CRESCENT REAL ESTATE EQUITIES INC, 10-K405, 1997-03-21

CRESCENT REAL ESTATE EQUITIES INC
10-K405, 1997-03-21
REAL ESTATE INVESTMENT TRUSTS

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<PAGE> 1

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

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

For the fiscal year ended December 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission file number 1-13038

CRESCENT REAL ESTATE EQUITIES COMPANY
(formerly known as Crescent Real Estate Equities, Inc.)
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

TEXAS 52-1862813
- ------------------------------------ ----------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)

777 Main Street, Suite 2100, Fort Worth, Texas 76102
- --------------------------------------------------------------------------------
(Address of principal executive offices)(Zip code)

Registrant's telephone number, including area code (817) 877-0477
--------------

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

Name of Each Exchange
Title of each class: on Which Registered:
- -------------------- ---------------------

Common Stock par value $.01 per share New York Stock Exchange, Inc.
- --------------------------------------------------------------------------------

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

YES X NO
------- -------

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

As of February 24, 1997, the aggregate market value of the 33,044,627 shares of
Common Stock held by non-affiliates of the registrant was approximately $1.8
billion, based upon the closing price of $55 5/8 on the New York Stock
Exchange.

Number of Shares of Common Stock outstanding as of March 7,1997: 36,156,664

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission for Registrant's 1996 Annual Meeting of Shareholders to be held in
June 1997 are incorporated by reference into Part III.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
PART I. ----

<S> <C> <C>
Item 1. Business ............................................................... 1
Item 2. Properties ............................................................. 7
Item 3. Legal Proceedings ...................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders .................... 18

PART II.

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters .. 18
Item 6. Selected Financial Data ................................................ 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Historical Results of Operations ................................... 20
Item 8. Financial Statements and Supplementary Data ............................ 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ................................. 52

PART III.

Item 10. Directors and Executive Officers of the Registrant .................... 52
Item 11. Executive Compensations ............................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and Management ........ 53
Item 13. Certain Relationships and Related Transactions ........................ 53

PART IV.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8K........ 53
</TABLE>

<PAGE> 3

PART I

ITEM 1. BUSINESS

THE COMPANY

Crescent Real Estate Equities Company ("Crescent Equities", together with its
subsidiaries, the "Company") is a fully integrated real estate company operating
as a real estate investment trust for federal income tax purposes (a "REIT").
Crescent Equities is a Texas real estate investment trust which became the
successor to Crescent Real Estate Equities, Inc., a Maryland corporation (the
"Predecessor Corporation"), on December 31, 1996, through the merger (the
"Merger") of the Predecessor Corporation and CRE Limited Partner, Inc., a
Delaware corporation, into Crescent Equities. The Merger was structured to
preserve the existing business, purpose, tax status, management, capitalization
and assets, liabilities and net worth (other than due to the costs of the
transaction) of the Predecessor Corporation, and the economic interests and
voting rights of the stockholders of the Predecessor Corporation (who became the
shareholders of Crescent Equities as a result of the Merger). The direct and
indirect subsidiaries of Crescent Equities include Crescent Real Estate Equities
Limited Partnership (the "Operating Partnership"); Crescent Real Estate
Equities, Ltd. (the "General Partner"), which is the sole general partner of the
Operating Partnership; six limited partnerships in which the Operating
Partnership owns substantially all of the economic interests directly or
indirectly, with the remaining interests owned indirectly by the Company through
six separate corporations, each of which is a wholly owned subsidiary of the
General Partner and a general partner of one of the six limited partnerships.
The term "Company" includes, unless the context otherwise requires, Crescent
Equities, the Predecessor Corporation, the Operating Partnership, and the other
subsidiaries of the Company.

As of December 31, 1996, the Company directly or indirectly owned a
portfolio of real estate assets (the "Properties") located primarily in 16
metropolitan submarkets in Texas and Colorado. The Properties include 53
office properties (the "Office Properties") with an aggregate of approximately
16.3 million net rentable square feet, four full-service hotels with a total of
1,471 rooms and two destination health and fitness resorts (the "Hotel
Properties"), six retail properties (the "Retail Properties") with an aggregate
of approximately .6 million net rentable square feet and real estate mortgages
and non-voting common stock in three residential development corporations (the
"Residential Development Corporations") that own all or a portion of six
single-family residential land developments and three condominium/townhome
developments. In addition, the Company owns one mortgage note secured by a
Class A office property.

The Company conducts all of its business directly through the Operating
Partnership and its other subsidiaries. The structure of the Company was
developed to facilitate and maintain its qualification as a REIT and to permit
persons contributing properties (or interests therein) to the Company to defer
some or all of the tax liability that they otherwise might have incurred in
connection with the formation of the Company.

See Note 1 of Item 8. "Financial Statements and Supplementary Data" for
the table which lists the principal subsidiaries of Crescent Equities and
Properties owned by such subsidiary.

The Company's executive offices are located at 777 Main Street, Suite
2100, Fort Worth, Texas 76102, and its telephone number is (817) 877-0477.

BUSINESS OBJECTIVES AND OPERATING STRATEGIES

The Company's business objective is to maximize the total return to its
shareholders through increased dividends, underlying asset values and share
price. By continuing to pursue the opportunistic approach to investments and
the financing and operating strategies described below, the Company believes it
will be able to take

<PAGE> 4

advantage of the considerable opportunities to acquire additional properties at
attractive returns while increasing cash flow from existing and newly acquired
properties. More specifically, management believes that attractive investment
opportunities will continue to exist primarily in the context of assets (i)
held or controlled by entities that do not intend to hold such assets for
long-term investment (such as assets held by insurance companies and financial
institutions under regulatory pressure to sell); (ii) encumbered by
indebtedness that is in default or is likely to be subject to future default;
(iii) performing at a level below their potential due to identifiable
management weaknesses or financial constraints of existing owners; or (iv) as
to which, due to factors not directly related to the potential value or
performance of an asset, the then-current market prices of such assets do not
reflect their potential value.

INVESTMENT STRATEGIES

The Company intends to continue utilizing its extensive network of
relationships, market reputation and ready access to capital to achieve
favorable returns on invested capital and growth in cash flow by:

o acquiring high-quality office properties at prices
significantly below their estimated replacement cost in selected
markets and submarkets that management expects to experience
above-average population and employment growth;

o acquiring unique destination resort and luxury hotel
properties at prices significantly below their estimated
replacement cost; and

o employing the corporate, transactional and financial
skills of the Company's management team to structure innovative
real estate investments.

OPERATING AND FINANCING STRATEGIES

The Company seeks to enhance its operating performance and financial
position by:

o maintaining a high tenant retention rate through
quality service, individualized attention to its tenants and
active preventive maintenance programs;

o applying aggressive leasing strategies in order to
capture the potential rental growth in the Company's existing
portfolio as occupancy and rental rates increase with the
recovery of the markets and submarkets in which the Company has
invested;

o empowering management and employing compensation
formulas linked directly with enhanced operating performance of
the Company and its Properties; and

o optimizing the use of debt and other sources of
financing to create a flexible capital structure that will allow
the Company to continue its opportunistic investment strategy.

EMPLOYEES

The Company, as a fully integrated real estate company, provides
management, leasing and development services with respect to certain of its
properties. The Company has more than 240 employees. None of the employees is
covered by collective bargaining agreements.

RECENT DEVELOPMENTS

From January 1, 1996 through March 1, 1997, the Company has completed more
than $885 million of real estate investments, consisting of 28 office properties
containing approximately 9.5 million net rentable square feet, four retail
properties containing approximately .4 million net rentable square feet, one
full-service hotel and two destination health and fitness resorts (collectively
the "Acquired Properties"). With the purchase of the Acquired Properties, the
Company increased its investments in real estate by approximately 94.2%.
Information regarding 1997 completed acquisitions and pending investments is as
of March 1, 1997.

<PAGE> 5

1996 AND 1997 COMPLETED ACQUISITIONS

3333 Lee Parkway. On January 5, 1996, the Company acquired 3333 Lee
Parkway, a 12-story Class A office property containing approximately 234,000
square feet of net rentable space located in the Uptown/Turtle Creek submarket
of Dallas, Texas. Constructed in 1983, the property, including the six-level,
738-space underground parking garage, was purchased for $14.5 million.

301 Congress Avenue. On April 18, 1996, the Company together with Aetna
Life Insurance Company ("Aetna") formed 301 Congress Avenue, L.P., a Delaware
limited partnership ("301 Partnership") in which the Company and Aetna each own
a 50% interest. Crescent/301, L.L.C., a Delaware limited liability company that
is wholly owned by the Operating Partnership and General Partner, serves as the
general partner of 301 Congress Avenue, L.P. On April 18, 1996, the Company
contributed to the 301 Partnership approximately $21.6 million for its 50%
ownership share of 301 Congress Avenue. Constructed in 1986, 301 Congress
Avenue, a 22-story Class A office property, contains approximately 418,000
square feet of net rentable space, an attached 841-space parking structure and
is located in the Austin Central Business District ("CBD") submarket.

Central Park Plaza. On June 13, 1996, the Company acquired Central Park
Plaza. Consisting of two 15-story towers, the Class A office property contains
approximately 410,000 square feet of net rentable space and is located in
downtown Omaha, Nebraska. Constructed in 1982, the property was purchased for
$25.5 million.

Canyon Ranch-Tucson. On July 26, 1996, the Company acquired Canyon
Ranch-Tucson (the "Tucson Resort"), a destination health and fitness resort,
located at the base of the Catalina Mountains near Tucson, Arizona. Built in
1980, the Tucson Resort encompasses 50 acres, and includes 179 rooms which can
accommodate 240 guests on a daily basis, a 62,000 square foot spa complex, a
life enhancement center offering structured therapy and counseling, a health
and healing center with a complete staff of physicians, dietitians,
psychologists and therapists, four pools and eight tennis courts. The Tucson
Resort was acquired for approximately $57.0 million through the issuance of
$27.0 million of operating partnership units and assumption of debt which the
Company subsequently retired for $30.0 million.

On July 26, 1996, the Company also obtained an option to acquire up to 30%
of a management company to be formed by the former owner of Canyon
Ranch-Tucson. The management company will have all rights to develop and
manage new Canyon Ranch resorts, both within the United States and
internationally. In addition, the management company will have the authority
to use and sublicense the Canyon Ranch name and trademarks on a worldwide basis
for business opportunities. This authority includes all licensing, development
and management rights associated with a new Canyon Ranch resort planned to be
developed in Bali, Indonesia. The option, which the Company must first
exercise on or before July 26, 1997, may be exercised in full at that time or
in three separate increments for an aggregate maximum amount of $6.0 million.
Management believes that, through the value associated with the Canyon Ranch
name, the Company will have the opportunity to receive significant returns on
its investment as Canyon Ranch expands its franchise.

The Woodlands Office Properties. On July 31, 1996, the partnership that
owns the 10 Woodlands Office Properties in the Woodlands Community near
Houston, Texas, and in which the Company holds a 75% limited partner interest,
acquired two additional office properties containing an aggregate of
approximately 109,000 square feet of net rentable space. The Company contributed
to the partnership approximately $8.2 million for its 75% ownership interest in
these two office properties. The properties were constructed in 1995 and 1996,
and each is currently occupied by a single tenant.

Three Westlake Park. On August 16, 1996, the Company acquired for
approximately $29.0 million the principal economic interest in Three Westlake
Park through its acquisition from the lender of a mortgage note (the "Three
Westlake Note"), in the principal amount of approximately $46.3 million. Prior
to the Company's acquisition of the Three Westlake Note, the seller granted the
borrower an extension of the maturity date of the Three Westlake Note from
February 1997 to February 2004. Under the terms of the Three Westlake Note, as

<PAGE> 6

modified, the Company will receive all net cash flow from Three Westlake Park
through February 2004. The Three Westlake Note also provides for the
acceleration of maturity of the Three Westlake Note if Amoco Production
Company, the principal tenant of the property, does not exercise its option to
renew its lease of 99% of the property's net rentable square feet by December
1999. The Three Westlake Note is secured by a first priority deed of trust on
Three Westlake Park, a 19-story Class A office property containing
approximately 414,000 square feet of net rentable space which was constructed
in 1983, and located in the Katy Freeway submarket of Houston, Texas.

1615 Poydras. On August 23, 1996, the Company acquired 1615 Poydras, a
23-story Class A office property containing approximately 509,000 square feet
of net rentable space located in downtown New Orleans, Louisiana.
Constructed in 1984, the property, including a 495-space parking structure, was
purchased for $36.5 million.

Greenway Plaza Portfolio. See Item 2. Properties under "Significant
Property."

Chancellor Park. On October 24, 1996, the Company acquired Chancellor Park
and an adjacent tract of land. The aggregate purchase price was approximately
$31.1 million, of which $25.4 million was allocated to Chancellor Park and $5.7
million was allocated to the adjacent tract of land. Chancellor Park consists
of two, three-story Class A office properties aggregating 196,000 square feet
of net rentable space located in the University Towne Centre submarket of San
Diego, California. Constructed in 1988, the property has a three-story parking
structure and surface parking that can accommodate 630 cars.

The Woodlands Retail Properties. On October 31, 1996, the Company formed
the Woodland Retail Equities - '96 Limited ("WRE") partnership with The
Woodlands Corporation ("TWC"), a subsidiary of Mitchell Energy & Development
Corp. The Company owns a 75% limited partner interest in WRE. WRE owns four
retail properties, constructed in 1984, consisting of 356,000 square feet of
net rentable space located in the Woodlands community near Houston, Texas. The
Company's investment was approximately $22.5 million, with a minimum
preferential return of 9.75% that escalates in January 1999 to 10.5%.

Sonoma Mission Inn & Spa. On November 18, 1996, the Company acquired
Sonoma Mission Inn & Spa, a four-star luxury resort and spa located
approximately 40 miles north of San Francisco, California. Constructed in 1927
and redeveloped in 1986 and 1987, the Sonoma Mission Inn & Spa sits on an eight
acre site and contains 168 rooms, a 13,000 square foot spa complex,
approximately 7,000 square feet of meeting and banquet facilities, two
full-service restaurants and two retail outlets. A $10.0 million expansion and
enhancement of the resort is currently in process, including the planned
addition of 30 suites during 1997. The resort was acquired for $53.4 million,
including the issuance of $25.2 million of operating partnership units and
assumption of debt which the Company subsequently retired for $19.0 million.

Canyon Ranch-Lenox. On December 11, 1996, the Company acquired Canyon
Ranch-Lenox ("Lenox Resort"), a destination health and fitness resort located
in the Berkshire mountains approximately 120 miles north of New York City. The
Lenox Resort opened in 1989, encompasses 120 acres, and includes 120 guest rooms
which can accommodate up to 202 guests on a daily basis, a 100,000 square foot
spa complex, 10,600 square foot health and healing center offering a complete
staff of health and fitness professionals, six indoor/outdoor tennis courts and
two pools. The Lenox Resort was acquired for $30.0 million, including the
assumption of $8.8 million in mortgage debt.

160 Spear Street. On December 13, 1996, the Company acquired 160 Spear
Street, a 19-story Class A office property containing approximately 276,000
square feet of net rentable space located in the South of Market section of the
CBD of San Francisco, California. Constructed in 1984, the property, inclusive
of the one-level, 37-space parking structure, was purchased for $35.5 million.

Greenway I & IA. On December 18, 1996, the Company acquired Greenway I &
IA, two Class A office properties containing approximately 147,000 square feet
of net rentable space located in the Richardson/Plano submarket

<PAGE> 7
of Dallas, Texas. Constructed in 1983, the properties, including surface
parking lots which contain 560 spaces, were purchased for $17.0 million.

Bank One Tower. On December 23, 1996, the Company acquired Bank One
Tower, a 21-story Class A office property containing approximately 389,000
square feet of net rentable space located in the CBD of Austin, Texas.
Constructed in 1974 and renovated in 1995, the property, including an attached
eight-level, 719-space above ground parking structure, was purchased for $39.2
million.

Frost Bank Plaza. On December 27, 1996, the Company acquired Frost Bank
Plaza, a 24-story Class A office property containing approximately 433,000
square feet of net rentable space located in the CBD of Austin, Texas.
Constructed in 1984 and renovated in 1994, the property, including an attached
eight-level, 514-space above ground parking structure, was purchased for $36.0
million.

Greenway II. On January 17, 1997, the Company acquired Greenway II, a
seven-story Class A office property containing approximately 154,000 square
feet of net rentable space located in the Richardson/Plano submarket of Dallas,
Texas. Constructed in 1985, the property, including an attached three-level,
560-space above ground parking structure, was purchased for approximately $18.2
million.

Trammell Crow Center. On February 28, 1997, the Company acquired
substantially all of the economic interest in Trammell Crow Center ("TCC"), a
50-story Class A office property. The Company acquired its interest in TCC
through the purchase of fee simple title to the property (subject to a ground
lease and a leasehold estate for years regarding the building) and two mortgage
notes encumbering the leasehold interests in the land and building for
approximately $162 million. TCC is located in the cultural and financial
district of the Central Business District ("CBD") submarket of Dallas, Texas.
Constructed in 1984, TCC contains approximately 1,128,000 square feet of net
rentable space with a six-level underground parking structure that accommodates
approximately 1,154 cars. A more detailed description of the TCC acquisition is
contained in the Company's Current Report on Form 8-K, dated February 28, 1997
and filed March 17, 1997.

Denver Properties. On February 28, 1997, the Company acquired, in a single
transaction, for an aggregate purchase price of $42.7 million, the following
three office properties in Denver, Colorado: 44 Cook, 55 Madison and AT&T. 44
Cook, a 123,000 square foot Class A office property, and 55 Madison, a 125,000
square foot Class A office property, are both located in the Cherry Creek
submarket. Constructed in 1984, 44 Cook is a 10-story office property.
Constructed in 1982, 55 Madison is an eight-story office property. 44 Cook and
55 Madison each have underground parking containing 236 and 171 spaces,
respectively, and both buildings share a four-level, 396-space above ground
parking structure. Constructed in 1982, AT&T, a 15-story office property,
contains approximately 170,000 square feet of net rentable space and is located
in the Denver CBD. The AT&T office property has a four-level, 207-space above
ground parking structure.

PENDING INVESTMENTS

Magellan Health Service Portfolio. On January 29, 1997, the Company
entered into a definitive agreement, as amended effective February 28, 1997, to
acquire substantially all of the real estate assets of Magellan Health Services
Inc.'s ("Magellan") domestic hospital provider business as currently operated by
Charter Behavioral Health Systems, Inc. ("Charter"). The assets to be acquired
by the Company consist primarily of approximately 90 acute care psychiatric
hospitals and similar facilities. Magellan and an affiliate of the Company
("Crescent Affiliate") to be formed as described below will be equal owners of a
to-be-formed limited liability company ("OpCo") which will operate the
facilities under a franchise arrangement with Magellan and a triple-net lease
agreement with the Company. The Company will receive $40 million in base rents
the first year with base rents in subsequent years increasing at a 5% compounded
annual rate over an initial twelve-year term. All maintenance and capital
improvement costs will be OpCo's responsibility during the duration of the
lease. Franchise payments to Magellan by OpCo will be subordinated to the base
rents due to the Company under the lease. Also, in conjunction with the
acquisition, the Company and Crescent Affiliate will each receive warrants to
purchase 1,283,311 shares of Magellan's common stock exercisable at $30 per
share subject to vesting and exercise restrictions. Management believes these
warrants will allow the Company and Crescent Affiliate to participate in the
benefits realized by Magellan from this business realignment as well as any
benefits from the growth of Magellan's managed care business and public sector
business. The total amount to be paid in connection with the transaction is $400
million, $5 million of which will be paid by Crescent Affiliate for its interest
in OpCo upon the closing. Crescent Affiliate and Magellan each will pay an
additional $2.5 million to OpCo within five days after the closing and will
commit to loan up to $17.5 million during the five years following the closing.
Closing of the transaction is scheduled to be completed by the end of May 1997,
subject to approval of the transaction by Magellan's shareholders and customary
closing conditions.

Carter Crowley Portfolio. On February 10, 1997, the Company entered into
a definitive agreement to acquire substantially all of the assets of
Carter-Crowley Properties, Inc., a company controlled by the family of Donald J.
Carter for an aggregate purchase price of approximately $383 million. The
purchase includes fourteen office properties aggregating approximately 3.0
million square feet located in seven suburban Dallas submarkets. The Company or
Crescent Affiliate will also acquire other

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assets consisting principally of 1,221 acres of commercially zoned, undeveloped
land in the Dallas-Fort Worth metroplex, marketable securities, and equity and
debt interest in the Dallas Mavericks NBA basketball franchise. The transaction
is scheduled to be completed by the end of April 1997, subject to the completion
of due diligence and customary closing conditions.

Spin Off of Crescent Affiliate. Due to limitations on the Company's ability
to invest in certain assets and engage in certain operations attributable to
its status as a REIT, the 50% interest in OpCo and certain of the assets to be
acquired in the Carter-Crowley transaction are expected to be acquired by
Crescent Affiliate. The common stock of Crescent Affiliate will be distributed
to the Company's shareholders on a pro rata basis, with such common stock
expected to be publicly traded no later than the effective date of the spin-off.

1996 FINANCING ACTIVITIES

In April 1996, the Company canceled its $150 million credit facility led
by The First National Bank of Boston ("FNBB"). In June 1996, the Company
executed a new $150 million credit facility (the "Credit Facility") led by
FNBB, which was increased to $175 million in August 1996, to enhance the
Company's financial flexibility in making new real estate investments. The
Credit Facility initially had a term that expired in March 1997, with advances
under the Credit Facility bearing interest at the Eurodollar rate plus 240
basis points for advances of $2 million or more, or at the lender's prime rate
plus 50 basis points for advances of less than $2 million. In October 1996,
the Company completed a public offering of its common stock and, as a result,
the Credit Facility became unsecured, the annual interest rate was reduced to
the Eurodollar rate plus 185 basis points or, as applicable, the lender's prime
rate, and the term was extended until March 1999. The Credit Facility requires
the Company to maintain compliance with a number of customary financial and
other covenants on an ongoing basis, including loan-to-value, fixed charge and
debt service coverage ratios, limitations on additional indebtedness and
distributions and a minimum net worth requirement.

On December 26, 1996, 301 Congress Avenue, L.P., whose sole asset is 301
Congress Avenue, entered into a financing arrangement with Northwestern Mutual
Life Insurance Company for a $26 million mortgage loan to be secured by 301
Congress Avenue. The loan bears interest at a fixed rate of 7.66% and has a
seven-year term during which only interest is payable, with a final payment of
the entire original principal amount due at the end of such term. The Company
is a 50% partner in 301 Congress Avenue, L.P. Following its receipt of the
loan proceeds, 301 Congress Avenue, L.P. made distributions of approximately
$13 million to each of the Company and Aetna.

TAX STATUS

The Company elected under Section 856(c) of the Internal Revenue Code of
1986, as amended (the "Code"), to be taxed as a REIT under the Code beginning
with its taxable year ended December 31, 1994. As a REIT for federal income
tax purposes, the Company generally is not subject to federal income tax on
income that it distributes to its shareholders. Under the Code, REITs are
subject to numerous organizational and operational requirements, including a
requirement that they distribute at least 95% of their taxable income
currently. If the Company fails to qualify for taxation as a REIT in any
taxable year, it will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates and will not be permitted to qualify for treatment as a REIT for federal
income tax purposes for four years following the year during which
qualification is lost. Even if the Company qualifies as a REIT for federal
income tax purposes, it may be subject to certain federal, state and local
taxes on its income and property and to federal income and excise tax on its
undistributed income. In addition, certain of its subsidiaries are subject to
federal, state and local income taxes.

ENVIRONMENTAL MATTERS

Under various federal, state and local laws, ordinances and regulations,
an owner or operator of real property may become liable for the costs of
removal or remediation of certain hazardous or toxic substances released on or
in its property, as well as certain other costs relating to hazardous or toxic
substances. Such liability may be imposed without regard to whether the owner
or operator knew of, or was responsible for, the release of such substances.
The presence of, or the failure to properly remediate, any such substances that
are released, may adversely affect the owner's ability to sell the affected
real estate or to borrow using such real estate as collateral. Such costs or
liabilities could exceed the value of the affected real estate. The Company
has not been notified by any governmental authority of any environmental
noncompliance, liability or other claim in connection with any of the
Properties, and the Company is not aware of any other environmental condition
with respect to any of the Properties

<PAGE> 9

that management believes would have a material adverse effect on the Company's
business, assets or results of operations.

Prior to the Company's acquisition of its Properties, independent
environmental consultants conducted or updated Phase I environmental
assessments (which generally do not involve invasive techniques such as soil or
ground water sampling) on the Properties. None of the Phase I assessments or
updates received to date revealed any material environmental condition not
known to the Company or the independent consultants preparing the assessments.
There can be no assurance, however, that environmental liabilities have not
developed since such environmental assessments or updates were prepared, or
that future uses or conditions (including, without limitation, changes in
applicable environmental laws and regulations) will not result in imposition of
environmental liability.

ITEM 2. PROPERTIES

OFFICE AND RETAIL PROPERTIES

The Company's Office and Retail Properties are located primarily in
Houston, Dallas/Fort Worth and Austin, Texas and Denver, Colorado. As of
December 31, 1996, the Office and Retail Properties in these cities represented
an aggregate of approximately 85% of the Company's portfolio of Office and
Retail Properties on the basis of total net rentable square feet and accounted
for approximately 85% of the Company's office and retail total revenues computed
on a pro forma basis for the year ended December 31, 1996, as if all of the
Properties owned at December 31, 1996, had been acquired as of January 1, 1996,
without giving effect to 1997 acquisitions or Pending Investments.

<PAGE> 10

OFFICE AND RETAIL PROPERTIES TABLES

The following table sets forth certain information about the Office and
Retail Properties owned as of December 31, 1996, without giving effect to
1997 acquisitions or Pending Investments listed in Item 1. Business. Based
on annualized rental revenues from office and retail leases in place as of
December 31, 1996, no single tenant would have accounted for more than 5%
of the Company's total annualized office and retail revenues for 1996.

