows:
Interest on approximately $25,139,000 debt related to acquisition of the three stabilized $ 1,786,000 $ 1,339,000
Chrysson properties. We calculated interest using rates of 6.97% for the first mortgages
and 7.68% for the unsecured loan..........................................................
Elimination of interest on certain existing mortgages and notes payable, and second
mortgages on the three stabilized Chrysson properties that would be repaid with proceeds
from the Offering......................................................................... (2,215,000 ) (1,705,000)
------------ -------------
$ (429,000 ) $ (366,000)
------------ -------------
------------ -------------
(f) Estimated minority interest of approximately 9% in net income of the operating
partnership, assuming approximately 571,000 operating partnership units issued to minority
interests related to acquisition of the three stabilized Chrysson properties and
approximately 2,500,000 operating partnership units issued to Boddie-Noell Properties for
net proceeds of the Offering contributed.................................................. $ 405,000 $ 292,000
------------ -------------
------------ -------------
</TABLE>

F-27

<PAGE>
REPORT OF INDEPENDENT AUDITORS

TO THE SHAREHOLDERS OF
BODDIE-NOELL PROPERTIES, INC.

We have audited the accompanying Combined Statement of Revenue and Certain
Operating Expenses of Acquired Properties as described in Note 1 for the year
ended December 31, 1996. This financial statement is the responsibility of
Acquired Properties' management. Our responsibility is to express an opinion on
this financial statement based on our audit.

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

The accompanying Combined Statement of Revenue and Certain Operating
Expenses was prepared using the basis of accounting described in Note 1 for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Form 8-K of Boddie-Noell Properties,
Inc. and is not intended to be a complete presentation of Acquired Properties'
revenue and expenses.

In our opinion, the financial statement referred to above presents fairly,
in all material respects, the revenue and certain operating expenses described
in Note 1 of Acquired Properties for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.

Ernst & Young LLP

Raleigh, North Carolina
September 12, 1997

F-28

<PAGE>
ACQUIRED PROPERTIES

COMBINED STATEMENTS OF REVENUE AND CERTAIN OPERATING EXPENSES

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30
DECEMBER 31 ------------------------
1996 1996 1997
----------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Rental income....................................................................... $4,641,260 $3,338,845 $4,855,475
Other income........................................................................ 8,143 4,583 14,708
----------- ---------- ----------
4,649,403 3,343,428 4,870,183
Certain operating expenses:
Property operations expense....................................................... 965,963 609,373 945,755
Insurance......................................................................... 33,124 20,964 26,323
Property taxes.................................................................... 370,878 264,000 419,371
----------- ---------- ----------
Total certain operating expenses.................................................... 1,369,965 894,337 1,391,449
----------- ---------- ----------
Revenue in excess of certain operating expenses..................................... $3,279,438 $2,449,091 $3,478,734
----------- ---------- ----------
----------- ---------- ----------
</TABLE>

See accompanying notes.

F-29

<PAGE>
ACQUIRED PROPERTIES

NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN OPERATING EXPENSES

DECEMBER 31, 1996

1. BASIS OF PRESENTATION

Presented herein are the Combined Statements of Revenue and Certain
Operating Expenses related to the operations of five apartment properties
located in the greater Greensboro, North Carolina metropolitan market (the
"Acquired Properties").

Acquired Properties is not a legal entity but rather a combination of the
operations of certain apartment properties expected to be acquired by
Boddie-Noell Properties, Inc. The accompanying Combined Statements of Revenue
and Certain Operating Expenses includes the accounts of the following apartment
properties, each of which is wholly owned by various parties not affiliated with
Boddie-Noell Properties, Inc. Abbington II and Waterford were in the start up
phase of operations during 1996; therefore, these properties had insignificant
operating activity.

<TABLE>
<CAPTION>
NUMBER OF DATE PLACED
PROPERTY PROPERTIES IN SERVICE OWNER
- --------------- --------- -------------- --------------------------------
<S> <C> <C> <C>
Savannah Place 1 March 1990 Savannah Place Associates, LLC
Pepperstone 1 April 1990 Pepperstone Association, LLC
Abbington I 1 November 1994 Abbington Place Associates, LLC
Abbington II 1 February 1997 Abbington Place Associates, LLC
Waterford 1 July 1996 Waterford Place Associates, LLC
</TABLE>

In accordance with Rule 3-14 of Regulation S-X, the accompanying financial
statement is not representative of the actual operations for the year presented
as certain operating expenses that may not be comparable to the expenses
expected to be incurred by Boddie-Noell Properties, Inc. in the proposed future
operations of the aforementioned properties have been excluded. Expenses
excluded consist of interest, depreciation and general and administrative
expenses not directly related to future operations.

2. SIGNIFICANT ACCOUNTING POLICIES

ADVERTISING EXPENSE

Acquired Properties expenses advertising costs as incurred. Advertising
expense included in leasing expense was $26,000 for the year ended December 31,
1996.

USE OF ESTIMATES

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those amounts.

INTERIM FINANCIAL DATA

The unaudited financial statements for the nine months ended September 30,
1996 and 1997 include all adjustments (consisting of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the revenues and certain operating expenses for such interim
periods. Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 1997.

3. LEASES

Acquired Properties leases its residential apartments under operating
leases with monthly payments due in advance. The majority of the apartment
leases are for terms of one year or less, with none longer than two years.
Rental and other revenues are recorded as earned.

4. ENVIRONMENTAL MATTERS

All of the Acquired properties have been subjected to Phase I environmental
reviews. Such reviews have not revealed, nor is management aware of, any
environmental liability that management believes would have a material adverse
effect on the accompanying financial statement.

F-30

<PAGE>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------

NEITHER THE COMPANY NOR THE UNDERWRITERS HAVE AUTHORIZED ANY PERSON TO
MAKE A STATEMENT THAT DIFFERS FROM WHAT IS IN THIS PROSPECTUS. IF ANY PERSON
DOES MAKE A STATEMENT THAT DIFFERS FROM WHAT IS IN THIS PROSPECTUS, YOU SHOULD
NOT RELY ON IT. THIS PROSPECTUS IS NOT AN OFFER TO SELL, NOR IS IT SEEKING AN
OFFER TO BUY, THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED. THE INFORMATION IN THIS PROSPECTUS IS COMPLETE AND ACCURATE AS OF ITS
DATE, BUT THE INFORMATION MAY CHANGE AFTER THAT DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................... 7
Risk Factors......................................... 11
History and Formation of the Company................. 21
The Company.......................................... 24
Use of Proceeds...................................... 32
Market Price of the Company's Common Stock,
Distributions and Related Shareholder Matters...... 33
Capitalization....................................... 35
Selected Financial Data.............................. 36
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 39
Our Properties....................................... 54
Certain Policies..................................... 62
Directors and Executive Officers..................... 67
Certain Relationships and Related Transactions....... 69
Security Ownership of Certain Beneficial Owners and
Management......................................... 74
Description of Capital Stock......................... 75
Partnership Agreement of the Operating Partnership... 80
Federal Income Tax Considerations.................... 83
Legal Proceedings.................................... 101
Underwriting......................................... 101
Experts.............................................. 103
Legal Opinions....................................... 103
Available Information................................ 104
Incorporation of Certain Documents By Reference...... 104
Index to the Financial Statements.................... F-1
</TABLE>

2,500,000 SHARES

(logo)

COMMON STOCK

-----------------
PROSPECTUS
-----------------

CIBC OPPENHEIMER
J.C. BRADFORD & CO.
INTERSTATE/JOHNSON LANE
CORPORATION
DAVENPORT & COMPANY LLC

DECEMBER 16, 1997

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