Net
Rentable
Acq. Year Area
Property Location Date Completed (Sq. Ft.)
- -------- -------- ------------- --------- ---------
<S> <C> <C> <C> <C>
OFFICE PROPERTIES
- -----------------
The Crescent Office Towers Dallas, TX (4) 1985 1,210,899
Continental Plaza Fort Worth, TX (4) 1982 954,895

MacArthur Center I & II Irving, TX (4) 1982/1986 294,069

The Citadel Denver, CO (4) 1987 130,652

Caltex House Irving, TX 5/94 1982 445,993
Liberty Plaza I & II Dallas, TX 7/94 1981/1986 218,813
Regency Plaza One Denver, CO 8/94 1985 309,862

Waterside Commons Irving, TX 10/94 1986 458,739

Two Renaissance Square Phoenix, AZ 11/94 1990 476,373
The Avallon Austin, TX 11/94 1993 125,959
Stanford Corporate Centre Dallas, TX 1/95 1985 265,507
The Aberdeen Dallas, TX 3/95 1986 320,629
12404 Park Central Dallas, TX 5/95 1987 239,103

Barton Oaks Plaza One Austin, TX 6/95 1986 99,792

MCI Tower Denver, CO 6/95 1982 550,807
The Woodlands Office
Properties(5) Houston, TX 7/95(6) 1980-1996 812,359
Spectrum Center(7) Dallas, TX 8/95 1983 598,250
Ptarmigan Place Denver, CO 10/95 1984 418,565
6225 North 24th Street Phoenix, AZ 11/95 1981 86,451
Briargate Office and
Research Center CO Springs, CO 11/95 1988 252,857

Albuquerque Plaza Albuq., NM 12/95 1990 365,952

3333 Lee Parkway Dallas, TX 1/96 1983 233,484

301 Congress Avenue (8) Austin, TX 4/96 1986 418,338

<CAPTION>
Full
Service
Percent Percent Rental Rate
Leased Leased Per Leased
Property (Commenced)(1) (Signed)(1) Sq. Ft.(2) Significant Tenants(3)
- -------- --------------- ------------- -------------- ----------------------
<S> <C> <C> <C> <C>
OFFICE PROPERTIES
- -----------------
The Crescent Office Towers 97% 97% $24.91 Tracy-Locke, Inc.
Continental Plaza 78 100 17.12 Burlington Northern Santa Fe Railroad; Banc One
Corporation
MacArthur Center I & II 100 100 16.47 Federal Home Loan Bank of Dallas; North Texas
Healthcare Network
The Citadel 98 98 16.75 New York Life Insurance; Daniels & Associates;
Multum Information Services, Inc.
Caltex House 97 97 24.89 Caltex Petroleum Corporation
Liberty Plaza I & II 96 96 13.63 Intecom, Inc.; Anthem Group Services Corporation
Regency Plaza One 97 97 18.73 Nextel Communications; Prudential Insurance
Company of America
Waterside Commons 100 100 15.95 Sprint Communications Company L.P.; GTE North
Incorporated
Two Renaissance Square 74 85 22.97 Lewis & Roca; Ernst and Young LLP
The Avallon 100 100 17.33 BMC Software, Inc.; Hewlett-Packard Company
Stanford Corporate Centre 97 97 14.34 TENET Healthcare, Inc.
The Aberdeen 100 100 15.82 Pepsico, Inc.
12404 Park Central 98 98 15.94 Steak & Ale Restaurant Corporation; Parker &
Parsley Properties LP
Barton Oaks Plaza One 94 94 18.51 Iguana Entertainment, Inc.; Tocquigny Advertising
& Design, Inc.; Barton Creek Health Inc.
MCI Tower 97 97 17.21 Atlantic Richfield Company; KPMG Peat Marwick
The Woodlands Office
Properties(5) 92 92 13.81 Gene Medecine, Inc.; Chevron Pipeline Co.
Spectrum Center(7) 93 93 16.00 Federal Deposit Insurance Corp.; Frito-Lay, Inc.
Ptarmigan Place 65 98 13.93 Janus Capital Corporation; Tilly & Graves, P.C.
6225 North 24th Street 0 52 -
Briargate Office and The Principal Mutual Life Insurance Company;
Research Center 100 100 13.37 Lockheed-Martin Corporation; Progressive Casualty
Insurance
Albuquerque Plaza 90 90 17.83 U.S. West Communications; Rodey, Dickason, Sloan,
Akin & Robb, P.A.
3333 Lee Parkway 62 75 17.04 Centex Corporation; Keystone Home Health
Management, Inc.
301 Congress Avenue (8) 86 95 23.85 International Business Machines Corporation;
Lumberman's Investment Corporation
</TABLE>

<PAGE> 11
<TABLE>
<CAPTION>
Net
Rentable
Acq. Year Area
Property Location Date Completed (Sq. Ft.)
- -------- -------- ------ --------- ----------
<C> <C> <C> <C> <C>
Central Park Plaza Omaha, NE 6/96 1982 409,850

Three Westlake Park (9) Houston, TX 8/96 1983 414,251
1615 Poydras New Orleans, LA 8/96 1984 508,741
Greenway Plaza Office Portfolio Houston, TX 10/96 1969-1982 4,256,885
Chancellor Park San Diego, CA 10/96 1988 195,733
160 Spear Street San Francisco, CA 12/96 1984 276,420

Greenway I & IA Dallas, TX 12/96 1983 146,704
Bank One Tower Austin, TX 12/96 1974 389,503

Frost Bank Plaza Austin, TX 12/96 1984 433,024
----------

Total Office Properties/Weighted Average 16,319,459
==========
RETAIL PROPERTIES
- -----------------
Las Colinas Plaza Irving, TX (4) 1989 135,449
The Crescent Atrium Dallas, TX (4) 1985 88,623
The Woodlands Retail Properties (10) Houston, TX 10/96 1984 356,104
---------
Total Retail Properties/Weighted Average 580,176
=========
<CAPTION>
Full
Service Rental
Percent Percent Rate
Leased Leased Per Leased
Property (Commenced)(1) (Signed) (1) Sq.Ft.(2) Significant Tenants(3)
- -------- --------------- ------------ --------------- ----------------------
<C> <C> <C> <C> <C>
Central Park Plaza 98 98 14.17 Acceptance Insurance Company;
ConAgra, Inc.; First National
Bank of Omaha; McGrath,
North, Mullin & Kratz; GSA
Corps of Engineers-Omaha
Three Westlake Park (9) 100 100 13.59 Amoco Production Company
1615 Poydras 74 77 14.55 Freeport-McMoRan, Inc.
Greenway Plaza Office Portfolio 74 77 14.18 The Coastal Corporation
Chancellor Park 90 90 18.19 Van Camp Seafood Company, Inc.
160 Spear Street 20 75 20.48 Internal Revenue Service;
Providian National Bancorp.
Greenway I & IA 100 100 12.31 Northern Telecom, Inc.
Bank One Tower 99 99 14.55 Bank One Texas National
Association; Texas Workers'
Compensation Insurance Fund
Frost Bank Plaza 68 68 16.35 Frost National Bank; The
--- --- ------ United States of America
Attorney Office; Ontra, Inc.;
Akin, Gump, Hauer & Feld,
L.L.P.
Total Office Properties/Weighted Average 84% 89% $16.80
=== === ======
RETAIL PROPERTIES
- -----------------
Las Colinas Plaza 93% 93% $14.65 Tom Thumb Stores, Inc.
The Crescent Atrium 75 75 21.87 Stanley Korshak
The Woodlands Retail Properties (10) 87 87 12.29 Cinemark USA, Inc.
--- --- ------
Total Retail Properties/Weighted Average 86% 86% $14.28
=== === ======
</TABLE>

(1) Percentage leased (commenced) represents commenced leases of paying
tenants. Percentage leased (signed) represents percentage leased
(commenced) plus significant signed but not commenced leases.
(2) Calculated based on base rent payable as of December 31, 1996, without
giving effect to free rent or scheduled rent increases that would be taken
into account under generally accepted accounting principles ("GAAP") and
including adjustments for (i) any operating costs (such as utilities, real
estate taxes and/or insurance) payable by the tenants and (ii) any expense
reimbursements received from the tenants, therefore representing an
equivalent full-service rental rate.
(3) Identifies tenants with leases that contribute 10% or more of total
rental revenue currently paid at the Property, except for Retail
Properties, for which only the largest tenant is identified.
(4) Property was contributed to the Operating Partnership on May 5, 1994.
(5) The Company has a 75% limited partner interest in the partnership that
owns the 12 office properties that comprise The Woodlands Office
Properties.
(6) Two of The Woodlands Office Properties were acquired July 31, 1996.
(7) The Company owns the principal economic interest in Spectrum Center
through an interest in the Spectrum Mortgage Associates L.P., which owns
both the Spectrum Note and the ground lessor's interest in the land
underlying the office building.
(8) The Company has a 1% general partner and a 49% limited partner interest
in the partnership that owns 301 Congress Avenue.
(9) The Company owns the principal economic interest in Three Westlake Park
through its ownership of the Three Westlake Park cash flow mortgage note.
(10) The Company has a 75% limited partner interest in the partnership that
owns the four retail properties that comprise The Woodlands Retail
Properties.
9

<PAGE> 12

The following table provides information for the Company's Office
Properties by state, city, and submarket as of December 31, 1996, without
giving effect to 1997 acquisitions or Pending Investments listed in Item 1.
Business.

<TABLE>
<CAPTION>
Class A
Percent Office
Leased Submarket
Number Total Percent of Total (Commenced) Percent
of Company Company at Company Leased/
State, City, Submarket Properties NRA(1) NRA(1) Properties Occupied(2)
- ------------------------------------------------- ---------- ---------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C>
TEXAS
- -----
DALLAS
Far North Dallas.............................. 4 1,403,199 9% 96% 98%
Las Colinas................................... 3 1,198,801 7 98 95
Uptown/Turtle Creek .......................... 2 1,444,383 7 97 86
LBJ Freeway .................................. 1 239,103 1 98 95
Richardson/Plano.............................. 2 146,704 1 100 98
-- ---------- - --- ---
Subtotal/Weighted Average.................... 12 4,432,190 25 95% 94%
-- ---------- -- --- ---
FORT WORTH
CBD........................................... 1 954,895 6% 78% 86%
---------- --- --- ---
HOUSTON
The Woodlands................................. 12 812,359 5% 92% 94%
Katy Freeway.................................. 1 414,251 3 100 100
Richmond/Buffalo Speedway..................... 10 4,256,885 26(7) 74(7) 80(7)
-- ---------- -- --- ---
Subtotal/Weighted Average.................... 23 5,483,495 34% 79% 85%
-- ---------- --- --- ---
AUSTIN
CBD........................................... 3 1,240,865 8% 83% 90%
Northwest..................................... 1 125,959 1 100 96
Southwest..................................... 1 99,792 1 94 99
-- ---------- --- --- ---
Subtotal/Weighted Average.................... 5 1,466,616 10% 86% 93%
-- ---------- --- --- ---
COLORADO
- --------
DENVER
CBD........................................... 1 550,807 3% 97% 89%
Cherry Creek.................................. 2 549,217 3 73 88
Denver Technology Center
("DTC")....................................... 1 309,862 2 97 91
-- ---------- --- --- --
Subtotal/Weighted Average.................... 4 1,409,886 8% 88% 90%
-- ---------- --- --- ---
COLORADO SPRINGS.............................. 1 252,857 2% 100% 95%
-- ---------- --- --- ---
ARIZONA
- -------
PHOENIX
CBD........................................... 1 476,373 3% 74% 93%
Camelback Corridor............................ 1 86,451 1 0 95
-- ---------- - --- --
Subtotal/Weighted Average.................... 2 562,824 4% 63% 95%
-- ---------- --- --- ---
LOUISIANA
- ---------
NEW ORLEANS
CBD........................................... 1 508,741 3% 74% 86%
-- ---------- --- --- ---
NEBRASKA
- --------
OMAHA
CBD........................................... 1 409,850 3% 98% 97%
-- ---------- --- --- ---
NEW MEXICO
- ----------
ALBUQUERQUE
CBD........................................... 1 365,.952 2% 90% 96%
-- ---------- --- --- ---
CALIFORNIA
- ----------
SAN DIEGO
University Towne Centre ("UTC")............... 1 195,733 1% 90% 92%
-- ---------- --- --- ---
SAN FRANCISCO
South of Market CBD........................... 1 276,420 2% 20% 97%
-- ---------- --- --- ---
Total/Weighted Average....................... 53 16,319,459 100% 84% 92%
== ========== === === ===
</TABLE>
10

<PAGE> 13

Company Class A
Share Quoted Company Company
of Class A Submarket Rental Quoted Full
Office Rate Rental Rate Service Rental
Submarket Per Square Per Square Rate Per
State, City, Submarket NRA Foot(2)(3) Foot(4) Square Foot(5)
- ------------------------------------------------- ------------------- ---------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
TEXAS
- -----
DALLAS
Far North Dallas.............................. 23% $20.88 $19.96 $15.27
Las Colinas................................... 19 23.14 21.12 19.34
Uptown/Turtle Creek .......................... 26 22.99 30.40 24.07
LBJ Freeway .................................. 2 20.32 20.00 15.94
Richardson/Plano.............................. 5 19.14 20.00 12.31
--- ------ ------ ------
Subtotal/Weighted Average.................... 14% 22.09 23.68 19.08
--- ------ ------ ------
FORT WORTH
CBD........................................... 23% 16.49 16.85 17.12
--- ------ ------ ------
HOUSTON
The Woodlands................................. 100% 14.32(6) 14.32 13.81
Katy Freeway.................................. 15 14.69 14.69 13.59
Richmond/Buffalo Speedway..................... 54(7) 13.35(7) 15.00(7) 14.18(7)
--- ------ ------ ------
Subtotal/Weighted Average.................... 48% 13.59 14.88 14.06
--- ------ ------ ------
AUSTIN
CBD........................................... 34% 19.95 19.97 18.28
Northwest..................................... 5 21.33 21.00 17.33
Southwest..................................... 8 21.50 21.50 18.51
--- ------ ------ ------
Subtotal/Weighted Average.................... 21% 20.17 20.16 18.20
--- ------ ------ ------
COLORADO
- --------
DENVER
CBD........................................... 5% 16.44 17.50 17.21
Cherry Creek.................................. 26 17.84 18.31 14.84
Denver Technology Center
("DTC")....................................... 8 22.95 24.00 18.73
--- ------ ------ ------
Subtotal/Weighted Average.................... 9% 18.42 19.24 16.82
--- ------ ------ ------
COLORADO SPRINGS............................... 7% 16.83(8) 15.73 13.37
--- ------ ------ ------
ARIZONA
- -------
PHOENIX
CBD........................................... 26% 20.00 20.00 22.97
Camelback Corridor............................ 3 23.40 21.00 -
--- ------ ------ ------
Subtotal/Weighted Average.................... 12% 20.52 20.15 22.97
--- ------ ------ ------
LOUISIANA
- ---------
NEW ORLEANS
CBD........................................... 6% 14.63 15.00 14.55
--- ------ ------ ------
NEBRASKA
- --------
OMAHA
CBD........................................... 32% 18.00 19.50 14.17
--- ------ ------ ------
NEW MEXICO
- ----------
ALBUQUERQUE
CBD........................................... 28% 17.75 18.50 17.83
--- ------ ------ ------
CALIFORNIA
- ----------
SAN DIEGO
University Towne Centre ("UTC")............... 7% 22.80 19.80 18.19
--- ------ ------ ------
SAN FRANCISCO
South of Market CBD........................... 3% 30.06 30.06 20.48
--- ------ ------ ------
Total/Weighted Average....................... 16% $17.99 $18.95 $16.80
=== ====== ====== ======
</TABLE>
(1) Represents net rentable area in square feet owned by the
Company.
(2) Sources are Jamison Research, Inc. (for the Far North
Dallas, Las Colinas, Uptown/Turtle Creek, LBJ Freeway,
Richardson/Plano, Fort Worth CBD and the New Orleans CBD
submarkets), The Woodlands Corporation (for the Woodlands
submarket), Cushman & Wakefield of Texas, Inc. (for the Katy
Freeway submarket), Baca Landata, Inc. (for the
Richmond/Buffalo Speedway submarket), CB Commercial (for the
Austin CBD, Northwest and Southwest submarkets), Cushman &
Wakefield of Colorado, Inc. (for the Denver CBD, Cherry Creek,
and Denver DTC submarkets), Turner Commercial Research (for the
Colorado Springs submarket), Grubb and Ellis Company (for the
Phoenix CBD, Camelback Corridor and San Francisco South of
Market CBD submarkets), Pacific Realty Group, Inc. (for the Omaha CBD
submarket), Koll Market Research (for the Albuquerque CBD
submarket), and John Burnham & Co. (for the San Diego UTC
submarket).
(3) Represents full-service rental rates. The weighted average subtotals
and totals are based on total net rentable square feet of the Company's
Office Properties in the submarket. These rates do not necessarily
represent the amounts at which available space at the Company's Office
Properties will be leased.
(4) Represents weighted average rental rates per square foot
quoted by the Company as of December 31, 1996, based on total
net rentable square feet of Company Office Properties in the
submarket, adjusted to an equivalent full-service quoted rental
rate to facilitate comparison to Class A quoted submarket rental
rates per square foot.
(5) Calculated based on base rent payable for Company Office
Properties in the submarket as of December 31, 1996, without
giving effect to free rent or scheduled rent increases that
would be taken into account under generally accepted accounting
principles ("GAAP") and including adjustments for (i) any
operating costs (such as utilities, real estate taxes and/or
insurance) payable by the tenants and (ii) any expense
reimbursements received from the tenants, therefore
representing an equivalent full-service rental rate divided by
total net rentable square feet of Company Office Properties in
the submarket.
(6) Represents an average of the submarket rental rate per square
foot quoted for all classes of office properties within The
Woodlands submarket, adjusted based on management estimates, to
full-service equivalent rental rates. The 12 Office Properties
included in the schedule represent all of the competitive
office space within The Woodlands submarket.
(7) Represents an average for Class A and B office properties.
(8) Represents quoted triple-net rental rates per square foot,
adjusted based on management estimates, to full-service
equivalent rental rates.

10
<PAGE> 14

MARKET INFORMATION

Management believes that its Office Properties reflect the Company's
strategy to invest in premier assets within markets that have significant
potential for rental growth. The Company has analyzed demographic and economic
data to focus on markets it expects to benefit from significant internal
employment growth as well as corporate relocations. After identifying and
analyzing attractive regional markets, the Company selects submarkets which the
Company believes will be the major beneficiaries of this projected growth.
Management believes that the most attractive submarkets for office investment
are those that integrate a premier office environment with quality of life
features including: affordable residential housing; an environment generally
well protected from crime; effective transportation systems; a significant
concentration of retailing alternatives; and cultural centers, entertainment
attractions and recreational facilities. Other factors considered by the
Company in selecting the submarkets include proximity to major airports and the
relative aggressiveness of local governments providing tax and other incentives
designed to favor business.

Within these submarkets, the Company has focused on premier properties
that management believes are able to attract and retain the highest quality
tenants and command premium rents. In addition, several of the Properties
benefit from significant "over-improvement" (improvements beyond what currently
could be justified by expected economic returns) made by prior owners or
developers. These over-improvements, which should not materially increase the
future operating cost of the Properties, include various amenities, use of
expensive materials, and extensive landscaping. Such premier properties also
tend to be more stable in downward property cycles. Consistent with its
investment strategies, the Company seeks situations where it can acquire
properties that have strong economic returns based on in-place tenancy and have
a dominant position within the submarket due to quality and/or location.
Accordingly, management's investment strategy not only demands acceptable
current cash flow return on invested capital, but also considers long-term cash
flow growth prospects.

The demographic conditions, economic conditions and trends (employment
growth and population growth) favoring the Company's major markets are projected
to continue to be at or above the national average, as illustrated in the
following table.

Projected Employment and Population Growth for all Company Markets

<TABLE>
<CAPTION>
Employment Population
Growth Growth
Metropolitan Area 1996-2006 1996-2006
- ------------------------------------------------------------------------------
<S> <C> <C>
Dallas/Fort Worth, TX....................... 22.2% 21.1%
Houston, TX................................. 14.0% 12.7%
Austin, TX.................................. 41.2% 41.0%
Denver, CO.................................. 21.6% 20.9%
Colorado Springs, CO........................ 26.3% 22.5%
Phoenix, AZ................................. 34.2% 31.7%
Albuquerque, NM............................. 26.8% 24.8%
New Orleans, LA............................. 8.9% 4.0%
Omaha, NE................................... 16.3% 11.4%
San Diego, CA............................... 23.9% 21.8%
San Francisco, CA........................... 15.8% 14.6%
United States............................... 14.2% 9.4%
</TABLE>
- -------------------------
Source: Cognetics, Inc.

<PAGE> 15

SIGNIFICANT PROPERTY

The following is a description of the Greenway Plaza Portfolio which
accounted for 10% or more of the Company's total assets as of December 31,
1996.

Greenway Plaza Portfolio. On October 7, 1996, the Company acquired from an
unaffiliated entity 10 suburban office properties totaling 4.3 million net
rentable square feet ("Greenway Plaza Office Portfolio") a 389-room full
service hotel, a private health and dining club, a central plant which provides
heated and chilled water to both the Greenway Plaza Office Portfolio and third
parties, and six parking garages (collectively with the Greenway Plaza Office
Portfolio, hereinafter referred to as the "Greenway Plaza Portfolio".) The
aggregate cost of the Greenway Plaza Portfolio was $206 million, which was
funded through the issuance to the sellers of 599,332 shares of common stock at
$41.71 per share, the assumption of $115 million of nonrecourse indebtedness
and $66 million of cash.

Situated on 50.3 acres, the Greenway Plaza Office Portfolio, which is
located in the Richmond-Buffalo Speedway submarket of Houston, Texas, contains
2.0 million net rentable square feet of Class A and 2.3 million net rentable
square feet of Class B office space. The office buildings were constructed
between 1969 and 1983 and range in size from 150,000 to 880,000 net rentable
square feet. Structured parking accommodates approximately 11,500 cars.

The Richmond-Buffalo Speedway submarket consists of 10.7 million square
feet of office space, of which 3.9 million square feet is Class A and 4.0
million square feet is Class B space. As of December 31, 1996, average Class A
and Class B suburban office occupancies in the Richmond-Buffalo Speedway
submarket were 95.6% and 63.8%, respectively, and average quoted market
rental rates were $14.03 and $12.68 per square foot, respectively.

The Greenway Plaza Office Portfolio was 74% leased as of December 31, 1996
(95.0% of the Class A office space and 56.2% of the Class B office space) with
a weighted average base rental rate per square foot of $13.55 ($13.87 for Class
A office space and $13.08 for Class B office space). The hotel and club are
under triple-net leases with unaffiliated third parties. The Greenway Plaza
Office Portfolio is leased to more than 280 tenants. The principal businesses
of the tenants are in the industry sectors of energy service, investment
management and natural gas.

One tenant of the Greenway Plaza Office Portfolio, the Coastal Corporation
("Coastal"), an energy service company, leases over 10% of the net rentable
square footage. As of December 31, 1996, Coastal leased approximately 641,000
net rentable square feet (approximately 15.1% of the net rentable square
footage of the Greenway Plaza Office Portfolio) pursuant to leases that expire
in June 2010 and December 2014. The current base rental rate per square foot
for approximately 617,000 net rentable square feet is $13.50, increasing
periodically during the lease term up to a rate of $28.00 in January 2006,
effective until December 2014. This lease provides for two 5-year renewal
options at the then prevailing market rental rates. The current base rental
rate per square foot for approximately 24,000 net rentable square feet is
$13.50, increasing periodically during the lease term up to a rate of $19.00 in
July 2005, effective until June 2010. This lease provides for one 4.5-year
renewal, and two 5-year renewal options at the then prevailing market rental
rates.

The aggregate tax bases of depreciable real property and improvements and
personal property of the Greenway Plaza Portfolio for federal income tax
purposes will be approximately $206 million. Depreciation and amortization are
computed for federal income tax purposes using straight line methods over lives
which range from 15 to 39 years for the real property and improvements, and 5
to 7 years for the personal property.

<PAGE> 16

The 1996 realty tax rate for the real property was $2.76 per $100 of the
$205 million assessed value. The total amount of tax at this rate for 1996 was
approximately $5.66 million, of which $0.35 million was attributable to the
hotel and club pursuant to their triple-net lease arrangements.

The following table sets forth the Greenway Plaza Office Portfolio
year-end occupancy and average base rent per leased square foot (excluding
storage space) for the five years ended December 31, 1996.

<TABLE>
<CAPTION>
Year Occupancy Average Base Rent(1)
---- --------- --------------------
<S> <C> <C>

1992 84.1% $12.14
1993 83.9 12.39
1994 83.7 12.71
1995 77.7 13.10
1996 74.4 13.01
</TABLE>

(1) Represents annual base rental revenues (excluding scheduled rent
increases and free rent that would be taken into account under generally
accepted accounting principles) divided by average occupancy in square
footage for the year.

The following table sets forth for the Greenway Plaza Office Portfolio, a
schedule of the lease expirations for leases in place as of January 1, 1997, for
each of the 10 years beginning with January 1, 1997, assuming none of the
tenants exercises renewal options and excluding 1,089,798 square feet of
unleased space.

<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE OF
OF LEASED TOTAL ANNUAL ANNUAL BASE
NUMBER OF NET RENTABLE NET RENTABLE ANNUAL BASE BASE RENT RENT PER NET
TENANTS WITH AREA SUBJECT TO AREA SUBJECT RENT UNDER REPRESENTED RENTABLE
EXPIRING EXPIRING LEASES TO EXPIRING EXPIRING BY EXPIRING AREA
YEAR OF LEASE EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 58 251,425 7.9% $ 3,163,176 5.8% $12.58
1998 74 314,169 9.9 3,963,614 7.3 12.62
1999 48 376,815 11.9 4,935,963 9.0 13.10
2000 31 229,757 7.2 2,990,396 5.5 13.02
2001 24 223,687 7.1 3,231,537 5.9 14.45
2002 20 253,101 8.0 3,909,404 7.2 15.45
2003 16 173,282 5.5 2,730,224 5.0 15.76
2004 4 372,360 11.8 6,021,179 11.0 16.17
2005 4 33,430 1.0 476,932 0.9 14.27
2006 - - - - - -
2007 and thereafter 4 939,061 29.7 23,196,070 42.4 24.70
</TABLE>

(1) Based on base rent payable as of the expiration date of the lease, for
net rentable square feet expiring, without giving effect to free rent or
scheduled rent increases that would be taken into account under GAAP and
excluding (i) any operating costs (such as utilities, real estate taxes
and/or insurance) payable by the tenants and (ii) any expense
reimbursements received from the tenants.

AGGREGATE LEASE EXPIRATIONS OF OFFICE PROPERTIES AND RETAIL PROPERTIES

The following table sets forth for the Office and Retail properties, a
schedule of the lease expirations for leases in place as of January 1, 1997, for
each of the 10 years beginning with January 1, 1997 on an aggregate basis,
assuming that none of the tenants exercises renewal options and excluding an
aggregate of 2,682,111 square feet of unleased space.

<PAGE> 17

<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE OF ANNUAL
NET RENTABLE OF LEASED TOTAL ANNUAL BASE RENT
NUMBER OF AREA NET RENTABLE ANNUAL BASE BASE RENT PER NET
TENANTS WITH REPRESENTED AREA REPRESENTED RENT UNDER REPRESENTED RENTABLE
EXPIRING BY EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING AREA
YEAR OF LEASE EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 276 1,855,265 13.2% $24,877,985 10.9% $13.41
1998 231 1,316,860 9.3 20,806,183 9.1 15.80
1999 180 1,388,147 9.8 20,019,194 8.7 14.42
2000 124 1,824,372 12.9 24,617,159 10.7 13.49
2001 135 1,515,725 10.8 26,861,942 11.7 17.72
2002 51 1,552,127 11.0 27,448,899 12.0 17.68
2003 34 628,793 4.5 10,911,665 4.8 17.35
2004 27 1,375,053 9.8 25,094,196 11.0 18.25
2005 17 1,285,309 9.1 18,196,862 7.9 14.16
2006 11 265,135 1.9 5,203,566 2.3 19.63
2007 and thereafter 8 1,091,388 7.7 24,994,110 10.9 22.90
</TABLE>

HOTEL PROPERTIES

HOTEL PROPERTIES TABLES

The following table sets forth certain information about the Hotel
Properties for the years ended December 31, 1996 and 1995. The information for
the Hotel Properties is based on available rooms, except for Canyon
Ranch-Tucson and Lenox, which are destination health and fitness resorts, that
measure performance based on available guest nights.

<TABLE>
<CAPTION>
For the year ended
December 31,
------------------------------------------------
Revenue
Average Average Per
Occupancy Daily Available
Year Rate Rate Room
Acq. Completed/ ----------------- --------------- --------------
Property Location Date Renovated Rooms 1996 1995 1996 1995 1996 1995
- -------- -------------- ----- ------------ ------ --------- ------- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Full-Service Hotels
- -------------------
Hyatt Regency Beaver Creek Avon, CO 1/95 1989 295 67% 70% $207 $191 $139 $134
Denver Marriott City Center Denver, CO 6/95 1982 613 79 77 108 98 85 76
Hyatt Regency Albuquerque Albuquerque,NM 12/95 1990 395 77 74 93 87 71 64
Sonoma Mission Inn & Spa Sonoma, CA 11/96 1927/1987 168 92 86 181 169 166 146
------ -- -- ---- ---- ---- ----
Total / Weighted Average 1,471 77% 77% $131 $122 $101 $ 93
====== == == ==== ==== ==== ====
Destination Health & Fitness Resorts
- ------------------------------------
Canyon Ranch - Tucson Tucson, AZ 6/96 1980 240(1) 80%(2) 77%(3) $479(3) $477(3) $366(4) $348(4)
Canyon Ranch - Lenox Lenox, MA 12/96 1989 202(1) 81 (2) 76 (3) 407(3) 390(3) 320(4) 288(4)
------ -- -- ---- ---- ---- ----
Total / Weighted Average 442 81% 77% $446 $437 $345 $321
====== == == ==== ==== ==== ====
</TABLE>

<PAGE> 18

(1) Represents the maximum number of guests that the resort can accommodate
per night.
(2) The occupancy rate equals the number of paying and complimentary guests
for the period, divided by the maximum number of available guest nights
for the period (87,600 and 73,730 guest nights for the year ended December
31, 1995 and 1996, respectively, based on a maximum guests per night of
240 and 202, respectively).
(3) Average daily rate equals the average daily "all-inclusive" guest package
charges for the period, divided by the average daily number of paying
guests for the period.
(4) Revenue per available room equals the total "all-inclusive" guest package
charges for the period, divided by the maximum number of available guest
nights for the period.

The following table sets forth average occupancy, average daily rate, and
revenue per available room for the Hotel Properties by full-service hotels and
destination health and fitness resorts for each of the years ended December 31,
1992 through 1996. The information for the Hotel Properties is based on
available rooms, except for Canyon Ranch-Tucson and Lenox, which are
destination health and fitness resorts, that measure performance based on
available guest nights and calculate occupancy, average daily rate and revenue
per available room as described in the notes of the preceding table.

<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Full-Service Hotels

Average Occupancy 70% 73% 73% 77% 77%
Average Daily Rate $106 $111 $117 $122 $131
Revenue Per Available Room $ 74 $ 81 $ 85 $ 93 $101

Destination Health and Fitness Resorts

Average Occupancy 71% 78% 78% 77% 81%
Average Daily Rate $380 $393 $418 $437 $446
Revenue Per Available Room $254 $290 $312 $321 $345
</TABLE>

HOTEL MARKET INFORMATION

The U.S. hotel industry is experiencing a resurgence in profitability from
its downturn in the early 1990's. Increased demand for luxury and destination
resort hotel rooms has been met with virtually no increase in the supply of
such rooms, resulting in increasing occupancies and room rates. According to
Smith Travel Research, average occupancies for hotel rooms rose from 62.1% in
1992 to 65.7% in 1996, the highest level in more than a decade. Average hotel
room rental rates grew 6.7%, 4.8%, and 4.8% in 1996, 1995, and 1994,
respectively, with the 1994 figure outpacing inflation for the first time in
eight years. Within the luxury/resort and full-service segments of the
industry, average occupancy increased approximately 8.9% and 6.5%,
respectively, between 1992 and 1996, while average room rental rates increased
approximately 20.3% and 17.4%, respectively, during the same period.

Business and convention travel accounts for about two-thirds of room
demand and has risen along with the improving economy and increased corporate
profits. Domestic leisure travel has also increased, especially among the
"baby boomers" who are not only at the prime age for leisure travel but also
have a greater tendency to travel than previous generations. A healthier, more
active senior population is also contributing to the increase in travel.

With the aging of the "baby boomer" generation and the growing interest in
quality of life activities, the resort/spa industry also is experiencing
significant growth in the United States.

The average annual growth rates in revenue per available room ("REVPAR"),
from 1991 through 1996, for the full-service and luxury/resort hotel segments
were 6.4% and 5.3%, respectively, according to Smith Travel Research. This
demand comes not only from the business and convention sector, but also from
the leisure traveler who vacations increasingly at higher-end hotels.

<PAGE> 19

The following table sets forth hotel REVPAR by price segment for the years
1991 through 1996.

<TABLE>
<CAPTION>
Annual
Average
1991 1992 1993 1994 1995 1996 Growth Rate
------ ------ ------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Luxury /Resort(1)........... $67.92 $70.61 $74.23 $80.42 $84.98 $92.45
% Change................... 4.0% 5.1% 8.3% 5.7% 8.8% 6.4%
Full-Service................ $45.21 $46.80 $49.11 $52.57 $55.52 $58.51
% Change................... 3.5% 4.9% 7.0% 5.6% 5.4% 5.3%
Mid-Priced.................. $33.38 $33.90 $35.08 $38.39 $40.77 $43.51
% Change................... 1.6% 3.5% 9.4% 6.2% 6.7% 5.4%
Economy..................... $25.26 $25.50 $26.59 $28.01 $29.92 $31.93
% Change................... 1.0% 4.3% 5.3% 6.8% 6.7% 4.8%
Budget...................... $19.18 $19.23 $19.98 $21.08 $22.38 $23.74
% Change................... 0.3% 3.9% 5.5% 6.2% 6.1% 4.4%
</TABLE>
- ---------------------
(1) Does not include destination health and fitness resorts such as the Canyon
Ranch resorts.

Source: Smith Travel Research

HOTEL LEASES

The Company cannot, consistent with its status as a REIT for federal
income tax purposes, operate the Hotel Properties directly. The Company has
leased the Hotel Properties to independent companies (collectively, the "Hotel
Lessees") pursuant to six separate leases. These independent companies are
owned 4.5% by each of John C. Goff and Gerald W. Haddock, each of whom is an
officer and director of the Company, and 91% by the Hotel Lessees' asset
manager. Under the leases, each having a term of 10 years, the Hotel Lessees
have assumed the rights and obligations of the property owner under the
respective management agreement with the hotel operators, as well as the
obligation to pay all property taxes and other charges against the property.
As part of each of the lease agreements for five of the Hotel Properties, the
Company has agreed to fund all capital expenditures relating to furniture,
fixtures and equipment reserves required under the applicable management
agreements. The only exception is Canyon Ranch-Tucson, in which the hotel
lessee owns all furniture, fixtures and equipment associated with the property
and will fund all related capital expenditures. Each of the leases provides
for the payment by the lessee of the Hotel Property of (i) base rent, with
periodic rent increases, (ii) percentage rent based on a percentage of gross
room revenues above a specified amount, and (iii) a percentage of gross food
and beverage revenues above a specified amount.

<PAGE> 20

RESIDENTIAL DEVELOPMENT PROPERTIES

The Company owns economic interests in three Residential Development
Corporations through residential development property mortgages and non-voting
common stock of these Residential Development Corporations. The Residential
Development Corporations in turn, through joint ventures or partnership
arrangements, own interests in nine residential development properties. The
Residential Development Corporations are responsible for the continued
development and the day-to-day operations of the residential development
properties.

RESIDENTIAL DEVELOPMENT PROPERTIES TABLE

The following table sets forth certain information about the residential
development properties as of December 31, 1996.

<TABLE>
<CAPTION>
Residential Total
Residential Development Total Lots/Units
Residential Development Corporation's Lots/ Developed
Development Properties Type of Effective Units Since
Corporation (1) (RDP) RDP(2) Location Ownership % Planned Inception
- --------------- ---------------- -------- --------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Mira Vista Mira Vista SF Fort Worth, TX 100.00% 691 521
Development The Highlands SF Breckenridge,CO 12.25% 750 190
Corp. Whitehawk Ranch SF Graeagle, CA 20.00% 223 36
------ -----
Total Mira Vista Development Corp. 1,664 747
------ -----
Houston Area
Development Falcon Point SF Houston, TX 100.0% 1,051(4) 288
Corp. Spring Lakes SF Houston, TX 100.0% 533(4)(5) -
------ -----
Total Houston Area Development Corp. 1,584 288
------ -----
Crescent One Beaver Creek CO Avon, CO 60.0% 18(6) -
Development Market Square CO Avon, CO 60.0% 26(6) -
Management Cresta TH Edwards, CO 60.0% 25 -
Corp. The Reserve at
Frisco SF Frisco, CO 60.0% 131 60
------ -----
Total Crescent Development Management Corp. 200 60
------ -----
Total Residential Development Properties 3,448 1,095
===== =====
<CAPTION>
Total Average
Residential Lots/Units Closed Range of
Residential Development Closed Sale Price Proposed
Development Properties Since Per Lot/ Sale Prices
Corporation (1) (RDP) Inception Unit Per Lot(3)
- --------------- ---------------- ------------ ------------ ----------------------
<S> <C> <C> <C> <C>
Mira Vista Mira Vista 463 $ 95,000 $50,000 - 265,000
Development The Highlands 126 137,000 55,000 - 225,000
Corp. Whitehawk Ranch 15 82,000 65,000 - 150,000
---
Total Mira Vista Development Corp. 604
---
Houston Area
Development Falcon Point 102 $ 36,000 $16,000 - 50,000
Corp. Spring Lakes - - 21,000 - 45,000
---
Total Houston Area Development Corp. 102
---
Crescent One Beaver Creek - $ $1,330,000 - 3,420,000
Development Market Square - - 356,000 - 2,161,000
Management Cresta - - 1,278,000 - 1,725,000
Corp. The Reserve at
Frisco 38 84,000 75,000 - 149,000
---
Total Crescent Development Management Corp. 38
---
Total Residential Development Properties 744
===
</TABLE>

(1) The Company has a 94%, 94% and 90% effective ownership interest in Mira
Vista Development Corp., Houston Area Development Corp. and Crescent
Development Management Corp., respectively, through ownership of
non-voting common stock.
(2) SF (Single-Family); CO (Condominium); TH (Townhome).
(3) Based on existing inventory of developed lots and lots to be developed.
(4) Houston Area Development Corporation has entered into a letter of intent
with a national homebuilder to sell 166 lots in Falcon Point and 93 lots
in Spring Lakes over a 24-month period commencing in the first quarter of
1997.
(5) The initial phase of this project (93 lots) is expected to be completed
in the second quarter of 1997.
(6) As of December 31, 1996, 18 of the condominium units at One Beaver Creek
and 22 of the condominium units at Market Square had been pre-sold,
generating aggregate gross sales of $39.3 and $18.6 million,
respectively. Closings are expected to begin in the fourth quarter of
1997 for One Beaver Creek and Market Square.

<PAGE> 21

ITEM 3. LEGAL PROCEEDINGS

Neither the Company nor any of the Properties currently is subject to any
material litigation nor, to the knowledge of the Company, is any material
litigation currently threatened against the Company or any of the Properties.

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

No matter was submitted to a vote of security holders during the fourth
quarter of the Registrant's fiscal year ended December 31, 1996.

PART II

ITEM 5 . MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's common stock has been traded on the New York Stock Exchange
under the symbol "CEI" since the completion of its initial public offering at a
price of $25 per share in May 1994. For each calendar quarter indicated, the
following table reflects the high and low sales prices for the common stock and
the distributions paid by the Company with respect to each such quarter.

<TABLE>
<CAPTION>
PRICE DISTRIBUTION
--------------------- DECLARED
HIGH LOW PER SHARE
----------- -------- ------------
<C> <C> <C> <C>
1995
- ----
First Quarter $29 1/4 $ 25 $.50
Second Quarter $32 $ 27 7/8 $.50
Third Quarter $32 3/8 $ 29 3/4 $.55
Fourth Quarter $35 7/8 $ 30 1/4 $.55

1996
- ----
First Quarter $34 7/8 $ 32 1/8 $.55
Second Quarter $38 1/8 $ 33 3/8 $.55
Third Quarter $42 3/8 $ 35 $.61
Fourth Quarter $53 1/4 $ 40 5/8 $.61
</TABLE>
___________________________

As of March 7, 1997, there were approximately 265 holders of record of the
common stock.

<PAGE> 22

DISTRIBUTION POLICY

On September 13, 1996, the Company announced an 11% increase in the
quarterly distribution, increasing the quarterly distribution on its common
stock from $.55 per share to $.61 per share. The higher distribution rate
commenced with the Company's distribution for the third quarter of 1996, which
was paid on November 5, 1996, to shareholders of record as of October 16, 1996.

The Company's current quarterly distribution is $.61 per share, an
indicated annualized distribution of $2.44 per share.

The actual results of operations of the Company and the amounts actually
available for distribution will be affected by a number of factors, including
revenues received from the Properties and any additional properties acquired in
the future, the operating and interest expenses of the Company, the ability of
tenants to meet their rent obligations, general leasing activity in the markets
in which the Office Properties and Retail Properties are located, consumer
preferences relating to the Hotel Properties, the general condition of the
United States economy, federal, state and local taxes payable by the Company,
capital expenditure requirements and the adequacy of reserves. In addition,
the Credit Facility limits distributions to the partners of the Operating
Partnership for any four successive quarters to an amount that will not exceed
90% of funds from operations for such period and 100% of funds available for
distribution for such period.

Future distributions by the Company will be at the discretion of the Board
of Trust Managers. The Board of Trust Managers has indicated that it will
review the adequacy of the Company's distribution rate on a quarterly basis.

Under the Internal Revenue Code of 1986, as amended (the "Code"), REITs
are subject to numerous organizational and operational requirements, including
the requirement to distribute at least 95% of taxable income. Pursuant to this
requirement, the Company was required to distribute $41.8 million and $40.8
million of taxable income for 1996 and 1995, respectively. Actual
distributions by the Company were $73.4 million and $52.8 million for 1996 and
1995, respectively.

Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes generally will be taxable
to a shareholder as ordinary dividend income. Distributions in excess of
current and accumulated earnings and profits will be treated as a nontaxable
reduction of the shareholder's basis in such shareholder's shares of common
stock, to the extent thereof, and thereafter as taxable gain. Distributions
that are treated as a reduction of the shareholder's basis in its shares of
common stock will have the effect of deferring taxation until the sale of the
shareholder's shares. The Company has determined that, for federal income tax
purposes, 10% of the quarterly distributions made in 1995 and 38% of quarterly
distributions made in 1996 represented a return of capital to shareholders.
Given the dynamic nature of the Company's acquisition strategy and the extent
to which any future acquisitions would alter this calculation, no assurances
can be given regarding what portion, if any, of distributions in 1997 or
subsequent years will constitute a return of capital for federal income tax
purposes.

ITEM 6 . SELECTED FINANCIAL DATA

The following table sets forth certain financial information for the
Company on a consolidated historical basis and for the Rainwater Property Group
(the Company's predecessor) on a combined historical basis, which consists of
the combined financial statements of the entities that contributed properties
in exchange for units or shares of common stock in connection with the
formation of the Company. Such information should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7 and the Financial Statements and Supplementary
Data included in Item 8.

<PAGE> 23

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED HISTORICAL FINANCIAL DATA AND
RAINWATER PROPERTY GROUP
COMBINED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
COMPANY RAINWATER PROPERTY GROUP (PREDECESSOR)
----------------------------------------------- --------------------------------------
For the For the
Period Period
from from
May 5, January 1,
Year ended Year ended 1994 to 1994 to Year Ended December 31,
December 31, December 31, December 31, May 4, --------------------------
1996 1995 1994 1994 1993 1992
------------- ------------ ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total Revenue .................. $ 208,861 $ 129,960 $ 50,343 $ 21,185 $ 57,168 $ 49,586
Operating income (loss)......... 44,101 30,858 10,864 (1,599) (53,024) (36,612)
Income (loss) before minority
interests and extraordinary
item......................... 47,951 36,358 12,595 (1,599) (53,024) (36,612)
Income per share before
extraordinary item........... $ 1.44 $ 1.31 $ .56 -- -- --
BALANCE SHEET DATA
(AT PERIOD END)
Total assets.................. $ 1,730,922 $ 964,171 $ 538,354 -- $290,869 $ 296,291
Total debt..................... 667,808 444,528 194,642 -- 278,060 548,517
Total shareholders' equity..... 865,160 406,531 235,262 -- 2,941 (328,240)
OTHER DATA:
Funds from Operations
before minority interests(1). $ 87,616 $ 64,475 $ 32,723 -- -- --
Cash Dividend declared per
share........................ $ 2.32 $ 2.10 $ 1.29 -- -- --
Weighed average shares of
Common Stock and Units
outstanding................... 32,324,421 27,091,003 22,498,855 -- -- --
Cash flow provided by
(used in)......................
Operating activities........ $ 77,384 $ 65,011 $ 21,642 $ 2,455 $ 9,313 $ (640)
Investing activities........ (513,038) (421,406) (260,666) (2,379) (20,572) (8,924)
Financing activities........ 444,315 343,079 265,608 (21,310) 28,861 14,837
</TABLE>

NOTES:
(1) Funds from Operations ("FFO"), based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") and as used herein, means net income (loss)
(determined in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sales of property,
plus depreciation and amortization of real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. For a
more detailed definition and description of FFO, see Item 7.
Management's Discussion and Analysis of Financial Condition and Historical
Results of Operations.

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

OVERVIEW

The following discussion should be read in conjunction with the "Selected
Financial Data" and the financial statements and notes thereto, appearing
elsewhere in this report. Historical results and percentage relationships set
forth in "Selected Financial Data" should not be taken as indicative of future
operations of the Company.

This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1993 and Section 21E of the Securities
Exchange Act of 1934. Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the Company's

<PAGE> 24

actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include the following: changes in real estate conditions (including rental
rates and competing properties) or in industries in which our principal tenants
compete, the failure to consummate anticipated transactions, the ability to
identify acquisitions opportunities meeting the Company's investment strategy,
timely leasing of unoccupied square footage, timely releasing of occupied
square footage upon expiration, and the Company's ability to generate revenues
sufficient to meet debt service payments and other operating expenses; and
financing risks, such as the availability of equity and debt financing, the
Company's ability to service existing debt, the possibility that the Company's
outstanding debt (which requires so-called balloon payments of principal) may
be refinanced at higher interest rates or otherwise on terms less favorable to
the Company and the fact that interest rates under the Credit Facility may
increase.

COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995

The changes in operating results from year to year are primarily the
result of increases in the total square feet and number of rooms of the
portfolio due to significant acquisitions made by the Company. The weighted
average square feet of consolidated office and retail properties for the years
ended December 31, 1996 and 1995, were approximately 9.5 and 6.5 million,
respectively, which represents a 46.2% increase in net rentable square feet.
The weighted average number of rooms for consolidated Hotel Properties for the
year ended December 31, 1996 and 1995, were approximately 1,397 and 615,
respectively, which represents a 127.2% increase in rooms.

The consolidated statement of operations for the year ended December 31,
1996 includes the results of operations of 53 office properties, six retail
properties, four full-service hotels and two destination health and fitness
resorts, the Biltmore Note and interests in three Residential Development
Corporations for all or a portion of the year. The consolidated statement of
operations for the year ended December 31, 1995 includes the results of
operations of 30 office properties, two retail properties, three full-service
hotels, the Biltmore Note and interests in three Residential Development
Corporations for all or a portion of the year.

Revenues from rental properties increased approximately $78.5 million, or
63.6%, to $202.0 million for the year ended December 31, 1996, as compared to
$123.5 million for the year ended December 31, 1995. This increase is
primarily attributable to the acquisition of: (i) 23 office properties, one
full-service hotel property, and two destination health and fitness resorts
during the year ended December 31, 1996 which resulted in $35.5 million of
incremental revenues; and (ii) 20 office properties and three full-service hotel
properties during 1995 which resulted in $43.9 million of incremental revenues;
which was offset by a $.9 million decrease in revenues from the properties
owned in 1994.

Total expenses increased $65.7 million, or 66.3%, to $164.8 million for
the year ended December 31, 1996, as compared to $99.1 million for the year
ended December 31, 1995. An increase in rental property operating expenses of
$27.9 million, is primarily attributable to the acquisition of: (i) 23 office
properties, one full-service hotel, and two destination health and fitness
resorts during the year ended December 31, 1996 which resulted in $14.0 million
of incremental expenses; and (ii) 20 office properties and three full-service
hotel properties during 1995 which resulted in $14.1 million of incremental
expenses; which was offset by a $.2 million decrease in expense from the
properties owned in 1994. Depreciation and amortization increased $12.8
million primarily due to the property acquisitions during 1996 and 1995. An
increase in interest expense of $24.1 million is primarily attributable to
$27.1 million of interest payable under the terms of the three new long-term
financing arrangements entered into between August 1995 and March 1996,
proceeds of which were used to repay the Credit Facility and to fund property
acquisitions in 1995 and 1996 and $2.1 million of interest payable under
LaSalle Note III, which was assumed in the Greenway Plaza Portfolio transaction.
This increase was offset by a $5.1 million decrease in interest expense on the
Credit Facility, primarily due to a lower average outstanding balance
throughout the year. An increase in corporate general and administrative
expenses of $.9 million was attributable to incremental costs associated with
the corporate operations of the Company as a direct result of recent property
additions to the Company's portfolio.

<PAGE> 25

Income before minority interest and extraordinary item increased from
$36.4 million for the year ended December 31, 1995 to $48.0 million for the
year ended December 31, 1996, an increase of $11.6 million, for the reasons
discussed above.

COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994

The changes in operating results from year end December 31, 1995 to 1994
are primarily the result of increases in the total square feet of the Company's
real estate portfolio due to significant acquisitions made subsequent to May 5,
1994. The weighted average square feet of consolidated properties for the year
ended December 31, 1995 and 1994 were approximately 6.5 and 3.6 million,
respectively, which represents an 80.6% increase.

The consolidated statement of operations for the year ended December 31,
1995 includes the results of operations of 30 office properties, two retail
properties, three full-service hotels, the Biltmore Note and interests in three
Residential Development Corporations for all or a portion of the year. The
combined statement of operations for the year ended December 31, 1994 includes
the results of operations of ten office properties, two retail properties and
interests in two Residential Development Corporations for all or a portion of
the year.

Revenues from rental properties increased approximately $55.9 million, or
82.7%, to $123.5 million for the year ended December 31, 1995, as compared to
$67.6 million for the year ended December 31, 1994. This increase is
attributable to: (i) an increase in revenue of $.8 million from the properties
owned as of May 5, 1994, which is offset by a $.7 million lease termination fee
received in July 1994 at Continental Plaza; (ii) the acquisition of six office
properties between May 5, 1994 and December 31, 1994 which resulted in $25.5
million of incremental revenue; and (iii) the acquisition of 20 office
properties and three hotel properties in 1995 which resulted in $30.3 million
of incremental revenue.

The increase in interest and other income of $5.2 million for the year
ended December 31, 1995, is primarily attributable to the $2.3 million net
profit from sale of co-investment rights in the Ritz-Carlton Hotel Company,
interest income of $1.2 million and $.4 million due to the acquisition of the
Biltmore Note and Spectrum Center mortgage note, respectively, and interest
earned on a greater amount of short-term cash investments outstanding during
1995.

The decrease in lot sale revenue and corresponding increase in income from
investments in real estate mortgages and common stock of Residential
Development Corporations for the year ended December 31, 1995, is a result of a
change in accounting treatment resulting from the non-controlling interest held
after the Company's formation transactions. On a comparative basis,
residential development lot sale revenue increased approximately $1.0 million,
or 10.4%, to $10.6 million for the year ended December 31, 1995, compared to
$9.6 million for the year ended December 31, 1994. The increase was
attributable to 150 lot closings (Mira Vista - 131 and Falcon Point - 19) for
the year ended December 31, 1995, as compared to 117 lot closings (Mira Vista -
73 and Falcon Point - 44) for the year ended December 31, 1994. Residential
development expenses increased approximately $.7 million, or 13.2%, to $6.0
million for the year ended December 31, 1995, as compared to $5.3 million for
the year ended December 31, 1994. The increase was attributable to the
increased lot closings discussed above and a $.5 million income tax provision
incurred for the year ended December 31, 1995, which was not required in 1994.

Total expenses increased $36.8 million, or 59.1%, to $99.1 million for the
year ended December 31, 1995, as compared to $62.3 million for the year ended
December 31, 1994. The increase in rental property operating expenses of $18.3
million is attributable to: (i) the acquisition of six office properties
between May 5, 1994 and December 31, 1994 which resulted in $9.6 million of
incremental expenses; (ii) the acquisition of 20 office properties and three
hotel properties in 1995 which resulted in $9.7 million of incremental
expenses; and (iii) offset by a $1.0 million decrease in expenses from the
properties owned as of May 5, 1994. Depreciation and amortization increased
$6.0 million due to the acquisitions in 1994 and 1995. The increase in
interest expense and amortization of deferred financing costs of $10.4 million
and $1.5 million, respectively, is primarily attributable to an increase in
borrowings under the Company's $150 million Credit Facility and the addition of
long-term debt pursuant to a financing arrangement with Nomura Asset Capital
Corporation ("Nomura"). The borrowings were used primarily to fund property

<PAGE> 26

acquisitions. The increase in corporate general and administrative expenses of
$2.0 million was attributable to a complete year of Company operations in 1995
versus a partial year in 1994 and also, to incremental costs associated with
the corporate operations of the Company as a direct result of property
additions to the Company's portfolio. These increases were offset by an
aggregate decrease in cost of lot sales and residential development operating
expenses of $1.4 million as a result of the non-controlling interest held after
the Company's formation transactions.

Income before minority interest and extraordinary item increased from
$11.0 million for the year ended December 31, 1994 to $36.4 million for the
year ended December 31, 1995, an increase of $25.4 million, for the reasons
discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $25.6 million and $16.9 million at December
31, 1996 and December 31, 1995, respectively. The increase is attributable to
$444.3 million and $77.4 million of cash provided by financing and operating
activities, respectively, offset by $513.0 million used in investing
activities. The Company's inflow of cash provided by financing activities is
primarily attributable to the October 1996 offering of its common stock ($456.3
million), proceeds received from the long-term financing arrangements with
Nomura, Connecticut General Life Insurance Company ("CIGNA"), and Northwestern
Mutual Life Insurance Company ($131.6), which were partially offset by the
repayment of short-term notes payable to FNBB ($73.0 million) and the
distributions paid to shareholders and unitholders ($73.4 million). The cash
inflow from operating activities is primarily attributable to property
operations, partially offset by an increase in accounts receivable, which is
due to (i) recent property acquisitions and (ii) the hotel lessees' percentage
rent lease payments which are remitted quarterly, and deferred rent receivable.
The Company utilized $513.0 million of cash flow primarily in the following
investing activities: (i) the acquisition of 23 office properties, four retail
properties, one full-service hotel and two destination health and fitness
resorts ($460.1 million); (ii) additional investments in Residential
Development Corporations ($16.7 million) (iii) notes receivable ($10.9 million)
primarily attributable to loans made to the Canyon Ranch-Tucson Hotel Lessee
($3.0 million) and Crescent Development Management Corp. ($5.0 million) (iv)
capital expenditures for rental properties ($2.4 million) primarily
attributable to building improvements for the Office and Retail Properties, and
replacement of furniture, fixtures and equipment for the Hotel Properties and
(v) tenant improvement and leasing costs for the Office and Retail properties
($20.1 million).

On October 2, 1996, the Company completed an offering (the "Offering") of
11,500,000 shares (including the underwriters' overallotment option) of its
common stock at $40.375 per share. Net proceeds from the Offering to the
Company, after an underwriting discount of $24.4 million and other offering
costs of approximately $2.5 million, were approximately $437.4 million. The
Company used a portion of these net proceeds to repay $16.0 million on FNBB
short-term note and $151.5 million of the Credit Facility. The remaining net
proceeds of $269.9 million were used to fund subsequent acquisitions. On
October 9, 1996, the Company completed an additional offering of 450,000 shares
of its common stock to the several underwriters who participated in the
Offering. The shares of common stock were sold at $42 per share. The gross
proceeds of $18.9 million from the additional offering were used to fund
subsequent acquisitions.

On February 14, 1997, the Company filed a shelf registration with the
Securities and Exchange Commission ("SEC") for an aggregate of $1.2 billion of
common stock, preferred stock and warrants exercisable for common stock. Any
securities issued under the registration statement may be offered from time to
time in amounts, at prices, and on terms to be determined at the time of the
offering. Management believes this shelf registration will provide the Company
with more efficient and immediate access to the capital markets at such time as
it is considered appropriate. Net proceeds from any offering of these
securities are expected to be used for general business purposes, including the
acquisition and development of additional properties and other acquisition
transactions, the payment of certain outstanding debt and improvements to
certain properties in the Company's portfolio.

<PAGE> 27
The significant terms of the Company's primary debt financing arrangements
are shown below (dollars in thousands):

<TABLE>
<CAPTION>
BALANCE
MAXIMUM INTEREST RATE EXPIRATION OUTSTANDING AT
DESCRIPTION BORROWINGS AT 12/31/96 DATE 12/31/96
- --------------------------- ---------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Fixed Rate Debt:
LaSalle Note I (a) $239,000 7.83% August 2027 $239,000
LaSalle Note II (b) 161,000 7.79% March 2028 161,000
CIGNA Note (c) 63,500 7.47% December 2002 63,500
Metropolitan Life Note(d) 12,411 8.88% September 2001 12,411
Nomura Funding VI Note(e) 8,780 10.07% July 2020 8,780
Northwestern Life(f) 26,000 7.66% January 2004 26,000
-------- ----- --------
Total $510,691 7.83% $510,691
======== ===== ========
Variable Rate Debt:
Line of Credit(g) $175,000 7.41% March 1999 $ 40,000
LaSalle Note III (h) 115,000 7.51% July 1999 115,000
Texas Commerce Bank Note(i) 11,700 7.39% September 1997 2,117
-------- ----- --------
Total $301,700 7.48% $157,117
======== ===== ========

</TABLE>

NOTES:
(a) The note has a seven-year period during which only interest is payable
(through August 2002), followed by principal amortization based on a
25-year amortization schedule through maturity. At the end of 12 years
(August 2007), the interest rate increases, and the Company is required to
remit, in addition to the monthly debt service payment, excess property
cash flow, as defined, to be applied first against principal until the
note is paid in full and thereafter, against accrued excess interest, as
defined. It is the Company's intention to repay the note in full at such
time (August 2007) by making a final payment of approximately $220
million. LaSalle Note I is secured by Funding I properties (See
Note 1 to Item 8. Financial Statements and Supplementary Data).
(b) The note has a seven year period during which only interest is payable
(through March 2003), followed by principal amortization based on a 25-year
amortization schedule through maturity. At the end of 10 years (March
2006), the interest rate increases, and the Company is required to remit,
in addition to the monthly debt service payment, excess property cash
flow, as defined, to be applied first against principal until the note is
paid in full and thereafter, against accrued excess interest, as defined.
It is the company's intention to repay the note in full at such time
(March 2006) by making a final payment of approximately $154 million.
LaSalle Note II is secured by Funding II properties (See Note 1 to
Item 8. Financial Statements and Supplementary Data).
(c) The note requires payments of interest only during its term, with a final
payment due in December 2002 of approximately $63.5 million. The CIGNA
Note is secured by the MCI Tower and Denver Marriott City Center
properties.
(d) The note requires monthly payments of principal and interest and is
secured by five of The Woodlands Office Properties.
(e) The note has a 15-year period during which principal and interest is
payable, based on a 25 year amortization schedule. In July 1998, the
Company may defease the loan by purchasing treasuries to pay out the
obligation without penalty. Nomura Funding VI Note is secured by the
Funding VI property (See Note 1 to Item 8. Financial Statements and
Supplementary Data). In July 2010, the loan's interest rate will change
to a 10-year treasury yield plus 500 basis points or if elected, the loan
can be prepaid without defeasance.
(f) The note requires payments of interest only during its term, with a final
payment due January 2004 of approximately $26 million. The Northwestern
Life note is secured by the 301 Congress Avenue property.
(g) The Credit Facility is unsecured with an interest rate of Eurodollar plus
185 basis points.
(h) The note bears interest at 30-day LIBOR plus a weighted average rate of
2.135% (subject to a rate cap of 10%) with a five-year period during which
only interest is payable (through July 1999) and a final payment of $115
million due July 1999. LaSalle Note III is secured by Funding III,
IV and V properties (See Note 1 to Item 8. Financial Statements and
Supplementary Data).
(i) The note has a one-year period, bears interest at LIBOR plus 1.7%,
with interest only payments through September 1997 and a final
payment of principal due September 1997. Texas Commerce Bank Note is
secured by land and improvements that relate to the construction of The
Avallon - Phase II (Building 5).

Based on the Company's total market capitalization of $2.9 billion at
December 31, 1996 (at a $52.75 stock price, which was the closing price of the
common stock on the NYSE on December 31, 1996, and including the full
conversion of all units of minority interest in the Operating Partnership plus
total indebtedness), the Company's debt represented 23% of its total market
capitalization. The Company intends to maintain a conservative capital
structure to support its high level of acquisition growth with total debt
targeted at approximately 40% of total market capitalization.

24
<PAGE> 28

The Company intends to maintain its qualification as a REIT under the
Code. As a REIT, the Company will generally not be subject to corporate
federal income taxes as long as it satisfies certain technical requirements of
the Code, including the requirement to distribute 95% of its taxable income to
its shareholders.

The Company expects to meet its short-term liquidity requirements
primarily through cash flow provided by operating activities, which the Company
believes will be adequate to fund normal recurring operating expenses, debt
service requirements, recurring capital expenditures and distributions to
shareholders and unitholders. To the extent the Company's cash flow from
operating activities is not sufficient to finance non-recurring capital
expenditures (including additions to or replacements of residential lots), or
investment property acquisition costs, the Company expects to finance such
activities with proceeds from the Credit Facility, available cash reserves and
other debt and equity financing.

The Company expects to meet its long-term liquidity requirements,
consisting primarily of maturities under the Company's fixed and variable rate
debt through long-term secured and unsecured borrowings and the issuance of
debt securities and/or additional equity securities of the Company.

FUNDS FROM OPERATIONS

Funds from Operations ("FFO"), based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate Investment
Trusts ("NAREIT") and as used herein, means net income (loss) (determined in
accordance with generally accepted accounting principles or "GAAP"), excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization of real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. FFO was developed by NAREIT as
a relative measure of performance and liquidity of an equity REIT in order to
recognize that income-producing real estate historically has not depreciated on
the basis determined under GAAP. The Company considers FFO an appropriate
measure of performance of an equity REIT. However, FFO (i) does not represent
cash generated from operating activities determined in accordance with GAAP
(which, unlike FFO, generally reflects all cash effects of transactions and
other events that enter into the determination of net income), (ii) is not
necessarily indicative of cash flow available to fund cash needs and (iii)
should not be considered as an alternative to net income determined in
accordance with GAAP as an indication of the Company's operating performance,
or to cash flow from operating activities determined in accordance with GAAP as
a measure of either liquidity or the Company's ability to make distributions.
The Company has historically distributed an amount less than FFO, primarily due
to reserves required for capital expenditures, including leasing costs. The
aggregate distributions paid to shareholders and unitholders for the years
ended December 31, 1996 and 1995 were $73.4 and $52.8 million, respectively.
An increase in FFO does not necessarily result in an increase in aggregate
distributions because the Company's board of trustees is not required to
increase distributions on a quarterly basis unless necessary in order to enable
the Company to maintain REIT status. Because the Company must distribute 95%
of its real estate investment trust taxable income (as defined in the Code),
however, a significant increase in FFO will generally require an increase in
distributions to shareholders and unitholders although not necessarily on a
proportionate basis. Accordingly, the Company believes that in order to
facilitate a clear understanding of the consolidated historical operating
results of the Company, FFO should be considered in conjunction with the
Company's net income (loss) and cash flows as reported in the consolidated
financial statements and notes thereto. However, the Company's measure of FFO
may not be comparable to similarly titled measures of other REIT's because
these REIT's may not apply the modified definition of FFO in the same manner as
the Company.

<PAGE> 29

STATEMENTS OF FUNDS FROM OPERATIONS
(dollars in thousands)

<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1995
------------ -----------
<S> <C> <C>
Income Before Minority Interest
and Extraordinary Item $47,951 $36,358

Adjustments:
Depreciation and amortization of real estate assets 39,290 26,900
Adjustment for unconsolidated investments in real estate mortgages
and common stock of residential development corporations 1,857 4,332
Minority interest in Joint Ventures (1,482) (815)
Other(1) - (2,300)
------- -------

Funds from Operations $87,616 $64,475
======= =======

RECONCILIATION OF FUNDS FROM OPERATIONS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
(dollars in thousands)

Funds From Operations $87,616 $64,475

Depreciation and amortization of non-real estate assets 835 917
Amortization of deferred financing costs 2,812 2,500
Minority interest in Joint Ventures profit and depreciation
and amortization 1,892 1,058
Adjustment in unconsolidated investments in real estate mortgages
and common stock of residential development corporations (1,857) (4,332)
Non-recurring gain on sale of investment - 2,300
Change in deferred rent receivable (6,210) (875)
Change in current assets and liabilities (7,493) (1,032)
Other (211) -
------- -------
Net Cash Provided by Operating Activities $77,384 $65,011
======= =======
</TABLE>

(1) Represents non-recurring gain on sale of investment

LEASING

The Company maintains an aggressive leasing strategy in order to capture
the potential rental growth in its office portfolio as the submarkets in which
the Company has invested continue to recover and occupancy and rental rates
increase. As of December 31, 1996, the weighted average annual rental rate for
the Company's Office Properties was $17.60 per square foot (including free rent
and scheduled rent increases that would be taken into account under generally
accepted accounting principles and expense recoveries), compared to an estimated
weighted average annual replacement cost rental rate (the rate estimated by
management to be necessary to justify new construction of comparable buildings)
of $26.54 per square foot. Many of the Company's submarkets have experienced
substantial rental rate growth during the past 18 months. As a result, the
Company has been successful in renewing or re-leasing office space in these
markets at rental rates significantly

<PAGE> 30

above the expiring rental rates. For the year ended December 31, 1996, leases
were signed renewing or re-leasing 639,548 square feet of office space at a
weighted average annual base rental rate (including expense recoveries) and FFO
annual net effective rate (calculated as weighted average annual base rate plus
expense recoveries minus operating expenses) of $20.52 and $14.52 per square
foot, respectively, compared to expiring leases with a weighted average annual
base rental rate and FFO annual net effective rate of $16.13 and $10.15 per
square foot, respectively, a 27% and 43% increase, respectively, with each of
these average rental rates, including free rent and scheduled rent increases
that would be taken into account under generally accepted accounting
principles.

HISTORICAL RECURRING OFFICE AND RETAIL PROPERTY
CAPITAL EXPENDITURES, TENANT IMPROVEMENT AND LEASING COSTS

The following table sets forth annual and per square foot recurring
capital expenditures (excluding those expenditures which are recoverable from
tenants) and tenant improvement and leasing costs for the period from May 4,
1994 (inception of operations) to December 31, 1994, and for the years ended
December 31, 1995 and 1996, attributable to leases that commenced (i.e., the
renewal or replacement tenant began to pay rent) for the Office and Retail
Properties consolidated in the Company's financial statements during each of
the periods presented. Tenant improvement and leasing costs for commenced
leases during a particular period do not equal the cash paid for tenant
improvement and leasing costs during such period, due to the timing of
payments.

<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
CAPITAL EXPENDITURES:
Capital Expenditures (in thousands)......... $ 147 $ 941 $1,383
Per square foot............................. .04 .14 .15
TENANT IMPROVEMENT AND LEASING COSTS:(1)
Replacement Tenant Square Feet.............. -- 159,877 413,410
Renewal Tenant Square Feet.................. 80,118 177,437 355,076
Tenant Improvement Costs (in thousands)..... $ 521 $1,901 $6,336
Per square foot leased...................... 6.50 5.64 8.25
Tenant Leasing Costs (in thousands)......... 55 1,039 3,208
Per square foot leased...................... .69 3.08 4.17
Total per square foot..................... 7.19 8.72 12.42
Total per square foot per year............ 2.17 1.33 2.33
Average lease term........................ 3.3 years 6.6 years 5.3 years
</TABLE>
- -----------------

(1) Excludes leasing activity for leases that have less than a one-year
term (i.e., storage and temporary space).

Capital expenditures may fluctuate in any given period subject to the
nature, extent, and timing of improvements required to be made in the Company's
Property portfolio. The Company maintains an active preventive maintenance
program in order to minimize required capital improvements. In addition,
capital improvement costs are recoverable from tenants in many instances.

Tenant improvement and leasing costs also may fluctuate in any given year
depending upon factors such as the property, the term of the lease, the type of
lease (renewal or replacement tenant), the involvement of external leasing
agents and overall competitive market conditions. Management believes that
future recurring tenant improvements and leasing costs for the Company's
existing Office Portfolio will approximate on average for "renewal tenants"
$6.00 to $8.00 per square foot or, $1.20 to $1.60 per square foot per year based
on an average five year lease term, and for "replacement tenants" $12.00 to
$14.00 per square foot, or $2.40 to $2.80 per square foot per year based on an
average five year lease term.

<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants ................................. 29

Consolidated Balance Sheets of Crescent Real Estate Equities Company
(successor to Crescent Real Estate Equities, Inc.) at December 31,
1996 and 1995 ............................................................ 30

Consolidated Statements of Operations of Crescent Real Estate
Equities Company (successor to Crescent Real Estate Equities, Inc.
and the Rainwater Property Group) for the years ended December 31,
1996 and 1995, and for the period from May 5, 1994 to December 31,
1994 and Combined Statement of Operations of the Rainwater Property
Group for the period from January 1, 1994 to May 4, 1994 ................. 31

Consolidated Statements of Shareholders' Equity of Crescent Real
Estate Equities Company (successor to Crescent Real Estate Equities,
Inc. and the Rainwater Property Group) for the years ended December
31, 1996 and 1995, and for the period from May 5, 1994 to December
31, 1994 and Combined Statement of Partners' Deficit of the Rainwater
Property Group for the period from January 1, 1994 to May 4, 1994 ........ 32

Consolidated Statements of Cash Flows of Crescent Real Estate
Equities Company (successor to Crescent Real Estate Equities, Inc.
and the Rainwater Property Group) for the years ended December 31,
1996 and 1995, and for the period from May 5, 1994 to December 31,
1994 and Combined Statement of Cash Flows of the Rainwater Property
Group for the period from January 1, 1994 to May 4, 1994 ................. 33

Notes to Financial Statements ............................................ 34

Schedule III Consolidated Real Estate Investments and Accumulated
Depreciation ............................................................. 50
</TABLE>

28
<PAGE> 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of Crescent Real Estate Equities Company:

We have audited the accompanying consolidated balance sheets of Crescent Real
Estate Equities Company as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended December 31, 1996 and 1995, and for the period from May 5, 1994
to December 31, 1994, and the combined statements of operations, partners'
deficit, and cash flows of the Rainwater Property Group (see Note 1) for the
period from January 1, 1994 to May 4, 1994. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
this 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 Crescent Real Estate Equities
Company as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for the years ended December 31, 1996 and 1995, and for the
period from May 5, 1994 to December 31, 1994, and the results of operations and
cash flows of the Rainwater Property Group for the period from January 1, 1994
to May 4, 1994, in conformity with generally accepted accounting principles.

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

ARTHUR ANDERSEN LLP

Dallas, Texas,
January 17, 1997

29
<PAGE> 33
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(Notes 1 and 2)

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

1996 1995
------------ ------------
<S> <C> <C>
ASSETS:
Investments in Real Estate:
Land $ 146,036 $ 57,566
Building and improvements 1,561,639 932,340
Furniture, fixtures and equipment 24,951 16,800
Less - Accumulated depreciation (208,808) (172,267)
------------ ------------
Net Investment in Real Estate 1,523,818 834,439

Cash and cash equivalents 25,592 16,931
Restricted cash and cash equivalents 36,882 22,187
Accounts receivable, net of allowance for doubtful
accounts of $ 904 and $ 715, respectively 15,329 7,005
Deferred rent receivable 16,217 10,007
Investments in real estate mortgages and common
stock of residential development corporations 37,069 20,090
Notes receivable 28,890 17,972
Other assets, net 47,125 35,540
------------ ------------
Total assets $ 1,730,922 $ 964,171
============ ============

LIABILITIES:
Borrowings under Credit Facility $ 40,000 $ 20,000
Notes payable 627,808 424,528
Accounts payable, accrued expenses and other liabilities 48,462 31,706
------------ ------------
Total liabilities 716,270 476,234
------------ ------------

MINORITY INTERESTS:
Operating partnership, 6,640,336 and 5,296,734 units,
respectively 120,227 71,925
Investment joint ventures 29,265 9,481
------------ ------------
Total minority interests 149,492 81,406
------------ ------------

SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 250,000,000
shares, 36,146,380 and 23,523,547 shares issued and
outstanding at December 31, 1996 and 1995, respectively 361 236
Additional paid-in capital 905,724 423,530
Deferred compensation on restricted shares (364) (455)
Retained deficit (40,561) (16,780)
------------ ------------
Total shareholders' equity 865,160 406,531
------------ ------------
Total liabilities and shareholders' equity $ 1,730,922 $ 964,171
============ ============
</TABLE>

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

30
<PAGE> 34
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS AND

RAINWATER PROPERTY GROUP
COMBINED STATEMENT OF OPERATIONS
(dollars in thousands, except per share data)
(Notes 1 and 2)

<TABLE>
<CAPTION>
Rainwater
Crescent Real Estate Equities Company Property Group
----------------------------------------------------------- -------------------
For the period from For the period from
For the year ended For the year ended May 5, 1994 to January 1, 1994 to
December 31, 1996 December 31, 1995 December 31, 1994 May 4, 1994
----------------- ----------------- ----------------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Rental property $ 202,003 $ 123,489 $ 49,075 $ 18,550
Interest and other income 6,858 6,471 1,268 42
Lot sales -- -- -- 2,593
------------ ------------ ------------ ------------
Total revenues 208,861 129,960 50,343 21,185
------------ ------------ ------------ ------------

EXPENSES:
Real estate taxes 20,606 12,494 5,426 2,270
Repairs and maintenance 12,292 7,787 2,651 1,279
Other rental property operating 40,915 25,668 10,916 5,147
Corporate general and administrative 4,674 3,812 1,815 --
Interest expense 42,926 18,781 3,493 4,867
Amortization of deferred financing costs 2,812 2,500 923 --
Depreciation and amortization 40,535 28,060 14,255 7,793
Cost of lot sales -- -- -- 867
Residential development operating -- -- -- 561
------------ ------------ ------------ ------------

Total expenses 164,760 99,102 39,479 22,784
------------ ------------ ------------ ------------

Operating income (loss) 44,101 30,858 10,864 (1,599)

OTHER INCOME (EXPENSE):
Reorganization costs -- -- (1,900) --
Equity in net income of residential
development corporations 3,850 5,500 3,631 --
------------ ------------ ------------ ------------

INCOME (LOSS) BEFORE MINORITY INTERESTS
AND EXTRAORDINARY ITEMS 47,951 36,358 12,595 (1,599)

Minority interests (9,510) (8,963) (3,618) --
------------ ------------ ------------ ------------

INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS 38,441 27,395 8,977 (1,599)
Extraordinary items (1,306) -- (677) --
------------ ------------ ------------ ------------

NET INCOME (LOSS) $ 37,135 $ 27,395 $ 8,300 $ (1,599)
============ ============ ============ ============

PER SHARE DATA:
Income before extraordinary items $ 1.44 $ 1.31 $ 0.56
Extraordinary items (0.05) -- (0.04)
------------ ------------ ------------

Net income $ 1.39 $ 1.31 $ 0.52
============ ============ ============

WEIGHTED AVERAGE SHARES
OUTSTANDING 26,641,130 20,871,251 16,024,570
============ ============ ============
</TABLE>

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

31
<PAGE> 35
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY AND

RAINWATER PROPERTY GROUP
COMBINED STATEMENT OF PARTNERS' DEFICIT

(dollars in thousands)
(Notes 1, 2 and 10)

<TABLE>
<CAPTION>
Deferred
Common Stock Additional Compensation Retained
----------------------- Paid-in on Restricted Earnings
Shares Par Value Capital Shares (Deficit) Total
---------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
PARTNERS' EQUITY, December 31, 1993 -- $ -- $ -- $ -- $ 2,941 $ 2,941

Contributions -- -- -- -- 5,660 5,660

Distributions -- -- -- -- (16,675) (16,675)

Net Loss -- -- -- -- (1,599) (1,599)

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

PARTNERS' DEFICIT, May 4, 1994 -- -- -- -- (9,673) (9,673)

Predecessor Partners' Deficit -- -- (9,673) -- 9,673 --

Initial Public Offering 16,047,392 161 249,153 -- -- 249,314

Dividends Paid -- -- -- -- (12,679) (12,679)

Net Income -- -- -- -- 8,300 8,300

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

SHAREHOLDERS' EQUITY, December 31, 1994 16,047,392 161 239,480 -- (4,379) 235,262

Common Stock Offering 5,175,000 51 136,322 -- -- 136,373

Issuance of Restricted Shares 15,105 1 454 (455) -- --

Issuance of Stock in Exchange for Operating
Partnership Units 2,286,050 23 47,274 -- -- 47,297

Dividends Paid -- -- -- -- (39,796) (39,796)

Net Income -- -- -- -- 27,395 27,395

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

SHAREHOLDERS' EQUITY, December 31, 1995 23,523,547 236 423,530 (455) (16,780) 406,531

Common Stock Offering 11,950,000 119 456,214 -- -- 456,333

Issuance of Common Stock 599,794 6 25,014 -- -- 25,020

Issuance of Stock in Exchange for Operating
Partnership Units 53,789 -- 856 -- -- 856

Exercise of Common Stock Options 19,250 -- 110 -- -- 110

Amortization of Deferred Compensation -- -- -- 91 -- 91

Dividends Paid -- -- -- -- (60,916) (60,916)

Net Income -- -- -- -- 37,135 37,135

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

SHAREHOLDERS' EQUITY, December 31, 1996 36,146,380 $ 361 $ 905,724 $ (364) $ (40,561) $ 865,160
========== ========== ========== ============ ========== ==========
</TABLE>

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

32
<PAGE> 36
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS AND
RAINWATER PROPERTY GROUP COMBINED STATEMENT OF CASH FLOWS
(dollars in thousands)
(Notes 1 and 2)

<TABLE>
<CAPTION>
Rainwater
Crescent Real Estate Equities Company Property Group
------------------------------------------------------ --------------
For the For the
For the period from period from
For the year ended year ended May 5, 1994 to January 1, 1994
December 31, 1996 December 31, 1995 December 31, 1994 to May 4, 1994
----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 37,135 $ 27,395 $ 8,300 $ (1,599)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 43,347 30,560 15,178 7,793
Reorganization costs -- -- 1,900 --
Minority interest 9,510 8,963 3,618 --
Extraordinary items 1,306 -- 677 --
Non-cash compensation 111 -- -- --
Equity in earnings in excess of distributions
received from residential development
corporations (322) -- -- --
(Increase) decrease in accounts receivable (8,324) (5,043) (608) 534
Increase in deferred rent receivable (6,210) (875) -- --
Increase in other assets (388) (7,737) (1,769) (2,520)
Increase in lots held for development and sale -- -- -- (1,670)
Increase in restricted cash and cash equivalents (15,537) (4,700) (12,074) --
Increase (decrease) in accounts payable,
accrued expenses and other liabilities 16,756 16,448 6,420 (293)
Increase in accrued interest payable -- affiliate -- -- -- 210
--------- --------- --------- ---------
Net cash provided by operating activities 77,384 65,011 21,642 2,455
--------- --------- --------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of investment properties (460,113) (420,284) (192,200) --
Capital expenditures - rental properties (2,380) (1,148) (2,100) (1,354)
Tenant improvement and leasing costs
- rental properties (20,052) (13,911) -- --
Decrease (increase) in restricted cash and cash equivalents 842 (5,413) -- --
Purchase of non-continuing partner's interest -- -- (14,000) (1,025)
Payments to continuing partners in connection with
formation transactions -- -- (7,496) --
Decrease in cash and cash equivalents resulting from
non-controlling interest held in residential development
corporations after formation transactions -- -- (744) --
Investment in residential development corporations (16,657) (8,654) -- --
Investment in unconsolidated companies (3,900) -- -- --
Escrow deposits - acquisition of investment properties 140 40,836 (41,186) --
Increase in notes receivable (10,918) (12,832) (2,940) --

--------- --------- --------- ---------
Net cash used in investing activities (513,038) (421,406) (260,666) (2,379)
--------- --------- --------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs (7,081) (8,342) (4,227) --
Borrowings under Credit Facility 191,500 217,450 194,642 --
Payments under Credit Facility (171,500) (392,092) -- --
Debt proceeds 152,755 411,862 -- 3,411
Debt payments (92,254) (66) (266,334) (15,137)
Capital contributions - Joint Venture 750 125 -- 5,660
Capital distributions - Joint Venture (14,505) -- -- --
Capital distributions -- -- -- (16,675)
Net proceeds from offerings 456,333 166,926 359,133 --
Proceeds from exercise of stock options 110 -- -- --
Reorganization costs -- -- (1,900) --
Issuance of partnership units 1,574 -- -- --
Dividends and unitholder distributions (73,367) (52,784) (17,792) --
Decrease in due from affiliates -- -- 3,439 815
(Decrease) increase in due to affiliates -- -- (1,353) 616
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 444,315 343,079 265,608 (21,310)
--------- --------- --------- ---------

INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 8,661 (13,316) 26,584 (21,234)
CASH AND CASH EQUIVALENTS,
Beginning of period 16,931 30,247 3,663 24,897
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS,
End of period $ 25,592 $ 16,931 $ 30,247 $ 3,663
========= ========= ========= =========
</TABLE>

The accompanying notes are an integral part of these financial statements

33
<PAGE> 37
CRESCENT REAL ESTATE EQUITIES COMPANY
AND RAINWATER PROPERTY GROUP
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

1. ORGANIZATION AND BASIS OF PRESENTATION:

ORGANIZATION

Crescent Real Estate Equities Company ("Crescent Equities", together with
its subsidiaries, the "Company") is a fully integrated real estate company
operating as a real estate investment trust for federal income tax purposes (a
"REIT"). The Company provides management, leasing, and development services with
respect to certain of its properties. Crescent Equities is a Texas real estate
investment trust which became the successor to Crescent Real Estate Equities,
Inc., a Maryland corporation (the "Predecessor Corporation"), on December 31,
1996, through the merger (the "Merger") of the Predecessor Corporation and CRE
Limited Partner, Inc., a Delaware corporation, into Crescent Equities. The
Merger was structured to preserve the existing business, purpose, tax status,
management, capitalization and assets, liabilities and net worth (other than due
to the costs of the transaction) of the Predecessor Corporation, and the
economic interests and voting rights of the stockholders of the Predecessor
Corporation (who became the shareholders of Crescent Equities as a result of the
Merger). The direct and indirect subsidiaries of Crescent Equities include
Crescent Real Estate Equities Limited Partnership (the "Operating Partnership");
Crescent Real Estate Equities, Ltd. (the "General Partner"), which is the sole
general partner of the Operating Partnership; six limited partnerships in which
the Operating Partnership owns substantially all of the economic interests
directly or indirectly, with the remaining interests owned indirectly by the
Company through six separate corporations, each of which is a wholly owned
subsidiary of the General Partner and a general partner of one of the six
limited partnerships. The term "Company" includes, unless the context otherwise
requires, Crescent Equities, the Predecessor Corporation, the Operating
Partnership, and the other subsidiaries of the Company.

As of December 31, 1996, the Company directly or indirectly owned a
portfolio of real estate assets (the "Properties") located primarily in 16
metropolitan submarkets in Texas and Colorado. The Properties include 53 office
properties (the "Office Properties") with an aggregate of approximately 16.3
million net rentable square feet, four full-service hotels with a total of
1,471 rooms and two destination health and fitness resorts (the "Hotel
Properties"), six retail properties (the "Retail Properties") with an aggregate
of approximately .6 million net rentable square feet and real estate mortgages
and non-voting common stock in three residential development corporations (the
"Residential Development Corporations") that own all or a portion of six
single-family residential land developments and three condominium/townhome
developments. In addition, the Company owns one mortgage note secured by a
Class A office property.

The Company conducts all of its business directly through the Operating
Partnership and its other subsidiaries.

The following table sets forth, by subsidiary, the Properties owned by
such subsidiary:

Operating Partnership: Bank One Tower, Canyon Ranch-Tucson, Chancellor
Park, Central Park Plaza, Denver Marriott City
Center, Frost Bank Plaza, Greenway I and IA, MCI
Tower, Sonoma Mission Inn & Spa, Spectrum
Center(1), Three Westlake Park(2), The Woodlands
Office Properties(3), The Woodlands Retail
Properties(3), 160 Spear Street, 1615 Poydras, 301
Congress Avenue(4), 3333 Lee Parkway, and 6225
North 24th Street

Crescent Real Estate The Aberdeen, The Avallon, Caltex House, The
Funding I, L.P.: Citadel, Continental Plaza, The Crescent Atrium,
("Funding I") The Crescent Office Towers, Regency Plaza One,
and Waterside Commons

Crescent Real Estate Albuquerque Plaza, Barton Oaks Plaza One,
Funding II, L.P.: Briargate Office and Research Center, Hyatt
("Funding II") Regency Albuquerque, Hyatt Regency Beaver Creek,
Las Colinas Plaza, Liberty Plaza I & II,
MacArthur Center I & II, Ptarmigan Place,
Stanford Corporate Centre, Two Renaissance
Square, and 12404 Park Central

34
<PAGE> 38

Crescent Real Estate Greenway Plaza Portfolio(5)
Funding III, IV, and V L.P.:
("Funding III, IV and V"):

Crescent Real Estate Canyon Ranch-Lenox
Funding VI, L.P.:
("Funding VI")

- ---------
(1) The Operating Partnership owns the principal economic interest in Spectrum
Center through an interest in the partnership which owns both a mortgage
note secured by the building and the ground lessor's interest in the land
underlying the building.
(2) The Operating Partnership owns the principal economic interest in Three
Westlake Park through its ownership of a mortgage note secured by the
building.
(3) The Operating Partnership owns a 75% limited partner interest in the
partnerships that own The Woodlands Office and Retail Properties.
(4) The Operating Partnership owns a 49% limited partner interest and
Crescent/301 L.L.C., a wholly owned subsidiary of the General Partner and
the Operating Partnership, owns a 1% general partner interest in 301
Congress Avenue, L.P., the partnership that owns 301 Congress Avenue.
(5) Funding III owns the Greenway Plaza Portfolio, except for the central
heated and chilled water plant building and Coastal Tower Office property,
both located within Greenway Plaza, which are owned by Funding IV and
Funding V, respectively (see Note 13).

BASIS OF PRESENTATION

The accompanying consolidated financial statements of the Company include
all direct and indirect subsidiary entities. The equity interests in those
direct and indirect subsidiaries not owned by the Company are reflected as
minority interests. All significant intercompany balances and transactions have
been eliminated.

The accompanying combined statements of operations, partners' deficit, and
cash flows of the Rainwater Property Group ("RPG") consist of the accounts of
prior entity partnerships and owner which had ownership interest in the
properties of The Crescent Office Towers, The Crescent Atrium, Continental
Plaza, MacArthur Center I & II, Mira Vista, Falcon Point, Spring Lakes, The
Citadel and Las Colinas Plaza (collectively, the "RPG Properties").

The business combination, in 1994, was structured as an exchange of
properties or partnership interests by RPG for limited partnership interests in
the Operating Partnership or shares of stock in the Company. Therefore, the
combination was accounted for as a reorganization of entities under common
control (except for investments in real estate mortgages and common stock of
Residential Development Corporations, which were accounted for under the equity
method of accounting) and, accordingly, all assets and liabilities of the
predecessor partnerships were recorded at predecessor historical cost in a
manner similar to that in pooling of interests accounting. Purchase accounting
was applied to those properties for which monetary consideration was given to
acquire certain partnership interests previously held by partners who did not
participate in the reorganization, in which case the value of the property
reflects the amount of the consideration paid in addition to predecessor
historical cost.

The accompanying combined statements of operations, partners' deficit, and
cash flows of RPG have been presented on a combined historical cost basis
because of the affiliated ownership and management, and because the assets and
liabilities were subject to a business combination with the Operating
Partnership, both newly formed entities with no prior operations. All
significant intercompany balances and transactions have been eliminated.

Certain amounts in prior year financial statements have been reclassified
to conform with current year presentation.

35
<PAGE> 39
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

INVESTMENTS IN REAL ESTATE

Properties are recorded at the lower of depreciable cost or net realizable
value. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, as follows:

Buildings and Improvements 5 to 49 years
Tenant Improvements Terms of leases
Furniture, Fixtures and Equipment 3 to 10 years

Expenditures for maintenance and repairs are charged to operations as
incurred. Significant renovations are capitalized.

CONCENTRATION OF REAL ESTATE INVESTMENTS

The majority of the Company's office and retail properties are in the
Houston, Texas and Dallas/Fort Worth, Texas metropolitan areas. As of December
31, 1996, these office and retail properties together represented approximately
35% and 33%, respectively, of the Company's total net rentable square feet and
accounted for approximately 27% and 34%, respectively, of the Company's total
pro forma rental revenues for 1996 (see Note 13). As a result of the geographic
concentration, the operations of these properties could be adversely affected
by a recession or general economic downturn in the areas where these properties
are located.

RESTRICTED CASH AND CASH EQUIVALENTS

Restricted cash includes escrows established pursuant to certain mortgage
financing arrangements for real estate taxes, insurance, security deposits,
ground lease expenditures, capital expenditures, and monthly interest carrying
costs paid in arrears.

OTHER ASSETS

Other assets consist principally of leasing costs and deferred financing
costs. Leasing costs are amortized on a straight-line basis over the terms of
the respective leases and unamortized lease costs are written off upon early
termination of lease agreements. Deferred financing costs are amortized on a
straight-line basis over the term of the respective loans.

DEFERRED COMPENSATION ON RESTRICTED SHARES

Deferred compensation on restricted shares relates to the issuance of
restricted shares to employees of the Company which are being amortized to
expense over the vesting period of the respective shares issued.

USE OF ESTIMATES

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents, and short-term
investments are reasonable estimates of their fair values because of the short
maturities of these instruments. The fair value of notes receivable, which
approximates carrying value, is estimated based on year-end interest rates for
receivables

36
<PAGE> 40

of comparable maturity. Notes payable and borrowings under Credit Facility have
aggregate carrying values which approximate their estimated fair values based
upon the current interest rates for debt with similar terms and remaining
maturities, without considering the adequacy of the underlying collateral.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1996 and 1995.

During 1996 and 1995, the Company did not invest in any asset backed or
off balance sheet derivative financial instruments as defined pursuant to
Statement of Financial Accounting Standards No. 119 "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments".

REVENUE RECOGNITION

Office/Retail

The Company, as a lessor, has retained substantially all of the risks and
benefits of ownership of the investment properties and accounts for its leases
as operating leases. Income on leases which include scheduled increases in
rental rates over the lease term and/or abated rent payments for various
periods following the tenant's lease commencement date is recognized on a
straight-line basis. Deferred rent receivable represents the excess of rental
revenue recognized on a straight-line basis over cash received under the
applicable lease provisions.

Residential Lots

Prior to the business combination of the Company, revenue from residential
lot sales was recognized at the time of the closing of a sale, when title to or
possession of the property transferred to the buyer. In 1995, the Company
adopted the accounting prescribed in EITF 95-6, "Accounting by Real Estate
Investment Trust for an Investment in Service Corporation" and utilized the
equity method with regard to the Company's investment in the Residential
Development Corporations. The effect of this change on the period from May 5,
1994 to December 31, 1994, was not material and such amounts have been
reclassified to conform to the current presentation.

Hotels

The Company cannot, consistent with its status as a REIT for federal
income tax purposes, operate the Hotel Properties directly. It has leased these
hotel properties to independent companies affiliated with the Company (see Note
6). The leases provide for the payment by the lessee of the Hotel Property of
(i) base rent, with periodic rent increases, (ii) percentage rent based on a
percentage of gross room revenues above a specified amount, and (iii) a
percentage of gross food and beverage revenues above a specified amount. Base
rental income under these leases is recognized on a straight-line basis over
the terms of the respective leases.

INCOME TAXES

Prior to May 5, 1994, all of the RPG Properties were owned by partnerships
and joint ventures whose partners were required to include their respective
share of profits and losses in their individual tax returns.

The ongoing operations of the Properties generally will not be subject to
Federal income taxes as long as the Company maintains its REIT status. A REIT
will generally not be subject to federal income taxation on that portion of its
income that qualifies as REIT taxable income to the extent that it distributes
such taxable income to its shareholders and complies with certain requirements
(including distribution of at least 95% of its taxable income). As a REIT, the
Company is allowed to reduce taxable income by all or a portion of its
distributions to shareholders. As distributions have exceeded taxable income,
no federal

37
<PAGE> 41

income tax provision (benefit) has been reflected in the accompanying
consolidated financial statements. State income taxes are not significant.

EARNINGS PER SHARE

Earnings per share have been computed using the weighted average number of
common shares outstanding. The dilutive effect of options outstanding under the
Company's Stock Incentive Plan is not material.

STATEMENTS OF CASH FLOWS

For purposes of the statements of cash flows, all highly liquid
investments purchased with an original maturity of 90 days or less are included
in cash and cash equivalents.

SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Interest paid $ 42,488 $ 18,224 $ 7,100 (1)

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Mortgage notes assumed in property acquisitions $142,799 $ 12,732 $ --
Minority interest - joint venture capital 31,985 8,994 --
Conversion of operating partnership units to common
stock with resulting reduction in minority interest
and increase in additional paid-in capital 856 47,297 --
Issuance of operating partnership units in conjunction
with property acquisitions 52,236 -- --
Issuance of common stock in conjunction with
property acquisition 25,000 -- --
Issuance of restricted shares -- 455 --
</TABLE>

(1) Represents for the period January 1, 1994 to May 4, 1994 and May 5, 1994
to December 31, 1994, $4,657 and $2,443, respectively.

ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

In March 1995, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of." This statement requires
that long-lived assets and certain identifiable intangibles, to be held and
used by an entity, be reviewed for impairment whenever events or changes in
circumstances indicated that the carrying amount of an asset may not be
recoverable. An impairment loss is recognized, on a property by property basis,
when expected undiscounted cash flows are less than the carrying value of the
asset. In cases where the Company does not expect to recover its carrying
costs, the Company reduces its carrying costs to fair value. No such reductions
have occurred to date.

In January 1996, the Company adopted SFAS No. 123, "Accounting and
Disclosure of Stock-Based Compensation," which requires disclosures based on
the fair values of share options at the date of grant. There was no cumulative
effect nor any impact on the Company's financial position as a result of the
adoption. The Company will continue to measure compensation costs associated
with the issue of share options using the guidance provided by the Accounting
Principles Board's Opinion No. 25 ("APB No. 25"). Under APB No. 25,
compensation costs related to share options issued pursuant to compensatory
plans are measured based on the difference between the quoted market price of
the shares at the measurement date (originally the date of grant) and the
exercise price and should be charged to expense

38
<PAGE> 42

over the periods during which the grantee performs the related services. All
share options issued to date by the Company have exercise prices equal to the
market price of the shares at the dates of grant (See Note 8).

3. OTHER ASSETS:

Other assets consist of the following:

<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Leasing costs ................................ $ 39,483 $ 30,858
Deferred financing costs ..................... 13,956 12,569
Other ........................................ 15,078 10,824
-------- --------
68,517 54,251
Less - Accumulated amortization .............. (21,392) (18,711)
-------- --------
$ 47,125 $ 35,540
======== ========
</TABLE>

4. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY:

Following is a summary of the Company's debt financing:

<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Note payable to LaSalle National Bank, as Trustee for Commercial
Mortgage Pass - Through Certificates, Series 1995-MD IV ("LaSalle
Note I") bears interest at 7.83% with an initial seven-year
interest-only period (through August 2002), followed by
principal amortization based on a 25-year amortization schedule
through maturity in August 2027 (1), secured by the Funding I
properties with a combined book value of $311,339 ..................... $239,000 $239,000

Note payable to LaSalle National Bank, as Trustee for Commercial
Mortgage Pass - Through Certificates, Series 1996-MD V ("LaSalle
Note II") bears interest at 7.79% with an initial seven-year
interest-only period (through March 2003), followed by
principal amortization based on a 25-year amortization schedule
through maturity in March 2028(2), secured by the Funding II
properties with a combined book value of $296,600 ..................... 161,000 67,362

Note payable to LaSalle National Bank, Trustee of the Commercial
Mortgage Pass - Through Certificates, Series 1994-MD II ("LaSalle
Note III") due July 1999, bears interest at 30-day LIBOR plus a
weighted average of 2.135% (at December 31, 1996 the rate was 7.51%
subject to a rate cap of 10%) with a five-year interest-only term,
secured by the Funding III, IV and V properties with a book
value of $213,243 ..................................................... 115,000 --

Note payable to Connecticut General Life Insurance Company ("CIGNA")
due December 2002, bears interest at 7.47% with a seven-year
interest-only term, secured by the MCI Tower and Denver Marriott City
Center properties with a combined book value of $102,990 .............. 63,500 51,500

Note payable to Northwestern Mutual Life Insurance Company due
January 2004, bears interest at 7.66% with a seven-year
interest-only term, secured by the 301 Congress Avenue property with
a book value of $44,501 ............................................... 26,000 --

Note payable to Metropolitan Life Insurance Company due September
2001, bears interest at 8.875% with monthly principal and interest
payments, secured by five of The Woodlands Office Properties with a
combined book value of $16,058 ........................................ 12,411 12,666
</TABLE>

39
<PAGE> 43

<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Note payable to Nomura Asset Capital Corporation ("Nomura Funding VI
Note") bears interest at 10.07% with monthly principal and interest
payments based on a 25-year amortization schedule through July
2020(3), secured by the Fund VI property with a book value of $29,332 . $ 8,780 $ --

Short-term note payable to The First National Bank of Boston ("FNBB")
due March 1996, bears interest at 7.9%, secured by six Operating
Partnership properties ................................................ -- 54,000

Short-term construction loan payable to Texas Commerce Bank due
September 1997, bears interest at LIBOR plus 1.7% (at
December 31, 1996 the rate was 7.39%) secured by land and
improvements that relate to the construction of The Avallon - Phase
II (Building 5) ....................................................... 2,117 --
-------- --------

Total Notes Payable ................................................... $627,808 $424,528
======== ========
</TABLE>

(1) In August 2007, the interest rate increases, and the Company is required
to remit, in addition to the monthly debt service payment, excess property
cash flow, as defined, to be applied first against principal until the
note is paid in full and thereafter, against accrued excess interest, as
defined. It is the Company's intention to repay the note in full at such
time (August 2007) by making a final payment of approximately $220,000.

(2) In March 2006, the interest rate increases, and the Company is required to
remit, in addition to the monthly debt service payment, excess property
cash flow, as defined, to be applied first against principal until the
note is paid in full and thereafter, against accrued excess interest, as
defined. It is the Company's intention to repay the note in full at such
time (March 2006) by making a final payment of approximately $154,000.

(3) In July 1998, the Company may defease the loan by purchasing treasuries to
pay out the obligation without penalty. In July 2010, the loan's interest
rate will change to a 10 year treasury yield plus 500 basis points or if
elected, the loan can be prepaid without defeasance.

In June 1996, the Company executed a new $150,000 credit facility (the
"Credit Facility") led by FNBB, which was increased to $175,000 in August 1996,
to enhance the Company's financial flexibility in making new real estate
investments. The Credit Facility initially had a term that expired in March
1997, with advances under the Credit Facility bearing interest at the
Eurodollar rate plus 240 basis points for advances of $2,000 or more, or at the
lender's prime rate plus 50 basis points for advances of less than $2,000. In
October 1996, the Company completed a public offering of its common stock and,
as a result, the Credit Facility became unsecured, the annual interest rate was
reduced to the Eurodollar rate plus 185 basis points or, as applicable, the
lender's prime rate, and the term was extended until March 1999. As of December
31, 1996, the interest rate was 7.41% and the outstanding balance was $40,000
with availability of $135,000. The Credit Facility requires the Company to
maintain compliance with a number of customary financial and other covenants on
an ongoing basis, including loan-to-value, fixed charge and debt service
coverage ratios, limitations on additional indebtedness and shareholder's
distributions, and a minimum net worth requirement. As of December 31, 1996,
the Company was in compliance with all covenants, except for one financial
covenant for which the Company had obtained a bank waiver.

Combined aggregate principal maturities of notes payable and borrowings
under the Credit Facility are as follows:

<TABLE>
<CAPTION>
Year
----
<C> <C>
1997 ............................ $ 2,515
1998 ............................ 435
1999 ............................ 155,477
2000 ............................ 523
2001 ............................ 11,170
Thereafter ......................... 497,688
----------
$ 667,808
==========
</TABLE>

40
<PAGE> 44
5. RENTALS UNDER OPERATING LEASES:

The Company receives rental income from the leasing of office, retail and
hotel property space under operating leases. Future minimum rentals (base
rents) under noncancelable operating leases over the next five years (excluding
tenant reimbursements of operating expenses) as of December 31, 1996, are as
follows:

<TABLE>
<CAPTION>
Leases Combined Office,
With Retail and Hotel
Affiliates Building Space
-------------- --------------------
<C> <C> <C>
1997 ...................... $ 24,879 $ 227,195
1998 ...................... 25,530 209,590
1999 ...................... 25,174 189,068
2000 ...................... 25,380 173,015
2001 ...................... 24,777 152,007
Thereafter ................ 105,866 589,445
-------------- --------------------
$ 231,606 $ 1,540,320
============== ====================
</TABLE>

Generally, the office and retail leases also require that tenants
reimburse the Company for increases in operating expenses above operating
expenses during the base year of the tenants lease. These amounts totaled
$16,719, $8,267, and $3,952 for the years ended December 31, 1996, 1995 and
1994, respectively. These increases are generally payable in equal installments
throughout the year, based on estimated increases, with any differences being
adjusted at year end based upon actual expenses.

The Company recognized percentage lease revenue from the Hotel Properties
of approximately $4,493, $1,797 and $0 for the years ended December 31, 1996,
1995, and 1994, respectively.

6. RELATED PARTY TRANSACTIONS:

Certain of the RPG Properties were managed by affiliates of certain
partners of RPG prior to the business combination. Management, security,
leasing and other fees earned by these affiliates in connection with the
management of these properties were $864 for the period from January 1, 1994 to
May 4, 1994. In addition, the RPG Properties reimbursed affiliates for various
operating expenses paid to third parties on its behalf. No related party fees
have been paid subsequent to May 4, 1994.

The Company has leased the Hotel Properties to independent companies
(collectively, the "Hotel Lessees") pursuant to six separate leases, each for a
term of approximately 10 years. These independent companies are owned 4.5% by
each of John C. Goff and Gerald W. Haddock, each of whom is an officer and
director of the Company, and 91% by the Hotel Lessees' asset manager. Under the
leases, the Hotel Lessees have assumed the rights and obligations of the
property owner under the respective management agreement with the hotel
operators, as well as the obligation to pay all property taxes and other
charges against the property. As part of the lease agreements for five of the
Hotel Properties, the Company has agreed to fund all capital expenditures
relating to furniture, fixtures and equipment reserves required under the
applicable management agreements. The only exception is Canyon Ranch-Tucson, in
which the hotel lessee owns all furniture, fixtures, and equipment associated
with the property and will fund all related capital expenditures.

41
<PAGE> 45

7. COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENTS

The Company has twelve properties located on land that is subject to
long-term ground leases which expire between 2001 and 2057. Ground lease
expense during each of the three years ended December 31, 1996, 1995 and 1994
was $681, $442, and $83, respectively. Future minimum lease payments due under
such ground leases as of December 31, 1996, are as follows:

<TABLE>
<CAPTION>
Ground Leases
---------------
<C> <C>
1997 $ 1,259
1998 1,212
1999 1,215
2000 1,228
2001 1,244
Thereafter 79,456
---------------
$ 85,614
===============
</TABLE>

CONTINGENCIES

The Company currently is not subject to any material legal proceedings or
claims nor, to management's knowledge, are any material legal proceedings or
claims currently threatened.

ENVIRONMENTAL MATTERS

All of the Properties have been subjected to Phase I environmental audits.
Such audits have not revealed, nor is management aware of, any environmental
liability that management believes would have a material adverse impact on the
financial position or results of operations.

8. STOCK AND UNIT BASED COMPENSATION PLANS:

STOCK OPTION PLANS

The Company has two stock incentive plans, the 1995 Stock Incentive Plan (
the "1995 Plan") and the 1994 Stock Incentive Plan (the "1994 Plan"). In June
1996, the shareholders amended the 1995 Plan, which increased the maximum
number of options and/or restricted stock that the Company may grant to
1,425,000 shares. The maximum aggregate number of shares of the 1995 Plan shall
increase automatically on January 1 of each year by an amount equal to 8.5% of
the increase in the number of shares of Common Stock and Units outstanding
since January 1 of the preceding year, subject to certain adjustment
provisions. As of January 1, 1997, the number of shares the Company may grant
under the 1995 Plan is 2,612,062. Under the 1995 Plan, the Company has granted
options and restricted shares of 1,191,100 and 15,105, respectively, through
December 31, 1996. Due to the approval of the 1995 Plan, additional options and
restricted stock will no longer be granted under the 1994 Plan. Under the 1994
Plan, the Company had issued 1,264,500 options and no restricted stock. Under
both Plans, options are granted at a price no less than the market value of the
shares on the date of grant, and expire ten years from the date of grant. The
1995 Plan options vest over five years with the exception of 250,000 options
that vest over two years. The 1994 Plan options vest between one and five
years.

42
<PAGE> 46

A summary of the status of the Company's 1994 and 1995 Plans as of
December 31, 1996 and 1995, and changes during the years then ended is
presented in the table below:

STOCK OPTIONS PLANS

<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
Wtd Avg Wtd Avg
Shares Exercise Shares Exercise
(000) Price (000) Price
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding as of January 1, 1,525 $ 26 1,221 $ 25
Granted 884 37 308 30
Exercised (19) 25 -- --
Forfeited (45) 33 (4) 26
Expired -- -- -- --
------ ------ ------ ------
Outstanding/Wtd Avg as of December 31, 2,345 $ 30 1,525 $ 26
------ ------ ------ ------
Exercisable/Wtd Avg as of December 31, 1,129 $ 26 815 $ 25
</TABLE>

UNIT PLANS

The Operating Partnership has two unit incentive plans, the 1995 Unit
Incentive Plan (the "1995 Unit Plan") and the 1996 Unit Incentive Plan (the
"1996 Unit Plan"). The 1995 Unit Plan is designed to reward persons who are not
trust managers, officers or 10% shareholders of the Company. An aggregate of
50,000 shares of common stock are reserved for issuance upon the exchange of
50,000 units available for issuance to employees and advisors under the 1995
Unit Plan. As of December 31, 1996, an aggregate of 6,397 units had been
distributed under the 1995 Unit Plan. The 1995 Unit Plan does not provide for
the grant of options. The 1996 Unit Plan provides for the grant of options to
acquire up to 2,000,000 units, all of which were granted to the Chief Executive
Officer and Vice Chairman of the Board of the Company in July 1996. The unit
options were priced at fair market value on the date of grant, vesting over
seven years, with a ten year term (if the fair market value of the Common Stock
equals or exceeds $50 for each of ten consecutive trading days, an additional
500,000 units shall vest and become exercisable). Under the 1996 Unit Plan, the
Units that may be purchased are not exchangeable for shares of Common Stock
until the shareholders of the Company approve exchange rights.

A summary of the status of the Company's 1996 Unit Plan as of December 31,
1996, and changes during the year then ended is presented in the table below:

1996 UNIT INCENTIVE OPTION PLAN

<TABLE>
<CAPTION>
1996
--------------------
Wtd Avg
Shares Exercise
(000) Price
------ ------
<S> <C> <C>
Outstanding as of January 1, -- $ --
Granted 2,000 35
Exercised -- --
Forfeited -- --
Expired -- --
------ ------
Outstanding/Wtd Avg as of December 31, 2,000 $ 35
------ ------
Exercisable/Wtd Avg as of December 31, 500 $ 35
</TABLE>

STOCK OPTION AND UNIT PLANS

The Company applies APB No. 25 in accounting for options granted pursuant
to the 1995 Plan, 1994 Plan, and 1996 Unit Plan (collectively, the "Plans").
Accordingly, no compensation cost has been recognized for the Plans. Had
compensation cost for the Plans been determined based on the fair value at the
grant dates for awards under the Plans consistent with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the
following proforma amounts:

43
<PAGE> 47
<TABLE>
<CAPTION>
1996 1995
---- ----
As reported Proforma As reported Proforma
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Net Income $ 37,135 $ 33,577 $ 27,395 $ 26,928

Earnings per share $ 1.39 $ 1.26 $ 1.31 $ 1.29
</TABLE>

Because SFAS No. 123 has not been applied to options granted prior to
January 1, 1995, the resulting proforma compensation cost may not be
representative of what is to be expected in future years.

At December 31, 1996 and 1995, the weighted average fair value of options
granted was $4.59 and $3.39, respectively. At December 31, 1996, 2,001,000 of
the 2,344,000 options outstanding have exercise prices between $25 and $35,
with a weighted average exercise price of $28 and a weighted average remaining
contractual life of 8.0 years (1,129,000 of these options are exercisable at
December 31, 1996). The remaining 343,000 options have an exercise price of $44
and a remaining contractual life of 9.9 years (none of these options are
exercisable at December 31, 1996).

The fair value of each option is estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1995, respectively: risk free interest
rates of 6.8% and 6.7%; expected dividend yields of 6.2% and 6.8%; expected
lives of 10 years; expected volatility of 17.0% and 18.6%.

9. MINORITY INTEREST:

Minority interest represents (i) the limited partnership interests owned
by unitholders in the Operating Partnership ("units") and (ii) joint venture
interests held by outside interests. Each unit may be exchanged for either one
share of common stock or, at the election of the Company, cash equal to the
fair market value of the share of common stock at the time of the exchange.
When a unitholder exchanges a unit, the Company's investment in the Operating
Partnership will be increased. During 1996 and 1995, 53,789 and 2,286,050
units, respectively, were exchanged for shares of common stock of the Company.
As of December 31, 1996 and 1995, 6,640,336 and 5,296,734 units, respectively,
of the Operating Partnership were outstanding and held by minority interest
unitholders.

10. SHAREHOLDERS' EQUITY AND PARTNERS' DEFICIT:

The cash dividend and unitholder distribution paid during the period from
May 5, 1994 to December 31, 1994 was $17,792 or $.79 per share.

On April 11, 1995, the Company completed a public offering of 5,175,000
shares (including the underwriters' overallotment option) of its common stock
at $28.125 per share. Net proceeds from the offering to the Company were
approximately $136,400, all of which were used to reduce amounts outstanding
under the Credit Facility. In connection with the offering, Richard E.
Rainwater, Chairman of the Board, indirectly purchased a partnership interest
represented by 1,097,014 partnership units (the "Rainwater Investment") in the
Operating Partnership, which were exchangeable for 1,097,014 shares of common
stock, subject to the approval of the shareholders of the Company. Net proceeds
from the Rainwater Investment were approximately $30,500, all of which were
used to reduce amounts outstanding under the Credit Facility. On June 12, 1995,
the shareholders approved the exchange of the Rainwater Investment for
1,097,014 shares of common stock. The exchange transaction occurred in July
1995.

The cash dividend and unitholder distribution paid during the year ended
December 31, 1995, was $52,784 or $2.05 per share.

44
<PAGE> 48

On October 2, 1996, the Company completed a public offering (the
"Offering") of 11,500,000 shares (including the underwriters' overallotment
option) of its common stock at $40.375 per share. Net proceeds from the
Offering to the Company after underwriting discount of $24,380 and other
offering costs of approximately $2,500 were approximately $437,433. The Company
used a portion of these net proceeds to repay $16,000 on FNBB short-term note
and $151,500 of the Credit Facility. The remaining net proceeds of $269,933
were used to fund subsequent acquisitions. On October 9, 1996, the Company
completed an additional offering of 450,000 shares of its common stock to
several underwriters who participated in the Offering. The shares of common
stock were sold at $42 per share. The gross proceeds of $18,900 from the
additional offering were used to fund subsequent acquisitions.

The cash dividend and unitholder distribution paid during the year ended
December 31, 1996, was $73,367 or $2.26 per share.

On February 4, 1997, the Company paid a cash dividend and unitholder
distribution of $26,100 or $.61 per share and equivalent unit, to shareholders
and equivalent unitholders of record on January 21, 1997. The dividend
represented an annualized dividend of $2.44 per share and equivalent unit.

Following is the income tax status of dividends paid during the years
ended December 31, 1996 and 1995, and the period from May 5, 1994 to December
31, 1994:

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Ordinary income 61.7% 90% 100%
Return on capital 38.3% 10% 0%
</TABLE>

11. REORGANIZATION COSTS:

In 1994, non-recurring reorganization costs, which represent costs
incurred in the formation of the Operating Partnership and in connection with
the transfer of the properties by the predecessor partnerships, are comprised
of the following:

<TABLE>
<S> <C>
Professional fees ........................... $ 955
Title insurance premiums .................... 920
Other ....................................... 25
------
$1,900
======
</TABLE>

12. EXTRAORDINARY ITEMS:

In April 1996, the Company canceled its $150,000 credit facility led by
FNBB. At that time the Company had no outstanding borrowings under the credit
facility. In connection with the cancellation of the credit facility, the
Company recognized an extraordinary loss of $1,306, net of minority interests,
resulting from the write-off of unamortized deferred financing costs.

During the period from May 5, 1994 to December 31, 1994, the Company
recognized an extraordinary loss of $677 resulting from the write-off of
deferred financing costs on notes payable which were repaid early and the
write-off of predecessor partnership organization costs.

13. ACQUISITIONS:

During 1996, the Company acquired the following properties from unrelated
third parties (certain of the properties are owned in fee simple or pursuant to
a lessee's interest under a ground lease). The Company funded these
acquisitions through cash proceeds from the Offering, debt proceeds from Nomura
Asset Capital Corporation and CIGNA Note, borrowings under the Credit Facility,
debt assumption, and issuance of units and common stock.

45
<PAGE> 49

<TABLE>
<CAPTION>
COMPANY'S ROOMS / NET
ACQ. EFFECTIVE ACQ. GUEST RENTABLE
PROPERTY DATE CITY, STATE OWNERSHIP% PRICE NIGHTS AREA
-------- ---- ----------- ---------- ----- ------ --------
<S> <C> <C> <C> <C> <C> <C>
3333 Lee Parkway 1/96 Dallas, TX 100% $14,500 -- 233,484
301 Congress Avenue 4/96 Austin, TX 50 21,635 -- 418,338
Central Park Plaza 6/96 Omaha, NE 100 25,486 -- 409,850
Canyon Ranch-Tucson 7/96 Tucson, AZ 100 57,000 240 --
The Woodlands Office Properties 7/96 Houston, TX 75 8,186 -- 109,400
Three Westlake Park 8/96 Houston, TX 100 28,980 -- 414,251
1615 Poydras 8/96 New Orleans, LA 100 36,450 -- 508,741
Greenway Plaza Office Portfolio 10/96 Houston, TX 100 206,000 -- 4,256,885
Chancellor Park 10/96 San Diego, CA 100 31,058 -- 195,733
The Woodlands Retail Properties 10/96 Houston, TX 75 22,500 -- 356,104
Sonoma Mission Inn & Spa 11/96 Sonoma, CA 100 53,400 168 --
Canyon Ranch-Lenox 12/96 Lenox, MA 100 30,000 202 --
160 Spear Street 12/96 San Francisco, CA 100 35,450 -- 276,420
Greenway I & IA 12/96 Dallas, TX 100 17,000 -- 146,704
Bank One Tower 12/96 Austin, TX 100 39,220 -- 389,503
Frost Bank Plaza 12/96 Austin, TX 100 36,000 -- 433,024
</TABLE>

The following represents additional information for properties which the
Company either owns a limited partnership interest in the partnership that owns
the property or has the principal economic interest in the property through its
ownership of a mortgage note secured by the property.

On April 18, 1996, the Company together with Aetna Life Insurance Company
("Aetna") formed 301 Congress Avenue, L.P., a Delaware limited partnership in
which the Company and Aetna, each own a 50% interest. Crescent/301, L.L.C., a
Delaware limited liability company that is wholly owned by the Operating
Partnership and General Partner, serves as the general partner of 301 Congress
Avenue, L.P. On April 18, 1996, the partnership acquired from Aetna the 301
Congress Avenue property. The Company contributed to the partnership
approximately $21,635. Beginning in April 1996, the operations of the
partnership were consolidated into the operations of the Company.

On July 31, 1996, the Woodland Office Equities - `95 Limited ("WOE"), in
which the Company owns a 75% limited partnership interest, acquired two office
properties developed by The Woodlands Corporation. The purchase price for the
two office properties was approximately $10,915, of which the Company
contributed $8,186 to WOE.

On August 16, 1996, the Company acquired for approximately $29,000, the
principal economic interest in Three Westlake Park through its acquisition from
the lender of a mortgage note (the "Three Westlake Note"), in the principal
amount of approximately $46,300. Under the terms of the Three Westlake Note, as
modified, the Company will receive all net cash flow from Three Westlake Park
through February 2004. The Three Westlake Note is secured by a first priority
deed of trust on Three Westlake Park. The operations of the property were
consolidated into the operations of the Company.

On October 31, 1996, the Company formed the Woodland Retail Equities - `96
Limited ("WRE") partnership with The Woodlands Corporation ("TWC"), a
subsidiary of Mitchell Energy & Development Corp., in which the Company owns a
75% limited partner interest. WRE owns four retail properties located in The
Woodlands. The Company's investment was approximately $22,500, with a minimum
preferential return of 9.75% that escalates in January 1999 to 10.5%.

SIGNIFICANT TRANSACTION

On October 7, 1996, the Company through three newly formed subsidiaries,
Fundings III, IV and V, L.P., acquired a property portfolio located in Houston,
Texas (the "Greenway Plaza Portfolio"). The Greenway Plaza Portfolio consists
primarily of 10 suburban office properties with an aggregate of

46
<PAGE> 50

approximately 4.3 million net rentable square feet, a central plant which
provides heated and chilled water to both the 10 office properties and third
parties, and a 389-room full-service hotel and a private health and dining
club, which are both subject to triple-net leases. The aggregate cost of the
Greenway Plaza Portfolio was $206,000, which was funded through the issuance to
the sellers of 599,332 shares of common stock at $41.71 per share, the
assumption of $115,000 of nonrecourse indebtedness and $66,000 of cash from
proceeds of the Offering.

PROFORMA OPERATING RESULTS

Assuming completion of (i) the 1996 and 1995 property acquisitions and Biltmore
Note and (ii) the public offering on October 2, 1996, additional offering on
October 9, 1996, the public offering on April 11, 1995 and Rainwater
Investment, in each case as of January 1, 1996 and 1995, pro forma operating
results are presented as follows:

<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
1996 1995
-------- --------
(unaudited) (unaudited)
<S> <C> <C>
Total Revenue ................................ $298,046 $288,536
Operating Income ............................. 74,802 72,481
Income before minority interest
and extraordinary item .................... 78,653 77,981
Net Income ................................... 64,248 64,108
Earnings Per Share ........................... $ 1.78 $ 1.77
</TABLE>

The pro forma operating results combine the Company's historical operating
results with the historical incremental rental income and operating expenses
including an adjustment for depreciation based on the acquisition price
associated with the property acquisitions and pro forma adjustments. The
historical operations of the destination resorts and full-service hotel
properties were adjusted to reflect the lease payments from the hotel lessee to
the Company calculated on a pro forma basis by applying the rent provisions (as
defined in the lease agreements). Pro forma adjustments primarily represent the
increase in interest costs assuming the borrowings to finance property
acquisitions had occurred at the beginning of the period.

These pro forma amounts are not necessarily indicative of what the actual
financial position of the Company would have been assuming the above property
acquisitions had been consummated as of the beginning of the period, nor do
they purport to represent the future financial position of the Company.

14. SUBSEQUENT EVENTS (Through March 1, 1997, unaudited):

Greenway II. On January 17, 1997, the Company acquired Greenway II, a
seven-story Class A office property containing approximately 154,000 square feet
of net rentable space located in the Richardson/Plano submarket of Dallas,
Texas. The purchase price was approximately $18,200, which was funded through a
draw under the Credit Facility.

47
<PAGE> 51

subordinated to the base rents due to the Company under the lease. Also, in
conjunction with the acquisition, the Company and Crescent Affiliate will each
receive warrants to purchase 1,283,311 shares of Magellan's common stock
exercisable at $30 per share, subject to vesting and exercise restrictions.
Management believes these warrants will allow the Company and Crescent Affiliate
to participate in the benefits realized by Magellan from this business
realignment as well as any benefits from the growth of Magellan's managed care
business and public sector business. The total amount to be paid in connection
with the transaction is $400,000, $5,000 of which will be paid by Crescent
Affiliate for its interest in OpCo upon the closing. Crescent Affiliate and
Magellan each will pay an additional $2.5 million to OpCo within five days
after the closing and will commit to loan up to $17.5 million during the five
years following the closing. Closing of the transaction is scheduled to be
complete by the end of May 1997, subject to approval of the transaction by
Magellan's shareholders and customary closing conditions.

Carter-Crowley Portfolio. On February 10, 1997, the Company entered into a
definitive agreement to acquire substantially all of the assets of
Carter-Crowley Properties, Inc., a company controlled by the family of Donald J.
Carter for an aggregate purchase price of approximately $383,000. The purchase
includes fourteen office properties aggregating approximately 3 million square
feet located in seven suburban Dallas submarkets. The Company or Crescent
Affiliate will also acquire other assets consisting principally of 1,221 acres
of commercially zoned, undeveloped land in the Dallas-Fort Worth metroplex,
marketable securities, and equity and debt interests in the Dallas Mavericks NBA
basketball franchise. The transaction is scheduled to be completed by the end of
April 1997, subject to the completion of due diligence and customary closing
conditions.

Shelf Registration. On February 14, 1997, the Company filed a shelf
registration with the Securities and Exchange Commission ("SEC") for an
aggregate of $1,200,000 of common stock, preferred stock and warrants
exercisable for common stock. Any securities issued under the registration
statement may be offered from time to time in amounts, at prices, and on terms
to be determined at the time of the offering. Management believes this shelf
registration will provide the Company with more efficient and immediate access
to the capital markets at such time as it is considered appropriate. Net
proceeds from any offering of these securities are expected to be used for
general business purposes, including the acquisition and development of
additional properties and other acquisition transactions, the payment of certain
outstanding debt and improvements to certain properties in the Company's
portfolio.

Trammell Crow Center. On February 28, 1997, the Company acquired
substantially all of the economic interest in Trammell Crow Center ("TCC"), a
50-story Class A office property containing approximately 1,128,000 square feet
of net rentable space. The Company acquired its interest in TCC through the
purchase of fee simple title to the property (subject to a ground lease and a
leasehold estate for years regarding the building) and two mortgage notes
encumbering the leasehold interests in the land and building. TCC is located in
the cultural and financial district of the Central Business District ("CBD")
submarket of Dallas, Texas. The purchase price was approximately $162,000, of
which $150,000 was funded through proceeds from an unsecured, short-term loan
with the FNBB and the remaining balance of $12,000 through a draw under the
Credit Facility. The short-term loan, which is interest only, bears interest at
the Eurodollar rate plus 185 basis points and is due at maturity on July 28,
1997.

Denver Properties. On February 28, 1997, the Company acquired, in a single
transaction, the following three office properties in Denver, Colorado: 44 Cook,
55 Madison and AT&T. 44 Cook, a 10-story Class A office property, contains
approximately 123,000 square feet of net rentable space and 55 Madison, an
8-story Class A office property, contains approximately 125,000 square feet of
net rentable space are both located in the Cherry Creek submarket. The AT&T, a
15-story office property, contains approximately 170,000 square feet of net
rentable space and is located in the Denver CBD. The combined purchase price for
the three office properties was $42,675, which was funded through a draw under
the Credit Facility.

48
<PAGE> 52

15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

<TABLE>
<CAPTION>
Year Ended December 31, 1996
--------------------------------------------
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues .......................... $ 43,060 $ 44,999 $ 49,368 $ 71,434
Income before minority interests
and extraordinary item ......... 8,563 9,655 8,517 21,216
Minority interests................. (1,583) (2,036) (2,239) (3,652)
Extraordinary item ................ -- (1,306) -- --
Net income ........................ 6,980 6,313 6,278 17,564
Per share data:
Income before extraordinary item .30 .33 .27 .49
Net Income ...................... .30 .27 .27 .49
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31, 1995
--------------------------------------------
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues .......................... $ 25,955 $ 29,228 $ 34,280 $ 40,497
Income before minority interests .. 5,320 11,012 11,427 8,599
Minority interests ................ (1,529) (2,846) (2,369) (2,219)
Net income ........................ 3,791 8,166 9,058 6,380
Net income per share .............. 0.24 0.39 0.39 0.27
</TABLE>

49
<PAGE> 53
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(dollars in thousands)

SCHEDULE III

<TABLE>
<CAPTION>
Costs
Capitalized
Subsequent to Gross Amount at Which
Initial Costs Acquisition Carried at Close of Period
------------------------ --------------- --------------------------
Land, Buildings, Buildings,
Improvements, Improvements,
Furniture, Furniture,
Buildings and Fixtures and Fixtures and
Description Land Improvements Equipment Land Equipment
- ----------------------------------------- ---------- ------------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
The Crescent , Dallas, TX $ 6,723 $ 153,383 $ 70,545 $ 6,723 $ 223,928
Continental Plaza, Fort Worth, TX 1,375 66,649 17,638 1,375 84,287
The Citadel, Denver, CO 1,803 17,259 3,406 1,803 20,665
MacArthur Center I & II, Irving, TX 704 17,247 2,213 880 19,284
Las Colinas Plaza, Irving, TX 2,576 7,125 1,293 2,582 8,412
Caltex House, Irving, TX 2,200 48,744 727 2,200 49,471
Liberty Plaza I & II, Dallas, TX 1,650 15,956 112 1,650 16,068
Regency Plaza One, Denver, CO 950 31,797 295 950 32,092
Waterside Commons, Irving, TX 3,650 20,135 1,678 3,650 21,813
The Avallon, Austin, TX 1,577 11,207 2,013 2,022 12,775
Two Renaissance Square, Phoenix, AZ -- 54,412 2,756 -- 57,168
Stanford Corporate Centre, Dallas, TX -- 16,493 986 -- 17,479
Hyatt Regency Beaver Creek, Avon, CO 10,882 30,789 111 10,882 30,900
The Aberdeen, Dallas, TX 850 25,895 21 850 25,916
Barton Oaks Plaza One, Austin, TX 900 8,207 1,030 900 9,237
12404 Park Central, Dallas, TX 1,604 14,504 25 1,604 14,529
MCI Tower, Denver, CO -- 56,593 79 -- 56,672
Denver Marriott City Center, Denver, CO -- 50,364 342 -- 50,706
The Woodlands Office Properties, Houston, TX 12,007 35,865 1,145 12,063 36,954
Spectrum Center, Dallas, TX 2,000 41,096 3,037 2,000 44,133
Ptarmigan Place, Denver, CO 3,145 28,815 317 3,145 29,132
6225 North 24th Street, Phoenix, AZ 719 6,566 74 719 6,640
Briargate Office and Research
Center, Colorado Springs, CO 2,000 18,044 254 2,000 18,298
Albuquerque Plaza, Albuquerque, NM -- 36,667 320 -- 36,987
Hyatt Regency Albuquerque, Albuquerque, NM -- 32,241 248 -- 32,489
3333 Lee Parkway, Dallas, TX 1,450 13,177 81 1,468 13,240
<CAPTION>
Life on Which
Depreciation in
Latest Income
Accumulated Date of Acquisition Statement Is
Description Total Depreciation Construction Date Computed
- ----------------------------------------- ---------- ------------ ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
The Crescent , Dallas, TX $ 230,651 $ (129,509) 1985 1985 (1)
Continental Plaza, Fort Worth, TX 85,662 (28,291) 1982 1990 (1)
The Citadel, Denver, CO 22,468 (11,585) 1987 1987 (1)
MacArthur Center I & II, Irving, TX 20,164 (3,335) 1982/1986 1993 (1)
Las Colinas Plaza, Irving, TX 10,994 (2,487) 1989 1989 (1)
Caltex House, Irving, TX 51,671 (3,388) 1982 1994 (1)
Liberty Plaza I & II, Dallas, TX 17,718 (1,001) 1981/1986 1994 (1)
Regency Plaza One, Denver, CO 33,042 (2,012) 1985 1994 (1)
Waterside Commons, Irving, TX 25,463 (1,466) 1986 1994 (1)
The Avallon, Austin, TX 14,797 (609) 1986 1994 (1)
Two Renaissance Square, Phoenix, AZ 57,168 (3,277) 1990 1994 (1)
Stanford Corporate Centre, Dallas, TX 17,479 (1,007) 1985 1995 (1)
Hyatt Regency Beaver Creek, Avon, CO 41,782 (1,619) 1989 1995 (1)
The Aberdeen, Dallas, TX 26,766 (1,153) 1986 1995 (1)
Barton Oaks Plaza One, Austin, TX 10,137 (424) 1986 1995 (1)
12404 Park Central, Dallas, TX 16,133 (588) 1987 1995 (1)
MCI Tower, Denver, CO 56,672 (2,120) 1982 1995 (1)
Denver Marriott City Center, Denver, CO 50,706 (2,268) 1982 1995 (1)
The Woodlands Office Properties, Houston, TX 49,017 (2,879) 1980-1993 1995 (1)
Spectrum Center, Dallas, TX 46,133 (1,331) 1983 1995 (1)
Ptarmigan Place, Denver, CO 32,277 (918) 1984 1995 (1)
6225 North 24th Street, Phoenix, AZ 7,359 (190) 1981 1995 (1)
Briargate Office and Research
Center, Colorado Springs, CO 20,298 (489) 1988 1995 (1)
Albuquerque Plaza, Albuquerque, NM 36,987 (922) 1990 1995 (1)
Hyatt Regency Albuquerque, Albuquerque, NM 32,489 (957) 1990 1995 (1)
3333 Lee Parkway, Dallas, TX 14,708 (332) 1983 1996 (1)
</TABLE>

50
<PAGE> 54
SCHEDULE III

<TABLE>
<CAPTION>
Costs
Capitalized
Subsequent to Gross Amount at Which
Initial Costs Acquisition Carried at Close of Period
------------------------ --------------- --------------------------
Land, Buildings, Buildings,
Improvements, Improvements,
Furniture, Furniture,
Buildings and Fixtures and Fixtures and
Description Land Improvements Equipment Land Equipment
- ----------------------------------------- ---------- ------------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
301 Congress Avenue, Austin, TX 2,000 41,735 1,525 2,000 43,260
Central Park Plaza, Omaha, NE 2,514 23,236 103 2,514 23,339
Ptarmigan Land, Denver, CO 1,737 -- -- 1,737 --
Canyon Ranch, Tuscon, AZ 14,500 43,038 -- 14,500 43,038
The Woodlands Office Properties, Houston, TX 2,393 8,523 1 2,394 8,523
Three Westlake Park, Houston, TX 2,920 26,512 30 2,920 26,542
1615 Poydras, New Orleans, LA -- 37,087 101 -- 37,188
Greenway Plaza, Houston, TX 25,200 186,728 2,253 25,200 188,981
Chancellor Park, San Diego, CA 8,028 23,430 5 8,029 23,434
The Woodlands Retail Properties, Houston, TX 11,340 18,948 -- 11,340 18,948
Sonoma Mission Inn & Spa, Sonoma, CA 10,000 44,922 441 10,000 45,363
Canyon Ranch, Lenox, MA 4,200 25,218 -- 4,200 25,218
160 Spear Street, San Francisco, CA -- 35,656 -- -- 35,656
Greenway I & IA, Richardson, TX 1,701 15,312 -- 1,701 15,312
Bank One Tower, Austin, TX -- 39,310 -- -- 39,310
Frost Bank Plaza, Austin, TX 35 35,984 -- 35 35,984
Other -- 4,794 55 -- 4,849
Crescent Real Estate Equities L.P. -- -- 2,370 -- 2,370
---------- ---------- ------------ ---------- ------------
Total $ 145,333 $1,469,663 $ 117,630 $ 146,036 $ 1,586,590
========== ========== ============ ========== ============
<CAPTION>
Life on Which
Depreciation in
Latest Income
Accumulated Date of Acquisition Statement Is
Description Total Depreciation Construction Date Computed
- ----------------------------------------- ---------- ------------ ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
301 Congress Avenue, Austin, TX 45,260 (759) 1986 1996 (1)
Central Park Plaza, Omaha, NE 25,853 (362) 1982 1996 (1)
Ptarmigan Land, Denver, CO 1,737 -- -- 1996 (1)
Canyon Ranch, Tuscon, AZ 57,538 (444) 1980 1996 (1)
The Woodlands Office Properties, Houston, TX 10,917 (172) 1995-1996 1996 (1)
Three Westlake Park, Houston, TX 29,462 (221) 1983 1996 (1)
1615 Poydras, New Orleans, LA 37,188 (308) 1984 1996 (1)
Greenway Plaza, Houston, TX 214,181 (940) 1969-1982 1996 (1)
Chancellor Park, San Diego, CA 31,463 (92) 1988 1996 (1)
The Woodlands Retail Properties, Houston, TX 30,288 (176) 1984 1996 (1)
Sonoma Mission Inn & Spa, Sonoma, CA 55,363 (244) 1927 1996 (1)
Canyon Ranch, Lenox, MA 29,418 (85) 1989 1996 (1)
160 Spear Street, San Francisco, CA 35,656 -- 1984 1996 (1)
Greenway I & IA, Richardson, TX 17,013 (32) 1983 1996 (1)
Bank One Tower, Austin, TX 39,310 -- 1974 1996 (1)
Frost Bank Plaza, Austin, TX 36,019 -- 1984 1996 (1)
Other 4,849 (134) 1968/1940 1995/1996 (1)
Crescent Real Estate Equities L.P. 2,370 (682) -- -- (1)
---------- ----------
Total $1,732,626 $ (208,808)
========== ==========
</TABLE>

51
<PAGE> 55

(1) Depreciation of the real estate assets is calculated over the following
estimated useful lives using the straight-line method:

Building and improvements 5 to 49 years
Tenant improvements Terms of leases
Furniture, fixtures, and equipment 3 to 10 years

A summary of combined real estate investments and accumulated depreciation is
as follows:

<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Real estate investments:
Balance, beginning of year .......... $1,006,706 $ 557,675 $ 358,400
Acquisitions ...................... 680,148 420,284 192,200
Basis Adjustments ................. -- -- 7,656
Improvements ...................... 13,787 7,455 3,454
Retirements ....................... -- -- (4,035)
Consolidation of Joint Venture .... 31,985 21,292 --
---------- ---------- ----------
Balance, end of year ................ $1,732,626 $1,006,706 $ 557,675
========== ========== ==========

Accumulated depreciation:
Balance, beginning of year .......... $ 172,267 $ 146,930 $ 131,071
Depreciation ...................... 36,541 25,337 18,174
Retirements ....................... -- -- (2,315)
---------- ---------- ----------
Balance, end of year ................ $ 208,808 $ 172,267 $ 146,930
========== ========== ==========
</TABLE>

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

Not Applicable.

PART III

Certain information required by Part III is omitted from the Report in
that the Registrant will file a definitive proxy statement with the Securities
and Exchange Commission (the "Commission") pursuant to Regulation 14A (the
"Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information to be included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Compensation Committee
Report or the Performance Graph included in the Proxy Statement.

ITEM 10. TRUST MANAGERS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information concerning the Company's trust managers required by this
Item is incorporated by reference to the Company's Proxy Statement to be filed
with the Commission for its annual shareholders' meeting to be held in June
1997. The information regarding compliance with Section 16 of the Securities
Exchange Act of 1934 is to be set forth in the Proxy Statement and is hereby
incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission for its annual
shareholders' meeting to be held in June 1997.

52
<PAGE> 56

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission for its annual
shareholders' meeting to be held in June 1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission for its annual
shareholders' meeting to be held in June 1997.

PART IV

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

(a) Financial Statements

Report of Independent Public Accountants

Crescent Real Estate Equities Company Consolidated Balance Sheets at
December 31, 1996 and 1995

Crescent Real Estate Equities Company Consolidated Statements of
Operations for the years ended December 31, 1996 and 1995, and for the
period from May 5, 1994 to December 31, 1994 and Rainwater Property
Group Combined Statement of Operations for the period from January 1,
1994 through May 4, 1994

Crescent Real Estate Equities Company Consolidated Statements of
Shareholders' Equity for the years ended December 31, 1996 and 1995, and
for the period from May 5, 1994 to December 31, 1994 and Rainwater
Property Group Combined Statement of Partners' Deficit for the period
from January 1, 1994 through May 4, 1994

Crescent Real Estate Equities Company Consolidated Statements of Cash
Flows for the years ended December 31, 1996 and 1995, and for the period
from May 5, 1994 to December 31, 1994 and Rainwater Property Group
Combined Statement of Cash Flows for the period from January 1, 1994
through May 4, 1994

Crescent Real Estate Equities Company and Rainwater Property Group Notes
to Financial Statements

(b) Financial Statement Schedules

Schedule III - Crescent Real Estate Equities Company Consolidated Real
Estate Investments and Accumulated Depreciation at December 31, 1996

All other schedules have been omitted either because they are not
applicable or because the required information has been disclosed in the
Financial Statements and related notes included in the consolidated and
combined statements.

Form 8-K/A filed November 12, 1996, to the Form 8-K dated August 15,
1996, and filed September 11, 1996, as previously amended on September
27, 1996, updating certain information regarding the Company's
acquisition of the Greenway Plaza Portfolio.

53
<PAGE> 57

Form 8-K dated October 4, 1996, and filed on October 4, 1996, for the
purpose of filing certain exhibits in connection with the Company's
public offering of 450,000 shares of its common stock.

<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<S> <C>
3.01 Form of First Amended and Restated Articles of Incorporation of
Crescent Real Estate Equities, Inc. (filed as Exhibit No. 3.01
to the Registrant's Registration Statement on Form S-11 (File
No. 33-75188) (the "1994 S-11") and previously incorporated by
reference but no longer incorporated herein by reference)

3.02 Amended and Restated Bylaws of Crescent Real Estate Equities,
Inc. (filed as Exhibit No. 3.02 to the 1994 S-11 and previously
incorporated by reference but no longer incorporated herein by
reference)

3.03 Restated Declaration of Trust of Crescent Real Estate Equities
Company (filed as Exhibit No. 4.01 to the Registrant's
Registration Statement on Form S-3 (File No. 333-21905) (the
"1997 S-3") and incorporated herein by reference)

3.04 Amended and Restated Bylaws of Crescent Real Estate Equities
Company (filed as Exhibit No. 4.02 to the Registrant's
Registration Statement on Form S-3 (File No. 333-23005) and
incorporated herein by reference)

4.01 Form of Stock Certificate (filed as Exhibit No. 4.01 to the 1994
S-11 and previously incorporated herein by reference but no longer
incorporated herein by reference)

4.02 Registration Rights Agreement, dated February 16, 1996, by and
among the Registrant, Crescent Real Estate Equities Limited
Partnership and certain of the limited partners of Crescent Real
Estate Equities Limited Partnership named therein (filed
herewith)

4.03 Registration Rights Agreement dated January 20, 1997, by and among
the Registrant, Crescent Real Estate Equities Limited
Partnership and certain of the limited partners of Crescent Real
Estate Equities Limited Partnership named therein (filed
herewith)

4.04 Form of Registration Agreement relating to the acquisition of
the Greenway Plaza Portfolio (filed as Exhibit 4.01 to the
Registrant's Current Report on Form 8-K dated and filed
September 27,1996 (the "1996 Form 8-K") and incorporated herein
by reference)

4.05 Registration Rights Agreement, dated as of June 26, 1996,
relating to Canyon Ranch-Tucson (filed as Exhibit No. 4.02 to
the 1996 Form 8-K and incorporated herein by reference)

4.06 Form of Common Share Certificate (filed as Exhibit No. 4.03 to
the 1997 S-3 and incorporated herein by reference)

10.01 First Amended and Restated Agreement of Limited Partnership of
Crescent Real Estate Equities Limited Partnership, dated May 5,
1994 (filed as Exhibit No. 10.01 to the 1994 S-11 and previously
incorporated by reference but no longer incorporated herein by
reference)

10.03 Form of Noncompetition Agreement (Goff) (filed as Exhibit No.
10.03 to the Registrant's Registration Statement on Form S-11
(File No. 33-90226) (the "1995 S-11") and incorporated herein by
reference)

10.04 Form of Noncompetition Agreement (Haddock) (filed as Exhibit No.
10.04 to the 1995 S-11 and incorporated herein by reference)
</TABLE>

54
<PAGE> 58

<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<S> <C>
10.05 Form of Employment Agreement (Goff) (filed as Exhibit No. 10.05
to the 1995 S-11 and incorporated herein by reference)

10.06 Form of Employment Agreement (Haddock) (filed as Exhibit No.
10.06 to the 1995 S-11 and incorporated herein by reference)

10.07 Form of Registration Rights, Lock-Up and Pledge Agreement (filed
as Exhibit No. 10.05 to the 1994 S-11 and incorporated herein by
reference)

10.08 Form of Officers' and Trust Managers' Indemnification Agreement
as entered into between the Registrant and each of its executive
officers and trust managers (filed as Exhibit No. 10.08 to the
1995 S-11 and incorporated herein by reference)

10.09 Crescent Real Estate Equities Company 1994 Stock Incentive Plan
(filed as Exhibit No. 10.07 to the 1994 S-11 and incorporated
herein by reference)

10.10 Crescent Real Estate Equities, Ltd. 401(k) Plan (filed as
Exhibit No. 10.10 to the 1995 S-11 and incorporated herein by
reference)

10.11 Agreement, dated as of August 15, 1996, relating to the
acquisition of the Greenway Plaza Portfolio (filed as Exhibit
No. 10.02 to the 1996 Form 8-K and incorporated herein by
reference)

10.12 Form of Amended and Restated Lease Agreement, dated January 1,
1996, among Crescent Real Estate Equities Limited Partnership,
Mogul Management, LLC and RoseStar Management, LLC, relating to
the Hyatt Regency Beaver Creek (filed as Exhibit 10.12 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (the "1995 10-K"))

10.13 Real Estate Purchase and Sale Agreement, dated as of January 29,
1997, between Crescent Real Estate Equities Limited Partnership,
as purchaser, and Magellan Health Services, Inc., as seller,
relating to the acquisition of approximately 90 hospitals, as
amended effective February 28, 1997 (filed herewith)

10.14 First Amended and Restated Revolving Credit Agreement, dated
September 30, 1994, among Crescent Real Estate Equities Limited
Partnership and The First National Bank of Boston, NationsBank
of Texas, N.A., and Other Banks which are or may become Parties
to the Agreement, and the First National Bank of Boston, as
Agent (filed as Exhibit No. 10.14 to the 1995 S-11 and
previously incorporated by reference but no longer incorporated
herein by reference)

10.15 First Amended and Restated 1995 Crescent Real Estate Equities
Company Stock Incentive Plan (filed herewith)

10.16 Lease Agreement, dated December 19, 1995 between Crescent Real
Estate Equities Limited Partnership and RoseStar Management,
LLC, relating to the Hyatt Regency Albuquerque (filed as Exhibit
10.16 to the 1995 10-K and incorporated herein by reference)

10.17 Amended and Restated Lease Agreement, dated June 30, 1995
between Crescent Real Estate Equities Limited Partnership and
RoseStar Management, LLC, relating
</TABLE>

55
<PAGE> 59

<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<S> <C>
to the Denver Marriott (filed as Exhibit 10.17 to the 1995 10-K
and incorporated herein by reference)

10.18 Loan Agreement, dated August 24, 1995, including Form of Deed of
Trust, Assignment of Rents, Security Agreement and Fixture
Filing, and Amendment to Loan Agreement, dated October 19, 1995,
between Crescent Real Estate Funding I, L.P. and Nomura Asset
Capital Corporation (filed as Exhibit 10.15 to the 1995 10-K and
incorporated herein by reference)

10.19 Loan Agreement, dated August 24, 1995, including Form of Deed of
Trust, Assignment of Rents, Security Agreement and Fixture
Filing, between Crescent Real Estate Funding II, L.P. and Nomura
Asset Capital Corporation (filed as Exhibit 10.19 to the 1995
10-K and incorporated herein by reference)

10.20 Mortgage Loan Application and Agreement, dated October 3, 1995,
as amended by letter agreements dated October 10, 1995 and
October 30, 1995, between Crescent Real Estate Equities Limited
Partnership and CIGNA Investments, Inc. and Secured Promissory
Note dated December 11, 1995 (filed as Exhibit 10.20 to the 1995
10-K and incorporated herein by reference)

10.21 Amended and Restated Revolving Note, dated December 18, 1995,
and the First Amendment thereto between Crescent Real Estate
Equities Limited Partnership and The First National Bank of
Boston (filed as Exhibit 10.21 to the 1995 10-K and incorporated
by reference but no longer incorporated herein by reference)

10.22 1995 Crescent Real Estate Equities Limited Partnership Unit
Incentive Plan (filed as Exhibit No. 99.01 to the Registrant's
Registration Statement on Form S-8 (File No. 333-3452) and
incorporated herein by reference)

10.23 1996 Crescent Real Estate Equities Limited Partnership Unit
Incentive Plan (filed as Exhibit No. 10.01 to the 1996 Form 8-K
and incorporated herein by reference)

10.24 Lease Agreement, dated July 26, 1996, between Canyon Ranch, Inc.
and Canyon Ranch Leasing, L.L.C. (filed herewith)

10.25 Lease Agreement, dated November 18, 1996, between Crescent Real
Estate Equities Limited Partnership and Wine Country Hotel, LLC.
(filed herewith)

10.26 Lease Agreement, dated December 11, 1996, between Canyon
Ranch-Bellefontaine Associates, L.P. and Vintage Resorts, LLC.
(filed herewith)

21.01 List of Subsidiaries (filed herewith)

23.01 Consent of Arthur Andersen LLP (filed herewith)

27.01 Financial Data Schedule (filed herewith)
</TABLE>

56
<PAGE> 60
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 5th day of
March, 1997.

CRESCENT REAL ESTATE EQUITIES COMPANY
(Registrant)

By /s/ GERALD W. HADDOCK
-------------------------------------
Gerald W. Haddock
President and Chief Executive Officer

SIGNATURES

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ RICHARD E. RAINWATER Trust Manager and 3/5/97
- ----------------------------- Chairman of the Board
Richard E. Rainwater

/s/ JOHN C. GOFF Trust Manager and Vice 3/5/97
- ----------------------------- Chairman of the Board
John C. Goff

/s/ GERALD W. HADDOCK Trust Manager, President and Chief 3/5/97
- ----------------------------- Executive Officer (Principal
Gerald W. Haddock Executive Officer)

/s/ DALLAS E. LUCAS Senior Vice President and Chief 3/5/97
- ----------------------------- Financial Officer
Dallas E. Lucas (Principal Financial and
Accounting Officer)

/s ANTHONY M. FRANK Trust Manager 3/5/97
- -----------------------------
Anthony M. Frank

/s/ MORTON H. MEYERSON Trust Manager 3/5/97
- -----------------------------
Morton H. Meyerson

/s/ WILLIAM F. QUINN Trust Manager 3/5/97
- -----------------------------
William F. Quinn

/s/ PAUL E. ROWSEY, III Trust Manager 3/5/97
- -----------------------------
Paul E. Rowsey, III

/s/ MELVIN ZUCKERMAN Trust Manager 3/5/97
- -----------------------------
Melvin Zuckerman
</TABLE>

57
<PAGE> 61
INDEX TO EXHIBITS

4.01 Form of Stock Certificate (filed as Exhibit No. 4.01 to the 1994
S-11 and previously incorporated herein by reference but no
longer incorporated herein by reference)

4.05 Registration Rights Agreement, dated as of June 26, 1996,
relating to Canyon Ranch-Tucson (filed as Exhibit No. 4.02 to
the 1996 Form 8-K and incorporated herein by reference)

4.06 Form of Common Share Certificate (filed as Exhibit No. 4.03 to
the 1997 S-3 and incorporated herein by reference

10.04 Form of Noncompetition Agreement (Haddock) (filed as Exhibit No.
10.04 to the 1995 S-11 and incorporated herein by reference)
</TABLE>

<PAGE> 62

10.06 Form of Employment Agreement (Haddock) (filed as Exhibit No.
10.06 to the 1995 S-11 and incorporated herein by reference)

10.07 Form of Registration Rights, Lock-Up and Pledge Agreement (filed
as Exhibit No. 10.05 to the 1994 S-11 and incorporated herein by
reference)

10.09 Crescent Real Estate Equities Company 1994 Stock Incentive Plan
(filed as Exhibit No. 10.07 to the 1994 S-11 and incorporated
herein by reference)

10.10 Crescent Real Estate Equities, Ltd. 401(k) Plan (filed as
Exhibit No. 10.10 to the 1995 S-11 and incorporated herein by
reference)

10.11 Agreement, dated as of August 15, 1996, relating to the
acquisition of the Greenway Plaza Portfolio (filed as Exhibit
No. 10.02 to the 1996 Form 8-K and incorporated herein by
reference)

10.15 First Amended and Restated 1995 Crescent Real Estate Equities
Company Stock Incentive Plan (filed herewith)

10.17 Amended and Restated Lease Agreement, dated June 30, 1995
between Crescent Real Estate Equities Limited Partnership and
RoseStar Management, LLC, relating
</TABLE>

<PAGE> 63

<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<S> <C>
to the Denver Marriott (filed as Exhibit 10.17 to the 1995 10-K
and incorporated herein by reference)

10.23 1996 Crescent Real Estate Equities Limited Partnership Unit
Incentive Plan (filed as Exhibit No. 10.01 to the 1996 Form 8-K
and incorporated herein by reference)

10.24 Lease Agreement, dated July 26, 1996, between Canyon Ranch, Inc.
and Canyon Ranch Leasing, L.L.C. (filed herewith)

10.25 Lease Agreement, dated November 18, 1996, between Crescent Real
Estate Equities Limited Partnership and Wine Country Hotel, LLC.
(filed herewith)

10.26 Lease Agreement, dated December 11, 1996, between Canyon
Ranch-Bellefontaine Associates, L.P. and Vintage Resorts, LLC.
(filed herewith)

21.01 List of Subsidiaries (filed herewith)

23.01 Consent of Arthur Andersen LLP (filed herewith)

27.01 Financial Data Schedule (filed herewith)
</TABLE>

<PAGE> 1
EXHIBIT 4.02

REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement (the "Agreement") is entered into
effective as of this 16th day of February 1996 by and among Crescent Real
Estate Equities, Inc., a Maryland corporation (the "Company"), Crescent Real
Estate Equities Limited Partnership (the "Operating Partnership") and certain
limited partners of the Operating Partnership (the "Holders") who have executed
a signature page to this Agreement and who are identified on Schedule A hereto.

WHEREAS, the Holders (as defined below) have purchased limited
partnership interests ("Partnership Interests") and Partnership Units ("Units")
in the Operating Partnership that were issued without registration under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to an
offering by the Operating Partnership of such Partnership Interests and Units
to such Holders;

WHEREAS, pursuant to the Operating Partnership Agreement (as defined
below), the Holders have obtained certain rights (the "Exchange Rights") to
exchange their Partnership Interests and Units, in whole or in part, for an
aggregate number of shares of common stock of the Company, $0.01 par value per
share (the "Common Stock"), equal to the aggregate number of Units owned by
such Holder on the terms and conditions specified in the Operating Partnership
Agreement (specifically including the Ninth Amendment thereto);

WHEREAS, in consideration of the purchase of the Partnership Interests and
Partnership Units by the Holders, the Company has agreed to provide the Holders
with the registration rights set forth in Section 2 hereof;

NOW, THEREFORE, in consideration of the foregoing, the mutual promises and
agreements set forth herein, and other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as set forth herein.

1. Certain Definitions.

As used in this Agreement, the following capitalized defined terms shall
have the following meanings.

"Common Stock" shall have the meaning set forth above in the recitals
hereto.

"Company" shall have the meaning set forth above in the recitals hereto.

"Exchange Rights" shall have the meaning set forth above in the recitals
hereto.

"Holders" shall mean (i) the Persons (other than the Company and the
Operating Partnership) executing this Agreement as of the date first above
written, and (ii) family members of the original Holder (which, for purposes
hereof, shall mean any spouse, child, or grandchild or, in the case of a trust,
the grantor or beneficial owner(s) thereof) to whom such Holder assigns such
Holder's rights hereunder and who execute this Agreement in connection with
such assignment, and (iii) any Person who succeeds to the rights of the
original Holder by will or intestate succession or, in the case of an entity,
by instrument of merger, consolidation, or similar instrument, and who executes
this Agreement in connection therewith. No Person shall be considered a

<PAGE> 2

Holder for purposes hereof unless and until such Person shall have executed
this Agreement, as the same may be amended in accordance with the provisions
hereof.

"NASD" shall mean the National Association of Securities Dealers, Inc.

"Offering" shall mean the sale of Partnership Interests and Units to the
Holders.

"Operating Partnership" shall have the meaning set forth above in the
recitals hereto and also shall include the Operating Partnership's successors
and subsidiaries.

"Operating Partnership Agreement" shall mean the First Amended and
Restated Agreement of Limited Partnership of the Operating Partnership, as
amended through and following the date hereof, including the Ninth Amendment
thereto (which, among other matters, admits the Holders to the Operating
Partnership as Limited Partners and as holders of Units).

"Partnership Interests" shall have the meaning set forth above in the
recitals hereto.

"Person" shall mean an individual, partnership, corporation, trust, or
incorporated organization, or a government or agency or political subdivision
thereof.

"Prospectus" shall mean the prospectus included in a Registration
Statement, including any preliminary prospectus, as amended or supplemented by
any prospectus supplement, with respect to the terms of the offering of any
portion of the Registrable Shares covered by such Registration Statement, and
by all other amendments and supplements to such prospectus, including
post-effective amendments, and in each case including all material incorporated
by reference therein.

"Registrable Shares" shall mean the Shares, excluding (i) Shares for which
a Registration Statement relating to the sale thereof shall have become
effective under the Securities Act, and (ii) Shares eligible for sale pursuant
to Rule 144 under the Securities Act.

"Registration Expenses" shall mean any and all expenses incident to
performance of or compliance with this Agreement, including, without
limitation: (i) all SEC, stock exchange or NASD registration and filing fees;
(ii) all fees and expenses incurred in connection with compliance with state
securities or "blue sky" laws (including reasonable fees and disbursements of
counsel in connection with "blue sky" qualification of any of the Registrable
Shares and the preparation of a Blue Sky Memorandum) and compliance with the
rules of the NASD; (iii) all expenses of any Persons in preparing or assisting
in preparing, word processing, printing and distributing any Registration
Statement, any Prospectus, certificates and other documents relating to the
performance of and compliance with this Agreement; (iv) all fees and expenses
incurred in connection with the listing, if any, of any of the Registrable
Shares on any securities exchange or exchanges pursuant to Section 2(d) hereof,
and (v) the fees and disbursements of counsel for the Company and of the
independent public accountants of the Company, including the expenses of any
"cold comfort" letters required by or incident to such performance and
compliance. Registration Expenses shall specifically exclude underwriting
discounts and commissions relating to the sale or disposition of Registrable
Shares by a selling Holder, the fees and disbursements of counsel representing
a selling Holder, and transfer taxes, if any, relating to the sale or
disposition of Registrable Shares by a selling Holder, all of which shall be
borne by such Holder in all cases.

-2-
<PAGE> 3

"Registration Statement" shall mean any registration statement of the
Company and any other entity required to be a registrant with respect to such
registration statement pursuant to the requirements of the Securities Act which
covers any of the Registrable Shares, and all amendments and supplements to
such registration statement, including post-effective amendments, in each case
including the Prospectus contained therein, all exhibits thereto and all
materials incorporated by reference therein.

"SEC" shall mean the Securities and Exchange Commission.

"Shares" shall mean any Common Stock issued to the Holders pursuant to the
exercise of Exchange Rights by any of such Holders in exchange for the Units
received by the Holders on the date hereof but shall not include any shares of
Common Stock issued to the Holders in exchange for the Units and subsequently
transferred to any Person other than (i) another Holder or (ii) a Person who
becomes a Holder pursuant hereto within ten days following any such transfer.
Pursuant to the Exchange Rights, the Company shall have the option to deliver
cash in lieu of shares of Common Stock upon a Holder's exercise of such
Holder's Exchange Rights.

"Units" shall have the meaning set forth above in the recitals hereto.

2. Registration of Shares. The following provisions relating to the Holders'
and the Company's rights and obligations with regard to registration of Shares
are set forth in this Section 2. Sections 2(c) through (f) apply to both the
demand registration provisions set forth in Section 2(a) and the piggyback
registration provisions set forth in Section 2(b).

(a) Demand Registration. Subject to the conditions set forth in this
Agreement, while any Registrable Shares are outstanding, the Company, upon the
written request for the registration under the Securities Act of all of the
Registrable Shares of any Holder who, for any reason, is unable, at the time
that such Holder makes the request, to sell its Registrable Shares pursuant to
Rule 144 under the Securities Act made more than 55 days following the date
hereof shall (i) promptly give written notice of the proposed registration to
all other Holders, and (ii) cause to be filed, in accordance with the terms
hereof, as soon as practicable after the date of such request by such
requesting Holder, a Registration Statement on Form S-3 under Rule 415 under
the Securities Act relating to the sale by the Holder of all of the Registrable
Shares held by such Holder (together with all of the Registrable Securities of
any other Holder or Holders joining in such request as specified in a written
request delivered by or on behalf of such other Holder or Holders within 15
calendar days after delivery of the above-described notice from the Company),
and (iii) use its best efforts to cause such Registration Statement to be
declared effective by the SEC as soon as practicable thereafter. The Company,
in its sole discretion, may elect to file the Registration Statement before
receipt of notice from any Holder. The Company agrees to use its best efforts
to keep the Registration Statement continuously effective thereafter until the
date on which each Holder whose Shares are covered by such Registration
Statement becomes eligible to sell any portion of such Holder's Registrable
Shares pursuant to Rule 144 under the Securities Act.

Notwithstanding the foregoing, the Company shall not be obligated, but
shall have the right, to take any action to effect any such registration,
qualification or compliance pursuant to this Section 2(a):

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<PAGE> 4

(i) in any particular jurisdiction in which either the Company or
the Operating Partnership would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance, unless the Company or the Operating Partnership is already
subject to service in such jurisdiction, and except as may be required by
the Securities Act;

(ii) within four months immediately following the effective date of
any Registration Statement pertaining to an underwritten public offering
of securities of the Company for its own account;

(iii) if such Registration Statement cannot be filed on Form S-3 or
successor form to such Form;

(iv) unless Holders with at least 25% of the aggregate number of
Units issued to the Holders as of the date hereof submit a written
request, in accordance with the procedures set forth above, for the
Company to file a Registration Statement relating to all of such Holders'
Registrable Shares;

(v) after the expiration of two years from the date hereof; after a
total of two such registrations pursuant to this Section 2(a) have become
effective, and the Registration Statements relating to such registrations
either have remained effective for an aggregate period of at least 180
days or the Registrable Shares covered by such Registration Statements
have been sold; or

(vi) at any time prior to 90 days following the date hereof,
unless the Company shall have received written requests (pursuant to the
terms of this Section 2(a)) from Holders owning at least 25% of the
aggregate number of Units issued to the Holders as of the date hereof,
requesting the Company to file a Registration Statement relating to all of
the shares of Common Stock that will be issuable to such Holders upon the
exercise by such Holders of the Exchange Rights that will become available
to such Holders commencing 90 days after the date hereof, provided that
the Company shall have received such written requests no later than 55
days following the date hereof.

(b) Piggyback Registration. If at any time after 90 days following the
date hereof and prior to two years following the date hereof, while any
Registrable Shares or Units are outstanding, the Company (without any
obligation to do so) proposes to file a registration statement under the
Securities Act with respect to an offering of Common Stock solely for cash
pursuant to a "firm commitment" underwritten offering (other than a
registration statement (i) on Form S-8 or any successor form to such Form or in
connection with any employee or director welfare, benefit or compensation plan,
(ii) on Form S-4 or any successor form to such Form or in connection with an
exchange offer, (iii) in connection with a rights offering exclusively to
existing holders of Common Stock, (iv) in connection with an offering solely to
employees of the Company, the Operating Partnership or subsidiaries of either,
or (v) relating to a transaction pursuant to Rule 145 of the Securities Act or
any other "business combination" transaction), whether or not for its own
account, the Company shall give prompt written notice of such proposed filing
to the Holders. The notice referred to in the preceding sentence shall offer
Holders the opportunity to register all of the Registrable Shares of any
requesting Holder (a "Piggyback Registration"). Subject to the

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<PAGE> 5

provisions of Section 3 below, the Company shall include in such Piggyback
Registration, in the registration and qualification for sale under the blue sky
or securities laws of the various states and in any underwriting in connection
therewith, all Registrable Shares for which the Company has received written
requests for inclusion therein within 15 calendar days after the notice
referred to above has been given by the Company to the Holders. Holders of
Registrable Shares shall be permitted to withdraw all or part of the
Registrable Shares from a Piggyback Registration at any time prior to the
effective date of such Piggyback Registration. If a Piggyback Registration is
an underwritten primary registration on behalf of the Company and the managing
underwriter advises the Company that the total number of shares of Common Stock
requested to be included in such registration exceeds the number of shares of
Common Stock which can be sold in such offering, the Company will include in
such registration in the following priority: (i) first, all Common Stock the
Company proposes to sell, and (ii) second, up to the full number of applicable
Registrable Shares requested to be included in such registration by any
Holders, but only to the extent that, in the opinion of such managing
underwriter, such number of Registrable Shares can be sold without adversely
affecting the price range or probability of success of such offering.

Notwithstanding the foregoing, the Company shall not be obligated to take
any action to effect any such registration, qualification or compliance
pursuant to this Section 2(b)(i) in any particular jurisdiction in which either
the Company or the Operating Partnership would be required to execute a general
consent to service of process in effecting such registration, qualification or
compliance, unless the Company or the Operating Partnership is already subject
to service in such jurisdiction and except as may be required by the Securities
Act, (ii) unless Holders holding at least 25% of the aggregate number of Units
issued to the Holders as of the date hereof submit a written request, in
accordance with the procedures set forth above, for the Company to file a
Registration Statement relating to all of such Holders' Registrable Shares, or
(iii) in connection with any offering of securities by the Company pursuant to
its existing registration statement on Form S-3 (File No. 33-97794), as
declared effective by the SEC on February 16, 1996.

(c) Notice of Effectiveness. The Company shall notify each Holder of the
effectiveness of the Registration Statement and shall furnish to each Holder
such number of copies of the Registration Statement (including any amendments,
supplements and exhibits), the Prospectus contained therein (including each
preliminary prospectus and all related amendments and supplements) and any
documents incorporated by reference in the Registration Statement or such other
documents as the Holder may reasonably request in order to facilitate its sale
of the Registrable Shares in the manner described in the Registration
Statement.

(d) Amendments and Supplements to Registration Statement; Listing. The
Company shall prepare and file with the SEC from time to time such amendments
and supplements to the Registration Statement and prospectus used in connection
therewith as may be necessary to keep the Registration Statement effective and
to comply with the provisions of the Securities Act with respect to the
disposition of all the Registrable Shares until the earlier of (i) such time as
all of the Registrable Shares have been disposed of in accordance with the
intended methods of disposition by the Holders as set forth in the Registration
Statement or (ii) the date on which the Company's obligation, pursuant to the
terms of this Section 2, to file or maintain an effective

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<PAGE> 6

Registration Statement ceases. Upon five business days' notice, the Company
shall file any supplement or post-effective amendment to the Registration
Statement with respect to the plan of distribution or such Holder's ownership
interests in Registrable Shares that is reasonably necessary to permit the sale
of the Holder's Registrable Shares pursuant to the Registration Statements. The
Company shall file any necessary listing applications or amendments to the
existing applications to cause the Shares registered under any Registration
Statement to be then listed or quoted on the primary exchange or quotation
system on which the Common Stock is then listed or quoted. a.

(e) SEC Requests. The Company shall promptly notify each Holder of, and
confirm in writing, any request by the SEC for amendments or supplements to the
Registration Statement or the Prospectus related thereto or for additional
information. In addition, the Company shall promptly notify each Holder of, and
confirm in writing, the filing of the Registration Statement or any Prospectus,
amendment or supplement related thereto or any post-effective amendment to the
Registration Statement and the effectiveness of any post-effective amendment.
a.

(f) Prospectus Delivery. At any time when a Prospectus relating to the
Registration Statement is required to be delivered under the Securities Act,
the Company shall immediately notify each Holder of the happening of any event
as a result of which the Prospectus included in the Registration Statement, as
then in effect, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. In such event, the Company shall promptly prepare and furnish
to each Holder a reasonable number of copies of a supplement to or an amendment
of such Prospectus as may be necessary so that, as thereafter delivered to the
purchasers of Registrable Shares, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Company will, if
necessary, amend the Registration Statement of which such Prospectus is a part
to reflect such amendment or supplement.

3. State Securities Laws.

Subject to the conditions set forth in this Agreement, the Company shall,
in connection with the filing of any Registration Statement hereunder, file
such documents as may be necessary to register or qualify the Registrable
Shares under the securities or "Blue Sky" laws of such states as any Holder may
reasonably request, and the Company shall use its best efforts to cause such
filings to become effective; provided, however, that the Company shall not be
obligated to qualify as a foreign corporation to do business under the laws of
any such state in which it is not then qualified or to file any general consent
to service of process in any such state. Once effective, the Company shall use
its best efforts to keep such filings effective until the earliest of (a) such
time as each such Holder may sell any portion of the Registrable Shares
pursuant to Rule 144 under the Securities Act, (b) in the case of a particular
state, a Holder has notified the Company that it no longer requires an
effective filing in such state in accordance with its original request for
filing or (c) the date on which the Registration Statement ceases to be
effective. The Company shall promptly notify each Holder of, and confirm in
writing, the receipt by the Company of any notification with respect to the
suspension of the qualification of the Registrable Shares for sale

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<PAGE> 7

under the securities or "Blue Sky" laws of any jurisdiction or the initiation
or threat of any proceeding for such purpose.

4. Expenses.

The Company shall bear all Registration Expenses incurred in connection
with the registration of the Registrable Shares pursuant to this Agreement.
Each Holder shall be responsible for any brokerage or underwriting commissions
and taxes of any kind (including, without limitation, transfer taxes) with
respect to any disposition, sale or transfer of Registrable Shares sold by it
and for any legal, accounting and other expenses incurred by it.

5. Cooperation.

Each of the Holders hereby agrees (a) to cooperate with the Company and to
furnish to the Company in a timely manner all such information concerning its
plan of distribution and ownership interests with respect to its Registrable
Shares and any other information as the Company may reasonably request in
connection with the preparation of the Registration Statement and any filings
with any state securities commissions and (b) to deliver or cause delivery of
the Prospectus contained in the Registration Statement to any purchaser of the
shares covered by the Registration Statement from the Holder.

6. Suspension of Registration Requirement.

(a) The Company shall promptly notify each Holder of, and confirm in
writing, the issuance by the SEC of any stop order suspending the effectiveness
of the Registration Statement or the initiation of any proceedings for that
purpose. The Company shall use its best efforts to obtain the withdrawal of any
order suspending the effectiveness of the Registration Statement at the
earliest possible moment.

(b) Notwithstanding anything to the contrary set forth in this Agreement,
the Company's obligation under this Agreement to use its best efforts to cause
the Registration Statement and any filings with any state securities commission
to become effective or to amend or supplement the Registration Statement shall
be suspended in the event and during such period as unforeseen circumstances
exist (including without limitation (i) an underwritten primary offering by the
Company if the Company is advised by the underwriters that sale of Registrable
Shares under the Registration Statement would have an adverse effect on the
primary offering or (ii) pending negotiations relating to, or consummation of,
a transaction or the occurrence of an event that would require additional
disclosure of material information by the Company in the Registration Statement
or such filing, as to which the Company has a bona fide business purpose for
preserving confidentiality or which renders the Company unable to comply with
SEC requirements) (such unforeseen circumstances being hereinafter referred to
as a "Suspension Event") that would make it impractical or inadvisable to cause
the Registration Statement or such filings to become effective or to amend or
supplement the Registration Statement, but such suspension shall continue only
for so long as such event or its effect is continuing, provided, that in no
event will that suspension exceed 90 days. The Company shall notify the Holder
of the existence and, in the case of circumstances referred to in clause (i) of
this Section 6(b), nature of any Suspension Event.

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<PAGE> 8

(c) Each holder of Registrable Shares whose Registrable Shares are covered
by a Registration Statement filed pursuant to Section 2 hereof agrees, if
requested by the Company in the case of a Company-initiated nonunderwritten
offering or if requested by the managing underwriter or underwriters in a
Company-initiated underwritten offering, not to effect any public sale or
distribution of any of the securities of the Company of any class included in
such Registration Statement, including a sale pursuant to Rule 144 or Rule 144A
under the Securities Act (except as part of such Company-initiated
registration), during the 15-day period prior to, and during the 90-day period
beginning on, the date of effectiveness of each Company-initiated offering made
pursuant to such Registration Statement, to the extent timely notified in
writing by the Company or the managing underwriters; provided, however, that
such 90-day period shall be extended by the number of days from and including
the date of the giving of any notice pursuant to Section 2(e) or (f) hereof to
and including the date when each seller of Registrable Shares covered by such
Registration Statement shall have received the copies of the supplemented or
amended Prospectus contemplated by Section 2(g) hereof.

7. Black-Out Period.

Following the effectiveness of the Registration Statement and the filings
with any state securities commissions, the Holders agree that they will not
effect any sales of the Registrable Shares, whether pursuant to the
Registration Statement or by any other means, from and after any time after
they have received notice from the Company to suspend sales as a result of the
occurrence or existence of any Suspension Event or so that the Company may
correct or update the Registration Statement or such filing. The Holder may
recommence effecting sales of the Shares following further notice to such
effect from the Company, which notice shall be given by the Company not later
than five days after the conclusion of any such Suspension Event. If so
directed by the Company, Holders will deliver to the Company all copies of the
Prospectus covering the Registrable Shares at the time receipt of such notice.

8. Additional Shares.

The Company, at its option, may register, under any registration statement
and any filings with any state securities commissions filed pursuant to this
Agreement, any number of unissued Common Stock of the Company or any Common
Stock of the Company owned by any other shareholder or shareholders of the
Company.

9. Indemnification.

(a) Indemnification by the Company. The Company agrees to indemnify and
hold harmless each Holder and each person, if any, who controls any Holder
within the meaning of Section 15 of the Securities Act of 1933 as follows:

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<PAGE> 9

untrue statement or alleged untrue statement of a material fact contained in
any Prospectus (or any amendment or supplement thereto), including all
documents incorporated therein by reference, or the omission or alleged
omission therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;

(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, if such settlement is effected with
the written consent of the Company; and

(iii) against any and all expense whatsoever, as incurred (including
reasonable fees and disbursements of counsel), reasonably incurred in
investigating, preparing or defending against any litigation, or
investigation or proceeding by any governmental agency or body, commenced
or threatened, in each case whether or not a party, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such expense
is not paid under subparagraph (i) or (ii) above;

provided, however, that the indemnity provided pursuant to this Section 9 does
not apply to any Holder with respect to any loss, liability, claim, damage or
expense to the extent arising out of (x) any untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with written information furnished to the Company by such Holder expressly for
use in the Registration Statement (or any amendment thereto) or the Prospectus
(or any amendment or supplement thereto) or (y) such Holder's failure to
deliver an amended or supplemental Prospectus if such loss, liability, claim,
damage or expense would not have arisen had such delivery occurred.

(b) Indemnification by Holders. Each Holder severally agrees to indemnify
and hold harmless the Company and the other selling Holders, and each of their
respective directors and officers (including each director and officer of the
Company who signed the Registration Statement), and each person, if any, who
controls the Company or the other selling Holders within the meaning of Section
15 of the Securities Act, to the same extent as the indemnity contained in
Section (a) hereof (except that any settlement described in Section 3(a)(ii)
shall be effected with the written consent of such Holder), but only insofar as
such loss, claim, damage or expense arises out of or is based upon (x) any
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto) or any Prospectus (or any Registration Statement (or any
amendment or supplement thereto) in reliance upon and in conformity with
written information furnished to the Company by such Holder expressly for use
in such Registration Statement (or any amendment thereto) or such Prospectus
(or any amendment or supplement thereto) or (y) such Holder's failure to
deliver an amended or supplemental Prospectus if such loss, liability, claim,
damage or expense would not have arisen had such delivery occurred.

(c) Conduct of Indemnification Proceedings. The indemnified party shall
give reasonably prompt notice to the indemnifying party of any action or
proceeding commenced against

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<PAGE> 10

it in respect of which indemnity may be sought hereunder, but failure so to
notify the indemnifying party (i) shall not relieve it from any liability which
it may have under the indemnity agreement provided in paragraphs (a) or (b) of
this Section 9, unless and to the extent it did not otherwise learn of such
action and the lack of notice by the indemnified party results in the
forfeiture by the indemnifying party of substantial rights and defenses and
(ii) shall not, in any event, relieve the indemnifying party from any
obligations to the indemnified party other than the indemnification obligation
provided under paragraphs (a) or (b) of this Section 9. If the indemnifying
party so elects within a reasonable time after receipt of such notice, the
indemnifying party may assume the defense of such action or proceeding at such
indemnifying party's own expense with counsel chosen by the indemnifying party
and approved by the indemnified party, which approval shall not be unreasonably
withheld; provided, however, that, if the indemnified party reasonably
determines that a conflict of interest exists where it is advisable for the
indemnified party to be represented by separate counsel or that, upon advice of
counsel, there may be legal defenses available to it which are different from
or in addition to those available to the indemnifying party, then the
indemnifying party shall not be entitled to assume such defense, and the
indemnified party shall be entitled to separate counsel at the indemnifying
party's expense. If the indemnifying party is not entitled to assume the
defense of such action or proceeding as a result of the provisions of the
preceding sentence, the indemnifying party's counsel shall be entitled to
conduct the indemnifying party's defense and counsel for the indemnified party
shall be entitled to conduct the defense of the indemnified party, it being
understood that both such counsel will cooperate with each other to conduct the
defense of such action or proceeding as efficiently as possible. If the
indemnifying party is not so entitled to assume the defense of such action or
does not assume such defense, after having received the notice referred to in
the first sentence of this paragraph, the indemnifying party will pay the
reasonable fees and expenses of counsel for the indemnified party. In such
event, however, the indemnifying party will not be liable for any settlement
effected without the written consent of the indemnifying party, with such
consent not to be unreasonably withheld. If an indemnifying party is entitled
to assume, and assumes, the defense of such action or proceeding in accordance
with this paragraph, the indemnifying party shall not be liable for any fees
and expenses of counsel for the indemnified party incurred thereafter in
connection with such action or proceeding, subject to the proviso set forth in
the second sentence of this paragraph (c).

10. Contribution.

In order to provide for just and equitable contribution in circumstances
in which the indemnity agreement provided for in Section 9 is for any reason
held to be unenforceable although applicable in accordance with its terms, the
Company and each Holder shall contribute to the aggregate losses, liabilities,
claims, damages and expenses of the nature contemplated by such indemnity
agreement incurred by the Company and each such Holder, in such proportion as
is appropriate to reflect the relative fault of and benefits to the Company on
the one hand and such Holder on the other, in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits to the indemnifying party and indemnified party shall

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<PAGE> 11

be determined by reference to, among other things, the total proceeds received
by the indemnifying party and indemnified party in connection with the offering
to which such losses, claims, damages, liabilities or expenses relate. The
relative fault of the indemnifying party and indemnified party shall be
determined by reference to, among other things, whether the action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact, has been made by, or relates to,
information supplied by, the indemnifying party or the indemnified party, and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such action.

The parties hereto agree that it would not be just or equitable if
contribution pursuant to this Section 9 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 9, each Holder shall be required
to contribute the amount of any damages which such Holder is required to pay by
reason of such untrue statement or omission, provided, however, that no Holder
shall be required under such circumstances to pay any amount in excess of the
amount by which the total price at which the Registrable Shares of such Holder
were offered to the public.

Notwithstanding the foregoing, no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 9, each person, if
any, who controls a Holder within the meaning of Section 15 of the Securities
Act shall have the same rights to contribution as such Holder, and each
director of the Company, each officer of the Company who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act shall have the same rights to
contribution as the Company.

11. No Obligation to Issue Common Stock to Holders; No Other Obligation to
Register; Obligation to Deliver Cash to Holders.

(a) No Obligation to Issue Common Stock. The Holders hereby acknowledge
that, upon any exercise of their Exchange Rights, the Company has the option
pursuant to the Operating Partnership Agreement, in its sole discretion, to
deliver cash or shares of Common Stock in exchange for the Units as to which a
holder exercises Exchange Rights.

(b) No Other Obligation to Register Shares. Except as otherwise expressly
provided in this Agreement, the Company shall have no obligation to the Holders
to register the Registrable Shares under the Securities Act.

(c) Obligation to Deliver Cash to Holders. Notwithstanding any provision
of this Agreement to the contrary, the Company and the Operating Partnership
each hereby acknowledge that the Company shall have the obligation to deliver
the Cash Amount (as defined in Article I of the Operating Partnership
Agreement) in accordance with Section 8.6 of the Operating Partnership
Agreement, (i) to each Holder who, within 75 days after the date hereof (but
not prior to 55 days after the date hereof), has properly requested the
registration of Registrable Shares pursuant to Section 2 hereof, if a
Registration Statement covering all such Registrable Shares has not become
effective with the SEC on or before June 5, 1996, and (ii) to each Holder whose
Registrable Shares have not been sold on or before (A) February 1, 1997 (for
any Holder other than Harry Frampton, III ("Frampton")), and (B) February 1,
1998 for Frampton.

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<PAGE> 12

Such payment shall be made by cashier's or certified check payable to the
Holder to whom the Cash Amount is due or, at the option of the Company, by wire
transfer to the account specified by the Holder to whom the Cash Amount is
payable within ten days following the occurrence of any of the events specified
in clauses (i) or (ii) of the preceding sentence.

12. Holder Representations, Warranties and Agreements.
--------------------------------------------------

Each Holder, jointly and not severally, and solely on behalf of itself,
represents and warrants to, and agrees with, the Company, that:

(a) Such Holder, if not a natural person, is duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization. Such Holder has all requisite power and authority to execute,
deliver and perform this Agreement. All necessary proceedings of such Holder,
if not a natural person, have been duly taken to authorize the execution,
delivery, and performance of this Agreement by such Holder. This Agreement has
been duly authorized by such Holder, if not a natural person, and executed, and
delivered by such Holder, and is the legal, valid, and binding obligation of
such Holder, and is enforceable as to such Holder in accordance with its terms.
No consent, authorization, approval, order, license, certificate, or permit of
or from, or declaration or filing with, any federal, state, local or other
governmental authority or any court or other tribunal is required by such
Holder for the execution, delivery or performance of this Agreement (except
filings under the Securities Act which will be made and such consents
consisting only of consents under Blue Sky or state securities laws which will
be obtained) by such Holder. No consent of any party to any contract,
agreement, instrument, lease, license, arrangement or understanding to which
such Holder is a party, or to which any of such Holder's properties or assets
are subject, is required for the execution, delivery and performance of this
Agreement which has not been obtained, and the execution, delivery and
performance of this Agreement will not violate, result in a breach of, conflict
with or (with or without giving of notice or the passage of time or both)
entitle any party to terminate or call a default under any such contract,
agreement, instrument, lease, license, arrangement or understanding, or, if
such Holder is not a natural person, violate or result in a breach of, or
conflict with, any law, rule, regulation, order, judgment or decree binding on
such Holder or to which any of such Holder's operations, business, properties
or assets are subject, which, in any of such events, would prohibit, impair or
restrict the ability of such Holder to execute and deliver this Agreement,
perform in accordance with the terms hereof or consummate the transactions
contemplated hereby, or would adversely affect the rights or benefits, or both,
hereunder of any other party hereto.

(b) Neither such Holder nor any of such Holder's affiliates (as defined in
the regulations under the Securities Act), will take, directly or indirectly,
during the term of this Agreement, any action designed to stabilize (except as
may be permitted by applicable law) or manipulate the price of any security of
the Company.

(c) Such Holder shall promptly furnish to the Company any and all
information as may be required by, or as may be necessary or advisable to
comply with the provisions of, the

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<PAGE> 13

Securities Act, the Exchange Act, and the rules and regulation of the SEC
thereunder in connection with the preparation and filing of any Registration
Statement pursuant hereto, or any amendment or supplement thereto, or any
Preliminary Prospectus or Prospectus included therein. All information to be
furnished to the Company by or on behalf of such Holder expressly for use in
connection with the preparation of any Preliminary Prospectus, the Prospectus,
the Registration Statement or any amendment or supplement thereto, will not
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading.

13. Underwritten Registration.

No Holder of Registrable Securities may participate in any underwritten
registration hereunder unless such Holder (i) executes and delivers the
underwriting agreement or similar documents relating thereto pursuant to which
such Holder shall agree to sell, upon the terms and subject to the conditions
therein set forth, such Holder's Registrable Securities on the basis provided
therein, and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, custodial or escrow agreements and other documents as
may be necessary, advisable or required pursuant to the terms thereof or as may
be from time to time reasonably requested by the underwriter or underwriters
named therein, the Company, or their respective legal counsel, in connection
therewith.

In the event of any conflict between the indemnification and contribution
terms as herein set forth and as set forth in any underwriting agreement
entered pursuant hereto, the underwriting agreement shall control.

14. Survival of Representations and Agreements.

All representations, warranties, covenants and agreements contained in,
this Agreement shall be deemed to be representations, warranties, covenants and
agreements at the effective date of each Registration Statement contemplated by
this Agreement, and such representations, warranties, covenants and agreements,
including the indemnity and contribution agreements contained in Sections 9 and
10 hereof, shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of the Company, any Holder or any Person
which is entitled to be indemnified under Section 9 hereof, and shall survive
termination of this Agreement.

15. Amendments and Waivers.

The provisions of this Agreement may not be amended, modified,
supplemented or waived without the prior written consent of the Company and the
Holders of Registrable Shares.

16. Notices.

Except as set forth below, all notices and other communications provided
for or permitted hereunder shall be in writing and shall be deemed to have been
duly given if delivered personally or sent by telex or telecopier, registered
or certified mail (return receipt requested), postage prepaid or courier or
overnight delivery service to the respective parties at the following addresses
(or at such other address for any party as shall be specified by like notice,
provided that notices of a change of address shall be effective only upon
receipt thereof), and further provided that in

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<PAGE> 14

case of directions to amend the Registration Statement pursuant to Section
2(d), a Holder must confirm such notice in writing by overnight express
delivery with confirmation of receipt:

If to the Company: Crescent Real Estate Equities, Inc.
c/o Crescent Real Estate Equities Limited
Partnership
777 Main Street
Suite 2700
Fort Worth, Texas 76102
Attn: John C. Goff
Telecopy: (817) 878-0429

If to the Holders: As listed on the applicable Holder Signature Page.
with a copy, in the case of notice to any Holder,
to:
James F. Wood
Sherman & Howard L.L.C.
633 Seventeenth Street
Denver, Colorado 80202

In addition to the manner of notice permitted above, notices given pursuant to
Sections 2, 6 and 7 hereof may be effected telephonically and confirmed in
writing thereafter in the manner described above.

17. Successors and Assigns.

This Agreement shall be binding upon the parties hereto and their
respective successors and assigns and shall inure to the benefit of the parties
hereto. This Agreement may not be assigned by any Holder, and any attempted
assignment hereof by any Holder to any Person other than (i) a Person who is
already a Holder on the date of such assignment, (ii) family members of the
original Holder (which, for purposes hereof, shall mean any spouse, child, or
grandchild or, in the case of a trust, the grantor or beneficial owner(s)
thereof) to whom such Holder assigns such Holder's rights hereunder and who
execute this Agreement in connection with such assignment, and (iii) any Person
who succeeds to the rights of the original Holder by will or intestate
succession or, in the case of an entity, by instrument of merger,
consolidation, or similar instrument, and who executes this Agreement in
connection therewith will be void and of no effect and shall terminate all
obligations of the Company hereunder with respect to such Holder. No Person
shall be considered a Holder for purposes hereof unless and until such Person
shall have executed this Agreement, as the same may be amended in accordance
with the provisions hereof.

18. Counterparts.

This Agreement may be executed in any number of counterparts and by the
parties hereto in separate counterparts, each of which when so executed shall
be deemed to be an original and all of which taken together shall constitute
one and the same agreement.

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<PAGE> 15

19. Governing Law.

This Agreement shall be governed by and construed in accordance with the
laws of the State of Maryland applicable to contracts made and to be performed
wholly within said State.

20. Severability.

In the event that any one or more of the provisions contained herein, or
the application thereof in any circumstances, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the
remaining provisions contained herein shall not be in any way impaired thereby,
it being intended that all of the rights and privileges of the parties hereto
shall be enforceable to the fullest extent permitted by law.

21. Entire Agreement.

This Agreement is intended by the parties as a final expression of their
agreement and intended to be the complete and exclusive statement of the
agreement and understanding of the parties hereto in respect of the subject
matter contained herein. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein, with respect to
such subject matter. This Agreement supersedes all prior agreements and
understandings (except the Operating Partnership Agreement, which is
incorporated by reference herein and hereby made a part of this Agreement)
between the parties with respect to such subject matter.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.

CRESCENT REAL ESTATE EQUITIES, INC.

By: /s/ David M. Dean
----------------------------------------
Name: David M. Dean
Title: Senior Vice President Law

CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP

By: CRESCENT REAL ESTATE EQUITIES,
LTD., its general partner

By: /s/ David M. Dean
-----------------------------------
Name: David M. Dean
Title: Senior Vice President Law

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<PAGE> 16

REGISTRATION RIGHTS AGREEMENT
HOLDER SIGNATURE PAGE

Holder: Ross E. Bowker

/s/ Ross E. Bowker
------------------
Ross E. Bowker